Form 8-K Two Harbors Investment Corp.

Current report, items 2.02 and 9.01

Published: 2019-02-06 16:15:11
Submitted: 2019-02-06
Period Ending In: 2019-02-06
two8kq4-2018earningsrelease.htm 8-K TWO HARBORS INVESTMENT CORP. FOURTH QUARTER 2018 FINANCIAL RESULTS




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 8-K

Current Report
 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 

Date of Report: 
February 6, 2019

Two Harbors Investment Corp.
(Exact name of registrant as specified in its charter)
 
Maryland
 
001-34506
 
27-0312904
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
 
575 Lexington Avenue, Suite 2930
New York, NY 10022
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:  
(612) 629-2500

(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
Written communications pursuant to Rule 425 under the Securities Act  (17 CFR 230.425)
 
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o








 
Item 2.02           Results of Operations and Financial Condition.

On
February 6, 2019
, Two Harbors Investment Corp. (the "Company") issued a press release announcing its financial results for the fiscal quarter ended
December 31, 2018
. A copy of the press release and the
2018
Fourth Quarter
Earnings Call Presentation are attached hereto as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference.

The information in this Current Report, including Exhibits 99.1 and 99.2 attached hereto, is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for any other purpose, including for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in Item 2.02 of this Current Report, including Exhibits 99.1 and 99.2, shall not be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filings (unless the registrant specifically states that the information or exhibit in this Item 2.02 is incorporated by reference).









Item 9.01
Financial Statements and Exhibits.

(d) Exhibits.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 




 
 






 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
TWO HARBORS INVESTMENT CORP.
 
 
 
 
 
 
 
By:
/s/ REBECCA B. SANDBERG
 
 
Rebecca B. Sandberg
 
 
General Counsel and Secretary
 
 
 
Date: February 6, 2019
 
 
 



twoq4-2018earningspressrel.htm PRESS RELEASE OF TWO HARBORS INVESTMENT CORP., DATED FEBRUARY 6, 2019.


twologoc.jpg

Two Harbors Investment Corp. Reports
Fourth Quarter
2018
Financial Results
2018 Transformative Year for the Company

NEW YORK,
February 6, 2019
-
Two Harbors Investment Corp.
(NYSE: TWO), a leading hybrid mortgage real estate investment trust (REIT) that invests in residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and other financial assets, today announced its financial results for the quarter ended
December 31, 2018
.

Quarterly Summary

Redeployed capital from CYS Investments, Inc. (CYS) acquisition in accordance with previously announced plan.
Added $36.1 billion unpaid principal balance (UPB) of MSR through bulk acquisitions and monthly flow-sale arrangements, bringing total holdings to
$163.1 billion
UPB.
Incurred a Comprehensive Loss of
($307.9) million
, or
($1.24)
per weighted average basic common share.
Generated Core Earnings, including dollar roll income, of
$120.7 million
, or
$0.49
per weighted average basic common share, representing a return on average common equity of
13.8%
.
(1) 
Reported book value of
$13.11
per common share, representing a
(8.3%)
total quarterly return on book value.
(2) 

2018 Summary

Completed the acquisition of CYS, growing the company’s market capitalization and equity base, increasing the liquidity of the company’s stock and driving expenses lower.
Added $75.9 billion UPB of MSR, growing portfolio by approximately 60% year-over-year.
Generated strong Core Earnings and competitive average dividend yield of 12.8% in 2018.

“2018 was a transformative year for our company. We acquired CYS, generated strong Core Earnings and a competitive dividend yield, drove our expenses lower, and achieved substantial scale and operating efficiencies in our MSR platform,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer.  “Heading into 2019, we believe that there are attractive opportunities to drive returns in our Rates and Credit strategies and we remain keenly focused on risk management and hedging.”




(1)
Core Earnings and Core Earnings, including dollar roll income, are non-GAAP measures. Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
(2)
Return on book value for the quarter ended
December 31, 2018
is defined as the
decrease
in book value per common share from
September 30, 2018
to
December 31, 2018
of
$1.70
, plus dividends declared amounting to
$0.47
per common share, divided by
September 30, 2018
book value of
$14.81
per common share.



-
1
-


Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the
fourth quarter
of
2018
:
Two Harbors Investment Corp. Operating Performance (unaudited)








(dollars in thousands, except per common share data)



Three Months Ended
December 31, 2018

Year Ended
December 31, 2018
Earnings attributable to common stockholders
 Earnings

 Per weighted average basic common share

Annualized return on average common equity

 Earnings

 Per weighted average basic common share

Annualized return on average common equity
Comprehensive Loss
$
(307,939
)

$
(1.24
)

(35.2
)%

$
(343,599
)

$
(1.67
)

(10.9
)%
GAAP Net Loss
$
(573,485
)

$
(2.31
)

(65.5
)%

$
(109,685
)

$
(0.53
)

(3.5
)%
Core Earnings, including dollar roll income
(1)
$
120,719


$
0.49


13.8
 %

$
405,430


$
1.97


12.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating Metrics












Dividend per common share
$
0.47






 




Dividend per Series A preferred share
$
0.50781

 
 
 
 
 
 
 
 
 
 
Dividend per Series B preferred share
$
0.47656

 
 
 
 
 
 
 
 
 
 
Dividend per Series C preferred share
$
0.45313

 
 
 
 
 
 
 
 
 
 
Dividend per Series D preferred share
$
0.484375

 
 
 
 
 
 
 
 
 
 
Dividend per Series E preferred share
$
0.46875

 
 
 
 
 
 
 
 
 
 
Book value per common share at period end
$
13.11






 




Other operating expenses, excluding non-cash LTIP amortization as a percentage of average equity
(2)
1.1
%





 




________________
(1)
Please see page 13 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.
(2)
Excludes non-cash equity compensation expense of
$3.2 million
.

Earnings Summary
Two Harbors incurred a Comprehensive Loss of
($307.9) million
, or
($1.24)
per weighted average basic common share, for the quarter ended
December 31, 2018
, as compared to a Comprehensive Loss of
($102.8) million
, or
($0.46)
per weighted average basic common share, for the quarter ended
September 30, 2018
. The company records unrealized fair value gains and losses on the majority of RMBS, classified as available-for-sale, in Other Comprehensive Loss. On a Comprehensive Loss
basis, the company recognized an annualized return on average common equity of
(35.2%)
and
(11.9%)
for the quarters ended
December 31, 2018
and
September 30, 2018
, respectively.

The company reported a GAAP Net Loss of
($573.5) million
, or
($2.31)
per weighted average basic common share, for the quarter ended
December 31, 2018
, as compared to GAAP Net Income of
$17.0 million
, or
$0.08
per weighted average basic common share, for the quarter ended
September 30, 2018
. On a GAAP Net (Loss) Income basis, the company recognized an annualized return on average common equity of
(65.5%)
and
2.0%
for the quarters ended
December 31, 2018
and
September 30, 2018
, respectively.

For the
fourth quarter
of
2018
, the company recognized non-Core Earnings of:
net realized losses on RMBS of
$248.9 million
;
net unrealized gains on certain RMBS of
$2.9 million
;
other-than-temporary impairment loss of
$0.1 million
;
net losses of
$35.8 million
related to swap, cap and swaption terminations and expirations;

-
2
-


net unrealized losses of
$219.1 million
associated with interest rate swaps, caps and swaptions economically hedging interest rate exposure (or duration);
net realized and unrealized losses on other derivative instruments of
$35.0 million
;
net realized and unrealized losses on MSR of
$113.5 million
(1)
;
servicing reserve expense of
$1.2 million
;
non-cash equity compensation expense of
$3.2 million
; and
net provision for income taxes on non-Core Earnings of
$6.4 million
.

The company reported Core Earnings, including dollar roll income, for the quarter ended
December 31, 2018
of
$120.7 million
, or
$0.49
per weighted average basic common share. The company reported Core Earnings, including dollar roll income, for the quarter ended
September 30, 2018
of
$107.0 million
or
$0.48
per weighted average basic common share. On a Core Earnings basis, including dollar roll income, the company recognized an annualized return on average common equity of
13.8%
for the quarter ended
December 31, 2018
, compared to
12.4%
for the quarter ended
September 30, 2018
.

Other Key Metrics
Two Harbors declared a cash dividend of
$0.47
per common share
for the quarter ended December 31, 2018
. The annualized dividend yield on the company’s common stock for the quarter, based on the
December 31, 2018
closing price of
$12.84
, was
14.6%
.

Two Harbors declared quarterly dividends of
$0.50781
per share on its 8.125% Series A fixed-to-floating rate cumulative redeemable preferred stock,
$0.47656
per share on its 7.625% Series B fixed-to-floating rate cumulative redeemable preferred stock,
$0.45313
per share of the 7.25% Series C fixed-to-floating rate cumulative redeemable preferred stock,
$0.484375
per share of the 7.75% Series D cumulative redeemable preferred stock and
$0.46875
per share of the 7.50% Series E cumulative redeemable preferred stock. The Series A, Series B and Series C preferred dividends were paid on January 28, 2019 to the applicable preferred stockholders of record at the close of business on January 11, 2019. The Series D and Series E preferred dividends were paid on January 15, 2019 to the applicable preferred stockholders of record at the close of business on January 1, 2019.
 
The company’s book value per common share, after taking into account the
fourth quarter
2018
common and preferred stock dividends, was
$13.11
as of
December 31, 2018
, compared to
$14.81
as of
September 30, 2018
, which represented a total return on book value for the quarter of
(8.3%)
.
(2) 

Other operating expenses, excluding non-cash LTIP amortization,
for the quarter ended December 31, 2018
were $12.7 million. The company’s annualized expense ratio was 1.1% of average equity, compared to other operating expenses, excluding non-cash LTIP amortization, of $13.8 million, or 1.3% of average equity, for the quarter ended
September 30, 2018
. These exclude non-cash equity compensation expense of
$3.2 million
for both of the quarters ended September 30, 2018 and December 31, 2018.

Portfolio Summary
The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities (Agency Derivatives) and MSR. As of
December 31, 2018
, the total value of the company’s portfolio
was
$27.6 billion
.


(1)
Excludes estimated amortization of
$57.8 million
included in Core Earnings, including dollar roll income.
(2)
Return on book value for the quarter ended
December 31, 2018
is defined as the
decrease
in book value per common share from
September 30, 2018
to
December 31, 2018
of
$1.70
, plus the dividends declared amounting to
$0.47
per common share, divided by
September 30, 2018
book value of
$14.81
per common share.


-
3
-


The company’s portfolio includes rates and credit strategies. The rates strategy consisted of
$23.7 billion
of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of
December 31, 2018
. Additionally, the company held
$6.5 billion
notional of net
long
to-be-announced securities (TBAs) as part of the Rates strategy. The credit strategy consisted of
$3.9 billion
of non-Agency securities, as well as their associated notional hedges as of
December 31, 2018
.

For the quarter ended
December 31, 2018
, the annualized yield on the company’s average aggregate portfolio was
4.14%
and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread on interest rate swaps and caps, was
2.53%
. This resulted in a net interest rate spread of
1.61%
.

RMBS and Agency Derivatives
For the quarter ended
December 31, 2018
, the annualized yield on average RMBS and Agency Derivatives was
3.9%
, consisting of an annualized yield of
3.3%
in Agency RMBS and Agency Derivatives and
7.7%
in non-Agency securities.

The company experienced a three-month average constant prepayment rate (CPR) of
6.8%
for Agency RMBS and Agency Derivatives held as of
December 31, 2018
, compared to
8.1%
as of
September 30, 2018
. The weighted average cost basis of the principal and interest Agency portfolio was
105.2%
of par as of both
December 31, 2018
and
September 30, 2018
. The net premium amortization was
$45.0 million
and
$48.5 million
for the quarters ended
December 31, 2018
and
September 30, 2018
, respectively. 

The company experienced a three-month average CPR of
5.2%
for legacy non-Agency securities held as of
December 31, 2018
, compared to
6.6%
as of
September 30, 2018
. The weighted average cost basis of the legacy non-Agency securities was
61.9%
of par as of
December 31, 2018
, compared to
61.7%
of par as of
September 30, 2018
. The discount accretion was
$24.6 million
for the quarter ended
December 31, 2018
, compared to
$19.9 million
for the quarter ended
September 30, 2018
. The total net discount remaining was
$1.9 billion
as of
December 31, 2018
, compared to
$1.8 billion
as of
September 30, 2018
, with
$1.3 billion
designated as credit reserve as of
December 31, 2018
.

As of
December 31, 2018
, fixed-rate investments composed
86.1%
and adjustable-rate investments composed
13.9%
of the company’s RMBS and Agency Derivatives portfolio.

Mortgage Servicing Rights
As of
December 31, 2018
, the company held MSR on mortgage loans with UPB totaling
$163.1 billion
.
(1)
The MSR had a fair market value of
$2.0 billion
, as of
December 31, 2018
, and the company recognized fair value losses of
$171.3 million
during the quarter ended
December 31, 2018
.

The company does not directly service mortgage loans, but instead contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the company’s MSR. The company recognized
$104.6 million
of servicing income,
$17.4 million
(1)
of servicing expenses and
$1.2 million
in servicing reserve expense during the quarter ended
December 31, 2018
.

Other Investments and Risk Management Derivatives
As previously described, the company held
$6.5 billion
notional of net
long
TBAs as of
December 31, 2018
, compared to
$9.3 billion
notional of net
long
TBAs as of
September 30, 2018
, which are accounted for as derivative instruments in accordance with GAAP.

As of
December 31, 2018
, the company was a party to interest rate swaps, caps and swaptions with a notional amount of 
$32.1 billion
. Of this amount,
$32.0 billion
notional in swaps and caps were utilized to economically hedge interest rate exposure (or duration), and
$0.1 billion
net notional in swaptions were utilized as macroeconomic hedges.

(1)
Excludes residential mortgage loans in securitization trusts for which the company is the named servicing administrator.

-
4
-


The following tables summarize the company’s investment portfolio, excluding the net TBA positions, as of
December 31, 2018
and
September 30, 2018
:
Two Harbors Investment Corp. Portfolio
(dollars in thousands)

Portfolio Composition
 
As of December 31, 2018
 
As of September 30, 2018
 
 
(unaudited)
 
(unaudited)
Rates Strategy
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
Fixed Rate
 
$
21,665,960

 
78.4
%
 
$
22,099,352

 
79.8
%
Hybrid ARMs
 
19,073

 
0.1
%
 
19,594

 
0.1
%
Total Agency
 
21,685,033

 
78.5
%
 
22,118,946

 
79.9
%
Agency Derivatives
 
70,257

 
0.2
%
 
67,040

 
0.2
%
Mortgage servicing rights
 
1,993,440

 
7.2
%
 
1,664,024

 
6.0
%
Other
 
17,712

 
0.1
%
 
18,182

 
0.1
%
Credit Strategy
 
 
 
 
 
 
 
 
Non-Agency
 
 
 
 
 
 
 
 
Senior
 
2,854,731

 
10.3
%
 
2,771,651

 
10.0
%
Mezzanine
 
928,632

 
3.4
%
 
976,150

 
3.5
%
Other
 
93,533

 
0.3
%
 
81,524

 
0.3
%
Total Non-Agency
 
3,876,896

 
14.0
%
 
3,829,325

 
13.8
%
Aggregate Portfolio
 
$
27,643,338

 
 
 
$
27,697,517

 
 


















-
5
-


 
 
 
 
 
Portfolio Metrics
 
Three Months Ended
December 31, 2018
 
Three Months Ended
September 30, 2018
 
 
(unaudited)
 
(unaudited)
Annualized portfolio yield during the quarter
 
4.14
%
 
3.76
%
Rates Strategy
 
 
 
 
Agency RMBS, Agency Derivatives and mortgage servicing rights
 
3.6
%
 
3.3
%
Credit Strategy
 
 
 
 
Non-Agency securities, Legacy
(1)
 
7.7
%
 
7.6
%
Non-Agency securities, New issue
(1)
 
7.8
%
 
5.4
%

 
 
 
 
Annualized cost of funds on average borrowing balance during the quarter
(2)
 
2.53
%
 
2.28
%
Annualized interest rate spread for aggregate portfolio during the quarter
 
1.61
%
 
1.48
%
Debt-to-equity ratio at period-end
(3)
 
5.8
:1.0
 
5.4
:1.0
Economic debt-to-equity ratio at period-end
(4)
 
7.2
:1.0
 
7.3
:1.0
 
 
 
 
 
Portfolio Metrics Specific to RMBS and Agency Derivatives
 
As of December 31, 2018
 
As of September 30, 2018
 
 
(unaudited)
 
(unaudited)
Weighted average cost basis of principal and interest securities
 
 
 
 
Agency
(5)
 
$
105.20

 
$
105.15

Non-Agency
(6)
 
$
61.87

 
$
61.68

Weighted average three month CPR
 
 
 
 
Agency
 
6.8
%
 
8.1
%
Non-Agency
 
5.2
%
 
6.6
%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
 
86.1
%
 
86.4
%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
 
13.9
%
 
13.6
%
________________
(1)
Legacy non-Agency securities includes non-Agency bonds issued up to and including 2009.  New issue non-Agency securities includes bonds issued after 2009.
(2)
Cost of funds includes interest spread income/expense associated with the portfolio's interest rate swaps and caps.
(3)
Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity.
(4)
Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.
(5)
Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(6)
Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for total legacy non-Agency securities excluding the company's non-Agency interest-only portfolio, would be
$59.07
at
December 31, 2018
and
$58.95
at
September 30, 2018
.

“The redeployment of capital from CYS unfolded according to our plan in the second half of 2018, as we allocated capital from Agency RMBS into MSR and non-Agency securities,” stated Bill Roth, Two Harbors’ Chief Investment Officer.  “The widening of spreads in the fourth quarter, while impactful to book value, provides attractive investment opportunities in 2019.”


Financing Summary
The company reported a debt-to-equity ratio, defined as total borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes to fund RMBS, Agency Derivatives and MSR divided by total equity, of
5.8:1.0
as of
December 31, 2018
. The company reported an economic debt-to-equity ratio, defined as total borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes to fund RMBS, Agency Derivatives and MSR, plus the implied debt on net TBA positions, divided by total equity, of
7.2:1.0
as of
December 31, 2018
.

As of
December 31, 2018
, the company had outstanding
$22.8 billion
of repurchase agreements funding RMBS and Agency Derivatives with
30
different counterparties. Excluding the effect of the company’s interest rate swaps and caps, the repurchase agreements funding RMBS and Agency Derivatives had a weighted average borrowing rate of
2.65%
as of
December 31, 2018
.


-
6
-


The company’s wholly owned subsidiary, TH Insurance Holdings Company LLC (TH Insurance), is a member of the FHLB.  As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances.  As of
December 31, 2018
, TH Insurance had
$865.0 million
in outstanding secured advances funding RMBS, with a weighted average borrowing rate of
2.79%
.

As of
December 31, 2018
, the company had outstanding
$310.0 million
of short and long-term borrowings secured by MSR collateral under revolving credit facilities with a weighted average borrowing rate of
5.60%
and remaining maturities of
4.3
years and an additional
$60.0 million
of available capacity for borrowings. Additionally, the company had outstanding
$300.0 million
of long-term repurchase agreements for MSR, with a weighted average borrowing rate of
4.51%
, with additional available capacity of
$100.0 million
.

As of
December 31, 2018
, the company’s aggregate repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes funding RMBS, Agency Derivatives and MSR had a weighted average of
3.7
months to maturity.

The following table summarizes the company’s borrowings by collateral type under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes outstanding as of
December 31, 2018
and
September 30, 2018
, and the related cost of funds for the three months ended
December 31, 2018
and
September 30, 2018
:
 
 
As of December 31, 2018
 
As of September 30, 2018
(in thousands)
 
(unaudited)
 
(unaudited)
Collateral type:
 
 
 
 
Agency RMBS and Agency Derivatives
 
$
21,001,246

 
$
22,419,779

Mortgage servicing rights
 
610,000

 
510,000

Non-Agency securities
 
2,697,254

 
2,051,876

Other
(1)
 
283,856

 
283,555

 
 
$
24,592,356

 
$
25,265,210

 
 

 
 
Cost of Funds Metrics
 
Three Months Ended
December 31, 2018
 
Three Months Ended
September 30, 2018
 
 
(unaudited)
 
(unaudited)
Annualized cost of funds on average borrowings during the quarter:
 
2.8
%
 
2.5
%
Agency RMBS and Agency Derivatives
 
2.5
%
 
2.3
%
Mortgage servicing rights
(2)
 
5.7
%
 
5.7
%
Non-Agency securities
 
3.7
%
 
3.6
%
Other
(1)(2)
 
6.8
%
 
6.7
%
________________
(1)
Includes unsecured convertible senior notes.
(2)
Includes amortization of debt issuance costs.

Dividends and Taxable Income
The company declared dividends totaling $444.0 million for the 2018 taxable year. The company is required to distribute at least 90% of its taxable income to maintain its REIT status, and must distribute 100% to avoid federal income tax. The company distributed 90.6% of its 2018 taxable income to stockholders during 2018, and intends to distribute the remaining 9.4% during the 2019 calendar year.  In addition, the tax characterization of each cash distribution made during 2018 will be treated as ordinary income to stockholders.



-
7
-


Conference Call
Two Harbors Investment Corp. will host a conference call on
February 7, 2019
at
9:00 a.m.
EST
to discuss
fourth quarter
2018
financial results and related information. To participate in the teleconference, please call toll-free
(800) 239-9838
(or
for international callers), conference code
3860780
, approximately 10 minutes prior to the above start time. You may also listen to the teleconference live via the Internet on the company’s website at
www.twoharborsinvestment.com
in the Investor Relations section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m.
EST
on
February 7, 2019
, through 12:00 a.m. EST on
February 14, 2019
. The playback can be accessed by calling
(888) 203-1112
(or
for international callers), conference code
3860780
. The call will also be archived on the company’s website in the Investor Relations section under the Events and Presentations link.

Two Harbors Investment Corp.
Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in New York, New York, and is externally managed and advised by PRCM Advisers LLC, a wholly owned subsidiary of Pine River Capital Management L.P. Additional information is available at
www.twoharborsinvestment.com.

Forward-Looking Statements
This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2017, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based. Additional information concerning these and other risk factors is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.

-
8
-


Non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as Core Earnings, Core Earnings, including dollar roll income, Core Earnings per basic common share and Core Earnings per basic common share, including dollar roll income, that exclude certain items. Two Harbors’ management believes that these non-GAAP measures enable it to perform meaningful comparisons of past, present and future results of the company’s core business operations, and uses these measures to gain a comparative understanding of the company’s operating performance and business trends. The non-GAAP financial measures presented by the company represent supplemental information to assist investors in analyzing the results of its operations. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 13 of this release.

Additional Information
Stockholders of Two Harbors and other interested persons may find additional information regarding the company at the SEC’s Internet site at
sec.report
or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 575 Lexington Avenue, Suite 2930, New York, NY 10022, telephone (612) 629-2500.

Contact
Margaret Field, Investor Relations, Two Harbors Investment Corp., (212) 364-3663 or
margaret.field@twoharborsinvestment.com    

# # #

-
9
-


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

December 31,
2018

December 31,
2017

(unaudited)


ASSETS



Available-for-sale securities, at fair value
$
25,552,604


$
21,220,819

Mortgage servicing rights, at fair value
1,993,440


1,086,717

Cash and cash equivalents
409,758


419,159

Restricted cash
688,006


635,836

Accrued interest receivable
86,589


68,309

Due from counterparties
154,626


842,303

Derivative assets, at fair value
319,981


309,918

Reverse repurchase agreements
761,815

 

Other assets
165,660


206,252

Total Assets
$
30,132,479


$
24,789,313

LIABILITIES AND STOCKHOLDERS’ EQUITY





Liabilities





Repurchase agreements
$
23,133,476


$
19,451,207

Federal Home Loan Bank advances
865,024


1,215,024

Revolving credit facilities
310,000


20,000

Convertible senior notes
283,856


282,827

Derivative liabilities, at fair value
820,590


31,903

Due to counterparties
130,210


88,898

Dividends payable
135,551


12,552

Accrued interest payable
160,005

 
87,698

Other liabilities
39,278


27,780

Total Liabilities
25,877,990


21,217,889

Stockholders’ Equity





Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 29,050,000 shares issued and outstanding, respectively ($1,001,250 and $726,250 liquidation preference, respectively)
977,501

 
702,537

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 248,085,721 and 174,496,587 shares issued and outstanding, respectively
2,481


1,745

Additional paid-in capital
4,809,616


3,672,003

Accumulated other comprehensive income
110,817


334,813

Cumulative earnings
2,332,371


2,386,604

Cumulative distributions to stockholders
(3,978,297
)

(3,526,278
)
Total Stockholders’ Equity
4,254,489


3,571,424

Total Liabilities and Stockholders’ Equity
$
30,132,479


$
24,789,313


-
10
-


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended December 31,
 
Year Ended
December 31,

2018

2017
 
2018
 
2017

(unaudited)
 
(unaudited)
Interest income:

 

 

Available-for-sale securities
$
242,535


$
182,712

 
$
847,325

 
$
631,853

Residential mortgage loans held-for-investment in securitization trusts


10,567

 

 
102,886

Other
9,420


1,826

 
22,707

 
10,350

Total interest income
251,955


195,105

 
870,032

 
745,089

Interest expense:





 


 


Repurchase agreements
146,702


74,674

 
469,437

 
210,430

Collateralized borrowings in securitization trusts


8,374

 

 
82,573

Federal Home Loan Bank advances
5,762


6,357

 
20,417

 
36,911

Revolving credit facilities
5,044


614

 
10,820

 
2,341

Convertible senior notes
4,793


4,776

 
18,997

 
17,933

Total interest expense
162,301


94,795

 
519,671

 
350,188

Net interest income
89,654


100,310

 
350,361

 
394,901

Other-than-temporary impairment losses
(107
)

(360
)
 
(470
)
 
(789
)
Other (loss) income:



 

 

Loss on investment securities
(245,763
)

(19,210
)
 
(341,312
)
 
(34,695
)
Servicing income
104,623

 
60,597

 
343,096

 
209,065

Loss on servicing asset
(171,284
)
 
(593
)
 
(69,033
)
 
(91,033
)
(Loss) gain on interest rate swap, cap and swaption agreements
(239,492
)

57,237

 
16,043

 
(9,753
)
Loss on other derivative instruments
(39,122
)

(3,831
)
 
(54,857
)
 
(70,159
)
Other income
342


9,088

 
3,037

 
30,141

Total other (loss) income
(590,696
)

103,288

 
(103,026
)
 
33,566

Expenses:



 

 

Management fees
12,152


10,671

 
30,272

 
40,472

Servicing expenses
18,610


10,135

 
61,136

 
35,289

Other operating expenses
15,943


9,787

 
62,983

 
54,160

Acquisition transaction costs

 

 
86,703

 

Restructuring charges



 
8,238

 

Total expenses
46,705


30,593

 
249,332

 
129,921

(Loss) income from continuing operations before income taxes
(547,854
)

172,645

 
(2,467
)
 
297,757

Provision for (benefit from) income taxes
6,681


10,618

 
41,823

 
(10,482
)
Net (loss) income from continuing operations
(554,535
)

162,027

 
(44,290
)
 
308,239

Income from discontinued operations, net of tax


4,977

 

 
44,146

Net (loss) income
(554,535
)

167,004

 
(44,290
)
 
352,385

Income from discontinued operations attributable to noncontrolling interest


1,100

 

 
3,814

Net (loss) income attributable to Two Harbors Investment Corp.
(554,535
)

165,904

 
(44,290
)
 
348,571

Dividends on preferred stock
18,950


11,949

 
65,395

 
25,122

Net (loss) income attributable to common stockholders
$
(573,485
)

$
153,955

 
$
(109,685
)
 
$
323,449

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-
11
-


TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME, continued
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
 
 
Three Months Ended December 31,
 
Year Ended
December 31,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(unaudited)
Basic earnings per weighted average common share:





 

 


Continuing operations
$
(2.31
)

$
0.86

 
$
(0.53
)
 
1.62

Discontinued operations


0.02

 

 
0.23

Net (loss) income
$
(2.31
)

$
0.88

 
$
(0.53
)
 
$
1.85

Diluted earnings per weighted average common share:





 


 


Continuing operations
$
(2.31
)

$
0.82

 
$
(0.53
)
 
$
1.60

Discontinued operations


0.02

 

 
0.21

Net (loss) income
$
(2.31
)

$
0.84

 
$
(0.53
)
 
$
1.81

Dividends declared per common share
$
0.47


$
0.47

 
$
1.88

 
$
2.01

Weighted average number of shares of common stock:





 


 


Basic
248,081,168


174,490,106

 
206,020,502

 
174,433,999

Diluted
248,081,168


188,938,030

 
206,020,502

 
188,133,341

Comprehensive (loss) income:





 


 


Net (loss) income
$
(554,535
)

$
167,004

 
$
(44,290
)
 
$
352,385

Other comprehensive income (loss), net of tax:





 


 


Unrealized gain (loss) on available-for-sale securities
265,546


(88,227
)
 
(233,914
)
 
135,586

Other comprehensive income (loss)
265,546


(88,227
)
 
(233,914
)
 
135,586

Comprehensive (loss) income
(288,989
)

78,777

 
(278,204
)
 
487,971

Comprehensive income attributable to noncontrolling interest


1,100

 

 
3,814

Comprehensive (loss) income attributable to Two Harbors Investment Corp.
(288,989
)

77,677

 
(278,204
)
 
484,157

Dividends on preferred stock
18,950


11,949

 
65,395

 
25,122

Comprehensive (loss) income attributable to common stockholders
$
(307,939
)

$
65,728

 
$
(343,599
)
 
$
459,035


-
12
-


TWO HARBORS INVESTMENT CORP.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION
(dollars in thousands, except share data)
Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended December 31,
 
Year Ended December 31,

2018

2017
 
2018
 
2017

(unaudited)
 
(unaudited)
Reconciliation of Comprehensive (loss) income to Core Earnings:



 

 

Comprehensive (loss)income attributable to common stockholders
$
(307,939
)

$
65,728

 
$
(343,599
)
 
$
187,863

Adjustment for other comprehensive (income) loss attributable to common stockholders:





 


 


Unrealized (gain) loss on available-for-sale securities attributable to common stockholders
(265,546
)

88,227

 
233,914

 
(135,586
)
Net (loss) income attributable to common stockholders
$
(573,485
)

$
153,955

 
$
(109,685
)
 
$
323,449





 

 

Adjustments for non-Core Earnings:




 


 


Realized losses on securities and residential mortgage loans held-for-sale
248,930


11,552

 
348,478

 
30,909

Unrealized (gain) loss on securities
(2,908
)

8,130

 
(6,444
)
 
2,109

Other-than-temporary impairment loss
107


360

 
470

 
789

Realized loss (gain) on termination or expiration of swaps, caps and swaptions
35,757


5,685

 
3,594

 
(63,169
)
Unrealized loss (gain) on interest rate swaps, caps and swaptions economically hedging interest rate exposure (or duration)
219,066


(60,878
)
 
29,580

 
64,099

Losses on other derivative instruments
34,967


6,616

 
52,018

 
82,906

Realized and unrealized loss (gain) on financing securitizations


(7,767
)
 

 
(22,609
)
Realized and unrealized loss (gain) on mortgage servicing rights
113,523


(40,148
)
 
(130,066
)
 
(47,636
)
Change in servicing reserves
1,200


(131
)
 
1,452

 
(3,464
)
Non-cash equity compensation expense (income)
3,211

 
(372
)
 
12,293

 
10,753

Management fee reduction associated with CYS acquisition

 

 
(17,484
)
 

Transaction expenses and purchase premium associated with CYS acquisition

 

 
86,703

 

Restructuring charges

 

 
8,238

 

Transaction expenses associated with the contribution of TH Commercial Holdings LLC to Granite Point

 

 

 
2,193

Income from discontinued operations, net of tax

 
(3,877
)
 

 
(12,719
)
Two Harbors’ share of Granite Point dividends declared during the three months ended September 30, 2017

 

 

 
10,658

Net provision for (benefit from) income taxes on non-Core Earnings
6,390

 
8,217

 
39,407

 
(15,262
)
Core Earnings attributable to common stockholders
(1)(2)
86,758


$
81,342

 
318,554

 
$
363,006

Dollar roll income
33,961

 
 
 
86,876

 
 
Core Earnings attributable to common stockholders, including dollar roll income
(1)
$
120,719

 

 
$
405,430

 
 




 

 

Weighted average basic common shares
248,081,168


174,490,106

 
206,020,502

 
174,433,999

Core Earnings attributable to common stockholders per weighted average basic common share
$
0.35

 
$
0.47

 
$
1.55

 
$
2.08

Dollar roll income per weighted average basic common share
0.14

 
 
 
0.42

 
 
Core Earnings, including dollar roll income, attributable to common stockholders per weighted average basic common share
$
0.49


 
 
$
1.97

 
 
_____________
(1)
Core Earnings is a non-U.S. GAAP measure that we define as
comprehensive (loss) income attributable to common stockholders
, excluding “realized and unrealized gains and losses” (impairment losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock, transaction costs related to the contribution of TH Commercial Holdings LLC to Granite Point and restructuring charges) and transaction costs and purchase premium associated with the acquisition of CYS. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. Dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. We believe the presentation of Core Earnings, including dollar roll income, provides investors greater transparency into our period-over-period financial performance and facilitates comparisons to peer REITs.
(2)
For the three months ended September 30, 2017, Core Earnings excludes our controlling interest in Granite Point’s Core Earnings and includes our share of Granite Point’s declared dividend. We believe this presentation is the most accurate reflection of our incoming cash associated with holding shares of Granite Point common stock and assists with the understanding of the forward-looking financial presentation of the company.


-
13
-


TWO HARBORS INVESTMENT CORP.
SUMMARY OF QUARTERLY CORE EARNINGS
(dollars in millions, except per share data)
Certain prior period amounts have been reclassified to conform to the current period presentation


Three Months Ended

December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 

(unaudited)
 
Net Interest Income:

 

 

 

 

 
Interest income
$
252.0

 
$
236.7

 
$
187.3

 
$
194.0

 
$
195.1

 
Interest expense
162.3

 
152.4

 
108.4

 
96.6

 
94.8

 
Net interest income
89.7

 
84.3

 
78.9

 
97.4

 
100.3

 
Other income:
 
 
 
 
 
 
 
 
 
 
Gain on investment securities

 

 
0.7

 
0.6

 
0.7

 
Servicing income, net of amortization
(1)
46.9

 
37.1

 
31.7

 
28.3

 
19.8

 
Interest spread on interest rate swaps and caps
15.3

 
16.2

 
13.8

 
3.8

 
2.0

 
(Loss) gain on other derivative instruments
(4.2
)
 
(2.7
)
 
1.7

 
2.5

 
2.8

 
Other income
0.6

 
0.6

 
0.5

 
0.7

 
1.1

 
Total other income
58.6

 
51.2

 
48.4

 
35.9

 
26.4

 
Expenses
42.3

 
42.5

 
35.1

 
38.1

 
31.1

 
Core Earnings before income taxes
106.0

 
93.0

 
92.2

 
95.2

 
95.6

 
Income tax expense (benefit)
0.3

 
(0.1
)
 
1.1

 
1.1

 
2.4

 
Core Earnings
105.7

 
93.1

 
91.1

 
94.1

 
93.2

 
Dividends on preferred stock
19.0

 
19.0

 
13.7

 
13.7

 
11.9

 
Core Earnings attributable to common stockholders
(3)
86.7

 
74.1

 
77.4

 
$
80.4

 
$
81.3

 
Dollar roll income
34.0

 
32.9

 
16.5

 
3.4

 
 
 
Core Earnings, including dollar roll income, attributable to common stockholders
(3)
$
120.7

 
$
107.0

 
$
93.9

 
$
83.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average basic Core EPS
$
0.35

 
$
0.33

 
$
0.44

 
$
0.46

 
$
0.47

 
Weighted average basic Core EPS, including dollar roll income
0.49

 
0.48

 
0.53

 
$
0.48

 


 
 
 
 
 
 
 
 
 
 
 
 
Core earnings return on average common equity
9.9
%
 
8.6
%
 
11.1
%
 
11.3
%
 
11.3
%
(4) 
Core earnings return on average common equity, including dollar roll income
13.8
%
 
12.4
%
 
13.5
%
 
11.8
%
 
 
 
________________
(1)
Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio. This amortization has been deducted from Core Earnings. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.
(2)
For the six months ended December 31, 2017, Core Earnings excludes our controlling interest in Granite Point’s Core Earnings and, for the three months ended September 30, 2017, includes our share of Granite Point’s declared dividend. We believe this presentation is the most accurate reflection of our incoming cash associated with holding shares of Granite Point common stock and assists with the understanding of the forward-looking financial presentation of the company.
(3)
Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
(4)
Core Earnings return on average common equity for the quarter ended December 31, 2017 excludes the company’s controlling interest in Granite Point equity.




-
14
-
twoq42018earningscallpre.htm 2018 FOURTH QUARTER EARNINGS CALL PRESENTATION.


ENT> EX-99.2 3 twoq42018earningscallpre.htm 2018 FOURTH QUARTER EARNINGS CALL PRESENTATION.

twoq42018earningscallpre

Fourth Quarter 2018 Earnings Call  FEBRUARY 7, 2019
 
Safe Harbor Statement  FORWARD-LOOKING STATEMENTS This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995.  Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events.  Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements.  These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2017, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire mortgage servicing rights (MSR) and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940. Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based.  Additional information concerning these and other risk factors is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.  This presentation may include industry and market data obtained through research, surveys, and studies conducted by third parties and industry publications.  We have not independently verified any such market and industry data from third-party sources. This presentation is provided for discussion purposes only and may not be relied upon as legal or investment advice, nor is it intended to be inclusive of all the risks and uncertainties that should be considered.  This presentation does not constitute an offer to purchase or sell any securities, nor shall it be construed to be indicative of the terms of an offer that the parties or their respective affiliates would accept. Readers are advised that the financial information in this presentation is based on company data available at the time of this presentation and, in certain circumstances, may not have been audited by the company’s independent auditors.                                                                                                                                                         2
 
Quarterly and Annual Summary                             2018 Transformative Year for the Company Quarterly Summary • Redeployed capital from CYS Investments, Inc. (CYS) acquisition in accordance with previously announced plan.  • Added  $36.1  billion  unpaid  principal  balance  (UPB)  of  MSR  through  bulk  acquisitions  and  monthly  flow-sale   arrangements, bringing total holdings to $163.1 billion UPB.  • Incurred a Comprehensive Loss of ($307.9) million, or ($1.24) per weighted average basic common share.   • Generated Core Earnings, including dollar roll income, of $120.7 million, or $0.49 per weighted average basic common   share, representing a return on average common equity of 13.8%.(1)  • Reported book value of $13.11 per common share, representing a (8.3%) total quarterly return on book value.(2)  2018 Summary • Completed the acquisition of CYS, growing the company’s market capitalization and equity base, increasing the liquidity   of the company’s stock and driving expenses lower.  • Added $75.9 billion UPB of MSR, growing portfolio by approximately 60% year-over-year.  • Generated strong Core Earnings and competitive average dividend yield of 12.8% in 2018.     (1) Core Earnings and Core Earnings, including dollar roll income, are non-GAAP measures. Please see Appendix slide 20 of this presentation for a definition of Core     Earnings and Core Earnings including dollar roll income and a reconciliation of GAAP to non-GAAP financial information.   (2) Return on book value for the quarter ended December 31, 2018 is defined as the decrease in book value per common share from September 30, 2018 to 3     December 31, 2018 of $1.70, plus dividends declared amounting to $0.47 per common share, divided by September 30, 2018 book value of $14.81 per common     share.
 
Driving Stockholder Value  Improved stockholder value over the past three years by growing our company and reducing operating complexity: •  2016: Discontinued our mortgage loan conduit, reducing operating complexity and costs •  2017: Formed and spun out Granite Point Mortgage Trust Inc. (NYSE: <a href=GPMT) to better reflect the embedded value of the commercial real estate lending business that we established in 2015 • 2018: Acquired CYS growing market capitalization and equity base, increasing liquidity of our stock and driving our expense ratio lower P Drove strong Core Earnings and generated a competitive average dividend yield of 12.8% in 2018 Building momentum and driving returns going forward: • Attractive investment opportunities in Rates(1) and Credit(2) strategies • Active risk management should dampen volatility through the utilization of a variety of hedging tools • Enhance stockholder returns and optimize earnings through construction of balance sheet P Goal to deliver strong results and book value stability through a variety of interest rate and mortgage spread environments 4 (1) Assets in “Rates” include Agency RMBS, MSR and other interest rate sensitive assets. (2) Assets in “Credit” include non-Agency securities and other credit sensitive assets. " />
 
 Book Value                                                                                                       Q4-2018                           FY-2018                                                                                    Q4-2018       Book Value          FY-2018      Book Value   (Dollars in millions, except per share data)                                   Book Value        per share      Book Value        per share    Beginning common stockholders’ equity                                              $3,674.7          $14.81         $2,845.2           $16.31    GAAP Net Income:         Core Earnings, net of tax(1)                                                     105.7                             384.0         Dividend declaration - preferred                                                  (19.0)                           (65.4)         Core Earnings attributable to common stockholders, net of tax(1)                  86.7                             318.6                         Comprehensive                                                                                                                                                         (Loss) Income        Dollar roll income                                                                34.0                              86.9                         (GAAP)        Core Earnings attributable to common stockholders, including dollar roll        income, net of tax(1)                                                            120.7                            405.5                          Incurred Q4-2018                                                                                                                                                         Comprehensive        Realized and unrealized gains and losses, net of tax                            (694.2)                           (428.4)                        Loss of $307.9        Transaction expenses and purchase premium associated with                                                                                        million.        acquisition of CYS Investments, Inc.                                                 —                             (86.7)    Other comprehensive loss, net of tax                                                  265.5                            (114.1)    Dividend declaration - common                                                        (116.6)                           (386.6)    Other                                                                                    3.2                             12.9    Acquisition of CYS Investments, Inc.                                                    (0.2)                         1,124.9    Issuance of common stock, net of offering costs                                          0.1                              0.3    Ending common stockholders’ equity                                                 $3,253.2           $13.11        $3,253.2           $13.11    Total preferred stock liquidation preference                                        1,001.3                          1,001.3    Ending total equity                                                                $4,254.5                         $4,254.5   (1)  Please see Appendix slide 20 for a definition of Core Earnings and Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial        5      information.
 
Core Earnings Summary(1)                                                        Q3-2018          Q4-2018      Variance ($)   (Dollars in millions, except per share data)                                                           •   Core Earnings, including dollar roll  Interest income                                        $236.7          $252.0             $15.3             income, was $0.49 per weighted average  Interest expense                                        152.4            162.3              (9.9)                                                                                                              basic common share, representing a    Net interest income                                    84.3             89.7               5.4                                                                                                              return on average common equity of  Gain on investment securities                               —                —                —  Servicing income, net of amortization on MSR             37.1             46.9               9.8            14.0%  Gain on swaps, caps and swaptions                        16.2             15.3              (0.9)       •   Core Earnings benefitted from the payoff  Gain (loss) on other derivatives                          (2.7)            (4.2)            (1.5)                                                                                                              of a legacy non-Agency bond, which  Other                                                      0.6             0.6                —                                                                                                              contributed approximately 2 cents to    Total other income                                     51.2             58.6               7.4                                                                                                              Core Earnings  Expenses                                                 42.5             42.3               0.2  Provision for (benefit from) income taxes                 (0.1)            0.3              (0.4)       •   Other operating expense ratio, excluding                (1)  Core Earnings                                            93.1            105.7              12.6            non-cash LTIP amortization, of 1.1%;  Dividends on preferred stock                             19.0             19.0                —  Core Earnings attributable to common                                                                        anticipate expenses should be stable in  stockholders(1)                                          74.1             86.7              12.6            the low 1’s in 2019  Dollar roll income                                       32.9             34.0               1.1  Core Earnings, including dollar roll income,  attributable to common stockholders(1)                 $107.0          $120.7             $13.7    Basic weighted average Core EPS                         $0.33            $0.35  Basic weighted average Core EPS, including  dollar roll income                                      $0.48            $0.49  Core Earnings as a % of average common  equity                                                     8.6%           10.1%  Core Earnings as a % of average common  equity, including dollar roll income                     12.4%            13.8%       (1) Core Earnings and Core Earnings, including dollar roll income, are non-GAAP measures. Please see Appendix slide 20 for a definition of Core Earnings and Core         6         Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.
 
Tax Characterization of Dividends in 2018                                                         FULL YEAR 2018 DIVIDEND SUMMARY  •   Generated REIT taxable income of $490.3 million in 2018(1) •   2018 dividend declarations totaled $444.0 million     –   $444.0 million consists of dividends to common shares of $384 million ($1.88 per common share), dividends to preferred shares of $58         million and deemed dividends from the convertible note conversion rate adjustments of $2 million     –   No carryover dividend obligation from 2017 REIT taxable income     –   Distributed 90.6% of REIT taxable income      –   Carrying $46.3 million, or approximately $0.19 per share, of excess ordinary income and dividend obligation to 2019 •   Dividends characterized fully as ordinary taxable income on Form 1099-DIV(2)                                   $500.0                                                                                                              $46.3                                     Carryover obligation                                                                                                                                                        to 2019 tax year                                 $400.0                               )                               s                                n $300.0                               o                               i                               l                               l                               i                                 $490.3                                                                                                              $444.0                               M                                ( $200.0                               $                                 $100.0                                      $0.0                                                     2018   REIT   Taxable  Income               2018    Dividend   Declarations    (1) Excludes net capital loss of $393.6 million generated in 2018 tax year.  Capital loss may be utilized in the next five future tax years before expiring.  (2) The U.S. federal income tax treatment of holding Two Harbors common stock to any particular stockholder will depend on the stockholder’s particular tax      circumstances.  You are urged to consult your tax advisor regarding the U.S. federal, state, local and foreign income and other tax consequences to you, in light of your      particular investment or tax circumstances, of acquiring, holding and disposing of Two Harbors common stock.  Two Harbors does not provide tax, accounting or legal      7      advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S., federal, state or local tax      penalties. Please consult your advisor as to any tax, accounting or legal statements made herein.
 
Optimizing Financing Profile and Capital Structure  DEBT-TO-EQUITY • 5.8x debt-to-equity at December 31, 2018(1) • Economic debt-to-equity, which includes the implied debt on net to-be-announced (TBA) positions, of 7.2x at   December 31, 2018, compared to 7.3x at September 30, 2018(2)  PREFERRED STOCK  • $1.0 billion outstanding across all preferred series with weighted average dividend rate of 7.6% • Accounts for approximately 24% of capital base  RATES – AGENCY RMBS  • Outstanding repurchase agreements of $20.1 billion with 29 active counterparties • Outstanding secured FHLB advances of $865.0 million with weighted average borrowing rate of 2.79% • Repo markets functioning efficiently for RMBS with new counterparties entering market  CREDIT – NON-AGENCY SECURITIES • Outstanding borrowings of $2.7 billion with 12 active counterparties • Market for non-Agency securities has seen improvement in both advance rates and spreads; spreads came down about   40 basis points in 2018  RATES – MSR • Outstanding borrowings of $610.0 million under MSR financing facilities; additional available capacity of $160.0 million  • Continue to advance MSR financing discussions with additional counterparties                                                                                                           8 (1) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity. (2) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.
 
Portfolio Composition                      PORTFOLIO COMPOSITION(1)                                                                        CAPITAL ALLOCATION     $27.6 BILLION PORTFOLIO AS OF DECEMBER 31, 2018                                                                                                                                      July 31, 2018 -                                                                                                                    March 31,          Acquisition of        December 31,                                                                                                                        2018                 CYS                  2018                  Non-Agency                     $3.9b                                                                                             Rates                               69%                  77%                    74%            MSR           $2.0b                                                                               Agency                            50%                  59%                    50%                                                                                                MSR                               19%                  18%                    24%                                                   Agency                                                   $21.7b                                                                                             Credit                              31%                  23%                    26%                                                                   Coupon breakdown                         •   Deployment of capital from CYS unfolded                                                                    3-3.5%: $0.2b                             according to plan                                                                    4-4.5%: $19.5b                                          (2)                                    Rates   $23.7b                    >5%: $1.5b                          •   Actively evaluate capital allocation going                                                                                                              forward based on best market                                    Credit(3) $3.9b              Note: Excludes $6.5                                                                 billion net long TBA                         opportunities                                                                 positions    (1)  For additional detail on the portfolio, see Appendix slides 21-25.  (2)  Assets in “Rates” include Agency RMBS, MSR and other interest rate sensitive assets.                                                                                    9  (3)  Assets in “Credit” include non-Agency securities and other credit sensitive assets.
 
  Market Performance      •    Current coupon Agencies underperformed hedges in the quarter    •    Higher coupons performed worse                                                                           (1)             2018     Mortgage      Coupon      Price   Performance                                   Q4-2018       Mortgage       Coupon      Price   Performance        (1)        20                                                                                           10         0                                                                                             0       -20                                                                                           -10 )                                                                                              ) s                                                                                              s k                                                                                              k c                                                                                              c i                                                                                              i t                                                                                              t (                                                                                              ( e                                                                                              e v                                                                                              v   o   -40                                                                                        o  -20 m                                                                                              M s                                                                                              s i                                                                                              i s                                                                                              s a                                                                                              a B                                                                                              B     -60                                                                                           -30       -80                                                                                           -40      -100                                                                                           -50        1/2/2018          3/31/2018         6/30/2018         9/30/2018        12/31/2018            10/1/2018                                11/15/2018                                12/31/2018                     3.5             4.0             4.5             5.0                                         3.5             4.0             4.5             5.0      (1)  Mortgage basis price underperformance of individual Agency coupons is hedge-adjusted versus the swap curve. Source: J.P. Morgan Live. 2018 underperformance from       10         December 31, 2017 through December 31, 2018 and Q4-2018 underperformance from September 30l 2018 through December 31, 2018.
 
Estimated Book Value Attribution(1)   • Rate volatility did not contribute to any meaningful change in book value  • MSR performed in line with current coupon Agency spread widening  • Book value primarily impacted by underperformance of higher coupon Agencies   • Legacy non-Agency securities also widened close to 50 basis points                                                                         Estimated book value impact  (% of                                                                        common equity, rounded to nearest       Fourth Quarter Book Value Performance Estimated Attribution                          half percent)        Impact of interest rate/curve move                                                          —%        MSR performance versus current coupon MBS                                                   —%        Impact of high coupon underperformance                                                    (8.0%)        Impact of specified pool underperformance                                                 (0.5%)        Non-Agency credit markdowns                                                               (3.0%)          Total book value impact                                                                (11.5%)                                                                                                          11 (1)  Represents estimated book value impact by asset class.  Attribution is based on results from third party models in conjunction with inputs from our internal investment professionals.
 
Performance Summary   • Net interest margin benefitted from purchases of Agency pools at attractive yields  • MSR benefitted from slower prepayment speeds and higher interest rate environment  • Non-Agency yields stable       Three Months Ended                                        September 30, 2018   December 31, 2018       Annualized portfolio yield during the quarter                           3.76%               4.14%        Rates         Agency RMBS, Agency Derivatives and MSR                               3.3%                3.6%        Credit         Non-Agency securities, Legacy(1)                                      7.6%                7.7%         Non-Agency securities, New issue(1)                                   5.4%                7.8%     Annualized cost of funds on average borrowings during the     quarter(2)                                                              2.28%               2.53%     Annualized interest rate spread for aggregate portfolio during     the quarter                                                             1.48%               1.61%                                                                                                           12 (1)  “Legacy” non-Agency securities includes non-Agency bonds issued up to and including 2009.  “New issue” non-Agency securities includes bonds issued after 2009. (2)   Cost of funds includes interest spread income/expense associated with the portfolio’s interest rate swaps and caps.
 
Portfolio Highlights & Opportunities for 2019  ATTRACTIVE INVESTMENT OPPORTUNITIES IN 2019 AS A RESULT OF SPREAD WIDENING  RATES STRATEGY  • Wider spreads creates attractive opportunities to invest capital in Agency RMBS  • Acquired $36.1 billion UPB of MSR in the fourth quarter 2018; grew portfolio by over 60%   year-over-year  • MSR market continues to be robust; over $30 billion UPB in bulk deals transacted in January 2019   CREDIT STRATEGY  • Discounted legacy non-Agencies continue to benefit from residential tailwinds that support strong total   returns   • Added $266 million legacy non-Agencies in the quarter  • As deeply discounted legacy non-Agency securities realize their upside potential, we expect to recycle   capital into the best market opportunities at that time                                                                                         13
 
 Risk Metrics   •   Active management of risk positioning with goal of maintaining low exposures to rates and spreads                                                                HEDGING ACROSS THE CURVE                 Book value exposure to changes in rates(1)                                          Net interest income exposure to changes in rates(2)    +25 basis points                                                             0.1%         +25 basis points                                                             (1.8%)    +50 basis points                                                             (2.6%)       +50 basis points                                                             (3.6%)                                              BOOK VALUE SENSITIVITY TO MORTGAGE SPREADS(3)                                                 Change in Agency RMBS and                                                                      Total overall Rates            Mortgage spreads                          mortgage derivatives                            Change in MSR                              strategy change    25 basis points increase                                                      ($224)                                         $80                        ($144) / (4.4%)    15 basis points increase                                                      ($131)                                         $49                          ($82) / (2.5%)    15 basis points decrease                                                       $117                                         ($54)                             $63 / 1.9%    25 basis points decrease                                                       $189                                         ($91)                             $98 / 3.0%   Note: The above scenario is provided for illustration purposes only and is not necessarily indicative of Two Harbors’ financial condition and operating results, nor is it necessarily indicative of the financial condition or results of operations that may be expected for any future period or date. (1)  Represents estimated change in book value for theoretical parallel shift in interest rates.  (2)  Represents estimated percentage change in net interest income for theoretical parallel shifts in interest rates. Amounts include the effect of interest spread from our interest rate swaps and caps and float income from custodial accounts associated with our MSR, but do not reflect any potential changes to dollar roll income associated with our TBA positions, which are accounted for as derivative instruments in accordance with GAAP. (3)  Dollars in millions. The information presented in this table projects the potential impact on book value of instantaneous changes in current coupon mortgage spreads. Spread14 sensitivity is based on results from third party models in conjunction with inputs from our internal investment professionals. Actual results could differ materially from these estimates.
 
Appendix
 
Return on Book Value   Return on common book value Q4-2018 (Per common share amounts, except for percentage)  Book value at September 30, 2018                                                                                                                                      $14.81  Book value at December 31, 2018                                                                                                                                        13.11  Decrease in book value                                                                                                                                                  (1.70)  Dividend declared in Q4-2018                                                                                                                                             0.47  Return on book value Q4-2018                                                                                                                                           ($1.23)  Percent return on book value Q4-2018(1)                                                                                                                                  (8.3)%  Return on common book value FY-2018 (Per common share amounts, except for percentage)  Book value at December 31, 2017                                                                                                                                       $16.31  Book value at December 31, 2018                                                                                                                                        13.11  Decrease in book value                                                                                                                                                  (3.20)  Dividends declared FY-2018                                                                                                                                               1.88  Return on book value FY-2018                                                                                                                                           ($1.32)  Percent return on book value FY-2018(2)                                                                                                                                  (8.1)%   (1)  Return on book value for the three-month period ended December 31, 2018 is defined as the decrease in book value per common share from September 30, 2018 to      December 31, 2018 of $1.70 per common share, plus dividends declared amounting to $0.47 per common share, divided by September 30, 2018 book value of      $14.81 per common share. (2)  Return on book value for the twelve-month period ended December 31, 2018 is defined as the decrease in book value per common share from December 31, 2017 to            16      December 31, 2018 of $3.20 per common share, plus dividends declared of $1.88 per common share, divided by December 31, 2017 book value of 16.31 per      common share.
 
  Financial Performance                         COMPREHENSIVE INCOME (LOSS)                                                                   BOOK VALUE AND DIVIDEND PER COMMON SHARE(1)     $150                                              13.1%                                           20%       $25.00                    8.5%                                                                                                      10%     $50            $65.7                             $90.8                                    $(23.7)                                                           0%        $20.00     -$50                                                                                                                        $4.14(2)                                     (3.3)%                           $(102.8)                        -10%                                                                                                                                                    0.47             0.47   -$150                                                                               $(307.9)                 $15.00                                                                0.47                                                                      (11.9)%                         -20%                                                                                                                                 $16.31                                                               $0.47                                                                                                                                                  $15.63            $15.69           $14.81   -$250                                                                               (35.2)%        -30%                                                                                            $13.11                                                                                                                $10.00   -$350                                                                                              -40%                  Q4-2017          Q1-2018           Q2-2018          Q3-2018          Q4-2018                                   Q4-2017          Q1-2018          Q2-2018          Q3-2018          Q4-2018                             Comp.  Income  ($M)                      Comp.  Income  ROACE   (%)                                          Book  Value ($)                      Dividend  Declared  ($)                                            DIVIDENDS(1)                                                                                           GAAP NET INCOME                                                                                      14.6%   $0.60                                                                                          15.0%          $400                                                                                                                                               $1.83   $0.50           $0.47            $0.47           $0.47           $0.47           $0.47                                                                                                                     $2.00                                                                                                                 $200           $0.88                   11.6%                                                                                                                       $321.1           $0.72                                                                                                                               $154.0   $0.40                                                            12.6%                                                                                       $125.7          $0.08                         $0.50                                    12.2%           11.9%                                                           $0                                                                                                                                                                                $17.0   $0.30                                                                                          10.0%                                                                                                                -$200                                                                                         -$1.00   $0.20                                                                                                                                                                                        $(2.31)                                                                                                                                                                                                              -$2.50   $0.10                                                                                                        -$400                                                                                                                                                                                               $(573.5)   $0.00                                                                                          5.0%          -$600                                                                                         -$4.00                  Q4-2017         Q1-2018          Q2-2018         Q3-2018         Q4-2018                                     Q4-2017         Q1-2018         Q2-2018         Q3-2018         Q4-2018                      Dividend per common   share  ($)               Divided Yield (%)                                                             GAAP   Net Inc. ($M)                                                                                                                                                   GAAP   Earnings per basic common    share ($)                                                                                                                                                                                                                   17 (1)   Historical dividends may not be indicative of future dividend distributions.  The company ultimately distributes dividends based on its taxable income per common share, not GAAP earnings. The       annualized dividend yield on the company’s common stock is calculated based on the closing price of the last trading day of the relevant quarter. (2)   Includes the special dividend of Granite Point common stock of $3.67 per common share.
 
Q4-2018 Operating Performance                                                                                                                                 Q4-2018                                                                                               Core Earnings,                                                                                          including dollar roll     Realized Gains  (In millions, except for per common share data)                                                  income(1)              (Losses)        Unrealized MTM                   Total   Interest income                                                                                   $252.0                     $—                     $—                $252.0   Interest expense                                                                                    162.3                     —                      —                 162.3        Net interest income                                                                             89.7                     —                      —                   89.7   Total other-than-temporary impairment losses                                                            —                     —                    (0.1)                 (0.1)   (Loss) gain on investment securities                                                                    —                 (248.8)                   3.1                (245.7)   Servicing income                                                                                    104.6                     —                      —                 104.6   (Loss) gain on servicing asset                                                                      (57.7)                   0.2                 (113.8)               (171.3)   Gain (loss) on interest rate swaps, caps and swaptions                                               15.3                  (35.7)                (219.1)               (239.5)   Gain (loss) on other derivative instruments                                                          29.8                  (38.9)                 (30.0)                (39.1)   Other income (loss)                                                                                   0.6                    (0.1)                 (0.2)                  0.3        Total other income (loss)                                                                       92.6                 (323.3)                (360.1)               (590.8)   Management fees & other expenses                                                                     42.3                    4.4                     —                   46.7   Net income (loss) before income taxes                                                               140.0                 (327.7)                (360.1)               (547.8)   Income tax expense (benefit)                                                                          0.3                    (0.2)                  6.6                   6.7   Net income (loss)                                                                                   139.7                 (327.5)               (366.7)               (554.5)   Dividends on preferred stock                                                                         19.0                     —                      —                   19.0  Net income (loss) attributable to common stockholders                                             $120.7                ($327.5)               ($366.7)              ($573.5)   Weighted average earnings (loss) per basic common share                                             $0.49                 ($1.32)                ($1.48)               ($2.31)    (1) Core Earnings, including dollar roll income, is a non-GAAP measure. Please see Appendix slide 20 of this presentation for a definition of Core Earnings, including dollar      roll income, and a reconciliation of GAAP to non-GAAP financial information.                                                                                            18
 
Q3-2018 Operating Performance                                                                                                                                 Q3-2018                                                                                               Core Earnings,                                                                                          including dollar roll     Realized Gains  (In millions, except for per common share data)                                                  income(1)              (Losses)        Unrealized MTM                   Total   Interest income                                                                                   $236.7                     $—                     $—                $236.7   Interest expense                                                                                    152.4                     —                      —                 152.4        Net interest income                                                                             84.3                     —                      —                   84.3   Total other-than-temporary impairment losses                                                            —                     —                    (0.1)                 (0.1)   Loss on investment securities                                                                           —                  (40.9)                  (2.1)                (43.0)   Servicing income                                                                                     89.6                     —                      —                   89.6   (Loss) gain on servicing asset                                                                      (52.5)                    —                    73.1                  20.6   Gain (loss) on interest rate swaps and swaptions                                                     16.2                  (39.9)                  99.5                  75.8   Gain (loss) on other derivative instruments                                                          30.2                  (23.3)                 (38.3)                (31.4)   Other income                                                                                          0.6                    0.2                    0.1                   0.9        Total other income (loss)                                                                       84.1                 (103.9)                132.3                 112.5   Management fees & other expenses                                                                     42.5                   80.8                     —                 123.3   Net income (loss) before income taxes                                                               125.9                 (184.7)                132.2                   73.4   Income tax (benefit) expense                                                                          (0.1)                  3.9                   33.6                  37.4   Net income (loss)                                                                                   126.0                 (188.6)                  98.6                  36.0   Dividends on preferred stock                                                                         19.0                     —                      —                   19.0  Net income (loss) attributable to common stockholders                                             $107.0                ($188.6)                 $98.6                 $17.0   Weighted average earnings (loss) per basic common share                                             $0.48                 ($0.84)                $0.44                 $0.08    (1) Core Earnings, including dollar roll income, is a non-GAAP measure. Please see Appendix slide 20 of this presentation for a definition of Core Earnings, including dollar      roll income, and a reconciliation of GAAP to non-GAAP financial information.                                                                                            19
 
GAAP to Core Earnings Reconciliation(1)   Reconciliation of GAAP to non-GAAP Information                                                                         Three Months Ended             Three Months Ended  (In thousands, except for per common share data)                                                                      September 30, 2018              December 31, 2018  Reconciliation of Comprehensive income (loss) to Core Earnings:   Comprehensive loss attributable to common stockholders                                                                               ($102,801)                     ($307,939)  Adjustment for other comprehensive loss (income) attributable to common stockholders:    Unrealized loss (gain) on available-for-sale securities attributable to common stockholders                                          119,796                       (265,546)  Net income attributable to common stockholders                                                                                         $16,995                      ($573,485)  Adjustments for non-core earnings:     Realized losses on securities and residential mortgage loans                                                                          40,758                       248,930     Unrealized loss (gain) on securities                                                                                                   1,965                         (2,908)     Other-than-temporary impairment loss                                                                                                      95                            107     Unrealized (gain) loss on interest rate swaps, caps and swaptions hedging interest rate exposure (or duration)                       (99,486)                      219,066     Realized losses on termination or expiration of swaps, caps and swaptions                                                             39,866                        35,757     Losses on other derivative instruments                                                                                                28,697                        34,967     Realized and unrealized gain (loss) on mortgage servicing rights                                                                     (73,104)                      113,523     Change in servicing reserves                                                                                                             141                          1,200     Non-cash equity compensation expense                                                                                                   3,211                          3,211     Management fee reduction associated with CYS acquisition                                                                             (17,484)                             —     Transaction expenses and purchase premium associated with CYS acquisition                                                             86,703                              —     Restructuring charges                                                                                                                  8,238                              —     Net provision for income taxes on non-Core Earnings                                                                                   37,504                          6,390  Core Earnings attributable to common stockholders(1)                                                                                     74,099                        86,758     Dollar roll income                                                                                                                    32,922                        33,961  Core Earnings attributable to common stockholders, including dollar roll income(1)                                                    $107,021                       $120,719  Weighted average basic common shares                                                                                               224,399,436                   248,081,168  Core Earnings per weighted average basic common share                                                                                     $0.33                          $0.35  Dollar roll income per weighted average basic common share                                                                                 0.15                           0.14  Core Earnings, including dollar roll income, per weighted average basic common share                                                      $0.48                          $0.49   (1) Core Earnings is a non-U.S. GAAP measure that we define as comprehensive (loss) income attributable to common stockholders, excluding “realized and unrealized      gains and losses” (impairment losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations      on MSR,  non-cash compensation expense related to restricted common stock and restructuring charges) and transaction costs and purchase premium associated with      the acquisition of CYS. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net    20      of estimated amortization on MSR. Dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. We      believe the presentation of Core Earnings, including dollar roll income, provides investors greater transparency into our period-over-period financial performance and      facilitates comparisons to peer REITs.
 
Rates: Agency RMBS Metrics         AGENCY PORTFOLIO YIELDS AND METRICS                                                             AGENCY PORTFOLIO COMPOSITION                                                                                                                                  Hybrid ARMs and                                                                                                                 IO & Inverse IO      Other                                Realized      At September   Realized      At December  Portfolio Yield               Q3-2018       30, 2018       Q4-2018       31, 2018                30-Year Fixed      1.1%             1.3%                                                                                                    5% & above  Agency yield                   3.1%          3.4%           3.3%         3.5%                                                                                                       6.7%   Repo and FHLB costs            (2.3%)        (2.3%)         (2.5%)       (2.5%)                                                                                          30-Year Fixed 3-3.5%  Swap and cap income            0.3%          0.4%           0.3%         0.6%                   1.1%   Net interest spread            1.1%          1.5%           1.1%         1.6%    Portfolio Metrics                                           Q3-2018      Q4-2018                                                            30-Year Fixed 4-4.5%                                                                                                                                                     89.8%   Weighted average 3-month CPR(1)                             8.1%         6.8%   Weighted average cost basis(2)                             $105.2        $105.2                           AGENCY RMBS CPR(1)   15.0%                                               9.2%  10.0%                 7.6%                                       8.1%                               7.0%                                       6.8%    5.0%     0.0%                Q4-2017       Q1-2018        Q2-2018       Q3-2018        Q4-2018    (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives).                                                                   21  (2) Weighted average cost basis includes RMBS principal and interest securities only.  Average purchase price utilized carrying value for weighting purposes.
 
Rates: Agency RMBS                                                                                                                                                                      Weighted  As of December 31,                                                                        % Prepay         Amortized Cost         Weighted Average              Average Age  2018                             Par Value ($M)       Market Value ($M)                 Protected(1)             Basis ($M)                   Coupon                (Months)   30-Year fixed       3.0-3.5%                                  $234                     $235                   100.0%                     $236                      3.5%                     19       4.0-4.5%                                18,878                   19,533                     91.8%                  19,812                      4.3%                     19       ≥ 5.0%                                   1,368                    1,452                     74.4%                   1,449                      5.1%                     24                                               20,480                   21,220                     90.7%                  21,497                      4.3%                     19    Hybrid ARMs                                     18                       19                       —%                       19                      5.1%                   177   Other                                          278                      271                      0.3%                     272                      4.7%                   149   IOs and IIOs                                 3,592                  246   (2)                     —%                      279                      2.6%                   115   Total Agency holdings                     $24,368                  $21,756                      88.4%                $22,067   Net TBA notional                             6,484   Total                                     $30,852    (1) Includes securities with implicit or explicit protection including lower loan balances (securities collateralized by loans less than or equal to $175K of initial      principal balance), higher LTVs (securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations and lower FICO      scores.  (2) Represents market value of $175.4 million of IOs and $70.3 million of Agency Derivatives.                                                                               22
 
Rates: Mortgage Servicing Rights(1)                                                                                                            As of September 30, 2018              As of December 31, 2018    Fair value ($M)                                                                                                              $1,664.0                              $1,993.4    Unpaid principal balance ($M)                                                                                              $131,114.5                           $163,102.3    Weighted average coupon                                                                                                            4.1%                                  4.1%    Original FICO score(2)                                                                                                             751                                  752    Original LTV                                                                                                                        74%                                   75%    60+ day delinquencies                                                                                                              0.4%                                  0.3%    Net servicing spread                                                                                                  25.7 basis points                     25.9 basis points     Vintage:        Pre-2013                                                                                                                       9.4%                                  7.4%        2013-2016                                                                                                                     20.1%                                 19.7%        Post-2016                                                                                                                     70.5%                                 72.9%   (1)  Excludes residential mortgage loans for which the company is the named servicing administrator.                                                                         23 (2)  FICO represents a mortgage industry accepted credit score of a borrower.
 
Credit: Non-Agency Securities Metrics    NON-AGENCY PORTFOLIO YIELDS AND METRICS                                                   LEGACY NON-AGENCY PORTFOLIO COMPOSITION                                                 At                                 Realized      September    Realized      At December  Portfolio Yield                Q3-2018       30, 2018     Q4-2018       31, 2018          Non-Agency: Loan Type                 September 30, 2018        December 31, 2018   Non-Agency yield               7.4%          7.2%          7.7%          7.0%                                                                                             Sub-prime                                              75%                       76%  Repo and FHLB costs            (3.6%)        (3.6%)        (3.7%)        (3.7%)   Swap and cap income            0.1%          0.1%          0.1%          0.1%                                                                                            Option-ARM                                             11%                       11%  Net interest spread            3.9%          3.7%          4.1%          3.4%                      LEGACY NON-AGENCY CPR                                                  Prime                                                   1%                        1%    10.0%                                                                                     Alt-A                                                  13%                       13%                                               6.9%                 6.4%          6.4%                         6.6%                            Portfolio Metrics                                 Q3-2018                   Q4-2018                                                                          5.2%   5.0%                                                                                             Weighted average 3-month CPR                          6.6%                      5.2%     0.0%                                                                                            Weighted average cost basis(1)                      $61.7                     $61.9               Q4-2017       Q1-2018        Q2-2018       Q3-2018       Q4-2018  (1)  Weighted average cost basis includes legacy non-Agency principal and interest securities only.  Average purchase price utilized carrying value for weighting purposes.  If current face were utilized 24      for weighting purposes, total legacy non-Agency securities excluding the company’s non-Agency interest-only portfolio would have been $59.07 at December 31, 2018.
 
Credit: Legacy Non-Agency Securities    As of December 31, 2018                                                                             Senior Bonds                           Mezzanine Bonds                                          Total P&I    Portfolio characteristics:    Carrying value ($M)                                                                                        $2,842.7                                      $799.9                                      3,642.6    % of non-Agency portfolio                                                                                       78.0%                                        22.0%                                     100.0%    Average purchase price(1)                                                                                    $60.72                                      $65.96                                       $61.87    Average coupon                                                                                                    3.4%                                        3.2%                                         3.3%    Weighted average market price(2)                                                                             $67.47                                      $82.18                                       $70.23    Collateral attributes:    Average loan age (months)                                                                                        148                                         157                                          150    Average loan size ($K)                                                                                          $373                                        $385                                        $376    Average original Loan-to-Value                                                                                  67.3%                                        66.9%                                       67.2%    Average original FICO(3)                                                                                         608                                         574                                          601    Current performance:    60+ day delinquencies                                                                                           19.6%                                        17.7%                                       19.2%    Average credit enhancement(4)                                                                                     5.1%                                       15.8%                                         7.5%    3-Month CPR(5)                                                                                                    4.9%                                        6.4%                                         5.2%   (1)   Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for senior, mezzanine and total legacy non-       Agency securities, excluding our non-Agency interest-only portfolio, would have been $58.12, $63.19 and $59.07, respectively. (2)   Weighted average market price utilized current face for weighting purposes. (3)   FICO represents a mortgage industry accepted credit score of a borrower. (4)   Average credit enhancement remaining on our legacy non-Agency portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying       collateral. (5)   3-Month CPR is reflective of the prepayment speed on the underlying securitization; however, it does not necessarily indicate the proceeds received on our investment tranche. Proceeds received         25       for each security are dependent on the position of the individual security within the structure of each deal.
 
Financing     $ in millions                                                                Repurchase                            Revolving Credit                          Total Outstanding  Outstanding Borrowings and Maturities(1)                     Agreements        FHLB Advances               Facilities  Convertible Notes           Borrowings      Percent (%)   Within 30 days                                       $           7,488.9  $                 —   $                —   $                —   $           7,488.9           30.5%   30 to 59 days                                                    5,077.6                    —                    —                    —               5,077.6           20.6%   60 to 89 days                                                    5,655.1                    —                    —                    —               5,655.1           23.0%   90 to 119 days                                                   1,938.8                    —                    —                    —               1,938.8             7.9%   120 to 364 days                                                  2,673.1                815.0                 20.0                    —               3,508.1           14.3%   One to three years                                                 300.0                    —                    —                    —                 300.0             1.2%   Three to five years                                                   —                     —                290.0                 283.9                573.9             2.3%   Five to ten years                                                     —                     —                    —                    —                     —              —%   Ten years and over(2)                                                 —                  50.0                    —                     —                  50.0            0.2%                                                        $         23,133.5   $             865.0   $            310.0   $             283.9  $          24,592.4          100.0%                                                               Repurchase                            Revolving Credit                            Total Collateral  Collateral Pledged for Borrowings(3)                       Agreements(4)       FHLB Advances             Facilities(4) Convertible Notes              Pledged      Percent (%)   Available-for-sale securities, at fair value         $         24,240.5   $             917.5   $                —                   n/a   $         25,158.0           95.4%   Derivative assets, at fair value                                    70.2                    —                    —                   n/a                 70.2             0.3%   Mortgage servicing rights, at fair value                          685.7                     —                458.2                   n/a              1,143.9             4.3%                                                        $         24,996.4   $             917.5   $            458.2                   n/a   $         26,372.1          100.0%    (1) Weighted average of 3.7 months to maturity.  (2) Includes FHLB advances of $50 million with original maturities of 20 years.  (3) Excludes FHLB membership and activity stock totaling $40.8 million.                                                                                                     26  (4) Repurchase agreements and/or revolving credit facilities secured by MSR may be over-collateralized due to operational considerations.
 
 Interest Rate Swaps and Caps                                                                        INTEREST RATE SWAPS                                                                                                                                                               Average Maturity   Maturities                             Notional Amounts ($B)(1)                Average Fixed Pay Rate(2)               Average Receive Rate(2)                         Years(2)   Payers       2019                                                        $4.3                                   1.769%                               2.565%                          0.8       2020                                                          3.6                                  1.806%                               2.689%                          1.8       2021                                                          4.1                                  1.550%                               2.687%                          2.7       2022                                                          2.5                                  2.002%                               2.728%                          3.7       2023 and after                                                6.8                                  2.495%                               2.636%                          7.6                                                                  $21.4                                   1.978%                               2.651%                          3.7                                                                                                                            Average Fixed Receive              Average Maturity   Maturities                               Notional Amounts ($B)                          Average Pay Rate                                     Rate                      (Years)   Receivers        2020                                                        $0.2                                   2.469%                               2.258%                          1.1       2021                                                        $2.5                                   2.538%                               2.736%                          2.2       2022                                                          0.8                                  2.653%                               2.975%                          3.4       2023 and after                                                4.6                                  2.653%                               2.757%                          7.4                                                                   $8.1                                   2.612%                               2.757%                          5.2                                                                          INTEREST RATE CAPS                                                                                                                Weighted Average Receive            Weighted Average Maturity   Swaps Maturities                           Notional Amount ($B)        Weighted Average Cap Rate                                       Rate                            (Years)    2019                               $                              0.8                             1.344%                             2.422%                                 0.5    2020                                                             $1.7                             1.250%                             2.766%                                 1.3                                 Total                               $2.5                             1.280%                             2.656%                                 1.0                                                                                                                                                                                27 (1)  Notional amount includes $0.6 billion in forward starting interest rate swaps as of December 31, 2018. (2)  Weighted averages exclude forward starting interest rate swaps. As of December 31, 2018, the weighted average fixed pay rate on interest rate swaps was 2.8%.
 
Interest Rate Swaptions                                                Option                                                                            Underlying Swap                                                                                            Average            Notional                               Average           Average                                                      Cost           Fair Value          Months to             Amount         Average Pay            Receive               Term  Swaption                   Expiration               ($M)                ($M)           Expiration               ($M)                Rate              Rate            (Years)   Purchase Contracts:      Payer                   <6 Months                $4.9                 $2.4                 5.1              $900                3.16%         3M LIBOR                10.0      Payer                   >6 Months                  8.4                 6.0                 8.6                800               3.14%         3M LIBOR                10.0      Total Payer                                     $13.3                 $8.4                 7.9            $1,700                3.15%         3M LIBOR                10.0   Sale Contracts:      Receiver                <6 Months                ($4.9)              ($9.0)                4.8              ($845)          3M LIBOR              2.66%               10.0      Receiver                >6 Months                ($8.4)             ($12.9)                8.6              ($792)          3M LIBOR              2.64%               10.0      Total Receiver                                 ($13.3)              ($21.9)                7.5            ($1,637)          3M LIBOR              2.65%               10.0                                                                                                                                                                                28
 
 
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$TWO $GPMT

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