AUGUST 8, 2017
Second Quarter 2017 Earnings Call
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, 2016, 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; the state of commercial real estate markets; our anticipated distribution of
Granite Point shares to the holders of our common stock; 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 Summary(1)
• Comprehensive Income of $85.9 million, or $0.25 per common share
• Core Earnings(3) of $97.5 million, or $0.28 per common share
• Formed Granite Point Mortgage Trust Inc. (“Granite Point”) and contributed portfolio of commercial
real estate assets to Granite Point, concurrent with the closing of their initial public offering in June
– In exchange, Two Harbors received approximately 33.1 million shares of Granite Point common stock, which it
intends to distribute through a special dividend to common stockholders
• Total return on book value of 2.2%(2)
– Book value of $9.87 per common share and cash dividend of $0.26 per common share
• Subsequent to quarter end, issued 11,500,000 shares of 7.625% Series B fixed-to-floating rate
cumulative redeemable preferred stock for proceeds, net of offering costs, of $278.1 million
3
(1) Except as otherwise indicated in this presentation, reported data is as of or for the period ended June 30, 2017.
(2) See Appendix slide 15 for calculation of Q2-2017 return on book value.
(3) Core Earnings is a non-GAAP measure. Please see Appendix slide 18 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
CAPITALIZED ON ATTRACTIVE MARKET OPPORTUNITIES
HIGHLIGHTS
Strategic Overview
4
COMMITTED TO MAXIMIZING STOCKHOLDER RETURN
Attractive investment
opportunities in target assetsMore efficient business model
Sophisticated approach to risk
management
Opportunistic use of capital
structure
ü POSITIONED TO DELIVER STRONG RETURNS AND STABLE BOOK VALUE
THROUGH A VARIETY OF RATE ENVIRONMENTS
(Dollars in millions, except per share data)
Q2-2017
Book Value
Q2-2017
Book Value
per share
YTD-2017
Book Value
YTD-2017
Book Value
per share
Beginning common stockholders’ equity $3,458.8 $9.91 $3,401.1 $9.78
GAAP Net Income:
Core Earnings, net of tax 101.8 196.8
Dividend declaration - preferred (4.3) (4.3)
Core Earnings attributable to common stockholders,
net of tax(1) 97.5 192.5
Realized gains and losses, net of tax (50.3) (7.9)
Unrealized mark-to-market gains and losses, net of tax (42.9) (108.2)
Other comprehensive income 81.6 155.4
Dividend declaration - common (90.7) (178.0)
Contribution of TH Commercial Holdings LLC to Granite Point(2) (13.8) (13.8)
Other 4.2 8.2
Balance before capital transactions 3,444.4 3,449.3
Preferred stock issuance costs — (4.9)
Issuance of common stock, net of offering costs 0.2 0.2
Ending common stockholders’ equity $3,444.6 $9.87 $3,444.6 $9.87
Series A preferred stock liquidation preference 143.8 143.8
Noncontrolling Interest 195.7 195.7
Ending total equity $3,784.1 $3,784.1
Book Value
5
Comprehensive
Income (GAAP)
Q2-2017
Comprehensive
Income of $85.9
million.
Declared Q2-2017
dividends of $0.26
per common share
and $0.75043 per
Series A preferred
share.
(1) Please see Appendix slide 18 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
(2) Impact of Granite Point’s consolidated balance sheet subsequent to IPO.
Noncontrolling
ownership in Granite
Point; portion of
equity and net
income not
attributable to
Two Harbors.
(Dollars in millions) Q1-2017 Q2-2017 Variance ($)
Interest income $191.6 $208.6 $17.0
Interest expense 75.4 90.8 (15.4)
Net interest income 116.2 117.8 1.6
Loss on swaps and swaptions (7.9) (2.6) 5.3
Gain on other derivatives 3.8 3.3 (0.5)
Servicing income, net of amortization
on MSR 13.2 19.4 6.2
Other 1.5 1.4 (0.1)
Total other income 10.6 21.5 10.9
Expenses 32.0 36.9 (4.9)
Benefit from income taxes (0.2) 0.5 (0.7)
Core Earnings attributable to
noncontrolling interest — 0.1 (0.10)
Core Earnings attributable to Two
Harbors(1) $95.0 $101.8 $6.8
Dividends on preferred stock — 4.3 (4.3)
Core Earnings attributable to common
stockholders(1) $95.0 $97.5 $2.5
Basic and diluted weighted average
Core EPS $0.27 $0.28 $0.01
Core Earnings Summary(1)
6(1) Core Earnings is a non-GAAP measure. Please see Appendix slide 18 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.(2) Other operating expenses as a percentage of average equity of 1.9% excludes $2.2 million of transaction expenses related to the initial public offering of Granite Point stock.
• Core earnings benefited from $1.6
million net carry due to higher average
balances of RMBS, partially offset by
higher average borrowing rates and
balances
• Higher average debt-to-equity of 4.7x
• Realized favorable difference of $5.3
million in swap expenses due to
increases in short-term LIBOR and
decreased notional swap amounts
• Other operating expense ratio increased
to 1.9%(2) from 1.8% due to recognition
of $2.5 million in de-boarding and
transfer fees as we repositioned MSR
portfolio across subservicer network
Illustrative Pro Forma Balance Sheet as of June 30, 2017
7
(unaudited, in thousands) Consolidated Standalone
Two Harbors Granite Point Two Harbors
Investment Corp. Mortgage Trust Inc. Investment Corp.
ASSETS
Available-for-sale securities, at fair value $ 16,427,710 $ 12,782 $ 16,414,928
Commercial real estate assets 1,782,749 1,782,749 —
Mortgage servicing rights, at fair value 898,025 — 898,025
Residential mortgage loans held-for-investment in
securitization trusts, at fair value 3,120,410 — 3,120,410
Residential mortgage loans held-for-sale, at fair 31,946 — 31,946
Cash and cash equivalents 651,707 249,119 402,588
Restricted cash 249,728 2,357 247,371
Other assets 618,758 24,983 1,186,055
Total Assets $ 23,781,033 $ 2,071,990 $ 22,301,323
LIABILITIES AND EQUITY
Liabilities
Repurchase agreements $ 13,316,881 $ 640,124 $ 12,676,757
Collateralized borrowings in securitization trusts,
at fair value 2,880,301 — 2,880,301
Federal Home Loan Bank advances 3,238,762 — 3,238,762
Revolving credit facilities 40,000 — 40,000
Convertible senior notes 282,290 — 282,290
Other liabilities 238,690 599,468 231,502
Total liabilities 19,996,924 1,239,592 19,349,612
Total Stockholders’ Equity 3,588,421 832,398 2,951,711
Noncontrolling interest 195,688 — —
Total equity 3,784,109 832,398 2,951,711
Total Liabilities and Equity 23,781,033 2,071,990 22,301,323
Common shares outstanding 348,977,215 348,977,215
Preferred stock liquidation preference 143,750 143,750
Book Value 9.87 8.05
Debt-to-equity 4.5 (1) 1.5 5.5
PRO-FORMA BOOK VALUE OF
$8.05 AT JUNE 30, 2017
• Debt-to-equity nominally
increases with removal of lower
levered CRE portfolio of Granite
Point; don’t expect further
material changes to overall
leverage
• Expect Core Earnings on a
relative basis will be flat to
accretive compared to the past
few quarters
Note: This unaudited pro forma balance sheet has been prepared for illustrative purposes only, and is not necessarily indicative of Two Harbors’ financial condition and operating results that would have occurred if the distribution of
Granite Point shares has been consummated as of June 30, 2017, nor is it necessarily indicative of hte financial condition or results of operations that may be expected for any future period or date.
(1) The company’s June 30, 2017 debt-to-equity ratio includes the consolidation of Granite Point’s assets and liabilities. Excluding the noncontrolling interest from the Granite Point IPO, the company’s debt-to-equity ratio as of
June 30, 2017 would have been 4.7x.
Tax Considerations for Distribution of Granite Point Shares
8
INTEND TO DISTRIBUTE GRANITE POINT STOCK VIA A SPECIAL DIVIDEND
• Goal is to distribute cash dividends that equal Two Harbors’ earnings and profit in 2017; may result in special cash
dividend later in the year, but expect amount to be relatively insignificant
• Effect a return of capital that will be approximately equal to the fair market value of the Granite Point common stock
distributed to stockholders
• Granite Point shares are currently subject to 120-day lockup period; dividend remains subject to approval from the
Board of Directors
DISTRIBUTION RATIO
• Based on June 30, 2017 shares outstanding of approximately 349 million, the distribution ratio would be
approximately 1 share of Granite Point for every 10 common shares of Two Harbors
• Final distribution ratio will be based on the number of shares outstanding as of the dividend record date
DIVIDEND VALUATION
• Valuation of distribution will be subject to Granite Point market price changes until the distribution date of Granite
Point shares to Two Harbors’ common shareholders
• As of June 30, 2017, approximately 33.1 million shares of Granite Point would have been valued at $625.7 million,
or $1.82 per common share of Two Harbors, based on Granite Point’s June 30, 2017 closing price of $18.92 per
share
Diversified Financing Profile
9
OPTIMIZING FINANCING STRUCTURE
REPURCHASE AGREEMENTS
• Outstanding borrowings of $13.3 billion with 25 active counterparties; 32 total counterparties
• Repo markets functioning efficiently for RMBS
• Repo balance includes the consolidation of Granite Point financing facilities
FEDERAL HOME LOAN BANK OF DES MOINES
• Outstanding secured advances of $3.2 billion
• Weighted average borrowing rate of 1.52%
• Anticipate secured advances to decline in future quarters
FINANCING FOR MSR
• Outstanding borrowings of $40.0 million under revolving credit facilities
• Additional available capacity of $50.0 million as of June 30, 2017
HISTORICAL CAPITAL ALLOCATIONPORTFOLIO COMPOSITION(1)
Portfolio Composition
10
$19.5 BILLION PORTFOLIO AS OF JUNE 30, 2017
(1) For additional detail on the portfolio, see Appendix slides 19-24.
(2) Commercial consists of the consolidated financial results of Granite Point and its subsidiaries, which assets include senior, mezzanine and B-note commercial real estate debt and related
instruments.
(3) MSR includes Ginnie Mae buyout residential mortgage loans.
(4) Assets in “Rates” include Agency RMBS, Agency Derivatives, MSR and Ginnie Mae buyout residential mortgage loans.
(5) Assets in “Credit” include non-Agency MBS, net economic interests in securitization trusts, prime jumbo residential mortgage loans and credit sensitive residential mortgage loans.
Rates(3)
$10,766
Commercial(2)
$1.8b
June 30,
2016
March 31,
2017
June 30,
2017
Rates(4) 56% 58% 54%
Credit(5) 31% 27% 28%
Commercial(2) 13% 15% 18%
OPPORTUNISTIC CAPITAL ALLOCATION
Agency
$14.3b
MSR(3)
$0.9b
Non-Agency
$2.3b
Rates(4) $15.2b Credit(5) $2.5b Commercial(2) $1.8b
Conduit
$0.2b
If Granite Point shares had been
distributed on June 30, 2017,
capital allocation to the Rates
and Credit strategies would
have been 65% and 35%,
respectively.
Portfolio Performance
11
Q2-2017 PERFORMANCE SUMMARY
(1) “Legacy” non-Agency RMBS includes non-Agency bonds issued up to and including 2009. “New issue” non-Agency MBS includes bonds issued after 2009.
(2) Cost of funds includes interest spread expense associated with the portfolio’s interest rate swaps.
(3) Commercial consists of the consolidated financial results of Granite Point and its subsidiaries, which assets include senior, mezzanine and B-note commercial real estate debt and related
instruments.
RATES
• Interest rates did not move substantially, while curve
flattened
• Agency RMBS prices mixed; lower coupon Agency
RMBS performed well while higher coupons
underperformed
CREDIT
• Mortgage credit spreads tightened
• Underlying residential credit environment continued to
improve
• Newer assets purchased at yields lower than our
existing portfolio
PORTFOLIO METRICS
Three Months Ended
March 31,
2017
June 30,
2017
Annualized portfolio yield during the quarter 3.99% 3.96%
Rates
Agency RMBS, Agency Derivatives and MSR 3.1% 3.2%
Credit
Non-Agency RMBS, Legacy(1) 9.2% 8.5%
Non-Agency MBS, New issue(1) 7.1% 7.2%
Net economic interest in securitization trusts 11.4% 11.0%
Residential mortgage loans held-for-sale 4.3% 5.1%
Commercial(3) 6.2% 6.2%
Annualized cost of funds on average repurchase
and advance balance during the quarter(2) 1.52% 1.60%
Annualized interest rate spread for aggregate
portfolio during the quarter 2.47% 2.36%
DRIVING SUPERIOR PORTFOLIO PERFORMANCE
Rates Update
12
PORTFOLIO SUMMARY
DELIVERING RESULTS THROUGH VARIETY OF RATE ENVIRONMENTS
• Pairing MSR with Agency RMBS results in a portfolio that has higher return potential with lower
mortgage spread risk and lower overall leverage
– Mitigates impact to book value in spread widening scenario
• Utilize combination of hedging tools to maintain low interest rate exposure
• Agency RMBS holdings of $14.3 billion
– 83% of Agency pools have some form of prepayment protection, compared to 72% in Q1-2017(1)
• MSR portfolio of approximately $900 million in fair market value
– Added $18.9 billion UPB on new issue, high quality MSR
◦ $13.1 billion UPB from two bulk MSR purchases
◦ $5.8 billion UPB from flow-sale arrangements
– Expect near-term flow MSR volume of approximately $2.0 billion UPB per month
(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.
Credit Update
13
• Home prices continue to improve; CoreLogic Home Price Index up 6.7% on a rolling 12-month
basis(1)
– Supported by affordability, low housing supply and strong demand
• Believe future performance will continue to be strong, driven by increasing prepayments, lower
delinquencies, defaults and severities
(1) Source: CoreLogic Home Price Index rolling 12-month change as of June 2017.
(2) Weighted average market price utilized current face for weighting purposes. Please see slide 23 in the Appendix for more information on our non-Agency RMBS portfolio.
RESIDENTIAL CREDIT TAILWINDS
• Non-Agency RMBS holdings of $2.3 billion, $2.0 billion of which are legacy non-Agency RMBS
• Released $13.9 million in credit reserves against portfolio; released $38.2 million in credit
reserves over the previous 12 months
• Average market price of ~$78 allows ability to capture upside opportunity(2)
PORTFOLIO SUMMARY
Appendix
Return on Book Value
15
(1) Return on book value for the three-month period ended June 30, 2017 is defined as the decrease in book value per common share from March 31, 2017 to June 30, 2017 of $0.04 per
common share, plus dividends declared of $0.26 per common share, divided by March 31, 2017 book value of $9.91 per common share.
(2) Return on book value for the six-month period ended June 30, 2017 is defined as the increase in book value per common share from December 31, 2016 to June 30, 2017 of $0.09 per
common share, plus dividends declared of $0.51 per common share, divided by December 31, 2016 book value of $9.78 per common share.
Return on common book value Q2-2017
(Per common share amounts, except for percentage)
Book value at March 31, 2017 $9.91
Book value at June 30, 2017 9.87
Decrease in book value (0.04)
Dividends declared in Q2-2017 0.26
Return on book value Q2-2017 $0.22
Percent return on book value Q2-2017(1) 2.2%
Return on common book value YTD-2017
(Per common share amounts, except for percentage)
Book value at December 31, 2016 $9.78
Book value at June 30, 2017 9.87
Decrease in book value 0.09
Dividends declared in YTD-2017 0.51
Return on book value YTD-2017 $0.60
Percent return on book value YTD-2017(2) 6.1%
Book Value ($) Dividend Declared ($)
$12.00
$10.00
$8.00
$6.00
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
$9.83 $10.01 $9.78 $9.91 $9.87
$0.23 $0.23 $0.24 $0.25 $0.26
Comp. Income ($M) Comp. Income ROACE (%)
$150
$100
$50
$0
-$50
-$100
20%
10%
0%
-10%
-20%
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
$122.3 $136.5
$2.2
$145.7
$85.9
14.3% 15.7%
0.3%
16.9%
9.9%
DIVIDENDS(1)
Financial Performance
16
COMPREHENSIVE INCOME BOOK VALUE AND DIVIDEND PER COMMON SHARE(1)
GAAP NET INCOME (LOSS)
(1) Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes dividends based on its taxable income per common share, not GAAP earnings. The
annualized dividend yield on the company’s common stock is calculated based on the closing price of the last trading day of the relevant quarter.
Dividend per common share ($) Divided Yield (%)
$0.30
$0.20
$0.10
$0.00
15.0%
10.0%
5.0%
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
$0.23 $0.23 $0.24 $0.25
$0.26
10.7% 10.8% 11.0% 10.4% 10.5%
GAAP Net Inc. ($M) GAAP Earnings per common share ($)
$400
$300
$200
$100
$0
-$100
$1.00
$0.50
$0.00
-$0.50
-$1.00
-$1.50
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
$(17.0)
$117.8
$341.4
$72.0 $4.3
$(0.05)
$0.34
$0.98
$0.21
$0.01
Operating Performance
Q1-2017 Q2-2017
(In millions, except for per common share data)
Core
Earnings(1)
Realized
Gains
(Losses)
Unrealized
MTM Total
Core
Earnings(1)
Realized
Gains
(Losses)
Unrealized
MTM Total
Interest income $191.6 $— $— $191.6 $208.6 $— $— $208.6
Interest expense 75.4 — — 75.4 90.8 — — 90.8
Net interest income 116.2 — — 116.2 117.8 — — 117.8
Net other-than-temporary impairment losses — — — — — — (0.4) (0.4)
Gain (loss) on investment securities — (50.4) (1.9) (52.3) — 33.3 (2.1) 31.2
(Loss) gain on interest rate swaps and swaptions (7.9) 66.0 (48.2) 9.9 (2.6) (30.1) (44.1) (76.8)
Gain (loss) on other derivative instruments 3.8 28.1 (59.8) (27.9) 3.3 (47.6) 24.7 (19.6)
Servicing income 39.8 — — 39.8 51.3 — — 51.3
(Loss) gain on servicing asset (26.6) 0.3 11.7 (14.6) (31.9) (0.6) (14.1) (46.6)
Gain (loss) on residential mortgage loans held-for-sale — 1.4 0.1 (1.5) — 0.2 0.1 0.3
Other income (loss) 1.5 (2.0) 8.5 8.0 1.4 (1.0) 2.5 2.9
Total other income (loss) 10.6 43.4 (89.6) (35.6) 21.5 (45.8) (33.4) (57.7)
Management fees & other operating expenses 32.0 1.1 — 33.1 36.9 5.8 — 42.7
Net income (loss) before income taxes 94.8 42.3 (89.6) 47.5 102.4 (51.6) (33.4) 17.4
Income tax (benefit) expense (0.2) (0.1) (24.2) (24.5) 0.5 (1.3) 9.5 8.7
Net income (loss) $95.0 $42.4 ($65.4) $72.0 $101.9 ($50.3) ($42.9) 8.7
Net income attributable to noncontrolling interest — — — — 0.1 — — 0.1
Net income (loss) attributable to Two Harbors 95.0 42.4 (65.4) 72.0 101.8 (50.3) (42.9) 8.6
Dividends on preferred stock — — — — 4.3 — — 4.3
Net income (loss) attributable to common
stockholders $95.0 $42.4 ($65.4) $ 72.0 $ 97.5 $ (50.3) $ (42.9) $ 4.3
Weighted average earnings per common share $0.27 $0.12 ($0.18) $0.21 $0.28 ($0.15) ($0.12) $ 0.01
17(1) Core Earnings is a non-GAAP measure. Please see Appendix slide 18 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
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) March 31, 2017 June 30, 2017
Reconciliation of Comprehensive income to Core Earnings:
Comprehensive income $145,747 $85.959
Adjustment for other comprehensive (income) loss:
Unrealized gains loss on available-for-sale securities (73,762) (81,626)
Net income $71,985 $4,333
Adjustments for non-core earnings:
Loss (gain) on sale of securities and residential mortgage loans, net of tax 28,018 (23,258)
Unrealized losses on securities and residential mortgage loans held-for-sale, net of tax 1,879 2,008
Other-than-temporary impairment loss — 429
Unrealized losses on interest rate swaps and swaptions hedging interest rate exposure (or duration), net of tax 37,642 43,121
Realized (gain) loss on termination or expiration of swaps and swaptions, net of tax (56,001) 35,358
Losses on other derivative instruments, net of tax 23,081 14,497
Realized and unrealized gains on financing securitizations, net of tax (6,614) (1,408)
Realized and unrealized (gain) loss on mortgage servicing rights, net of tax (11,503) 16,600
Change in servicing reserves, net of tax (1,835) (16)
Non-cash equity compensation expense(2) 3,955 3,682
Tax valuation allowance 4,351 (11)
Transaction expenses associated with the IPO of Granite Point — 2,193
Core Earnings attributable to common stockholders $94,958 $97,528
Weighted average common shares outstanding 348,563,930 348,946,335
Core Earnings (revised) per weighted average common share outstanding $0.27 $0.28
18
(1) Core Earnings is a non-U.S. GAAP measure that we define as comprehensive income attributable to common stockholders, excluding “realized gains and losses” (impairment losses, realized gains or losses on the aggregate portfolio, reserve
expense for representation and warranty obligations on MSR, certain upfront costs related to securitization transactions, non-cash compensation expense related to restricted common stock, restructuring charges and nonrecurring transaction
costs related to Granite Point’s initial public offering) and “unrealized mark-to-market gains and losses” (unrealized gains and losses on the aggregate portfolio). 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. We believe the presentation of Core Earnings provides investors greater transparency into our period-over-period financial performance and
facilitates comparisons to peer REITs.
(2) This non-cash equity compensation expense was included in Core Earnings for periods ending prior to March 31, 2017.
Rates: Agency RMBS Metrics
19
AGENCY PORTFOLIO YIELDS AND METRICS
AGENCY RMBS CPR(1)
(1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives).
(2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
Portfolio Yield
Realized
Q1-2017
At March
31, 2017
Realized
Q2-2017
At June 30,
2017
Agency yield 3.1% 3.1% 3.1% 3.0%
Repo and FHLB costs 1.0% 1.1% 1.2% 1.3%
Swap costs 0.3% 0.2% 0.2% —%
Net interest spread 1.8% 1.8% 1.7% 1.7%
Portfolio Metrics Q1-2017 Q2-2017
Weighted average 3-month CPR(1) 5.6% 8.0%
Weighted average cost basis(2) $105.9 $106.6
AGENCY PORTFOLIO COMPOSITION
15.0%
10.0%
5.0%
0.0%
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
8.6%
9.7%
7.1%
5.6%
8.0%
30-Year Fixed 4-4.5%
60.7%
30-Year Fixed 3-3.5%
31.4%
30-Year Fixed
5% & above
3.8%
IO & Inverse IO
2.3%
Hybrid ARMs and
Other
1.8%
Rates: Agency RMBS
20
As of June 30, 2017 Par Value ($M) Market Value ($M)
% Prepay
Protected(1)
Amortized Cost
Basis ($M)
Weighted Average
Coupon
Weighted
Average Age
(Months)
30-Year fixed
3.0-3.5% $4,343 $4,477 74.8% $4,538 3.5% 10
4.0-4.5% 8,097 8,674 92.9% 8,670 4.2% 21
≥ 5.0% 491 548 84.2% 531 5.5% 86
12,931 13,699 86.6% 13,739 4.0% 20
Hybrid ARMs 25 27 —% 26 4.8% 159
Other 232 231 0.7% 225 4.7% 146
IOs and IIOs 3,685 323 (2) —% 334 3.2% 100
Total $16,873 $14,280 83.1% $14,324
(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 $215.2 million of IOs and $108.3 million of Agency Derivatives.
Rates: Mortgage Servicing Rights(1)
21
As of March 31, 2017 As of June 30, 2017
Fair value ($M) $747.6 $898.0
Unpaid principal balance ($M) $68,128.0 $84,814.2
Weighted average coupon 3.9% 3.9%
Original FICO score(2) 755 754
Original LTV 73% 73%
60+ day delinquencies 0.2% 0.2%
Net servicing spread 25.3 basis points 25.4 basis points
Vintage:
Pre-2009 0.4% 0.4%
2009-2012 20.9% 16.8%
Post 2012 78.7% 82.8%
Percent of MSR portfolio:
Conventional 99.9% 100.0%
Government 0.1% —%
(1) Excludes residential mortgage loans held-for-investment in securitization trusts for which the company is the named servicing administrator.
(2) FICO represents a mortgage industry accepted credit score of a borrower.
Credit: Non-Agency MBS Metrics
22
NON-AGENCY PORTFOLIO COMPOSITIONNON-AGENCY PORTFOLIO YIELDS AND METRICS
(1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting
purposes, total non-Agency MBS excluding the company’s non-Agency interest-only portfolio would have been $58.04 at June 30, 2017.
Portfolio Yield
Realized
Q1-2017
At March
31, 2017
Realized
Q2-2017
At June 30,
2017
Non-Agency yield 9.0% 9.0% 8.4% 8.2%
Repo and FHLB costs 2.8% 2.8% 2.9% 2.9%
Swap costs 0.1% 0.1% 0.1% —%
Net interest spread 6.1% 6.1% 5.4% 5.3%
NON-AGENCY MBS CPR
Non-Agency: Loan Type March 31, 2017 June 30, 2017
Sub-prime 74% 73%
Option-ARM 8% 10%
Prime 2% 2%
Alt-A 8% 7%
Other 8% 8%
Portfolio Metrics Q1-2017 Q2-2017
Weighted average 3-month CPR 6.7% 6.2%
Weighted average cost basis(1) $59.5 $60.5
10.0%
5.0%
0.0%
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
6.1%
7.3%
6.2%
6.7%
6.2%
Credit: Non-Agency MBS
23
As of June 30, 2017 Senior Bonds Mezzanine Bonds Total P&I
Portfolio characteristics:
Carrying value ($M) $1,418.4 $832.2 $2,250.6
% of non-Agency portfolio 63.0% 37.0% 100.0%
Average purchase price(1) $57.23 $66.12 $60.52
Average coupon 2.9% 2.2% 2.6%
Weighted average market price(2) $77.97 $77.01 $77.61
Collateral attributes:
Average loan age (months) 130 140 132
Average loan size ($K) $362 $352 $359
Average original Loan-to-Value 70.5% 69.6% 70.2%
Average original FICO(3) 634 603 624
Current performance:
60+ day delinquencies 22.5% 20.1% 21.7%
Average credit enhancement(4) 9.2% 16.8% 11.6%
3-Month CPR(5) 5.4% 7.7% 6.2%
(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 non-Agency
MBS, excluding our non-Agency interest-only portfolio, would have been $54.52, $63.98 and $58.04, 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 non-Agency MBS 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
for each security are dependent on the position of the individual security within the structure of each deal.
Granite Point’s Commercial Real Estate Portfolio(1)
(1) Due to the company’s controlling ownership interest in Granite Point, the company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of equity and comprehensive income not
attributable to the company.
(2) Cash coupon does not include origination or exit fees. Weighted average cash coupon excludes fixed rate loans.
(3) Yield includes net origination fees and exit fees, but does not include future fundings, and is expressed as a monthly equivalent yield. Weighted average yield excludes fixed rate loans.
(4) Initial LTV considers the original appraisal at the time of origination.
(5) Stabilized LTV considers the "as stabilized" value (as determined in conformance with USPAP) of the underlying property or properties, as set forth in the original appraisal. "As stabilized" value may be based on certain
assumptions, such as future construction completion, projected re-tenanting, payment of tenant improvement or leasing commissions allowances or free or abated rent periods, or increased tenant occupancies.
24
$ in millions Type
Origination
Date
Principal
Balance Book Value Cash Coupon(2) Yield(3)
Original Term
(Years) State Property Type Initial LTV(4)
Stabilized
LTV(5)
Asset 1 Senior 12/15 $120.0 $120.0 L + 4.20% L + 4.43% 4 LA Mixed-Use 65.5% 60.0%
Asset 2 Senior 09/15 105.0 105.0 L + 3.42% L + 3.79% 3 CA Retail 70.9% 66.9%
Asset 3 Senior 07/16 97.8 96.7 L + 4.45% L + 4.99% 4 Various Office 62.8% 61.5%
Asset 4 Senior 04/16 82.0 81.5 L + 4.75% L + 5.44% 3 NY Industrial 75.9% 55.4%
Asset 5 Senior 11/15 78.0 78.0 L + 4.20% L + 4.67% 3 NY Office 66.4% 68.7%
Asset 6 Senior 10/16 75.6 74.9 L + 4.37% L + 4.83% 4 NC Office 72.4% 68.1%
Asset 7 Senior 05/17 68.0 67.0 L + 4.10% L + 4.82% 4 MA Office 71.3% 71.5%
Asset 8 Senior 12/16 62.3 60.7 L + 4.11% L + 4.87% 4 FL Office 73.3% 63.2%
Asset 9 Senior 06/16 51.3 51.0 L + 4.49% L + 4.93% 4 HI Retail 76.2% 57.4%
Asset 10 Senior 01/17 51.5 50.9 L + 4.75% L + 5.24% 4 SC Office 67.6% 67.1%
Asset 11 Senior 12/15 46.7 46.7 L + 4.65% L + 4.87% 4 PA Office 74.5% 67.5%
Asset 12 Mezzanine 03/15 45.9 45.9 L + 6.75% L + 7.61% 5 Various Hotel 70.3% 63.5%
Asset 13 Senior 06/17 45.0 44.4 L + 4.50% L + 5.24% 3 CA Hotel 54.7% 48.6%
Asset 14 Senior 12/15 43.5 43.5 L + 4.05% L + 4.25% 3 TX Multifamily 82.3% 76.8%
Asset 15 Mezzanine 11/15 43.5 43.5 L + 7.25% L + 8.06% 3 Various Office 77.6% 77.5%
Assets 16-40 Various Various 780.0 773.2 L + 4.90% L + 5.56% 4 Various Various 69.6% 63.1%
Total/Weighted Average $ 1,796.2 $ 1,782.7 L + 4.67% L + 5.24% 4 69.9% 63.8%
Financing
25
(1) Weighted average of 2.9 years to maturity.
(2) Includes FHLB advances of $2.4 billion with original maturities of 20 years.
(3) Excludes FHLB membership and activity stock totaling $134.8 million.
(4) Revolving credit facilities over-collateralized due to operational considerations.
$ in millions
Outstanding Borrowings and Maturities(1)
Repurchase
Agreements FHLB Advances
Revolving Credit
Facilities Convertible Notes
Total Outstanding
Borrowings Percent (%)
Within 30 days $ 3,418.6 $ — $ — $ — $ 3,418.6 20.2%
30 to 59 days 3,267.0 — — — 3,267.0 19.4%
60 to 89 days 2,250.9 — 20.0 — 2,270.9 13.4%
90 to 119 days 2,354.5 — — — 2,354.5 13.9%
120 to 364 days 1,478.4 — 20.0 — 1,498.4 8.9%
One to three years 547.4 815.0 — — 1,362.4 8.1%
Three to five years — — — 282.3 282.3 1.7%
Ten years and over(2) — 2,423.7 — — 2,423.7 14.4%
$ 13,316.8 $ 3,238.7 $ 40.0 $ 282.3 $ 16,877.9 100.0%
Collateral Pledged for Borrowings(3)
Repurchase
Agreements FHLB Advances
Revolving Credit
Facilities(4) Convertible Notes
Total Collateral
Pledged Percent (%)
Available-for-sale securities, at fair value $ 13,639.1 $ 2,749.7 $ — n/a $ 16,388.8 88.6%
Derivative assets, at fair value 108.2 — — n/a 108.2 0.6%
Commercial real estate assets 883.0 720.3 — n/a 1,603.3 8.7%
Mortgage servicing rights, at fair value — — 166.0 n/a 166.0 0.9%
Net economic interests in consolidated
securitization trusts 219.4 2.0 — n/a 221.4 1.2%
$ 14,849.7 $ 3,472.0 $ 166.0 n/a $ 18,487.7 100.0%
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2)
Average Maturity
Years(2)
Payers
2017 $1.5 0.771% 1.220% 0.3
2018 4.3 1.155% 1.223% 1.0
2019 0.4 1.283% 1.165% 1.9
2020 1.2 1.463% 1.209% 3.3
2021 and after 4.5 1.699% 1.235% 5.6
$11.9 1.322% 1.224% 2.7
Maturities Notional Amounts ($B) Average Pay Rate
Average Fixed Receive
Rate
Average Maturity
(Years)
Receivers
2020 0.2 1.171% 1.642% 3.1
2021 and after 2.7 1.193% 2.190% 6.4
$2.9 1.192% 2.152% 6.2
Interest Rate Swaps
26(1) Notional amount includes $778.0 million in forward starting interest rate swaps as of June 30, 2017.
(2) Weighted averages exclude forward starting interest rate swaps. As of June 30, 2017, the weighted average fixed pay rate on interest rate swaps starting in 2017 was 2.4%.
Interest Rate Swaptions
27
Option Underlying Swap
Swaption Expiration
Cost
($M)
Fair Value
($M)
Average
Months to
Expiration
Notional
Amount
($M)
Average Pay
Rate
Average
Receive
Rate
Average
Term
(Years)
Purchase Contracts:
Payer <6 Months $43.7 $7.7 2.9 $5,025 2.35% 3M LIBOR 6.2
Total Payer $43.7 $7.7 2.9 $5,025 2.35% 3M LIBOR 6.2
Receiver <6 Months $2.7 $2.1 3.2 $2,000 3M LIBOR 1.78% 8.5
Receiver >6 Months — 5.9 10.8 250 3M LIBOR 2.35% 10.0
Total Receiver $2.7 $8.0 7.6 $2,250 3M LIBOR 1.84% 8.7
Sale Contracts:
Payer <6 Months ($35.5) ($0.9) 3.2 ($2,300) 2.92% 3M LIBOR 8.7
Total Payer ($35.5) ($0.9) 3.2 ($2,300) 2.92% 3M LIBOR 8.7
Receiver <6 Months ($9.7) ($6.2) 2.4 ($3,000) 3M LIBOR 2.02% 10.0
Receiver >6 Months (1.4) (6.5) 10.8 (625) 3M LIBOR 1.95% 10.0
Total Receiver ($11.1) ($12.7) 4.9 ($3,625) 3M LIBOR 2.00% 10.0
