Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Investor Day (October 2012)
50 slides from Two Harbors Investment's investor day presentation, Oct 10, 2012
Slide 1: Two Harbors Investment Corp. Analyst & Investor Day
Two Harbors Investment Corp. Analyst & Investor Day New York Stock Exchange October 10, 2012
Slide 2: Agenda
July Hugen, Investor Relations 2 Agenda Time Schedule 10:45 a.m. ET Registration 11:05 a.m. ET Opening Remarks 11:10 a.m. ET Ivy Zelman Guest Speaker 11:50 a.m. ET Luncheon 12:30 p.m. ET Thomas Siering Executive Overview 12:45 p.m. ET William Roth Market & Portfolio Update 1:25 p.m. ET Brad Farrell
Slide 3: Safe Harbor Statement
3 Safe Harbor Statement 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 sh
Slide 4: Market Landscape - Ivy Zelman
Market Landscape 4 Ivy Zelman Zelman & Associates Leading authority on the housing industry. Founded Zelman & Associates in 2007, focused on extensive macro and company-specific research, including coverage of 34 individual stocks. Former Managing Director at Credit Suisse in homebuilding-rela
Slide 5: Executive Overview - Tom Siering
Executive Overview 5 Tom Siering President & Chief Executive Officer President & Chief Executive Officer since inception in 2009. Partner of Pine River Capital Management since 2006. Previously a partner at EBF & Associates leading the Value Investment Group. Former portfolio manager special
Slide 6: Compelling Market Drivers
Compelling Market Drivers 6 The U.S. government has indicated its intent to reduce its involvement in the RMBS market and banks are adjusting their portfolios due to new regulatory framework for capital and liquidity requirements. Private capital, such as mortgage REITs, is essential to fill the
Slide 7: RMBS Investment Universe
RMBS Investment Universe Flexibility as a hybrid REIT to take advantage of opportunities in both Agency and non-Agency sectors. Hybrid Mortgage REIT Residential mortgage-backed securities (RMBS) Residential mortgage loans Residential real properties Other financial assets Mission To be r
Slide 8: Two Harbors Today
Two Harbors Today 8 Executive Overview (1) As of October 5, 2012. Largest hybrid mortgage REIT focused on investing in residential mortgage-backed securities. Total RMBS portfolio of over $15 billion. $3.4 billion market capitalization1. – Completed eight stock offerings raising approximately
Slide 9: Talented and Deep Bench
Talented and Deep Bench 9 Executive Overview Legal team navigates changing legal backdrop and ensures strong governance practices. Accounting and Tax teams focus on robust financial reporting and disclosure. Investor Relations team provides best-in-class transparency, disclosure and investor reporti
Slide 10: Building a Strong Franchise
Building a Strong Franchise 10 Executive Overview 2009 Inception October 29, 2009 2012 Market capitalization surpasses $3 billion 2010 Market capitalization reaches $400 million 2011 Market capitalization surpasses $1 billion Initial investments aggregating $488 million Listing transferred to NYSE S
Slide 11: Delivering Total Return
Delivering Total Return 11 (1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through October 8, 2012. Total stockholder return is defined as capital gains on stock price including dividends. Source: Bloomberg. (2) Two Harbors’ total stockholder return is calcula
Slide 12: Dividend History
Dividend History 12 Dividends1 (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 base
Slide 13: Book Value History
Focus on maintaining book value stability, as healthy book value is critical to dividend generation over time. Goal is to increase book value through opportunistic capital allocation and security selection. During the third quarter, our book value per share rose substantially, to well north of
Slide 14: Positioned for Continued Performance
Positioned for Continued Performance 14 Established track record of delivering exceptional results and shareholder returns. Flexible hybrid structure to opportunistically invest in Agency and non-Agency securities. Disciplined investment and effective hedging strategies to manage risk. Robus
Slide 15: Portfolio Update - Bill Roth
15 Portfolio Update Portfolio Update Bill Roth Co-Chief Investment Officer Co-Chief Investment Officer since October 2009. Partner of Pine River Capital Management. Three decades of experience in the mortgage securities market. Managing Director at Citigroup overseeing a proprietary trading
Slide 16: U.S. Financial and Mortgage Market
16 U.S. Financial and Mortgage Market $ 10.2 Trillion Non-Agency RMBS $1.0 Agency RMBS $5.5 Unsecuritized 1st Lien Loans $2.9 Unsecuritized 2nd Lien Loans $0.8 Residential sector represents an extremely large asset class. Unsecuritized Product $3.7T Securitized product $6.5T U.S. Mortgage Market Sou
Slide 17: Agency Market Overview
17 Agency Market Overview FNMA $2.6 GMNA $1.3 FHLMC $1.6 Agency Market1 Agency Ownership2 $ 5.5 Trillion (1) Source: Amherst Securities Group LP. Data presented as of June 2012. (2) Source: Nomura Securities, public company filings and estimates of Two Harbors and its external manager, PRCM Advisers
Slide 18: Non-Agency Market Overview
$ 1.0 Trillion 18 Non-Agency Market Overview Non-Agency Market1 Non-Agency Mortgages Outstanding2 Non-Agency supply is decreasing as a result of legacy pay downs and minimal new originations. Portfolio Update $ Trillions Historic Projected $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 Jan-08 Jan-09 Jan-10 Jan-11 Ja
Slide 19: Market Update
19 Market Update Macroeconomic Non-Agency RMBS Agency RMBS QE3 announcement on September 13th. Open-ended MBS purchases of an additional $40 billion per month, totaling ~$70 billion per month. Federal Reserve’s commitment to keep target federal funds rate low until mid-2015. Housing market app
Slide 20: Current Market Trends
20 Current Market Trends 10-Year Treasuries vs. Current Coupon Yield1 1 Month Forward LIBOR Rates2 2-Year vs. 10-Year Treasury Spread3 Housing Stabilization4 (1) Source: Bloomberg. (2) Source: Intex. (3) Source: Bloomberg. (4) Sources: J.P. Morgan Home Price Monitor, CoreLogic, Case-Shiller Fiserv a
Slide 21: Agency Spreads Are Tighter
21 Agency Spreads Are Tighter Sources: The Yield Book and RBS. 50 100 150 200 250 300 350 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Ba si s P o int s FN Current Coupon - 5/10Yr U.S. Treasury Yield 05-07 "Pre-Crisis" Average QE1 03/25/09- 10/29/09 Tsy
Slide 22: HARP is Working
22 HARP is Working Portfolio Update Larger servicers are aggressively pursuing HARP. Speeds are consistently elevated compared to pre-HARP. HARP Speeds by Servicer1 HARP Scorecard2 Source: J.P Morgan. (1) Aggregate speeds observed on Gold 30-year ’06-’08 vintage 5.95%+ WAC loans by current servicer
Slide 23: Generics Remain Fast
12% -5% 5% 15% 25% 35% 45% 55% May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 FN 30Yr Generic 2008 4.5 FN 30Yr MHA 2010 4.5 FN 30Yr LLB 2010 4.5 23 Generics Remain Fast Speeds on generics are expected to remain fast in comparison to prepayment protected pools. Portfolio Update LLB an
Slide 24: Specified Pool Payups vs. TBA
24 Specified Pool Payups vs. TBA LLB MLB M125 HLB M175 10Y Tsy Yield (R.) - 20.0 40.0 60.0 80.0 100.0 120.0 01/01/12 02/01/12 03/01/12 04/01/12 05/01/12 06/01/12 07/01/12 08/01/12 09/01/12 - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 LLB MLB M125 HLB M175 10Y Tsy Yield (R.) Payups for prepayment protec
Slide 25: Prepayment Protected Pools Offer Value
25 Prepayment Protected Pools Offer Value Portfolio Update Coupon Generic LLB1 Payup LLB1 Price MHA 80 Payup MHA 80 Price 4.0 $107.81 $3.75 $111.56 $2.07 $109.88 4.5 $108.31 $4.78 $113.09 $2.85 $111.16 Coupon Generic Yield LLB1 Yield MHA 80 Yield 4.0 0.3% 2.1% 2.0% 4.5 0.5% 2.2% 2.1% Coupon Generic
Slide 26: Credit Rally in 2012
26 Credit Rally in 2012 Portfolio Update Credit-sensitive assets rally with mortgage-backed securities outperforming. ABX vs. High Yield $70 $75 $80 $85 $90 $95 $100 $105 $110 $25 $30 $35 $40 $45 $50 $55 $60 $65 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 ABX 06-2 AAA High Yield Generic 5-Yr So
Slide 27: Non-Agency Delinquencies
27 Non-Agency Delinquencies Delinquencies have stabilized with notable improvement in Sub-Prime. Source: Loan Performance. 60+ Day Delinquencies 48% 41% 40% 44% 48% 52% Sep-09 May-10 Jan-11 Sep-11 May-12 Sub-Prime Delinquencies 12% 25% 41% 41% 0% 10% 20% 30% 40% 50% 60% Jan-06 Jul-06 Jan-07 Jul-07 J
Slide 28: Non-Agencies Remain Attractive
Non-Agencies Remain Attractive Portfolio Update 28 Market Yields Estimates as of September 28, 2012 Source: Estimates of Two Harbors and its external manager, PRCM Advisers LLC. Market data presented as of September 28, 2012. (1) Returns on high yield and investment grade bonds are calculated before
Slide 29: Portfolio Overview
29 Portfolio Overview Attractive returns with moderate leverage in 6.0x - 7.0x range. Intense focus on prepayment stability intended to provide for sustainable yields. Stable cash flows make interest rate hedging more effective. Portfolio’s implied or explicit prepayment protection of 97%. A
Slide 30: Agency Portfolio
30 Agency Portfolio Agency RMBS Portfolio Prepayment Protected Securities7 Two Harbors’ CPR vs. Cohorts8 16.6% 13.7% 18.4% 24.2% 23.4% 23.5% 17.6% 13.1% 18.1% 25.3% 25.1% 25.4% 11.9% 9.0% 11.7% 16.3% 17.7% 17.2% 6.3% 5.0% 5.0% 5.6% 5.2% 5.6% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Q1-2011 Q2-2011 Q3
Slide 31: TWO Prepayment Protected Securities
TWO Prepayment Protected Securities Portfolio Update 31 Market Value ($B) % of Agency Portfolio Dominant Age Type Dominant Prepay Type1 30-Year Fixed $ 9.0 70% New LLB, MLB & MHA 15-Year Fixed 0.5 4% New & Seasoned LLB $ 9.5 74% HECM $ 1.9 15% New HECM Hybrid ARMs 0.2 2% Seasoned & Super Seasoned Se
Slide 32: Non-Agency Portfolio
32 Non-Agency Portfolio Sub-Prime Exposure Sub-Prime Cohort 12-Month Perfect Pay1 26% 84% 0% 20% 40% 60% 80% 100% Q1-2010 Q3-2010 Q1-2011 Q3-2011 Q1-2012 Prime Alt-A POA Non-Agency Portfolio Non-Agency Portfolio: $2.0B As of June 30, 2012 Portfolio Update 28% 35% 25% 27% 29% 31% 33% 35% 37% Jan-10 J
Slide 33: State Performance
33 State Performance HPA Analysis by State Case Shiller by Tier Portfolio Update Los Angeles Sequential Change San Francisco Sequential Change 1.75% 1.09% 1.14% 1.33% 2.46% 2.19% 1.11% 1.94% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% Low Medium High Aggregate Low Medium High Aggregate Source: Core Logic an
Slide 34: Non-Agency Discount Sub-Prime Senior Bond
Pays sequentially after the A3 is fully paid, expected to be in early 2014. Receives protection from credit losses from the subordinate bonds and ongoing excess interest. Pays a coupon of LIBOR + 0.31%. Wells Fargo & SPS as servicers. A3 39.7%-100% $19M Current Face 0.6 Yr WAL1 SUBORDINATED
Slide 35: Delinquencies and MTM LTVs
Delinquencies and MTM LTVs 35 Represents actual bond held in Two Harbors’ portfolio as of the filing date of this presentation. Collateral summary and yield analysis scenarios represent the views of Two Harbors and its external manager, PRCM Advisers LLC, and are provided for illustration purposes o
Slide 36: Credit Enhancement and Market Price
$63.2 $75.5 $50 $55 $60 $65 $70 $75 $80 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Credit Enhancement and Market Price 36 Represents actual bond held in Two Harbors’ portfolio as of the filing date of this presentation. Collateral summary and yield analysis scenarios represent the views of Two Harbor
Slide 37: Hedging Interest Rate Exposure Is Key
37 Hedging Interest Rate Exposure Is Key Portfolio Update Interest rates can move quickly during rising rate environments. Source: Bloomberg. 3.00% 3.75% 4.20% 6.24% 7.70% 5.50% 2% 3% 4% 5% 6% 7% 8% Jan-93 Apr-93 Jul-93 Oct-93 Jan-94 Apr-94 Jul-94 Oct-94 2 Year U.S. Treasuries (%) Fed Funds Policy T
Slide 38: Protecting Book Value
Protecting Book Value Objective of protecting book value in a rising interest rate environment. Multifaceted hedging approach, including swaps, swaptions and interest-only bonds. Daily monitoring of interest rate exposures. TWO Risk Management Report Excerpt Hedging Strategy Portfolio Update S
Slide 39: Attractive Returns With Lower Risk
39 Attractive Returns With Lower Risk Attractive & Comparable Dividend Yield1… … With Lower Leverage2… … Less Interest Rate Exposure 3 … … And Less Prepayment Risk 4 3.7x 6.6x 4.3x 7.3x – 2x 4x 6x 8x 5.0% 11.4% 5.6% 17.5% 5.2% 15.9% 5.6% 15.9% – 5% 10% 15% 20% 15.4% 13.6% – 5% 10% 15% 20% Note: All
Slide 40: Financial Review - Brad Farrell
Financial Review 40 Chief Financial Officer and Treasurer since January 2012. Previously, Brad was the Financial Controller for Two Harbors. Career focused on overseeing financial management, reporting and business analysis for public financial service companies. Prior, Vice President and Ex
Slide 41: Financial Stewardship
Financial Stewardship 41 Mitigate financial and counterparty risks. Maintain compliant accounting standards and controls. Achieve reporting transparency through robust disclosure. Oversee financial planning and expense management. Comply with REIT status and 1940 Act requirements. Delive
Slide 42: Financing Profile
Financing Profile 42 Long duration and laddered repo maturities. Daily margin and excess liquidity management. Stress tests for shifts in market value and advance rates. Financing Repurchase Agreements: RMBS and Agency Derivatives2 June 30, 2012 Amount ($M) Percent (%) Within 30 days $3,168 33
Slide 43: Financing Profile
43 Financing Profile Quantity and quality of counterparties is meaningful to our RMBS financing profile. Broad diversification in our Agency counterparties supports portfolio growth and provides a mean to manage both available capacity and counterparty risk. The vast majority of our non-Agency
Slide 44: Counterparty Risk Management
44 Counterparty Risk Management Our counterparty risk management focus allows us to proactively address market and company specific events. Team focused solely on counterparty risk management across Pine River and Two Harbors. Dashboards (as illustrated below) across key metrics evaluate the h
Slide 45: Core vs. GAAP EPS
Core vs. GAAP EPS 45 Operating Performance (In millions, except for per share amounts) Core Earnings Realized Gains Unrealized MTM Q2-2012 Financials Interest income $105.9 $ - $ - $105.9 Interest expense 15.5 - - 15.5 Net interest income 90.4 - - 90.4 Net other-than-temporary impairment losses - -
Slide 46: Operating Expense Management
Operating Expense Management 46 Downward trend in expense ratio (as a percentage of average equity) driven by economies of scale and thoughtful expense management. Future run-rate trend expected to be relatively flat: Many of our expenses are related to portfolio size, such as data services an
Slide 47: Dividend Distribution
Dividend Distribution 47 Dividend vs. Book Value per Diluted Share 1 Financial Review “We are pleased to deliver another strong dividend to our stockholders this quarter. The dividend is based on our evaluation of current market conditions. We continue to believe that the housing and mortgage sector
Slide 48: Question and Answer
Question and Answer 48 Tom Siering, President and Chief Executive Officer Bill Roth, Co-Chief Investment Officer Brad Farrell, Chief Financial Officer
Slide 49: Key Takeaways
Key Takeaways 49 Closing Comments Industry leading hybrid mortgage REIT. Highly experienced investment team. Flexible and opportunistic investment approach. Strong foundation in place for future growth – deep and talented bench, best-in-class infrastructure, risk management systems, and hedg
Slide 50: Contact Information
50 For further information, please contact: Contact Information Anh Huynh Investor Relations Two Harbors Investment Corp. 212.364.3221 Anh.Huynh@twoharborsinvestment.com July Hugen Investor Relations Two Harbors Investment Corp. 612.629.2514 July.Hugen@twoharborsinvestment.com