Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2012 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, Mar 25, 2013
Slide 1: Two Harbors Investment Corp. Fourth Quarter 2012 Investor Presentation
Two Harbors Investment Corp. Fourth Quarter 2012 Investor Presentation
Slide 2: Safe Harbor Statement
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,
Slide 3: Executive Summary: 2012 and Fourth Quarter Results
2 2012 and Fourth Quarter Results In 2012 we generated a return on book value of 47%1 with dividends of $1.71 per share, which was driven by an exceptional economic return of $1.05 billion. We delivered a total annual shareholder return of 40%2, which compares to a return of 19% for the sector3.
Slide 4: Hybrid Model Allows for Multi-Faceted Approach
Hybrid Model Allows for Multi-Faceted Approach Expansion of Core Competency Set We continue to pursue opportunities in the Agency and non-Agency markets. Our criteria for considering new investments include the following: ― Based on core competencies, such as understanding and managing prepaymen
Slide 5: Building a Strong Franchise
Building a Strong Franchise 4 (1) Source: Bloomberg. 2009 Inception October 29, 2009 Initial investments aggregating $488 million 2012 Market capitalization surpasses $3 billion Total RMBS portfolio $14 billion Contributed single-family rental properties to Silver Bay 2010 Market capitalization reac
Slide 6: Book Value & Dividend History
Book Value & Dividend History 5 (1) See Appendix, page 17 for calculation of 2012 return on book value. (2) 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 a
Slide 7: Delivering Total Return
-10% 10% 30% 50% 70% 90% 110% Delivering Total Return 6 (1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through January 30, 2013. Total stockholder return is defined as capital gains on stock price including dividends. Source: Bloomberg. (2) Two Harbors’ total
Slide 8: Market Update
Market Update 7 Non-Agency RMBS Home prices improving, CoreLogic Home Price Index +7.5%1 in 2012 Low rate environment expected to persist; continue to hedge against an increase in rates Unemployment trends improving, but still high Policy considerations include: ― Boxer-Menendez legislation
Slide 9: Portfolio Composition
110 110 Portfolio Composition (1) “IO” is defined as Interest Only securities; includes Agency Derivatives (“IIOs”) of $301 million as of December 31, 2012. (2) Home Equity Conversion Mortgage loans (“HECM”) are loans that allow the homeowner to convert home equity into cash collateralized by the va
Slide 10: Agency Portfolio with Prepayment Protection
Agency Portfolio with Prepayment Protection Agency RMBS Portfolio Agency Strategy Agency Portfolio: $11.3B1 As of December 31, 2012 Other Low Loan Balance Pools4 15% Low FICO5 7% Post 2006 - Discount 2% Prepayment Protected 5% Seasoned6 6% HECM 17% High LTV (Predominately MHA)2 26% $85K Max Pools3 2
Slide 11: Non-Agency Portfolio with Sub-Prime Focus
Non-Agency Portfolio with Sub-Prime Focus 10 Sub-Prime Exposure Non-Agency Strategy Non-Agency Portfolio Non-Agency Portfolio: $2.7B As of December 31, 2012 Option-ARM 8% Alt-A 4% Prime 1% Sub-Prime 87% Non-Agency underlying performance continues to improve; still potential upside Deeply discoun
Slide 12: Hedging Strategy
Hedging Strategy 11 Swaps, Swaptions and IOs BV Exposure to +100 bps Change in Rates1 $12.6 $5.0 $0.5 $0 $4 $8 $12 Hedging Tools (Notional Value) Agency Securities (Fair Market Value) Swaps - Notional ($) Swaptions - Notional ($) IOs and IIOs ($) 2 $B ill io ns Hedging Hedging Strategy: ― Objectiv
Slide 13: Financing Profile
Financing Profile High-Quality Counterparties2 Diverse Counterparties1 We continue to ladder repo maturities, and averaged 85 days to maturity as of December 31, 2012. We have relationships with many different counterparties with an emphasis on North America. The vast majority of our repo is h
Slide 14: Hybrid Model Opportunity Set
Hybrid Model Opportunity Set Agency Opportunistically deploy capital Non-Agency Continued focus on assets with attractive yield and potential upside Securitization Math around creating subordinate bonds and IOs is more attractive Opportunity to create attractive mortgage credit investment is
Slide 15: Attractive Returns With Lower Risk
Attractive Returns With Lower Risk Attractive & Comparable Dividend Yield1… … With Lower Leverage3… … Less Interest Rate Exposure 4 … … And Less Prepayment Risk 5 5.6% 17.3% 6.0% 15.9% 6.0% 18.7% 6.6% 19.0% – 5% 10% 15% 20% 15.8% 13.9% 15.4% 13.6%12.3% 11.9% 19.9%2 12.8% – 5% 10% 15% 20% Note: All p
Slide 16: Appendix
Appendix 15
Slide 17: 2012 Return on Book Value of 47%
2012 Return on Book Value of 47% Return on book value1 (Per diluted share amounts, except for percentage) Book value at December 31, 2012 $ 11.54 Book value at December 31, 2011 9.03 Increase in book value 2.51 Dividends declared in 2012 1.71 Return on book value ($) $ 4.22 Return on book value (%)
Slide 18: Agency: Vintage & Prepayment Protection
Agency: Vintage & Prepayment Protection Q3-2012 Q4-2012 High LTV (predominately MHA) 31% 26% $85K Max Pools 25% 20% HECM 15% 17% Other Low Loan Balance Pools 9% 15% Low FICO 6% 7% Seasoned (2005 and prior vintages) 6% 6% Prepayment protected 4% 5% 2006 & subsequent vintages - Discount 2% 2% 2006 & s
Slide 19: Agency Securities as of December 31, 2012
Agency Securities as of December 31, 2012 Par Value ($M) Market Value ($M) % of Agency Portfolio Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed 3.0-3.5% $ 2,747 $ 2,919 25.8% $ 2,910 3.2% 4 4.0-4.5% 3,502 3,868 34.1% 3,801 4.2% 10 ≥ 5.0% 1,040 1,163 10.
Slide 20: Change in Agency Portfolio
Q4-2012 Market Value ($M) Q4-2012 % of Agency Portfolio Q3-2012 Market Value ($M) Q3-2012 % of Agency Portfolio Change in Agency Portfolio3 30-Year Fixed 3.0-3.5% $ 2,919 25.8% $ 1,224 9.6% 16.2% 4.0-4.5% 3,868 34.1% 6,518 50.9% (16.8%) ≥ 5.0% 1,163 10.2% 1,230 9.6% 0.6% $ 7,950 70.1% $ 8,972 70.1%
Slide 21: Non-Agency Securities as of December 31, 2012
Non-Agency Securities as of December 31, 2012 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,132 $518 $2,650 % of Non-Agency Portfolio 80.4% 19.6% 100.0% Average Purchase Price1 $50.83 $57.68 $52.17 Average Coupon 1.8% 1.1% 1.7% Collateral Attributes Av
Slide 22: Non-Agency Discount Bond Example
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 39.9%-100% $15M Current Face 0.6 Yr WAL1 SUBORDINATED
Slide 23: Financing and Hedging Strategy
110 110 December 31, 2012 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2013 $ 2,275 0.713% 0.458% 0.56 2014 1,675 0.644% 0.467% 1.57 2015 2,770 0.908% 0.435% 2.43 2016 1,940 0.874% 0.418% 3.46 2017 and after 3,910 0.960% 0.387% 4.72 $ 12
Slide 24: Management Team and RMBS Expertise
23 William Roth − Partner of Pine River Capital Management − 32 years in mortgage securities market, including at Salomon Brothers and Citi; Managing Director in proprietary trading group managing MBS and ABS portfolios Brad Farrell − Most recently served as Two Harbors’ Controller from 2009 to 2011
Slide 25: Overview of Pine River Capital Management
24 Overview of Pine River Capital Management Global multi-strategy asset management firm providing comprehensive portfolio management, transparency and liquidity to institutional and high net worth investors Founded 2002 with offices in New York, London, Beijing, Hong Kong, San Francisco and Minne
Two Harbors Investment — Q4 2012 Earnings Presentation on 6ix