Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2013 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Feb 5, 2014
Slide 1: Fourth Quarter 2013 Earnings Call
Februar y 6 , 2014 Fourth Quarter 2013 Earnings Call
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 - Financial Overview
Executive Summary - Financial Overview FULL YEAR 2013 – DELIVERED STRONG RETURN ON BOOK VALUE • Produced full year 2013 return on book value of 10.4%(1) with dividends of $2.18(2) per share, despite a volatile interest rate and mortgage spread environment • Reported Comprehensive Income for the full
Slide 4: Executive Summary - Strategic Overview
Executive Summary - Strategic Overview ADVANCING STRATEGIC INIT IATIVES MORTGAGE SERVIC ING RIGHTS(MSR) • Completed substantial bulk purchase of MSR from Flagstar Bank – Unpaid principal balance of $40.7 billion – Purchase price of approximately $500 million • Announced two-year flow sale MSR agreem
Slide 5: Monitoring Key Macroeconomic Factors
Monitoring Key Macroeconomic Factors INTEREST RATES • Treasury and mortgage interest rates continue to rise as the Federal Reserve begins to taper its purchases EMPLOYMENT • While unemployment remains high, job creation in recent quarters indicates improvements in the economy • Unemployment is a mea
Slide 6: Book Value
Book Value 6 Q4-2013 Book Value ($M) Q4-2013 Book Value per share Year Ended 2013 Book Value ($M) Year Ended 2013 Book Value per share Beginning Stockholders’ equity – basic $3,773.1 $10.36 $3,450.6 $11.55 GAAP Net Income: Core Earnings, net of tax 76.4 311.9 Realized gains and losses, net of tax 86
Slide 7: Financial Summary
E X P E N S E R AT I O Financial Summary 7 F I N A NC IAL H I G H L I G H TS C O R E E A R N I NGS (1 ) AC C O U NT I NG M AT T E R S (1) Core Earnings is a non-GAAP measure that the company defines as GAAP net income, excluding impairment losses, gains or losses on sales of securities and terminati
Slide 8: 2013 Distributions
2013 Distributions 8 Distributions, Year Ended December 31, 2013 (in millions, except per share data) Q1 Q2 Q3 Q4 Total REIT 2013 taxable income plus prior year undistributed taxable income of $10.7 million $425.6 Cash distributions $116.8 $113.4 $102.0 $94.9 $427.1 Silver Bay common stock distribut
Slide 9: 2013 Taxable Income
2013 Taxable Income 9 GAAP-to-Taxable Income, Year Ended December 31, 2013 (in millions) REIT TRS Securitization Trusts Consolidated GAAP net income, pre-tax $ 398.6 $ 248.5 $ 16.3 $ 663.4 Permanent differences Silver Bay common stock distribution 2.3 - - 2.3 Securitization Trusts consolidated for G
Slide 10: Federal Home Loan Bank
Federal Home Loan Bank IN DECEMBER, TH INSURANCE HOLDINGS COMPANY LLC, A WHOLLY OWNED SUBSIDIARY OF TWO HARBORS, WAS GRANTED MEMBERSHIP IN THE FEDERAL HOME LOAN BANK OF DES MOINES (FHLB) • Membership provides up to $1.0 billion of available uncommitted credit for borrowings, which may be adjusted at
Slide 11: Financing Profile
D I V E R S E AG E N C Y C O U N T E R PART IE S (2 ) H I G H - Q UAL IT Y N O N - AGE NC Y C O U N T E R PART IE S (3 ) Financing Profile (1) 11 • We continue to ladder repo maturities, and average 72 days to maturity with 20 counterparties at year-end • All non-Agency repos are held with counterpa
Slide 12: Portfolio Performance Summary
BE N C H M A R K I N D I C E S (1 ) Portfolio Performance Summary 12 P E R FO R M A NC E H I G H L I G H TS N E T I N T E R E ST Y I E L D A N N UAL I ZE D Y I E L D S BY R M BS P O RT FO L I O (3 ) (1) Source for benchmark indices: Bloomberg (2) Cost of funds includes RMBS financing, as outlined in
Slide 13: Portfolio Composition
TA RG ET E D C A P I TAL A L LO C AT I O N H I G H L I G H TS P O RT FO L I O C O M P O S I T I O N Portfolio Composition 13 • Capital allocation at December 31, 2013 was 57% Rates(3) and 43% Credit(4) • Agencies declined to 44% of capital allocation while MSR increased to 13% at December 31st • Goi
Slide 14: Key Portfolio Metrics
BV E X P O S U R E TO + 100BP S C H A N G E I N R AT E S (2 ) H E D G I N G ST R AT E GY P O RT FO L I O M E T R I C S Key Portfolio Metrics 14 • Low implied debt-to-equity(1) ratio of 3.1x at December 31 vs. 3.2x at September 30 • Long-term target debt-to-equity ratios ― Agency: 6.0-7.0x ― Non-Agen
Slide 15: Mortgage Servicing Rights
Mortgage Servicing Rights BU L K AC Q U IS IT IO N O F M S R F RO M F L AG STAR • MSR on residential mortgage loans • Underlying pool of mortgage loans is comprised of Fannie Mae and Ginnie Mae loans that were originated primarily after 2010 • Subservicing agreement with Flagstar Bank to provide ong
Slide 16: Mortgage Loan Conduit & Securitization
Mortgage Loan Conduit & Securitization ONGOING PROGRESS BUILDING OUR ORIGINATOR PLATFORM • Completed two prime jumbo securitizations in 2013, totaling over $800 million • Over 30 originators in various stages of approval • Ability to source prime jumbo loans as well as other products, creating mutua
Slide 17: Appendix
Appendix
Slide 18: Return on Book Value
Return on Book Value 18 Return on book value Q4-2013 (Per diluted share amounts, except for percentage) Book value at December 31, 2013 ($) $10.56 Book value at September 30, 2013(1) 10.35 Increase in book value 0.21 Dividend declared in Q4-2013 0.26 Return on book value Q4-2013 ($) $0.47 Return on
Slide 19: Portfolio Performance Summary
D I V I D E NDS (1 ) Portfolio Performance Summary 19 C O M P R E H E N S I V E I N C O M E BO O K VA LU E A N D D I V I DE ND (1 ) P E R S H A R E (2 ) G A A P N E T I N C O M E (1) Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes divid
Slide 20: Operating Performance
Operating Performance 20 (In millions, except for per share data) Core Earnings Realized Gains Unrealized MTM Q3-2013 Financials Core Earnings Realized Gains Unrealized MTM Q4-2013 Financials Interest income $138.0 $ - $ - $138.0 $137.4 $ - $ - $137.4 Interest expense 24.9 - - 24.9 26.9 - - 26.9 Net
Slide 21: Operating Performance - Reconciliation of GAAP to non-GAAP
Operating Performance 21 (In thousands, except for per share data) Three Months Ended December 31, 2013 Year Ended December 31, 2013 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net income attributable to common stockholders $ 239,414 $ 579,039 Adjustments for non-core earnings: (Ga
Slide 22: RMBS Portfolio Metrics
RMBS Portfolio Metrics 22 AGENCY RMBS CPR PORTFOLIO YIELDS AND METRICS (1) Agency yield includes impact of Agency Derivatives. Interest income on Agency Derivatives was $1.5 million and $5.8 million for the third and fourth quarters of 2013, respectively. (2) Cost of financing RMBS includes interest
Slide 23: Financing and Hedging Strategy - Interest Rate Swaps
I N T E R E ST R AT E SWA P S (2 ) F I N A NC ING Financing and Hedging Strategy(1) 23 (1) As of December 31, 2013. (2) Notional amounts do not include $1.0 billion of notional interest rate swaps economically hedging our trading securities, $3.1 billion of notional interest rate swaps hedging our a
Slide 24: Financing and Hedging Strategy - Interest Rate Swaptions
I N T E R E ST R AT E SWA P T I O NS Financing and Hedging Strategy(1) 24 (1) As of December 31, 2013. Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts:
Slide 25: Agency Securities as of December 31, 2013
Agency Securities as of December 31, 2013 25 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% $719 $715 7.4% $765 3.5% 19 4.0-4.5% 3,855 4,008 41.3% 4,185 4.1% 19 ≥ 5.0% 837 926 9.5% 909 5.5% 60
Slide 26: Non-Agency Securities as of December 31, 2013
Non-Agency Securities as of December 31, 2013 26 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,282 $469 $2,751 % of Non-Agency Portfolio 83.0% 17.0% 100.0% Average Purchase Price(1) $52.58 $59.09 $53.69 Average Coupon 2.5% 1.6% 2.3% Weighted Average Ma
Slide 27: RMBS Portfolio Composition
RMBS Portfolio Composition 27 Agency: Vintage & Prepayment Protection Q3-2013 Q4-2013 High LTV (predominately MHA)(1) 24% 24% HECM 18% 19% $85K Max Pools(2) 14% 14% 2006 & subsequent vintages – Premium and IOs 14% 14% Low FICO(3) 7% 7% 2006 & subsequent vintages – Discount 7% 7% Seasoned (2005 and p
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
Two Harbors Investment — Q4 2013 Earnings Presentation on 6ix