Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2012 Earnings Presentation
20 slides from Two Harbors Investment's earnings presentation, Nov 6, 2012
Slide 1: Third Quarter 2012 Earnings Call
Two Harbors Investment Corp. Third Quarter 2012 Earnings Call November 7, 2012
Slide 2: Forward-Looking Statements
2 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, reade
Slide 3: Executive Summary
3 Executive Summary Delivered Exceptional Results Delivered comprehensive income of $524.4 million and total return on book value of 18.7%1. Book value increased 15.1% to $11.442 per diluted share, due primarily to strong appreciation in Agency and non-Agency holdings, net of hedges. Core Earn
Slide 4: Key Macroeconomic Update
4 Key Macroeconomic Update Key Macroeconomic Factors that Impact our Business Europe Dissolution of European Union or Euro is a significant risk to global markets. Home Prices CoreLogic Home Price Index increased 6.1%1 and we continue to find firming in certain regions. Interest Rates Interest
Slide 5: Business Diversification
5 Business Diversification Single Family Residential Properties As of October 31st, we had acquired a portfolio of approximately $240 million and over 2,000 homes. Represents an attractive asset class given long duration, current yield and potential home price appreciation. Securitization Cont
Slide 6: Financial Summary
110 110 6 Financial Summary Financial Highlights Core Earnings1 Expense Ratio Core Earnings1 are $0.31 per weighted average share. Drivers of Core Earnings ― Impacted by capital deployment from July 2012 capital raise. ― Lower net interest spreads on Agency securities acquired in recent months.
Slide 7: Book Value
7 Book Value Book Value Q3-2012 Book Value ($M) Common Shares Outstanding (Diluted basis) Net Book Value Per Common Share (Diluted basis) Beginning stockholders’ equity $ 2,182.7 219.7 $ 9.94 GAAP Net Income: Core Earnings, net of tax 84.4 Realized losses, net of tax (7.0) Unrealized mark-to-market
Slide 8: Portfolio Performance Summary
110 Achieved total return on book value of 18.7%1 for Q3-2012. Performance driven by both Agency and non- Agency strategies. Net interest spread impacted by lower Agency yields, lengthening repo terms, and maintaining the company’s hedging strategy with increase in Agency portfolio. Sector Q3-
Slide 9: Portfolio Composition
110 110 0% 10% 20% 30% 40% 50% 60% Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 50% 60% 60% 55% 55% 52% 52% 57% 50% 40% 40% 45% 45% 48% 44% 36% 4% 7% Agency Non-Agency Residential Real Properties Portfolio Composition 9 (1) Includes Agency Derivatives (“IIOs”) of $329 million as o
Slide 10: Key Portfolio Metrics
10 110 Key Portfolio Metrics 110 Continued to realize low and stable CPRs. 98% of Agency securities with implicit or explicit prepayment protection. Targeted debt-to-equity ratios: ― Agency: 6.0-7.0x ― Non-Agency: 1.0-1.5x (1) Agency weighted average 3-month CPR includes derivatives. (2) Weigh
Slide 11: Hybrid Model Provides Flexibility
11 Hybrid Model Provides Flexibility Agency Portfolio Today Focus on prepayment protected securities has generated low and stable prepayment experience. Low interest rate exposure. Non-Agency Portfolio Today Delinquencies are declining and performance is improving. Housing stable and improvi
Slide 12: Appendix
Appendix "TWO HARBORS
Slide 13: Q3-2012 Return on Book Value of 18.7%
13 Q3-2012 Return on Book Value of 18.7% Return on book value1 (Per diluted share amounts, except for percentage) Book value at September 30, 2012 $ 11.44 Book value at June 30, 2012 9.94 Increase in book value 1.50 Dividend declared in Q3-2012 0.36 Return on book value ($) $ 1.86 Return on book val
Slide 14: Operating Performance
110 Operating Performance 110 $9.30 $9.03 $9.67 $9.94 $11.44 $5.00 $7.50 $10.00 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Book Value per Share ($) ($18.0) $19.0 $195.7 $141.6 $524.4 (5.6%) 6.0% 44.5% 26.6% 70.2% -25.0% 25.0% 75.0% ($20.0) $180.0 $380.0 $580.0 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Co
Slide 15: Operating Performance
15 Operating Performance Operating Performance (In millions, except for per share amounts) Core Earnings Realized Gains Unrealized MTM Q2-2012 Financials Core Earnings Realized Gains Unrealized MTM Q3-2012 Financials Interest income $ 105.9 $ - $ - $ 105.9 $ 126.3 $ - $ - $ 126.3 Interest expense 15
Slide 16: Portfolio Yields and Metrics
16 110 Portfolio Metrics Portfolio Yield Realized Q2-2012 At Jun. 30, 2012 Realized Q3-2012 At Sept. 30, 2012 Annualized yield1 4.6% 4.5% 4.2% 3.8% Agency1 3.3% 3.3% 3.1% 2.8% Non-Agency 9.6% 9.6% 9.6% 9.6% Cost of financing2 1.0% 1.0% 1.1% 1.1% Net interest spread 3.6% 3.5% 3.1% 2.7% Portfolio Metr
Slide 17: Financing and Hedging Strategy
110 110 September 30, 2012 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2012 $ 25 0.868% 0.502% 0.23 2013 2,275 0.713% 0.484% 0.81 2014 1,675 0.644% 0.497% 1.82 2015 2,770 0.908% 0.471% 2.68 2016 and after 5,350 0.923% 0.410% 4.45 $ 12,0
Slide 18: Agency Securities as of September 30, 2012
18 Agency Securities as of September 30, 2012 Par Value ($M) Market Value ($M) % of Agency Portfolio Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed ≤ 4.5% $ 7,022 $ 7,742 60.5% $ 7,570 4.0% 8 5.0-6.0% 994 1,115 8.7% 1,078 5.4% 38 ≥ 6.5% 99 115 0.9% 112
Slide 19: Non-Agency Securities as of September 30, 2012
19 Non-Agency Securities as of September 30, 2012 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $1,990 $507 $2,497 % of Non-Agency Portfolio 79.7% 20.3% 100.0% Average Purchase Price1 $51.01 $57.80 $52.38 Average Coupon 1.8% 1.1% 1.7% Collateral Attribute
Slide 20: Agency: Vintage & Prepayment Protection
Agency: Vintage & Prepayment Protection Q2-2012 Q3-2012 High LTV (predominately MHA)1 21% 31% $85K Max Pools2 31% 25% HECM3 17% 15% Other Low Loan Balance Pools4 11% 10% Low FICO5 4% 7% Seasoned (2005 and prior vintages) 7% 5% Prepayment protected 6% 4% 2006 & subsequent vintages - Discount -% 1% 20
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