Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Investor Day (March 2015)
65 slides from Two Harbors Investment's investor day presentation, Mar 18, 2015
Slide 1: Analyst & Investor Day Presentation
New York Stock Exchange M a rc h 19 , 2 015 Analyst & Investor Day Presentation
Slide 2: Safe Harbor Statement
Safe Harbor Statement 2 FO RWAR D - LO O KI NG STAT E M E NT S 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 pr
Slide 3: Executive Overview – Tom Siering
Executive Overview – Tom Siering
Slide 4: Key Market and Policy Considerations
Key Market and Policy Considerations 4 RATES STRATEGY CONSIDERATIONS POLICY UPDATE • Actively engaged with a variety of parties in Washington – FHFA proposed rulemaking – Conforming loan limits – G-Fees – Private label securitization market – GSE reform • Gene Sperling serves as advisor to Pine Rive
Slide 5: Key Market and Policy Considerations: Prices, Homeownership, Affordability
0 50 100 150 200 250 Afford a b ili ty Housing Affordability Index Historical Median Key Market and Policy Considerations 5 RESIDENTIAL & COMMERCIAL PRICE INDEX HOMEOWNERSHIP RATES AFFORDABIL IT Y 70 90 110 130 150 170 190 210 P ri ce I n de x Resi HPI CRE CPPI 185 158 30.0 35.0 40.0 45.0 55.0 60.0
Slide 6: Two Harbors Today
Two Harbors Today 6 CELEBRATED FIFTH ANNIVERSARY IN 2014 • Initial market capitalization of $124 million in October 2009 • Largest hybrid mortgage REIT, with a market capitalization of approximately $3.8 billion(1) • Core competencies in understanding and managing prepayments and mortgage credit • C
Slide 7: Mission Based Strategy
Mission Based Strategy OUR MISSION IS TO BE RECOGNIZED AS THE INDUSTRY -LEADING MORTGAGE REIT: • Largest hybrid mortgage REIT investing in residential mortgage assets • Provider of permanent capital to the U.S. mortgage market • Thought leader in the U.S. housing market WE UT IL IZE SUPERIOR ASSET S
Slide 8: Opportunity Set
Opportunity Set 8 FLEXIB IL IT Y TO TAKE ADVANTAGE OF OPPORTUNITIES ACROSS THE MARKET RATES STRATEGY Agency RMBS Mortgage Servicing Rights CREDIT STRATEGY Non-Agency RMBS Mortgage Loan Conduit COMMERCIAL Commercial Real Estate Debt
Slide 9: 2014 In Review
2014 In Review 9 TRANSFORMATIONAL YEAR FOR OPERATIONAL BUSINESSES; ANNOUNCED PLAN S TO EXPAND TARGET ASSETS TO INCLUDE COMMERCIAL MORTGAGE LOANS (1) Pipeline includes interest rate locks and prime jumbo holdings. (2) As of respective quarter-end. First Quarter 2014 • Pipeline of approximately $295 m
Slide 10: Delivering Attractive Total Return
-20% 0% 20% 40% 60% 80% 100% 120% 140% TWO Pine River Mortgage REIT Index TOTAL STOCKHOLDER RETURN OF 134% S INCE INCEPTION (1) DRIVEN BY SUPERIOR SECURIT Y SELECTION AND SOPHISTICATED RISK MIT IGATION STRATEGIES Delivering Attractive Total Return 10 134% (1) Two Harbors’ total stockholder return is
Slide 11: Strategy Update – Bill Roth
Strategy Update – Bill Roth
Slide 12: Generating Stockholder Value
Generating Stockholder Value 12 FOCUSED ON DEVELOPING MULTIPLE AVENUES TO DRIVE STOCKHOLDER VALUE • Consistent with core competencies of understanding and managing prepayment, interest rate and credit risk RATES STRATEGY • Includes Agency RMBS, Agency derivatives, MSR and associated notional hedges
Slide 13: Rates Strategy
Rates Strategy
Slide 14: Rates: Market Update
0.4% 0.5% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6% 2.9% 3.1% 3.4% 12/31/2013 4/30/2014 8/31/2014 12/31/2014 2,10 10-Year Rates 5,10 0 150 300 450 600 750 900 1050 1200 O A S Weighted Average MSR to IOS Spread Weighted Average IOS OAS Weighted Average MSR OAS 0
Slide 15: Rates: Summary and Outlook
Rates: Summary and Outlook 15 • $11.9 billion Rates strategy comprised of Agency securities, MSR and associated hedges • Leverage of 4.7x as of December 31, 2014 • Low spread duration STRATEGY • Extract value from Agency market focusing on mispriced prepayment situations • Dynamically hedge portfoli
Slide 16: Rates: Portfolio Holdings
As of December 31, 2014 Market Value ($M) % of Rates Strategy 30-Year Fixed 3.0-3.5% $501 4.2% 4.0-4.5% $7,012 58.8% ≥ 5.0% $782 6.5% $8,295 69.5% MSR $452 3.8% HECM $1,741 14.6% Hybrid ARMs $128 1.1% Other-Fixed(1) $853 7.1% IOs and IIOs $462(2) 3.9% Total $11,931 100.0% Rates: Portfolio Holdings 1
Slide 17: Rates: MSR Portfolio
Agency Product Current UPB (in millions) % of Total UPB Count Weighted Average Coupon (WAC) Weighted Average Loan Age (WALA) Weighted Average LTV Weighted Average FICO Pct Cur/30DPD FN / FH 30Y 24,124.7 56.3% 103,990 3.94 28 69 764 99.66% 15Y 5,970.7 13.9% 35,295 3.21 28 61 769 99.94% ARM 895.8 2.1%
Slide 18: Rates: Market Opportunity Set
Rates: Market Opportunity Set 18 VALUE IN HIGHER COUPONS • Higher coupons offer relatively attractive expected ROEs ― Hold roughly $7.0 billion, or most of Agency exposure, in this sector • MSR yields tighter but provides multi-faceted benefits across our portfolio AGENCY RMBS OPPORTUNITY SET(1) Ass
Slide 19: Hedging
Hedging
Slide 20: Rates: Illustrative Portfolio Durations
Strategy Total 0-2 years 3-7 years 7+ years Assets Agency Pools $3,528,984 $321,860 $1,521,395 $1,685,729 HECM Pools $405,724 $106,364 $308,365 ($9,005) CMO,IO,IIO $347,359 $95,907 $353,342 ($101,890) MSR Assets ($1,227,515) $47,742 ($189,402) ($1,085,854) Credit $2,245,514 $63,410 $851,615 $1,330,4
Slide 21: Rates: Hedging to Protect Book Value
HEDGING STRATEGY Rates: Hedging to Protect Book Value 21 BOOK VALUE EXPOSURE TO CHANGE IN RATES (1 ) • Employ dynamic and sophisticated approach to protect against moves in interest rates • Use combination of swaps, swaptions and IO products, including MSR • Use of swaptions and mortgage options mit
Slide 22: Rates: Hedging to Protect Earnings
Rates: Hedging to Protect Earnings 22 HEDGING STRATEGY PROTECTS EARNINGS IN R IS ING RATE ENVIRONMENT • Interest rates rallied in early 2015 • Increased short dated swaps by $1.0 billion in early March to decrease duration – Positively impacts net interest income in rising rate environment (1) Data
Slide 23: Credit Strategy
Credit Strategy
Slide 24: Credit: Market Update
250 300 350 400 450 500 50 60 70 80 90 100 12/31/2012 4/30/2013 8/31/2013 12/31/2013 4/30/2014 8/31/2014 12/31/2014 S p rea d S p rea d DJ CDX.NA.IG Main on the run (5Yr) DJ CDX.NA.HY 100 On the run (5Yr) Credit: Market Update MARKET SUMMARY • Credit performed well in 2014 despite widening at the en
Slide 25: Credit: Summary and Outlook
PORTFOLIO SUMMARY OUTLOOK STRATEGY Credit: Summary and Outlook 25 • $4.1 billion; includes non-Agency RMBS, net economic interest in securitization trusts and residential mortgage loans • Leverage of 1.5x as of December 31, 2014 • Continued improvement in housing metrics and employment ‒ Housing pri
Slide 26: Credit: Legacy Non-Agency Overview
Credit: Legacy Non-Agency Overview IMPROVING CREDIT FUNDAMENTALS WITH UPSIDE OPTIONALIT Y • Majority of legacy non-Agency loans held in areas with strong housing recovery metrics • Macroeconomic tailwinds; improving employment, housing price appreciation (HPA) and lower gas prices • Better loan perf
Slide 27: Credit: Legacy Non-Agency Opportunity Today
Credit: Legacy Non-Agency Opportunity Today 27 ILLUSTRATIVE LEGACY NON - AGENCY BOND EXAMPLE • Bond characteristics(1): ― Second pay – starts receiving principal in approximately 3 years ― Total 60+ day delinquencies: 38% ― 12-month CPR: 1.4% ― 12-month loss severities: 62% YIELD ANALYSIS - CARR 200
Slide 28: Credit: Evolution of Conduit Business
Credit: Evolution of Conduit Business 28 Second Half 2015 THE MISSION OF THE CONDUIT BUSINESS IS TO: • Cultivate network of sellers and servicers that provide access to a broad array of opportunities such as prime jumbo, high LTV and non-prime loans, as well as MSR flow • Increase market share with
Slide 29: Credit: Infrastructure Development
Credit: Infrastructure Development 29 EFFIC IENT AND SCALABLE PROGRAM ALLOWS QUICK RESPONSE TO BROAD ARRAY OF OPPORTUNITIES • Substantial resource commitment to support the operational elements of Conduit and MSR businesses • Key transaction management teams oversee: ― Due diligence ― Contract manag
Slide 30: Credit: ABMT Securitization Deal Characteristics
Credit: ABMT Securitization Deal Characteristics ABMT 2013-1 ABMT 2014-1 ABMT 2014-2 ABMT 2014-3 ABMT 2015-1 TOTAL/ WEIGHTED AVERAGE Loan Characteristics(1): Aggregate UPB ($ millions) $434 $268 $374 $356 $279 $1,711 WAC (%) 3.9% 4.2% 4.2% 4.1% 4.1% 4.1% WALA 6 months 9 months 2 months 1 month 2 mon
Slide 31: Credit: Illustrative Securitization Economics
Credit: Illustrative Securitization Economics 31 GOAL IS TO CREATE ATTRACTIVE ASSETS FOR PORTFOLIO • Hypothetical 30-year 4.00% gross note rate (3.50% net), servicing released, $1 billion loan portfolio • Source loans at 102.54% • Estimate 6.5% subordination to AAA; – 3.0% subordination to A-rating
Slide 32: Credit: High LTV and Non-Prime
Credit: High LTV and Non-Prime 32 HIGH LT V IS EXPANSION OF CURRENT PRIME JUMBO PROGRAM • Focused on higher credit-quality borrowers who need or desire to make smaller down payments • Loans up to 90% LTV • Requires higher reserves, lower DTI ratios and higher FICO scores LARGE POTENTIAL IN NON -PRIM
Slide 33: Credit: Positioning
December 2013 ($Millions) December 2014 ($Millions) Year/Year Change December 2014 % of Capital Legacy non-Agency $2,723 $2,686 ($37) 30.9% New Issue AAA - $199 $199 0.9% New Issue Subs $36 $164 $128 2.6% Conduit AAA (retained) $76 $383 $307 1.8% Conduit Subs/IO (retained) $79 $147 $68 2.5% Total wi
Slide 34: Credit: Market Opportunity Set
Credit: Market Opportunity Set 34 Credit Market Opportunity Set Asset Yield Expected Estimated ROE Legacy Non-Agencies 4%-5% 6%-10% GSE Credit Risk Transfer 3%-7% 9%-13% Prime Securitization Retained Interests 6%-8% 10%-14% Non-Prime Loans 5%-8% 10%-15% OPPORTUNIT IES • Legacy non-Agencies playing o
Slide 35: Commercial Real Estate
Commercial Real Estate
Slide 36: Commercial Real Estate: Market Overview
(1) Source: Federal Reserve Board Flow of Funds Data, as of December 31, 2014. (2) Source: Goldman Sachs; Trepp, LLC. Based on Federal Reserve Flow of Funds Data. Commercial Real Estate: Market Overview • Compelling opportunity to capitalize on favorable fundamental trends – More than $3.0 trillion
Slide 37: Commercial Real Estate: Strategy
Commercial Real Estate: Strategy 37 I N I T I AL A L LO C AT I O N O F $ 5 0 0 M I L L I O N E Q U I T Y C A P I TAL • Target assets to include first mortgage loans, mezzanine loans, b-notes and preferred equity • Typical loan amounts range from $10 to $100 million – U.S.-domiciled – Primarily incom
Slide 38: Commercial Real Estate: Illustrative Senior Loan
Commercial Real Estate: Illustrative Senior Loan 38 INVESTMENT $190 MILLION FIRST MORTGAGE LOAN Collateral An 18-story, office building in the Midwest; currently 89% occupied Sponsor A property group Purpose Refinancing / repositioning; sponsor plans to convert part of the office units into multifam
Slide 39: Commercial Real Estate: Illustrative Mezzanine Loan
Commercial Real Estate: Illustrative Mezzanine Loan 39 INVESTMENT $40 MILLION MEZZANINE LOAN Collateral An 750-key full-service hotel in a major U.S. city Sponsor A hotel group Purpose Refinancing; retire outstanding corporate and property-secured debt Loan “Metrics” Appraised LTV “attachment points
Slide 40: Commercial Real Estate: Looking Forward
F IRST QUARTER 2015 SECOND QUARTER 2015 THIRD QUARTER 2015 FOURTH QUARTER 2015 BUILD OUT INFRASTRUCTURE: TEAM, I.T. AND REPORTING Commercial Real Estate: Looking Forward 40 KEY NEAR-TEAM OBJECTIVES INITIATE LENDING PROCESS AND DEPLOY CAPITAL DEVELOP FINANCING AND ORIGINATION RELATIONSHIPS INITIATE A
Slide 41: Looking Forward
Looking Forward
Slide 42: Capital Allocation Outlook
Assets Capital Allocation 2012-2013 Average Capital Allocation December 2014 Capital Allocation 2015-2016 Average Capital Allocation 2015-2016 ($ Billion) Leverage Amount of Assets ($ Billion) Percent of Assets Potential Expected ROE Rates 54% 56% 40%-60% $1.6 - $2.4 8%-12% Agency RMBS 53% 44% 30%-4
Slide 43: CFO Update – Brad Farrell
CFO Update – Brad Farrell
Slide 44: Financial Discussion
Financial Discussion ACCOUNTING AND FINANCIAL IMPLICATIONS OF DIVERSIFICATION • REIT Status and Compliance with 1940 Act Requirements – Compliance does not inhibit diversification • Capitalization and Financing – Broad and dynamic financing options – FHLB financing capacity recently increased from $
Slide 45: REIT Compliance
REIT Compliance REIT COMPLIANCE DOES NOT INHIBIT ABIL IT Y TO DIVERSIFY PORTFOLIO REIT CONSIDERATIONS • Intend to buy and hold investments (i.e., RMBS, residential and commercial loans and excess servicing rights) – Established sister REIT and TRS entities within each asset strategy; provides flexib
Slide 46: 1940 Act Compliance
1940 Act Compliance 1940 ACT CONSIDERATIONS • Each legal entity has exemption • Legal entity that invests in RMBS complies through section 3 (c) (5) (C) 55% whole pool test • Continuously monitor compliance 46 1940 ACT EXEMPTIONS UTILIZED Section 3 (a) (1) (c) Defines an investment company as any is
Slide 47: Capitalization and Financing – Rates
Capitalization and Financing – Rates Rates Strategy • Consists of Agency RMBS and MSR • 56%, or $2.2 billion, of capital allocation TARGET CAPITAL ALLOCATION Agency RMBS • $11.5 billion market value • Highly liquid secondary market MSR • $0.5 billion market value • Active market participants; howeve
Slide 48: Capitalization and Financing – Credit and Commercial
Capitalization and Financing – Credit and Commercial Credit Strategy • Consists of Non-Agency RMBS, Residential Mortgage Loans (Prime Jumbo and Credit Sensitive) • 44%, or $1.7 billion, of capital allocation Commercial Mortgage Loans • Intend to initially allocate $500 million in equity capital TARG
Slide 49: Financial Reporting and Accounting
• Balance sheet and earnings components are more complex than a traditional Agency mortgage REIT • Elected to account for most assets, as permitted under GAAP, at fair value; believe it is truest reflection of the economics of the business – RMBS – Mortgage loans held-for-sale and locks – Retained i
Slide 50: Operating Expense Management
Operating Expense Management 50 • New asset classes have more operational expenses embedded in higher returns – Expense ratio will likely move higher by 20-40 basis points as commercial mortgage loan initiative grows • Best-in-class operational businesses create long-term franchise value • Operating
Slide 51: Dividend Considerations
Dividend Considerations 51 FINANCIAL OBJECTIVE IS TO CREATE STOCKHOLDER WEALTH SUCCESSFUL FINANCIAL EXECUTION LEADS TO DIVIDEND DISTRIBUTIONS AND RETURN ON BOOK VALUE CRITICAL OPERATING METRICS Comprehensive Income Taxable Income Book Value Performance Portfolio Risk Metrics • Our primary objective
Slide 52: Financial Performance Summary
TA X ABL E I N C O M E V S . D I ST R I BUT IO N S Financial Performance Summary 52 C O M P R E H E N S I V E I N C O M E C U M U L AT I VE P E R FO R M AN CE V. D I ST R I BUT I O NS BO O K VA LU E A N D D I V I DE NDS P E R S H A R E (3 ) (1) Does not include Silver Bay common stock distribution.
Slide 53: 2015 & Beyond – Tom Siering
2015 & Beyond – Tom Siering
Slide 54: 2015 & Beyond
2015 & Beyond 54 PERMANENT CAPITAL PROVIDER TO THE U.S . MORTGAGE MARKET • Operational businesses create the foundation for continued performance in a variety of housing and interest rate environments • Source a variety of products from Conduit: ― High LTV program focuses on high credit quality borr
Slide 55: Advancing Operational Businesses
Advancing Operational Businesses 55 COMMERCIAL MORTGAGE LOANS OPERATIONAL BUSINESSES: MORTGAGE LOAN CONDUIT AND MSR • Substantial resource commitment to support the operational elements of business • Robust mortgage acquisition and infrastructure allows us to control and manage loans we purchase and
Slide 56: Market Valuations
Market Valuations 56 OPERATING COMPANIES ARE HIGHLY COVETED IN THE MARKET (1) Valuation multiple calculated by dividing closing stock price by closing book value, as of December 31, 2014. (2) Agency category includes ANH, AGNC, CYS, CMO, HTS and ARR. (3) Credit/Hybrid category includes CIM, MITT, NL
Slide 57: Benefits of our Diversified Business Model
Benefits of our Diversified Business Model 57 OPTIONALIT Y IN PORTFOLIO BUILDS FRANCHISE VALUE AND DRIVES STOCK HOLDER RETURNS • Opportunistic capital allocation aims to take advantage of evolving mortgage finance landscape ― Ability to capitalize on compelling investment opportunities • Operating c
Slide 58: Question & Answer
Question & Answer
Slide 59: Appendix
Appendix
Slide 60: On-Balance Sheet Securitizations
On-Balance Sheet Securitizations 60 FAIR MARKET VALUE • Accounted for using the guidelines of ASC 860 (Transfers and Servicing) • Primary accounting paths: ― Sale ― Financing (consolidation) • We account for mortgage loans held-for- investment in securitization trusts at fair value ― Prices are obta
Slide 61: Accounting for Mortgage Servicing Rights
Accounting for Mortgage Servicing Rights 61 ACCOUNT FOR MSR AT FA IR MARKET VALUE • Separate recognition of MSR using the guidelines of ASC 860 (Transfers and Servicing) • Two valuation methods: ― Amortization Method • Amortize each MSR over period of income • Record valuation allowance and impairme
Slide 62: Introducing our Two Harbors Team – Thomas Siering
Introducing our Two Harbors Team 62 THOMAS S IERING – PRESIDENT & CHIEF EXECUTIVE OFFICER Thomas Siering is our Chief Executive Officer and President and a member of our Board of Directors. Mr. Siering has been a director and executive officer since we were incorporated in May 2009. Since 2012, Mr.
Slide 63: Introducing our Two Harbors Team – Bill Roth
Introducing our Two Harbors Team 63 BILL ROTH – CHIEF INVESTMENT OFFICER William Roth was appointed Chief Investment Officer in January 2013 after serving as Co-Chief Investment Officer since October 2009. Mr. Roth also serves as Partner of Pine River Capital Management and is a Director of the Pine
Slide 64: Introducing our Two Harbors Team – Brad Farrell
Introducing our Two Harbors Team 64 BRAD FARRELL – CHIEF F INANCIAL OFFICER & TREASURER Brad Farrell has served as Chief Financial Officer and Treasurer of Two Harbors since January 2012. Mr. Farrell previously served as Two Harbors’ Controller. Mr. Farrell has spent the breadth of his career overse
Slide 65: Two Harbors Investment Corp.
TWO HARBORS, Investment Cor ‘Pin Rr Cap! Managed Company