Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2014 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Feb 4, 2015
Slide 1: Fourth Quarter 2014 Earnings Call
Februar y 5 , 2015 Fourth Quarter 2014 Earnings Call
Slide 2: Safe Harbor Statement
Safe Harbor Statement F O R W A R D - L O O K I N G S T A T E M EN T 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, estimate
Slide 3: Financial Summary
Financial Summary F U L L Y E A R 2 0 1 4 – D E L I VE R ED S T R O N G R E T U R N O N B O O K V A L U E C O N S I D E R I N G C O N S E R V A T I VE P O R T F O L I O P O S I T I O N I N G • Reported book value of $11.10 per share; total return on book value 15.0%(1) — FY-2014 cash dividends of $1
Slide 4: Business Overview
Business Overview T R A N S F O RM A T I O N A L Y E A R F O R O P E R A T I O N A L B U S I NE S S E S ; A N N O U N C E D P L A N S T O E X P A N D T A R G E T A S S E T S T O I N C L U D ED C O M M ER C I A L M O R T G A G E L O A N S M O R T G A G E L O A N C O N D U I T A N D S E C U R I T I Z
Slide 5: Market and Policy Update
Market and Policy Update M AC RO E C O NO M IC E N V I RO N ME NT & P O L I C Y C O N S I D E R AT IO NS • End of Federal Reserve’s Quantitative Easing (QE) – Final reduction in asset purchases occurred during Q4-2014 – Reinvestment in MBS paydowns expected to continue for the foreseeable future • C
Slide 6: Delivering Total Return
-20% 0% 20% 40% 60% 80% 100% 120% 140% TWO Pine River Mortgage REIT Index Delivering Total Return TOTA L STO C K H O L DE R R E T U R N O F 1 2 5 % S I N C E I N C E P T I O N (1 ) 6 125% (1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through December 31, 201
Slide 7: Book Value
Book Value 7 (Dollars in millions, except per share data) Q4-2014 Book Value ($M) Q4-2014 Book Value per share Year Ended 2014 Book Value ($M) Year Ended 2014 Book Value per share Beginning stockholders’ equity – basic $4,118.1 $11.25 $3,855.0 $10.56 GAAP Net Income: Core Earnings, net of tax 83.1 3
Slide 8: Financial Summary: Core Earnings
E X P E N S E R AT I O Financial Summary 8 Q 4 - 2 014 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 ) (1) See footnote 2 on slide 3 for Core Earnings definition. For a reconciliation of GAAP to non-GAAP financials, refer to Appendix slide 20. (2) Implied debt-to-equity is calculated af
Slide 9: Tax Characterization of Dividend
$388 338.0 - - $50 - $338 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2014 REIT Taxable Income Before Capital Loss Carry-Forward Capital Loss Carry- Forward 2014 REIT Taxable Income M il lion s Tax Characterization of Dividend • Generated REIT taxable income before capital loss carry-forward of $
Slide 10: Financing Profile
Financing Profile(1) 10 R E P U R C H A S E A G R E EM E N T S • Repo markets functioning normally; no meaningful shifts in financing haircuts or repo rates • Focused on diversification and financial stability across repo counterparties ― Outstanding borrowings of $12.9 billion with 25 active counte
Slide 11: Targeted Capital Allocation: Portfolio Composition
TA RG ET E D C A P I TAL A L LO C AT I O N Q 4 - 2 014 A L LO C AT IO 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 11 • 56% capital allocation to Rates — Opportunistically added lower loan balance pools • 44% capital allocation to Credit — Continued sales of legac
Slide 12: Portfolio Performance
Portfolio Performance 12 Q 4 - 2 014 P E R FO R M A NC E H I G H L I G H T S (1) Assets in “Rates” include Agency RMBS, IIOs (or Agency Derivatives) and MSR. (2) Assets in “Credit” include non-Agency RMBS, prime jumbo residential mortgage loans, net economic interest in securitization trusts and CSL
Slide 13: Hedging Summary
Q 4 - 2 014 H E D G I N G H I G H L I G H T S & O BJE C T I V E S Hedging Summary 13 (1) Represents estimated percentage change in equity value for theoretical +100 bps parallel shift in interest rates. Change in equity value is total net asset change. (2) Represents estimated percentage change in e
Slide 14: Mortgage Loan Conduit and Securitization
Mortgage Loan Conduit and Securitization T R A N S FO R M AT I O NAL Y E A R FO R C O N D U I T BU S I N E SS • Completed three securitizations throughout the year; Agate Bay Mortgage Trust 2014-3 closed in Q4-2014 • Pipeline (interest rate locks and prime jumbo holdings) strong; approximately $1.0
Slide 15: Business Update
Business Update L AU NC H ED H I G H - LT V A N D N O N - P R I ME D U R I NG T H E Q UA RT E R • High-LTV: – Extension of current prime jumbo program – Focused on higher credit quality borrowers who need or desire to make smaller down payments • Non-Prime: – Aimed at average credit quality borrower
Slide 16: Appendix
Appendix
Slide 17: Return on Book Value
Return on Book Value 17 Return on book value Q4-2014 (Per diluted share amounts, except for percentage) Book value at September 30, 2014 $11.25 Book value at December 31, 2014 $11.10 Decrease in book value $(0.15) Dividend declared in Q4-2014 $0.26 Return on book value Q4-2014 $0.11 Return on book v
Slide 18: Financial Performance
D I V I D E NDS (2 ) Financial Performance 18 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 P E R S H A R E (1 ) G A A P N E T I N C O M E ( LO S S ) (1) Diluted shares outstanding at end of period, which includes the effect of dilutive outstanding warrants (Q4-2013) deter
Slide 19: Operating Performance
Operating Performance 19 (In millions, except for per share data) Core Earnings Realized Gains Unrealized MTM Q4-2014 Financials Core Earnings Realized Gains Unrealized MTM FY-2014 Financials Interest income $156.2 $ - $ - $156.2 $577.2 $ - $ - $577.2 Interest expense 31.7 - - 31.7 107.5 - - 107.5 N
Slide 20: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation 20 (In thousands, except for per share data) Three Months Ended December 31, 2014 Year-Ended December 31, 2014 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net (loss) income $(36,963) $167,139 Adjustments for non-core earnings: Gain on sale of se
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 21 AGENCY RMBS CPR(3) AGENCY PORTFOLIO YIELDS AND METRICS (1) Securities collateralized by loans of less than or equal to $175K, but more than $85K. (2) Securities collateralized by loans of less than or equal to $85K. (3) Agency weighted average 3-month Constant Prepaymen
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS 22 As of December 31, 2014 Par Value ($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% $495 $501 4.4% $492 3.0% 19 4.0-4.5% $6,466 $7,012 61.1% $6,947 4.2% 19 ≥ 5.0% $694 $782 6.8% $7
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights 23 As of Mar. 31, 2014 As of Jun. 30, 2014 As of Sept. 30, 2014 As of Dec. 31, 2014 Fair Value ($M) $476.7 $500.5 $498.5 $452.0 Unpaid Principal Balance ($M) $41,596.3 $45,629.2 $45,526.8 $44,949.1 Weighted Average Coupon 3.9% 3.9% 3.9% 3.9% Original FICO Score 738 7
Slide 24: Credit: Non-Agency RMBS Metrics
Credit: Non-Agency RMBS Metrics 24 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for w
Slide 25: Credit: Non-Agency RMBS
Credit: Non-Agency RMBS 25 As of December 31, 2014 Senior Bonds Mezzanine Bonds Total P&I Portfolio Characteristics: Carrying Value ($M) $2,370.5 $670.4 $3,040.9 % of Credit Portfolio 78% 22% 100% Average Purchase Price(1) $56.45 $68.74 $59.16 Average Coupon 2.4% 2.1% 2.3% Weighted Average Market Pr
Slide 26: Repo and FHLB Financing
Repo and FHLB Financing(1) 26 (1) As of December 31, 2014. (2) Repo pledged collateral does not include U.S. Treasuries with repurchase agreements of $2.0 billion outstanding, cash and cash equivalents (restricted and unrestricted) and collateral due from counterparties. (3) Excludes FHLB membership
Slide 27: Interest Rate Swaps
Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers Hedging Repo and FHLB Advances 2016 $4.1 0.667% 0.249% 1.65 2017 $5.3 1.063% 0.248% 2.55 2018 $0.6 0.945% 0.233% 3.08 2019 and after $1.5 2.408% 0.235% 7.70 $11.5 1.089% 0.246% 2.92 Other Pay
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions(1) 28 (1) As of December 31, 2014. Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer ≥ 6 Months $255.4 $130.1 56.62 $8,210
Slide 29: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
Two Harbors Investment — Q4 2014 Earnings Presentation on 6ix