Two Harbors Investment Corp · NYSE:TWO

Two Harbors Investment — Q2 2013 Earnings Presentation

21 slides from Two Harbors Investment's earnings presentation, Aug 6, 2013

  1. Slide 1: Second Quarter 2013 Earnings Call

    Two Harbors Investment Corp. Second Quarter 2013 Earnings Call August 7, 2013

  2. 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

  3. Slide 3: Executive Summary

    Executive Summary Second Quarter Results – Protected Book Value in a Volatile Environment  Positioned portfolio defensively to protect book value from rising interest rates and wider mortgage spreads.  Reported book value of $10.47 per diluted common share and declared a $0.31 dividend.  Incurred

  4. Slide 4: Macroeconomic Update

    Macroeconomic Update (1) Source: CoreLogic Home Price Index rolling 12-month change as of May 31, 2013. Key Macroeconomic Factors that Impact our Business Interest Rates  Interest rates moved higher in the second quarter, as employment strengthened and concern increased around the Federal Reserve t

  5. Slide 5: Investment Opportunities

    5 Investment Opportunities Core Competencies – Understanding and managing prepayment, interest rate and credit risk within the mortgage and housing finance markets  Agency and non-Agency markets  Progress on several new opportunities: ― Mortgage Servicing Rights (MSRs) ― Mortgage Loan Conduit and

  6. Slide 6: Financial Summary

    110 110 Financial Summary Financial Highlights Core Earnings(1) Expense Ratio  Core Earnings(1) of $0.21 per weighted average share represents an annualized ROE of 7.6%.  GAAP Earnings of $1.06 per weighted average share.  Debt-to-equity increased to 3.6x from 3.1x at March 31, 2013. Net of TBAs,

  7. Slide 7: Book Value

    7 Book Value Book Value Q2-2013 Book Value ($M) Q2-2013 Book Value per Share Year-to-Date 2013 Book Value ($M) Year-to-Date 2013 Book Value per Share Beginning Stockholders’ equity – basic $4,065.1 $11.23 $3,450.6 $11.55 GAAP Net Income: Core Earnings, net of tax 78.1 167.8 Realized gains, net of ta

  8. Slide 8: Financing Profile and Counterparties

    Diverse Agency Counterparties(2) 8 Financing Profile High-Quality Non-Agency Counterparties(3)  We continue to ladder repo maturities, and average 86 days to maturity. We currently have 24 counterparties.  The majority of repo is held with counterparties having a CDS spread of <150, indicating low

  9. Slide 9: Portfolio Performance Summary

    110  Positioned portfolio defensively in the second quarter  Mark-to-market decline in Agency portfolio as spreads widened  Non-Agency fundamental performance is strong (prepays higher)  Outperformed the benchmark 50/50 index portfolio shown below Sector Q2-2013 Agency Strategy: Barclays US MBS

  10. Slide 10: Portfolio Composition

    110 110 Portfolio Composition 10 (1) “Other” category includes prime jumbo loans of $520.0 million, net economic interest in securitization of $38.3 million, and non-Agency IOs of $8.8 million. (2) Home Equity Conversion Mortgage loans (HECM) are loans that allow the homeowner to convert home equity

  11. Slide 11: Key Portfolio Metrics

    110 (3.1%) (1.1%) (1.8%) 0.1% 9.9% (10%) (6%) (2%) 2% 6% 10% 11 110 Key Portfolio Metrics  Low overall implied debt-to-equity of 2.9x(1)  Prepay speeds ― Agency continues low and stable ― Non-Agency continues moving higher  Long-term target debt-to-equity ratios ― Agency: 6.0-7.0x ― Non-Agency: 1

  12. Slide 12: New Initiatives Update

    12 New Initiatives Update Mortgage Servicing Rights (MSRs)  Natural interest rate hedge for portfolio, as well as hedging the mortgage basis  We recently acquired a company with seller-servicer approvals from Fannie Mae, Freddie Mac and Ginnie Mae  We closed two small bulk transactions  In advan

  13. Slide 13: Appendix

    13 Appendix

  14. Slide 14: Q2-2013 Return on Book Value

    14 Q2-2013 Return on Book Value Return on book value(1) (Per diluted share amounts, except for percentage) Book value at June 30, 2013 $10.47 Book value at March 31, 2013 11.19 Decrease in book value (0.72) Dividend declared in 2Q13 0.31 Return on book value ($) $(0.41) Return on book value (%) (3.7

  15. Slide 15: Operating Performance

    15 110 Operating Performance 110 $141.6 $524.4 $185.4 $248.0 ($146.1) 26.6% 70.2% 21.6% 26.9% (14.2%) -50% 0% 50% 100% ($300) $0 $300 $600 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Comprehensive Income ($M) Comprehensive Income ROAE (%) (1) Diluted shares outstanding at end of period, which includes t

  16. Slide 16: Operating Performance

    16 Operating Performance (1) Second quarter 2013 gain on interest rate swap includes $19.4 million in interest costs, of which $1.3 million relates to swaps associated with U.S. Treasuries. (2) Core Earnings includes $1.5 million and $3.7 million of net premium amortization on credit default swaps f

  17. Slide 17: Portfolio Metrics

    17 Portfolio Metrics 110 Portfolio Yield Realized Q1-2013 At March 31, 2013 Realized Q2-2013 At June 30, 2013 Annualized yield(1) 4.0% 3.8% 3.7% 3.8% Agency(1) 2.9% 2.9% 2.7% 2.8% Non-Agency 9.2% 9.2% 9.1% 9.1% Cost of financing(2) 1.1% 1.1% 1.2% 1.2% Net interest spread 2.9% 2.7% 2.5% 2.6% Portfoli

  18. Slide 18: Financing and Hedging Strategy

    110 110 June 30, 2013 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2013 $ 500 0.523% 0.274% 0.15 2014 900 0.316% 0.277% 0.54 2015 4,000 0.386% 0.278% 1.53 2016 2,650 0.579% 0.276% 2.67 2017 and after 9,435 0.999% 0.277% 4.58 $ 17,485 0.7

  19. Slide 19: Agency Securities as of June 30, 2013

    19 Agency Securities as of June 30, 2013 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% $3,819 $3,773 31.0% $4,024 3.1% 9 4.0-4.5% 3,976 4,193 34.4% 4,323 4.1% 14 ≥ 5.0% 932 1,026 8.4% 1,013 5

  20. Slide 20: Non-Agency Securities as of June 30, 2013

    20 Non-Agency Securities as of June 30, 2013 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,444 $499 $2,943 % of Non-Agency Portfolio 83.0% 17.0% 100.0% Average Purchase Price(1) $51.08 $57.45 $52.16 Average Coupon 1.8% 1.4% 1.7% Collateral Attributes A

  21. Slide 21: Agency: Vintage & Prepayment Protection

    Agency: Vintage & Prepayment Protection Q1-2013 Q2-2013 High LTV (predominately MHA)(1) 27% 26% $85K Max Pools(2) 22% 20% HECM(3) 15% 15% Other Low Loan Balance Pools(4) 15% 14% 2006 & subsequent vintages – Premium and IOs 2% 8% Low FICO(5) 7% 6% Seasoned (2005 and prior vintages) 5% 5% Prepayment P

Two Harbors Investment — Q2 2013 Earnings Presentation on 6ix