Two Harbors Investment Corp · NYSE:TWO

Two Harbors Investment — Q4 2012 Earnings Presentation

22 slides from Two Harbors Investment's earnings presentation, Feb 6, 2013

  1. Slide 1: Two Harbors Investment Corp. Fourth Quarter 2012 Earnings Call

    Two Harbors Investment Corp. Fourth Quarter 2012 Earnings Call February 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: 2012 and Fourth Quarter Results

    Executive Summary 2012 and Fourth Quarter Results  Generated total 2012 return on book value of 47%1 with dividends of $1.71 per share.  Delivered total annual shareholder return of 40%2, which compares to a return of 19% for the sector3.  Generated exceptional economic return in 2012 with $1.05

  4. Slide 4: Macroeconomic Update

    Macroeconomic Update (1) Source: CoreLogic Home Price Index rolling 12-month change as of January 1, 2013. Key Macroeconomic Factors that Impact our Business Home Prices  The U.S. housing market has been a bright spot recently  CoreLogic Home Price Index +7.5%1 on a rolling 12-month basis Interest

  5. Slide 5: Investment Opportunities

    5 Investment Opportunities Investment Opportunity Set  We continue to pursue opportunities in the Agency and non-Agency markets.  Criteria for considering new investment opportunities include the following: ― Based on core competencies, such as understanding and managing prepayments and credit ris

  6. Slide 6: Financial Summary

    110 110 6 Financial Summary Financial Highlights Core Earnings1 Expense Ratio  Core Earnings1 of $0.28 per weighted average share.  GAAP Earnings of $0.64 per weighted average share.  Leverage declined to 3.4x from 3.8x at September 30, 2012.  Earnings diluted by average capital of $295 million

  7. Slide 7: Book Value

    7 Book Value Book Value Q4-2012 Book Value ($M) Q4-2012 Book Value Per Common Share (Diluted basis) Annual 2012 Book Value ($M) Annual 2012 Book Value Per Common Share (Diluted basis) Beginning stockholders’ equity $ 3,391.5 $ 11.48 $ 1,270.1 $ 9.03 GAAP Net Income: Core Earnings, net of tax 84.0 31

  8. Slide 8: Financing Profile

    8 Financing Profile High-Quality non-Agency Counterparties2 Diverse Agency Counterparties1  We continue to ladder repo maturities, and currently average 85 days to maturity.  The vast majority of repo is held with counterparties having a CDS spread of <150 indicating an overall low counterparty ri

  9. Slide 9: 2012 Taxable Earnings Distribution

    9 2012 Taxable Earnings Distribution GAAP to Taxable Income, Year Ended December 31, 2012 (in millions) TRS REIT Consolidated GAAP net (loss) income, pre-tax $ (124.5) $ 374.2 $ 249.7 Permanent differences Non-deductible expenses - - - Temporary differences Net accretion of OID and market discount -

  10. Slide 10: Portfolio Performance Summary

    110  Achieved total return on book value of 47%1 for the 2012 fiscal year.  Overall performance driven primarily by non-Agency strategy.  Prepay-protected Agency pools drive strong Agency performance. Sector FY2012 Agency Strategy: Barclays US MBS Fixed Rate Index vs. duration-matched swap at 6:1

  11. Slide 11: Portfolio Composition

    110 110 Portfolio Composition 11 (1) Includes Agency Derivatives (“IIOs”) of $301 million as of December 31, 2012. (2) Home Equity Conversion Mortgage loans (“HECM”) are loans that allow the homeowner to convert home equity into cash collateralized by the value of their home. Highlights Targeted Cap

  12. Slide 12: Key Portfolio Metrics

    12 110 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

  13. Slide 13: Hybrid Model Provides Flexibility

    13 Hybrid Model Provides Flexibility Securitization  Math around creating subordinate bonds and IOs is more attractive  Opportunity to create attractive mortgage credit investment is beneficial to shareholders Credit Sensitive Loans (CSLs)  Very similar to loans in subprime/Alt-A deals  We will

  14. Slide 14: Appendix

    14 Appendix

  15. Slide 15: 2012 Return on Book Value of 47%

    15 2012 Return on Book Value of 47% Return on book value1 (Per diluted share amounts, except for percentage) Book value at December 31, 2012 $ 11.54 Book value at December 31, 2011 9.03 Increase in book value 2.51 Dividends declared in 2012 1.71 Return on book value ($) $ 4.22 Return on book value (

  16. Slide 16: Operating Performance

    110 Operating Performance 110 $9.03 $9.67 $9.94 $11.44 $11.54 $8.00 $10.00 $12.00 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Book Value per Share ($) 110 $19.0 $195.7 $141.6 $524.4 $185.4 6.0% 44.5% 26.6% 70.2% 21.6% 0.0% 50.0% 100.0% $0.0 $200.0 $400.0 $600.0 Q4-2011 Q1-2012 Q2-2012 Q3-2012 4-2012 Com

  17. Slide 17: Operating Performance

    17 Operating Performance (1) Fourth quarter 2012 loss on interest rate swap includes $15.4 million in interest costs, of which $1.1 million relates to swaps associated with U.S. Treasuries. (2) Core Earnings includes $3.4 million and $3.8 million of net premium amortization on credit default swaps f

  18. Slide 18: Portfolio Yields and Metrics

    18 Portfolio Metrics 110 Portfolio Yield Realized Q3-2012 At Sept. 30, 2012 Realized Q4-2012 At Dec 31, 2012 Annualized yield1 4.2% 3.8% 4.0% 4.0% Agency1 3.1% 2.8% 2.9% 2.9% Non-Agency 9.6% 9.6% 9.5% 9.4% Cost of financing2 1.1% 1.1% 1.1% 1.2% Net interest spread 3.1% 2.7% 2.9% 2.8% Portfolio Metri

  19. Slide 19: Financing and Hedging Strategy

    110 110 December 31, 2012 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2013 $ 2,275 0.713% 0.458% 0.56 2014 1,675 0.644% 0.467% 1.57 2015 2,770 0.908% 0.435% 2.43 2016 1,940 0.874% 0.418% 3.46 2017 and after 3,910 0.960% 0.387% 4.72 $ 12

  20. Slide 20: Agency Securities as of December 31, 2012

    20 Agency Securities as of December 31, 2012 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% $ 2,747 $ 2,919 25.8% $ 2,910 3.2% 4 4.0-4.5% 3,502 3,868 34.1% 3,801 4.2% 10 ≥ 5.0% 1,040 1,163

  21. Slide 21: Non-Agency Securities as of December 31, 2012

    21 Non-Agency Securities as of December 31, 2012 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,132 $518 $2,650 % of Non-Agency Portfolio 80.4% 19.6% 100.0% Average Purchase Price1 $50.83 $57.68 $52.17 Average Coupon 1.8% 1.1% 1.7% Collateral Attributes

  22. Slide 22: Agency: Vintage & Prepayment Protection

    Agency: Vintage & Prepayment Protection Q3-2012 Q4-2012 High LTV (predominately MHA)1 31% 27% $85K Max Pools2 25% 20% HECM3 15% 17% Other Low Loan Balance Pools4 10% 16% Low FICO5 7% 7% Prepayment protected 4% 5% Seasoned (2005 and prior vintages) 5% 4% 2006 & subsequent vintages - Discount 1% 2% 20

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