Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Investor Presentation (December 2012)
30 slides from Two Harbors Investment's investor presentation, Dec 17, 2012
Slide 1: Agency Prepayments Part Two: Concepts in Agency Valuation
Two Harbors Investment Corp. Webinar Series December 2012 Agency Prepayments Part Two: Concepts in Agency Valuation
Slide 2: Welcoming Remarks
Welcoming Remarks July Hugen Director of Investor Relations William Roth Co-Chief Investment Officer 2
Slide 3: Safe Harbor Statement
Safe Harbor Statement 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,
Slide 4: Two Harbors' Company Overview
Two Harbors’ Company Overview Our mission is to be recognized as an industry-leading mortgage REIT. We’ll accomplish this goal by achieving excellence in four areas: ― Superior portfolio construction and fluid capital allocation using rigorous security selection and credit analysis. ― Unparalleled
Slide 5: Definition of TBAs and Specified Pools
Buyer agrees to purchase a generic pool on a future date. Pool information and precise characteristics are communicated to buyer. Definition of TBAs and Specified Pools 5 To-Be-Announced Pools (TBAs) Specified Pools TBA Trade Process Pool is delivered and paid for. Settlement Date 48-hours Before Se
Slide 6: Examples of Prepayment Protection
Examples of Prepayment Protection Examples of Prepayment Protection Low Balance Fixed costs associated with refinancing low balance loans are large in percentage terms. Borrowers have less incentive to refinance, or need a larger reduction in rate to realize the same incentive, than borrowers with l
Slide 7: Originators Optimize Profits With Specified Pools
Originators Optimize Profits With Specified Pools 7 Loans with FICO < 700 Loans with LTV > 80% and < 90% Loans originated in certain states (e.g. New York) Everything else - TBAs Examples of Specified Pools Originator creates pools containing loans with different balances, rates and characteristics
Slide 8: Originators Optimize Profits With Specified Pools
Originators Optimize Profits With Specified Pools 8 Loans with FICO < 700 Loans with LTV > 80% and < 90% Loans originated in certain states (e.g. New York) Everything else - TBAs Examples of Specified Pools Originator creates pools containing loans with different balances, rates and characteristics
Slide 9: Supply of Specified Pools
9 Supply, Net of Fed Purchases ($B) Aug 2012 (Actual) Sept 2012 (Actual) Oct 2012 (Actual) Nov 2012 (Actual) Dec 2012 (Actual) Jan 2013 (Estimates) Feb 2013 (Estimates) Gross Issuance $148 $148 $131 $132 $137 $135 $133 Fed Purchases $29 $57 $70 $67 $68 $66 $65 Remaining Production $119 $91 $61 $65 $
Slide 10: Collateral Summary By Pool
Collateral Summary By Pool 10 Collateral Summary FN 30Yr Generic 2011 4.0 FN 30Yr MHA 80 2012 4.01 FN 30Yr LLB 2012 4.0 Average Loan Size ($) $ 297,352 $ 231,950 $ 57,318 Weighted Average Loan Age (months) 12 6 3 FICO2 766 706 752 Geography: Top Three CA 28.9% NY 6.6% TX 4.5% CA 18.0% NY 15.2% TX 8.
Slide 11: 2003 Trailing 6 Month Prepayment Speeds
10% 42% 0% 68% -5% 5% 15% 25% 35% 45% 55% 65% 75% -150 -100 -50 0 50 100 150 T ri a li ng 6 M o nt h CPR ( % ) Refinance Incentive (bps) 2003 CPRs for 2001 LLB Pools 2003 CPRs for 2001 Originated Pools Specified Pools Provided Prepay Protection in 2003 11 2003 Trailing 6 Month Prepayment Speeds1 Str
Slide 12: Specified Pools Provide Prepay Protection Today
Specified Pools Provide Prepay Protection Today 12 2003 vs. 2012 Trailing 6 Month Prepayment Speeds1 Prepayment protection provides better call protection in different financing environments. Source: Barclays. Data presented as of November 2012. 1) Presents the 2003 prepay experience for all pools a
Slide 13: Specified Pools Provide More Stable Speeds
Lifetime Projected Prepayment Speeds Specified Pools Provide More Stable Speeds 13 Low prepayment volatility for Low Loan Balance and MHA 80 pools. 40% 12% 14% 9% 19% 10% 5% 10% 15% 20% 25% 30% 35% 40% -150 -100 -50 0 +50 +100 +150 L ifet ime P roj e cte d CPR (% ) Change in Rates (bps) FN 30Yr Gene
Slide 14: Rally in Specified Pool Payups
14 Rally in Specified Pool Payups 2012 Payup Performance Payups for prepayment protected pools have increased during the year. 1.1% 4.3% 3.2% 2.2% 2.0% 1.7% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 10Yr T re a su rie s a n d
Slide 15: Basic Concepts in Mortgage Analytics
15 Basic Concepts in Mortgage Analytics ▪ Yield-to-Maturity ▪ Nominal Yield Spread ▪ Zero-Volatility Spread ▪ Option-Adjusted Spread (OAS) ▪ Other Relative Value Measures (e.g. Breakeven Analysis and Scenario Analysis)
Slide 16: Yield-to-Maturity
16 Yield-to-Maturity Internal rate of return where price equals net present value of security’s expected future cash flows. ▪ Future cash flows require prepayment rate assumption. ▪ Doesn’t account for reinvestment risk, average life or prepayment variability.
Slide 17: Nominal Yield Spread
17 Nominal Yield Spread Difference between yield of mortgage-backed security and specified benchmark. Usually compared to Treasuries or swaps of similar average life to MBS. Accounts for asset’s average life and maturity. Doesn’t account for reinvestment risk or cash flow variability. Source:
Slide 18: Zero-Volatility Spread
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 0 2 4 6 8 10 Y ie ld ( % ) Swap Tenures (years) Forward Curve Adjusted for Constant ZV-Spread Discounts each cash flow according to its own discount rate. Discount rate calculated as adding a constant spread to each forward rate. Accounts for asset’
Slide 19: Option-Adjusted Spread
Option-Adjusted Spread 19 i i j j i OASf CF P 1 1 Compensation investor receives for assuming prepayment risk. Calculated as difference between z-spread and cost of options held by borrower. Model dependent. Based on multiple interest rate paths generated by interest rate model.
Slide 20: Potential Adjustments to Valuation Models
Potential Adjustments to Valuation Models 20 Valuation Model Inputs Housing turnover Lock-in effect Steepness of refinancing curve Burnout effect Length of seasoning period Home price appreciation (HPA) and cashout refinancing opportunity State-specific HPA Servicer behavior HARP e
Slide 21: Valuation Example: Yield Analysis
21 Valuation Example: Yield Analysis Valuation Metrics Price Projected Lifetime CPR Expected Yield FN 30Yr Generic 2011 4.0 $107.02 25.5% 1.6% FN 30Yr MHA 80 2012 4.0 $109.08 13.5% 2.2% FN 30Yr LLB 2012 4.0 $111.56 10.2% 2.2% Source: Barclays. Data presented as of November 2012.
Slide 22: Valuation Example: Swap Spread Analysis
22 Valuation Example: Swap Spread Analysis Valuation Metrics Price Projected Lifetime CPR Expected Yield Average Life Nominal Spread to Swaps FN 30Yr Generic 2011 4.0 $107.02 25.5% 1.6% 3.2 years 113 bps FN 30Yr MHA 80 2012 4.0 $109.08 13.5% 2.2% 5.9 years 128 bps FN 30Yr LLB 2012 4.0 $111.56 10.2%
Slide 23: Valuation Example: ZV-Spread Analysis
23 Valuation Example: ZV-Spread Analysis Valuation Metrics Price Projected Lifetime CPR Expected Yield Average Life Nominal Spread to Swaps ZV-Spread FN 30Yr Generic 2011 4.0 $107.02 25.5% 1.6% 3.2 years 113 bps 66 bps FN 30Yr MHA 80 2012 4.0 $109.08 13.5% 2.2% 5.9 years 128 bps 83 bps FN 30Yr LLB 2
Slide 24: Valuation Example: OAS Analysis
24 Valuation Example: OAS Analysis Valuation Metrics Price Projected Lifetime CPR Expected Yield Average Life Nominal Spread to Swaps ZV-Spread Option Cost Libor OAS FN 30Yr Generic 2011 4.0 $107.02 25.5% 1.6% 3.2 years 113 bps 66 bps 51 bps 15 bps FN 30Yr MHA 80 2012 4.0 $109.08 13.5% 2.2% 5.9 year
Slide 25: "Percentage of Breakeven" Analysis
25 “Percentage of Breakeven” Analysis Price Payup as % of Theoretical Price Payup Expected Yield Libor OAS Expected Yield Difference Libor OAS Difference TBA $107.02 1.6% 15 bps LLB $107.02 -% $ - 2.9% 100 bps 1.2% 85 bps $108.53 25% $1.51 2.6% 77 bps 1.0% 62 bps $110.05 50% $3.03 2.4% 56 bps 0.8% 4
Slide 26: Valuation Example: Scenario Analysis
Valuation Example: Scenario Analysis 26 Yield Analysis Price Analysis Yields dependent on purchase prices and prepayment rates. Prepayment protected pools generate smaller range of realized yields for a given price than generics. MHA 80 price paths are less negatively convex. Profile allows
Slide 27: Two Harbors' Agency Portfolio
Two Harbors’ Agency Portfolio 27 Prepayment Protected Securities 92% 94% 96% 97% 97% 97% 98% 0% 20% 40% 60% 80% 100% Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Prepayment Protected Securities (%) Agency RMBS Portfolio Agency Portfolio: $12.8B1 As of September 30, 2012 Other Low Loan Bal
Slide 28: Two Harbors' CPR vs. Cohorts
Two Harbors’ CPR vs. Cohorts 28 Two Harbors’ CPR vs. Cohorts1 . (1) Source: eMBS. 16.6% 13.7% 18.4% 24.2% 23.4% 23.5% 27.6% 17.6% 13.1% 18.1% 25.3% 25.1% 25.4% 28.5% 11.9% 9.0% 11.7% 16.3% 17.7% 17.2% 21.4% 6.6% 5.3% 5.5% 5.9% 5.6% 6.0% 6.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Q1-2011 Q2-2011 Q3
Slide 29: Summary
29 Summary We believe that prepayment protected pools offer the RMBS investor value at the right price. ▪ Specified pools provide prepayment protection during refinancing cycles in addition to lower scenario volatility. ▪ It’s important not to rely on just one valuation approach; security analysis i
Slide 30: Contact Information
Contact Information 30 For further information, please contact: Anh Huynh Investor Relations Two Harbors Investment Corp. 212.364.3221 Anh.Huynh@twoharborsinvestment.com July Hugen Investor Relations Two Harbors Investment Corp. 612.629.2514 July.Hugen@twoharborsinvestment.com
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