Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2013 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, Sep 9, 2013
Slide 1: Two Harbors Investment Corp. Second Quarter 2013 Investor Presentation
Two Harbors Investment Corp. Second Quarter 2013 Investor Presentation
Slide 2: Forward-Looking Statements
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, readers
Slide 3: Two Harbors Today
Two Harbors Today 2 Largest hybrid mortgage REIT focused on investing in residential mortgage assets $3.5 billion market capitalization(1) Total portfolio of $16.1 billion as of June 30, 2013 Talented and deep bench in Minnesota and New York ― Experienced investment and administrative teams
Slide 4: Mission-Based Strategy
Mission-Based Strategy 3 RMBS Investment Universe Agency RMBS Non-Agency RMBS Mortgage Servicing Rights (MSRs) Prime Jumbo Mortgage Loan Conduit and Securitization Credit Sensitive Loans (CSLs) Mission To be recognized as the industry-leading hybrid mortgage REIT Objectives Optimize st
Slide 5: Strong Return on Book Value
20.3% 7.6% 5.3% -9.3% 66.0% 42.7% 25.7% 14.2% -10.0% 10.0% 30.0% 50.0% 70.0% 90.0% Return from Change in Book Value Return from Dividends 4.9% 31.0% 50.3% 86.3% Last 6 Months(2) 1 Year(2) 2 Years(2) 3 Years(2) 4 Book Value and Dividend History (1) Total return on book value is calculated from book v
Slide 6: Delivering Total Return
-10% 10% 30% 50% 70% 90% 110% 130% 5 Delivering Total Return (1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through August 30, 2013. Total stockholder return is defined as capital gains on stock price including dividends. Source: Bloomberg. (2) Pine River Mor
Slide 7: Attractive Returns With Lower Risk
3.8x 3.4x 3.1x 3.6x 7.0x 7.1x 7.1x 8.0x – 2x 4x 6x 8x 10x Q3-2012 Q4-2012 Q1-2012 Q2-2013 Q3-2012 Q4-2012 Q1-2013 Q2-2013 12.3% 19.9%(2) 10.2%(3) 12.1% 11.9% 12.8% 10.9% 12.7% 0% 5% 10% 15% 20% Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Superior asset selection and risk manageme
Slide 8: Second Quarter 2013 Market Update
7 Second Quarter 2013 Market Update Non-Agency RMBS Interest rates moved higher Yield curve steeper Home prices improving; CoreLogic Home Price Index +12%(1) on a rolling 12-month basis Policy considerations include: ― Timing around Fed tapering ― New Fed Chairman ― GSE reform ― Potential ne
Slide 9: Portfolio Composition
110 110 Portfolio Composition 8 (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
Slide 10: Agency Portfolio with Prepayment Protection
Prepayment Protected 4% 9 Agency Portfolio with Prepayment Protection Agency RMBS Portfolio Agency Strategy Agency Portfolio: $12.2B(1) As of June 30, 2013 Other Low Loan Balance Pools (4) 14% Low FICO(6) 6% Seasoned 5% 2006 and subsequent vintages(5) 8% HECM 15% High LTV (Predominately MHA)(2) 26%
Slide 11: Non-Agency Portfolio with Sub-Prime Focus
10 Non-Agency Portfolio with Sub-Prime Focus Non-Agency CPR Non-Agency Strategy Non-Agency Portfolio Non-Agency Portfolio: $2.9B As of June 30, 2013 Option-ARM 7% Alt-A 4% Prime 2% Sub-Prime 87% Non-Agency underlying performance continues to improve; declining delinquencies, rising home prices and
Slide 12: Hedging Strategy
(3.1%) (1.1%) (1.8%) 0.1% 9.9% -10% -6% -2% 2% 6% 10% $17.5 $11.7 $6.3 $0.5 $- $5 $10 $15 $20 $25 Hedging Tools (Notional Value) Agency Securities (Fair Market Value) Swaps - Notional ($) Swaptions - Notional ($) IOs and IIOs ($) 11 Hedging Strategy Swaps, Swaptions and IOs(2) BV Exposure to +100 bp
Slide 13: Financing Profile
Diverse Agency Counterparties(2) 12 Financing Profile High-Quality Non-Agency Counterparties(3) We continue to ladder repo maturities; average 86 days to maturity. We have repo agreements with 24 counterparties. The majority of repo is held with counterparties having a Credit Default Swap (CDS)
Slide 14: Mortgage Servicing Rights (MSRs)
Mortgage Servicing Rights (MSRs) 13 Recent Developments In second quarter 2013, we acquired a company with seller-servicer approvals from Fannie Mae, Freddie Mac and Ginnie Mae Closed two small bulk transactions in July 2013 In advanced discussions with sellers; potential for significant inves
Slide 15: Mortgage Loan Conduit and Securitization
Mortgage Loan Conduit and Securitization 14 Recent Developments Our goal is to develop an industry leading, prime jumbo mortgage conduit Business Objectives Generate attractive credit investments for our portfolio while providing capital to the U.S. mortgage market Work with origination partne
Slide 16: Additional Investment Opportunities
Additional Investment Opportunities 15 Credit Sensitive Loans (CSLs) Currently have $438 million CSLs in portfolio Very similar to the performing residential mortgage loans in subprime/Alt-A deals Potential to securitize and create attractive credit investments Intend to take an opportunisti
Slide 17: Appendix
Appendix 16
Slide 18: Q2-2013 Return on Book Value
17 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
Slide 19: 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
Slide 20: Agency Securities
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% $4,024 3.1% 9 4.0-4.5% 3,976 4,193 34.4% 4,323 4.1% 14 ≥ 5.0% 932 1,026 8.4% 1,013 5
Slide 21: Non-Agency Securities
20 Non-Agency Securities as of June 30, 2013 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($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
Slide 22: Non-Agency Discount Bond Example
Pays sequentially after the A3 is fully paid, expected to be in early 2014 Receives protection from credit losses from the subordinate bonds and ongoing excess interest Pays a coupon of LIBOR + 0.31% Wells Fargo & SPS as servicers A3 39.9%-100% $8.7M Current Face 0.6 Yr WAL(1) SUBORDINATED B
Slide 23: Financing and Hedging Strategy
110 110 Swaps Maturities Notional Amounts ($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 0.746% 0.277% 3.2
Slide 24: Overview of Two Harbors Team
23 Overview of Two Harbors Team Pine River Capital Management Partner 32 years in mortgage securities market, including at Salomon Brothers and Citi; Managing Director in proprietary trading group managing MBS and ABS portfolios Most recently served as Two Harbors’ Controller from 2009 to 2011
Slide 25: Overview of Pine River Capital Management
Global, multi-strategy asset management firm providing comprehensive portfolio management, transparency and liquidity to institutional and high net worth investors Founded in 2002 with approximately $13.7 billion assets under management today, of which $10.8 billion is dedicated to mortgage stra
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