Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2012 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, Nov 14, 2012
Slide 1: Two Harbors Investment Corp. Third Quarter 2012 Investor Presentation
Two Harbors Investment Corp. Third Quarter 2012 Investor Presentation
Slide 2: Safe Harbor Statement
1 Safe Harbor Statement 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 sh
Slide 3: Mission
Mission To be recognized as an industry-leading mortgage REIT. Hybrid Mortgage REIT Flexibility as a hybrid REIT to take advantage of opportunities in both Agency and non-Agency sectors, including unsecuritized assets. Ability to diversify into areas that capitalize on our core competencies.
Slide 4: Compelling Market Drivers
Compelling Market Drivers 3 The U.S. government has indicated its intent to reduce its involvement in the RMBS market and banks are adjusting their portfolios due to new regulatory framework for capital and liquidity requirements. Sources of private capital, including mortgage REITs, are essenti
Slide 5: Building a Strong Franchise
Building a Strong Franchise 4 2009 Inception October 29, 2009 2012 Market capitalization surpasses $3 billion 2010 Market capitalization reaches $400 million 2011 Market capitalization surpasses $1 billion Initial investments aggregating $488 million Listing transferred to NYSE Announced share repur
Slide 6: Book Value & Dividend History
Book Value & Dividend History 5 Dividends1 (1) Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes dividends based on its taxable income per common share, not GAAP earnings. The annualized dividend yield on the company’s common stock is cal
Slide 7: Delivering Total Return
-15% 5% 25% 45% 65% 85% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Delivering Total Return 6 (1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through November 9, 2012. Total stockholder return is defined as capital gains on stock price including dividends
Slide 8: Two Harbors Today
Two Harbors Today 7 (1) Source: Bloomberg. Largest hybrid mortgage REIT focused on investing in residential mortgage-backed securities. Total RMBS portfolio of over $15 billion. $3.3 billion market capitalization1. – Completed eight stock offerings raising approximately $2.5 billion. Talente
Slide 9: Market Update
8 Market Update Macroeconomic Non-Agency RMBS Agency RMBS Uncertainty around resolution of fiscal cliff. QE3 announcement on September 13th. Open-ended MBS purchases of an additional $40 billion per month, totaling ~$70 billion per month. Federal Reserve’s commitment to keep target federal fun
Slide 10: Fluid Asset Allocation Drives Performance
Fluid Asset Allocation Drives Performance 9 Investment Portfolio Net Interest Spread Capital Allocation 0% 10% 20% 30% 40% 50% 60% Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 50% 60% 60% 55% 55% 52% 52% 57% 50% 40% 40% 45% 45% 48% 44% 36% 4% 7% Agency Non-Agency Residential Real
Slide 11: Agency Portfolio with Prepayment Protection
10 Agency Portfolio with Prepayment Protection Agency RMBS Portfolio Agency Strategy Agency Portfolio: $12.8B1 As of September 30, 2012 Other Low Loan Balance Pools4 10% Low FICO6 7% Post 2006 - Discount 1% Prepayment Protected 4% Seasoned7 5% HECM5 15% High LTV (Predominately MHA)2 31% $85K Max Poo
Slide 12: Non-Agency Portfolio with Sub-Prime Focus
11 Non-Agency Portfolio with Sub-Prime Focus Sub-Prime Exposure Non-Agency Strategy Non-Agency Portfolio Non-Agency Portfolio: $2.5B As of September 30, 2012 Option-ARM 9% Alt-A 4% Prime 1% Sub-Prime 86% Attractive loss-adjusted yields and return on equity. Deeply discounted weighted average cos
Slide 13: Hedging Strategy – Focus on BV Protection
12 Hedging Strategy – Focus on BV Protection Swaps, Swaptions and IOs BV Exposure to +100 bps Change in Rates1 (2.3%) (0.9%) (3.1%) (1.1%) (15%) (10%) (5%) – Q4-2011 Q1-2012 Q2-2012 Q3-2012 $12.1 $5.2 $0.3 $0 $4 $8 $12 Hedging Tools (Notional Value) Agency Securities (Fair Market Value) Swaps - Noti
Slide 14: Financing Strategy
Financing Strategy Focus on managing liquidity risk by using long- dated repos and through diligent counterparty selection. ― Strong and diverse financing relationships, consisting of 23 counterparties. ― Average repo term of over 4 months. ― Consistent focus on long-dated and laddered maturity re
Slide 15: Hybrid Model Provides Flexibility
Hybrid Model Provides Flexibility Agency Portfolio Today Focus on prepayment protected securities has generated low and stable prepayment experience. Low interest rate exposure. Non-Agency Portfolio Today Delinquencies are declining and performance is improving. Housing stable and improving,
Slide 16: Attractive Returns With Lower Risk
15 Attractive Returns With Lower Risk Attractive & Comparable Dividend Yield1… … With Lower Leverage2… … Less Interest Rate Exposure 3 … … And Less Prepayment Risk 4 4.3x 7.3x 3.8x 6.8x – 2x 4x 6x 8x 5.9% 17.5% 5.6% 15.9% 6.0% 15.9% 6.0% 18.7% – 5% 10% 15% 20% 12.3% 11.9% – 5% 10% 15% 20% Note: All
Slide 17: Appendix
Appendix
Slide 18: Q3-2012 Return on Book Value of 18.7%
Q3-2012 Return on Book Value of 18.7% Return on book value1 (Per diluted share amounts, except for percentage) Book value at September 30, 2012 $ 11.44 Book value at June 30, 2012 9.94 Increase in book value 1.50 Dividend declared in Q3-2012 0.36 Return on book value ($) $ 1.86 Return on book value
Slide 19: Agency: Vintage & Prepayment Protection
Agency: Vintage & Prepayment Protection Q2-2012 Q3-2012 High LTV (predominately MHA)1 21% 31% $85K Max Pools2 31% 25% HECM3 17% 15% Other Low Loan Balance Pools4 11% 10% Low FICO5 4% 7% Seasoned (2005 and prior vintages) 7% 5% Prepayment protected 6% 4% 2006 & subsequent vintages - Discount -% 1% 20
Slide 20: Agency Securities as of September 30, 2012
Agency Securities as of September 30, 2012 Par Value ($M) Market Value ($M) % of Agency Portfolio Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed ≤ 4.5% $ 7,022 $ 7,742 60.5% $ 7,570 4.0% 8 5.0-6.0% 994 1,115 8.7% 1,078 5.4% 38 ≥ 6.5% 99 115 0.9% 112 7.3
Slide 21: Non-Agency Securities as of September 30, 2012
Non-Agency Securities as of September 30, 2012 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $1,990 $507 $2,497 % of Non-Agency Portfolio 79.7% 20.3% 100.0% Average Purchase Price1 $51.01 $57.80 $52.38 Average Coupon 1.8% 1.1% 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 39.7%-100% $19M Current Face 0.6 Yr WAL1 SUBORDINATED
Slide 23: Financing and Hedging Strategy
110 110 Financing and Hedging Strategy September 30, 2012 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2012 $ 25 0.868% 0.502% 0.23 2013 2,275 0.713% 0.484% 0.81 2014 1,675 0.644% 0.497% 1.82 2015 2,770 0.908% 0.471% 2.68 2016 and after
Slide 24: Management Team Biographies
23 William Roth − Also serves as Partner of Pine River Capital Management. − 31 years in mortgage securities market, including at Salomon Brothers and Citi; Managing Director in proprietary trading group managing MBS and ABS portfolios. Brad Farrell − Most recently served as Two Harbors’ Controller
Slide 25: Overview of Pine River Capital Management
24 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 June 2002 with offices in New York, London, Beijing, Hong Kong, San Francisco and
Two Harbors Investment — Q3 2012 Earnings Presentation on 6ix