Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Investor Day (March 2017)
58 slides from Two Harbors Investment's investor day presentation, Mar 15, 2017
Slide 1: Analyst & Investor Day Presentation
New York Stock Exchange M a rc h 16 , 2 017 Analyst & Investor Day Presentation
Slide 2: Introduction & Two Harbors Team – Tim Perrott
Introduction & Two Harbors Team – Tim Perrott
Slide 3: Analyst and Investor Day 2017 Agenda
Analyst and Investor Day 2017 Agenda 3 Two Harbors’ Analyst and Investor Day 2017 Agenda Laurie Goodman, Senior Director of the Housing Finance Policy Center Two Harbors’ Management Presentation Tom Siering – Executive Overview Bill Roth – Investment Overview Brad Farrell – CFO Overview Closing Rema
Slide 4: Safe Harbor Statement
Safe Harbor Statement 4 FO RWAR D- LO O KI NG STAT E M E NT S 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 pro
Slide 5: Higher Earnings Potential in 2017
Higher Earnings Potential in 2017 5 REALIZE INCREASED EARNINGS POTENTIAL IN 2017 CONTINUE SENSIBLE APPROACH TO RISK MANAGEMENT DRIVE STRONG TOTAL STOCKHOLDER RETURN
Slide 6: Introducing our Team: Thomas Siering
Introducing our Team 6 THOMAS S IERING – PRESIDENT AND CHIEF EXECUTIVE OFFICER Thomas Siering is our Chief Executive Officer and President and a member of our Board of Directors. Mr. Siering has been a director and executive officer since we were incorporated in May 2009. Since 2012, Mr. Siering has
Slide 7: Introducing our Team: Bill Roth
Introducing our Team 7 BILL ROTH – CHIEF INVESTMENT OFFICER William Roth is our Chief Investment Officer and a member of our Board of Directors. Mr. Roth was appointed Chief Investment Officer in January 2013 after serving as Co-Chief Investment Officer since October 2009. Mr. Roth also serves as Pa
Slide 8: Introducing our Team: Brad Farrell
Introducing our Team 8 BRAD FARRELL – CHIEF F INANCIAL OFFICER Brad Farrell is our Chief Financial Officer and Treasurer. Mr. Farrell was appointed Chief Financial Officer in January 2012, after serving as Two Harbors’ Controller. Mr. Farrell has spent the breadth of his career overseeing financial
Slide 9: Introducing our Team: Rebecca B. Sandberg
Introducing our Team 9 REBECCA B. SANDBERG – GENERAL COUNSEL & SECRETARY Rebecca B. Sandberg is our General Counsel and Secretary. Ms. Sandberg was appointed General Counsel and Secretary in March 2013, after serving as Deputy General Counsel and Secretary of Two Harbors since May 2012. From 2010 to
Slide 10: Introducing our Team: Victor Baev
Introducing our Team 10 VICTOR BAEV – MANAGING DIRECTOR Victor Baev has served as a managing director at Two Harbors since 2013. Prior to joining Two Harbors, Mr. Baev was with the residential mortgage-backed securities team at Pine River since 2009. Previously, Mr. Baev was a Vice President in the
Slide 11: William Greenberg – Managing Director
11 WILLIAM GREENBERG – MANAGING DIRECTOR William Greenberg has served as a Managing Director at Two Harbors since 2012. Prior to joining Two Harbors, Mr. Greenberg was a Managing Director and the Head of Investment Bank Risk Control Strategy at UBS AG, where he was responsible for issues of strategi
Slide 12: Introducing our Team: Matthew Koeppen
Introducing our Team 12 MATTHEW KOEPPEN – MANAGING DIRECTOR Matthew Koeppen has served as a Managing Director of Two Harbors since 2012. Mr. Koeppen previously served as a senior trader of Two Harbors since 2010. Prior to joining Two Harbors in 2010, Mr. Koeppen held a variety of positions with Blac
Slide 13: Introducing our Team: Robert Rush
Introducing our Team 13 ROBERT RUSH – CHIEF R ISK OFFICER Robert Rush serves as the Chief Risk Officer of Two Harbors. Mr. Rush previously served as a Managing Director at Two Harbors since 2013. Prior to joining Two Harbors, Mr. Rush held a variety of positions at UBS AG in New York. During 2013, M
Slide 14: Introducing our Team: Jack Taylor
Introducing our Team 14 JACK TAYLOR – MANAGING DIRECTOR Prior to joining Pine River in New York as Global Head of Commercial Real Estate, Mr. Taylor served as a Managing Director and Head of the Global Real Estate Finance business for Prudential Real Estate Investors. Mr. Taylor joined Prudential in
Slide 15: Introducing our Team: Marcin Urbaszek
Introducing our Team 15 MARCIN URBASZEK – MANAGING DIRECTOR Marcin Urbaszek has served as a Managing Director at Two Harbors since 2013. Prior to joining Two Harbors, Mr. Urbaszek was a Director in the Financial Institutions Group at Credit Suisse, where he was responsible for sourcing and executing
Slide 16: Introducing our Team: Tim Perrott
Introducing our Team 16 T IM PERROTT – SENIOR DIRECTOR, INVESTOR RELATIONS Timothy Perrott has served as a Senior Director of Two Harbors since 2016. Prior to joining the company, Mr. Perrott served as Vice President, Investor Relations, at ADT Security Services since 2014. In this role, Mr. Perrott
Slide 17: Executive Overview – Tom Siering
Executive Overview – Tom Siering
Slide 18: Two Harbors Investment Corp. Overview
Two Harbors Investment Corp. Overview (1) LEADING HYBRID MORTGAGE REIT PROVIDING STRONG RISK - ADJUSTED RETURNS 18 1) Except as otherwise indicated in this presentation, reported data is as of or for the period ended December 31, 2016. 2) Includes Agency and non-Agency RMBS, Agency Derivatives, MSR,
Slide 19: Attractive Returns With Lower Risk
…LESS INTEREST RATE R ISK (3 ) . . . Attractive Returns With Lower Risk 19 AT T R AC T I VE & C O M PA R A BLE D I V I D E ND Y I E L D (1 ) …WITH LOWER LEVERAGE (2 ) . . . SUPERIOR ASSET SELECTION AND RISK MANAGEMENT DRIVE RETURNS WITH LESS RISK TWO Peer Average TWO Peer Average TWO Peer Average …A
Slide 20: Focus on Book Value Performance
7.5% TWO Co. A Co. B Co. C Co. D Co. E Co. F Co. G Co. H Focus on Book Value Performance 20 • Since inception, book value has grown by 7.5%; peer median over same time period is (17.6%)(1) 1) Book value growth measured from December 31, 2009 through December 31, 2016. Companies A-H represent compara
Slide 21: Delivering Results
-20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 10/29/2009 11/29/2010 12/29/2011 1/29/2013 2/28/2014 3/31/2015 4/30/2016 TWO BBG REIT MTG Index Delivering Results 21 1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through December 31, 2016. Tota
Slide 22: Positioned to Increase Earnings in 2017
Positioned to Increase Earnings in 2017 22 STRONGER EARNINGS POTENTIAL IN 2017 MORE EFFICIENT BUSINESS MODEL • Completed wind down of mortgage loan conduit in 2016 • Redeployed capital and improved overall efficiencies; expect to benefit earnings power by about $20 million or $0.06 per share in 20
Slide 23: Investment Overview – Bill Roth
Investment Overview – Bill Roth
Slide 24: Diversified Capital Allocation Strategy
Diversified Capital Allocation 24 Strategy December 31, 2014 December 31, 2015 December 31, 2016 Expected Allocation(4) Expected return on equity (ROE)(5) Rates(1) 56 % 49 % 58 % 40-60% Low-to-mid double digits Credit(2) 44 % 43 % 27 % 20-30% High single/low double digits with upside Commercial(3) n
Slide 25: Rates: Thoughtfully Manage Agency Portfolio and Build Out MSR
Rates: Thoughtfully Manage Agency Portfolio and Build Out MSR 25 $12.1 billion Rates strategy comprised of Agency RMBS and MSR Agency RMBS paired with MSR generates expected low-to-mid double digit ROE with lower risk MSR provides positive yield and negative duration, while hedging interest rat
Slide 26: Rates: Focus on New Issue MSR
Rates: Focus on New Issue MSR 26 MSR PORTFOLIO AT A GLANCE(1) MSR PORTFOLIO COMPRISED OF HIGH QUALIT Y, NEW ISSUE, CONVENTIONAL MSR As of December 31, 2016 Fair value ($M) $693.8 Unpaid principal balance ($M) $62,828.0 Weighted average coupon 3.8% Original FICO score(2) 756 Original LTV 73% 60+ day
Slide 27: MSR in a Portfolio Context
MSR in a Portfolio Context (From MSR Primer Webinar, December 6, 2016; Located on Two Harbors’ website under “Investor Relations” and “Webinars” tabs) EXECUTIVE OVERVIEW INVESTMENT OVERVIEW CFO OVERVIEW
Slide 28: Portfolio With MSR Has Higher Yield Potential
THLOWER ANOLOWER MGRTEAGE SPREAD >> Portfolio With MSR Has Higher Yield Potential MSR HAVE POSITIVE YIELD; PAYER SWAPS HAVE NEGATIVE YIELD RMBS & SWAPS PORTFOLIO RMBS & MSR F ‘Change Assely/ Duration | basis Copral | tiapity| | “Gyars)_ {point shit rates ‘AgencyRMBS $100 $900 230% 49 —$44i_—=AgencyR
Slide 29: Higher Yield of MSR Portfolio is Not Free
MSRARE ANATURAL HAVE HIGHER eee AND LOWER itt) a> bead Higher Yield of MSR Portfolio is Not Free A PORTFOLIO OF RMBS + MSR IS MORE NEGATIVELY CONVEX... ae omnpsseeeee ees em rot same RMBS + MSR() range sty)
Slide 30: Outperforms an RMBS + Swaps Portfolio in Most Scenarios
..BUT OUTPERFORMS AN RMBS + SWAPS PORTFOLIO IN MOST SCENARIOS OVER TIME HORIZON SHOCK()
Slide 31: Enhanced MSR Portfolio Outperforms
[MSRAREA NATURAL HAVEHIGHER Po -aNO LOWER ee a) ae saa Enhanced MSR Portfolio Outperforms EXCESS REVENUE CAN BE USED TO PURCHASE SWAPTIONS THAT CAN HEDGE THE NEGATIVE RETURNS IN THE -100 SCENARIO ENHANCED MSR VERSUS RMBS PORTFOLIO cman eenon g 000) —rewawegen 2 emectonwnsywen rows suesome | —eances
Slide 32: MSR Are a Natural Hedge to RMBS
[MSRAREA NATURAL HEDGE TO RMS. HAVE HIGHER. RETURN POTENT
Slide 33: Portfolio With MSR Has Lower Leverage
MSRAREANATURAL NS save HIGHER MTHLONER, cR Z Portfolio With MSR Has Lower Leverage MSR HAVE POSITIVE YIELD; PAYER SWAPS HAVE NEGATIVE YIELD + It's better to get paid to hedge instead of paying to hedge S & SWAPS PORTFOLIC RMBS & MSR PORTFOLIO Asset/ | ojga | Duration Ne Capital | vaputy | “| oars ro
Slide 34: Conclusion
Conclusion he ver MSR AREA NATURAL HEDGE TO RMBS. AND LOWER HAVE HIGHER: LEVERAGE. RETURN POTENTIAL. PORTFOLIO OF M Imoectt 20. Pei | tnpactot 20 st Pont Rate Ino RMBS Spread Widening,
Slide 35: Investment Overview, Cont. – Bill Roth
Investment Overview, Cont. – Bill Roth
Slide 36: Rates: Financing MSR Enhances Returns
Rates: Financing MSR Enhances Returns 36 RMBS & MSR RMBS & MSR WITH F INANCING 1) Illustrative market yields/returns as of February 28, 2017. Such yields/returns do not take into account the operational costs and expenses associated with portfolio management activities or the oversight of sub-servic
Slide 37: Credit: Capitalizing on Valuable Legacy Non-Agency RMBS
Credit: Capitalizing on Valuable Legacy Non-Agency RMBS 37 Affordability still quite high by historical standards; credit availability has also been improving Continued economic growth and strong employment Housing prices increasing due to household formation outpacing new supply, creating a s
Slide 38: Credit: Significant Runway for Legacy non-Agency RMBS
Credit: Significant Runway for Legacy non-Agency RMBS 38 • Current holdings could realize substantially higher yields • Revaluation to “upside scenario” could drive >$100 million potential upside Fourth Quarter 2016 Base Assumptions (Forward LIBOR) Upside Scenario (Forward LIBOR) Delinquency 28% Liq
Slide 39: Commercial: Selective Portfolio Focus
Commercial: Selective Portfolio Focus 39 PORTFOLIO FOCUS Diverse across property types and geographies with a focus on second tier markets ― Target assets are U.S.-domiciled first mortgage loans, mezzanine loans, b-notes and preferred equity Average loan size of $40 million ― Typical loan amount
Slide 40: Commercial: Office - Meier & Frank Building
Commercial: Office - Meier & Frank Building 40 INVESTMENT $68.8 MILLION FIRST MORTGAGE LOAN(1) Collateral Planned conversion to retail and office space of 208,520 square foot department store Sponsor Business Plan Lease grade-level space to retail tenants, and the higher floors to office tenants Loa
Slide 41: Commercial: Retail - Lahaina Cannery Mall
Commercial: Retail - Lahaina Cannery Mall 41 INVESTMENT $68.4 MILLION FIRST MORTGAGE LOAN(1) Collateral 130,599 SF grocery-anchored shopping center in the Lahaina submarket of Maui, Hawaii Sponsor Business Plan Expansion of grocery store and development of adjacent site Loan “Metrics” Appraised goin
Slide 42: Commercial: Multifamily - Jasmine at Tamarac
Commercial: Multifamily - Jasmine at Tamarac 42 INVESTMENT $23.9 MILLION FIRST MORTGAGE LOAN(1) Collateral 291 unit condominium complex in Tamarac, Florida, 15 miles northwest of downtown Fort Lauderdale Sponsor Business Plan Sponsor closed initially on 222 units with plans to acquire remaining 69 u
Slide 43: Hedging to Protect Book Value and Earnings
Hedging to Protect Book Value and Earnings 43 HEDGING STRATEGY INSULATES BOOK VALUE AND EARNINGS FROM CHANGES IN RATES • In addition to MSR, we utilize other hedges including: swaps, swaptions, interest-only (IO), inverse interest-only (IIO) and mortgage options • Solid book value and earnings perfo
Slide 44: CFO Overview – Brad Farrell
CFO Overview – Brad Farrell
Slide 45: Diversified Financing Profile Provides Competitive Advantage
Diversified Financing Profile Provides Competitive Advantage 45 • Diversifying counterparties and maturities is fundamental to financing strategy • Thoughtfully manage liquidity risk EXECUTIVE OVERVIEW INVESTMENT OVERVIEW CFO OVERVIEW Repurchase Agreements • Repo markets functioning efficiently for
Slide 46: Diversified Financing Profile Provides Competitive Advantage
Diversified Financing Profile Provides Competitive Advantage 46 • Continuously evaluate our financing tool box to ensure it evolves with business needs ― Recent issuance of 5-year unsecured convertible senior notes EXECUTIVE OVERVIEW INVESTMENT OVERVIEW CFO OVERVIEW Financing for MSR • Utilize revol
Slide 47: Operating Expense Management
Operating Expense Management 47 DRIV ING EXPENSE EFFIC IENCIES THROUGH THE LENS OF THE RISKS AND R ETURNS THAT IT SUPPORTS • Evaluated expense trajectory in business model in 2016 ― Conduit expenses did not provide targeted return value; expect approximately $10 million in cost savings from conduit
Slide 48: Delivering Strong Dividends to Stockholders
Delivering Strong Dividends to Stockholders 48 • Our primary objective is to provide attractive risk-adjusted total returns over the long term, principally through dividends and secondarily through capital appreciation ― Book value per share was $9.08 at December 31, 2009 and $9.78 per share at Dece
Slide 49: Concluding Thoughts
Concluding Thoughts
Slide 50: Stronger Earnings Potential in 2017
Stronger Earnings Potential in 2017 50 INCREASING EARNINGS POTENTIAL IN 2017 WHILE MAINTAINING SOPHISTICATED APPROACH TO RISK MANAGEMENT MORE EFFICIENT BUSINESS MODEL MAINTAIN SOPHISTICATED APPROACH TO RISK MANAGEMENT FINANCING PROFILE ENHANCING VALUE ATTRACTIVE INVESTMENT OPPORTUNITIES IN TARGET
Slide 51: Appendix
Appendix
Slide 52: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 52 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 53: Rates: Agency RMBS
Rates: Agency RMBS 53 As of December 31, 2016 Par Value ($M) Market Value ($M) % Prepay Protected(1) Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 3.0-3.5% $6,653 $6,762 70.5 % $6,909 3.3 % 5 4.0-4.5% 3,238 3,463 100.0 % 3,480 4.2 % 42 ≥ 5.0% 455 512 1
Slide 54: Rates: MSR
Rates: MSR(1) 54 As of December 31, 2015 As of December 31, 2016 Fair value ($M) $493.7 $693.8 Unpaid principal balance ($M) $51,386.1 $62,828.0 Weighted average coupon 3.9 % 3.8 % Original FICO score(2) 751 756 Original LTV 73 % 73 % 60+ day delinquencies 1.1 % 0.3 % Net servicing spread 27.4 basis
Slide 55: Credit: Non-Agency MBS Metrics
Credit: Non-Agency MBS Metrics 55 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for wei
Slide 56: Credit: Non-Agency MBS
Credit: Non-Agency MBS 56 As of December 31, 2016 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,210.5 $687.6 $1,898.1 % of non-Agency portfolio 63.8 % 36.2 % 100.0 % Average purchase price(1) $53.64 $65.63 $57.86 Average coupon 2.9 % 2.2 % 2.6 % Weighted av
Slide 57: Commercial Real Estate Assets
Commercial Real Estate Assets (1) Cash coupon does not include origination or exit fees. (2) Yield includes net origination fees and exit fees, but does not include future fundings. (3) Initial LTV considers the original appraisal at the time of origination. (4) Stabilized LTV considers the prospect
Slide 58: Two Harbors Investment Corp.
TWO HARBORS, Investment Cor ‘Pin Rr Cap! Managed Company