Two Harbors Investment Management Discusses Q2 2012 Results - Earnings Call Transcript

Two Harbors Investment (TWO)

Q2 2012 Earnings Call

August 02, 2012 9:00 am ET

Executives

Christine Battist - Managing Director

Thomas Edwin Siering - Chief Executive Officer, President and Director

Brad Farrell - Chief Financial Officer, Principal Accounting Officer and Treasurer

William Roth - Co-Chief Investment Officer

Analysts

Bose George - Keefe, Bruyette, & Woods, Inc., Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Mark C. DeVries - Barclays Capital, Research Division

Trevor Cranston - JMP Securities LLC, Research Division

Joel J. Houck - Wells Fargo Securities, LLC, Research Division

Calvin Hotrum - Sterne Agee & Leach Inc., Research Division

Gabriel J. Poggi - FBR Capital Markets & Co., Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Presentation

Operator

Good morning. My name is Mimi, and I'll be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] I would now like to the call over to Christine Battist, Managing Director of Two Harbors. You may begin.

Christine Battist

Thank you, Mimi, and good morning. Welcome to Two Harbors' Second Quarter 2012 Financial Results Conference Call. With me this morning are Tom Siering, President and Chief Executive Officer; Brad Farrell, Chief Financial Officer; and Bill Roth, Co-Chief Investment Officer. After my introductory comments, Tom will provide some insights into the current macro environment and potential impact to our strategy. Then, Brad will highlight some key items from our financial results, and Bill will review our portfolio performance, provide an update on the deployment of capital from our recent stock offerings and discuss the market outlook.

The press release and financial tables associated with today's conference call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website.

This call is also being broadcast live over the Internet and may be accessed on our website in the Investor Relations section under the Events and Presentations link. In addition, we'd like to encourage you to reference the accompanying presentation to this call, which can also be found on our website.

Before management begins its discussion of its second quarter results, we wish to remind you that remarks made by Two Harbors' management during this conference call and the supporting slide presentation may include forward-looking statements. Forward-looking statements reflect our views regarding future events and are typically associated with the use of words such as anticipate, target, expect, estimate, believe, assume, project and should or similar words. We caution investors not to rely unduly on forward-looking statements. They imply risks and uncertainties, and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, which may be obtained on the SEC's website at www.sec.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate.

Before we discuss second quarter results, I'd like to draw your attention to our recently launched webinar series, beginning with our views on investing in subprime. The webinar can be found on our website. We intend to post additional webinars in the future to provide investors and analysts with management insights regarding the markets and our business.

I will now turn the call over to Tom, who will provide some highlights as summarized on Slide 3.

Thomas Edwin Siering

Thanks, Christine. Good morning, everyone, and thank you for joining our call today. We had remarkable performance in the second quarter, delivering 6.9% in total returns. We recorded comprehensive income of $0.60 per share. We are pleased to report total stockholder return of nearly 79% since our launch in October 2009. Our book value increased $0.27 to $9.94 per share during the second quarter. Finally, we generated core earnings of $0.35 per share. Brad will provide additional comments regarding our financials in a few moments.

In mid-July, we completed a public offering raising approximately $592 million in net proceeds. We plan to use these proceeds primarily to purchase Agency bonds, but we will also purchase non-Agency securities when we find them at attractive prices, as well as acquiring single-family residential properties.

In addition, during the second quarter, we commenced an at-the-aftermarket offering program more commonly referred to as an ATM and sold nearly $78 million worth of additional common stock during the quarter.

Although we are quite early in the quarter, non-Agency prices rallied smartly in July, causing Two Harbors book value to rise noticeably since June 30. As a result of this in a flatter yield curve, we believe that yield in net interest spreads on Agency and non-Agency RMBS that are currently available for investment are generally lower than we have historically realized in our portfolio. That said, we believe the opportunity to produce attractive returns for stockholders still exist.

Please turn to Slide 4. During last quarter's call, I highlighted some insights on the key macroeconomic factors that would impact our business in the mortgage and housing sectors, including home prices, unemployment and interest rates. This quarter, I'd like to provide an update based upon the changing macroeconomic landscape in the light of recent economic status, including a weakening economic recovery, concerns around the fiscal cliff created by potential tax increases and spending cuts at the end of 2012 and continued concerns about Europe as global markets deteriorated in the second quarter.

The European situation is unsettled, and it's not clear that the Congress of nations with disparate fiscal policies and a common monetary policy is viable. Dissolution of the euro or EU represents a significant risk to global markets.

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