Two Harbors Investment Corp (TWO) 2011 Q2 法說會逐字稿

Good morning. My name is Mary, and I will be your conference facilitator. At this time I would like to welcome everyone to Two Harbors' Second Quarter 2011 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer period.

(Operator Instructions)

I would like now to turn the call over to Anh Huynh, Investor Relations for Two Harbors.

Thank you, Mary, and good morning. Welcome to Two Harbors' second quarter 2011 financial results conference call. The press release and financial tables associated with today's call were filed yesterday evening with the SEC. If you do not have a copy, you may find them on the Company's website at www.twoharborsinvestment.com.

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. This presentation can also be found on our website.

Before management begins the discussion of the 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 website at www.sec.gov. We do not undertake any obligation to update or correct any forward-looking statements that later events can prove to be inaccurate.

I would now like to turn the call over to Two Harbors' President and Chief Executive Officer, Tom Siering.

Thank you, Anh, and thank you to our audience for joining us for Two Harbors' second quarter earnings call. With me this morning to discuss the financial results for the quarter are Jeff Stolt, our Chief Financial Officer and Bill Roth, our Co-Chief Investment Officer. Additionally, we are joined by Brad Farrell, our Controller.

For those of you with access to the slide presentation, please refer to Slide Three. During the second quarter, adjusted GAAP earnings were $0.47 per weighted share representing an 18.7% return on average equity on an annualized basis.

Core earnings increased 28.1% on a sequential quarterly basis to $0.41 per weighted share. Both of these earning metrics illustrate strong underlying portfolio performance driven by favorable financing spreads in the Agency sector and attractive loss-adjusted yields in the non-Agency market.

Book value decreased 1.7% on a sequential quarterly basis from $9.90 on March 31st, to $9.73 per share on June 30th, reflecting weaker non-Agency price performance. On June 14th, we declared a dividend of $0.40 per share for record holders as of June 24th. This dividend was unchanged and represents a 14.9% yield on an annualized basis based upon on our stock's June 30, 2011 closing price of $10.75 per share.

In May, we completed an accretive secondary stock offering of 23 million shares for net proceeds of approximately $235.2 million. We completed an additional accretive offering of 48.3 million shares for net proceeds of approximately $483.6 million in July. The recent pullback in the non-Agency market has created a terrific investment environment with values not seen in the market since late 2009 or early 2010.

In response to this opportunity, we raised capital last month with the intention of directing it to attractive non-Agency assets. We believe it is within our charge to act decisively and strategically for the benefit of our shareholders.

During the second quarter, we announced our intention to begin a securitization program in partnership with Barclays. This program would pool jumbo whole loans with Two Harbors selling the senior pieces while retaining the credit and IO components. To this end, we welcome Diane Wold to our management team. While at GMAC ResCap she directed their residential mortgage securitization efforts. They were a leader in this space and her expansive experience is quite valuable in our effort.

The current opportunity in the non-Agency sector affords us the time to build this program thoughtfully and robustly. So investors should think not of this as meaningful financially for 2011, but part of our options for the future.

I'm also pleased to announce that David Miller has joined our management team. David recently served at the US Department of Treasury as the CIO of the TARP investment portfolio. He is also a Goldman Sachs veteran. David will help us on business development and strategic initiatives. These hires are consistent with our organizational mantra of enlisting only the best people.

I would like to commend the investment team for their foresight and respect of the recent governmental torpor in managing around the implications of it on the financing markets. They have done a terrific job husbanding liquidity and extending maturities on our financings, with de minimis borrowings due prior to September 1st.

In this vein, subsequent to quarter-end, we announced an extension of our facility with Wells Fargo to finance non-Agency securities. Additionally, the capacity under it was increased from $75 million to $150 million.

In the past few days, financing has returned more or less to pre-crisis levels. Despite it all, our portfolio was more or less unaffected by the political firefight. While a month does not a quarter make, July was a solid month for us.

This concludes my opening remarks. I will now turn it to Jeff, to discuss our financial results for the quarter.

Thank you, Tom. I would like to, at this time, deliver some detail on the financial results and key earnings metrics for the quarter. Please refer to Slide Four of the presentation.

For the second quarter, Two Harbors' Core Earnings increased $16.6 million on a sequential quarter basis to $31.4 million or $0.41 per weighted average share. Two factors primarily attributed to this increase. First, the portfolio realized higher quarter-over-quarter Agency net interest spreads, inclusive of inverse IIOs.

Second is the higher average asset base resulting from the deployment of March and May 2011 capital raises. For the second quarter, the average investment portfolio was approximately $3.4 billion compared to approximately $1.7 billion in the previous quarter.

GAAP Net Income for the second quarter decreased $23.4 million on a sequential quarter basis to a negative $1 million or negative $0.01 per weighted average share. This change is principally attributable to the drop in fair value of our swaps and swaptions due to the decline in the swap curve. As a reminder, due to our accounting treatment, unrealized mark-to-market valuations on our swaps and swaptions are captured in GAAP Net Income as opposed to in the balance sheet.

Since these swaps and swaptions are used for purposes of hedging our interest rates exposure, their unrealized valuation losses are generally offset by unrealized gains in our Agency RMBS portfolio, which are recorded in stockholders' equity through other comprehensive income. We encourage our investors to view this as an accounting mismatch and not as an economic reflection of the Agency portfolio net of hedges. Adjusted GAAP Earnings is a metrics that attempts to reconcile this accounting disparity.

Adjusted GAAP Earnings for the second quarter increased to $36.1 million or $0.47 per weighted average share, reflecting Core Earnings performance and realized gains on securities and other derivative instruments of $13 million.

Please refer to Slide Five of the presentation. For the second quarter the Company reported comprehensive income of $13.5 million representing a 7% annualized return on average equity. Book value for the second quarter was $9.73 per share. This decrease is principally due to the valuation declines in non-Agency portfolio. The Agency portfolio remained relatively unchanged, net of hedges.

Operating expenses as a percentage of average equity was 1.1% for the quarter. Our expense ratio improved quarter-over-quarter as we achieved economics of scale on an increased capital base.

I would now like to turn the call over to Bill to discuss the portfolio in further detail. Bill?

Thanks, Jeff. Please refer to Slide Six. During the second quarter, rates declined by roughly 40 basis points against a backdrop of weaker expected US economic data and ongoing concerns of the Greek debt crisis. The Fed's auction of Maiden Lane assets continued to put pressure on the non-Agency sector and triggered a material cheapening of asset prices, particularly in subprime.

Late in June, the BofA/Countrywide settlement proposal offered optimism for bondholders, thus lifting bonds at quarter-end. After the market closed on June 30th, the Fed revealed that they did not intend to be, quote, "forced sellers," and, they halted the Maiden Lane sales of non-Agency bonds. This provided some additional stability to the non-Agency market. Finally, quarter-end also brought the ramp down of QE2 and we found that, as expected, it had a benign effect on the market.

In the beginning of this year, we found Agency securities to be of particular interest, and we commenced the second quarter with this perspective. However, the events of the quarter greatly impacted the non-Agency market, driving prices lower. As such, we shifted our focus to the non-Agency sector and repositioned the portfolio to take advantage of the pullback in prices.

We completed deployment of the proceeds from the May capital raise with a capital allocation that slightly favored non-Agency. The resulting portfolio included an increase in attractive yielding subprime bonds and on the Agency side, GNMA HECM pools.

Our capital allocation, after the May deployment, was 60%/40% in favor of Agencies, which compares to the period prior to the May capital raise of 65%/35%.

We are pleased that our portfolio delivered yet another quarter of strong returns in light of the volatility experienced in the market. Two Harbors reported an annualized yield on our average portfolio of 5.4% and all-in liability costs of 1.3%, which includes interest rate swap spread expense. Net interest spread came in at 4.1%, up from 3.8%. Agency securities, inclusive of IIOs performed notably well, delivering an annualized yield of 4.7%, up roughly 80 basis points from the previous quarter.

Please turn to Slide Seven. At June 30th, the portfolio composition was $3.9 billion in Agency securities, including inverse IOs, and $0.8 billion in non-Agency securities. This represents an asset mix of approximately 85%/15% favoring Agency.

On the top right, you will note that 94% of our Agency holdings contain what we consider to be some form of prepayment protection. We continue to focus on this despite the general tight refinancing conditions and slow prepayment environment, as this provides more stability to our expected cash flows, thus making hedging more effective.

One addition to our Agency portfolio I would like to highlight is $658 million of GNMA Home Equity Conversion Pools or HECMs. These loans, also referred to as reverse mortgages, are most popular with senior citizens and allow homeowners to convert the equity in their homes into cash.

HECMs encompass the story of stable and predictable cash flows our investment teams seek to uncover in the mortgage market. Compared to the traditional mortgage borrower, HECM borrowers are significantly less likely to refinance, as the borrower is making no monthly payments. Yet the loans get paid off upon certain events, including the borrower's death, so extension risk isn't much of a concern either. At June 30th, HECM pools made up 14% of the portfolio.

In the non-Agency market, we found particular value in subprime bonds in the second half of the quarter. This sector was the most affected by the Maiden Lane sales, seeing price declines of 5% to 20%, and we increased our allocation to 55%. Also, our focus on lower dollar priced bonds continued, with our average non-Agency cost dropping slightly from the low 60s to the high 50s.

Please turn to Slide Eight. Before I continue, I would like to note that we have improved our earning presentation by consolidating key highlights pertaining to portfolio metrics, hedging and financing. You may refer to the slides in the appendix for additional information.

The portfolio continues to exhibit low and stable prepayment speed on the Agency side, as a result of our approach to selecting pools that we believe have lower refinancing risk. Agency securities we held as of June 30th experienced a favorable three month CPR of 5.0%.

On the leverage side, our debt-to-equity ratio was 4.2 times. If our open trade positions had settled at quarter end, the debt-to-equity ratio would have been approximately 4.5 times. We anticipate continuing to apply leverage in the range 6 to 7 times on the Agency portfolio, and 1.0 to 1.5 times on the non-Agency portfolio, leading to an overall moderate level of leverage.

As you can see from the lower left-hand corner, we continue to believe in maintaining a relatively low level of interest rate exposure. For the second quarter, the estimated variance in equity value for an up 100 and down 100 basis point move increased slightly to 6.7%. Further, on the top right, you will note that 40% of our notional protection is optional. This enables us to benefit from falling rates, yet still offer protection if rates rise.

Liquidity management is an important component of managing our portfolio. During the quarter, we continued to focus on long-dated repos, and at June 30th, 43% of our total RMBS borrowings have maturities of over 90 days. As Tom mentioned, we increased and extended our Wells facility post-quarter end, thus enhancing our financing options. In addition, we increased our matched interest rate swap Treasury position to $1 billion due to the increase on our asset base, especially on the non-Agency side.

Please turn to Slide Nine. Despite the passing on Tuesday of the debt ceiling increase, the anticipation of slower US economic growth and ongoing concerns about the European financial system continue to weigh on the markets. Since quarter-end, rates have fallen roughly 50 basis points in the long end, with the curve flattening quite a bit. Agency RMBS have generally kept pace with the rally, and it appears that RMBS funding rates will remain low for much longer than previously expected.

On the non-Agency side, we are very excited by the opportunities we are seeing, particularly in subprime. We have recently observed subprime bonds offering high single digit to low double digit yields on a loss-adjusted basis. In addition, typically these bonds finance with 35% to 40% haircuts, at interest rates of 2% or less. I am pleased to announce that we are roughly 50% deployed in just three weeks since our capital raise, and we anticipate that non-Agency bonds will continue to be our focal point.

Finally, we expect the debt-to-equity ratio upon completion of deployment to be in the range of 4.0 to 4.5 times. I would now like to turn the call back to Tom for his closing remarks.

Thank you, Bill. While we've come a long way at Two Harbors, we feel in many ways that our story is just beginning to unfold. We feel the environment in the mortgage space is very fertile, and we are committed to optimize all prudent opportunities for our shareholders. Before turning to the called to Q&A, I would like to take a moment to thank our shareholders, both new and old, for your continued support of Two Harbors. With that, I will open the call to questions. Mary?

(Operator instructions). Our first question comes from the line of Douglas Harter from Credit Suisse. Your line is open.

Thanks. I was hoping you guys could talk about the change in the equity sensitivity to a rate change. Obviously, that's still low, but increased, so sort of what was behind that?

Hey, good morning, Doug. Thanks for joining us. Yes, it became apparent to us during the second quarter that given the economic statistics we were seeing, that we would see rates lower for longer, if you will? And keeping in mind that we do include optional protection, if the market rallies you naturally gain some duration from those because their hedging value decreases.

And so basically we felt, that based on what we were seeing, it made sense to let the hedging effectiveness of the swaptions decline as the market rallied and not replace them, as such, for the time being. So that's sort of where we gained a little bit of duration.

All right, that makes sense. And then just a point of clarification, on that leverage that you just talked about, of 4.0 to 4.5, does that exclude the Treasury position?

Yes, that's the RMBS leverage, yes.

Perfect, thank you.

Thanks, Doug.

Thanks, Doug.

Thank you. Our next question comes from the line of Bose George from KBW. Your line is open.

Hey, good morning. I had a couple of things. First, just on the book value -- and that's definitely an impressive job keeping the book values that steady -- just wondering if you could walk us through some of the changes that happened, how much the non-Agencies were down and some of the offsets to that?

Hey, Bose, good morning. Thank you for that. Yes, the book value decline of 1.7%, if you think about it, basically we had greatly reduced our allocation to the non-Agency market, as each -- despite that market rallying, so therefore your investment actually is going up. We actually reduced our allocation substantially based on those valuations.

And we do think that that capital allocation flexibility is a key component of what we do here. So on the Agency side, the book net of hedges was roughly unchanged, and so that was, obviously, a much bigger part of our book. Now, keep in mind since we don't take that much interest rate risk, the rally doesn't give us a big boost for taking a lot of rate risk.

On the non-Agency side, we were down somewhat, but a couple of things contributed to that. First of all, we think that our securities selection enabled us to outperform the broader non-Agency market. Second of all, the lows during the middle of the month afforded us the ability to pick up some bonds, what we thought were particularly cheap. And as you know, right near the end of the month we saw a little bit of a boost higher in non-Agencies, so that obviously helped us quite a bit as well.

Okay, great. Thanks for that. A couple of others, just do you have a number for the accretion-to-book value from the raise you guys did in July?

Yes, this is Brad Farrell. We estimate that to be around 1% book value growth, or roughly in the upper $0.08 range. That's kind of roughly how we feel the overall economics of the offering played out.

Okay, great, thanks. And then, actually just touching on the improvement you guys had on the Agency yields, I was just curious what drove that? Was it just slowing prepayments? Was there anything else?

Yes, it was a combination of we bought a bunch of -- I talked about this on the last call, I think, that we had picked up some higher coupon loans that were sort of HARP-like, that prepaid, frankly, very slowly. These are higher couponed. You see our average price on the Agency book went up. So it was a combination of really, frankly, slower prepays than a lot of the premiums, as well as particularly good performance on the IO/inverse IO book.

Great, thanks. Let me just sneak in one more. Just on the GNMA HECM pools, I'm just curious how the accounting for that works, just in terms of -- I mean, since there's no cash from the borrower, just curious how the security is structured? And also, just in the funding markets, does it make any difference and is it funded just as easy as other GNMAs?

Yes, so first of all, there -- it's GNMA security. Like any other GNMA, it's full faith and credit. It has -- these are fixed coupon bonds. I couldn't tell you the exact coupon, but 5%, for example. So the coupon would come in like any other mortgage pool. And then I'm not an accountant on that, but I would assume they would be accounted for like any other mortgage pool.

Yes, this is Brad Farrell. We adjust for our expected prepayment or expected life of that portfolio, so we kind of more do a constant yield approach to those and monitor it that way.

Okay, great. Thanks a lot.

Thanks, Bose.

Thanks, Bose.

Thank you. Our next question comes from the line of Mark DeVries from Barclays Capital. Your line is open.

Yes, thanks. First, just a couple quick clarifying questions, does your comment around leverage coming in at kind of 4.0 to 4.5 times once you fully deploy this latest capital raise, imply kind of a similar 60/40 Agency/non-Agency split?

Yes, so, hey, Mark, good morning.

Good morning.

Yes, the ending leverage actually comes the mix, so if we were 100% Agency and we were six to seven, you can obviously figure out what that would be, and then, obviously, the other end. So we had noted on the investor call when we raised capital, that we were going to focus on non-Agency.

Yes.

So the fact that we're still tilted somewhat towards Agency, even if we do focus more on non-Agency here, we're probably going to be not that dissimilar at ending capital. As you know, being that we're somewhat, really frankly, opportunistic. I can't tell you what the final portfolio will look like. But once the capital allocation comes in, you can sort of take those leverage numbers and make an adjustment, and that's sort of where you get to that range.

Okay, and your comment around subprime yields coming in 9%-10% plus, is it right to think that implies you're generating kind of 20% or so levered returns on those?

Well, yes, the subprimes that we've seen out there, are sort of, as you've noted, high single digit, low double digit, and I did mention that the financing was 2% or lower.

Yes.

So if you imply the leverage of 1.0 to 1.5 times, you will get something up in that zip code, I believe.

Okay. And then on your comments around what you're seeing on the Agency side, where obviously there's been a rally and funding costs remain low, but are you seeing general kind of compression in spreads in the Agency market?

Agencies actually since quarter-end have pretty -- they're actually wider since quarter end. We saw, after the debt ceiling debacle kind of came and went, mortgages actually performed pretty well the remainder of this week. But spreads in general are still wider than versus quarter-end.

And then, just one last question. Given what's happened with the rates here, what are your expectations for CPRs? I guess normally with that kind of movement we've had in rates, you'd expect them to accelerate, but this feels very different in that borrowers just aren't that responsive to lower rates. Kind of what are your thoughts around that?

Yes, you're actually -- you're spot on there, Mark. Basically, obviously, we are retrenching or retracing a lot of the sell-off, and we're going back to substantially lower rates than we've seen. That being said, the mortgage rate is still above the lows.

And we've seen a little bit of a response, and I think the market is expecting to see the refi index that's come in even higher in the coming weeks, but not anything that is of a dramatic nature. I think the market -- by and large, what we've seen in terms of prepays is people look at it and compare it to what the lows were before. And so in order to get like a real big jump you need to see new lows in the rates that people can borrow at.

Okay, great, thanks.

Thanks, Mark.

Thanks, Mark.

Thank you. Our next question comes from the line of Gabe Poggi from FBR. Your line is open.

Hi, good morning, guys.

Good morning.

Good morning.

I wanted to ask you guys kind of a 20,000-foot question. I know you mentioned you've been active in subprime, but obviously it's been a very volatile environment over the last several weeks. I wanted to kind of get -- if you would be able to provide a little more color, kind of, on where you're finding the most relative value? Has competition defined that subprime paper waned? Are other market participants on the sidelines?

I just want to get a gauge for kind of Two Harbors' aggressiveness, for lack of a better word, in buying this paper, their comfortability with the paper in light of what's happening from a macro perspective relative to, kind of, the market.

Sure. I think there were two or three questions in there, I'm not sure.

Yes, sorry. That was a long one.

Yes, let me try and let's start with -- I'll just try and hit them in any particular order. So the first thing is when we look at non-Agency securities, we actually are taking a fairly draconian approach to assumptions around the performance of the housing market, employment, et cetera, and we're being -- continue to be what we think is appropriately conservative in terms of the actual -- the way these things will perform.

Yes.

So I would say when we see bonds that we think are particularly cheap and offer attractive yields to what we consider to be draconian assumptions, we're very aggressive about trying to buy them at an attractive price, but I wouldn't say that means we're aggressive about chasing prices higher. So we're in the market every day, and we're -- we run a lot -- we run a massive number of bonds to try and find the ones we like.

So I'd say in terms of our approach, that's sort of the way we look at it. If prices get to the point where they're not attractive, or we don't think they provide appropriate risk-adjusted return, then we just won't be involved.

In terms of the overall macro, clearly, the market is concerned, and it appears to justifiably so, that the second quarter wasn't necessarily a soft patch. It's too hard to predict, obviously, what the future will bring, but it appears that one of the reasons the market is where it is on the non-Agency side is because there is some concern about that.

One of the things we do like about certain parts of subprime is, frankly, that our assumptions allow us to default a substantial part of the pool.

Right.

Bill Roth. 75%, 80%, 85% of the pool even though not anywhere close to that number of ours are delinquent and yet it still provides an attractive return.

Okay, that's helpful. I just wanted to get a kind of understanding if I could follow up? Have other participants for that paper, and not necessarily subprime, just in the non-Agency space, have you seen because of the anxiety in the market more participants kind of go to the sidelines which has offered a better opportunity set to buy bonds? Or is it business as usual generally speaking?

I mean, well, it's a couple things. Prices, as we noted, price has obviously come down quite a bit. And while we've seen a little bit of improvement in pricing since the end of the quarter, the reality is is that there's a lot of people out there that can run bonds and do analysis. And the sector is attractive, so not only from a fundamental standpoint.

There's some people who just won't buy this stuff, okay? They don't want anything to do with non-Agency mortgages of any sort. So that's a positive dynamic. The offset is that there are people like ourselves who can run these things and they find them attractive. So I'd say in general if you throw all those together it's really fairly balanced.

Okay, that's helpful. Thanks, guys, good quarter.

Thanks, Gabe.

Thanks, Gabe.

Thank you. Our next question comes from the line of Trevor Cranston from JPM Securities -- or JMP Securities. Your line is open.

Hi, guys, congratulations on a nice quarter.

Thanks, Trevor.

I just had a clarification question on the increase in the Agency yield? It sounded like that was primarily due to slow prepayments on some higher coupon pools. So is it fair to say that the yield is going to stay kind of roughly at the same level if prepayments kind of stay where they were in the second quarter? Or were the speeds kind of unusually slow in the second quarter relative to what you expected them to be when you bought the stuff you bought?

Yes. I'm just -- good morning, Trevor. How are you?

I'm good. How are you?

Good. Yes, I mean as you can see, look, you know that we focus on pools where we think there's substantial prepayment protection either implicit or explicit -- 5% CPRs that's a pretty darn good speed. So to the extent the speed stays in that range because of the pools that we bought, then the yields going forward would be reasonably comparable.

We're hoping that the pools that we select, as I mentioned on the call, 94% of what we own we think has some degree of protection. If we do start to see overall prepays pick up, I would expect our speeds to pick up, probably not as much as sort of the mortgage universe. In which case -- and if they do pick up then yields will obviously be somewhat lower.

Okay. Can you comment on what you saw in prepayments in the July report?

Well, I don't think we want to get into July just today. Obviously I commented that July was a solid month for us, but it's just a month. It's not a quarter and I think -- frankly, I think we've probably said all we're prepared to say about July.

Okay, that's fine. And then last thing, you guys had previously mentioned that you were targeting to complete a securitization by the end of the year. I was just wondering if you could just provide an update on the status of the securitization program and if the timing is still kind of reasonable to think about?

Sure, thanks for that question. It's Tom, Trevor. What we've been working on is creating a platform with multiple originators, and so our people have been spending time filling out that roster. And so we feel that we are on track for 2011. But again, as I said in my opening remarks, I think we should think of this as not a real mover of the financial needle for Two Harbors in 2011.

Okay, that's helpful. Thank you.

Thanks, Trevor.

Thanks, Trevor.

Thank you. (Operator Instructions). And our next question comes from the line of Joel Houck from Wells Fargo. Your line is open.

Good morning and thanks. The folks on the non-Agency market, I'm wondering if you can give us a sense for what your current thinking is in terms of home price depreciation as you guys -- the capital you've already deployed into subprime and as implied in your Slide Nine the capital you will deploy from the July raise?

Sure. Typically when we model we try to be fairly conservative. And so we're currently modeling down 10% from here. So I think it's -- and that varies by region but sort of generically. I think that that based on most economists' projections, our assumptions would be somewhat more conservative. That's kind of where we are.

Okay, yes. I mean I can appreciate that it's by region, but kind of that broad assessment is helpful. On the interest swaptions, can you talk about the benefit in terms of NAV if in an up 100 rate, up 200 rate environment, just kind of give us the sensitivity around that or the hedge?

Yes. So and the Q will be out shortly, and we put a table in there that sort of gives you a breakdown. I'm not sure if there's something specifically on the swaptions, but we did have a chart in a prior, I believe in an investor presentation it was, that basically showed that, as you would imagine, since you have optional protection if rates fall you don't exercise that option and you basically get the benefit of the rally after deducting the cost of what you paid for the option. But if the market continues to rally you can only lose what you paid for those options.

The flip side is what we focus on is typically buying out of the money protection so basically our protection increases it at an increasing rate as rates sell off until those options go -- until those swap strikes get hit. So we think that that helps us get back quite a bit of protection in a rate rise. We don't actually disclose the exact metrics on that at this point.

Okay. And then last question on the Agency book 5% CPR, your weighted average cost basis is a little over 105. How high would the CPRs have to go in order for ROE in the Agency business to drop below 15%, which is kind of where your dividend yield is right now?

I actually don't think we calculate or release that information.

Okay. I mean I guess obviously it's investors I think appreciate the strategy here, and as long as CPRs stay low or relatively low there's high economic value add. But on the flip side if we do see a spike in CPR, obviously with such a premium to cost basis, that's where the ROEs could become compromised. So that's -- I'm just trying to get a sense of the sensitivity around that?

Sure. Well, I guess maybe the best thing to point you to is in the earnings deck on Slide Seven on the right. If you take a look there you'll see 18% of the pools were these GNMA HECM pools, which the borrower's not making any payments. The prepays on that we would expect to be not 100% but very high percentage of insensitivity to rate moves.

Then you've got another 16% that are discount pools, okay? Then you've got 6% of hard prepayment protection and then another 14% of high LTVs, so these are guys that refi'd through the HARP program so you have this one-time ability to refi even though you had a high LTV loan.

So if you add the HECMs and the discounts and the prepayment protected together, right there that's 40% of what we own, which I would say have a way higher degree of protection versus even some of the other buckets. And then if you throw in the high LTV, I mean speeds could go up. Never say never, but most of what we own isn't your typical generic mortgage stuff.

Right. Well, and even the lower loan balances presumably the CPRs would stay low on those as well.

Exactly. Exactly. I mean just to give you an idea, in 2003 which was the fastest refinancing environment ever, you could refinance online in an hour, right? Low loan balance pools with 100 basis points of incentive didn't even pay a 30 CPR. They paid in the 20s.

Okay. That's helpful. Thank you very much.

Sure. Thanks, Joel.

Thank you. I show no further questions in the queue and would like to turn the conference back to Mr. Tom Siering for closing remarks.

Thank you, Mary. We would like to thank everyone for your interest and to all our listeners for your interest in Two Harbors, and we wish you a very good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.