Hatteras Financial Corp (HTS)

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Hatteras Financial Corp (HTS)

Q4 2012 Earnings Call

February 13, 2013 10:00 am ET


Mark S. Collinson - Partner

Michael R. Hough - Chairman and Chief Executive Officer

Kenneth A. Steele - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Benjamin M. Hough - President, Chief Operating Officer and Director

William H. Gibbs - Co-Chief Investment Officer and Executive Vice President

Frederick J. Boos - Co-Chief Investment Officer and Executive Vice President


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

Steven C. Delaney - JMP Securities LLC, Research Division

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Stephen Laws - Deutsche Bank AG, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Jackie Earle



Good morning, and welcome to the Hatteras Fourth Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Mark Collinson, Partner, CCG Investor Relations. Please go ahead.

Mark S. Collinson

Thanks, Laura. Good morning, everyone. Welcome to the Hatteras Fourth Quarter and Year-end 2012 Earnings Conference Call. With me today, as usual, are the company's Chairman and Chief Executive Officer, Michael Hough; the company's President and Chief Operating Officer, Ben Hough; and the company's Chief Financial Officer, Ken Steele. Also available to answer your questions are the company's Co-Chief Investment Officers Bill Gibbs and Fred Boos.

Before I hand the call over to them, I need to remind all of you that any forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our annual and quarterly filings with the SEC. Actual events and results can differ materially from these forward-looking statements.

The content of this conference call also contains time-sensitive information that's accurate only as of today, February 13, 2013, and the company undertakes no obligations to make any revisions to these statements or to update these statements to reflect events or circumstances occurring after this conference call.

That's all for me. Here's Michael Hough.

Michael R. Hough

Good morning, and thanks for your interest in Hatteras Financial. We're pleased to host this call reflecting the fourth quarter and full year of 2012. As always, our entire management team is participating and available to answer your questions, following a few minutes of prepared summary remarks.

I'd like to start off and spend a minute to take a big picture look where Hatteras stands today and what we've been thinking about as we plan for the future. We all know we're in a low rate environment, and margins have been compressing. It's tough to have a clear picture of even the near future when markets are so influenced by policy. However, earnings at these more normal levels should be expected given how long rates have been low. I think Hatteras is a pretty good proxy for the market as we cut our dividend twice last year but to a level that is still very attractive relatively and on a risk-adjusted basis.

Hatteras is an interest rate vehicle that we try to operate in a clear and concise way so investors are able to understand and model what they're investing in. We've been using the same strategy since we started in 2007 that we designed from experience. And doing this through past cycles, we learned that, to be a predictable long-term investment, we need to operate solely on the short end of the yield curve. We strongly believe that adjustable rate assets are the best way for a levered mortgage portfolio to protect equity and deliver risk-adjusted returns through market cycles. An ARM portfolio is especially important now that we've had a trough in rates and we're not yet through the cycle.

So we love the ARM portfolio we've accumulated since 2007 that would be impossible to recreate now even if only for its sheer size. I could go on and on highlighting the positive AL attributes to this asset, but it all boils down to mitigating interest rate risk. Because ARMs predictably step-down the duration curve, they tend to follow a similar path as our liabilities. This makes hedging the portfolio more effective and more efficient. Both sides of the balance sheet help offset interest rate risks, so we're not dependent solely on our hedges to do the heavy lifting as we would with the longer fixed-rate portfolio. Right now, we like where the portfolio sits when looking at possible future yield curve scenarios and we really like the mix of assets and the balance in the portfolio.

We say this a lot, but return in this business is a function of risk taken. We've built a pretty efficient company over the years, which is nice because efficiency is risk we don't have to take. This is not the time for us to try to make up for lower yields by reaching.

Before handing this to Ken, I'd like to hit on 2 things in the fourth quarter. As you know, we decided to cut the fourth quarter dividend from $0.80 to $0.70 to carry over some undistributed taxable income. This was very unusual for us because we've never before realized such meaningful gains. We've usually distributed most if not all of our income. It's our recommendation to the board to cut the dividend to this level to reflect the more current spread environment we're in.

As we mentioned on the Third Quarter Call, we were highly sensitive to the potential volatility that could come from the confluence of all the political and market uncertainty at yearend: Tight balance sheets were tight, the fiscal cliff, year-end pressures, et cetera, we just want additional liquidity and flexibility entering 2013.

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