Hatteras Financial Corp (HTS)

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Hatteras Financial Corp (HTS)

Q3 2012 Earnings Call

October 24, 2012 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


Arren Cyganovich - Evercore Partners Inc., Research Division

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

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

Steven C. Delaney - JMP Securities LLC, Research Division

Jason Weaver - Sterne Agee & Leach Inc., Research Division

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

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

Benjamin Ram - OppenheimerFunds, Inc.



Good morning, everyone, and welcome to the Hatteras Q3 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to your moderator, Mr. Mark Collinson, CCG. Sir, please go ahead.

Mark S. Collinson

Thanks so much. And good morning, and welcome to the Hatteras Third Quarter 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.

Just quickly before I hand over to them, I need to remind 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 SEC filings. Actual events and results can differ materially from these forward-looking statements. The contents of this conference call also contains time-sensitive information that's accurate only as of today, October 24, 2012. 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 CEO, Michael Hough.

Michael R. Hough

Good morning. Thanks for joining our call today and for your interest in Hatteras. As always, the entire management team is on the line to answer any questions you have following some brief prepared remarks.

Before we discuss the mundane of our earnings, I'd like to briefly express our thoughts on the loss of Mike Farrell. We want to first convey our sympathies and best wishes to Mike's family and to his close friends and coworkers. We know he will be greatly missed. All of us at Hatteras and the mortgage industry as a whole will miss him as well, and we'll miss his leadership and principled approach to business that we all enjoyed the benefits from. Michael is our industry's best spokesman, our most progressive thinker and the one the market looked to in times of stress. We will recognize at every opportunity the path he paved for us. At Hatteras, we want to wish the Annaly team good luck and for a smooth transition through this difficult time.

So as far as our report goes, Hatteras had a very good third quarter, especially with all things considered. While we reduced our dividend by $0.10, to $0.80 per share, it still equates to a very attractive yield and is more indicative of the lower interest rate market we have today. In today's share price, an $0.80 quarterly dividend equates to about a 12% annualized yield. Even though margins have compressed somewhat, the carry power and short-duration agency mortgage-backed securities continues to allow for risk-adjusted returns such as these.

However, there is no reason for us to reach for yield by changing our risk management approach, especially in a market where most yield and spread products have declined to new recent lows. On the contrary, market risk will need to be managed more diligently.

On the equity side, our book value on September 30 was at an all-time high of $29.60. The increase quarter-over-quarter was not as much a result of positive duration as much as it was a combination of a significant basis change in MBS and the excellent timing of our preferred stock offering in August. In August, we raised $278 million in a preferred offering that serves Hatteras well on multiple fronts. As an unrated company post credit crisis, being able to accretively issue preferred equity is a luxury, especially one that meaningfully exceeds the expectations of everyone involved.

For one, we matched the lowest-ever mortgage REIT preferred coupon, further proving that Hatteras has one of the lowest costs of capital. Second, $278 million puts our issue at a size we think benefits investors with good liquidity, which could also improve future access to this market. And three, we were able to allocate the proceeds into attractive paper ahead of the rally and basis type. This, by itself, allowed us to quickly take advantage of the backup in the market during August. It helped us add some more stability in managing to our long-term duration targets. And it enabled us to hedge a little for the possibility of QE3, which we were uncertain about at the time. So all in all, we were very pleased with the success of the deal and benefits the company enjoys from it.

So what I really want to use this time for was to make a point about how we are looking at new risks being introduced into the market. There are looming headline risks out there, including the election, the fiscal cliff, potential leadership changes at the Fed and the Treasury, among others. There are a lot of wildcards that we have to factor into our operation, including, most recently, QE3 and what it means now that we are competing daily with an open-ended buyer of maybe half of the new agency MBS production.

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