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Hatteras Financial Corp. Q1 2010 Earnings Call Transcript

Hatteras Financial Corp. Q1 2010 Earnings Call Transcript

Hatteras Financial Corp. (HTS)

Q1 2010 Earnings Call Transcript

April 28, 2010 10:00 am ET


Mark Collinson – IR, CCG Investor Relations

Michael Hough – Chairman and CEO

Ken Steele – CFO, Secretary and Treasurer

Ben Hough – President and COO

Fred Boos – EVP and Co-chief Investment Officer

Bill Gibbs – EVP and Co-chief Investment Officer


Jason Arnold – RBC Capital Markets

Daniel Furtado – Jefferies

Mike Widner – Stifel Nicolaus

Mike Taiano – Sandler O'Neill

Henry Coffey – Sterne, Agee

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Good morning, and welcome to the Hatteras Financial Corp's first quarter 2010 earnings call. All participants have been in a listening only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mark Collinson. Please go ahead.

Mark Collinson

Thanks, Linnia. Good morning, everyone, and welcome to the Hatteras Financial first quarter 2010 earnings conference call. With me today as usual is 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, please note that on this call, information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, or projected.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements. The company's limited operating history, changes in its business and investment strategy, changes in interest rates, interest rate spreads, the yield curve or prepayment rates, changes in economic conditions generally, inflation or deflation, availability of certain opportunities, availability terms and deployment of capital, the degree and nature of the company's competition, general volatility of the capital markets, dependence on the company's manager and the company's ability to find a suitable replacement if the manager were to terminate its management relationship, and other factors that are set forth in the company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent reports on Forms 10-Q and 8-K.

The content of this conference call contains time-sensitive information that is accurate only as of today, April the 28th, 2010. And the company undertakes no obligation to make any revisions to the statements contained in these remarks, or to update and to reflect the events or circumstances occurring after this conference call.

That's it for me. It's my pleasure to turn the call over to Michael Hough.

Michael Hough

Hi, good morning. Welcome to our first quarter call. As usual, our entire senior management team is here to answer any and all questions you may have about our first quarter results. But first we'll present some prepared remarks that should help answer some of your questions and give you a good up-to-date picture of our operations.

Quarter-end March 31st was to mark an eventful period in the Agency MBS market. As many predicted significant spread and price volatility to occur as the Federal Reserve terminated their MBS purchase program. Their support of the mortgage market appears to ultimately have been successful as they were able to drop spreads tighter and somewhat stabilized the US housing market.

In the expectations that spreads were going to widen and MBS prices would fall because of the Fed exit have, to date, been wrong. Relative spreads have tightened and prices on the short end of the curve have been traded higher. Hybrids, in particular, have maintained an extremely strong bid and prices on some parts of the coupon stock have kept rising and remained prohibitive as a long term investment option for us. However, our view is that since the Fed has stopped buying, much of the strong bid can be attributed to the government’s recent foray into our market with aggregate purchase by the GSCs of delinquent loans out of our securities.

We will discuss this on more detail. But along with the impact from the short term prepayment ramp comes a sizable amount of cash that will go directly back to the purchase of Agency MBS, temporarily offsetting the demand vacancy created by the Fed's withdrawal. Our short term view is that we expect the bid side to remain strong as (inaudible) is in need for many financial institutions. We have seen the demand for it continue to grow.

Our slightly longer term view is that as this new cash gets reinvested, we should expect more volatility in our market and more investment opportunity. We like our current leverage range and the flexibility that comes with it, especially in less certain times such as now, it puts us in a strong position to be able to quickly exploit opportunities as they arise.

For an example, the recent discussions surrounding how the Fed, at some point, will have to un-line their investment as one to play – to pay close attention to. We think this is a difficult proposition for them and wouldn’t happen any time soon. But our thought is that it could become ultimately be beneficial for us because when this happens, the long end of the yield curve would likely be most affected, which will then serve to make the mortgage yield curve steeper. Mortgage yield curve is steep right now, which hasn’t had counter-productive additional steepening will likely be an investment opportunity for us as hybrid prices should adjust as well.

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