Hatteras Financial Corp's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Hatteras Financial Corp (HTS)

Q1 2012 Earnings Call

April 25, 2012 10:00 am ET

Executives

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

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

Analysts

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

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

Unknown Analyst

Steven C. Delaney - JMP Securities LLC, Research Division

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

Arren Cyganovich - Evercore Partners Inc., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Presentation

Operator

Good day and welcome to the Hatteras Financial Q1 Earnings Conference Call and Webcast. Operator Instructions] Please also note that today's conference is being recorded. I would now like to turn the conference call over to Mr. Mark Collinson, CCG. Mr. Collinson, please go ahead.

Mark S. Collinson

Thank you, Johnny. Good morning, everyone, and welcome to Hatteras' first 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.

Briefly, before I hand over the call to them, I need to remind you all 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 content of this conference call also contains time-sensitive information that is accurate only as of today, April 25, 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.

So that's all for me. Here's CEO, Michael Hough.

Michael R. Hough

Okay, good morning. Thank you all for joining us today and for your interest in Hatteras. I'll give a quick overview before turning it over to Ben and Ken to get more detail on the quarter and recent capital raise. As always, our entire team is here and available to discuss the quarter and any other questions you have. First, I'd like to introduce a new member of our management team. As we've grown in size, we've continued to deepen our bench and our expertise and the core skill sets required to be successful in this business.

In the first quarter, we were lucky enough to add Jim Sutton to our team. Jim has spent his career advising clients on their interest rate hedging needs, most recently with Bank of America Merrill Lynch. He'll be responsible for all aspects of our interest rate hedging and will deepen our day-to-day knowledge of the various markets for interest rate risk-related product. We're very excited to have him onboard and take his addition will add a lot of value to our company.

We had a solid first quarter, having declared a $0.90 dividend with $0.89 in earnings per average share, about 13% return on average equity and almost 1% increase in book value. We feel good that these results came without exposing our investors to undue and additional risks. They're also fortunate enough to have been able to raise almost $540 million in a follow-on common equity offering on March 26, in a deal that turned out very positive for the company and for all of our shareholders.

I think we've been pretty consistent in our views on this business and on capital raising. In late March, there was a short window of opportunity for us to buy securities, when the 10-year treasury hit its half levels in about a year and where net interest margin opportunities were very attractive.

I'll let Ben get into more detail, but this deal has been very positive in a lot of ways. It was accretive to current book value at the time of the deal, and a chunk of the book value increase at quarter end came directly from the new bonds purchased, then with the new capital. We bought new assets at obviously attractive prices, especially compared to today's market, and we were able to put them on our books at attractive net interest spreads, most likely higher than the 158 basis points we earned in the first quarter.

We took advantage of the timing and got invested pretty quickly this time, probably the quickest we've invested a follow-on deal to date. We're also able to extend the duration of our swaps book, which was the primary intention, while maintaining the desired risk position of the balance sheet. And we brought down the company's overall cost of funds, which obviously should help earnings going forward.

Also we further reduced our expense ratio, expanding our cost advantage over others. All in, we couldn't be happier with how the deal went, and accessing the capital markets opportunistically is a great feature of this business. We thank you all -- we thank all of you who have the confidence in us to participate.

So anyone who has followed us for a while knows we believe the #1 risk for agency mortgage REITs will always be a rising interest rate market. So as we've said many times, we will always be focused on managing our portfolio against this eventuality, no matter how far away it might be. In many ways, we have slowly been positioning arsenals for a turn of cycle since our IPO. Because of the ideal timing of our formation and early capitalization, we have a fantastic portfolio that was acquired at relatively low prices. This gave us the flexibility to manage through a number of different events while still delivering good returns to our shareholders. Our strategy has remained intact, and the portfolio is much better off having stayed the course rather than straying and altering the risk of the company.

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