Hatteras' Management Present At UBS Global Financial Services Conference (Transcript)

Hatteras Financial Corp. (HTS)

UBS Global Financial Services Conference Call

May 09, 2012 10:00 am ET


Ben Hough - President & COO


Dean Choksi - UBS


Dean Choksi - UBS

Good morning I am Dean Choksi, UBS' Consumer and Specialty Finance Analyst. Thanks for joining us for our next presentation. I am pleased to introduce Ben Hough President and COO of Hatteras Financial. To his right John Dalena, Chief Strategy Officer of Hatteras. Hatteras is a $3.3 billion agency-mortgage REIT with a portfolio of shorter duration hybrid ARMS. It trades at 1.06 times book with a 12.5% dividend yield and has one of the lowest expense ratios among its peers.

Ben Hough

Thanks Dean and I appreciate and thanks to be here this week. I want to give a brief overview and discuss with you some of the details, but I want to be – want you to free to interrupt me for questions in the middle of it at any time if you have just anything you want further clarification on. Again Hatteras is an agency-only US mortgage REIT. We have a target asset class of short duration hybrid ARMS and I will give a little more detail on that in a minute on where we fit into the yield curve.

We have an experienced management team that has been together for a long time, Hatteras has been around since the fall of 2007. However we have managed almost identical strategy, agency only, ARM only mortgage REIT since 1998 and a private structure which we still own that private structure, so we are externally managed under Atlantic Capital Advisors that manage both ACM and Hatteras. So we do have an extended track record through multiple interest rate cycles and we take a long-term approach to the model and to the strategy and I will get into that here in a second but it is focused on an asset liability mix where assets and liabilities work together throughout an interest rate cycle to provide a longer-term risk-adjusted return that we feel adds value to the portfolio.

You can see the total economic return since the recession obviously it's been a pretty one-way market since 2007. But even if you go back to you know this strategy or similar strategies including our private company going back to 1998 this provides double-digit or has provided double-digit returns on average over the course of the last 12 to 13 years. So you know we take a book value focused approach. Book value represents the value of our equity, it's our assets and liabilities mark to market at any point in time.

We feel that that's you know when you're using leverage, it's one of the most important aspects of the strategy because that is what you are leveraging and it is your ability to earn. So we do take a very focused approach there. Here is a brief example of the business model, you know it's a generic example of where we might put capital to work today given I mean depending on the assets that we choose and how we choose to hedge it, but it's a generic example of what we would likely do if we were have to capital today.

Just to give you an illustration of how the model works. We have a yield basically on the investment mix that we purchase which in our case and this case might be 51 and 71 hybrid ARMS and we repo that and leverage that through the repurchase agreement market which I'll get into a little more detail in a minute, which currently we can borrow at around 35 basis points but we are going to hedge some of that -- some of that cost in order to limit our book value volatility and to lock in to some longer-term funding which in this example we use four-year slots averaged with 30-day repo and that gets to a blended cost of funds rate of 53 basis points in this example.

So we are basically managing a net interest spread, it is similar to a bank model. We are basically earning on assets and paying on liabilities and managing the risk in between those two in order to produce a net interest spread to which we can leverage to make you know a gross ROE which at 7 1/2 times leverage which is probably a reasonable number to assume for our strategy, for us today. 7 1/2 it provides us plenty of liquidity to meet daily cash needs, especially given the short duration nature of our assets and the lower volatility that, that experiences as interest rates shift that it provides us a very cushioned spot. So 7 1/2 is the right target leverage for us to use today given the current market.

So you can see with that average and then adding back the leverage of adding back the yield of our equity portion of the securities that we do not leverage. You're producing still very solid gross ROEs. Again this is similar to a bank model in a lot of aspects, but it is a much more focused disciplined strategy, it's a more cost-efficient strategy we have. You known as a REIT, we are not paying any corporate income tax we are passing it through in the form of dividend to the investors and it's an efficient use of leverage and a way to provide capital to the housing market which is obviously desperately needed and hence the opportunity today and the capital that has been raised by ourselves and the sector as a whole.

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