Anworth Mortgage Asset Earnings Call INSIGHTS: Portfolio Spread, New Hedges and New Security Purchases

On Friday, Anworth Mortgage Asset Corporation (NYSE:ANH) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Portfolio Spread

Bose George – KBW: My first question was just the spread that you guys are seeing on steps that you are adding to the portfolio?

Joseph E. McAdams – EVP and Chief Investment Officer: The spreads we are seeing on new security purchases we are making are a little lower than the portfolio spread of 127 basis points, but still in that general area. I guess the point I would make when we think about spreads going forward is when we buy new assets, we’re thinking about having – making a projection for a longer term CPR. Obviously, brand new securities have very low prepayment rates. So, when we talk about our – put assets on the books, make a long-term CPR assumption, that’s going to have a higher rate of premium amortization than your actual CPR for the first several months. So, when we see portfolio spreads in sort of 115 sort of area that would incorporate not like a low single digit CPR we see on an asset right after purchase, but I think a more realistic longer term assumption, which on a new security where it’s not currently having a large prepayment incentive is probably going to be in a low-to-mid teen area. So a slightly lower portfolio yields, obviously mortgage rates are lower again in July than where they were during the prior quarters, so I do think we’re on the margin adding new assets hedged appropriately at a similar, but slightly lower spread than where the portfolio is in the second quarter.

Bose George – KBW: Then actually just on the increase in asset prices in this quarter, and just what — can you characterize that how much of an increase you’ve seen?

Joseph E. McAdams – EVP and Chief Investment Officer: We’re still seeing an increase in values, we do have a significant power of our portfolio as Lloyd pointed out that is inside the 12 months of reset or has already reset, so there is not a lot of price depreciation on that part of the portfolio, 15-year mortgages have performed well. So, I would think on a sort of a pro forma basis, we’re still expecting to see an increase in book value quarter-to-date so far, even though we would have had negative mark-to-market adjustments on our swaps.

Bose George – KBW: One last thing, your price to book is obviously low, so in the past you repurchased shares I think when we got close to that 90% of book number, just curious about your thoughts there and just where the authorization stands?

Joseph E. McAdams – EVP and Chief Investment Officer: We have an authorization to repurchase shares back, right now we have not purchased any shares back during the quarter, we will consider it if we don’t think we have the opportunity to find investments that we think are attractive. Right now, we’re very comfortable with the structure of the portfolio and repurchasing shares what obviously increase the leverage of the portfolio.

New Hedges and New Security Purchases

Jason Weaver – Sterne Agee: I actually just one. As we’re seeing this higher cost swaps with around 3.75% coupons roll off over the next six months or so, curious if and if you are what maturities you’re targeting to replace those hedges?

Joseph E. McAdams – EVP and Chief Investment Officer: This is Joe. We’re not looking to replace those hedges in the sense that the assets that would have been purchased in the past when those hedges were put on are at a stage where we generally don’t believe they need much of a hedge going forward for two reasons. One, many of them are at or getting very close to the reset date as hybrids, and the other is that since rates have come down fairly significantly over the past several years, the prepayment rates we’ve experienced on those securities are such that we have a smaller balance of those securities than we probably would have targeted back then we initially put those hedges on. So, the new hedges that are — will be going over the next six months to a year will be — our anticipation is they will be a related to new security purchases.