Anworth Mortgage Asset's (ANH) CEO Joseph Lloyd McAdams on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Anworth Mortgage (ANH)

Anworth Mortgage Asset Corporation (NYSE:ANH)

Q2 2014 Results Earnings Conference Call

August 4, 2014, 01:00 PM ET

Executives

Joseph Lloyd McAdams - Chairman, Chief Executive Officer and President

Joseph E. McAdams - Chief Investment Officer, Executive Vice President

Thad Brown - Chief Financial Officer

Chuck Siegel - Senior Vice President of Finance

Analysts

Daniel Altscher - FBR Capital Markets

Steven Delaney - JMP Securities

Mike Widner - KBW

Art Lipson - Western Investments

Howard Henick - ScurlyDog Capital

Operator

Good afternoon, and welcome to the Anworth Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-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.

Before we begin the call, I will make a brief introductory statement. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we hereby claim the protection of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, with respect to any such forward-looking statements.

Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words may, will, believe, expect, anticipate, intend, estimate, assume, continue or other similar terms or variations on those terms or the negative of those terms.

You should not rely on our forward-looking statements because the matters they describe are subject to assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Statements regarding the following subjects are forward-looking by their nature: our business and investment strategy; market trend and risks; assumptions regarding interest rates; and assumptions regarding prepayment rates on mortgage loans securing our mortgage-backed securities.

These forward-looking statements are subject to various risks and uncertainties, including those relating to changes in interest rates, changes in the market value of our mortgage-backed securities, changes in the yield curve, the availability of mortgage-backed securities for purchase, increases in prepayment rates on mortgage loans securing our mortgage-backed securities, our ability to use borrowing to finance our assets, and if available, the terms of any financing, risks associated with investing in mortgage-related assets, changes in business conditions and the general economy, including the consequences of actions by the U.S. government and other foreign governments to address the global financial crisis, implementation of or changes in government regulations or programs affecting our business, our ability to maintain our qualification as a real estate investment trust under our Internal Revenue Code, our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, and management's ability to manage our growth.

These and other risks, uncertainties and factors, including those discussed under the heading Risk Factors in our annual report on Form 10-K and other reports that we file from time to time with the Securities and Exchange Commission, could cause our actual results to differ materially and adversely from those projected in any forward-looking statements we make.

All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement that may be made today or that reflect any change in our expectations or any change in events, conditions or circumstances based on which any such statements are made. Thank you.

I would now like to introduce Mr. Lloyd McAdams, Chairman and Chief Executive Officer with Anworth. Please go ahead, sir.

Joseph Lloyd McAdams

Thank you, very much. Good morning or good afternoon, ladies and gentlemen. I'm Lloyd McAdams, and I welcome you to this conference call, in which we will summarize our recent operations, which were presented in our press release released last Friday afternoon.

Also here with me today are Joe McAdams, our Chief Investment Officer and a Director; and Chuck Siegel, our Senior Vice President of Finance and Thad Brown, our Chief Financial Officer.

A comment about our earnings. During the second quarter of 2014, our GAAP net income available to common stockholders was $8.6 million, which is $0.07 per diluted share. The GAAP net income includes and expense of $7.2 million or $0.06 per common share from interest rate swap agreements classified at hedged swaps, approximately $2.6 million $0.02 per share of non-recurring expense for the legal and professional fees for any cost etcetera related to the contested election of Directors at our 2004 Annual Meeting of Stockholders.

Also please note that any economic gain from increases and paid in capital per share as a result of share repurchases are not included in GAAP net income.

Our dividends, for the second quarter we again declared dividend of $0.14 per share based on last Friday's closing price, this dividend currently provides investors 11.0% dividend as of that date.

As outlined in our most recent dividend declaration, press release, our ongoing dividend declaration process is based on earnings from the company's current portfolio of assets and related active hedges that excludes the cost of certain interest swaps for which we have discontinued hedge accounting.

I'll rejoin the presentation in just a moment, but at this time, I would like to introduce Joe McAdams, who will discuss our portfolio results for the quarter.

Joseph E. McAdams

Thank you. This was another good quarter for Anworth's portfolio particularly if we look through the changes to GAAP income that resulted from the change and accounting treatment of some of our interest rate swaps.

Our book value increased in the quarter as our Agency MBS assets outperformed their hedges on a price basis, while premium amortization expense increased on the quarter, our net interest income was unchanged on a per share basis and effectively increased once the implied income of the TBA positions entered into is taken into account. We also continue to see the cost of our repo borrowings fall, as we see increased stability in the funding market.

So turning to the data disclosed in our earnings release, starting with the composition of our portfolio assets, you'll see that on the quarter, our assets decreased as we look to maintain a relatively constant level of leverage relative to total equity, which did decrease during the quarter due to share repurchase activity.

This decrease in assets was largely achieved through not reinvesting the principal repayments received from our Agency MBS during the quarter, while we did sell approximately 200 million worth of 15-year fixed rate MBS during the quarter, we also entered into approximately the same amount of 15-year fixed rate TBA purchases.

We expect the portfolio to benefit from the advantage of the implied financing available through rolling TBA purchases versus our typical repo borrowing. The TBA positions are accounted for as derivatives and as such are not included in the $8.1 billion of Agency MBS shown on the balance sheet, but when the TBAs are taken into account, the fair value of all Agency MBS and TBAs is approximately $8.3 billion at June 30 versus $8.6 billion the prior quarter end.

Despite the shifts within the 15-year fixed rate portion of our portfolio, the percentage of adjustable rate MBS whose interest rates we'll be adjusting within 12 months and we'll continue to do so going forward, increased to 22% on the quarter. Also there is an additional 25% of the portfolio in hybrid arms with between one and three years until their initial rate reset.

When you additionally factor in the total expected principal repayments, over half of our current portfolio would have limited exposure to increases in short term interest rate and that's before taking into account our significant rate swap position, which protects a large portion of our borrowings from rising rates, both in the near term and in the longer term.

Looking at other portfolio characteristics, the average coupon remains 2.65%, the average cost is 103.34%, resulting in a current yield of 2.56% prior to amortization of purchase premiums.

Premium amortization expenses increased to approximately $12 million on the quarter and the portfolio prepayment rate increased to 14 CPR from 12 CPR the previous quarter. While we expect to see some continued increase in the portfolio CPR in the near term due to decrease in mortgage rates by approximately a third of a percentage point year-to-date. We continue to expect the overall prepayment environment to remain relatively benign.

Now turning to our liabilities, I'd first want to highlight that the average interest rate on repo borrowings continues to decrease albeit slightly to an average of 32 basis points at June 30, when taking into account our interest rate swap hedges, our average interest rate now stands at 1.07% with an average adjusted maturity of 889 days or approximately 2.5 years.

Taking into account all swaps, including those for which hedge accounting has been discontinued, the average adjusted rate and maturity are 1.47% and approximately 2.75 years average maturity of our adjusted liabilities.

Given that we estimate our assets portfolio duration at approximately 2.75 years as of June 30, you can see that we have little to no net interest rate gap between our assets and liabilities and effectively a small negative gap when taking the discontinued hedges into account.

Our total position in interest rate swaps has a notional face amount of approximately $5.3 billion, which is 74% of our total outstanding balance of repo borrowings.

On the topic of approximately $1.5 billion notional balance of legacy swaps for which we discontinued hedge accounting, the mark-to-market fair value changes in these swaps is recognized as either derivative income or loss in the current quarter's income statement. So the $2.006 million of net loss on interest rate swaps you see on the income statement reflects the net unrealized mark-to-market loss on these transactions alone.

These are not realized losses and we do expect these unrealized losses to be recovered over the near term as these legacy swaps mature with an average maturity date of September 2015.

The net payments, which accrued on these legacy swaps was $7.2 million for the quarter and as was previously discussed, it's our policy to exclude the cost of these swaps when determining our appropriate dividend distribution level. So if we start with our GAAP net income to common stockholders and take out the net payments and unrealized loss recognized on these legacy swaps you get a number that is just above $0.14 per share for the quarter and that's also again without making any adjustment for the non-recurring expenses relative to the director election that were incurred last quarter.

As you can see from the table, that follows the breakdown of various characteristics of our interest rate swaps, we have over a $1 billion of relatively high cost swaps maturing in the next two years while the swaps that continue to be accounted for as hedges in general are longer term swaps with an average remaining term of approximately 4.5 years at an average fixed rate that we pay of 1.64%.

Our leverage multiple remains at approximately eight times our long-term capital. We continue to remain comfortable with this level of leverage, particularly in light of our portfolio of predominantly adjustable-rate MBS, our very narrow asset liability gap and the generally improving market environment for both our assets and our borrowings.

Our average net interest rate spread decreased four basis points to 58 basis points in total for the quarter. however as net interest does not reflect the effect of the TBA positions, the small decrease would be offset by the increase in implied rolled income from TBAs on the quarter and in addition, I would point out that the average cost of funds of 1.4% includes the cost of all swaps, whether they are currently accounted for as hedges or not and from one of the prior tables, given that the average interest rate adjusted for only our interest rate hedges was 40 basis points lower than that adjusted for all swaps, that net interest rate spread calculation would be higher by that amount if only the current hedges were taken into account. So based on that, I will think of the portfolio spread as approximately 1% on an economic basis.

Lastly I would like to highlight the book value per share stood at $6.26 at June 30, up from $6.10 at March 31 and $5.98 at year end. As was the case in the first quarter, this increase in book value was primarily driven by the outperformance of our assets relative to their hedge liabilities, but book values also increased by our continued active share repurchase program.

Since the company repurchases shares at a discounted book value, the repurchases are accretive and our buyback program added approximately $0.06 to book value per share during the quarter.

And I think this highlights -- the increase in book value highlights that while our current dividend distribution of $0.14, which would equate to a 9% annualized yield on current book value has been greater than the company's reported GAAP earnings, it has been more than supported by the company's economic gains in 2014 to date.

In particular, the declared dividend and additional book value increase resulted in a return of 4.9% on common equity during the quarter, which is 21% annualized rate and for the year-to-date, the return on common equity now stands at 9.5%, which would annualize to almost 20%.

So with that, I would like to turn the call back over to Lloyd for some further discussion of the company's share repurchase program and other developments.

Joseph Lloyd McAdams

Thank you, Joe. As to the share repurchase program, unlike last year's period of significant market volatility and uncertainty, 2014 continues to reflect more stability for the markets in which we invest and borrow.

Given this environment, we've continued repurchase shares that results in increases in our paid and capital per share, which is also the important long term earnings base on which we earn income and eventually from which we pay dividends.

More specifically, during the second quarter we purchased 9.522441, that's 9.5 million shares of our common stock at a weighted average price of $5.30 a share, economic gain paid in capital from this repurchase was $7.6 million or $0.06 a share as Joe just mentioned.

This gain of course is the result of repurchasing the shares for $7.6 million left in our carrying value. Other items, return of our common stock for the year in the quarter, including the reinvestment of our dividend and with shares produced a total return of approximately 6.8% during the quarter ended June 30 and the year-to-date total return as of last Friday's closing price is now 27%.

Finally, I would like to discuss investment opportunities and things that we see changing in the future. During last quarter's earnings call, I described our outlook for changes to U.S. mortgage market. I will not repeat that discussion today, but I am confident that the U.S. residential mortgage market will be changing and will ultimately be quite different from that which we've seen in recent years and may be even recent decades.

As previously reported, the company's Board of Directors, during the first quarter, created a Strategic Review Committee to independently value and identity weak qualified opportunities that would best achieve the Board's broad low risk objective, while also providing our shareholders with attractive income potential. In addition the Board has retained Credit Suisse to assist this Strategic Review Committee in this ongoing process.

Our investment in single family residential rental properties remains quite small and we intend to be very deliberate in our efforts in this regard. We’ve now acquired 79 properties whose cost is approximately $10.6 million. We expect to receive attractive returns on equity that will provide us of what we believe will be a very comfortable margin of safety.

In summary, we continue to execute our strategy and we took significant steps during the second quarter to generate value and increase shareholder returns. We made significant purchases under our ongoing share repurchase program. We maintained our quarterly dividend and we continue our valuation of our expanded investment strategy to position us for future growth.

Our independent strategic review committee is assisting us with the execution of our investment strategy and is exploring long-term value enhancement opportunities for the company. Moving forward, we remain committed to creating long-term value and generating significant returns for our shareholders.

With that, we can turn the call over to Denise, our conference operator and we can begin our Q&A session.

Question-and-Answer Session

Operator

[Operator instructions] Our question is from Daniel Altscher from FBR. Please go ahead sir.

Daniel Altscher - FBR Capital Markets

Hey thanks. I appreciate you taking my call today. I want to start first on the TBAs. I assume the rational for going to the dollar rolls was some attractive or implied financing rates rather than regular repo. So can we maybe just talk some of the rationale there and also maybe what the differentials and returns you think you’re getting from the TBAs versus normal repo.

Joseph E. McAdams

Sure Dan, this is Joe. You’re right. We did have a portion of our 15 year fixed rate position that we sold and added an equivalent amount of TBA securities.

We did move up in coupon somewhat it wasn’t exactly a like-for-like transaction, but the securities we sold were ones that didn’t have significant pay-ups versus TBAs. So they are the ones that we thought would -- going forward would have similar performance to TBA and as you pointed out, the price differential in terms of rolling one month forward provided significantly better implied financing versus repo.

If you look at where the rolls are today for the sorts of coupons we invest in, the implied financing rate is negative 40 to 50 basis points, which is about 75 basis point advantage over where repo financing would be today. That was a little higher in the last quarter. It even got close to negative 100 basis points, a 100 basis point advantage. So that’s the sort of range we’ve been in while -- there obviously has been a lot of discussion about the specialness of the TBA rolls and what happens if they become less special.

They do provide an advantage versus repo financing. I think the way to think about it is the give up is moving out of a specified pool and the gain is to get a positive financing pickup. So from our perspective, the sorts of securities that we own that have relatively low pay-ups to begin with are going to be the most likely candidates.

Daniel Altscher - FBR Capital Markets

And are you putting on any hedges or swaps against those TBAs?

Joseph E. McAdams

Yes in a sense that for the last quarter there weren’t any net additional purchases, right. We were selling specified pools and acquiring TBAs. So we didn’t terminate the hedges that were associated with those assets. We simply moved assets from specified pool to a TBA but obviously if there were to be a net increase in the TBA position, we would continue to hedge that appropriately as we would any asset in our portfolio.

Daniel Altscher - FBR Capital Markets

Okay. And Joe, maybe I misheard you or maybe not, but did you say you moved to maybe a small negative duration gap in the quarter?

Joseph E. McAdams

Mortgage rates were sort of at a relatively low point at June 30. So estimating our duration at June 30 it was a small negative net interest gap. Most of that comes from adding the duration -- the hedging contribution of those relatively short legacy swaps that are not accounted for as hedges anymore, but again -- so most of that negative gap comes on the relative short end of the yield curve.

Daniel Altscher - FBR Capital Markets

Okay. Thanks. I will drop back in the queue.

Operator

And our next question is from Steven Delaney from JMP Securities. Please go ahead sir.

Steven Delaney - JMP Securities

Hello Lloyd and Joe. How are you?

Joseph E. McAdams

Very well. Thanks.

Steven Delaney - JMP Securities

There’s a new line in the income statement obviously associated with the dollar rolls and it’s very clear loss on, excuse me, gain on derivatives-TBAs approximately $1.6 million. Should we assume that that $1.6 million simply reflects the drop income component of the TBA positions or might it also include any unrealized fair value mark associated with those positions? What we're trying to get at here is we have an internal definition of core EPS and we would include the drop, but not necessarily include the -- any unrealized mark-to-market? Thanks.

Joseph E. McAdams

Of course, it's good question Steve. We entered into the TBA positions during the quarter. They weren’t held for the entire quarter, but from a GAAP standpoint, the $1.6 million is the total realized gain from rolling those transactions, which would include both the expected drop you’re going to capture over the long run through rolling and also net of any unrealized gains and losses as the market moves.

So for the second quarter, if we were to calculate or to strip out solely -- and it’s not a gap measure, right, but the expected role income component of our TBAs, it would be approximately $800,000.

But again those TBAs were only on our books so to speak for about half of the quarter. So we would expect more than $800,000 on a pro forma basis going forward given those positions but the $1.6 million on the income statement reflects not only the expected roll income but also since mortgage prices that increase some during the quarter, some additional realized gains.

Steven Delaney - JMP Securities

That’s helpful. Thanks Joe. And can you say whether or not the -- you had a 3% allocation to the TBAs. I guess it works out to $250 million. Can you say whether or not you’ve increased the TBA component of the portfolio in the third quarter?

Joseph E. McAdams

It's still in approximately the same as it was at June 30, but it’s still something we continue to look at and again from the first question, the tradeoff we’re evaluating is the financing advantage of the roll financing, versus repo, versus potential price performance of a specified pool versus the generic TBA deliverable pool that you’re going to be just kind of drive the TBA price performance.

Steven Delaney - JMP Securities

Right. Right. No I think it’s wise you make that -- you point out that there is tradeoff obviously because you’re not controlling necessarily what the specific nature of the pay you get back other than the coupon when you’ re repurchasing the security and then just a final, one final thing, your reported leverage, are you including like the effective leverage embedded in the TBAs and your reported leverage figure or is that just for the repo funded positions.

Joseph E. McAdams

In the earnings release, the calculation that is shown does not include either TBA positions or payables for securities purchase.

Steven Delaney - JMP Securities

Okay.

Joseph E. McAdams

So it will be -- instead of 8.0, it would be more like 8.2 or 8.3 if you include the TBA positions.

Steven Delaney - JMP Securities

Okay. Thanks for the comments.

Operator

Our next question is from Mike Widner from KBW. Please go ahead sir.

Mike Widner - KBW

Good morning guys or afternoon. Let me ask a quick question on the single-family rental piece even though it’s still small. You’ve got those assets broken out now, are we at some point going to see a full PNL for those and costs and so on so forth, so we can just understand how that segment is performing.

Joseph Lloyd McAdams

This is Lloyd. Yes that obviously will happen. When we discussed it with our auditors, they thought it was so insignificant that it wasn’t included this quarter.

Since we are going about it in such a slow method and waiting for the strategic review committee to give their evaluation etcetera, the one thing we can describe is just a general philosophy and I am certainly -- rental houses are bought and sold based on net income and cap rates, typical cap rates are about 6%. Most places we just set our goal that we would to try buy properties on an 8% cap rate, very difficult to do, which was perfectly good thing to do which we are not trying to buy a lot of properties.

We’ve achieved that goal, in fact exceeded it. But we’re also in the business of doing significant renovation on properties and I think when it’s all said and done probably the end of next quarter, everything will be rented hopefully and we will be able to say precisely what the cap rate was.

Mike Widner - KBW

Okay. And so, yeah. I guess it’s just for purposes of understanding whether that deployment of capital is working in terms of accretion and what not that would certainly be helpful.

You made reference to the Credit Suisse examination of opportunities. So that’s an ongoing effort. I guess one thing I was wondering about is you had what you categorized as expenses that you mentioned related to the election of directors and what not. I think it was $2.6 million. Is that included in there or is that a separate thing and how should we think about the cost of that if it’s still an ongoing process?

Joseph Lloyd McAdams

It is ongoing. It’s not expected to go through the end of the year. Some of that cost was in the number you mentioned. A small maybe de minimis amount of the total will be included in the third quarter, but I don’t think it would be material.

Mike Widner - KBW

So I guess what I am hearing you say is the bulk of it was included in that 2.6.

Joseph Lloyd McAdams

Yeah I think bulk is a good enough term.

Mike Widner - KBW

Okay. And I guess at this point, so that sort of implies that you’ve got most of the process finished and I guess I am curious as to whether you have any additional clarity on what that process is going to conclude.

Joseph E. McAdams

It’s fair to say we paid the bulk of it. The process will continue till the end of the year. So…

Mike Widner - KBW

Do you pay it advance?

Joseph E. McAdams

Well not in advance. No. They’ve been working for 2.5 months.

Joseph Lloyd McAdams

And so I would say Board of Directors is -- I am not a member of strategic review committee. So they report to me and tell me what they’re thinking and they have their private meetings with Credit Suisse.

Mike Widner - KBW

All right. It seems like a very strange structure especially given that you are now external, you manage. The Board is -- I guess it’s just all very puzzling that you got the setup it would seem. I guess number one, it would seem that the external manager’s job is to come and recommend things to the Board as opposed to the Board hiring someone else to guide them as to what the stock should -- the company the REIT if you will, should invest in and it would also imply that -- I guess the question that it raises to me is there is certainly plenty of other single-family mortgage REITs out there and if you guys are ever going the scale or not, why not hire a different external manager to run that piece of the business and so on and so forth.

So I guess it’s just a puzzling prices and you guys come back again this quarter and say, “well, we are still waiting for the results” just we don’t hear a whole lot of that from other mortgage REITs, so it’s a little puzzling.

Joseph Lloyd McAdams

All right. I’ll clarify something. Waiting for the results is to having rented all of the properties and when you do major renovation of a property you don’t rent in the first 60 days. So if it implied that just because the property -- all the property is not rented and it is a small activity. I think there are many other activities that will be significantly greater than anything to do with owning and renting residential properties.

It is an insignificant part. I keep trying say it’s significant. It has accomplished things for us that I think that are relatively important as it relates to other businesses the Board may ask us to go into and whether the Board and how the Board has Anworth invest in those properties, so that is why they’re talking with Credit Suisse.

Mike Widner - KBW

Well I guess I don’t want to make it -- so my point was not so much that being anxious to see what the returns were on the single-family rental then as much the process of the Board going around the external manager to pay someone else to advise on what the REIT should be invested and it seems peculiar to me to start with and then to have the default assumption that no matter what they decide it’s going to be that same external manger managing them.

I loop the single-family REITs back in just to say why a specific investment managing the external manager of the REITs given that the single-family rentals given that there’s certainly many other options out there and I guess overall my question was just it seems like we’re pretty far into this process of Anworth re-exploring what exactly it wants to be in terms of a REIT. What asset class does it want to be in and we’re not seeing a whole lot of changes and this is the second quarter where the answer just seems to be that well the Board is going to get back to us when Credit Suisse finishes its study and that just seems like a strange answer at this point given you’re the only one of the twenty something public REITs that seem to be in this particular situation at this time.

Joseph Lloyd McAdams

Well I’ll try to shed some light on what the concern is. The manager has clearly described to the Board of Directors and always described to the Board Of Directors things that we think we should be doing, how we should expand, how the resources of the company should change and develop, then it happened.

So if you imply that it hasn’t happened it has definitely happened. The Board of Directors decided that they wanted to talk more broadly than just a conversation with us. You’ve made your point to the Board of Directors today. You would like them to act quicker.

I am sure they’ll hear and read exactly what you said and they may well respond more quickly than they are responding today. But clearly we’ve told them exactly what we thought is in the best interests of Anworth and all the Anworth stockholders as the external manager. They are evaluating many things beyond just what we’ve recommended.

Mike Widner - KBW

Okay. Well, thank you. That actually helps because the piece that I wasn’t clear on was what you just said that you as the external manager had made your recommendations and now this is the Board’s way of -- it sounds like they’re basically looking for somebody else to either say yes, that makes sense or no we want to go in a different direction.

Joseph Lloyd McAdams

Fair. That’s a fair observation.

Mike Widner - KBW

Okay, well thanks guys. Sorry for the longwinded question but I am just trying to figure out how that process works.

Joseph Lloyd McAdams

Glad you asked the question.

Mike Widner - KBW

Thanks.

Operator

And our next question is from Howard Henick from ScurlyDog Capital. Please go ahead sir.

Howard Henick - ScurlyDog Capital

Thank guys. Thanks Lloyd. Thanks Joe. I have got a couple of questions. You said -- I believe you said went up in coupon when you did the dollar roll and as a person who work in the bond business for 23 years that wouldn’t be dollar roll but a swap because it wouldn’t be a similar asset. Is that that -- am I hearing you incorrectly or am I wrong?

Joseph E. McAdams

I’ll give a little more detail. Maybe I was unclear. We did sell approximately 200 million of securities that we had owned and we’re financing via repo. After we sold those positions we entered into some TBA purchases and have been rolling those TBA purchases since that day.

Howard Henick - ScurlyDog Capital

Okay. That makes more sense.

Joseph E. McAdams

Yeah. The securities that were sold had a lower coupon than the TBAs that were purchased.

Howard Henick - ScurlyDog Capital

Got you. So it was done in two steps, which is how it's has to be done, otherwise it wouldn’t be a dollar roll. You sold let's call it three, 3.5 and already you rolled the 3.5.

Joseph E. McAdams

Correct.

Howard Henick - ScurlyDog Capital

Okay. The next question, you spend about 2.6 million contesting the proxy. That seems really high. The people I spoke to say it normally costs roughly $1 million to contest the proxy, why are your expenses seem to be out of line with other people in similar situations?

Joseph Lloyd McAdams

This is Lloyd. I know what all the expenses were, I know what all the people did, I know what they have responded to and I guess I will just conclude that it appeared that anything that the parties did was reasonable. A couple of parties I negotiated a much lower fee, if we were not successful, but we were successful so they did get paid an additional fee I guess in the form of incentive.

This was my first experience with this activity so -- but I did review the bills carefully and they seem to be consistent with the work that was done.

Howard Henick - ScurlyDog Capital

And is there more, are we expecting further. I was a little confused what you were telling just now to KBW. Is there further expense that will be recognized next quarter or are we pretty much that’s done with for now, that’s already reflected.

Joseph Lloyd McAdams

The expense that I think related to the contested proxy is completed. We are talking about the Board of Directors retaining an advisor for some strategic planning activities. Some of that expense is included in that amount and the balance of the expense will come forward in the next quarter, but as I try to say I did not think it would be anything will be described as material.

Howard Henick - ScurlyDog Capital

Okay. Thank you. A couple more question, you guys bought back in excess of five million shares in April during the height of the proxy when you were trying to defend the stock price. Since then you are buying less than half of that on a monthly basis, a little over two million seems basically at May, June and July. Given the fact that now your spread between your stock price and your tangible book value is the widest in the sector and it was roughly 80% given last dated book. Why are buyer actually wanting down, why aren’t they increasing at least up to the $5 million that we saw in April if not more?

Joseph Lloyd McAdams

The principal reason is that during the contested proxy election, the volume of stock trading was really very high and we were able to purchase that numbers of shares.

As you know, during the month of July the volume is down by more than it's a third of what it was during that period when for whatever reason, lots of people were buying and selling stock and we were able to participate and not come close to the limit. So that would be my principal reason. Clearly I like buying the stock cheaper that higher.

Howard Henick - ScurlyDog Capital

What are your limits? I don't understand that really.

Joseph Lloyd McAdams

Limit, look first there is all the…

Joseph Lloyd McAdams

There is a limit in terms of the most shares you could buy in a day is a percentage of a rolling four or five week average daily trading volume. I think currently that stands at about 190,000 shares a day. So that would be the most you will be allowed to buy on daily basis.

Howard Henick - ScurlyDog Capital

You buy 190,000 shares every day over 20 days, you are close to 6 million shares, 5.8 million shares, that's a hell of a lot more than 2.3 million.

Joseph Lloyd McAdams

Do the math again for us.

Howard Henick - ScurlyDog Capital

I did 190,000 shares on 20 business days a month, I am assuming, that would be -- I am sorry, I did the math wrong, for every 3.8 million shares. Sorry I did 30 days. That's still a lot more than you’ve been buying though. So…

Joseph Lloyd McAdams

Again, just to make sure, our goal -- I don't think we stated our goal is to buy the maximum allowable number of shares every day and it wasn’t that case even during the second quarter as you mentioned when they were nine million shares in total acquired, but we obviously buy more shares all else being equal when the discount is greater and the price is lower.

As we pointed out, there are -- there is a discount rate you would say, you would still look to sell portions of the portfolio to repurchase shares, what happened during the second quarter was that we didn't make any net purchases. We didn't reinvest our pay-downs.

In fact, that was a factor taken into consideration would be the pace of share repurchases versus the overall leverage and liquidity of the company. So these are all factors we take into account, but the amount we could buy during the second quarter, both in terms of the SEC rule as well as the much higher volume that was available in terms of willing sellers that would sell to us on the bid side was significantly higher leading into the proxy contest than it's been after.

Howard Henick - ScurlyDog Capital

I am skeptical, but my last question is and this is really takes the buyback into account as well, why do you guys think you trade at clearly the largest discount at tangible book value versus virtually any other every unit sector. CMO trade -- casted trades over 100 or so intangible book, MSA is in the high 90 like 97, even agencies which has its ups and downs and it had a go out quarters 88%, had around 86% and you guys are close to 80%. Why do you think that is?

Joseph Lloyd McAdams

Well, that is the very purpose of the Board of Directors setting Strategic Review Committee. The focus is on price to book value issue and what strategies will have an effect or could possibly have an effect on that issue. It is also accurate that we stated, we had a hedge position of four something years on our active hedges. I think that might imply that we have more longer hedges than maybe other people in this sector.

It might mean that we buy more insurance in our portfolio. It might be that the market doesn’t reward people who buy insurance on their portfolio. These are lot of.

Howard Henick - ScurlyDog Capital

That's not it, that's clearly not it, but whatever. The one thing I would suggest to the Board or actually this will be my last comment in case they are listening is that you said we are going to continue buying back stock until at tangible book value, price to tangible book value approaches 95% or even 90%, that would be way more helpful when virtually anything else you are doing in this exploratory fashion and I'll stop asking questions and get back in the queue. Thank you.

Joseph Lloyd McAdams

Thank you.

Operator

And our final question is from Art Lipson from Western Investments. Please go ahead sir.

Art Lipson - Western Investments

Thank you. It's more of a suggestion than a question and actually another companies who engage repurchase programs notify the shareholders a day or two after the end of the month as to how much they -- how many shares they repurchased in the month. I think it improves credibility and I might suggest even the Board consider doing that. That's it.

Joseph Lloyd McAdams

Thanks a lot. Appreciate it.

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Joseph Lloyd McAdams

Well, thank you very much. I look forward to having this call again next quarter and we appreciate your interest in Anworth and anytime along the way, if you have additional questions, please don't hesitate to call the company. We do our best to respond to your inquiries. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!