ATLANTA--(BUSINESS WIRE)--Today James Kieffer, Managing Director and Portfolio Manager of the Artisan Partners U.S. Value Team, delivered the following letter to Michael Hough, Chairman and Chief Executive Officer of Hatteras Financial Corp. The letter is similar to a letter issued separately today to Wellington Denahan, CEO of Annaly Capital Management, which also expressed Mr. Kieffer’s views with respect to the implementation of a share repurchase program at that company.
Mr. Michael R. Hough
Chief Executive Officer, Chairman of the Board
Hatteras
Financial Corp.
751 W. Fourth Street, Suite 400
Winston-Salem,
NC 27101
Dear Michael,
Earlier today my firm released to the public a letter I sent to Wellington Denahan, the CEO of Annaly Capital, as well as a second letter addressed to Annaly’s board of directors. The letters discussed the case for share repurchase. The content of my letter to Ms. Denahan is very similar to an email that I sent to you on February 19, 2015. (For your convenience, I have attached a copy of my February 19, 2015 email to you, as well as the two letters to Annaly referenced above.) In the time since my original email communication with you, you have visited my office to discuss the matter and we also had a brief discussion during your first quarter conference call.
Discussions are fine, but I still see no action. In fact, given your comments on the first quarter call, it appears that you have decided that share repurchase is not a high priority. I remain as perplexed as ever concerning your obstinacy over this issue. There is a very clear opportunity to build the per share value of our investment via share repurchase. Failure to act on this opportunity raises some serious concerns regarding corporate governance and whether the compensation scheme that Hatteras employs creates a serious conflict of interest.
As Chairman and CEO of Hatteras, one of your primary jobs is to allocate capital. An important consideration when allocating capital is to ask yourself, “How attractive is share repurchase?” Often times, the answer is murky. But when it is crystal clear, it is time to act. That time is now. The incremental returns that can be achieved via share repurchase are very compelling. I urge you to take action as soon as possible.
Though Hatteras is not a closed-end fund, as a mortgage REIT it is not that much different either. Persistent discounts to net asset value are endemic in the closed-end fund world. Why? Academic studies have argued that the discount exists as a result of shareholder concerns regarding fee structures and conflicts of interest that create a disincentive to repurchase shares. Given your resistance to share repurchase (and that of other peer mortgage REITs), I fear that the mortgage REIT industry may soon find itself being regarded and treated similarly. Perhaps it already is. There is a simple way to counter this perception: take action and repurchase shares.
Let’s recognize that Hatteras has sold at a persistent discount to book value for an extended period of time. Thus far, you have failed to take advantage of this opportunity. I stressed in my previous communication that the market is essentially arguing that Hatteras cannot earn its cost of capital and does not deserve to exist. If you agree with the market’s assessment, the best and honest route is to liquidate the business and return the funds to shareholders. If you disagree, like I do, then share repurchase should be top of mind.
Michael, I know that you have given this issue some thought. That said, I have not heard you articulate a convincing case for passing over share repurchase. I remain available to discuss this issue as I think it is of vital shareholder interest. Because I feel strongly about this topic, I intend to make the contents of this letter public promptly after delivering it to you.
Respectfully submitted,
James C. Kieffer
Managing Director, Portfolio Manager
Artisan
Partners Limited Partnership
| cc: | Benjamin M. Hough | |||
| David W. Berson | ||||
| Ira G. Kawaller | ||||
| Vicki McElreath | ||||
| Jeffrey D. Miller | ||||
| William V. Nutt, Jr. | ||||
| Thomas D. Wren |