nvcsrs
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21102
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
(Exact name of registrant as specified in charter)
THREE WORLD FINANCIAL CENTER
200 VESEY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10281-1010
(Address of principal executive offices) (Zip code)
CLIFFORD E. LAI, PRESIDENT
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
THREE WORLD FINANCIAL CENTER
200 VESEY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10281-1010
(Name and address of agent for service)
Registrants telephone number, including area code: 1 (800) Hyperion
Date of fiscal year end: November 30
Date of reporting period: May 31, 2008
Item 1. Reports to
Shareholders.
|
The
Hyperion
Brookfield
Strategic
Mortgage
Income
Fund, Inc.
|
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio Composition (Unaudited)
The chart that follows shows the allocation of the Funds
holdings by asset category as of May 31, 2008.
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments as of May 31, 2008*
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* |
As a percentage of total investments calculated as total credit
exposure by sector. |
1
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2008
Dear Stockholder:
We welcome this opportunity to provide you with information
about The Hyperion Brookfield Strategic Mortgage Income Fund,
Inc. (the Fund) for the semi-annual period ended
May 31, 2008. The Funds shares are traded on the New
York Stock Exchange (NYSE) under the symbol
HSM.
Description of the Fund
The Fund is a diversified closed-end management investment
company. The Funds primary investment objective is to
provide a high level of current income by investing primarily in
mortgage-backed securities that offer an attractive combination
of credit quality, yield and maturity. The Funds secondary
investment objective is to provide capital appreciation. Under
normal market conditions, the Fund will invest at least 80% of
its total assets in investment-grade mortgage-backed securities
(MBS) including Agency MBS, non-Agency residential
MBS (RMBS) and commercial MBS (CMBS),
and may invest up to 20% of its total assets in U.S. Government
securities, cash or other short-term instruments. The Fund may
invest up to 10% of its total assets in asset-backed securities
(ABS) that are secured by pools of assets that may
not represent interests in real estate.
Portfolio Performance
For the six month period ending May 31, 2008, stockholders
total return was -2.22%, which assumes the reinvestment of
dividends and is exclusive of brokerage commissions. Based on
the NYSE closing price of $9.21 on May 31, 2008, the
Funds shares have a current dividend yield of 11.73%,
which was 8.31% higher than the 3.42% yield of the 5-Year U.S.
Treasury note. This also was competitive with the yields of
other multi-sector bond funds in the Funds category.
The Funds net asset value (NAV) declined
20.79% over the period. The majority of the decline was the
result of unrealized mark-to-market adjustments on the
Funds holdings. These mark-to-market adjustments have been
significant due to a number of unprecedented market factors.
However, we believe that these securities offer future potential
appreciation in excess of their current market values, and it is
our current intention to hold these securities for their
potential value appreciation.
During this period of uncertainty, we have maintained a
significant allocation to high quality Agency MBS and U.S.
Treasury securities. We believe that there are no credit issues
with the Funds Agency MBS. They are backed first by the
credit of the underlying home mortgages and second by the
corporate guarantee of the Federal National Mortgage Association
(Fannie Mae) or the Federal Home Loan Mortgage
Corporation (Freddie Mac). Additionally, we believe
that should Fannie Mae and Freddie Mac encounter any enterprise
level problems, the Agency MBS that the Fund owns will be
further supported by the U.S. Government. At the same time, we
may decide to prudently allocate some funds away from Agency MBS
and U.S. Treasury securities to take advantage of opportunities
in the market.
The Fund utilizes reverse repurchase agreements to finance
purchases on leverage. As of May 31, 2008, the Funds
leverage was 30.6%. The Fund pledges high quality Agency MBS and
U.S. Treasury securities as collateral against the reverse
repurchase agreements. Due to the Funds significant
allocation to Agency MBS and U.S. Treasury securities, there has
been no disruption in the Funds ability to maintain its
leverage.
As of May 31, 2008, the Fund, inclusive of the effect of
leverage, was managed with an average net duration of
4.2 years.
Fixed Income Market Environment
The market turmoil, which began in the summer of 2007, persisted
through the first half of 2008 as the state of the U.S. mortgage
market and the U.S. economy continued to worsen. The early part
of the year continued to bring headlines about asset
liquidations, hedge fund closures, and other forced sales of
securities. Corporate write-downs related to structured finance
investments are now in excess of $400 billion, not only
related to residential mortgage loans, but also related to
commercial real estate assets and corporate debt. We expect
asset write-downs at banks and financial institutions to persist
for some time, but we believe that the majority of the
write-downs are behind us.
2
THE HYPERION BROOKFIELD
STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2008
The market experienced significant liquidity pressure in
mid-March, coinciding with the sale of Bear Stearns to JP Morgan
Chase. In March, broker-dealers and other leveraged entities
were forced to sell securities at deeply discounted prices
across a broad range of sectors, including non-Agency RMBS,
commercial real estate debt, ABS, and corporate debt.
In March, the U.S. Government undertook a number of steps
through the Federal Reserve and the U.S. Treasury to shore up
the financial system. The Federal Reserves measures
included creating of a term auction facility and a primary
broker-dealer credit facility and allowing broker-dealers and
banks to access financing on assets in certain sectors, such as
RMBS, CMBS and ABS. These measures helped to stabilize
valuations in the credit markets and to reduce volatility,
although prices continued to drift lower.
The resolution of the following economic and credit
marketrelated issues is a prerequisite to the future
stabilization of the credit markets:
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The consensus around the forward path for home prices must
stabilize. Current home price forecasts include an additional
home price depreciation of 10% to 15% nationally, in addition to
the 10% home price depreciation already registered. In certain
regions, such as San Diego, Las Vegas and Phoenix, home price
depreciation forecasts are significantly worse than national
averages. |
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|
Economic fundamentals have to stabilize, and there must be a
market consensus around the economic conditions that will
unfold. We need to see stabilization or improvement in the areas
of employment, consumer confidence and inflation. |
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|
Realized losses resulting from the write-downs of assets and
negative earnings impact on the books of financial institutions
have to abate. |
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Liquidations of highly leveraged portfolios, including
structured investment vehicles, asset-backed commercial paper
conduits, and collateralized debt obligations, must come to a
halt. |
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|
Rating agencies need to reach a consensus view on expected
losses, and their ratings on securities must stabilize. The
market must believe the ratings changes are finalized and the
significant and continual downgrading of structured securities,
including RMBS, CMBS and other ABS must end. |
|
|
|
Lending institutions have to get back into the business of
prudent lending. |
Portfolio Strategy
As of May 31, 2008, the Fund had a 54.5% allocation to
Agency MBS and U.S. Treasury securities. Agency MBS and U.S.
Treasury securities are high-quality, albeit lower-yielding,
liquid securities backed by the U.S. Government and its
agencies. Owners of Agency MBS are guaranteed the timely payment
of principal and interest, which gives the securities the
equivalent of an AAA credit rating. Agency MBS securities have
held up well over the last year, in fact, versus Treasuries they
are one of the better performing asset classes. We are targeting
some of these securities for potential sale in a move to
reallocate a portion of these lower-yielding securities in the
Fund into higher-yielding opportunities. Investment
opportunities are clear and plentiful as senior securities that
once were available at 6% yields can now be purchased in the 10%
to 18% yield range. That said, as we target securities for sale
to increase income, we remain somewhat defensive with respect to
purchases, given the outlook for the consumer and the economy.
The Fund had a 26.5% allocation to CMBS. While these holdings
are less liquid than Agency MBS or U.S. Treasury securities, the
overall credit performance of CMBS remains solid, and we would
expect these securities to recover in price as the CMBS market
consensus evolves.
Approximately 16.9% of the Fund was invested in non-Agency RMBS.
This portion of the portfolio does have below-investment-grade
holdings, which have been severely penalized in terms of price
and liquidity. However, many of our holdings in this sector are
from the 2003 to 2005 vintages, representing, along with the
CMBS allocation, the more seasoned component of the portfolio.
As a result, many of these securities have significantly fewer
credit problems than securities from
3
THE HYPERION BROOKFIELD
STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2008
2006 and 2007 vintages. It is our view that current market
values in the non-Agency RMBS sector do not show a difference
across securities based on performance, particularly within the
prime RMBS market.
A large portion of the Fund is invested in high-quality,
highly-rated securities. As of May 31, 2008, approximately
91.6% of the Funds securities were rated investment grade,
while only approximately 8.4% of the Funds securities were
rated below investment grade. Further, the portfolio has only a
0.01% exposure to second lien loans.
With 54.5% of the portfolio allocated to Agency MBS and U.S.
Treasuries, we believe we are in a good position to take
advantage of current market dislocations, and we continue to
look for investment opportunities in the RMBS and CMBS sectors,
particularly among highly-rated distressed securities. Despite
the current market turmoil, there are still well-structured
securities that are defensive in their expected return profile.
We have increased our subprime RMBS allocation from 1% to 4%,
all of which are AAA rated securities to take advantage of the
opportunities in the market. We expect this type of
opportunistic allocation to continue to add long-term value for
stockholders.
Conclusion
We remain committed to the Fund and its stockholders. As always,
we will continue to actively seek investment opportunities in
the market and act on them in a timely fashion in an effort to
achieve the Funds objectives. We welcome your questions
and comments, and encourage you to contact our Stockholder
Services Representatives at 1-800-HYPERION.
We appreciate the opportunity to serve your investment needs.
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CLIFFORD E. LAI |
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President, |
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The Hyperion Brookfield Strategic |
|
Mortgage Income Fund, Inc. |
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Chairman, |
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Hyperion Brookfield Asset Management, Inc. |
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MICHELLE RUSSELL DOWE |
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Portfolio Manager |
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The Hyperion Brookfield Strategic |
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Mortgage Income Fund, Inc. |
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Managing Director, |
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Hyperion Brookfield Asset Management, Inc. |
|
4
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Portfolio of Investments (Unaudited)
May 31, 2008
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|
|
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|
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|
|
|
|
Principal | |
|
|
|
|
Interest | |
|
|
|
Amount | |
|
Value | |
|
|
Rate | |
|
Maturity |
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(000s) | |
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(Note 2) | |
| |
U.S. GOVERNMENT & AGENCY
OBLIGATIONS 81.9% |
U.S. Government Agency Pass-Through
Certificates 61.8% |
|
Federal Home Loan Mortgage Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pool C69047
|
|
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7.00 |
% |
|
06/01/32 |
|
$ |
864 |
^ |
|
$ |
916,132 |
|
|
|
Pool H01847
|
|
|
7.00 |
|
|
09/01/37 |
|
|
2,664 |
|
|
|
2,782,143 |
|
|
|
Pool G01466
|
|
|
9.50 |
|
|
12/01/22 |
|
|
746 |
|
|
|
829,644 |
|
|
|
Pool 555559
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|
|
10.00 |
|
|
03/01/21 |
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|
642 |
|
|
|
715,511 |
|
|
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|
|
|
|
|
|
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|
|
|
|
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|
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5,243,430 |
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|
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|
|
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Federal National Mortgage Association
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pool 694391
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|
|
5.50 |
|
|
03/01/33 |
|
|
3,232 |
^ |
|
|
3,220,809 |
|
|
|
Pool 753914
|
|
|
5.50 |
|
|
12/01/33 |
|
|
5,908 |
@ |
|
|
5,887,933 |
|
|
|
Pool 955347
|
|
|
5.82 |
|
|
10/01/37 |
|
|
1,963 |
|
|
|
2,008,319 |
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|
|
Pool 949293
|
|
|
5.85 |
|
|
10/01/37 |
|
|
1,777 |
|
|
|
1,821,488 |
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|
|
Pool 754355
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|
|
6.00 |
|
|
12/01/33 |
|
|
2,330 |
|
|
|
2,375,694 |
|
|
|
Pool 761836
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|
|
6.00 |
|
|
06/01/33 |
|
|
2,372 |
^ |
|
|
2,422,345 |
|
|
|
Pool 763643
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|
|
6.00 |
|
|
01/01/34 |
|
|
4,994 |
^ |
|
|
5,083,789 |
|
|
|
Pool 255413
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|
|
6.50 |
|
|
10/01/34 |
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|
5,524 |
@ |
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|
5,712,961 |
|
|
|
Pool 795367
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|
|
6.50 |
|
|
09/01/34 |
|
|
1,883 |
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|
|
1,947,119 |
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|
|
Pool 809989
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|
|
6.50 |
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|
03/01/35 |
|
|
2,103 |
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|
|
2,171,344 |
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|
|
Pool 945836
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|
|
6.50 |
|
|
08/01/37 |
|
|
4,719 |
|
|
|
4,840,670 |
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|
|
Pool 948362
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|
|
6.50 |
|
|
08/01/37 |
|
|
4,465 |
^ |
|
|
4,579,943 |
|
|
|
Pool 650131
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|
|
7.00 |
|
|
07/01/32 |
|
|
1,076 |
^ |
|
|
1,140,259 |
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|
|
Pool 887431
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|
|
7.50 |
|
|
08/01/36 |
|
|
326 |
|
|
|
341,491 |
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|
|
Pool 398800
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|
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8.00 |
|
|
06/01/12 |
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|
294 |
|
|
|
307,929 |
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|
|
Pool 827854
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|
|
8.00 |
|
|
10/01/29 |
|
|
1,267 |
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|
|
1,375,141 |
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|
|
Pool 636449
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|
|
8.50 |
|
|
04/01/32 |
|
|
1,241 |
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|
|
1,363,283 |
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|
|
Pool 823757
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|
|
8.50 |
|
|
10/01/29 |
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|
2,413 |
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|
|
2,646,324 |
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|
|
Pool 458132
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|
|
9.49 |
|
|
03/15/31 |
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|
1,054 |
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1,174,563 |
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|
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50,421,404 |
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Total U.S. Government Agency
Pass-Through Certificates |
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(Cost $55,515,418)
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|
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|
|
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55,664,834 |
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|
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|
U.S. Treasury Obligations 20.1% |
|
|
United States Treasury Notes
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|
4.50 |
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|
02/15/16 |
|
|
3,000 |
|
|
|
3,127,968 |
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|
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United States Treasury Notes
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|
|
4.50 |
|
|
05/15/17 |
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|
14,500 |
@ |
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14,998,437 |
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Total U.S. Treasury Obligations |
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|
(Cost $17,150,963)
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|
18,126,405 |
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Total U.S. Government & Agency Obligations |
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(Cost $72,666,381)
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73,791,239 |
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ASSET-BACKED SECURITIES 5.9% |
Housing Related Asset-Backed
Securities 4.5% |
|
Asset Backed Funding Certificates
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Series 2005-AQ1, Class B1*(b)(c)(e)
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5.75/6.25 |
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06/25/35 |
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|
993 |
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|
|
523,818 |
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|
|
Series 2005-AQ1, Class B2*(b)(c)(e)
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|
|
5.75/6.25 |
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|
06/25/35 |
|
|
1,050 |
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|
|
601,545 |
|
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|
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|
|
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1,125,363 |
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Asset Backed Securities Corp. Home Equity
|
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|
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Series 2006-HE3, Class A4(a)(c)
|
|
|
2.56 |
|
|
03/25/36 |
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|
661 |
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|
|
635,640 |
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See notes to financial statements.
5
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
May 31, 2008
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|
Principal | |
|
|
|
|
Interest | |
|
|
|
Amount | |
|
Value | |
|
|
Rate | |
|
Maturity |
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(000s) | |
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(Note 2) | |
| |
ASSET-BACKED SECURITIES (continued) |
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Mid-State Trust
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|
|
|
|
|
|
Series 2004-1, Class M2
|
|
|
8.11 |
% |
|
08/15/37 |
|
$ |
1,129 |
|
|
$ |
1,111,612 |
|
|
Securitized Asset-Backed Receivables LLC Trust
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Series 2005-HE1, Class A1A*(a)(c)(e)
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|
|
2.69 |
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|
10/25/35 |
|
|
1,138 |
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|
1,125,291 |
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Total Housing Related Asset-Backed Securities |
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|
(Cost $4,738,934)
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|
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|
|
|
|
|
|
|
|
|
3,997,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Housing Related Asset-Backed
Securities 1.4% |
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Airplanes Pass Through Trust
|
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|
Series 1R, Class A8 (cost $1,318,433)
|
|
|
2.89 |
|
|
03/15/19 |
|
|
1,436 |
|
|
|
1,292,179 |
|
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|
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|
|
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|
|
|
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Total Asset-Backed Securities |
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|
|
(Cost $6,057,367)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,290,085 |
|
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COMMERCIAL MORTGAGE BACKED
SECURITIES 26.2% |
|
Banc America Commercial Mortgage, Inc.
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|
|
|
|
|
|
Series 2007-2, Class L*(e)
|
|
|
5.37 |
|
|
04/10/49 |
|
|
1,127 |
|
|
|
358,512 |
|
|
|
Series 2006-1, Class J*(e)
|
|
|
5.78 |
|
|
09/10/45 |
|
|
1,000 |
|
|
|
457,064 |
|
|
|
Series 2007-2, Class K*(e)
|
|
|
5.88 |
|
|
04/10/49 |
|
|
3,000 |
|
|
|
1,117,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,932,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear Stearns Commercial Mortgage Securities
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Series 2006-PW13, Class K*(e)
|
|
|
5.26 |
|
|
09/11/41 |
|
|
347 |
|
|
|
129,776 |
|
|
|
Series 2006-PW11, Class H*(e)
|
|
|
5.62 |
|
|
03/11/39 |
|
|
1,100 |
|
|
|
506,692 |
|
|
|
Series 2006-PW13, Class H*(e)
|
|
|
6.23 |
|
|
09/11/41 |
|
|
2,450 |
|
|
|
1,145,022 |
|
|
|
Series 1999-C1, Class D
|
|
|
6.53 |
|
|
02/14/31 |
|
|
2,500 |
|
|
|
2,489,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,271,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD 2006 CD2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-CD2, Class J*(e)
|
|
|
5.47 |
|
|
01/15/46 |
|
|
1,000 |
|
|
|
458,611 |
|
|
Credit Suisse Mortgage Capital Certificates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-C4, Class L*(e)
|
|
|
5.15 |
|
|
09/15/39 |
|
|
513 |
|
|
|
211,210 |
|
|
|
Series 2006-C4, Class M*(e)
|
|
|
5.15 |
|
|
09/15/39 |
|
|
565 |
|
|
|
209,357 |
|
|
|
Series 2006-C1, Class K*(e)
|
|
|
5.55 |
|
|
02/15/39 |
|
|
2,358 |
|
|
|
1,098,696 |
|
|
|
Series 2006-C4, Class K*(e)
|
|
|
6.10 |
|
|
09/15/39 |
|
|
2,970 |
|
|
|
1,382,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,902,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GE Capital Commercial Mortgage Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2002-2A, Class G*(e)
|
|
|
6.04 |
|
|
08/11/36 |
|
|
3,000 |
|
|
|
2,898,246 |
|
|
|
Series 2002-2A, Class H*(e)
|
|
|
6.31 |
|
|
08/11/36 |
|
|
2,000 |
|
|
|
1,955,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,853,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAC Commercial Mortgage Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-C1, Class G*(e)
|
|
|
5.61 |
|
|
01/24/45 |
|
|
2,500 |
|
|
|
1,467,133 |
|
|
JP Morgan Chase Commercial Mortgage Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2003-LN1, Class G*(e)
|
|
|
5.44 |
|
|
10/15/37 |
|
|
1,600 |
|
|
|
1,377,478 |
|
|
|
Series 2006-CB14, Class H*(e)
|
|
|
5.72 |
|
|
12/12/44 |
|
|
1,211 |
|
|
|
565,106 |
|
|
|
Series 2007-LD11, Class K*(e)
|
|
|
5.82 |
|
|
06/15/49 |
|
|
1,879 |
|
|
|
700,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,643,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
6
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal | |
|
|
|
|
Interest | |
|
|
|
Amount | |
|
Value | |
|
|
Rate | |
|
Maturity |
|
(000s) | |
|
(Note 2) | |
| |
COMMERCIAL MORTGAGE BACKED SECURITIES (continued) |
|
JP Morgan Mortgage Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2007-CB18, Class G*(e)
|
|
|
5.92 |
% |
|
06/12/47 |
|
$ |
600 |
|
|
$ |
264,174 |
|
|
Morgan Stanley Capital I
Series 2004-HQ4, Class G*(e)
|
|
|
5.35 |
|
|
04/14/40 |
|
|
1,000 |
|
|
|
817,596 |
|
|
UBS 400 Atlantic Street Mortgage Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2002-C1A, Class B3*(e)
|
|
|
7.19 |
|
|
01/11/22 |
|
|
2,000 |
|
|
|
2,156,250 |
|
|
Wachovia Bank Commercial Mortgage Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2007-C31, Class L*(e)
|
|
|
5.13 |
|
|
04/15/47 |
|
|
1,788 |
|
|
|
538,408 |
|
|
|
Series 2005-C16, Class H*(e)
|
|
|
5.36 |
|
|
10/15/41 |
|
|
2,000 |
|
|
|
1,258,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,797,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Mortgage Backed Securities |
|
|
|
(Cost $36,603,271)
|
|
|
|
|
|
|
|
|
|
|
|
|
23,563,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-AGENCY RESIDENTIAL MORTGAGE BACKED
SECURITIES 22.2% |
Subordinated Collateralized Mortgage
Obligations 22.2% |
|
Banc of America Funding Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-2, Class B4
|
|
|
5.66 |
|
|
04/25/35 |
|
|
842 |
|
|
|
212,185 |
|
|
|
Series 2005-2, Class B5
|
|
|
5.66 |
|
|
04/25/35 |
|
|
674 |
|
|
|
110,982 |
|
|
|
Series 2005-2, Class B6
|
|
|
5.66 |
|
|
04/25/35 |
|
|
507 |
|
|
|
37,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Alternative Loan Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2004-3, Class 30B4
|
|
|
5.50 |
|
|
04/25/34 |
|
|
965 |
|
|
|
233,921 |
|
|
|
Series 2004-3, Class 30B5
|
|
|
5.50 |
|
|
04/25/34 |
|
|
666 |
|
|
|
46,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Mortgage Securities, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2004-A, Class B4
|
|
|
4.02 |
|
|
02/25/34 |
|
|
1,529 |
|
|
|
1,018,758 |
|
|
|
Series 2003-10, Class 1B4
|
|
|
5.50 |
|
|
01/25/34 |
|
|
535 |
|
|
|
322,414 |
|
|
|
Series 2002-10, Class 1B3
|
|
|
6.00 |
|
|
11/25/32 |
|
|
1,366 |
|
|
|
1,271,759 |
|
|
|
Series 2007-4, Class B3
|
|
|
6.19 |
|
|
12/28/37 |
|
|
248 |
|
|
|
87,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cendant Mortgage Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2002-4, Class B1
|
|
|
6.50 |
|
|
07/25/32 |
|
|
2,347 |
|
|
|
2,221,120 |
|
|
|
Series 2002-4, Class B2
|
|
|
6.50 |
|
|
07/25/32 |
|
|
939 |
|
|
|
888,448 |
|
|
|
Series 2002-4, Class B3
|
|
|
6.50 |
|
|
07/25/32 |
|
|
548 |
|
|
|
501,336 |
|
|
|
Series 2002-4, Class B4
|
|
|
6.50 |
|
|
07/25/32 |
|
|
313 |
|
|
|
271,329 |
|
|
|
Series 2002-4, Class B5
|
|
|
6.50 |
|
|
07/25/32 |
|
|
235 |
|
|
|
178,467 |
|
|
|
Series 2002-4, Class B6*(e)
|
|
|
6.50 |
|
|
07/25/32 |
|
|
313 |
|
|
|
179,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countrywide Home Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2003-J13, Class B3
|
|
|
5.22 |
|
|
01/25/34 |
|
|
350 |
|
|
|
200,553 |
|
|
|
Series 2003-J13, Class B5
|
|
|
5.22 |
|
|
01/25/34 |
|
|
263 |
|
|
|
65,857 |
|
|
|
Series 2007-11, Class B2
|
|
|
6.00 |
|
|
08/25/37 |
|
|
497 |
|
|
|
265,162 |
|
|
|
Series 2007-17, Class B1
|
|
|
6.24 |
|
|
10/25/37 |
|
|
570 |
|
|
|
364,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fieldstone Mortgage Investment Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-3, Class 2A3(a)(c)
|
|
|
2.55 |
|
|
11/25/36 |
|
|
1,105 |
|
|
|
733,940 |
|
See notes to financial statements.
7
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal | |
|
|
|
|
Interest | |
|
|
|
Amount | |
|
Value | |
|
|
Rate | |
|
Maturity |
|
(000s) | |
|
(Note 2) | |
| |
NON-AGENCY RESIDENTIAL MORTGAGE BACKED
SECURITIES (continued) |
|
First Horizon Alternative Mortgage Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-AA6, Class B4
|
|
|
5.42 |
% |
|
08/25/35 |
|
$ |
840 |
|
|
$ |
62,973 |
|
|
|
Series 2005-AA6, Class B5
|
|
|
5.42 |
|
|
08/25/35 |
|
|
790 |
|
|
|
39,512 |
|
|
|
Series 2005-AA6, Class B6
|
|
|
5.42 |
|
|
08/25/35 |
|
|
400 |
|
|
|
10,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon Mortgage Pass-Through Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-4, Class B4*(e)
|
|
|
5.45 |
|
|
07/25/35 |
|
|
407 |
|
|
|
177,935 |
|
|
|
Series 2005-5, Class B4*(e)
|
|
|
5.46 |
|
|
10/25/35 |
|
|
700 |
|
|
|
105,035 |
|
|
|
Series 2005-5, Class B5*(e)
|
|
|
5.46 |
|
|
10/25/35 |
|
|
525 |
|
|
|
52,494 |
|
|
|
Series 2005-5, Class B6*(e)
|
|
|
5.46 |
|
|
10/25/35 |
|
|
526 |
|
|
|
26,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harborview Mortgage Loan Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-9, Class B11*(a)(e)
|
|
|
4.23 |
|
|
06/20/35 |
|
|
496 |
|
|
|
223,037 |
|
|
|
Series 2005-1, Class B4*(a)(e)
|
|
|
4.25 |
|
|
03/19/35 |
|
|
472 |
|
|
|
218,125 |
|
|
|
Series 2005-1, Class B5*(a)(e)
|
|
|
4.25 |
|
|
03/19/35 |
|
|
685 |
|
|
|
47,963 |
|
|
|
Series 2005-1, Class B6*(a)(e)
|
|
|
4.25 |
|
|
03/19/35 |
|
|
490 |
|
|
|
14,690 |
|
|
|
Series 2005-2, Class B4*(a)(e)
|
|
|
4.55 |
|
|
05/19/35 |
|
|
1,222 |
|
|
|
109,984 |
|
|
|
Series 2005-14, Class B4*(a)(e)
|
|
|
5.67 |
|
|
12/19/35 |
|
|
392 |
|
|
|
39,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
652,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IXIS Real Estate Capital Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-HE3, Class A1(a)(c)
|
|
|
2.44 |
|
|
01/25/37 |
|
|
196 |
|
|
|
192,297 |
|
|
JP Morgan Mortgage Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2003-A1, Class B4
|
|
|
4.47 |
|
|
10/25/33 |
|
|
530 |
|
|
|
124,213 |
|
|
|
Series 2006-A6, Class B5
|
|
|
5.99 |
|
|
10/25/36 |
|
|
912 |
|
|
|
100,373 |
|
|
|
Series 2006-A6, Class B6
|
|
|
5.99 |
|
|
10/25/36 |
|
|
861 |
|
|
|
86,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley Capital I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2006-WMC2, Class A2C(a)(c)
|
|
|
2.54 |
|
|
07/25/36 |
|
|
2,010 |
|
|
|
1,372,492 |
|
|
|
Series 2006-HE1, Class A3(a)(c)
|
|
|
2.57 |
|
|
01/25/36 |
|
|
1,425 |
|
|
|
1,374,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,747,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAAC Series
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-SP1, Class M3
|
|
|
5.51 |
|
|
09/25/34 |
|
|
308 |
|
|
|
170,017 |
|
|
Residential Funding Mortgage Securities I, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2004-S1, Class B2
|
|
|
5.25 |
|
|
02/25/34 |
|
|
433 |
|
|
|
196,202 |
|
|
|
Series 2003-S7, Class B3
|
|
|
5.50 |
|
|
05/25/33 |
|
|
504 |
|
|
|
176,516 |
|
|
|
Series 2003-S7, Class B2
|
|
|
5.50 |
|
|
05/25/33 |
|
|
306 |
|
|
|
167,667 |
|
|
|
Series 2006-SA1, Class B2*(e)
|
|
|
5.66 |
|
|
02/25/36 |
|
|
822 |
|
|
|
32,876 |
|
|
|
Series 2006-SA1, Class B3*(e)
|
|
|
5.66 |
|
|
02/25/36 |
|
|
211 |
|
|
|
3,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resix Finance Limited Credit-Linked Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-C, Class B7*(e)
|
|
|
5.69 |
|
|
09/10/37 |
|
|
1,922 |
|
|
|
991,490 |
|
|
|
Series 2004-C, Class B7*(e)
|
|
|
6.09 |
|
|
09/10/36 |
|
|
945 |
|
|
|
662,546 |
|
|
|
Series 2006-C, Class B9*(e)
|
|
|
6.66 |
|
|
07/15/38 |
|
|
1,495 |
|
|
|
458,232 |
|
|
|
Series 2004-B, Class B8*(e)
|
|
|
7.34 |
|
|
02/10/36 |
|
|
762 |
|
|
|
497,263 |
|
|
|
Series 2003-CB1, Class B8*(e)
|
|
|
9.34 |
|
|
06/10/35 |
|
|
908 |
|
|
|
804,464 |
|
|
|
Series 2004-B, Class B9*(e)
|
|
|
10.84 |
|
|
02/10/36 |
|
|
1,168 |
|
|
|
854,694 |
|
See notes to financial statements.
8
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal | |
|
|
|
|
Interest | |
|
|
|
Amount | |
|
Value | |
|
|
Rate | |
|
Maturity |
|
(000s) | |
|
(Note 2) | |
| |
NON-AGENCY RESIDENTIAL MORTGAGE BACKED
SECURITIES (continued) |
|
|
Series 2004-A, Class B10*(e)
|
|
|
14.09 |
% |
|
02/10/36 |
|
$ |
467 |
|
|
$ |
397,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,666,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Asset Securities Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-6, Class B5
|
|
|
5.34 |
|
|
05/25/35 |
|
|
479 |
|
|
|
57,497 |
|
|
|
Series 2005-6, Class B6
|
|
|
5.34 |
|
|
05/25/35 |
|
|
479 |
|
|
|
28,748 |
|
|
|
Series 2005-6, Class B7
|
|
|
5.34 |
|
|
05/25/35 |
|
|
304 |
|
|
|
12,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Mutual Mortgage Securities Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2005-AR2, Class B9(a)
|
|
|
3.59 |
|
|
01/25/45 |
|
|
565 |
|
|
|
112,977 |
|
|
|
Series 2005-AR2, Class B10*(a)(e)
|
|
|
3.59 |
|
|
01/25/45 |
|
|
1,351 |
|
|
|
390,300 |
|
|
|
Series 2002-AR12, Class B4
|
|
|
7.20 |
|
|
10/25/32 |
|
|
79 |
|
|
|
71,877 |
|
|
|
Series 2002-AR12, Class B5
|
|
|
7.20 |
|
|
10/25/32 |
|
|
59 |
|
|
|
53,531 |
|
|
|
Series 2002-AR12, Class B6
|
|
|
7.20 |
|
|
10/25/32 |
|
|
98 |
|
|
|
9,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
638,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Mortgage Backed Securities Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2002-10, Class B5
|
|
|
6.00 |
|
|
06/25/32 |
|
|
334 |
|
|
|
305,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subordinated Collateralized
Mortgage Obligations |
|
|
|
(Cost $35,853,734)
|
|
|
|
|
|
|
|
|
|
|
|
|
20,046,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Agency Residential Mortgage
Backed Securities |
|
|
|
(Cost $35,853,734)
|
|
|
|
|
|
|
|
|
|
|
|
|
20,046,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHORT TERM INVESTMENTS 5.7% |
|
Federal Home Loan Bank Discount Notes(d)
|
|
|
2.05 |
|
|
06/09/08 |
|
|
5,000 |
|
|
|
4,997,722 |
|
|
United States Treasury Bill(d)
|
|
|
3.20 |
|
|
06/19/08 |
|
|
100 |
# |
|
|
99,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short Term Investments |
|
|
|
(Cost $5,097,562)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,097,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments 141.9% |
|
|
|
(Cost $156,278,315)
|
|
|
|
|
|
|
|
|
|
|
|
|
127,789,535 |
|
Liabilities in Excess of Other Assets (41.9)%
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,736,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS 100.0%
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,053,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
@
|
|
|
|
Portion or entire principal amount delivered as collateral for
reverse repurchase agreements. (Note 6) |
|
|
|
|
Variable Rate Security: Interest rate is the rate in effect as
of May 31, 2008. |
^
|
|
|
|
Portion or entire principal delivered as collateral for swap
contracts (Note 8) |
#
|
|
|
|
Portion or entire principal delivered as collateral for futures
contracts (Note 8) |
*
|
|
|
|
Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may only be resold in
transactions exempt from registration, normally to qualified
institutional buyers. |
(a)
|
|
|
|
Security is a step up bond where coupon increases or
steps up at a predetermined date. At that date these coupons
increase to LIBOR plus a predetermined margin. |
(b)
|
|
|
|
Security is a step up bond where coupon increases or
steps up at a predetermined date. Rates shown are current coupon
and next coupon rate when security steps up. |
(c)
|
|
|
|
Investment in sub-prime security. As of May 31, 2008 the
total value of all such investments was $6,559,765 or 7.3% of
net assets. |
(d)
|
|
|
|
Zero Coupon Note Interest rate represents current
yield to maturity. |
(e)
|
|
|
|
Private Placement. |
See notes to financial statements.
9
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Statement of Assets and Liabilities
(Unaudited)
May 31, 2008
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments in securities, at market (cost $156,278,315)
(Note 2)
|
|
$ |
127,789,535 |
|
|
Cash
|
|
|
33,487 |
|
|
Receivable for investments sold
|
|
|
184,978 |
|
|
Principal paydown receivable
|
|
|
18,821 |
|
|
Interest receivable
|
|
|
753,386 |
|
|
Receivable for variation margin
|
|
|
1,656 |
|
|
Unrealized appreciation on swaps contracts (Note 8)
|
|
|
552,742 |
|
|
Prepaid expenses
|
|
|
92,653 |
|
|
|
|
|
|
|
Total assets
|
|
|
129,427,258 |
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Reverse repurchase agreements (Note 6)
|
|
|
21,574,500 |
|
|
Interest payable for reverse repurchase agreements (Note 6)
|
|
|
16,172 |
|
|
Unrealized depreciation on swaps contracts (Note 8)
|
|
|
17,664,688 |
|
|
Investment advisory fee payable (Note 4)
|
|
|
50,316 |
|
|
Administration fee payable (Note 4)
|
|
|
16,819 |
|
|
Accrued expenses
|
|
|
51,726 |
|
|
|
|
|
|
|
Total liabilities
|
|
|
39,374,221 |
|
|
|
|
|
Net Assets (equivalent to $8.88 per share based on
10,135,477 shares issued and outstanding)
|
|
$ |
90,053,037 |
|
|
|
|
|
Composition of Net Assets:
|
|
|
|
|
|
Capital stock, at par value ($0.01, 50,000,000 shares
authorized) (Note 7)
|
|
$ |
101,355 |
|
|
Additional paid-in capital (Note 7)
|
|
|
144,065,021 |
|
|
Distributions in excess of net investment income
|
|
|
(608,295 |
) |
|
Accumulated net realized loss
|
|
|
(7,790,049 |
) |
|
Net unrealized depreciation on investments, swap contracts and
futures
|
|
|
(45,714,995 |
) |
|
|
|
|
|
Net assets applicable to capital stock outstanding
|
|
$ |
90,053,037 |
|
|
|
|
|
See notes to financial statements.
10
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Statement of Operations (Unaudited)
For The Six Months Ended May 31, 2008
|
|
|
|
|
|
|
|
Investment Income (Note 2):
|
|
|
|
|
|
Interest
|
|
$ |
5,136,560 |
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment advisory fee (Note 4)
|
|
|
326,683 |
|
|
Administration fees (Note 4)
|
|
|
104,518 |
|
|
Insurance
|
|
|
66,828 |
|
|
Directors fees
|
|
|
42,090 |
|
|
Custodian
|
|
|
38,282 |
|
|
Audit and tax services
|
|
|
31,000 |
|
|
Legal
|
|
|
21,941 |
|
|
Reports to stockholders
|
|
|
20,869 |
|
|
Transfer agency
|
|
|
15,348 |
|
|
Registration fees
|
|
|
13,751 |
|
|
Miscellaneous
|
|
|
46,006 |
|
|
|
|
|
|
|
Total operating expenses
|
|
|
727,316 |
|
|
|
|
Interest expense on reverse repurchase agreements (Note 6)
|
|
|
455,637 |
|
|
|
|
|
|
|
Total expenses
|
|
|
1,182,953 |
|
|
|
|
|
|
Net investment income
|
|
|
3,953,607 |
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments
(Notes 2 and 8):
|
|
|
|
|
Net realized gain/(loss) on:
|
|
|
|
|
|
Investment transactions
|
|
|
(1,517,067 |
) |
|
Swap contracts
|
|
|
1,015,271 |
|
|
Future transactions
|
|
|
234,578 |
|
|
|
|
|
Net realized loss on investment transactions, swap contracts and
futures transactions
|
|
|
(267,218 |
) |
|
|
|
|
Net change in unrealized appreciation/depreciation on:
|
|
|
|
|
|
Investments
|
|
|
(14,849,356 |
) |
|
Swap contracts
|
|
|
(6,805,922 |
) |
|
Futures
|
|
|
(149,551 |
) |
|
|
|
|
Net change in unrealized depreciation on investments, swap
contracts and futures
|
|
|
(21,804,829 |
) |
|
|
|
|
Net realized and unrealized loss on investments, swap contracts
and futures
|
|
|
(22,072,047 |
) |
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$ |
(18,118,440 |
) |
|
|
|
|
See notes to financial statements.
11
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months | |
|
|
|
|
Ended | |
|
For the Year | |
|
|
May 31, 2008 | |
|
Ended | |
|
|
(Unaudited) | |
|
November 30, 2007 | |
|
|
Increase (Decrease) in Net Assets Resulting from
Operations: |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
3,953,607 |
|
|
$ |
9,872,488 |
|
|
Net realized loss on investment transactions, swap
contracts, and futures transactions
|
|
|
(267,218 |
) |
|
|
(3,165,441 |
) |
|
Net change in unrealized depreciation on investments, swap
contracts and futures
|
|
|
(21,804,829 |
) |
|
|
(25,520,392 |
) |
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(18,118,440 |
) |
|
|
(18,813,345 |
) |
|
|
|
|
|
|
|
Dividends to Stockholders (Note 2):
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(5,472,477 |
) |
|
|
(10,955,634 |
) |
Capital Stock Transactions (Note 7):
|
|
|
|
|
|
|
|
|
|
Net asset value of shares issued through dividend reinvestment
(1,371 and 0 shares, respectively)
|
|
|
12,212 |
|
|
|
|
|
|
Cost of shares repurchased (0 and 10,000 shares, respectively)
|
|
|
|
|
|
|
(97,478 |
) |
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from capital stock
transactions
|
|
|
12,212 |
|
|
|
(97,478 |
) |
|
|
|
|
|
|
|
|
|
Total decrease in net assets
|
|
|
(23,578,705 |
) |
|
|
(29,866,457 |
) |
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
113,631,742 |
|
|
|
143,498,199 |
|
|
|
|
|
|
|
|
|
End of period (including undistributed (distributions in excess)
of net income of ($1,562,303) and $522,177, respectively)
|
|
$ |
90,053,037 |
|
|
$ |
113,631,742 |
|
|
|
|
|
|
|
|
See notes to financial statements.
12
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Statement of Cash Flows (Unaudited)
For the Six Months Ended May 31, 2008
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
Cash flows provided by (used for) operating activities:
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$ |
(18,118,440 |
) |
|
Adjustments to reconcile net decrease in net assets from
operations to net cash provided by operating activities:
|
|
|
|
|
|
|
Purchases of long-term portfolio investments
|
|
|
(6,332,146 |
) |
|
|
Proceeds from disposition of long-term portfolio investments,
principal paydowns, net of losses
|
|
|
14,320,501 |
|
|
|
Purchases of short-term portfolio investments, net
|
|
|
(4,970,876 |
) |
|
|
Decrease in net swap premiums paid
|
|
|
165,625 |
|
|
|
Decrease in interest receivable
|
|
|
140,862 |
|
|
|
Increase in receivable for investments sold
|
|
|
(184,978 |
) |
|
|
Decrease in principal paydown receivable
|
|
|
2,498,095 |
|
|
|
Increase in prepaid expenses
|
|
|
(89,411 |
) |
|
|
Decrease in variation margin receivable
|
|
|
4,735 |
|
|
|
Decrease in interest payable for reverse repurchase agreements
|
|
|
(38,800 |
) |
|
|
Decrease in investment advisory fee payable
|
|
|
(12,807 |
) |
|
|
Decrease in administration fee payable
|
|
|
(3,273 |
) |
|
|
Increase in accrued expenses
|
|
|
21,653 |
|
|
|
Net amortization and paydown gain on investments
|
|
|
274,215 |
|
|
|
Unrealized depreciation on investments
|
|
|
14,849,356 |
|
|
|
Unrealized depreciation on swaps
|
|
|
6,805,922 |
|
|
|
Net realized loss on investment transactions
|
|
|
1,517,067 |
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,847,300 |
|
|
|
|
|
Cash flows used for financing activities:
|
|
|
|
|
|
Payment on shares redeemed
|
|
|
(97,478 |
) |
|
Net cash used for reverse repurchase agreements
|
|
|
(8,734,500 |
) |
|
Dividends paid to stockholders, net of reinvestments
|
|
|
(5,460,265 |
) |
|
|
|
|
|
Net cash used for financing activities
|
|
|
(14,292,243 |
) |
|
|
|
|
Net decrease in cash
|
|
|
(3,444,943 |
) |
Cash at beginning of period
|
|
|
3,478,430 |
|
|
|
|
|
Cash at end of period
|
|
$ |
33,487 |
|
|
|
|
|
Interest payments for the six months ended May 31, 2008,
totaled $494,437.
|
|
|
|
|
Cash at beginning of period includes $1,670,000 received for
margin requirements on swap contracts.
|
|
|
|
|
Cash at the end of period includes $440,000 held by brokers for
margin requirements on swap contracts.
|
|
|
|
|
Noncash financing activities includes reinvestment of dividends
of $12,212.
|
|
|
|
|
See notes to financial statements.
13
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
|
|
|
|
|
|
|
|
|
|
Six Months | |
|
|
|
|
Ended | |
|
For the Year Ended November 30, | |
|
|
May 31, 2008 | |
|
| |
|
|
(Unaudited) | |
|
2007 | |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
Per Share Operating Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$ |
11.21 |
|
|
$ |
14.15 |
|
|
$ |
14.05 |
|
|
$ |
14.56 |
|
|
$ |
14.41 |
|
|
$ |
14.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.39 |
|
|
|
0.97 |
|
|
|
0.92 |
|
|
|
1.16 |
|
|
|
1.20 |
|
|
|
1.22 |
|
Net realized and unrealized gain (loss) on investments,
short sales, futures transactions and swap contracts
|
|
|
(2.18 |
) |
|
|
(2.83 |
) |
|
|
0.26 |
|
|
|
(0.46 |
) |
|
|
0.25 |
|
|
|
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net asset value resulting from
operations
|
|
|
(1.79 |
) |
|
|
(1.86 |
) |
|
|
1.18 |
|
|
|
0.70 |
|
|
|
1.45 |
|
|
|
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of shares repurchased
|
|
|
|
|
|
|
0.00 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.54 |
) |
|
|
(1.08 |
) |
|
|
(1.08 |
) |
|
|
(1.21 |
) |
|
|
(1.30 |
) |
|
|
(1.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$ |
8.88 |
|
|
$ |
11.21 |
|
|
$ |
14.15 |
|
|
$ |
14.05 |
|
|
$ |
14.56 |
|
|
$ |
14.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$ |
9.21 |
|
|
$ |
9.98 |
|
|
$ |
14.08 |
|
|
$ |
12.70 |
|
|
$ |
14.61 |
|
|
$ |
14.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Return+
|
|
|
(2.22 |
)%(1) |
|
|
(22.54 |
)% |
|
|
20.36% |
|
|
|
(5.20 |
)% |
|
|
9.10% |
|
|
|
17.55% |
|
|
Ratios to Average Net Assets/ Supplementary Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000s)
|
|
$ |
90,053 |
|
|
$ |
113,632 |
|
|
$ |
143,498 |
|
|
$ |
142,531 |
|
|
$ |
147,645 |
|
|
$ |
146,180 |
|
Operating expenses
|
|
|
1.45%(2 |
) |
|
|
1.23% |
|
|
|
1.18% |
|
|
|
1.24% |
|
|
|
1.25% |
|
|
|
1.28% |
|
Interest expense
|
|
|
0.91%(2 |
) |
|
|
0.94% |
|
|
|
1.87% |
|
|
|
1.45% |
|
|
|
0.58% |
|
|
|
0.51% |
|
|
Total expenses
|
|
|
2.36%(2 |
) |
|
|
2.17% |
|
|
|
3.05% |
|
|
|
2.69% |
|
|
|
1.83% |
|
|
|
1.79% |
|
Net investment income
|
|
|
7.87%(2 |
) |
|
|
7.41% |
|
|
|
6.60% |
|
|
|
8.05% |
|
|
|
8.23% |
|
|
|
8.54% |
|
Portfolio turnover rate
|
|
|
5%(1 |
) |
|
|
101% |
|
|
|
93% |
|
|
|
46% |
|
|
|
65% |
|
|
|
78% |
|
|
|
+ |
Total investment return is computed based upon the New York
Stock Exchange market price of the Funds shares and
excludes the effect of brokerage commissions. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Funds dividend reinvestment plan. |
|
* |
Rounds to less than $.01 |
|
(1) |
Not Annualized |
|
(2) |
Annualized |
See notes to financial statements.
14
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
1. The Fund
The Hyperion Brookfield Strategic Mortgage Income Fund, Inc.
(the Fund), which was incorporated under the laws of
the State of Maryland on May 17, 2002, is registered under
the Investment Company Act of 1940 (the 1940 Act) as
a diversified, closed-end management investment company.
The Funds investment objective is to provide a high level
of current income by investing primarily in mortgage-backed
securities. No assurance can be given that the Funds
investment objective will be achieved.
2. Significant Accounting
Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Valuation of Investments: Where market quotations are
readily available, securities held by the Fund are valued based
upon the current bid price, except preferred stocks, which are
valued based upon the closing price. Securities may be valued by
independent pricing services that have been approved by the
Board of Directors. The prices provided by a pricing service
take into account broker dealer market price quotations for
institutional size trading in similar groups of securities,
security quality, maturity, coupon and other security
characteristics as well as any developments related to the
specific securities. The Fund values mortgage-backed securities
(MBS) and other debt securities for which market
quotations are not readily available at their fair value as
determined in good faith, utilizing procedures approved by the
Board of Directors of the Fund, on the basis of information
provided by dealers in such securities. Some of the general
factors which may be considered in determining fair value
include the fundamental analytic data relating to the investment
and an evaluation of the forces which influence the market in
which these securities are purchased and sold. Determination of
fair value involves subjective judgment, as the actual market
value of a particular security can be established only by
negotiations between the parties in a sales transaction. Debt
securities having a remaining maturity of sixty days or less
when purchased and debt securities originally purchased with
maturities in excess of sixty days but which currently have
maturities of sixty days or less are valued at amortized cost.
The ability of issuers of debt securities held by the Fund to
meet their obligations may be affected by economic developments
in a specific industry or region. The values of MBS can be
significantly affected by changes in interest rates or in the
financial condition of an issuer or market.
FAS 157: The Fund adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157), effective
for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. In accordance with FAS 157, fair value is defined as
the price that the Fund would receive upon selling an investment
in an orderly transaction to an independent buyer in the
principal or most advantageous market for the investment.
Various inputs are used in determining the value of the
Funds investments. FAS 157 established a three-tier
hierarchy for measuring fair value and enhancing disclosure.
This three-tier hierarchy of inputs is summarized in the three
broad levels listed below:
|
|
|
|
|
Level 1 quoted prices in active markets for
identical securities |
|
|
|
Level 2 other significant observable inputs
(including quoted prices for similar securities, interest rates,
prepayment speeds, credit risk, etc.) |
|
|
|
Level 3 significant unobservable inputs
(including the Funds own assumptions in determining the
fair value of investments) |
The inputs or methodology used for valuing securities are not
necessarily an indication of the risk associated with investing
in those securities.
15
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
The following is a summary of the inputs used, as of
May 31, 2008, in valuing the Funds assets carried at
fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Investments in | |
|
Other Financial | |
Valuation Inputs |
|
Securities | |
|
Instruments* | |
|
|
| |
|
| |
Level 1 Quoted Prices
|
|
$ |
0 |
|
|
$ |
(114,269 |
) |
Level 2 Other Significant Observable Inputs
|
|
|
127,789,535 |
|
|
|
(17,111,946 |
) |
Level 3 Significant Unobservable Inputs
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
127,789,535 |
|
|
$ |
(17,226,215 |
) |
|
|
|
|
|
|
|
The following is a reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair
value:
|
|
|
|
|
|
|
|
|
|
|
Investments in | |
|
Other Financial |
|
|
Securities | |
|
Instruments* |
|
|
| |
|
|
Balance as of December 1, 2007
|
|
$ |
5,379,930 |
|
|
$ |
|
|
Accrued discounts/premiums
|
|
|
(425,174 |
) |
|
|
|
|
Realized gain (loss)
|
|
|
67,850 |
|
|
|
|
|
Change in unrealized appreciation (depreciation)
|
|
|
439,446 |
|
|
|
|
|
Net purchases (sales)
|
|
|
(4,223,322 |
) |
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
(1,238,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2008
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
* |
Other financial instruments include futures and swap contracts |
Options Written or Purchased: The Fund may write or
purchase options as a method of hedging potential declines in
similar underlying securities. When the Fund writes or purchases
an option, an amount equal to the premium received or paid by
the Fund is recorded as a liability or an asset and is
subsequently adjusted to the current market value of the option
written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the
Fund on the expiration date as realized gains or losses. The
difference between the premium and the amount paid or received
on affecting a closing purchase or sale transaction, including
brokerage commissions, also is treated as a realized gain or
loss. If an option is exercised, the premium paid or received is
added to the proceeds from the sale or cost of the purchase in
determining whether the Fund has realized a gain or a loss on
the investment transaction.
The Fund, as writer of an option, may have no control over
whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the
written option.
The Fund purchases or writes options to hedge against adverse
market movements or fluctuations in value caused by changes in
interest rates. The Fund bears the risk in purchasing an option,
to the extent of the premium paid, that it will expire without
being exercised. If this occurs, the option expires worthless
and the premium paid for the option is recognized as a realized
loss. The risk associated with writing call options is that the
Fund may forego the opportunity for a profit if the market value
of the underlying position increases and the option is
exercised. The Fund will only write call options on positions
held in its portfolio. The risk in writing a put option is that
the Fund may incur a loss if the market value of the underlying
position decreases and the option is exercised. In addition, the
Fund bears the risk of not being able to enter into a closing
transaction for written options as a result of an illiquid
market.
Short Sales: The Fund may make short sales of securities
as a method of hedging potential declines in similar securities
owned. The Fund may have to pay a fee to borrow the particular
securities and may be obligated to pay to the lender an amount
equal to any payments received on such borrowed securities. A
gain, limited to the amount at which the Fund sold the security
short, or a loss, unlimited as to dollar amount, will be
realized upon the termination of a short sale if the market
price is less or greater than the proceeds originally received.
Financial Futures Contracts: A futures contract is an
agreement between two parties to buy and sell a financial
instrument for a set price on a future date. Initial margin
deposits are made upon entering into futures contracts and can
be either cash
16
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as
unrealized gains or losses by marking-to-market on a
daily basis to reflect the market value of the contract at the
end of each days trading. Variation margin payments are
made or received, depending upon whether unrealized gains or
losses are incurred. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between
the proceeds from (or cost of) the closing transaction and the
Funds basis in the contract.
The Fund invests in financial futures contracts to hedge against
fluctuations in the value of portfolio securities caused by
changes in prevailing market interest rates. Should interest
rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of
futures contracts, interest rates and the underlying hedged
assets. The Fund is at risk that it may not be able to close out
a transaction because of an illiquid market.
Swap agreements: The Fund may enter into swap agreements
to manage its exposure to various risks. An interest rate swap
agreement involves the exchange by the Fund with another party
of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A total
rate of return swap agreement is a derivative contract in which
one party (the receiver) receives the total return of a specific
index on a notional amount of principal from a second party (the
seller) in return for paying a funding cost, which is usually
quoted in relation to the London Inter-Bank Offer Rate
(LIBOR). During the life of the agreement, there are
periodic exchanges of cash flows in which the index receiver
pays the LIBOR based interest on the notional principal amount
and receives (or pays if the total return is negative or spreads
widen) the index total return on the notional principal amount.
A credit default swap is an agreement between a protection buyer
and a protection seller whereby the buyer agrees to periodically
pay the seller a premium, generally expressed in terms of
interest on a notional principal amount, over a specified period
in exchange for receiving compensation from the seller when an
underlying reference debt obligation is subject to one or more
specified adverse credit events (such as bankruptcy, failure to
pay, acceleration of indebtedness, restructuring, or
repudiation/moratorium). The Fund will usually enter into swaps
on a net basis, i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. Swaps are marked to market based
upon quotations from market makers and the change, if any, along
with an accrual for periodic payments due or owed is recorded as
unrealized gain or loss in the Statement of Operations. Net
payments on swap agreements are included as part of realized
gain/loss in the Statement of Operations. Payments paid or
received upon the opening of a swap agreement are included in
Swap premiums paid or received in the Statement of Assets and
Liabilities. These upfront payments are recorded as realized
gain or loss in the Statement of Operations upon the termination
or maturity of the swap. Entering into these agreements
involves, to varying degrees, elements of credit and market risk
in excess of the amounts recognized in the Statement of Assets
and Liabilities. Such risks include the possibility that there
will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to
perform, that there may be unfavorable changes in the
fluctuation of interest rates or the occurrence of adverse
credit events on reference debt obligations. See Note 8 for
a summary of all open swap agreements as of May 31, 2008.
When-Issued Purchases and Forward Commitments: The Fund
may purchase securities on a when-issued basis and
may purchase or sell securities on a forward
commitment basis in order to hedge against anticipated
changes in interest rates and prices and secure a favorable rate
of return. When such transactions are negotiated, the price,
which is generally expressed in yield terms, is fixed at the
time the commitment is made, but delivery and payment for the
securities take place at a later date, which can be a month or
more after the date of the transaction. At the time the Fund
makes the commitment to purchase securities on a when-issued or
forward commitment basis it will record the transaction and
thereafter reflect the value of such securities in determining
its net asset value. At the time the Fund enters into a
transaction on a when-issued or forward commitment basis,
Hyperion Brookfield Asset Management Inc. (the
Advisor) will identify collateral consisting of cash
or liquid securities equal to the value of the when-issued or
forward commitment securities and will monitor the adequacy of
such collateral on a daily basis. On the delivery date, the Fund
will meet its obligations from securities that are then maturing
or sales of the securities identified as collateral by the
Advisor and/or from then available cash flow. When-issued
securities and forward commitments may be sold prior to the
settlement date. If the Fund disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it can
incur a gain or loss due to market fluctuation. There is always
a risk that the securities may not be delivered and that the
Fund may incur a loss. Settlements in the ordinary course are
not treated by the Fund as when-issued
17
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
or forward commitment transactions and, accordingly, are not
subject to the foregoing limitations even though some of the
risks described above may be present in such transactions.
Securities Transactions and Investment Income: Securities
transactions are recorded on the trade date. Realized gains and
losses from securities transactions are calculated on the
identified cost basis. Interest income is recorded on the
accrual basis. Discounts and premiums on securities are accreted
and amortized, respectively, using the effective yield to
maturity method.
Taxes: It is the Funds intention to continue to
meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially
all of its taxable income to its stockholders. Therefore, no
federal income or excise tax provision is required.
The Financial Accounting Standards Board (FASB) has
issued FASB Interpretation 48 (FIN 48),
Accounting for Uncertainty in Income Taxes.
FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the
financial statements. FIN 48 requires the evaluation of tax
positions taken in the course of preparing the Funds tax
returns to determine whether the tax positions are
more-likely-than-not of being sustained by the
taxing authority. Tax benefits of positions not deemed to meet
the more-likely-than-not threshold would be booked as a tax
expense in the current year and recognized as: a liability for
unrecognized tax benefits; a reduction of an income tax refund
receivable; a reduction of deferred tax asset; an increase in
deferred tax liability; or a combination thereof. As of
May 31, 2008, the Fund has implemented FIN 48 and has
determined that there is no impact on its financial statements.
Dividends and Distributions: The Fund declares and pays
dividends monthly from net investment income. Distributions of
realized capital gains in excess of capital loss carryforwards
are distributed at least annually. Dividends and distributions
are recorded on the ex-dividend date. Dividends from net
investment income and distributions from realized gains from
investment transactions have been determined in accordance with
Federal income tax regulations and may differ from net
investment income and realized gains recorded by the Fund for
financial reporting purposes. These differences, which could be
temporary or permanent in nature, may result in reclassification
of distributions; however, net investment income, net realized
gains and net assets are not affected.
Cash Flow Information: The Fund invests in securities and
distributes dividends and distributions which are paid in cash
or are reinvested at the discretion of stockholders. These
activities are reported in the Statement of Changes in Net
Assets. Additional information on cash receipts and cash
payments is presented in the Statement of Cash Flows. Cash, as
used in the Statement of Cash Flows, is the amount reported as
Cash in the Statement of Assets and Liabilities, and
does not include short-term investments.
Accounting practices that do not affect reporting activities on
a cash basis include carrying investments at value and accreting
discounts and amortizing premiums on debt obligations.
Repurchase Agreements: The Fund, through its custodian,
receives delivery of the underlying collateral, the market value
of which at the time of purchase is required to be in an amount
at least equal to the resale price, including accrued interest.
The Advisor is responsible for determining that the value of
these underlying securities is sufficient at all times. If the
seller defaults and the value of the collateral declines or if
bankruptcy proceedings commence with respect to the seller of
the security, realization of the collateral by the Fund may be
delayed or limited.
3. Risk of Investing in
Asset-Backed Securities
The value of asset-backed securities may be affected by, among
other factors, changes in: interest rates, the markets
assessment of the quality of underlying assets, the
creditworthiness of the servicer for the underlying assets,
information concerning the originator of the underlying assets,
or the creditworthiness or rating of the entities that provide
any supporting letters of credit, surety bonds, derivative
instruments, or other credit enhancement. The value of
asset-backed securities also will be affected by the exhaustion,
termination or expiration of any credit enhancement.
4. Investment Advisory
Agreements and Affiliated Transactions
The Fund has entered into an Investment Advisory Agreement with
the Advisor under which the Advisor is responsible for the
management of the Funds portfolio and provides the
necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.65%
of the
18
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
Funds average weekly net assets. For the six months ended
May 31, 2008, the Advisor earned $326,683 in investment
advisory fees.
The Fund has entered into an Administration Agreement with
Hyperion Brookfield Asset Management, Inc. (the
Administrator). The Administrator entered into a
sub-administration agreement with State Street Bank and
Trust Company (the Sub-Administrator). The
Administrator and Sub-Administrator perform administrative
services necessary for the operation of the Fund, including
maintaining certain books and records of the Fund and preparing
reports and other documents required by federal, state, and
other applicable laws and regulations, and providing the Fund
with administrative office facilities. For these services, the
Fund pays to the Administrator a monthly fee at an annual rate
of 0.20% of the Funds average weekly net assets. For the
six months ended May 31, 2008 the Administrator earned
$104,518 in administration fees. The Administrator is
responsible for any fees due the Sub-Administrator, except for
NQ filing fees.
Certain officers and/or directors of the Fund are officers
and/or directors of the Advisor and/or Administrator.
5. Purchases and Sales of
Investments
Purchases and sales of investments, excluding short-term
securities, U.S. Government securities and reverse repurchase
agreements, for the six months ended May 31, 2008, were
$6,332,146 and $11,916,900, respectively. There were no
purchases of U.S. Government securities during the six months
ended May 31, 2008. Sales of U.S. Government securities for
the six months ended May 31, 2008 were $4,232,385. For
purposes of this footnote, U.S. Government securities may
include securities issued by the U.S. Treasury, Federal Home
Loan Mortgage Corporation, and the Federal National Mortgage
Association.
6. Borrowings
The Fund may enter into reverse repurchase agreements with the
same parties with whom it may enter into repurchase agreements.
Under a reverse repurchase agreement, the Fund sells securities
and agrees to repurchase them at a mutually agreed upon date and
price. Under the 1940 Act, reverse repurchase agreements will be
regarded as a form of borrowing by the Fund unless, at the time
it enters into a reverse repurchase agreement, it establishes
and maintains a segregated account with its custodian containing
securities from its portfolio having a value not less than the
repurchase price (including accrued interest). The Fund has
established and maintained such an account for each of its
reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale by the Fund may
decline below the price of the securities the Fund has sold but
is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the
Funds obligation to repurchase the securities, and the
Funds use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
As of May 31, 2008, the Fund had the following reverse
repurchase agreements outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity | |
Face Value | |
|
Description |
|
Amount | |
| |
|
|
|
| |
$ |
5,451,000 |
|
|
Credit Suisse 2.24%, dated 5/19/08, maturity date 6/17/08 |
|
$ |
5,460,836 |
|
|
5,661,000 |
|
|
Credit Suisse 5.24%, dated 5/20/08, maturity date 6/10/08 |
|
|
5,678,304 |
|
|
10,462,500 |
|
|
Merrill Lynch 2.15%, dated 5/29/08, maturity date 6/17/08 |
|
|
10,474,372 |
|
|
|
|
|
|
|
|
$ |
21,574,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Amount, Including Interest Payable |
|
$ |
21,613,512 |
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Assets Sold Under Agreements |
|
$ |
21,944,646 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate |
|
|
2.98% |
|
|
|
|
|
|
|
|
The average daily balance of reverse repurchase agreements
outstanding during the six months ended May 31, 2008, was
approximately $25,548,336 at a weighted average interest rate of
3.28%. The maximum amount of reverse repurchase agreements
outstanding at any time during the period was $37,235,024 as of
May 13, 2008, which was 28.95% of total assets.
19
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
7. Capital Stock
There are 50 million shares of $0.01 par value common stock
authorized. Of the 10,135,477 shares outstanding as of
May 31, 2008, the Advisor owned 7,018 shares.
The fund is continuing its stock repurchase program, whereby an
amount of up to 15% of the original outstanding common stock, or
approximately 1.5 million of the funds shares, are
authorized for repurchase. The purchase price may not exceed the
then-current net asset value.
For the six months ended May 31, 2008, no shares were
repurchased. For the year ended November 30, 2007, 10,000
shares were repurchased at a cost of $97,478 and at an average
discount of 16.11% from its net asset value. All shares
repurchased have been retired.
8. Financial Instruments
The Fund regularly trades in financial instruments with
off-balance sheet risk in the normal course of its investing
activities to assist in managing exposure to various market
risks. These financial instruments include written options,
futures contracts and swap agreements and may involve, to a
varying degree, elements of risk in excess of the amounts
recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all
related and offsetting transactions are considered. During the
six months, the Fund had segregated sufficient cash and/or
securities to cover any commitments under these contracts.
There was not any written option activity for the six months
ended May 31, 2008.
As of May 31, 2008, the following swap agreements were
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized | |
|
|
Expiration |
|
|
|
Appreciation/ | |
Notional Amount | |
|
Date |
|
Description |
|
(Depreciation) | |
| |
|
|
|
|
|
| |
$ |
1,500,000 |
|
|
11/7/09 |
|
Agreement with JP Morgan, dated 11/05/07 to pay semi-annually
the notional amount multiplied by 4.40% and to receive quarterly
the notional amount multiplied by the 3 month USD-LIBOR-BBA. |
|
$ |
(23,596 |
) |
|
|
2,000,000 |
|
|
11/8/09 |
|
Agreement with JP Morgan, dated 11/06/07 to pay semi-annually
the notional amount multiplied by 4.45% and to receive quarterly
the notional amount multiplied by the 3 month USD-LIBOR-BBA. |
|
|
(32,972 |
) |
|
|
15,000,000 |
|
|
4/10/12 |
|
Agreement with JP Morgan dated 03/28/07 to receive semi-annually
the notional amount multiplied by 4.96% and to pay quarterly the
notional amount multiplied by the 3 month USD-LIBOR-BBA. |
|
|
552,742 |
|
|
|
5,000,000 |
|
|
8/12/41 |
|
Agreement with Greenwich Capital, dated 12/06/06 to receive
monthly the notional amount multiplied by 0.75% and to pay only
in the event of a write down, or failure to pay a principal
payment or an interest shortfall on MSC 2006-T23 H. |
|
|
(2,984,970 |
) |
|
|
5,000,000 |
|
|
10/12/41 |
|
Agreement with Greenwich Capital, dated 12/01/06 to receive
monthly the notional amount multiplied by 0.75% and to pay only
in the event of a write down, or failure to pay a principal
payment or an interest shortfall on BSCMS 2006-T24 H. |
|
|
(2,474,869 |
) |
|
|
5,000,000 |
|
|
2/11/44 |
|
Agreement with Bear Stearns, dated 06/01/07 to receive monthly
the notional amount multiplied by 2.35% and to pay only in the
event of a write down, or failure to pay a principal payment or
an interest shortfall on BSCMS 2007-PW15 H. |
|
|
(2,852,332 |
) |
20
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized | |
|
|
Expiration |
|
|
|
Appreciation/ | |
Notional Amount | |
|
Date |
|
Description |
|
(Depreciation) | |
| |
|
|
|
|
|
| |
|
$ |
5,000,000 |
|
|
10/15/48 |
|
Agreement with Bear Stearns, dated 11/28/06 to receive monthly
the notional amount multiplied by 0.75% and to pay only in the
event of a write down, or failure to pay a principal payment or
an interest shortfall on WBCMT 2006-C28 J. |
|
$ |
(3,049,033 |
) |
|
|
5,000,000 |
|
|
1/15/49 |
|
Agreement with Bear Stearns, dated 06/01/07 to receive monthly
the notional amount multiplied by 2.45% and to pay only in the
event of a write down, or failure to pay a principal payment or
an interest shortfall on CSMC 2007-C2 K. |
|
|
(3,222,496 |
) |
|
|
5,000,000 |
|
|
11/12/49 |
|
Agreement with Bear Stearns, dated 06/01/07 to receive monthly
the notional amount multiplied by 2.35% and to pay only in the
event of a write down, or failure to pay a principal payment or
an interest shortfall on MSC 2007-T25 H. |
|
|
(3,024,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(17,111,946 |
) |
|
|
|
|
|
|
|
|
|
As of May 31, 2008, the following futures contracts were
outstanding:
Long:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
Expiration |
|
Cost at |
|
Value at |
|
Unrealized |
Amount |
|
Type |
|
Date |
|
Trade Date |
|
May 31, 2008 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
$ |
8,700,000 |
|
|
5 Yr. U.S. Treasury Note |
|
September 2008 |
|
$ |
9,692,888 |
|
|
$ |
9,564,563 |
|
|
$ |
(128,325 |
) |
Short:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
Expiration |
|
Cost at |
|
Value at |
|
Unrealized |
Amount |
|
Type |
|
Date |
|
Trade Date |
|
May 31, 2008 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,600,000 |
|
|
10 Yr. U.S. Treasury Note |
|
September 2008 |
|
$ |
2,936,619 |
|
|
$ |
2,922,563 |
|
|
$ |
14,056 |
|
9. Federal Income Tax
Information
Income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ
from accounting principles generally accepted in the United
States of America.
During the six months ended May 31, 2008, the tax character
of the $5,472,477 of distributions paid was entirely from
ordinary income. As of the end of the Funds fiscal year,
if it has paid distributions in excess of accumulated ordinary
taxable income, such excess amounts will be reclassified to
return of capital. During the year ended November 30, 2007,
the tax character of the $10,955,634 of distributions paid was
also entirely from ordinary income.
As of May 31, 2008, the components of net assets (excluding
paid-in-capital) on a tax basis were as follows:
|
|
|
|
|
Distributions in excess of net ordinary income
|
|
$ |
(553,014 |
) |
Capital loss carryforward
|
|
|
(7,904,318 |
) |
|
Book basis unrealized depreciation
|
|
|
(45,714,995 |
) |
Plus: Cumulative timing differences
|
|
|
58,988 |
|
|
|
|
|
Net unrealized depreciation on investments and swap contacts
|
|
|
(45,656,007 |
) |
|
|
|
|
Total tax basis net accumulated losses
|
|
$ |
(54,113,339 |
) |
|
|
|
|
21
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements (Unaudited)
May 31, 2008
The difference between distributions in excess of ordinary
income on a tax basis and book distributions in excess of net
investment income is due to the differing treatment of swap
interest income (expense) for tax purposes. The differences
between the tax basis capital loss carryforward and book
accumulated realized losses is due to the mark-to market of
futures for tax purposes. The differences between book and tax
basis unrealized appreciation/(depreciation) is primarily
attributable to the mark-to-market of futures and differing
treatment of swap interest income (expense) for tax
purposes.
Federal Income Tax Basis: The federal income tax basis of
the Funds investments as of May 31, 2008 was
$156,278,315. Net unrealized depreciation was $28,488,780 (gross
unrealized appreciation $1,542,993; gross unrealized
depreciation $30,031,773). As of May 31, 2008,
the Fund had a capital loss carryforward of $7,904,318, of which
$1,070,268 expires in 2011, $1,251,786 expires in 2013, $767,748
expires in 2014, $928,622 expires in 2015, and $3,885,894
expires in 2016, available to offset any future gains, to the
extent provided by regulations.
Capital Account Reclassification: As of May 31,
2008, the Funds distributions in excess of net investment income
was decreased by $388,398 with an offsetting increase in
accumulated net realized loss. These adjustments result from
reclassifications due to permanent book/tax differences.
10. Subsequent Events
Dividend: The Funds Board of Directors declared the
following regular monthly dividend:
|
|
|
|
|
Dividend |
|
Record |
|
Payable |
Per Share |
|
Date |
|
Date |
|
|
|
|
|
$0.090
|
|
06/17/08 |
|
06/26/08 |
0.090
|
|
07/15/08 |
|
07/24/08 |
11. Contractual Obligations
The Fund enters into contracts that contain a variety of
indemnification. The Funds maximum exposure under these
arrangements is unknown. However, the Fund has not had prior
claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
12. New Accounting
Pronouncement
In March 2008, FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161).
FAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. FAS 161 requires
enhanced disclosures about the Funds derivative and
hedging activities. Management is currently evaluating the
impact the adoption of FAS 161 will have on the Funds
financial statements and disclosures.
22
COMPLIANCE CERTIFICATIONS (Unaudited)
On 4/18/2008, the Fund submitted a CEO annual certification to
the New York Stock Exchange (NYSE) on which the
Funds principal executive officer certified that he was
not aware, as of that date, of any violation by the Fund of the
NYSEs Corporate Governance listing standards. In addition,
as required by Section 302 of the Sarbanes-Oxley Act of
2002 and related SEC rules, the Funds principal executive
and principal financial officers have made quarterly
certifications, included in filings with the SEC on
Forms N-CSR and N-Q relating to, among other things, the
Funds disclosure controls and procedures and internal
control over financial reporting, as applicable.
23
PROXY RESULTS (Unaudited)
During the six months ended May 31, 2008, The Hyperion
Brookfield Strategic Mortgage Income Fund, Inc. stockholders
voted on the following proposals at a stockholders meeting
on March 27, 2008. The description of each proposal and
number of shares voted are as follows:
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Shares Voted |
|
Shares Voted |
|
|
For |
|
Against |
|
Abstain |
|
|
1. To elect to the Funds Board of
Directors Louis
P. Salvatore
|
|
9,050,783 |
|
0 |
|
238,875 |
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Shares Voted |
|
Shares Voted |
|
|
For |
|
Against |
|
Abstain |
|
|
2. To elect to the Funds Board of
Directors Clifford
E. Lai
|
|
9,049,915 |
|
0 |
|
239,743 |
|
24
BOARD CONSIDERATIONS RELATING TO THE INVESTMENT ADVISORY
AGREEMENT (Unaudited)
At a meeting held on March 27, 2008, the Board, including a
majority of the Disinterested Directors, approved the
continuation of the investment advisory agreement (the
Advisory Agreement) between Hyperion Brookfield
Asset Management, Inc. (the Advisor) and the Fund.
In approving the Advisory Agreement, the Board, including a
majority of the Disinterested Directors, determined that the fee
structure was fair and reasonable and that approval of the
Advisory Agreement was in the best interests of the Fund and its
stockholders. The Board of Directors considered a wide range of
information, including the information received from the Advisor
on a quarterly basis. While attention was given to all
information furnished, the following discusses the primary
factors relevant to the Boards decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board
considered the level and depth of knowledge of the Advisor. In
evaluating the quality of services provided by the Advisor, the
Board took into account its familiarity with the Advisors
management through board meetings, conversations and reports.
The Board noted that the Advisor is responsible for managing the
Funds investment program, the general operations and the
day-to-day management of the Fund and for compliance with
applicable laws, regulations, policies and procedures. The Board
concluded that the nature, extent and quality of the overall
services provided by the Advisor and its affiliates are
satisfactory. The Boards conclusion was based, in part,
upon services provided to the Fund such as quarterly reports
provided by the Advisor: 1) comparing the performance of the
Fund with a peer group, 2) showing that the investment policies
and restrictions for the Fund were followed, and
3) covering matters such as the compliance of investment
personnel and other access persons with the Advisors and
the Funds code of ethics, the adherence to fair value
pricing procedures established by the Board, the monitoring of
portfolio compliance and presentations regarding the economic
environment. The Board also considered the experience of the
Advisor as an investment advisor and the experience of the team
of portfolio managers that manage the Fund, and its current
experience in acting as an investment adviser to other
investment funds and institutional clients.
INVESTMENT PERFORMANCE. The Board placed significant
emphasis on the investment performance of the Fund in view of
its importance to stockholders. While consideration was given to
performance reports and discussions at Board meetings throughout
the year, particular attention in assessing the performance was
given to a presentation that compared the Funds
performance with nine similar funds for the 1, 3 and 5 year
periods and the year-to-date period as of January 31, 2008.
The Board noted that while the Fund was outperformed by the
other funds for all periods, based on the Advisors
explanation of the current market and the steps taken to improve
performance, the Board concluded that the Funds
performance was adequate.
PROFITABILITY. The Board also considered the level of
profits expected to be realized by the Advisor and its
affiliates in connection with the operation of the Fund. In this
regard, the Board reviewed the Fund profitability analysis
addressing the overall profitability of the Advisor for its
management of the Hyperion Brookfield fund family, as well as
its expected profits and that of its affiliates for providing
administrative support for the Fund. The Board further noted
that the methodology followed in allocating costs to the Fund
appeared reasonable, while also recognizing that allocation
methodologies are inherently subjective. The Board concluded
that the expected profitability to the Advisor from the Fund was
reasonable.
MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed
significant emphasis on the review of Fund expenses. The Board
compared the advisory fees and total expense ratio of the Fund
with various comparative data that it had been provided with.
The Board noted that the Funds total advisory and
administrative fee and the Funds total expenses were
slightly higher than the median of the Funds peer group.
The Board further noted that the fees and expenses payable by
the Fund were comparable to those payable by other client
accounts managed by the Advisor and concluded that the
Funds management fee and total expenses were reasonable.
ECONOMIES OF SCALE. The Board considered the potential
economies of scale that may be realized if the assets of the
Fund grow. The Board noted that stockholders might benefit from
lower operating expenses as a result of an increasing amount of
assets being spread over the fixed expenses of the Fund, but
noted that, as a closed-end fund, the Fund was unlikely to grow
significantly.
In considering the approval of the Advisory Agreement, the
Board, including the Disinterested Directors, did not identify
any single factor as controlling. Based on the Boards
evaluation of all factors that it deemed to be relevant, the
Board, including the Disinterested Directors, concluded that the
Advisor has demonstrated that it possesses the capability and
resources necessary to perform the duties required of it under
the Advisory Agreement; performance of the Fund is adequate in
light of the current market and in relation to the performance
of funds with similar investment objectives; and the proposed
Advisory fee is fair and reasonable, given the nature, extent
and quality of the services to be rendered by the Advisor.
After carefully reviewing all of these factors, the Board,
including the Disinterested Directors, unanimously approved the
continuation of the Advisory Agreement.
25
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND,
INC.
Information Concerning Directors and Officers (Unaudited)
The following tables provide information concerning the
directors and officers of The Hyperion Brookfield Strategic
Mortgage Income Fund, Inc. (the Fund).
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held with |
|
|
|
Number of | |
|
|
Fund and Term of |
|
|
|
Portfolios in Fund | |
Name, Address |
|
Office and Length of |
|
Principal Occupation(s) During Past 5 Years |
|
Complex Overseen | |
and Age |
|
Time Served |
|
and Other Directorships Held by Director |
|
by Director | |
| |
|
Disinterested Director |
|
Class II Director to serve until 2010 Annual Meeting of
Stockholders: |
|
Rodman L. Drake
c/o Three World
Financial Center,
200 Vesey Street,
10th Floor,
New York, New York
10281-1010
Age 65
|
|
Chairman Elected December 2003
Director since
June 2002, Member of the Audit Committee, Chairman of the
Nominating and Compensation Committee
Elected for Three Year Term |
|
Chairman (since 2003) and Director of several investment
companies advised by the Advisor or by its affiliates
(1989-Present); Director, and/or Lead Director of Crystal River
Capital, Inc. (CRZ) (2005-Present); Director of
Celgene Corporation (CELG) (April 2006- Present);
Director of Student Loan Corporation (STU)
(2005-Present); Director of Apex Silver Corp. (SIL)
(2007-Present); General Partner of Resource Capital Fund II
& III CIP L.P. (1998-2006); Co-founder of Baringo Capital
LLC (2002-Present); Director of Jackson Hewitt Tax Services Inc.
(JTX) (2004-Present); Director of Animal Medical
Center (2002-Present); Director and/or Lead Director of Parsons
Brinckerhoff, Inc. (1995-2008); Trustee and Chairman of
Excelsior Funds (1994-2007); Trustee of Columbia Atlantic Funds
(2007-Present). |
|
|
4 |
|
|
Disinterested Directors |
|
Class I Directors to serve until 2009 Annual Meeting of
Stockholders: |
|
Robert F. Birch
c/o Three World
Financial Center,
200 Vesey Street,
10th Floor,
New York, New York
10281-1010
Age 72
|
|
Director since June 2002, Member of the Audit Committee, Member
of the Nominating and Compensation Committee, Member of the
Executive Committee
Elected for Three Year Term |
|
Director of several investment companies advised by the Advisor
or by its affiliates (1998- Present); President and Director of
New America High Income Fund (1992-Present); Director of
Brandywine Funds (3) (2001- Present). |
|
|
4 |
|
|
Stuart A. McFarland
c/o Three World
Financial Center,
200 Vesey Street,
10th Floor,
New York, New York
10281-1010
Age 61
|
|
Director since April 2006, Member of the Audit Committee, Member
of the Nominating and Compensation Committee
Elected for Three Year Term |
|
Director of several investment companies advised by the Advisor
or its affiliates (2006- Present); Director of Brandywine Funds
(2003- Present); Director of New Castle Investment Corp.
(2000-Present); Chairman and Chief Executive Officer of Federal
City Bancorp, Inc. (2005-2007); Managing Partner of Federal City
Capital Advisors (1997-Present). |
|
|
4 |
|
26
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Information Concerning Directors and Officers (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held with |
|
|
|
Number of | |
|
|
Fund and Term of |
|
|
|
Portfolios in Fund | |
Name, Address |
|
Office and Length of |
|
Principal Occupation(s) During Past 5 Years |
|
Complex Overseen | |
and Age |
|
Time Served |
|
and Other Directorships Held by Director |
|
by Director | |
| |
|
Interested Director |
|
Class Director to serve until 2011 Annual Meeting of
Stockholders: |
|
Clifford E. Lai*
c/o Three World Financial Center,
200 Vesey Street,
10th Floor,
New York, New York
10281-1010
Age 55
|
|
Director since December 2003, Member of the Executive
Committee
Elected for Three Year Term |
|
Managing Partner of Brookfield Asset Management Inc.
(2006-Present); Chairman (2005-Present); Chief Executive Officer
(1998-2007); President (1998-2006) and Chief Investment Officer
(1993-2002) of the Advisor; President (2005-2008), Chief
Executive Officer (2005-2008) and Director of Crystal River
Capital, Inc., (CRZ) (2005-Present); President and
Director of several investment companies advised by the Advisor
or by its affiliates (1995-Present); and Co-Chairman (2003-2006)
and Board of Managers (1995-2006) of Hyperion GMAC Capital
Advisors, LLC (formerly Lend Lease Hyperion Capital Advisors,
LLC). |
|
|
4 |
|
|
Disinterested Director |
|
Class III Director to serve until 2011 Annual Meeting of
Stockholders: |
|
Louis P. Salvatore
c/o Three World Financial Center,
200 Vesey Street,
10th Floor,
New York, New York
10281-1010
Age 61
|
|
Director since September 2005, Chairman of the Audit Committee,
Member of the Compensation and Nominating Committee
Elected for Two Year Term |
|
Director of several investment companies advised by the Advisor
or by its affiliates (2005- Present); Director of Crystal River
Capital, Inc. (CRZ) (2005-Present); Director of
Turner Corp. (2003-Present); Director of Jackson Hewitt Tax
Services, Inc. (JTX) (2004- Present); Employee of
Arthur Andersen LLP (2002-Present); Partner of Arthur Andersen
LLP (1977- 2002). |
|
|
4 |
|
|
|
* |
Interested person as defined by the Investment Company Act of
1940 (the 1940 Act) because of affiliations with
Hyperion Brookfield Asset Management, Inc., the Funds
Advisor. |
27
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
Information Concerning Directors and Officers (Unaudited)
Officers of the Fund
|
|
|
|
|
|
|
|
|
Position(s) |
|
Term of Office and |
|
Principal Occupation(s) |
Name, Address and Age |
|
Held with Fund |
|
Length of Time Served |
|
During Past 5 Years |
|
|
Clifford E. Lai*
c/o Three World
Financial Center,
200 Vesey Street,
10th floor,
New York, New York
10281-1010
Age 55
|
|
President |
|
Elected Annually
Since June 2002 |
|
Please see Information Concerning Directors. |
|
John J. Feeney, Jr.*
c/o Three World
Financial Center,
200 Vesey Street,
10th floor,
New York, New York
10281-1010
Age 49
|
|
Vice President |
|
Elected Annually
Since July 2007 |
|
Director (2002-Present), Chief Executive Officer (February
2007-Present), President (2006- Present) and Director of
Marketing (1997-2006) of the Advisor; Vice President of several
investment companies advised by the Advisor (July 2007-Present);
Executive Vice President and Secretary of Crystal River Capital,
Inc. (CRZ) (2005-2007). |
|
Thomas F. Doodian*
c/o Three World
Financial Center,
200 Vesey Street,
10th floor,
New York, New York
10281-1010
Age 49
|
|
Treasurer |
|
Elected Annually
Since June 2002 |
|
Managing Director of Brookfield Operations and Management
Services, LLC (2007-Present); Managing Director, Chief Operating
Officer (1998-2006) and Chief Financial Officer (2002- 2006) of
the Advisor; Treasurer of several investment companies advised
by the Advisor (1996-Present); Treasurer of Hyperion GMAC
Capital Advisors, LLC (formerly Lend Lease Hyperion Capital
Advisors, LLC) (1996-2006). |
|
Jonathan C. Tyras*
c/o Three World
Financial Center,
200 Vesey Street,
10th floor,
New York, New York
10281-1010
Age 39
|
|
Secretary |
|
Elected Annually
Since November 2006 |
|
Director, General Counsel and Secretary (October 2006-Present)
of the Advisor; Vice President and General Counsel (November
2006- Present), Assistant Secretary (November 2006- January
2007), Secretary (February 2007- Present) of Crystal River
Capital, Inc. (CRZ); Secretary of several investment
companies advised by the Advisor (November 2006- Present);
Attorney at Paul, Hastings, Janofsky & Walker LLP
(1998-October 2006). |
|
Josielyne K. Pacifico*
c/o Three World
Financial Center,
200 Vesey Street,
10th floor,
New York, New York
10281-1010
Age 35
|
|
Chief Compliance Officer
(CCO) |
|
Elected Annually
Since August 2006 |
|
Director and CCO (September 2006-Present), Assistant General
Counsel (July 2006-Present), and Compliance Officer (July
2005-August 2006) of the Advisor; CCO of several investment
companies advised by the Advisor (November 2006-Present);
Assistant Secretary of Crystal River Capital, Inc.
(CRZ) (April 2007- Present); Compliance Manager of
Marsh & McLennan Companies (2004-2005); Staff Attorney at
the United States Securities and Exchange Commission (2001-2004). |
|
|
* |
Interested person as defined by the Investment Company Act of
1940 (the 1940 Act) because of affiliations with
Hyperion Brookfield Asset Management, Inc., the Funds
Advisor. |
The Funds Statement of Additional Information includes
additional information about the directors and is available,
without charge, upon request by calling 1-800-497-3746
28
DIVIDEND REINVESTMENT PLAN
A Dividend Reinvestment Plan (the Plan) is available
to stockholders of the Fund pursuant to which they may elect to
have all distributions of dividends and capital gains
automatically reinvested by American Stock Transfer &
Trust Company (the Plan Agent) in additional
Fund shares. Stockholders who do not participate in the
Plan will receive all distributions in cash paid by check mailed
directly to the stockholder of record (or if the shares are held
in street or other nominee name, then to the nominee) by the
Funds Custodian, as Dividend Disbursing Agent.
The Plan Agent serves as agent for the stockholders in
administering the Plan. After the Fund declares a dividend or
determines to make a capital gain distribution, payable in cash,
if (1) the market price is lower than net asset value, the
participants in the Plan will receive the equivalent in Fund
shares valued at the market price determined as of the time of
purchase (generally, the payment date of the dividend or
distribution); or if (2) the market price of the shares on
the payment date of the dividend or distribution is equal to or
exceeds their net asset value, participants will be issued Fund
shares at the higher of net asset value or 95% of the market
price. This discount reflects savings in underwriting and other
costs that the Fund otherwise will be required to incur to raise
additional capital. If net asset value exceeds the market price
of the Fund shares on the payment date or the Fund declares a
dividend or other distribution payable only in cash (i.e., if
the Board of Directors precludes reinvestment in Fund shares for
that purpose), the Plan Agent will, as agent for the
participants, receive the cash payment and use it to buy Fund
shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants accounts. If, before the
Plan Agent has completed its purchases, the market price exceeds
the net asset value of the Funds shares, the average per
share purchase price paid by the Plan Agent may exceed the net
asset value of the Funds shares, resulting in the
acquisition of fewer shares than if the dividend or distribution
had been paid in shares issued by the Fund. The Fund will not
issue shares under the Plan below net asset value.
Participants in the Plan may withdraw from the Plan upon written
notice to the Plan Agent. When a participant withdraws from the
Plan or upon termination of the Plan by the Fund, certificates
for whole shares credited to his or her account under the Plan
will be issued and a cash payment will be made for any fraction
of a share credited to such account.
There is no charge to participants for reinvesting dividends or
capital gain distributions, except for certain brokerage
commissions, as described below. The Plan Agents fees for
handling the reinvestment of dividends and distributions are
paid by the Fund. There are no brokerage commissions charged
with respect to shares issued directly by the Fund. However,
each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agents open
market purchases in connection with the reinvestment of
dividends and distributions.
The automatic reinvestment of dividends and distributions will
not relieve participants of any federal income tax that may be
payable on such dividends or distributions.
A brochure describing the Plan is available from the Plan Agent,
by calling
1-212-936-5100.
If you wish to participate in the Plan and your shares are held
in your name, you may simply complete and mail the enrollment
form in the brochure. If your shares are held in the name of
your brokerage firm, bank or other nominee, you should ask them
whether or how you can participate in the Plan. Stockholders
whose shares are held in the name of a brokerage firm, bank or
other nominee and are participating in the Plan may not be able
to continue participating in the Plan if they transfer their
shares to a different brokerage firm, bank or other nominee,
since such stockholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are
transferred.
29
INVESTMENT ADVISOR AND ADMINISTRATOR
HYPERION BROOKFIELD ASSET
MANAGEMENT, INC.
Three World Financial Center
200 Vesey Street, 10th Floor
New York, NY 10281-1010
For General Information about the Fund:
1 (800) HYPERION
SUB-ADMINISTRATOR
STATE STREET BANK and TRUST COMPANY
2 Avenue De Lafayette
Lafayette Corporate Center
Boston, Massachusetts 02116
CUSTODIAN AND FUND ACCOUNTING AGENT
STATE STREET BANK and TRUST COMPANY
2 Avenue De Lafayette
Lafayette Corporate Center
Boston, Massachusetts 02116
TRANSFER AGENT
AMERICAN STOCK TRANSFER & TRUST
COMPANY
Investor Relations Department
59 Maiden Lane
New York, NY 10038
For Stockholder Services:
1 (800) 937-5449
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BRIGGS, BUNTING & DOUGHERTY, LLP
1835 Market Street, 26th Floor
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
SULLIVAN & WORCESTER LLP
1666 K Street, NW
Washington, D.C. 20006
Notice is hereby given in accordance with Section 23(c) of
the Investment Company Act of 1940 that periodically the Fund
may purchase its shares in the open market at prevailing market
prices.
Quarterly Portfolio Schedule: The Fund will file
Form N-Q with the
Securities and Exchange Commission for the first and third
quarters of each fiscal year. The Funds
Forms N-Q will be
available on the Securities and Exchange Commissions
website at http://www.sec.gov. The Funds
Forms N-Q may be
reviewed and copied at the Securities and Exchange
Commissions Public Reference Room in Washington, D.C.
and information on the operation of the Public Reference Room
may be obtained by calling
1 (800) SEC-0330.
Once filed, the most recent
Form N-Q will be
available without charge, upon request, by calling
1 (800) HYPERION or on the Funds website at
http://www.hyperionbrookfield.com.
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses
to determine how to vote proxies relating to portfolio
securities is available without charge, upon request, by calling
1 (800) 497-3746
and on the Securities and Exchange Commissions website at
http://www.sec.gov.
Proxy Voting Record
The Fund has filed with the Securities and Exchange Commission
its proxy voting record for the
12-month period ending
June 30 on Form N-PX.
Once filed, the most recent Form
N-PX will be available
without charge, upon request, by calling
1 (800) 497-3746
or on the Securities and Exchange Commissions website at
http://www.sec.gov.
Officers & Directors
|
|
|
|
Rodman L. Drake* |
|
|
Chairman |
|
|
|
Robert F. Birch* |
|
|
Director |
|
|
|
Stuart A. McFarland* |
|
|
Director |
|
|
|
Louis P. Salvatore* |
|
|
Director |
|
|
|
Clifford E. Lai |
|
|
Director and President |
|
|
|
John J. Feeney, Jr. |
|
|
Vice President |
|
|
|
Thomas F. Doodian |
|
|
Treasurer |
|
|
|
Jonathan C. Tyras |
|
|
Secretary |
|
|
|
Josielyne K. Pacifico |
|
|
Chief Compliance Officer |
|
|
|
|
|
* Audit Committee Members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This report is for stockholder
information. This is not a prospectus intended for use in the
purchase or sale of Fund shares.
|
|
|
|
The financial information
included herein is taken from records of the Fund without audit
by the Funds independent auditors, who do not express an
opinion thereon.
|
|
|
|
The Hyperion Brookfield
Strategic |
|
|
Mortgage Income Fund,
Inc. |
|
|
Three World Financial Center
|
|
|
200 Vesey Street, 10th Floor
|
|
|
New York, NY 10281-1010
|
|
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semi-annual reports.
Item 6. Schedule of Investments.
Please see Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semi-annual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
There has been no change, as of the date of this filing, in the portfolio manager identified
in response to paragraph (a)(1) of this Item in the Registrants most recently filed annual report
on Form N-CSR.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers.
None.
Item 10. Submission of Matters to a Vote of Security Holders.
None.
Item 11. Controls and Procedures.
(a) The Registrants principal executive officer and principal financial officer have concluded
that the Registrants Disclosure Controls and Procedures are effective, based on their evaluation
of such Disclosure Controls and Procedures as of a date within 90 days of the filing of this report
on Form N-CSR.
(b) As of the date of filing this Form N-CSR, the Registrants principal executive officer and
principal financial officer are aware of no changes in the Registrants internal control over
financial reporting that occurred during the Registrants second fiscal quarter of the period
covered by this report that has materially affected or is reasonably likely to materially affect
the Registrants internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable.
(2) A separate certification for each principal executive officer and principal financial
officer of the Registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 is
attached as an exhibit to this Form N-CSR.
(3) None.
(b) A separate certification for each principal executive officer and principal financial officer
of the Registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 is attached
as an exhibit to this Form N-CSR.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HYPERION BROOKFIELD STRATEGIC MORTGAGE INCOME FUND, INC.
|
|
|
|
|
|
|
|
|
By: |
/s/ Clifford E. Lai
|
|
|
|
Clifford E. Lai |
|
|
|
Principal Executive Officer |
|
|
Date: August 7, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
By: |
/s/ Clifford E. Lai
|
|
|
|
Clifford E. Lai |
|
|
|
Principal Executive Officer |
|
|
Date: August 7, 2008
|
|
|
|
|
|
|
|
|
By: |
/s/ Thomas F. Doodian
|
|
|
|
Thomas F. Doodian |
|
|
|
Treasurer and Principal Financial Officer |
|
|
Date: August 7, 2008