MFA Financial Inc (MFA) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second-quarter 2008 earnings MFA Mortgage Investments Inc. conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our first speaker, [Stephanie Coyle]. Please go ahead.

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA that reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations. When used, statements which are not historical in nature including those containing words such as believe, expect, anticipate, estimate, plan, continue, intend, should, may or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors, including but not limited to those relating to changes in interest rates and the market value of MFA's investment securities; changes in the prepayment rates on the mortgage loan securing MFA's investment securities; MFA's ability to borrow to finance its assets; changes in government regulations affecting MFA's business; MFA's ability to maintain its qualification as a real estate investment trust for federal income tax purposes; MFA's ability to maintain its redemption from registration under the Investment Company Act of 1940; and risks associated with investing in real estate related assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2007 and other reports that it may file from time to time with the Securities and Exchange Commission, could cause MFA's actual results, performance and achievements to differ materially from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in MFA's quarterly report on Form 10-Q for the quarter ended June 30, 2008 and/or the press release announcing MFA's second-quarter 2008 financial results.

Thank you for your time. I would now like to turn this call over to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning and I welcome you to the MFA investor call announcing MFA's first-quarter 2008 financial results. Joining me this morning are Bill Gorin, President and Chief Financial Officer; Ron Freydberg, Executive Vice President and Chief Investment Officer; Teresa Covello, Chief Accounting Officer; Tim Korth, General Counsel; Craig Knutson, Senior Vice President, and Deborah Yang, Vice President.

Today we reported net income of $33 million or $0.20 per share of common stock for the second quarter ended June 30, 2008. For the second quarter, net income, excluding items not affecting distributable income, was $37 million or $0.22 per share of common stock. On July 1, 2008, we announced our second-quarter dividend of $0.20 per share of common stock, which will be paid on July 31, 2008 to stockholders of record as of July 14, 2008. As of June 30, 2008, our book value per share was $6.59. We remain focused in high-quality agency mortgage-backed securities, and our portfolio spread has trended up in each of the last six quarters.

During the second quarter of 2008, agency MBS were available at attractive spreads, and additional repurchase funding capacity was available to us from multiple counterparties. As a result, utilizing the net proceeds of $304.3 million raised in our June 3, 2008 publicly equity offering, we grew our agency MBS portfolio by $2.4 billion on our repurchase agreement balances by $2 billion. At June 30, 2008, approximately 99% of our assets consisted of mortgage-backed securities issued or guaranteed by the agencies of the United States government or federally chartered corporation, other MBS rated AAA by nationally recognized rating agencies, MBS-related receivables and cash.

Due to recent market volatility and credit issues throughout the financial system, we continue to maintain a relatively low leverage multiple. At June 30, 2008, our debt-to-equity multiple was 6.7 times, and our liquidity position was $696 million, consisting of $252 million in cash and $464 million of unpledged mortgage-backed securities. At this leverage multiple, our quarterly dividend annualized provides investors with a 12.1% yield relative to our quarter-end book value.

Recently there has been a well-publicized market focus on the adequacy of the capitalization of Fannie Mae and Freddie Mac. Notwithstanding these concerns, the US government continues to rely on these two GSEs as a major source of funding for the US housing market. Based on recent actions and announcements, we believe the relationship of the GSEs to the United States government has been reaffirmed and, in fact, strengthened.

Based on existing regulatory policy, both of the GSEs have surplus capital relative to a failed mandated capital requirement. At June 30, 2008, agency MBS or related receivables constituted approximately 94.7% of our assets or approximately $10.2 billion. The AAA MBS-related receivables were approximately 2.8% or approximately $205 million, and cash was approximately 2.1% or approximately $232 million. The Company's remaining assets consist primarily of $12.9 million of interest rate swaps and $11.5 million investment in real estate and $1.8 million in securities rated below AAA. The value with securities rated below AAA decreased during the quarter as we wrote all off of our unrated securities, resulting in impairment charges of $4 million. The average cost basis of our MBS portfolio was 101.26% of par at June 30, 2008.

Our MBS assets are liquid and continue to be financed with multiple funding providers through repurchase agreements. As of June 30, 2008, we financed our portfolio with 18 repurchase agreement counterparties.

During the second quarter of 2008, our portfolio spread, which is the difference between our interest-earning asset portfolio net yield of 5.23% and our 3.85% cost of funds, was 138 basis points versus 90 basis points in the first quarter of 2008. In the second quarter of 2008, our cost for compensation and benefits and other G&A expense was $5 million, which includes approximately $1 million of expenses related to the postponed MFResidential Investments Inc. initial public offering.

Our primary focus is high-quality, higher coupon agency hybrid and adjustable-rate mortgage-backed security assets. The MBS in our portfolio are primarily adjustable-rate or hybrid, which have an initial fixed interest rate for a specified period of time and thereafter generally reset annually.

Assuming a 20% constant repayment rate, approximately 27% of the MBS in our portfolio are expected to prepay or have their interest rates reset within the next 12 months with a total of 83% expected to reset or prepay during the next six months.

We take into account the coupon resets and expected prepayments when measuring the sensitivity of our portfolio with changing interest rates. In measuring our assets-to-borrowing repricing gap, we measured the difference between the weighted average month until coupon adjustment or projected prepayment on our portfolio and the months remaining on our repurchase agreements, including the impact of interest rate swap agreements. Assuming a 20% CPR, the weighted average time to repricing or assumed prepayment for our MBS portfolio as of June 30, 2008 was approximately 33 months, and the average term remaining on our repurchase agreements, including the impact of interest rate swaps, was approximately 17 months, resulting in a repricing gap of 16 months. The remaining speed on our MBS (technical difficulty)-- averaged 15.8% CPR during the second quarter of 2008.

I thank you for your continued interest in MFA, and at this time I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Mike Widner, Stifel Nicolaus.

A solid quarter. Just a couple of questions if I may. The leverage ratio that you guys mentioned is a little bit on the low side, but probably a prudent place to be in this environment given the volatility. I'm just wondering if you could give us some quick guidance on where you might think that would go going forward and what would have to happen for you to change that view?

Sure. Thanks for asking the question. Look, what I have said in the past is we would be at or about 7 times we're citing below that. Right now I feel very comfortable telling you that on the whole 7 to 8 times is where we're going to be. We have seen terrific, terrific opportunities. As you know, we have a lot of dry powder, and I think the Company is very, very well-positioned to take advantage of the opportunities that we see, which continue on a day to day basis to be better than they were the day before.

So we're very pleased about where the Company and how the Company situated. The guys have done just a great job in putting us in that position, and to answer your question again, anywhere from 7 to 8 times.

Great. Just one other one if I may. I see the duration gap you guys mentioned was about 16 months, a touch higher than I would have expected. I was just wondering if you could comment briefly on sort of the swaps notional amount you might have out there, the duration of those? Or maybe alternatively if you could talk about what your target is for that duration gap going forward and then how that might change given different Fed scenarios?

Okay. I'm going to answer the question about the $25,000 fee, and then I will turn it over to the guys that are smarter than I am, and they can kind of give you some details.

But in terms of what we have done, we did buy some longer dated assets, and we kept the leverage low. So in terms of the risk, we tried to keep the risk as minimal as we possibly could, and we did not swap everything against that. So again, that is why you've seen the duration gap kind of go out of touch. So that is the reason for it in terms of getting the details.

Yes, Mike, just to be clear, that is not at all the duration. That is the month until expected prepay or reset, which is not a number that anybody else gives you. It is a number that we provide. The duration is 1.57 as of the end of the quarter. So it is not 16 months, although it is not for from it. But at 1.57, the point is the duration is a little bit higher, but the leverage is a little bit lower. So you really have not added that much more interest rate risk.

Okay. So could you maybe quantify that in terms of what the notional swaps are that you have got on there and maybe what the duration of those is?

Ron will take that.

The swap balance, which I think you will find when the Q comes out, is about a little less than $4.2 billion at the end of the quarter.

Great.

We hope to have the 10-Q out within the next couple of hours.

Okay, great. I was looking for that but did not see it hit the ticker yet. Great. Well, thanks a lot. I appreciate you answering the question, guys, and congrats on a solid quarter.

Steve Delaney, JMP Securities.

The net spread had a nice pop from the first quarter, but I just wanted to see -- kind of get a feel for what to expect in 3Q. Now you added about $2.4 billion, which is almost 30% growth in the MBS portfolio, and that obviously was late in the quarter. So your 138 I assume is sort of a weighted average spread of which you started with and which you ended with, but obviously you did not get the full benefit of the new securities and the wider spreads.

So I guess we could get it just one or two ways. Could you either share with us what your spot spread was as of June 30 -- I know just an estimate of those to yield in the cost -- or maybe give us an idea of what your average spread was on the new assets purchased?

I'm going to answer part of the question, and then I am going to turn it over to Bill and Ron to give you some more detail. But I will tell you we will give you some guidance going forward. Looking to Q3, we will probably be at or about 155 basis points.

(multiple speakers) -- 155?

Steve, let me just caveat that. That is assuming we will (multiple speakers)

Assuming everything is constant, assuming about a 15% CPR with those qualifications.

Right. Okay. And Stewart said 155, correct?

That is correct. So you are absolutely right. There is an upward trend. There is the positive impact of the new investments we made in June, but rather than having you try to extrapolate from one data point, if the prepays stay where they have been and there is no unforeseen Fed action, the spreads will continue to trend up for MFA.

And Bill, within that, are you assuming 30 day repos in the neighborhood of 240?

Yes.

Bose George, KBW.

Just to follow-up on Mike's earlier question, the 6.7 leverage, can we kind of assume that was partly just the deploying the capital more slowly than -- it ended up with a little more capital at the end of the quarter and then the 7 to 8 number for next quarter in terms of where we modeled the portfolio?

Yes, I don't know if it is more slowly. We've raised the money that month.

Right. We raised the money in early June. We started to deploy it, remember, the settlement days in June, so it's very difficult to get the full use of those dollars kind of earning for you. So again, we showed you what the number was as of June 30, and that is fine. Yet it might be a little lower than you anticipated, but we have been working hard to invest the dollars. But again, as we had done previously and I have said I don't know how many times on these calls, I don't feel that we have a gun to our heads to invest the dollar. It was the volatility of the marketplace. In retrospect I think the decisions that we made were very prudent, and as we continue to take our time and be patient, spreads increased.

So (multiple speakers) I'm very pleased about where we are both in terms of leverage and the types of assets that we have been able to purchase.

Okay. Great. Just on the portfolio, the duration number you gave, the 1.57, that is the net duration of the portfolio currently?

Yes, that excludes -- that is tracking the liability in duration, yes.

And that is sort of the level you are comfortable with at least for all things being equal for awhile? I mean given that the last quarter your direction I think was 0.6 years, right?

Yes. We are probably a little bit less hedged now than we were at the end of the first quarter. That is correct.

Okay. But this is sort of -- in terms of modeling or -- because presumably this does result in you guys getting a better spread on some of your new investments as well, right?

Yes. So we are a little bit less hedged if that is your question.

Jim Ackor, Sterne Agee.

I have got -- I hate to keep beating on this topic, but when you look at what is going on with your spreads right now, obviously the widening out and the interest rate risk I think is a little bit more pronounced, albeit under a much lower leverage ratio than you normally might support. It feels a little bit like the '04, '05 time period, early '05. At what point do you kind of start taking some of that interest rate risk out of the equation in anticipation of rising short-term interest rates whenever they might come about?

We're being -- you know, we probably ended the first quarter a little bit more hedged than we wanted to be. We added some hybrids without hedging it all. But this is, you know, we share your view that there is inflation as the chance that long rates move up over time. So we are being careful to the incremental duration we had this quarter.

I think if you look at us as an entity, we are generally more hedged than some other folks. So we feel very comfortable about how this Company is situated at the moment. Again, one, taking advantage of the opportunities that we see and having some dry powder, and two, in terms of the hedge ratio, we feel that we are pretty much in the right place.

Now that is modified on a day by date basis and see what headlines and what are the counterparties doing and so on and so forth. But I really do feel comfortable about how we are situated.

Jim, let me reinforce and to all of you that we are sensitive to how much yield we pick up for how much more duration. And I know you know us, but I just want to repeat, we're not buying fixed-rate mortgage-backed securities. These are hybrids and adjustables. Yes, a 51 gives you more duration than a 11, but it is not that we're buying 30-year fixed-rate mortgages.

I totally understand. Just to follow-up on that thought process -- thanks for the insert -- how do you guys kind of look at the concept of balancing what sort of interest rate risks you are willing to take vis-a-vis leverage? It seems like the choice is to maybe take (multiple speakers) a little bit more of an outside or a little bit more of a riskier position with regard to the interest rate mismatch, if you will, but more comfortable in doing so with less leverage. Is there any set of circumstances where you could foresee closing that mismatch gap but using more leverage? I mean you guys are well below the group average in terms of leverage, but is that something that you think about?

The answer is yes. It is something that we think about. We think about it on a moment by moment basis. If, in fact, spreads continue to widen and we continue to see those opportunities, we would certainly have the leverage but to up the leverage relative to the risk reward. So again, if you up the leverage, I want the duration, okay, not to increase.

So it is a balancing act, and it is a balancing act based on picking up the journal, picking up the Financial Times, picking up the New York Times and kind of having your ear to the ground what is going on with the counterparties? How many more write-downs are there going to be? Is there another shoe to drop somewhere? Very, very sensitive to those types of things. And again, coming in with the leverage that we're at, being able to now put additional assets at higher spreads than we might have been certainly in June, I'm very pleased.

Great. Thanks very much. Appreciate it.

(OPERATOR INSTRUCTIONS). Matthew Howlett, Fox-Pitt Kelton.

When you look across all your lenders, how much difference are you seeing between one haircuts and two and, more importantly, two financing costs? Is there room to move lines over to some of the cheaper sources of funding, or would you like to preserve all the relationships and keep the business lines open despite it might be costing you a little bit extra money to do so?

Let me answer one part of your question, and I will turn it over to Ron who is really enjoying that area.

We have 18 counterparties. And it is important that that we do business with 18 counterparties, you don't have too much of the concentration, and that's a very, very important part of our business and again, another part that we are very, very sensitive to, and it is a balancing act.

In terms of the cost of repo, haircuts have been pretty consistent. Ron will give you some data in a moment and tell you where we have been. But again, haircuts have pretty much remained consistent.

So we are sensitive to our counterparties. We very much appreciate being able to finance ourselves with 18 quality counterparties, and that is part of what we do.

In terms of the other part, Ron, why don't you respond?

Sure. You know, the haircuts throughout the quarter, they essentially remain the same. We did not see any change. They range anywhere from 3% to 5% for one month repo. And what we have found with each of the repos that we roll is that within a couple of basis points, each of the counterparties within a couple of basis points. And when they are outside of the norm, we go back and give them some market color, and they tend to come back to where the norm needs to be.

So we have not seen any issues on the financing side because we try and keep open transparent relationships with our counterparties, and we spend a lot of time speaking with them, letting them know what we're doing, and so we have a pretty good feel for what they are doing.

Okay. Great. So the real benefit in the funding costs will be sort of if LIBOR comes back to where federal funds is? Is that sort of -- that is really not part of your expectations going forward. But if there is a normalization, we would see off-season improvement in the repo costs?

Yes, you would expect to see that LIBOR should be pretty close to Fed Funds, which right now it is somewhat higher.

Great. And just on the second one, just in terms of trading overall liquidity in the hybrid arm market, has that improved a little bit since March, or is that still -- I'm assuming you could get better financing if you did fixed-rate pass-throughs -- but is the hybrid -- liquidity in the hybrid market improved at all since the first quarter?

The fixed-rate market, as you know, is a much larger market than the hybrid market. But in terms of -- they use March spreads kind of as a benchmark, and yes, it is much more liquid than it was in March. One, we're seeing product in terms of assets to buy and be able to finance them everything that has been on a very, very positive basis.

[Richard Sloan], private investor.

Most of my questions have been answered, but I have two remaining. One is the 18 counterparties that you have, are they the same counterparties that you had in the past? Has there been any change, any that have left the fold and any new ones coming in?

And second, I know there has been a lot of talk about the interest rate spread. I would like to know -- you mentioned that if all things stay the same and Fed actions don't dramatically change, then these were your projections. When you say dramatically change, are you anticipating the Fed to raise rates in the next meeting?

Taking the second part of your question, unfortunately Mr. Bernanke doesn't call me. I only wish he did. But individually no, I'm not anticipating the Fed to raise rates.

Again, we have to give a caveat kind of qualification relative to answering the particular question of what we thought the spread would be in Q3. Having said that, again the qualification is, if all of a sudden the Fed did something that we did not quite understand and they raised rates to exaggerate by 100 basis points, it would certainly change the scenario. I'm assuming that the Fed is going to stay somewhat constant at the next meeting, and it will kind of be flat.

So that is part of your question. Does that answer that part for you?

No, not exactly. I know that if, in fact, they would raise it 100 basis points, that is substantial. But if they would've raised it 25 basis points, is that calculated, and is that figured into your calculations?

No, the 1.55 is without Fed actions.

Say again. I lost you.

The 1.55 assumed no Fed action in the third quarter.

No Fed action.

Correct.

Okay. And what would happen to it if they raised it 25 basis points?

As the last person pointed out, our funding is specific to LIBOR, not Fed Funds. The relationship between Fed Funds and LIBOR is varying over time. Right now LIBOR is a little above Fed Funds, so I cannot give you one exact answer.

Okay. And what about the counterparty situation?

The counterparties -- in the second quarter, there has been no change in our counterparties. We have added a few over the past year. We have seen a couple who just decided to exit the business in the first quarter, but nobody exited the business in the second quarter, and none of our counterparties have given us any type of problem in rolling any of our repo.

[Richard Krebs], private investor.

This is probably kind of a silly question, but the $40 million I'm going to call it write-off that took the earnings from 22 to 20, could you explain to me if that is mortgages that you have actually sold and took that write-off, or is it still on the books with a value of $0.00?

We didn't fill around the books with a value of $0.00.

Okay. Is it reasonable to assume that there might be some value there?

Our view right now is more likely than not, no, but yes, there's always room for some positive surprise there.

Understood. I appreciate the answer and your support over the years. Thank you, guys.

Barry Cohen, Knott Partners.

I may have missed this. Did you give any indication when you will be putting to work the cash that you have on your balance sheet?

Well again, what we tried to show you in the press release is a combination of what the liquidity of the Company is, which was it may have consisted of cash and unpledged mortgage-backed securities. So again, you need a certain amount of cash, a certain amount of unpledged collateral in order to meet margin [hauls], which are our unusual part of the business. So it is not like we're waiting to invest that $200 million some-odd of cash at a rate of X.

So I think the question then kind of evolves to, what will the leverage of the Company be? Alright? And again, what I have tried to answer before would be somewhere between 7 to 8 times is where I feel comfortable. Does that kind of help, or is that --?

No, no, that is perfectly understandable. Very lucid. Thank you for your help.

Dale Benson, Wells Capital Management.

Some of my questions have been answered with regard to counterparties, but the question I have is that one earlier person mentioned that he thinks this is a '04, '05 kind of timeframe. And that is when the yield curve flattened. And, in other words, that was part of Greenspan's conundrum that long rates did not rise when the short rates rise.

If we are in a more inflationary environment, it seems to me that any increase on the part of the Fed will likely result in a parallel shift in the yield curve until the economy recovers substantially and there's lots of financing pressure. In that instance then, it seems to me that spreads will not narrow significantly except on existing book, but new purchases will continue to experience what right now are unbelievably widespread, the Fannie and Freddie both 51 hybrids in the 30-year fixed are against LIBOR pretty close to 400 basis points. Would you want to comment on that?

Well, I think you're right. I mean what I've heard you say, which I would agree with, is that the yield -- forgetting whether the Fed goes up 25 basis points, basically the yield curve is going to steepen. And generally if that happens, that is going to be a very, very positive -- continued positive for us. My own opinion is I don't believe that is going to happen, but that is neither here nor there what my own opinion happens to be.

But I think that we are, as I said before, I think we are very well situated to the fact that just because we have so much dry powder, we can invest our new assets at very, very attractive spreads.

Are there any of the counterparties you are concerned about, by the way?

As Ron said to you a moment ago, the only counterparties that have left us over going back to March have been people that have exited the business. They have not exited MFA as an entity. They have just got out of the repo market, and we have actually picked up with our net net basis positive in terms of repo counterparties. We have only positive indications from all of our counterparties in terms of continuing to want to do business with us, And again the feedback is all positive.

Okay. That is it. Thank you.

And there are no further questions at this time.

Well, I just want to thank everybody for taking the time to be on the call. We look forward to speaking with you again for Q3 2008. Thank you.

Ladies and gentlemen, the replay will be available today at 11:40 AM until August 6 of 2008. You may access the AT&T Replay System at any time by dialing 1-800-475-6701 and entering the access code 955793. International participants may dial 320-365-3844, access code 955793.

That does conclude your conference for today. We thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.