MFA Financial Inc (MFA) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter '08 earnings teleconference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. [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 loans 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 exemption 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 annul report on Form 10-K for the year ended December 31, 2008 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'a annual report on Form 10-K for the year ended December 31, 2008 and/or the press release announcing MFA's fourth-quarter 2008 financial results. I thank you for your time and I would now like to turn this call over to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning. This is Stewart Zimmerman, CEO of MFA Financial. I welcome you to the MFA investor call announcing our fourth-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 Covallo, Chief Accounting Officer; Tim Korth, General Counsel; Craig Knutson, Senior Vice President; Kathleen Hanrahan, Senior Vice President; and Debra Yang, First Vice President.

Today, we reported net income of $44.6 million, or $0.21 per share of common stock for the fourth quarter ended December 31, 2008. On December 11, 2008, we announced our fourth-quarter dividend of $0.21 per share of common stock, which was paid on January 30, 2009 to stockholders of record as of December 31, 2008. As of December 31, 2008, our book value per share of common stock was $5.29. Subsequent to year-end, our agency MBS portfolio gained value with book value per share as of January 31, 2009 increasing to $5.80.

MFA's primary focus remains high-quality, hybrid and adjustable rate mortgage-backed securities. Due to recent market volatility and dislocation throughout the financial system, we continue to maintain a modest leverage multiple. While repo funding is available at attractive rates from a growing group of counterparties, it is our view that the banking system remains fragile in light of the probable credit impact of the current economic recession. At December 31, 2008, our debt-to-equity multiple was 7.2 times and our liquidity position was $467 million, consisting of $360 million of cash and $106 million of unpledged mortgage-backed securities.

Even with this conservative capital structure, our quarterly dividend annualized provided investors with a 16% yield relative to our year-end book value. Based on current LIBOR and repo rates, we expect our overall funding costs will begin a multi-month downward trend beginning in February. We currently expect that first-quarter 2009 earnings per share will be in a range from $0.21 to $0.23.

A further positive trend is that, while our book value per share includes a negative swap valuation of $237 million as of December 31, 2008 from our existing interest rate hedges, we expect a partial recovery of this amount over the course of 2009 due to both scheduled amortization of $963 million and the rolldown of the remaining average turn of our existing swaps. Under swap agreements, the Company pays fixed rates of interest averaging 4.21% of the notional balance totaling $3.97 billion with an average maturity of 29 months as of December 31, 2008.

During the fourth quarter of 2008, our portfolio spread, which is the difference between our interest earning asset portfolio, including cash balances, net yield of 5.19% and our 3.82% cost of funds, was 137 basis points. During the fourth quarter, our MBS net spread, which is the difference between our MBS net yield of 5.29% and our cost of funds, was 147 basis points. In the fourth quarter of 2008, our costs for compensation and benefits and other G&A expense were $3.4 million.

Our primary focus remains high quality and a higher coupon agency, hybrid mortgage-backed security assets. Hybrid MBSes have an initial fixed interest rate for a specified period of time and thereafter, generally reset annually. In addition, as part of a long-term strategy to grow our asset management business, we have funded MFResidential Assets I, LLC to build the track record in the non-agency MBS sector under our non-agency portfolio management team led by Craig Knutson. To date, MFR LLC has acquired the most senior -- meaning the highest priorities of cash flow tranches -- of residential mortgage-backed securities at a highly discounted weighted average price of 51% of par of the securities and with an average credit support of 12%.

In this current market, our MFR LLC team is assembling a non-agency MBS portfolio with what we project to be loss-adjusted yields in the mid to high teens without the use of leverage. Our December 31, 2008 agency MBS and related receivables constituted approximately 94% of our assets. The senior most tranches of non-agency MBS, including MFR LLC, were approximately 2% and cash was approximately 4%. The remainder of our assets, consisting primarily of real estate, other MBS assets and goodwill, represented less than 1% of total assets. The average cost basis of our agency MBS portfolio is 101.28% of par at December 31, 2008.

Our MBS assets continue to be financed with multiple funding providers through repurchase agreements. As of December 31, 2008, our portfolio was financed with 19 counterparties. Assuming a 15% constant prepayment rate, or CPR, approximately 23% of the mortgage-backed securities in our portfolio are expected to prepay or will have their interest rates reset within the next 12 months with a total of 79% expected to reset or prepay during the next 15 months.

We take into account both coupon resets and expected prepayments when measuring the sensitivity of our MBS portfolio with changing interest rates. In measuring our assets to borrowing the repricing gap, we measure the difference between the weighted average months until coupon adjustment or projected prepayments on our MBS portfolio in the months remaining on our repurchase agreements, including the impact of interest rate swap agreements.

Assuming a 15% CPR, the weighted average time to repricing or assumed prepayment for our MBS portfolio as of December 31, 2008 was approximately 36 months and the average term remaining on our repurchase agreements, including the impact of interest rate swaps, was approximately 16 months, resulting in a repricing gap of approximately 20 months. The prepayment speed of our MBS portfolio averages 8.5% CPR during the third quarter of 2008. I thank you for your continued interest in MFA and at this time, I would like to open the call for questions.

Operator?

(Operator Instructions). Andrew Wessel, JPMorgan.

Hey, guys. Good morning. Just, I guess, a couple questions. One, a little housekeeping just on G&A. Pretty big drop in the quarter. Is that -- I imagine that isn't going to be a run rate, but could you just kind of give us some help there?

You're right. That's not the run rate. It was a reversal of bonus accruals in the fourth quarter.

Okay, great. And then the other question I have, and I think it is a broader one, is really looking at the amount of issuance that is going on right now and seeing at least the people with ARMs applying to get into fixed-rate product, what are your thoughts -- 6 to 12 months down the road -- in terms of availability for a hybrid ARM product to continue to execute the strategy? Do you see either it advantageous right now to take on 15 or 30-year fixed product or do you think that that is going to kind of force your hand due to the availability of product? Any color would be helpful there.

Andrew, actually, I was at a conference earlier in the week and they asked me a similar question. And the answer is we really have not seen a problem in looking at hybrid assets. Sometimes they aren't always new originations. They may be, in fact, from a secondary market. But there certainly is no shortage of assets to look at. Obviously, it makes more sense today for a borrower to get a fixed rather than take out a 3/1, 5/1, 7/1 or 10/1 for the most part, but it is still a viable market and again, based on what is being produced and based on what is available in the secondary market, it doesn't seem that we are going to have any problem buying assets.

Great. Thank you very much.

Jason Arnold, RBC Capital Markets.

Hi, good morning, guys. Just wondering if you can share your thoughts on prepayment speeds from a big picture perspective and then perhaps with respect to your portfolio in particular.

As we said in the press release and as I've mentioned to you, prepays go back 8.5 CPR. With what the government might or might not do, chances are prepaids are going to pick up. Where they are going to go, I am not 100% sure. But again, are we going to go back to the level of August of '03? My guess is we are not going to get there. However, they certainly will pick up it would be our best estimate. And in light of that and because of that, again, we are staying at a very modest leverage ratio and we will have a larger cushion than we might have in a more normal time sequence. But again, with the larger cushion, lower leverage, we could certainly meet all our obligations.

Perfect. Yes, I agree. 2003 is not going to return. The prepays of 50% are not likely here anytime soon. Okay, one more question. I guess could you give us a little bit more color on MFResidential specifically, the assets held in the strategy right now and then kind of your game plan going forward?

Sure. In terms of types of assets, it is the senior most tranches of residential mortgage-backed securitizations. Underlying collateral is between Alt-A and prime. And as you can see, for the whole Company, we are 94% agency, 4% cash and 2% the senior most tranches. We don't see that changing very much, but what is important is to build a track record in the space to seed MFR so that, if the opportunity is there, we can launch a new company and generate asset management fees for MFA.

By the way, I would like to point out that our goal is to have the 10-K out by the end of the day. So some of your other numerical questions hopefully will be satisfied that way. But our goal is to get the K out the same day we announce earnings.

Great. Perfect. Yes, it certainly seems like a good time to buy these pieces of these highly rated deals at such a low price. So great. Thank you so much.

Mike Widner, Stifel Nicolaus.

Good morning, guys. Congratulations on a solid quarter and thanks for taking the questions. I just have two quick follow-ups to a couple of the earlier questions. First, on the prepayment speeds, I recognize there are a lot of unknowns there. Just wondering if you have got the data from January and what prepayment speeds in January looked like relative to Q4?

Actually, we do and the CPR is approximately 8%.

So actually you were 8.5% for Q4 and actually slower in January?

It was slightly slower, but having said that, again, following up on I think it was the question before from Jason, I would say the same thing relative to your question, Michael. We have to assume that prepays are going to pick up. And again, as I said, I'm sorry to be somewhat redundant. I don't think they'll go back to August of '03, but you have to be prepared that possibly prepays do pick up somewhat significantly. We want to be prepared for that.

Absolutely. That makes a lot of sense and consistent with what everyone else is saying. You are the first to comment on January prepays speeds in the call and I expected somewhere in the 12% to 15% range. So 8% is surprising.

Let me -- one other question. I guess I am just going to follow up on also from Jason. On MFR, if and when you do spin that out as the market gets better, what would you envision the financial relationship between MFR and MFA being? Would it be an external management fee structure or would there be some other sort of profit sharing or how would you envision that working?

It would be a discrete company that we would own some percentage of and it would be externally advised, similar to -- you may or may not recall. We actually tried to take MFR public in the middle of last year. So it would be a similar structure to the proposed public offering we tried earlier this year.

So basically MFA is an external manager and partial owner and you would collect part of the dividend stream, as well as a management fee?

Correct.

All right. That sounds great. Appreciate you taking the call, guys.

Steve Delaney, JMP Securities.

Good morning, gentlemen. I know you're happy to have 2008 behind you.

Thank you, Steve.

We all are. I know there is a lot of questions. The other guys have had good questions on the prepays, but I just wanted to ask a specific question, especially Mike's surprise with the 8% and that surprises me a little too. But I think we -- I wanted to ask a question that gets behind that because we all saw fixed coupons move from 18% -- when we saw the factors last week, we saw the fixed stack in a blend move from 8% to 17% and I think that gets more of the headlines.

But here is what -- when we were digging through the products last Friday, we noticed a huge difference in the speed in hybrids. If it was an IO, it was much, much slower than an amortizing hybrid. So in other words, I think the LIBOR IOs went from like 8 to 10 CPR and the regular amortizing LIBOR were up in the low 20s, the amortizing hybrids. So here is the question. Can you estimate for us what percentage, since you are a hybrid player, what percentage of your portfolio and your hybrids would be IO paper?

Steve, for 10 years, we have been telling people that the volatility of the CPR of the hybrids is a lot less than fixed rates.

No question.

And sometimes the facts support us. In addition, we do try to do a superior job in predicting prepays and I think you would understand why we don't want to lay out everything that we do. But I think your question touched upon what are the differences, which is interest-only versus amortizing.

And the point being that we think generally those borrowers might be, let's say, less creditworthy or more challenged than a guy that would take on a full amortizing payment?

Well, there is more than that. If they are only paying interest only, the interest rate may be lower on the 30 year, but the payment would be higher because it is amortizing.

Makes sense. Okay. But you don't want to comment on what percent are IOs is what you are saying, Bill?

I really don't.

Okay, fair enough.

You will have the K and we break down a lot of information, but certain stuff we like to keep in-house.

Okay, great. So then on the continuous offering plan, it looked like, in fourth quarter, that you guys did about 13 million shares in that plan, new shares and it was about twice what you did in the third quarter. Can you give us any color as to what -- going looking out over the next couple of quarters, would it be more like 3Q or more like 4Q? I assume you're going to continue to use the plan.

Well, only where it kind of makes some sense for us. Again, we had the opportunity to raise some money through the equity plan, which is relatively efficient from a cost basis. And we did it (inaudible) with some very positive prices for the Company. So if those situations continued to arise, yes, we will continue to look at the plan.

Okay, thanks, Stewart. And one final thing, the swaps actually -- your notional swaps actually went down, which you actually showed us when I think -- Bill, for the first -- you put that table in the 10-Q that showed a couple hundred million were going to be coming up in the fourth quarter. Will that table be in the 10-K as well?

Yes, Steve.

Okay, great. So I mean that $237 million that Stewart alluded to, something over $1 a share and based on what we saw in the third quarter, we should be seeing $0.40 to $0.50 of that coming back in over the next year by my rough estimate.

Both things being equal if interest rates don't go down again.

Well, exactly. And of course, yes, we are not worried about them going up, which would actually be beneficial. But yes, if we got another -- obviously another 20, 30 down on swaps, we wouldn't get as much of that for sure. Well, guys, thanks a lot for the comments.

Bose George, KBW.

Good morning, guys, nice quarter. Just had a couple of little things left. Just on -- the portfolio spread that you mentioned, the 137 basis points, is that the number that we compared to the 161 last quarter as opposed to the 147 basis point spread on MBS?

It was 160 one quarter before and 138 the quarter before that.

Okay and that is comparable with the 137 this quarter?

That is correct. That would be apples and apples.

And then just in terms of the repo funding costs, I was just wondering what you guys are seeing out there for one-month repo. And also are you seeing dealers willing to take haircuts back down or do you not particularly care since you've got a lot of excess capital anyway?

I will answer -- this is Ron. I'll answer the second question first. We have seen the haircuts start to trend down a little bit. We don't envision it going back to the 2% and 3% that we saw 18 months ago, but it has come down and one-month repo trades up 1%.

Okay, great. Thanks.

Rob Schwartzberg, Compass Point.

Good morning. I had a couple of questions. Getting back to the non-agency portfolio, do you have a target percentage of assets you would like to get that portfolio to before looking at the spin-out possibilities again?

This is Stewart. There isn't an absolute number, but, again, I think the point that Bill was making before and I would like to reiterate is that the percentages that you see here are not going to change drastically. So again it is 94%, 4% and 4% and 2%. So again, you are at or about 2%. Chances are that's not going to change one heck of a lot. So you are at 94% in agency, you have some cash receivables and you have got, give or take, 2% in the non-agency.

Great. And then just a couple other quick questions. So your actual CPRs are running closer to the 8, 8 plus range. Did I hear that correctly?

This quarter ended 12/31/08 was 8.5 and the question was asked, as Bill answered, where was it in January and it looks like it was about 8.

Right. So my question is your modeling I think a 15, if I read that correctly. At what point do you kind of true that up during the year and then what is the ultimate impact on earnings?

That 15 is looking at our mismatch. So that 15 has nothing to do with our earnings. So that is over the life -- that 15 estimate has nothing to do with one month or one quarter or three quarters worth of numbers. It does not impact the earnings.

But aren't you amortizing the premium more quickly at 15?

No, we are amortizing the premium based on actual results. We true up --

Okay, all right. That was my question.

I know some people do it differently. We true up quarterly.

Okay. And I guess, lastly, how are you financing the non-agency, the 2% of assets and what is the haircut there?

Incremental assets, we are using only equity. The pre-existing assets have been on repo as long as we have owned them and they remain there.

Great. Thank you very much.

Matthew Howlett, Fox-Pitt Kelton.

Thanks, guys. Just on new acquisition spreads, what are you seeing in the marketplace now and how do you look at hedging here?

In the marketplace, if you look at any -- the range between 3/1 and 10/1, if you assume a 40% hedge, what you see going out 12 months or so is you see anywhere from 225 to 275 basis points of spread.

Okay and then assuming you still like the up in coupon trade with premiums here, the Fannie Mae 5.5 coupon is roughly 103, that is a lot higher than what you have with the existing book. How do you feel about adding premiums here in the marketplace here?

I've been in this business for a long time and what I learned a long time ago is you don't really want to pay a very, very significant premium when the optionality is 100% on the side of the borrower. So we are not a big premium payer company. We never really have been. So to put a lot of product on or not of new assets on at three plus in terms of premium -- meaning 103 or a price higher than -- is not something that I think we would find acceptable. So that is not where you really want to go and plus the fact that, over time -- one of the questions we have to ask ourselves and possibly maybe you ask looking at our Company, why are interest rates are going to be a little bit higher at some point in the cycle? I don't know if that means one year or three years or four years, but at some time in the cycle, they are going to be higher.

And do you want to have a portfolio of a few billion dollars of 3.5% coupons at a three-point premium? You're right. You're not going to have a lot of prepay risk, but, boy, you are going to have some duration risk that is going to be very interesting. So that is not exactly where we want to be. So I think here and there, we will certainly look at some assets and see if it makes some sense for us, but I don't think we are going to be a big buyer at a three to four point premium.

Great. Thank you very much.

(Operator Instructions). [Sean Kelleher], JGC Management.

Good morning, everyone. You noted that you are seeing agency repo rates sub 1% right now. Could you be a little more specific there? It seems like those rates should be around 45 or 50 basis points. I mean can you just comment on how those financing rates were affected by all the turmoil in the fourth quarter?

I will answer part of it and then maybe other folks can chime in if I don't give an adequate answer. Look, we fund -- most people can fund themselves between one and three months here. The shorter that timeframe, you're going to be over LIBOR. The longer part of that timeframe, you are going to be below LIBOR. Three months now is like 124. One month is 45, 46 basis points. So that kind of gives you an idea.

The number Stewart reported was LIBOR.

LIBOR, yes. I'm sorry. Did I not say that? One month LIBOR or three months LIBOR. I'm sorry. We fund off of LIBOR. So those are the basic numbers.

And right now, we are funding at LIBOR plus for one month and LIBOR minus for three months. It is -- I gave you -- I said it was sub 1% because it varies between 5 and 10 basis points on any kind of day, but it is somewhere between where LIBOR is and 1%. Depends on the day and the counterparty.

But the reason we are not being specific is we get competitive bids on our repo each day and I don't want all repo providers to know exactly what we're paying. So we are not trying to hide anything. It is for competitive reasons that we are being a little vague.

Okay. And then just relative to the fourth quarter, how much better is that just on a versus LIBOR basis?

Well, what we said in the press release is that we're going to continue to see downward pressure on our funding costs, meaning funding costs should continue to go down. So if you look at where we were at the end of 12/31/08, we had put on a number of repos, sometimes a little more expensive than you would like, simply to get over year-end, because we didn't know with the turmoil of the market, we felt certainty was better than not being certain.

So, in fact, that is the decision that we made, which in retrospect I would make the same decision all over again. So that was a little bit higher cost than it might have been, but again as you know by all LIBOR, LIBOR is trended down. And the fact is that we have been able to have our funding costs go in the same direction.

Thanks, guys, and just last question. Are haircuts for agency security still in that 5% to 7% range?

Yes, generally that is about the number, depending on how far out you go.

Thanks very much.

Steve Covington, Stieven Capital.

Good morning guys, good quarter. Most of my questions have been answered. I did want to get your take on some of the announcements on the TALF, and maybe the public-private funds that are out there and how those might impact your non-agency portfolio just in general. And obviously, with the MF residential growing a little bit, it is opportunistic, but just maybe talk about what prices you're seeing on the stuff that is on your books and where you expect them to go?

The TALF proposals, as you know, are moving targets, and we don't need to be the spokesman for the Treasury. They explain it well. But it is our understanding that this new proposal is really focused on consumer receivables, so it is not specific to RMBS, as you know.

And also there is the concept of separating new securitizations versus old securitizations, in terms of TALF funding. Is that what your question is?

There is some ambiguity there. There is some very exciting potential there, although there is a long way to go between what is out there riding and what will exist. But there are some things there that have us very excited.

Okay, thanks.

At this time, I am showing no further questions in queue.

Thanks, guys and operator. I would like to thank everybody for their questions, for being part of the conference call today. We look forward to speaking with you next quarter, and thank you.

Ladies and gentlemen, this conference call will be available for replay starting today at 12 p.m. through February 20th at 12 midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 986420. For international participants, the number to call is 1-320-365-3844. (Operator Instructions)

That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.