MFA Financial Inc (MFA) 2009 Q2 法說會逐字稿

Welcome to the second-quarter 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, [Stephanie Coyle].

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc. that reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations.

When we use statements which are not historical in nature, including those containing words such as believes, expects, anticipates, estimates, plans, 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 statements -- these types of statements are subject to various known and unknown risks, uncertainties and 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, implementation of, or changes in government regulations or programs 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 annual 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 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, 2009 and/or the press release announcing MFA's second-quarter 2009 financial results. Thank you for your time.

I would now like to turn this call ovary to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning everybody. Hi, it is Stewart Zimmerman welcoming you to our earnings call. Joining me morning are Bill Gorin, President and Chief Financial Officer; Ron Freydberg, Executive Vice President and Chief Investment Officer; Craig Knutson, Senior Vice President; Tim Korth, Senior Vice President and General Counsel; Teresa Covello, Senior Vice President and Chief Accounting Officer; and [Deborah Yang], First Vice President Analytics.

We will were well-positioned going into the second quarter of 2009 and we are certainly pleased to announce our financial results. First, I would like to make a few remarks about our strategy and then open the call to questions.

So where we have added senior mortgage-backed securities to high-yielding agency mortgage-backed securities we think that is a very compelling strategy. Consistent with our focus on high-quality assets, we are blending senior MBS with higher-yielding agency securities, not junior credit enhancement securities, or lower tranches of mortgage-backed securities.

The majority of our assets will continue to be whole pool agency mortgage-backed securities due to both the attractiveness of the asset class and for purposes of our exemption under the Investment Company Act of 1940. With senior mortgage-backed securities we can generate attractive returns for stockholders with less leverage and less sensitivity to the yield curve and interest rate cycles.

We are uniquely positioned with the requisite expertise to benefit from existing investment in high-yielding agency mortgage-backed securities and the acquisition of the senior most tranches of non-agency residential mortgage-backed securities.

Adding these senior and mortgage-backed securities to our high-yielding MBS, again I would say is a compelling strategy. Why? Well, senior mortgage-backed securities offer low to high teen loss adjusted returns. The structured credit enhancement to highly discounted purchase price mitigates the risk of loss of invested principal.

We are currently acquiring these assets without leverage. These high-yielding assets are significantly less sensitive to changes in the yield curve and interest rates. And the return on discounted senior mortgage-backed securities increase if prepayments were to increase.

So what I would like to do is go over some of the key data that were listed in the press release, and then simply open the call to questions. So you can see that our net income was $67.1 million or $0.30 per share. Our net income, excluding items not affecting distributable income was $61 million or $0.27 per share. And our dividend declared, as you know, was $0.25 per share.

Our book value as of June 30, $6.99. Return on equity on distributable income, 15.9%. Leveraged overall debt-to-equity was 4.8 times, however, the effective leverage, excluding equity used to fund unleveraged non-agency mortgage-backed securities was 6.2 times.

Liquidity, about $653 million. Our portfolio spread, 231 basis points. Our MBS net spread, 249 basis points. Average cost of secure agency securities, 101.3% of particularly. Repricing gap, assuming a 15% CPR, 19 months. And our CPR was in fact 16% for the quarter.

So I want to thank you for your continued interest in MFA Financial. And at this time I would like to open the call for questions.

(Operator Instructions). Andrew Wessel, JPMorgan.

Just a couple of questions on the strategy going forward. So obviously you have added a lot of equity to the non-agency strategy in the last couple of quarters. Do you have a target for where you expect that to go longer term, given the current opportunities you're seeing?

No, we don't have an absolute number. There is no magic number to say that we are going to be at a particular -- again, as I said I think in my opening remarks, the bulk of our assets will continue to be agency -- high quality agencies. And again, we do look for this portion of the portfolio -- you know, certainly we are going to continue to buy, because it doesn't make (technical difficulty) heck of a lot of sense to buy agencies at 5 and 6 point premium and load up on very, very low coupon. So that is not part of our strategy now.

We still like the agency market. We still think there's going to be incredible value in the agency market, but not quite now. So we think a little bit of this credit area certainly makes sense for us, and it is proving to be very, very positive.

Then given the projected returns you're seeing in that asset class, and the possibility of applying leverage going forward at some point, and then countering that with all the other of these kinds of -- these mortgage REITs that are coming out that are on file right now kind of targeting similar parts of the non-agency market, what are your thoughts on raising capital here or on the potential for MFResidential to be spun out at some point on its own?

Let's take the second part first. In terms of -- we always like to have optionality. Whether or not MFResidential would have got spun off or not, that is something that could happen, but it is not necessarily in the plans, and they may be in future, and that is why we have done everything through MFA. So I think our strategy has proven to be good.

In terms of other folks coming into the market, that is fine. Basically when we look at our mark to market on what we have purchased -- that is going back to the latter part of last year -- what we own is kind of golden, and we are very comfortable about what we have paid. I think our average purchase price, if you look in the press release, is about 51% of par. So we are very, very pleased with that.

If in fact prices were to continue to grow, meaning that the value continues to increase, that makes what we own that much more valuable, and very pleased with that. But you can still obtain very, very handsome returns on these types of assets.

Andrew, as you know, we have publicly been pounding the table on these assets since December. Now albeit, December we are only pounding it lightly, and in February and March we were pounding heavily, but we like the [assets] very much. I think in retrospect our timing was -- overtime you will be able to look back and [say, gee], you really timed this well.

The investment opportunities are still there. And what you have here was the numbers through June. In July we continued to buy senior-most tranches of non-agency MBS.

So in that regard, are the opportunities attractive enough to consider new capital, or do you think just the recycling of capital from the agency portfolio over to the non-agency portfolio would kind of --?

We always look at the opportunity, as you know, in this type of an entity to create capital, because that is how you grow. If the share price gets to a point where it makes some sense, we always look for that opportunity.

Great. Thanks a lot guys. I appreciate it.

Mike Widner, Stifel Nicolaus.

Just a quick one on repo costs. I am wondering if you can talk about where those stand, and if you're looking at the extended duration repo now or if we are still fairly short?

All right. Ron.

Yes, we are seeing more counterparties coming into play for repo. You're seeing one-month repo in the mid to high 30s now. So we broke through the 40 barrier recently. We are also seeing more counterparties entertaining going further out with their repo financing. So we've talking to a couple of people about going out one, two and maybe even more than a couple of years. But again, it is very different than what you saw six, nine months ago where people were a little bit hesitant to go out beyond one and three months.

As far as the longer duration stuff, and the prices on that, is it attractive pricing relative to swaps, or is it kind of crazy expensive to go out more than three, six months?

No, it is not crazy expensive. It is probably swaps minus some, so it is not crazy expensive.

So are you doing much of that today? Are you still keeping it short and waiting to see how interest rate plays out?

It is something that we look out at all the time. We have seen that short rates have stayed in the same general area for a while now, and we don't see a whole lot of change in the marketplace. But again it is something we look at, and we will keep looking and see what works best with your assets.

Great. Thanks. And just one other one, if I could. The leverage on the non-agency part of the portfolio, you indicated that is down around 6 -- sorry, on the agency side of the portfolio, that is down around 6.2 times. Are you guys thinking about that and managing the leverage at this point, or is it more about buying agency assets if you find the pricing attractive, and pricing is not very attractive right now?

It is really a combination of the two. And again, the world is still somewhat unsettled. It is certainly better than it was going back a year ago. And I think it is still important to be very cautious in terms of leverage. So in terms of where we are, we are very comfortable with that. If that were to change, we can change on a dime also. So I am very comfortable with where leverage is. And that is really where we are.

If you're not going to buy assets, obviously you're not going to increase the mortgage.

But again, as I said before though, to pay 5 and 6 point premiums for agency assets when you have the optionality 100% on the side of the homeowner or the borrower, it is just not our strategy. It may be someone else's, but it isn't ours.

Great. Well, thanks, guys. I appreciate the comments.

Steve Delaney, JMP Securities.

Good morning everyone and congratulations on your quarter. Just for clarity, I think if we look at just this leverage it is going to be confusing for you guys, not only because you have the unlevered non-agency book, but within your legacy book your MFA book, you actually -- you have the $96 million of repo on your legacy senior RMBS at a lower leverage rate. So I think 6.5 times would be the correct figure if we just looked at the leverage on the agency book alone, just to put you apples-to-apples with your peers. For what that's worth.

I wanted to ask -- following up on Mike's question on repo as well, but I would like to talk about on the non-agency side. Ron, thank you for the color on where agency was. Can you let us know -- you have had this some $90 million of repo that you have been able to maintain even throughout 2008 on your legacy book. Can you tell us what the pricing on that is relative to the agency repo pricing?

It is LIBOR -- typically it is one month LIBOR, and is LIBOR between plus 150 to 250.

We are hearing some signs, just like you were talking about, maybe people going out longer, that maybe repo lenders have been a little more open-minded to collateral other than just agency. Do you think the terms that -- if you were to choose to apply some modest leverage to the MFR book maybe as an alternative to doing re-REMICs, do you think that those same -- that same price range of say 150 to 250 would apply to those positions, the new positions as well?

The answer is probably, but we are talking to -- there are a variety of different options that we are looking at when it comes to leverage for the non-agencies. Different people have different thoughts, and we are owing to go through and see what works best economically for MFA before we put any leverage on. So the leverage that we have on now is one month. What I think we are going to focus on is trying to get a little bit longer leverage and make sure it is permanent for a longer period of time.

Sure.

It is Bill Gorin. Our Q will file this afternoon. You will see the yield we are booking at our non-agencies is approximately 15% on the MFR assets. At the same time, if some of you guys have cash in money market funds, you know those are probably yielding maybe 10 basis points. The point is there is going to be a number of structures to solve for leverage on assets that yield 15%. But we are not locking in because every day these structures seem to become more efficient.

What we are doing now is to buy the assets to give us this yield. As we say in the press release, we are comfortable that different forms of leverage are available and will become available. But the key right now is to acquire the assets. The reason we don't structure a deal is the structure will become more efficient in a couple of months from now.

Sure. And, Bill, I totally get it. And once you do a re-REMIC you've locked and loaded. So I was thinking that maybe it makes sense just doing some short repo near term until you really see how the re-REMICs pricing settles in.

Right now we are not capital constrained on acquiring the assets. If we see an asset we want, we can acquire it. We don't need to come up with the leverage answer right now.

And the other side of that same coin is definitely that we are very comfortable with what we are earning on the assets without leverage.

I hear you, Stewart. That is fair. Which brings us to the fact that you have bought at a -- your timing has been good. You've got very attractive prices. And in fact for what we are seeing out there for current quotes for super senior Alt-A hybrids, most of those have like six handles now. Would you say that if you are in the market now that you would be paying 5 to 10 points higher than you probably had to pay back in February and March?

Are you on with us, Frank?

Yes, I am. And, Steve, I would say that is true, the prices are certainly higher today. And as Bill said before, we think there are some good values. They are not maybe as easy to find as they were a few months ago, but they still exist.

Great. That's helpful guys. Thank you so much.

Bose George, KBW.

Actually I just wanted to see you had the dollars amounts of gains by the different types, the non-agency and agency? I assume it will be out in your 10-Q, but if you have been handy that would be great.

Let me just give you approximate numbers. And the agency, obviously, is a larger part of the Company. And I would say -- and again, these are approximate numbers. Let's say we are up about $60 million in the month -- in the quarter for the agencies. Almost a comparable amount on the non-agencies and probably closer to $50 million on the swaps.

Great. Thanks. Then just switching to the agency portfolio, I just wanted to see your take on the government raising the limit on the HARP refi's to 125%. The 105% didn't seem to do a whole lot. Do you do think this increase is going to be material in terms of prepayment fees?

I think, if you keep in mind that a good portion of our portfolio on the agency portfolio are interest-only mortgages. It is going to be -- they are going to be more sensitive to what the rate is than the LTV. So you could have a 6% I/O mortgage, they need to get to below 4.5% on their conforming just for them to be dollar for dollar, to go along with that.

I think you will see some pickup because they're going to 125%, but I don't think it is going to be all that significant.

That is one change. The other change is while 30 year rates had bottomed off 450, now they're closer to 5, so there is even factors impacting it. I don't think any researcher is saying they expect a substantial change because of the change from 105% to 125% maximum loan to value.

Great. Thanks guys.

[Jordan Himmowitz], Philadelphia Financial.

Two questions. First of all, what is be book value x the markup in the assets? In other words, what is the book value if the -- at cost as opposed to mark-to-market?

Just on the (inaudible).

We don't actually -- we don't have people that rely on historical book value. We believe in mark-to-market book value. But I think you can look at the balance sheet and figure that out, right? Just take away the cumulative deficit or -- you know, if you take out the comprehensive loss, it is very close. The book value is very close to the historical cost basis right now. The other comprehensive loss is only $4 million.

You don't understand what I'm asking. In other words, the fair value is between 105 and 106 of your agency repos today. (multiple speakers).

(multiple speakers) agency is more. Is that your question?

Say it again. I am sorry?

(technical difficulty). Stewart said to buy in the markets by the 6 point premiums, we do not have our agencies more than 5 or 6 point premiums.

You do not?

Do not.

Are they marked at par then?

No, they are not marked to par. They are marked at market.

How much above par are they marked at on the agencies? That is my question. Then I can do the math.

North of 4 points.

So my next question then becomes, if you could actually -- if the market is between 105 and 106, why don't you just sell your agency book and take the gain?

To some extent we have. Your logic is exactly the way we looked at it. If we are not a buyer, sometimes we are a seller, and that is why you saw some realized gains in the second quarter.

We looked at the portfolio. We took the longest duration assets that we had at the moment, and we sold a portion of those. That was simply not necessarily to book the gain, that was simply because we are trying to take risk out of the portfolio.

Over time, I am not suggesting for the balance of this year, maybe even not at the balance of next year, but over time the interest rates are going to be higher than they are today. So we have to look forward two and three years, not for the next quarter.

Don't forget, if you sell these assets which are yielding us 5%, and your incremental repo costs is in the 30s, you impact your earnings by selling these assets too. So we do sell assets, but it is not an all or none decision.

And I am offsetting this 104, apparently you've got some losses on swaps too -- or gains on swaps, rather, that would be offsetting that.

Say that again. I'm sorry.

If the [8766] is basically held at 104 today on your balance sheet approximately?

Yes?

There is some loss on swaps that is offsetting that as well.

Correct. So $170 million, I believe.

Yes, $173 million.

Yes.

So you seem to have a $350 million in gain, offset by $173 million in loss. So $177 million net basis would be if you liquidated everything, what the [cream] of the book would be.

We haven't done that number.

You are saying to the extent that our agencies aren't marked to the absolute highs -- because we are not sure if we could sell $9 billion at 105, 106. Our market -- our book value reflects the market values we understand. There is no difference there.

I not saying there is difference -- and we can do this more after -- but I'm just saying that your book value reflects a premium over cost today, and that premium is approximately a little under $1 a share.

Just on the agency side, because you still have mark-to-market losses on the MFA AAAs.

Yes, yes. I'm excluding that.

So it is about even. It is about even.

[Joe Stephen], Stephen Capital.

Listen, all my questions have already been asked, but I want to congratulate you guys. Nice quarter again. Take care guys.

Jason Arnold, RBC Capital Markets.

It seems like mortgage originations and refi activity have reached a near-term peak here, and are likely to head back down. I was just curious if you can't share your thoughts on mortgage refi's and prepayments ahead? I note your portfolio is a lot more insulated with the I/Os, but just curious about your big thoughts.

This is just one person's thought process. Looks, our CPR for the quarter was 16. There is no reason to believe that it doesn't go slightly higher. But I don't think you would go back into the 30s and 40s the way you were in August of '03, as an example. So, yes, could there be a pickup? The answer is, yes. But again we continue to look at the refi and [assets] which goes up and down. It has been down over the last -- I don't know -- week or two and kind of lifted up just slightly.

So I would think that, yes, could we see a pickup in prepays, the answer is yes. But I don't think it becomes anything of great significance.

I am with you on that one for sure. And then I guess as a follow-up on the non-agency side of the portfolio, I was just curious what segment of the market are you really more or less concentrated in? Is it like [31s, 51s]? Are you focusing on deal structured by particular issuers, or what are the -- what does that look like there?

Craig, do you want to handle that?

Sure. I would say it is not necessarily concentrated on certain issuers or on certain product that is 31, 51, 71. The analysis that we do when we look at all these deals is really very fundamental on an underlying loan basis. So we try not to approach it with a predisposition to avoid a certain vintage, to avoid a certain state, because we believe that we account for that and price for that.

That being said, and we have said this previously, we haven't bought any prime paper. We haven't bought any option ARM paper.

Okay.

Does that help?

That is helpful. Thank you for the color. And again, nice job guys.

Henry Coffey, Sterne Agee.

Good morning. Let me add my congratulations to everyone else. A couple of questions. One has to do with the actual discount on your non-agency book. Over time most of that accretes into value through earnings, correct? Does any of it work its way into book value, or would that just come from the mark-to-market adjustments?

Certainly the legacy non-agencies owned by MFA, that will go back into book value, because we are still booking that income off our cost basis. Did you follow that?

Yes. And the stuff that you bought at "$0.50 on the dollar" that accretes into earnings?

Most of the discount does; some of it we don't expect to receive, and it is credit reserved.

But when we talk to people about their non-agency book, a lot of them are in the situation where they are seeing tremendous cash flows coming in, and then their accountants are going, no, no, no, you can't count that. We are uncertain about the absolute outcome. And so there is a lot of -- the equivalent I guess of reserve building. Are you finding yourself in the same situation?

I am not sure what -- we are buying the senior-most tranches, so it is very different than someone that might own a subordinate piece, which might be booking a large income without the cash. So, no, we are not seeing that.

So you're able to accrue most of that into income? Because of your senior position you are able to capture most of the actual income-related cash flows as well as some of the discount into income?

Yes, that's correct. The coupon and some of the discount is accrued into income.

Then on your -- as your swaps mature, how much of that gets done by year-end and how much of that stretches out into 2010?

You know what, we will -- as I said, we are getting ready to file the Q this afternoon, and we will lay it all out there.

Thank you very much.

Matthew Howlett, Fox-Pitt Kelton.

Just on the non-agency side again, you mentioned recurring loss adjusted yields in the low teens to high teens area. Could you maybe just elaborate on that more in terms of what you are assuming for prepayments and losses, and have you factor in potential modifications, given it looks like the collateral is Alt-A and so forth?

Frank, you want to take that from overseas or --?

Sure, First, when we book those there is two components (technical difficulty) discount, right? One component is (technical difficulty) into the income. The other is a credit reserve. In terms of prepayments and loss assumptions, again it really varies by collateral. So in some cases we may have prepayment assumptions that are as slow as 1 or 2 CPR. In other cases they might be in the high single digits. But it really depends on the deal.

Similarly in terms of loss type assumptions, loss severities, again, will depend on the deal. They could be down around 50%, and maybe even it could be as high as 70% or 80% depending on the deal.

You had one other part of your question --?

The modification impact, in terms of -- number one, is the collateral, what type of vintage is it -- could you give us? And then two, in terms of where the 60+ delinquencies, and how do you factor in the potential for a high amount of modifications through Hope for Homeowners or through some other mechanism that impacting the securities in terms of the yields?

The way that we really consider loan modifications is in most cases where we believe we are most vulnerable to loan modifications, we do try to quantify what effect that that will have on the yield. But at the end of the day, I think most of the loss assumptions that we make on the securities are harsher than the impact on the cash flow of loan modifications.

If you assume that you have a lot of loan modifications, then in all likely -- and they are successful, obviously, then that means that your original default loss assumptions were probably too high. So in most of those cases we believe that we actually end up either better or maybe in the same place with loan modifications, because I think we are pretty harsh on the securities and we model them in the first place. Does that make sense?

Yes, it does make complete sense. And just maybe one recommendation, which would be breakout by vintage possibly, if that is possible, the underlying asset.

We do that in the Q.

Okay, great. Thank you.

Omotayo Okusanya, UBS.

Congratulations on the quarter. Just a couple of quick questions. One, going back to an original question that was asked, it definitely makes sense having the non-agency book. But from the viewpoint of investors who are clearly looking to just invest in agencies, do you think that creates some type of problem that would kind of result in you guys spinning off MFResidential very much the same way some of your peers have done, or so people, or some other companies that are trying to go public in that space purely focusing on the non-agency markets?

I don't think it creates a problem at all. If anything, this is a positive -- certainly a positive for our shareholders. And if, in fact, it is in the best interest of our shareholders to spin off MFResidential, we will certainly consider that and look at that opportunity. But it is not a problem, it is a positive.

Okay. That makes sense. Then the second question I have is in regards to the non-agency portfolio, since the discount is now accreting into your GAAP earnings, I am trying to get a sense what is the difference between GAAP earnings and taxable earnings now, if there is any?

It is still not a large number, because the bulk of our assets still are agencies, so it is not a large (technical difficulty) to us.

Great. Thank you very much.

(Operator Instructions). Jim Young, West Family Investments.

My questions on the payments has already been addressed. Thank you.

Henry Coffey, Sterne Agee.

It is Henry Coffey. When was the last time that you actually bought an agency security?

August of last year.

August of last year. Thank you. And the CPR was 15 or 14?

16. (multiple speakers).

16, 1 6?

16.

Bose George, KBW.

Can I just get your portfolio, the duration number?

Hang on, Bose. Hold on. I think it is -- actually 1 is the number. The (inaudible) duration is now 1.

Great. Thanks.

(Operator Instructions). No other questions at this time. Please go ahead.

I would like to thank everybody for participating on our earnings call. We look forward to speaking with you next quarter, and thank you.

Ladies and gentlemen, that does conclude our conference for today. This conference will be made available for replay after 12 PM Eastern time today until August 3, 2009 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 108968. International participants may dial 1-320-365-3844.

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