MFA Financial Inc (MFA) 2011 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the MFA Financial Inc. first quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions provided. (Operator Instructions). As a reminder this conference is being recorded today, Tuesday May 3rd, 2011. I would now like to turn the conference over to Alexandra Giladi, please go ahead.

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial Inc., that reflects management beliefs, expectations and assumptions as to MFA's future performance and operations. When used the 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 and 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 pre-payment rates and the mortgage loans 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 at 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 31st , 2010. 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 March 31st, 2011, and/or the press release announcing MFA's first quarter 2011 financial results.

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

Good morning. And welcome to MFA's first quarter 2011 earnings call. With me this morning are Bill Gorin, President, Stephen Yarad, Chief Financial Officer, Ron Freydberg, Executive Vice President, Craig Knutson, Executive Vice President, Tim Korth, Senior Vice President and General Counsel, Teresa Covello, Senior Vice President and Chief Accounting Officer, Kathleen Hanrahan, Senior Vice President, Shira Finkel, Senior Vice President, and [Goodmunder Christiansen], Vice President. Today we announced financial results for the first quarter ended March 31st, 2011.

Recent financial results and other significant highlights for MFA include the following, first quarter net income per common share of $0.27 and core earnings per common share of $0.25. Book value per common share increased to $7.86 at the end of the first quarter, versus $7.58 at 2010 year end. In February we saw $1.32 billion in principle value of non-agency mortgage-backed securities as part of a resecuritization. In connection with this transaction, $488 million of senior bonds rated AAA by DBRS Inc. were issued to third-party investors via a trust at a rate of LIBOR plus 100 basis points.

In March we issued 74.75 million common shares to a public offering at a gross price of $8.10 per share, generating net proceeds of $605 million. In the first quarter we grew both our nonagency and agency mortgage-backed security portfolios, through the purchase of approximately $855 million of non-agency mortgage-backed securities, and approximately $1.84 billion of agency mortgage-backed securities. For the first quarter ended March 31st , 2011, we generated net income allocable to common stockholders of $80.4 million, or $0.27 per share of common stock. Core earnings for the first quarter were $73.9 million, or $0.25 per share of common stock.

On April 29th, 2011, we paid our first quarter 2011 dividend of $0.235 per share of common stock, for stockholders of record as of April 11th, 2011. I would now like to go over certain additional data highlights as they pertain to our first quarter 2011 results. Leverage overall debt to equity 3 times, Portfolio spread, which is interest earning assets minus cost of funds, 2.87%. Portfolio spread, which is the interest earning assets minus the cost of funds, including MBS underlying wing transactions, 3.01%, and our Asian CCPR was at 21%.

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

Thank you. (Operator Instructions). Your first question comes from the line of Mike Taiano of Sandler O'Neill. Please go ahead.

Good morning. Hey, just had a question on the swaps this quarter. Looked like they declined the percentage of the repo balance, I think around 40%. Just curious as to what you are thinking on the swaps going forward, particularly it looks like you added some 15-year and 30-year paper during the quarter. Should we expect that ratio to stay relatively stable from here? Or how should we think about that?

Hi, this is Goodmunder, it is really a timing issue and a snap set of time as of March 31 st . Actually after the quarter we continue to ask, swaped to replace some of the swaps and runoffs throughout the quarter. We do anticipate the ratio of we can use notional on the swap relative to the 80% repo balance to be about 50%. And the fact that it appears lower at the end of the quarter is really just a mapped set in

Got you, so it is more or less a timing issue. Okay. And then just a second question on sort of how you guys are thinking about re-REMICs. I had read in a couple of places that kind of thought that the new rules with respect to risk retention, could affect the ability to do re-REMICs, it is something that you guys are concerned with, or do you feel like at this stage you are not likely to do re-REMICs in the near term. What are your thoughts there?

Mike, we continue to look at the re-REMIC or the resecuritization of market. I think the new Reg AB 2 guidelines are still somewhat uncertain. There certainly is a possibility that those could affect the ability to do those in the future. But we think it is probably a little ways out. So we still view it as a very viable way to diversify our financing sources.

Great. Thanks a lot.

Your next question comes from the line of Bose George of KBW. Please go ahead.

Good morning. I was wondering if I could get an indication of unlevered risk adjusted yields now on the nonagency MBS you are buying?

Bose, I would say it depends on the bond, of course. But in general I would say 6% to 7%, plus adjusted unlevered yields today.

Okay. Great. And then on the agency side, I was just wondering where the spreads are over there?

On the side one arms we are seeing yields running 250, spreads are around 180 to 200 basis points. On the [15]-year fixed yields are anywhere from 290 to about 325 or 330. Spreads around 200 basis points, probably 225 to 230.

Okay. Great. And then just wanted to confirm. The timing of your dividend, you guys did that before quarter end, so it now is incorporated into your book value, is that kind of a change from the way you did it in the past?

We asked them at, we did want to highlight it. It is a change. So the dividend was declared in the quarter. So the dividend is out of this book value. So the book value is up, and that is subtracting the dividend.

Okay. Great. Thanks a lot, guys.

You are welcome.

Your next question comes from the line of Henry Coffey of Sterne Agee, please go ahead.

Good morning everyone. And congratulations on a great quarter.

Thanks Henry.

I am just not running fast enough here. Can you give us some comment on the marks in the non-agency book this quarter versus the December quarter? And there has been some discussion from various part, different sources, rumors, stories about some people being challenged by the performance of the sort of underlying subordinates. Is there a cash-trapping issue that you manage around here? Or have you structured it so that is not a problem?

Well, as far as marks quarter-over-quarter on our agency book is up, it is up slightly, $25 million give or take I would say. As far as the subordinates and cash trapping, I think you tend to see that more on subprime and perhaps option ARM type securities. And less so on prime and all day. So it certainly is something that we pay attention to. But for the most part, it does not affect the securities in our portfolio to a meaningful extent.

And I know Bose asked the question. But what kind of reinvestment rates are you able to get right now?

Henry, again it depends on the bond, of course, and the structure. But in general very rough numbers. I would say 6% to 7% yields are where the market continues to be.

Great. Thank you.

Sure.

Your next question comes from the line of Steve Delaney of JMP Securities. Please go ahead.

Good morning everybody. Nice quarter.

Thank you.

On the $1.8 billion of agency MBS that were added in the quarter, could you give us the rough breakout of what percentage was hybrid 5/1 or 7/1 hybrids, and what was 15 years? Just approximate.

Sure. This is Goodmunder, so approximately 60% was 15-year, and it was ARMs in the first quarter.

I am sorry, did you say 60% was 15 years?

60%, yes.

60.

Okay. Thank you. Just a little feedback in the phone, 60 for 15 years. Okay. And could you talk about sort of with the average, are you buying sort of the current lower coupon like 3.5s, or some higher coupons?

Well, we haven't really been buying the lower coupons, the 3s and 3.5s from our point of view. They feel a little too long for us in terms of interest rate risk. Most of the stuff that we have been focusing has been 4s and 4.5s. I guess you could call it slightly higher coupons. We just felt the relative value was there in terms of interest rate risk and pre-paid protection.

Okay. And with that coupon or with the 60% into the 15 years, which obviously don't have that stated reset date like a hybrid, when you are adding these swaps, both what you replaced in Q1 and which you said you have added since March 31, are you moving out a little bit in terms of the tenor to say, like four-to five-year range on this stuff?

Yes. I would say on average those swaps are four-year swaps.

Okay.

I feel pretty comfortable with that. at 15-year, 4 or 4.5% coupons.

Steve, just to make sure people understand. As we have added some 15-year assets to the mix of the portfolio, we've been very, very sensitive to the other sides, to the liability side, so in fact, we have again been very, very much on top of the swaps and entered the swaps.

Thanks, Stewart. Then one final thing I guess on the non-agencies. You have got in your press release your cost was 73% of par. Do you have handy what the average fair value dollar price was?

Yes, Steven. It is in the queue. The weighted average fair value was 78.6%.

78.6%. Okay. Very good. Thanks, gentlemen. Appreciate it.

Thanks, Steve.

That reminds me. We will have the Q filed some time this afternoon. So there will be lot more data coming out to you today.

And your next question comes from the line of Douglas Harter of Credit Suisse. Please go ahead.

Thanks. Good morning. I was wondering if you could talk about leverage on each of the agency and the non-agency, kind of where you see it going in 2011?

Doug, do you have the press release available to you?

Yes.

We have noted a table, it is Table One.

Yes.

So you see the agency debt to equity ratios was in the 6s. Which I don't think is much of an outlier compared to some of the pure agency models you might be familiar with, maybe on the low end, but not by a lot. The non-agency side, we have said that we will continue to trend up over time for two reasons. We continue to add more counterparties, which gives us more coverage, that there are alternatives if someone does change their strategy. And in addition we have become very comfortable and really think it is a great competitive advantage to be able to do resecuritizations, so the leverage did not go up much on the nonagency side. But that is probably a function of the equity raise. So we continue to see the non-agency leverage trend up over time.

And again just ahead, we are also seeing additional counterparties involved in the non-agency side of the business. So it is becoming more of it, rather than less.

Great. Thank you.

Yes.

(Operator Instructions). Your next question comes from the line of Daniel Furtado of Jefferies. Please go ahead.

Good morning, guys. Nice quarter and thanks for taking my question.

Thank you.

Just real quick for modeling purposes. When you talk about the non-agency portfolio, what is the average margin on reset there? Like 250?

It is probably lower than that, to the extent that they are LIBOR based arms, it is probably closer to 200. If it is CMT and there is a lot more LIBOR than there is CMT, it would probably be higher, 225 or so.

And that LIBOR is typically a 6 month LIBOR?

It varies between six and 12 months.

Okay. Perfect. Thanks a lot. Nice quarter.

Thank you.

Ladies and gentlemen, there are no further questions at this time.

I would like to thank everybody for being part of the call. We look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes the conference call for today. This conference call will be available for replay at 11.30 AM Eastern Time today through May 10th at Midnight. You may access the AT&T Executive Replay system at any time by dialing 1(800)475-6701 and entering the access code 203154. International participants may dial (320)365-3844. Those numbers again are 1(800)475-6701 or area code (320)365-3844. And access code 203154. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.