MFA Financial Inc (MFA) 2011 Q3 法說會逐字稿

Welcome to the MFA Financial Inc. third-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. Instructions will be given at that time.

(Operator Instructions)

As reminder this conference is being recorded. 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. which reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations. When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, 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, changed in the prepayment rates on the mortgage loans securing MFA's investment securities, MFA's ability to borrow or 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 10K for the year ended December 31, 2010, and other reports that MFA may file from time to time with the Securities and Exchange Commission, could cause MFA's actual results to differ material 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 the press release announcing MFA's third 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 Officer.

Good morning, and welcome to MFA's third 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, Hal Schwartz, Senior Vice President and General Counsel, Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer, and Shira Finkle, Senior Vice President.

Today we announced financial results for the third quarter ended September 30, 2011. Recent financial results and other significant highlights for MFA include the following. Third-quarter net income per common share of $0.23, or Core Earnings per common share of $0.24.

On October 31, 2011 we paid our third quarter 2011 dividend of $0.25 per share of common stock, to stockholders of record as of October 11, 2011. Book value per common share was $7.16 at the end of the third quarter, versus $7.48 at June 30, 2011 due primarily to price weakness within the Non-Agency mortgage-backed securities sector. This is after the $0.25 dividend we deducted.

For the third quarter ended September 30, 2011, we generated net income allocable to common stockholders of $81.2 million, or $0.23 per share of common stock. Core Earnings in the third quarter were $84.7 million, or $0.24 per share of common stock.

We continue to provide stockholders with attractive returns through appropriate leverage investments in both Agency and Non-Agency, residential mortgage-backed securities. Our Agency portfolio had an average amortized core space of 102.6% of par as of September 30, 2011, and generated a 3.37% yield in the third quarter. Our Non-Agency portfolio had an average amortized cost of 73.2% of par as of September 30, 2011 and generated a loss adjusted yield of 7.29% in the third quarter.

In the third quarter, we continued to selectively find value in the Agency hybrid MBS market. In addition, we continued to implement our strategy of identifying and acquiring Non-Agency mortgage-backed securities, with what we consider to be superior loss adjusted yields at prices well below par.

Our goal remains to continue positioning MFA to generate double digit returns on equity over time. In the third quarter, the Non-Agency mortgage-backed security market, like other credit sensitive markets became less liquid.

While this made prices more volatile it also has given longer-term investors, such as MFA, the opportunity to acquire assets with attractive long-term cash flows. Due to underlying borrower characteristics and structural features our Non-Agency portfolio was less impacted by price movement, declining an average of 2.4 points.

I would like to go over other certain additional data highlights as they pertain to our third quarter 2011 results. Fair market value of Non-Agency mortgage-backed securities, $4.14 billion. Face amount of Non-Agency mortgage-backed securities, $5.65 billion. Amortized cost of Non-Agency mortgage-backed securities, $4.1 billion. Net purchase discount of Non-Agency MBS, $1.518 billion.

Average structured credit enhancement of Non-Agency mortgage-backed securities, 5.7%. Interest earning asset portfolio net yield of 4.53%, cost of funds of 1.7%, and our portfolio spread as defined by the interest earning assets minus the cost of funds of 2.83%, and the portfolio spread, as defined of the interest earning assets minus the cost of funds, but this concludes our mortgage-backed securities underlying lien transactions of 2.9%.

Our mortgage-backed securities portfolio CPR, which includes net mortgage-backed securities underlying lien transactions of17.8%. Our Agency MBS CPR, 19.2%, and for those of you who have an interest, which I think most everybody on this call, our CPR as just recorded on Friday, was approximately 19.6%.

Our Non-Agency MBS CPR was 14.5%, and our leverage, which is overall debt to equity was 3.5 times. I thank you for your continued interest in MFA Financial, and at this time, I would like to open the call to questions.

Thank you,

(Operator Instructions)

Steve DeLaney, JMP securities. Please go ahead.

Thank you, good morning, everyone. Just wondering if you could give us a little more color on what you guys were thinking about as you were watching this volatile market in the third quarter and kind of how it affected your portfolio decisions? Specifically, Stewart, you started buying Non-Agency RMBS I believe in the fourth quarter of 2009 --.

It was 2008, Steve.

Time flies.

When you're having fun.

Yes, we are. We are, almost 3 years now. So, but this, I think, is the first quarter that I can recall since then where sequentially, the Non-Agency portfolio or the average cost basis didn't go. So, I mean, overall you were roughly flat. You grew the Agency book a little bit, maybe just big picture kind of what your thoughts were looking at relative value between say new Non-Agency versus seasoned hybrids on the Agency side? Because, it looks like in terms of any commitment to higher leverage seemed to go to the Agency book in this quarter if I am looking at it right? Thanks.

Steve, let me do this at a 25,000, and I think Bill would probably like to give you some detail. But, as you know, where ever we see value is where we continue to buy assets and again, we did see some value on the Agency side and as you know, there's been quite a bit of volatility on the Non-Agency side. There are a number of folks who would say, well in a situation like that, maybe you would back away from the Non-Agency but again, we don't necessarily do that because those are always opportunities. And, as you know, your book value is a snapshot in time. So yes, there was certainly some volatility on the Non-Agency side as I said in the opening remarks, and as you can find in our press release we were down about 2.4 points on the Non-Agencies, but as far as I'm concerned that's just an -- that's another opportunity for us. Bill?

Yes, look, we are excited about the opportunity in the Non-Agencies and Goodmunder has found some good opportunities on the Agency side, so pretty much the relationship between the two asset classes didn't change over the course of the quarter. I think, actually the second quarter was probably the first quarter where Non-Agency marks trended down and that continued in the third quarter. We selectively found buying opportunities. As you know, we focus on senior most traunches of better quality assets, and despite what you might read in the popular press, there has not actually been a large amount of selling of these types of assets. But, when those assets are available, we pick through it, we're probably a little more choosy because we're not looking to grow a large amount, probably until we do another re-securitization. So, we found opportunities on both sides and we invested throughout the quarter.

Just one quick follow-up, Bill. You sold some MBS during the quarter, I assume that was Agency. Were you just trying to get out of the way of HARP or trying to protect yourself from a standpoint of pre-pays picking up?

Yes, it was a small amount and it was some higher coupon assets. I think, actually a good amount of those were non--

But Steve, that's something we always do it from time to time, we really call it culling out the portfolio in terms of particular securities that maybe with convexity those might be securities you're better of selling rather than keeping.

Understood.

But again, it's such a small amount.

Thanks for the comments guys.

Thank you.

Bose George, KBW. Please go ahead.

Just kind of a follow-up on that, in terms of the yields on the new Non-Agencies, I was just wondering where they are relative to last quarter and the same on the Agency side, the spreads rather.

So, on the Non-Agency side, Bose, I would say, and as Bill said, the opportunity to buy products has not quite been the same in the last month or 2 so there aren't as many bonds for sale, but I would say those yields right now, are probably 7% to 8% type range.

But a little bit, fair to say a little bit higher than what you guys have had on the portfolio. The average for the third quarter?

Yes. This back up in price has obviously raised the yields and so I would say, we probably told you I'm guessing on the second quarter call that the yields were in the 6% to 7%, 6.5% to mid 7% type range, would say they are now yield 7% to 8%.

Okay, great. And then, just similar on the Agencies, like where are incremental spreads?

Hi, Bose, this is Goodmunder. So, on the Agency side, the yield are about 2.25% and the spread, you are including the appropriate hedges is about 175 basis points, so 1.75%.

Okay, great. And then, just, had a follow-up from something, on the last call, you guys discussed the $2 billion of Non-Agencies that are resetting and your yield assumptions incorporates it so there's no impact on the returns. I just wanted to make sure I understand the mechanics. So is it just that in the early years there is more cash and then there's more accretion in later years after the reset occurs?

Well, I guess yes. In practice, you would get more accretion in later years if the coupon goes down. But, the yield assumption incorporates assumptions of future coupons on the security. So, as the forward curve changes the assumptions about future coupon will likely also change.

Okay. Okay, that makes sense. Great. Thanks a lot.

Thank you.

Mike Taiano, Sandler O'Neill. Please go ahead.

Hi, thanks for taking the question. Just curious on--I think you guys have said that the activity on the Non-Agency MBS has slowed and just wondering does that affect sort of how you mark your portfolio? In other words to have to rely more on a mark to model as opposed to mark to actual trades that are happening at this point?

No. The answer is we don't mark to a model. We -- obviously, we have models and we have anticipations of what those yields might or might not be, and how sensitive are those cash flows to the vagaries in the market, but again, we continue to go out and we get marks from various counter parties in addition to the pricing services.

But, Mike, you'll see in our 10-Q which will be filed later today that we still have everything classified as level II in our disclosures for FAS157.

Okay. Okay, great. And then, just curious as to what you've seen in price movement specifically on the Non-Agency side since the end of the quarter?

So, Mike, it's Craig. I would say prices have still been soft since the end of the quarter which is somewhat surprising given the rally in most other risk assets. But, if I had to guess your cost of sector prices since September 30 are probably down about 1 point or so.

Great. Thanks a lot.

Thank you.

(Operator Instructions).

Jason Weaver, Stern, Agee. Please go ahead.

Yes, good morning, guys thanks for taking my questions. First, can you talk about -- a little bit about the effect of taking some of your gains from the Non-Agency prepayments and using those to increase the credit reserve discount and how we should think about that going forward?

Thanks for the question. So, I think what I would like to explain is that we use what we think are conservative assumptions about future losses. Now, the losses occur in the future, as we've showed in this press release, the CPRs for Non-Agencies was close to 15%. That's higher than what we project in our yield estimates. So, when the extra cash comes in, and it does, it actually prepays, the cash actually comes in, what it does is it lowers your amortized costs and I think that might address your question, Jason?

Yes, exactly. So, going forward, that's really just going to be a function of how prepayments come in versus your estimates, is that what I'm hearing?

Yes. Because the prepayments, look, they are performing better than we projected when we bought the assets, when that actual cash comes in what it does is it is going to pull down somewhat our amortized costs, which should help your yield over time.

Fair enough. And, just one more, what are you seeing right now as far as the state of the re-securitization market goes? And whether this becomes an ongoing part of your strategy?

Well, we've had 3 re-securitizations, which, the last 3 have cleared of capital for us to invest at good yields. Some of the drawbacks now are the rating agencies have made it more difficult to get ratings. Not a good rating, get any rating, on re-securitization, but, it is something we are working on.

Great. Thanks, guys.

Thank you.

Douglas Harter, Credit Suisse.

Thanks. Just to follow-up on that last question, is the non-rated market still open? Is that something that you guys consider in light of the rating agencies?

Yes. As long as the buyer is there it's open and it's been open, but because we are buying higher quality assets and the execution is more expensive on the non-rated re-REMIC, it's something we haven't considered doing. I mean, we've looked at it but because we are buying better assets, that don't -- if they are yielding 7%, you're not excited on the execution of the non-rated re-REMIC.

It's much more efficient, if you will, relative to the marketplace when we look at a rated situation rather than a non-rated.

I think, the other thing I would add is, the issue with the non-rated re-securitizations, and obviously those have become more prevalent in the last 2 quarters or so. The issue with those is really, it's a big liquidity give up, so for instance if we were to purchase the senior piece of a non-rated re-REMIC, it's more difficult to finance, it's a private placement based on a dealer's shelf, so there really only be maybe 1 place to finance that, and also more importantly, you can never re-securitize again in the future. So, we view it as sort of a liquidity give up.

I think Doug was asking is that being an issuer, not an investor. Is that right, Doug?

I was talking about the issuer, but that color is all helpful. Thank you.

Thank you.

Thank you, at this time we have no further people in queue. Do you have any further remarks at this time?

No, I would just like to say thank you and we look forward to speaking with you on our next earnings call.

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