MFA Financial Inc (MFA) 2012 Q4 法說會逐字稿

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Good morning.

The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial Inc. which reflects managements' 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; changes in the prepayment rates on the mortgage loans securing MFA's investment securities; changes in the default rates and managements' assumptions regarding default rates on the mortgage loans securing MFA's MBS; 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; MFA's estimates regarding taxable income, and the timing and amount of distributions to stockholders; 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, 2011, its quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2012, and other reports that it may file from time to time with the Securities and Exchange Commission, could cause MFA's actual results 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 the press release announcing MFA's fourth-quarter 2012 financial results.

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

Good morning, and welcome to MFA's fourth-quarter 2012 earnings call. Joining 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, Chief Accounting Officer and Goodmunder Christiansen, First Vice President.

What I'd like to do this morning is just go over some of the highlights of the press release that I hope all of you have had the opportunity to look at. I'm not going to go over the whole thing, but just a number of them that I think are important. And then very quickly open the call for Q&A. So if we're looking at the fourth-quarter 2012 highlights, our net income of common share was $0.19 with core earnings per common share of $0.20. Book value for common share grew to $8.99 as of December 31, 2012, compared to $8.80 as of September 30, 2012, and $6.74 at December 31, 2011. For the year, MFA strategy of investing in both agency and discounted non-agency mortgage-backed securities generated book value growth, share growth of 33% in addition to quarterly dividend payments. At January 31, 2013, our value had grown to $9.40 as non- agency mortgage-backed security prices have continued to gain additional value.

On March 4, 2013, our Board of Directors declared a special cash dividend of $0.50 per share of common stock. This dividend reflects a portion of the REIT taxable income in excess of distributions previously paid to stockholders for prior periods. This dividend will be paid on April 10, 2013, to stockholders of record on March 15, 2013. A combination of both hold price appreciation and mortgage amortization has led to a decrease in loan-to-value ratios for many of the mortgages underlying our non-agency portfolio. Due to this lower LPV, we have reduced estimated future losses within our non-agency portfolio. As a result, in the fourth quarter, we transferred $81 million to accretable discount for in credit reserve and transferred $152.5 million in total for 2012. This increase in accretable discount prospectively increases the yield on non-agency mortgage-backed securities and will be realized in income over the life of the assets.

Following a detailed review of tax calculations initiated by management, we determined that REIT taxable income for certain prior periods exceeded distributions made to stockholders. Consequently our Board of Directors declared a special cash dividend totaling approximately $179.4 million. Approximately $130 million of this distribution will be allocated to the previously undistributed REIT taxable income for 2010 and 2011 with the remainder available to satisfy a portion of 2012 taxable income undistributed to date. Determination of 2012 taxable income will not be finalized until a timely filing of our 2012 tax return, which is expected to occur in the third quarter of 2013. Before filing our 2012 tax return, MFA may elect to apply on a asset by asset basis, an alternative methodology for calculating taxable income for non-agency assets acquired in 2012. Application of this alternative methodology may serve to reduce the final determination of 2012 taxable income. After payment of the special dividend, we currently estimate that under either methodology, taxable income for 2012 is in excess of distributions paid to date in respect to that year. And it expects that our Board of Directors will declare dividends in 2013 to address any undistributed 2012 taxable income.

Having said that, what I would like to do is thank you all for your continued interest in MFA and open the call to questions.

Thank you, sir.

(Operator instructions)

Henry Coffey; Sterne Agee.

Good morning, everyone, and thanks for getting all this together promptly. Looking forward, it's fair to assume that there may be some potential additional distribution coming in 2013. As you put the final dots on your September tax filing?

Good question. So, as Stewart pointed out to you, we have yet to finalize our calculations for 2012. And what Stuart mentioned is there's two alternative methodologies and we need to compare both methodologies to calculate our 2012 taxable income. But what we have said in writing and on this call is the special distribution fully satisfied are under distribution for 2010 and 2011. And based on our estimate of 2012, it's only partially paid out all of our distributable income for 2012. So to make the assumption that there's yet some more distribution related to 2012 would be correct. We have not finalized 2012 and we're not ready to forecast 2013. So hopefully that's able to help you with your question.

And sort of looking forward, FHFA put out their plan for 2013. They're talking about doing $30 billion worth of NUPB of risk-based assets. Have you had any dialogue with them? Do have a sense of what kind of opportunities that may create for MFA?

Sure. We have looked at this possible risk transfer which to date has not really solidified. But we have looked at that trade for months now. It may make sense for us. It may not. It will depend on a lot of things. It will depend on the risk return and what sort of yields we think are available. It will also depend on what form those assets take. For instance, whether are not those sales are structured as good assets for REIT for instance.

Are there any other alternative asset classes that are sort of coming down the pipe that might be interesting for MFA to explore? And I'll get off the queue, the phone and listen, but again, thank you for taking my questions.

Henry, we have looked at various asset classes over the years. We have looked at a myriad, a myriad of things. And we continue to do that. Having said that, at the moment, there is nothing that is that pressing to us. And we still very much enjoy the continued success that we've had in both the agency and the non-agency markets and that's where our concentration is. Having said that, we spent a good portion of our time looking at other asset classes and how that might bring value to our shareholders.

Henry, I might also add, it's sort of our mission statement. You know for a long time we've been disturbing a good amount of income. But what we've done over the last five years is also benefit, have our assets perform due to improvement in the residential mortgage credit fundamentals. And I think that positions us well for any new activities that might come up in the next couple of years. There's benefit for the shareholders of improvement from residential mortgage credit fundamentals has really shown in the fourth-quarter performance. And it's something that we hope to benefit from in the future.

Thank you.

Thank you. Chris Donat; Sandler O'Neill.

Good morning. It's Chris Donat here. One quick question on the excise tax and interest. That's something we haven't seen for a couple years. Can you remind us exactly what that is?

Sure. Let's turn it over to Stephen Yarad, our CFO, who can explain that to you in some detail.

Thanks, Chris. This is Steve Yarad. There's a lot of detail around the rules for the excise tax. I'll try and keep this relatively high level. But there are two components to the excise tax and interest accrual. The interest portion is calculated on the amount of the undistributed dividends for prior periods.

In our situation, it's primarily 2010 and 2011. And you pay an interest amount based on the short-term AFR plus 3%. So in our case, it's roughly 3.5% interest paid on that dividend shortfall for that period. The excise tax comes into play to the extent that you've distributed less than 85% of your taxable income in the calendar year. And, if you're in that situation, you pay an excise tax that's roughly 4% of the difference between the amount you distributed and 85% of your taxable income. And in our financial statements for 2012, we have recorded an accrual for $7.5 million covering both excise tax and interest for the current year and or prior period.

Got it. Okay. Thanks, Steve. That's helpful. And then, just to make sure I understand this. In the filing you put out earlier this week, it states that no material impact to previously issued financial statements from the material weakness here. And also, no expected impact to REIT status. I didn't see that language in the press release. I just want to make sure that that is still the case. Nothing's changed in two days, right?

Sure, Chris. Absolutely. When you see our 10-K, which will be filed later this morning, you'll see some disclosure around that in our controls and procedures section. And what you said is absolutely correct. There is no restatement of prior period financials and there's no material impact on our current period financials relative to this matter as well. And as you've said as well, there's no impact on our REIT status whatsoever.

Is it also just fair to say also just to follow-up, nothing's changed in the last two days?

Absolutely. No change. (laughter)

I just want to be precise relative to your question.

Thank you. I appreciate that. And then, finally for me, the $81 million that was transferred from the credit reserve to accretable discount, just ballpark when I think about the timing of that flowing into income, how does that work?

It's Craig. So it flows in over the remaining life of those assets. So, basically we take that $80 million and it goes into accretable discount. So it'll translate to a higher yield on those assets going forward. If you look at the total, which was I think $152 million that we transferred from credit reserve to accretable discount during the calendar year 2012, just to sort of frame it for you, it probably, if I just isolate that one change, so forget forward curve and forget assets that pay down, it probably increases the yield of the non-agency portfolio by between 20 and 25 basis points.

Great. Thanks for quantifying that for me. I appreciate it. That's it for me.

Thank you.

Daniel Furtado; Jefferies.

Yes. Good morning, everybody. Thank you for the opportunity. Craig, I missed the tail end of that response. Are you saying the $81 million, or the $152 million for the full year is 20 to 25 basis points?

The $152 million. For the whole year, if you look at those assets as of the end of the year, it increases the yield between 20 and 25 basis points.

Okay. And then another kind of methodological question. You are saying that your credit reserve is approximately twice the underlying 60 plus DQs. Is it as simple as if you assume that you are not going to get to 2X to 60s that say all the 60s go bad but nothing else rolls into that bucket. That what you could theoretically transfer from credit reserve into accretable discounts is about 50% of your current credit reserve? Or is it not linear like that?

Well, I think what we say is, we don't say our credit reserve is twice our 60. I think what we say is in our GAAP assumptions, that our estimated defaults on the portfolio are equal to approximately two times the current 60 plus days delinquent.

Okay. And where do you believe the market is today in that assumption when competitors or just the market is out buying bonds? I mean is it still at that two times your 60 paradigm when you are pricing bonds? Or has the market tightened? In that sense, how much more conservative versus the market do believe you are?

I can't really speak to how much more conservative or less conservative we are versus the market. But what I will tell you is that as we see increased performance in the underlying assets, and that can be because LTVs are improving, which could be due to the fact that loans are now amortizing in many cases, and in addition we've seen some home price appreciation. So as those underlying LTV's get better and borrowers are less underwater, or perhaps not under water at all, our assumptions on future defaults will come down. So I think over time, if credit reserve changes continue along the same vein, what that will mean is that the ultimate default assumptions will not be twice the 60 plus at some point.

Got you. Thank you. And if I may just squeak one last one in. Do you have any material swap maturities this year? If so, what's the fixed pay on those that are rolling off?

Okay. Let me give you an update. This will be laid out in the K which will come out today. In the first quarter of this year a very small amount of swaps run off. It's about $50 million and the average cost there is about 3.9% so we're glad to have those swaps go way. And then you really don't see much high cost swaps running off until the second half of the year. At which time, we have about $400 million of swaps with a fixed pay rate of 4% runoff. So we continue to see improvement, funding costs coming down as these swaps run off. But most of the improvement will occur later in the year.

Great. Thank you for the color. And congratulations on the quarter.

Thank you.

(Operator Instructions)

Rick Shane; JPMorgan.

Thanks, guys, for taking my questions this morning. I just want to talk a little bit about capital allocation and particularly given what we've seen in the market this quarter. You have obviously seen strong continued appreciation on the non-agency paper, and during the fourth quarter your allocation there increased slightly. Given we've seen agency spreads widen out a little bit and potentially rich pricing on the non-agency stuff, are you thinking about shifting back a little bit more?

Let me start the answer and then we can give you some detail. As I've said I don't know how many times on other calls, we continue to see value in both sides of it, in terms of the agencies and non-agencies. And you're right, when you look at the appreciation on the non-agency side, it is certainly dramatic. But we have also seen opportunity, I'm going to turn it over to Goodmunder Christiansen in a moment, just to give you some color on the agency side, where we have also continued to see some value. And Goodmunder, why don't you let them know what you've been seeing.

Well, you're absolutely right. I mean in the first quarter of 2013, yields have gone up and spreads are widening on agency securities so they are incrementally more attractive in the first quarter of 2013 relative to what they were in the fourth quarter of 2012. So yields on the assets that we are acquiring, we are seeing them about 185 basis points and with spreads including funding costs of about 125 basis point.

So incrementally we are investing the same way. But an important point, some of the run off doesn't need to be invested because some of that run off is being used for the special dividend.

Got it. And given the opportunities that you're seeing and the stability we've seen in the capital base over the last couple years, do you feel like you have the right amount of capital right now for the market opportunity that you see?

The answer is generally yes. There are always exceptions, but again, as you know as we've had discussions before, I think we've been very disciplined in raising equity. We will continue to be very disciplined. If we see those opportunities to raise equities there. We will certainly approach that but we are very comfortable about how we sit today.

Rick, as you know, we are internally managed and our incentive and shareholder incentives are the same. So we have been so happy with the performance of the assets that we have, we really didn't want to share it much with too many shareholders. So we continue to work for the benefit of existing shareholders.

Fair enough, guys. Thank you, very much. And I am smiling at that response.

Okay. Thank you.

Gabe Poggi, FBR.

Good morning, guys. Just had a quick question on the agency side of things. Your speed of decline in the fourth quarter from the third quarter. Any color year-to-date you can provide? And as you are rotating, as you are getting those pre-pays, where are you guys allocating capital in the agency bucket? That'd be helpful. Thank you.

On the agency side, the speed in the first quarter should be in line with what we've seen over the last couple of quarters. Jan and Feb were about 20 CPR so I guess that gets you two-thirds there. In terms of what we are looking at and what we find most attractive, we have been focused on the [fifteener] and we continue to favor that over the hybrids. And I don't see that changing going forward.

Okay. Great. Thank you.

Stephen Laws, Deutsche Bank.

Good morning, guys. This is actually [Viterra Netsky] dialing for Stephen. Just had a quick question, just looking ahead and given Bernanke's comments last week. Do you have any thoughts, Bernanke that he might just let the securities run off upon the QE exit? And what if the Fed decides to kind of put some of these agency MBS out on repo? And what the impact would be on the funding costs? Thank you.

So, ever since the QE started and ever since the Fed has been buying assets, the natural question would be how do you get out? And he's been answering it the same way since it started, either we could sell the assets, we could borrow against the assets, or we'll just let the assets pay off. His answer has been the same for years. So no new news there. Those are the only three ways out. Remember if his goal is not to increase liquidity but to decrease liquidity, the sale or borrowing against it is going to achieve the same thing. You're pulling liquidity out of the market. So the standard answer is to remain the same. No new news there.

I guess I'm just wondering about the impact on the actual funding cost if the Fed was to put these out on repo.

Again, it's the same if you have a new competitor, it would incrementally it would impact funding cost going up. But this question, we have answered this question for many years on these phone calls. Yes, incrementally, if the Fed became a competitor for repo funding, it would have an impact on agency repo funding costs.

Great. Thank you.

Thank you.

Thank you. I show no further questions in queue at this time, sir. You may continue.

So, at this point, I would like to thank you for your continued interest in MFA. And we look forward to speaking with you next quarter.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may now disconnect. Good day.