MFA Financial, Inc.
Q1 2011 Earnings Call Transcript

Published: 3 May 2011

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Inc. first quarter 2011 earnings conference call. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday, May 3, 2011. I would now like to turn the conference over to Alexandra Giladi. Please go ahead.

[Alexandra Giladi:]

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 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

[Stewart Zimmerman:]

Good morning and welcome to MFA’s first quarter 2011 earnings call. With me this morning are Bill Gorin, President; Steven 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 Gudmundur Kristjansson, Vice President. Today we announced financial results for the first quarter ended March 31, 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 sold $1.32 billion in principal value of non-agency mortgage-backed securities as part of the resecuritization. In connection with this transaction, $488 million of senior bonds rated AAA by DBRS, Inc. were issued to third-party investors via a [ph] 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 non-agency 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 31, 2011, we generated net income allocable to common stockholders of $18.4 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 29, 2011, we paid our first quarter 2011 dividends of $0.235 per share of common stock to stockholders of record as of April 11, 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 three 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 win transactions – 3.01% and our agency CPR which is 21%. I thank you for your continued interest in MFA Financial and at this time I would like to open the call for questions.

[Operator:]

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

[Mike Taiano:]

Good morning. Just had a question on the swap this quarter. Looks like they declined the percentage of the repo balance I think around 40%. Curious as to what you’re thinking on the swaps is going forward, particularly it looks like you added some 15-year and 30-year paper during the quarter. We expect that ratio to stay relatively stable from here or how should we think about that?

[Gudmundur Kristjansson:]

This is Gudmundur. It’s really a timing issue and it’s mapped to the [ph] time at March 31, actually after the quarter. We continue to add swaps to replace some of the that run off throughout the quarter. We do anticipate the ratio of -- you can use notional on the swap relative to the (inaudible) balance to be about 50%, and the fact that it appears lower at the end of the quarter is really just a snap set in time..

[Mike Taiano:]

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

[Stewart Zimmerman:]

Mike, we continue to look at the re-remic or the resecuritization market. I think that the new Reg AB2 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’s probably a little ways out. So we still view it as a very viable way to diversify our financing sources.

[Mike Taiano:]

Great. Thanks a lot.

[Operator:]

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

[Bose George:]

Good morning. I was wondering if I could get an indication of unleveraged risk adjusted yields now on the non-agency MBS you’re buying?

[Stewart Zimmerman:]

Yeah, Bose, I would say again it depends on the bond of course, but in general I would say 6%-7% plus adjusted unleveraged yield today.

[Bose George:]

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

[Gudmundur Kristjansson:]

On the 5/1 arms, we see yields of about 250 with spreads around 180 to 200 basis points. The 6-year [ph] fixed yields are anywhere from 290 to about 325, 330 with spreads around 200 basis points, probably 225 to 230.

[Bose George:]

Okay, great. And then I just wanted to confirm the timing of your dividends. 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?

[Stewart Zimmerman:]

[inaudible] we did want to highlight it, it’s a change. So the dividend was declared in the quarter, so the dividend is out of this book value, so the book value is [inaudible] and attracting the dividend.

[Bose George:]

Okay, great. Thanks a lot, guys.

[Operator:]

Your next question comes from Henry Coffey of Sterne Agee. Please go ahead.

[Henry Coffey:]

Good morning, everyone and congratulations on a great quarter. I’m just not running fast enough here, but could 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 different sources, rumors, stories about some people being challenged by the performance of the set of underlying subordinates. Is there a cash trapping issue that you manage around here or have you structured it so that it’s not a problem?

[Stewart Zimmerman:]

As far as marks, I think quarter over quarter, agency book is up slightly – $25 million, give or take I would say. As far as the subordinates and cash trapping, I think it tended – we got more on sub-prime and perhaps option arm type securities and less so on prime and Alt-A. So it’s certainly something that we pay attention to, but for the most part, it does not affect securities in our portfolio to a meaningful extent.

[Henry Coffey:]

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

[Stewart Zimmerman:]

Well, Henry, again it depends on the bonds, 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.

[Henry Coffey- Sterne Agee:]

Great. Thank you.

[Operator:]

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

[Steve DeLaney:]

Good morning everybody. Nice quarter. So on the $1.8 billion of agency MBS that were added in the quarter, could you give us sort of a rough breakout of what percentage was hybrid, 5/1 or 7/1 hybrids [ph] and what was 15 years? Just approximate.

[Gudmundur Kristjansson:]

Sure, this is Gudmundur. So approximately 60% was 15-year and that was [ph] arms in the first quarter.

[Steve DeLaney:]

I’m sorry. Did you say 60% was 15-year?

[Gudmundur Kristjansson:]

60%, yes. 60.

[Steve DeLaney:]

60. Okay, thank you. There’s just a little feedback in the phone. 60 for 15 years. And so could you talk about what the average, are you buying sort of the current lower coupon like 3½ or more, some higher coupon?

[Gudmundur Kristjansson:]

Well, we haven’t really been buying the lower coupons, the 3s and 3½. From our point of view, they feel a little too long for us in terms of interest spread rates. Most of the stuff that we’ve been focusing has been 4, 4½, I guess you could call that slightly higher coupons and [inaudible] relative value was there in terms of interest rate risk and pre-paid protection.

[Steve DeLaney:]

Okay, and with that 60% into the 15 years, which obviously don’t have that stated reset date like a hybrid, when you’re adding these swaps, both which you replace in 1Q and which you said you’ve added since March 31, are you moving out a little bit in terms of the tenor to say 4 to 5 year range on the new swaps?

[Gudmundur Kristjansson:]

I would say on average those swaps are 4-year swaps. I feel pretty comfortable with that (inaudible) again, a 15-year, 4½% coupon.

[Stewart Zimmerman:]

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

[Steve DeLaney:]

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

[Stewart Zimmerman:]

Yes, Steve, and it’s in the Q which you’ll see. The weighted average fair value was 78.6.

[Steve DeLaney:]

78.6. Okay, very good. Thanks, gentlemen. Appreciate it.

[Stewart Zimmerman:]

That reminds me – we will have the Q filed sometime this afternoon, so there will be a lot more data coming at you today.

[Operator:]

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

[Douglas Harter:]

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

[Stewart Zimmerman:]

You have the press release available with you?

[Douglas Harter:]

Yes.

[Stewart Zimmerman:]

So we’ve numbered a table, there’s a table 1?

[Douglas Harter:]

Yes.

[Stewart Zimmerman:]

So you see the agency debt to equity ratio within 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 said will continue to trend up over time for two reasons. We continue to add more counter-parties which gives us more comfort that there’s alternatives if someone does change their strategy. And in addition, we have become very comfortable and really think it’s a great competitive advantage to be able to do resecuritizations. So the levers do not go up much on the non-agency side, but that’s probably a function of the equity rates. So we continue to see the non-agency leverage trend up over time.

[Stewart Zimmerman:]

And again, just to add, we’re also seeing additional counter-parties involved in the non-agency side of the business. So it’s becoming more of it, rather than less.

[Douglas Harter:]

Right, thank you.

[Operator:]

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

[Daniel Furtado:]

Morning, guys, nice quarter and thanks for taking my question. Just real quick for modeling purposes. When you talk about the non-agency portfolio, what’s the average margin on reset there – like 250?

[Stewart Zimmerman:]

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

[Daniel Furtado:]

Okay, and that LIBOR is typically a 6-month LIBOR?

[Stewart Zimmerman:]

It varies between 6 and 12 months.

[Daniel Furtado:]

Okay. Perfect. Thanks a lot. Nice quarter.

[Operator:]

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

[Stewart Zimmerman:]

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

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. This conference call will be available for replay at 11