MFA Financial, Inc. (MFA)
J.P. Morgan SMid Cap Conference Transcript
November 28, 2012 2:30 PM ET
Stewart Zimmerman - Chairman and CEO
William Gorin - President
Craig Knutson - Executive Vice President
Rich Shane - J.P. Morgan
Rich Shane - J.P. Morgan
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Thank you. Thank you very much. MFA is an internally managed real estate investment for us and we are positioned to benefit from an investment both Agency and Non-Agency residential mortgage-backed securities.
I think what’s important in this particular slide as we’ve underlined it, we are self-advised and self-managed. And we’ve had a history of investment in a very positive way in both Agency and Non-Agency residential mortgage-backed securities.
Our strategy is to identify the best investment opportunities throughout the residential MBS universe. Our Non-Agency MBS selection is driven by credit analysis and expected return, Agency MBS selection is driven by an analysis of interest rate sensitivity, prepayment exposure and expected return.
We are very proud that our book value per common share grew at $8.80 as of September 30, 2012, compared to $6.74 as of December 31, 2011. This 30% increase in book value per share in the first nine months of 2012 was a result of MFA’s total return strategy of investing in both Agency and discounted Non-Agency mortgage-backed securities.
I’m particularly proud of this particular slide, that we’ve had a long track record of delivering attractive shareholder return, 16% annual return since January of 2000 and 572% total stockholder returns since the similar date of January 2000.
On that note, I’m going to turn it over to Mr. Gorin, President of the company.
Thanks Stewart. Welcome everybody.
Rich Shane - J.P. Morgan
Do you need chairs.
So thank you. On this slide we show you how we’ve allocated our equity and where our assets lie. The majority of our assets are Agency MBS, the yield on these assets is 2.66. Our cost of funds is 1.53 and so the spread is 113 basis points.
We point out that the cost of funds in our agencies reflects the fact that we put on swaps in prior years and the good news is the most expensive of these swaps will be running off at the end of this quarter. So there should be a downward trend in our cost of funds for agencies in 2013.
Our Non-Agency MBS has a market value in excess of $5 billion. We think this is one of the largest holdings of the public mortgage REITs and therefore we think we actually have good exposure and are, and we continue to benefit from the seeming rebound in home prices. So we are clearly sensitive to that credit and we’re glad that we are.
The loss adjusted unlevered yield on these assets is 6.65% and as I say, that's loss adjusted, our funding cost is $240, obviously it’s a little costlier to finance your non-agencies and your agencies, but surprisingly we get longer term financing for Non-Agency.
So many cases this term financing there, the net interest rate spread of the non-agencies is 4.25%, cash yield almost nothing these days. As a result, with the leverage of only 3.2 times we are generating double-digit ROEs and the unlevered asset yield is 4.12%.
Focusing first on the agencies, within our Agency portfolio, we focus on lower duration assets, 70% of these Agency assets are hybrids, which means they are fixed for a period of time and then become one-year adjustable. And 30% of our Agency assets are 15-year fixed rate assets. Good news about 15-year fixed rates is the amortize over 15-years, so we don't have extension risk beyond the 15th year.
Compared to the other agency mortgage REITs. We are the very low end of premium exposure, our average amortized cost is 103.2%. As I previously mentioned, $341 million of existing swaps with the weighted average fixed pay rate of 4.4% are scheduled to expire at the end of this quarter.
So foremost in peoples mind is the Fed and impact of QE3. So the FOMC has kept their target range for the Fed funds rate at 0% to 0.25%, and they currently anticipate that this exceptionally low level will likely to be warranted at least through mid-2015. So, when people say, well, rates will be lower through mid-2015. The Fed does have some legal room in terms of their language.
They've also announced the Fed will increase their holdings of Agency MBS by $40 billion per month until the labor market improves. That's interesting, previously they talked about purchases of a dollar amount over certain period of time. We hear the same. We are going to keep buying it till we determine the labor market improves. Nobody knows exactly what that means, but again that gives them flexibility.
In addition, they continue to reinvest runoff. So, it looks like the total monthly purchase will be near $85 billion. And clearly, this put downward pressure on Agency MBS yields and we’ll not be surprise if this elevated Agency MBS prepayments into 2013.