MFA Financial, Inc. (MFA)

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MFA Financial Inc. (MFA)

JMP Securities Financial Services and Real Estate Conference

October 1, 2013 04:00 PM ET


Bill Gorin - Future President and CEO

Craig Knutson - President and COO


Steve Delaney - JMP Securities


Steve Delaney - JMP Securities

Good afternoon. My name is Steve Delaney and I’m the Senior Mortgage Finance Analyst at JMP Securities and we're pleased to introduce MFA Financial Inc., ticker MFA. Stock closed yesterday at $7.45. The market cap here is $2.7 billion, making this company one of the larger diversified residential mortgage REITs. The third quarter dividend was maintained at $0.22 for a yield just under 12%. Maintaining dividends is a solid performance in the third quarter given what's happened recently.

MFA is an internally managed residential REIT with a 15 year operating history post their IPO in 1998. The company invests in both agency and non-agency RMBS with the equity allocation increasingly shifting towards the non-agency sector beginning in late 2008. The company recently announced a management succession plan effective January of 2014 and are very pleased to introduce you today, the new CEO of the company, Bill Gorin who's starting beside me, the new President and Chief Operating Officer Craig Knutson. Also with us today are Gudmander Christiansen who is the agency portfolio manager and we have a lot of support here from the company, Steve Yarad the CFO, Terry Myers who I just met recently joined as Director of Tax and Danielle Rositahli, Investor Relations. With that I'll turn it over to Bill.

Bill Gorin

Thanks for the intro, Steve and thanks for putting together a great conference. So for those of you who we can see, we have a forward looking statement disclaimer, and I'll give you a second to take a look at that. So as Steve mentioned, we are an internally REIT and what we do is we look to deliver shareholder value basically through the investments in residential mortgage products.

So when we say residential we include both agency and non-agency. We've never felt it was important to tie one hand behind our back. If the best opportunities are agencies, which they were for many years that's where we will focus and when better opportunities are in non-agencies we'll take advantage of it.

Besides earning a good yield as Steve mentioned, we've also put ourselves in a position to benefit from improvements in residential mortgage credits and hopefully in the slideshow we'll show you the positive trends that are occurring nationwide in home prices and why that's going to impact the assets that we own.

So as I mentioned we look for the best investment opportunities throughout the residential MBS universe. When you look at non-agency MBS, you look at what's the credit, what's the expected return and for agencies where there really isn't a credit component, you're looking at interest rate sensitivity which are prepayment exposure and again your expected return.

So we've been public for a number of years and each year you finish up, you never really look back until you do these presentations and basically we've generated over 60% per annum assuming dividend reinvestment since the year 2000, cumulative returns is 668%. So we really have dwarfed the returns from the general S&P, or the S&P Financials.

Here's how we look at the Company when we allocate the equity, the leverage to various asset classes. So in the first column you see our agency, MBS holdings. It's approximately $7 billion, which is funded with approximately $6 billion of repo and a little bit under $1 billion of equity. The debt-to-equity ratio there is little over 7. The assets were yielding a little over 2, funding them a little bit over 1 for a spread of a 100 basis points. So 2% yield on the unlevered equity, 7 times leverage, you have an ROE close to 9% to 10% on the agency portion of the portfolio.

The non-agency portion of the portfolio which is very significant, over $5 billion, is funded using a less leveraged and a lower ratio of debt to equity. There the unlevered yield, because of the strong credit performance is in excess of 7%, funding costs of 241 spread over 440, actually close to 500. So the non-agency sector is generating a very high ROE for us.

We hold cash because you need cash, which yields almost nothing for you these days and all-in-all the Company's levered three times generating a spread of 238 basis points. Its funny people talk to us about spread compression. We haven't seen it because basically our agencies have a relatively high yield because we bought them over time. Our funding costs have been higher than others because we swap more, we swap before they did higher cost swaps. So the spreads remained fairly consistent on the agency side. The non-agency side, you've continued to see an improvement in the yield as our credit assumptions are proven to be conservative and as we release money from our credit reserves.

Now the second quarter, what people were focusing on is changes in asset values, which is reflected in change of book value ultimately. Our non-agency MBS portfolio which is deeply discounted, the value is driven by a number of factors. The major factor is change in home prices and that’s going to influence default rates and severities and voluntary prepays.

Another important factor is changes in interest rates. And that will impact these assets depending on whether they are adjustable rate, hybrid or fixed. The good news for all non-agency assets, much more credit sensitive and interest rate sensitive and even though there is interest rate sensitivity, the majority of our non-agencies or adjustable rate mean the coupon is going to reset within the next 12 months. That’s because that they are probably seasons 5/1s which are already been resetting or many of them are 7/1s approaching their first reset.

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