MFA Financial, Inc. (MFA)

MFA 
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MFA Financial, Inc. (MFA)

Q2 2010 Earnings Call Transcript

August 3, 2010 10:00 am ET

Executives

Stewart Zimmerman – CEO

Bill Gorin – President and CFO

Craig Knutson – EVP

Ron Freydberg – EVP, Chief Investment Officer and Administrative Officer

Analysts

Ryan O'Steen [ph] – KBW

Jason Arnold – RBC Capital Markets

Michael Taiano – Sandler O'Neill

Jasper Birch – Macquarie

Jim Ballan – Lazard Capital Markets

Steven Zakalik [ph]

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MFA Mortgage Investments second quarter 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, August 3rd, 2010.

And now, I would like to turn the conference over to Alexandra Gelardi [ph]. Please go ahead, ma'am.

Unidentified Participant

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, 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; 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; 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 31st, 2009, Quarterly Reports on Form 10-Q for the quarter ended March 31st, 2010 and June 30th, 2010, and other reports that it may file from time to time with the Securities and Exchange Commission could cause MFA's actual results, performance, and achievements 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 MFA's Quarterly Report on Form 10-Q for the quarter ended June 30th, 2010 and/or the press release announcing MFA's second quarter 2010 financial results.

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

Stewart Zimmerman

Good morning, and welcome to MFA Financial's second quarter 2010 earnings call. With me this morning are Bill Gorin, President and 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; and Kathleen Hanrahan, Senior Vice President.

For the second quarter ended June 30th, 2010, we generated net income available to common stock of $46.3 million or $0.16 per share of common stock. For the second quarter, core earnings were $51.3 million or $0.18 per share of common stock. Core earnings for the quarter represents a non-GAAP financial measure, which reflects net income, excluding impairment losses and changes in the unrealized net gains on MBS Forwards.

On July 1st, 2010, we announced our second quarter 2010 dividend of $0.19 per share of common stock, which was paid on July 30, 2010 to stockholders of record as of July 12, 2010.

We continue to provide stockholders with attractive returns through appropriately leveraged investments in residential mortgage-backed securities. Second quarter 2010 results were negatively impacted by extremely high Agency MBS prepayment rates, due primarily to programs instituted by the GSEs to buy out 120-plus day delinquent loans in their Agency MBS pools. For the second quarter of 2010, our weighted average Agency MBS prepayment rate as measured by CPR was 42.7% compared to 25.6% for the first quarter of 2010.

Prepayments on mortgage-backed securities acquired at a premium reduce earnings as the premium is amortized based on prepayments. With the completion of the initial implementation of the buyout programs, we believe that our Agency MBS prepayment rates will decline in the third quarter. Our goal remains to position MFA to generate double-digit returns on equity over time, and we continue to take advantage of investment opportunities by identifying and acquiring non-Agency mortgage-backed securities with superior loss-adjusted yields at prices significantly below par.

We have substantially reduced our reliance on leverage through repurchase financings. As of June 30th, 2010, our debt-to-equity multiple was 2.8 times versus 4.8 times as of June 30th, 2009. By utilizing less leverage, we believe that future earnings will be less sensitive to changes in interest rates and the yield curve.

I would like to go over some recent financial results and certain additional data highlights as they pertain to our second quarter 2010 results. Second quarter net income per share of $0.16 and core earnings per common share of $0.18. Book value was $7.61 per common share at the end of the second quarter.

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