MFA Financial, Inc. (MFA)

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MFA Financial, Inc. (MFA)

Morgan Stanley Financials Conference

June 10, 2014 10:20 AM ET


Bill Gorin - CEO

Craig Knutson - President and COO


Cheryl Pate - Morgan Stanley


Cheryl Pate - Morgan Stanley

Good morning, I am Cheryl Pate. I cover the Specialty and Consumer Finance Stocks here at Morgan Stanley, and it’s my pleasure to welcome MFA Financial to our conference this morning. MFA Financial is a hybrid mortgage REIT with a long track record, formed in 1998 as one of the few mortgage REITs operating today that has been in the business through the full interest rate cycle. MFA invests in both agency and non-agency RMBS and is an internally managed REIT.

With us today to present for MFA is Bill Gorin, Chief Executive Officer and Craig Knutson, President and COO. And with that I’d like to pass it over to Bill and Craig.

Bill Gorin

Thanks Cheryl. Thanks for the introduction and thanks for having us here. Your opening introduction reminded me of my one man battle against the term hybrid mortgage REIT. I believe that what we do is we focus on residential mortgage assets and find the best opportunities and if other people exclude non-agencies, perhaps sometimes they are detriment. So I don’t believe in a hybrid concept. I believe in we look for the best investment opportunities across the residential mortgage asset universe.

So we’re internally managed. We’re a REIT and we deliver shareholder value through both the generation of distributable income and through asset performance linked to improvements in residential mortgage credit fundamentals. So because we purchase agencies and non-agencies, not everything is purchased out of premium. Some assets are purchased at large discounts and that’s why in addition to distributable income we’re also generating value appreciations through the asset performance.

Here you see our historic returns and since January 2000 our annual return is 15.9%. So usually when you quote a periodical, you’ll be quoting Bloomberg these days, but I'm going to quote the New York Times. They took a look at rate of return owning the Clippers. So the Clippers were purchased for $12.5 million and their pending lawsuits might be sold for much as $2 billion. The rate of return on that -- it was a 31 year holding period -- was about 16%. So you still lose the concept of how important 15.9% is and what that does over time when you compound. So if you reinvest your dividends we’re compounding at a good rate and -- the good example are the Clippers and what close to 60% return does over time.

First quarter, we continue to generate consistent and attractive results despite the low interest rate environment. The first quarter earnings per share and the dividend per share were both $0.20. Credit fundamentals on our non-agency MBS portfolio continue to improve. So some of you might have caught Janet Yellen’s presentation in New York at The Economics Club. And what she did was, she would quote the blue chip forecast of economic interest rates over the next couple of years, but she did it over time. She’d tell us when these blue chip forecasts came out. So over time every year -- analyst forecast interest rates will be higher two years from now and that’s been the case for the last six years.

So it’s hard to forecast exactly where interest rates are going to be, because the Fed will make their decisions based on data on labor markets, inflation of the economic data. Therefore we have to be positioned to understand that we can't perfectly predict where interest rates will be. So do we do that? One, we have a very low leverage ratio 2.9:1 and two-thirds of our MBS portfolio are either adjustable rate or hybrid. Hybrid means fixed for a period of time and then adjustable.

So in the last slide I said consistent returns. What does that mean? Consistent returns despite a low interest rate environment. So let’s look at the yields on interest earnings assets over the last five quarters; consistently over 4%, pretty consistent with a slight upward trend. Now why is that? If interest rates are going down, you have high yielding assets running off and you have to replace them in the marketplace? Why is it our yield is going up. It’s because the yields in our existing portfolio of non-agencies continues to go up due to the fact that the underlying credit continues to perform better than we initially expected. We therefore could change our assumptions on the yield on the non-agencies have trended up.

That pretty much explains why our spreads have also gone up. So there has been no spread compression despite the low interest rate environment. In fact spreads have trended up somewhat over the last five quarters. When you look at the debt to equity ratio, so increasing yields, increasing spreads. We don’t have to increase our leverage to generate earnings. Our leverage has stayed flat or actually has gone down a bit.

We mentioned asset performance in addition to distributing the high coupon. So what happens where book value in the first quarter went up primarily due to appreciation in the non-agency portfolio? You’ll see that net income was $0.20. We dividended about $0.20. Our agencies appreciated $0.05, our non-agencies appreciated $0.13 per share. Hedge is pretty much equal to the appreciation in the agencies and therefore the change as I said was due to the appreciation in the non-agency portfolio.

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