MFA Financial, Inc. (MFA)

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MFA Financial, Inc. (MFA)

Q3 2010 Earnings Conference Call

November 4, 2010 10:00 AM ET


Alexandra Giladi [ph]

Stewart Zimmerman – Chairman and CEO

Craig Knutson – EVP

Ron Freydberg – EVP

Bill Gorin – President, Director


Bose George – KBW

Steve DeLaney – JMP Securities

Jason Arnold – RBC Capital Markets

Mike Taiano – Sandler O'Neill

Matthew Kelly – Morgan Stanley

Henry Coffey – Sterne Agee

Gabe Poggi – FBR Capital Markets

Dan Furtado – Jefferies

Douglas Harter – Credit Suisse

Mike Widner – Stifel Nicolaus

Jim Ballan – Lazard Capital Markets

Matthew Howlett – Macquarie

Jim Young – West Family

Stephen Zadeklik – Private Investor



Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Incorporated Third Quarter 2010 Earnings Conference Call.

(Operator Instructions)

At this point I’d like to turn the meeting over to Ms. 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 reflects management’s beliefs, expectations and assumptions at some of its future performance on operations. When used, statements which are not historical in nature including those containing words such 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 31, 2009, quarterly reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010 and other reports that it may file from time to time with the Securities and Exchange Commission could cause MFA’s actually results, performance and achievements to differ materially from those projected, expressed or implied in any forward-looking statement 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 September 30, 2010 and/or the press release announcing MFA’s third 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. Good morning and welcome to MFA’s third quarter 2010 earnings call. With me this morning are Bill Gorin, President; 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. By way of introduction, also joining us this morning is Stephen Yarad, our Chief Financial Officer.

Today we announced financial results for the third quarter ended September 30, 2010. Recent financial results and other significant highlights for MFA include third quarter net income per common share of 27 cents and core earnings per common share of 22 cents. Book value was $7.83 per share at the end of the third quarter.

In the third quarter our non-agency residential mortgage-backed security portfolio including mortgage-backed securities, underlying mortgage-backed security forwards, generated non-levered loss adjusted yield of 9.27%. At September 30, 2010, we owned $2.351 billion of non-agency mortgage-backed securities including MBS forwards, advertise cost of 68.1% of par.

In the third quarter our agency MBS portfolio generated unlevered yield of 3.93%. At September 30, 2010, we owned $6.181 billion of agency MBS consisting of 5.731 billion of hybrid and floating rate mortgage-backed securities and $449.3 million of 15-year fixed rate mortgage-backed securities. These agency MBS had an average cost basis of 101.6% of par.

Subsequent to quarter-end, we sold $985 million in principal value of non-agency mortgage-backed securities as part of a re-securitization. In connection with this transaction, $246 of AAA senior bonds were issued to third-party investors or via a trust at a pass-through rate of LIBOR plus 125 basis points. As required under GAAP, we will consolidated the re-securitization and will account for this transaction as a financing of the underlying mortgage-backed securities.

For the third quarter ended September 30, 2010, we generated net income available to common stock of $75.2 million or 27 cents per share of common stock. Core earnings in the third quarter were $61.70 million or 22 cents per share of common stock. Core earning represents a non-GAAP financial measure which reflects net income excluding changes in the unrealized net gains on MBS forwards.

On October 1, 2010 we announced our third quarter 2010 dividend of 22.5 cents per share of common stock, which is paid on October 29, 2010 to stockholders of record as of October 12, 2010.

I would like to go over certain additional data highlights as they pertain to our third quarter 2010 results. Leverage overall debt to equity, 2.62 times. Portfolio spread, interest-earning assets minus cost of funds, 2.56%. Our MBS net spread, which is mortgage-backed securities net yield minus cost of funds, 2.84%. Our repricing that [ph] assuming a 15% CPR of 17 months and our agency CPR, 23.8%

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