MFA Financial, Inc. (MFA)

MFA 
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MFA Financial, Inc. (MFA)

Q2 2011 Earnings Call

August 3, 2011 10:00 AM ET

Executives

Alexandra Gelardi (ph)

Stewart Zimmerman – Chairman and CEO

Craig Knutson – EVP

Ron Freydberg – EVP

Goodmunder Christiansen (ph) – EVP

Bill Gorin – President

Analysts

Jason Weaver – Sterne Agee

Steve DeLaney – JMP Securities

Bose George – KBW

Jason Arnold – RBC Capital

Douglas Harter – Credit Suisse

Daniel Furtado – Jefferies

Mike Widner – Stifel Nicolaus

Henry Coffey – Sterne Agee

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Inc. second quarter 2011 earnings call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions). As a reminder, this conference is being recorded today.

I would like to turn the conference over to Alexandra Gelardi (ph) for opening remarks. Please go ahead.

Alexandra Gelardi (ph)

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 31, 2010 and other reports that mail file from time-to-time with the Securities And Exchange Commission could cause anaphase 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 disclosures in MFA’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 and or the press release announcing MFA second quarter 2011 financial results.

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

Stewart Zimmerman

Good morning and welcome to MFA second quarter 2011 earnings call. With me this morning are Bill Gorin, President; Stephen Yarad, Chief Financial Officer; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Hal Schwartz, Senior Vice President and General Counsel; Teresa Covello, Senior Vice President and Chief Accounting Officer; Kathleen Hanrahan, Senior Vice President; Shira Finkel, Senior Vice President; and Goodmunder Christiansen (ph), Vice President.

Today we announced financial results for the second quarter ended June 30, 2011. Recent financial results and other significant highlights for MFA include the following. Second quarter net income per common share of $0.22 and core earnings per common share of $0.26. On July 29, 2011 we paid our second quarter 2011 dividend of $0.25 per share of common stock to stockholders of record as of July 14, 2011.

In June, we sold $1.283 billion in principal value of Non-Agency Mortgage-Backed Securities as part of a resecuritization. In connection with this transaction $474.9 million of senior bonds rated AAA by DBRS were issued to third-party investors via a trust at a rate of LIBOR +125 basis points. As required under GAAP we will consolidate the resecuritization and will account for this transaction as a financing.

Book value per common share was $7.48 at the end of the second quarter versus $7.86 in March 31, 2011, due primarily to price weakness within the Non-Agency Mortgage-Backed Securities sector. In the quarter, we grew our Non-Agency MBS portfolio at an accelerated pace through the purchase of approximately $945 million of Non-Agency Mortgage-Backed Securities.

For the second quarter ended June 30, 2011; we generated net income allocable to common stockholders of $77.2 million or $0.22 per share of common stock. Core earnings for the second quarter were $91.6 million or $0.26 per common share of stock. Core earnings is a non-GAAP financial measure which reflects net income excluding $2.4 million of other than temporary impairment charges, $11.7 million of unrealized net losses on link transactions and includes an adjustment of $0.7 million to increase interest income, following the de-linking of certain Non-Agency Mortgage-Backed Securities previously reported as link transactions for GAAP.

We continue to provide stockholders with attractive returns to appropriate leverage investments in both Agency and Non-Agency residential mortgage-backed securities. We are well positioned with an Agency MBS portfolio with an average amortized cost of 102.4% of par.

In the second quarter, we continue to implement our strategy of identifying and acquiring Non-Agency Mortgage-Backed Securities with what we consider to be superior loss adjusted yields at prices well below par. We currently project that approximately two-thirds of our third quarter 2011 core earnings will be generated by Non-Agency Mortgage-Backed Securities.

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