MFA Financial, Inc. (MFA)

MFA 
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MFA Financial, Inc. (MFA)

Q3 2011 Earnings Call

November 07, 2011, 10:00 a.m. ET

Executives

Alexandra Giladi - Executive Assistant

Stewart Zimmerman - Chairman and CEO

Bill Gorin - President

Stephen Yarad - CFO

Ron Freydberg - EVP

Craig Knutson - EVP

Hal Schwartz - SVP & General Counsel

Kathleen Hanrahan - SVP and CAO

Shira Finkel - SVP

Goodmunder Christiansen - EVP

Analysts

Steve DeLaney - JMP Securities

Bose George - KBW

Mike Taiano - Sandler O'Neill

Jason Weaver - Stern, Agee & Leach

Douglas Harter - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Inc. Third Quarter 2011 Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded.

I’d now like to turn the conference over to 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. which reflect management’s beliefs, expectations, and assumptions as to MFA’s future performance and operations.

When used, statements that are not historical in nature, including those containing words such as, will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, 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, 2010 and other reports that it may file from time-to-time with the Securities and Exchange Commission could cause MFA’s actual results to differ materially from those projected, expressed or implied in any forward-looking statements they make. For additional information regarding MFA’s use of forward-looking statements please see the relevant disclosure in press release announcing MFA’s third quarter 2011 financial results.

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

Stewart Zimmerman

Good morning, and welcome to MFA’s third 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 & General Counsel; Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer; and Shira Finkel, Senior Vice President.

Today we announced financial results for the third quarter ended September 30th, 2011. Recent financial results and other significant highlights for MFA includes the following; third quarter net income per common share $0.23 of core earnings per common share in $0.24.

On October 31, 2011, we paid our third quarter 2011 dividend of $0.25 per share of common stock to shareholders of record as of October 11, 2011. Book value per common share was $7.16 at the end of the third quarter versus $7.48 at June 30, 2011 due primarily to price weakness within the Non-Agency mortgage backed security sector. This is after the $0.25 dividend deducted.

For the third quarter ended September 30, 2011 we generated net income allocable to common stockholders of $81.2 million or $0.23 per share of common stock. Core earnings for the third quarter were $84.7 million or $0.24 per share of common stock. We continue to provide stockholders good attractive returns to appropriate leverage investments in our Agency and Non-Agency residential mortgage backed securities.

Our Agency portfolio had an average amortized cost basis of 102.6% of par as of September 30, 2011, and generated a 3.37% yield in the third quarter. Our Non-Agency portfolio had an average amortized cost of 73.2% of par as of September 30, 2011. And generated a loss adjusted yield of 7.29% in the third quarter. In the third quarter we continue to selectively find value in the Agency hybrid MBS market. In addition, we continue to implement our strategy of identifying and acquiring Non-Agency mortgage backed security with what we consider to be superior loss adjusted yields of prices well below par. Our goal remains to continue positioning MFA to generate double-digits returns on equity overtime.

In the third quarter, the Non-Agency mortgage backed security market like other credit set is a good market became less listed. All this made prices more volatile and also has given longer term investors such as MFA. The opportunity to acquire assets with attractive long-term cash flows. Due to underlying borrower characteristics and structural features, our Non-Agency portfolio was less impacted by price movements, declining an average of 2.4 points.

I’d like to go over other certain additional data highlights as they pertain to our third quarter 2011 results. Fair market value of Non-Agency mortgage backed securities $4.14 billion; face amount of Non-Agency mortgage backed securities $5.65 billion; amortized cost of Non-Agency mortgage backed securities $4.1 billion; net purchase discount of Non-Agency MBS $1.58 billion.

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