MFA Financial, Inc., (MFA)
Credit Suisse Financial Services Forum
February 8, 2012 2:15 pm ET
Stewart Zimmerman – Chairman of the Board, Chief Executive Officer
William S. Gorin – President, Director
Craig L. Knutson – Executive Vice President
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With that now let me turn it over to CEO, Stewart Zimmerman; President, Bill Gorin; and Craig Knutson, who is responsible for Non-Agency investing. Thanks.
Thank you. Okay, good afternoon and thank you for your interest in our company. We hope you find this informative. We are an internally managed REIT positioned to benefit from an investment in both Agency and Non-Agency residential mortgage backed securities. So, let me say that one more time, we are self advised and self managed. Again very, very different than those companies that have an external advisor and again I think it's an important part of the fact that we are aligned with our shareholders in terms of your interest.
We have an experienced management team focused on residential mortgage backed securities. I've been doing this since 1967. So it's more than a couple of years and actually Bill and Craig. Craig and I worked together once upon a time, number of years ago. So, we've all been involved in the residential mortgage backed area for a number of years.
Investment opportunities certainly exist in residential mortgage backed securities particularly in the Non-Agency sector. Agency MBS investment returns continue to benefit from the steep yield curve and despite government [elections] refinancing rates are not spiked.
In this period of economic uncertainty our goal remains to generate double-digit returns on equity with an appropriate level of leverage. Again, I think you’ll find that we have been a very disciplined company and that we’ll continue to be so. Slide I’m very proud of, we’ve had as 14.5% annual returns since January of 2000 and you can see as we’ve depicted here MFA relative to the S&P 500 financials and the S&P 500.
Having said that, as introduction, I’m going to turn it over to Bill Gorin, who is the President of the company.
William S. Gorin
Thanks Stewart. So, while Stewart mentioned our focus is residential mortgage backed securities. We allocate our equity and assets over Agency and both Non-agency. So, the first column is an agency model, which some of you are familiar with, deleverage, debt to equity ratio is 6.7 times. So, not different than any companies you’ve seen. The yields in our agency assets as of the third quarter, in the third quarter was 3.37%, which again in line with other companies. Although, we achieved that without owning any 30-year fixed rates.
So, we’re very happy with the yield on our Agency portfolio. Our cost of funds in our Agency portfolio is 1.74% and we’re not very happy with that. That reflects the fact that we invested in prior time periods when interest rates were a lot higher. And the good news is we expect this cost of funds to go down because many of our high cost swaps will be running off over the next 12 months.
But the spread on agencies was 1.63% which is high for us on a historic basis and, spread we’re happy with.
The next column is the Non-Agency MBS portfolio. So this is a portion of the company that we've grown really, we timed it right, we got in the bottom at the end of ’08, I believe. The leverage is two to one and we've used different forms of leverage overtime. So when we reentered the Non-Agency space we’ve financed all the assets just with equity. And eventually as the market became available and as we became more comfortable, we added some repo financing.
Again we waited for the market to become more efficient and we added secularization financing, and what we’re going to tell you today in this presentation is, we’ve actually added three-year term structured financing of $500 million. So we continue to diversify our funding sources of longer-term funding for a Non-Agency MBS. And why is that interesting to us? Well, the unlevered loss-adjusted yield our Non-Agencies as of the third quarter was 7.29%.
And today we’re going to tell you what loss-adjusted means. Our funding cost was 1.61, so the spreads were 5.68 and with two times leverage, the ROE there is in the mid-teens. We own cash and cash doesn't earn much for you and lowers your returns somewhat, but we will always own cash, because of all the uncertainties in the world. So the spread across the whole company was 3.5 times leverage was 2.9.
On the agency side, we’re about 75% hybrids, in case you don't know a hybrid might be fixed for an initial term and then become a one-year adjustable. And 25% of the portfolio or so is 15-year fixed rate.
Our amortized cost basis is 102.6, I think that would compare very nicely to other [reach] you may be familiar with. We believe we have limited exposure to HARP 2.0. So, really, it seems the goal of HARP 2.0 is to get people to refi from high-cost mortgages into new lower cost 30-year, amortizing fixed rate mortgages.