MFA Financial, Inc. (MFA)

MFA 
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MFA Financial, Inc. (MFA)

Q4 2011 Earnings Conference Call

February 16, 2012 10:00 AM ET

Executives

Alexandra Giladi – IR

Zimmerman Chief Executive Officer & Chairman of Board of Directors

Bill Gorin – President

Craig Knutson – Executive Vice President

Steve Yarad – Chief Financial Officer

Analysts

Steve DeLaney – JMP Securities

Bose George – KBW

Jason Weaver – Sterne, Agee

Mike Widner – Stifel Nicolaus

Arren Cyganovich – Evercore Partners

Jay Mccanless – Guggenheim Securities

Dan Furtado – Jefferies

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial, Inc. fourth quarter 2011 earnings release. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator instructions) As a reminder, today’s call is being recorded.

With that being said, for opening remarks, I will turn it over to Ms. Alexandra Giladi. Please go ahead.

Alexandra Giladi

Good morning. 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 the press release announcing MFA’s fourth quarter 2011 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 and welcome to MFA’s fourth quarter 2011 earnings call. With me this morning are Bill Gorin, President; Steve Yarad, Chief Financial Officer; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Harold Schwartz, Senior Vice President and General Counsel; Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer; and Shira Finkel, Senior Vice President.

Today, we announced financial results for the fourth quarter ended December 31st, 2011. Recent financial results and other significant highlights for MFA include the following

Fourth quarter net income per common share of $0.19 and core earnings per common share of $0.22. Book value per common share was $6.74 at the end of the fourth quarter versus $7.16 at September 30th, 2011 due primarily to price weakness within the Non-Agency MBS sector. Book value per common share has since increased to $7.10 at January 31st, 2012, due principally to a rebound in the value of Non-Agency mortgage-backed securities during the month of January.

We continue to increase our focus on financing structures that reduce our reliance on short-term repurchase arrangements collateralized by Non-Agency mortgage-backed securities. In the fourth quarter, we entered into a three-year collateralized financing arrangement that effectively provides $300 million of financing for Non-Agency mortgage-backed securities, and subsequent to year-end, we increased the amount financed under this arrangement to $500 million.

On February 9th, 2012, we sold $433 million in principal amount of Non-Agency mortgage-backed securities as part of a re-securitization. In connection with this transaction, $186.7 million of senior bonds rated AAA by DBRS were issued to third-party investors via a trust. These bonds, with an average life of 1.9 years, were priced at a 2.75% yield. As required by GAAP, MFA will consolidate the re-securitization and will account for this transaction as a financing.

At year-end, our debt-to-equity ratio, including the liabilities underlying our Linked Transactions was 3.7:1. Our Agency portfolio had an amortized cost of 102.6% of par as of December 31st, 2011 and generated a 3.14% yield in the fourth quarter. Our Non-Agency portfolio had an average amortized cost of 72.8% of par as of December 31st, 2011 and generated a loss-adjusted yield of 7.06% in the fourth quarter.

We continued to selectively find value in the Agency MBS market. In addition, we continued 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 believe that we continue to be run on a very cost-effective basis for the benefit of our stockholders. For the three months ended December 31st, 2011, our cost for compensation and benefits and other G&A expenses were $6.6 million or 1.06% on an annualized basis of stockholders' equity as of December 31st, 2011. Our goal remains to continue positioning MFA to generate double-digit returns on equity over time.

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