MFA Financial, Inc. (MFA)

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MFA Financial, Inc. (MFA)

JPMorgan SMid Cap Conference Call

November 30, 2011 11:45 ET

Executives

Stewart Zimmerman – Chief Executive Officer

Bill Gorin – President

Craig Knutson – Executive Vice President

Analysts

Rich Shane – JPMorgan

Presentation

Rich Shane – JPMorgan

Since we're already on the clock, I'm just going to do a very brief introduction. I'm Rick Shane from JPMorgan. I'm the specialty finance analyst. I'm delighted to introduce the management from MFA. MFA is one of the most established mortgage REITs. The company's current dividend is over 15%. MFA is a hybrid mortgage REIT with over $12 billion of assets, about $7.5 billion of that is in agency securities, just over $4 billion is in non-agency securities. We look at MFA as an absolute return play as opposed to some of the more relative return plays within the mortgage REIT industry. And with that, I will turn it over to management.

Stewart Zimmerman -- Chief Executive Officer

Thank you.

Rich Shane – JPMorgan

Thank you, Stewart.

Stewart Zimmerman – Chief Executive Officer

Good morning. Thanks for being here. My name is Stewart Zimmerman. I’m the CEO of MFA. With me is Bill Gorin is President, Craig Knutson, Executive Vice President, our CFO is sitting over here, Steve Yarad. So, thank you.

Generally, we do this kind of in a -- as we do everything, actually, in our office, kind of in the team efforts. So, I will kind of lead it off, and turn it over to Bill, turn it over to Craig, and then you ask some questions. We have the CFO here he can answer any of your accounting questions.

So when we look at this, this is for our attorneys. We are an internally managed REIT. We are positioned to benefit from with agency and non-agency residential mortgage-backed securities. One thing Rich said a moment ago, he used the term hybrid. It's not offensive, but we don't consider ourselves a hybrid REIT. We can consider ourselves if you will specialist in residential mortgage-backed securities, which consists of both agency and non-agency securities. But what our expertise is in residential mortgage-backed securities. So I would just like to make you understand that.

Kind of an experienced management team focused on residential MBS opportunities. I've been doing this since 1971 I guess. So that’s more than a couple of years. Non-agencies remain available at significant discounts. Craig will give you some data on that, but there is still wonderful opportunities non-agency arena very much so at or about the 8% level on a risk-adjusted return.

We continue to benefit from a steep yield curve, and our goal remains to generate double digit returns with appropriate levels of leverage and again you will see some slides in few moments in terms of leverage. I think you will find we're one of the lowest, if not the lowest, levered entity in our space.

We have had a 14.6% annual return compound down since January 2000, so for the last -- call it 10 years -- you can see for yourself. I'm kind of proud of this slide and the returns, and especially the fact we have been basically the lowest leverage of the company in our space.

Here I’m just going to go one or two things and I’m going to turn to Bill, but one or two things I would like to just point out to. So, when you look at our debt to equity and if you go to the far right column you can see that the agencies are levered at about 6.7 times, non-agencies were about two times. Overall leverage about 3.5 times.

So we've been able to get the kind of returns without upping the leverage. You can see the spread returns for yourself and Bill probably go into some greater detail.

So, with that moment I turn it over to Bill.

Bill Gorin – President

Okay, thanks. Great. So, staying on this slide, you can see how we allocate our equity and why we allocate the way we do. So, the first column is our ADC MBS portfolio, if you see the debt to equity ratio is 6.76, which is probably generally in line with mortgage REITs that focus principally on agencies. What’s interesting is the yields on our agency portfolio is 3.37, which I believe is at the high end, and we achieve that without owning any 30-year fixed rates. Obviously, you have a high yield in 30-year fixed rates, but if you could add too much interest rate risk. So, we are very happy with the yield on our agency assets.

Our cost of funds for agencies is 1.74 and that’s we are not happy with. We are probably in the high end of cost of funds for the agencies and the spread is 1.63. Now, the good news is our asset lives are a lot longer than our liability lives. This cost of funds on the agencies is trending down and it reflects the fact that five years ago we put on slop that costs us 4% and they are rolling off pretty regularly this year.

So, well we do believe that agency investment opportunities might lower your average yield, so you probably see people are investing in agencies that yield 2.25%, 2.3%, which would drive down the average yield. We uniquely will have our cost of funds going down almost in line with that. So, we see less compression on our spread going forward.

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