MFA Financial's CEO Discusses Q1 2012 Results - Earnings Call Transcript

MFA Financial, Inc., (MFA)

Q1 2012 Earnings Call

May 4, 2012 10:00 am ET

Executives

Alexandra Giladi – Investor Relations

Stewart Zimmerman – Chairman and Chief Executive Officer

Stephen D. Yarad – Chief Financial Officer

Craig L. Knutson – Executive Vice President

Analysts

Bose George – Keefe, Bruyette & Woods, Inc.

Steven Delaney – JMP Securities

Jason Arnold – RBC Capital Markets

Douglas Harter – Credit Suisse

Jason Weaver – Sterne Agee & Leach Inc.

Arren Cyganovich – Evercore Partners

Christopher R. Donat – Sandler O'Neill

Daniel Furtado – Jefferies & Co.

Alan Straus – Schroders

Michael Widner – Stifel Nicolaus & Company, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Inc. First Quarter 2012 Earnings Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session, instructions will be given at that time. (Operator instructions) As a reminder this conference is being recorded.

I’ll now like to turn the conference over to 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 31, 2011 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 first quarter 2012 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 first quarter 2012 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; Harold Schwartz, Senior Vice President and General Counsel; Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer; (Inaudible) Vice President.

Today, we announced financial results for the first quarter ended March 31, 2012.

Recent financial results and other significant highlights for MFA includes the following. Our first quarter net income per common share of $0.23 and core earnings per common share of $0.21. Book value per common share increased to $7.49 at the end of the first quarter versus $6.74 at 2011 year-end due primarily to price appreciation within our Non-Agency portfolio.

At April 30, 2012, we paid our first quarter 2012 dividend of $0.24 per share of common stock to stockholders of record as of April 4, 2012. In the first quarter, we added multi-year Non-Agency MBS financing; including an expanded collateralized financing arrangement and a re-securitization, reducing our reliance on short-term repurchase arrangements for Non-Agency mortgage-backed securities.

We increased $500 million in existing collateralized financing arrangement that effectively provides three year financing again for Non-Agency mortgage-backed securities. As part of a re-securitization, $186 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.

At quarter-end our debt to equity ratio including the liabilities underlying our Linked Transactions was 3.5:1. Our Agency portfolio had an average amortized cost of 102.8% of par as of March 31, and generated a 3.15% yield in the first quarter. Our Non-Agency portfolio had an average amortized cost of 73.1% of par as of March 31, 2012, and generated a loss-adjusted yield of 6.92% in the first quarter.

In the first quarter, book value per share increased by approximately 11% due primarily to appreciation within our Non-Agency portfolio. While housing fundamentals remain weak, we believe that we have appropriately factored this into our cash flow projections and credit reserve estimates.

These underlying mortgage loans were originated on average more than five years ago, so that we have access to more than 60 months of payment history. In the first quarter, we continued to add multi-year financing that serves to reduce our reliance on short-term repurchase agreements for Non-Agency mortgage-backed securities. While this financing is incrementally more expensive than short-term repo financing by approximately 100 to 150 basis points, we believe the certainty of the committed term outweighs the additional costs.

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