MFA Financial's Management Presents At The Morgan Stanley Financials Conference (Transcript)

MFA Financial, Inc. (MFA)

Morgan Stanley Financials Conference

June 12, 2012 12:05 PM EST

Executives

Craig L. Knutson – Executive Vice President

Goodmunder Christiansen – Executive Vice President

Presentation

Moderator

Hi, good afternoon. I’m Cheryl Pate, the Specialty Finance Analyst here at Morgan Stanley and here to introduce MFA Financial. MFA Financial is a hybrid Mortgage REIT with a long track record. It was formed back in 1998 and is one of the few mortgage REITs operating today that has been in business through an entire interest rate cycle. The company has a strong track record in evaluating non-agency MBS and we look for the company to experience some expansion as some of the high cost flats roll off the portfolio over the next couple of years. As an internally managed REIT, MFA has among the lowest operating costs in our coverage group. And with us here today to present is Craig Knutson, Executive Vice President responsible for MFA’s non-agency portfolio and Goodmunder Christiansen, EVP that worked on the Agency side of the portfolio. So we have both sides of the portfolio coverage here which should make for interesting discussion.

So I’ll turn it over to the company and I’ll kick off the Q&A session once the formal presentation has concluded.

Craig L. Knutson

Thanks Cheryl. So as Cheryl pointed out, MFA is an internally managed mortgage REIT and we do invest in both agency and non-agency RMBS. Investment opportunities continue to exist in both the Agency and non-agency sector. The Agency MBS investments that we make continue to benefit from the steep yield curve, and despite repeated government actions and policies, we are not seeing prepayment rates spike as one might expect. And we reiterate this; our goal is really to generate low double-digit returns on equity with the appropriate amount of leverage. So have we done that over time?

So since January of 2000 we’ve put up a 15.2% annual return, that’s assuming reinvestment of dividends. So we are pretty proud of that.

So, this is what we call our asset allocation table and this is how we look at the company. So yes, we are invested in Agency and Non-Agency RMBS and so you could look across our entire company and look at our balance sheet and say it looks like you are about three-and-a half times levered. But the reality is we think it makes more sense to split out the two businesses solely for the purposes of equity allocation and leverage. So you can see the first column here is Agency MBS, and then you can see that debt to equity ratio is 6.87. So again, probably fairly typically on our space, six to seven or six to eight times leverage is what you typically see on Agencies. On the Non-Agency side, you can see that our debt to equity ratio is a little less than two times. So again, three-and-a half maybe is the whole company, but – and so that would be people to say, you are lower leveraged than most other REITS. We really think that you have to split out the two different components.

But if you look across the bottom at the yield on average earning assets, and this is for the first quarter of this year, you can see that in Agencies, our average yield on interest earning assets was 3.15, which is actually pretty high and is extraordinarily high if you consider the fact that we don’t own any 30-year of fixed rate mortgages.

The primary reason for that is that many of those are older securities that we bought some time ago that have generated higher yields. However, the next line that average cost of funds on our Agency you see is 1.71, that’s actually very high and the primary reason for that is again, we have a legacy book and we have a legacy book of interest rate flops and many of those interest rate flops that are at very high cost rates will be rolling off.

So somewhat uniquely we think that our cost of funds on our agency portfolio will decrease over the next twelve months or so, which is somewhat unusual on our space. Now, obviously at the same time, to the expense that we replace run off on the Agencies, we are not buying new securities that yield 3.15. So we think that while the assets that we add will obviously come on at lower yield, the funding cost somewhat uniquely will decrease for us.

On the Non-Agency side, you can see that the yield in the first quarter on the Non-Agency portfolio was 6.92%, so close to 7% yield. Our average cost of funds there a little over 2% for a net interest rate spread of about 4.75%.

So on the Agency side, we have a balanced portfolio of hybrid ARMs, it were approximately 75% hybrid ARMs and about 25%, 15 year fixed. Our overall premium exposure is quite low, our average amortized cost of our agency portfolio is 102.8%, and we believe that we have limited exposure to HARP 2.0, or HARP 3.0 or 4.0 or whatever we see there. Most of the hybrid securities that we own that are HARP eligible, so that’s 3 June of 2009 are interest only. So the underlying mortgages are not amortizing principal. So the purpose really of HARP is to push these forward into a 30-year fully amortizing mortgages, and because of those 30-year mortgages are fully amortizing, in most cases the payment is actually -- even though the rate is lower, the payment is actually higher than the payment that these borrowers are making now on these interest only loans. So again, that is our observation that the payment that the borrower makes is typically more important than the interest rate associated with the mortgage.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

Video: Jim Cramer on the Markets, Tiffany, Micron Technology and Union Pacific

Video: Jim Cramer on the Markets, Tiffany, Micron Technology and Union Pacific

Bank Stocks Slump After Congress Greenlights Dodd-Frank Rollback

Bank Stocks Slump After Congress Greenlights Dodd-Frank Rollback

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Tesla Model 3 Outsells BMW, Mercedes Equivalents in California

Tesla Model 3 Outsells BMW, Mercedes Equivalents in California

Stocks Trade Lower as Optimism Wanes Over China Trade Talks

Stocks Trade Lower as Optimism Wanes Over China Trade Talks