MFA Financial's CEO Discusses Q2 2012 Results - Earnings Call Transcript

MFA Financial, Inc. (MFA)

Q2 2012 Earnings Results Conference

August 6, 2012 10:00 AM ET


Stewart Zimmerman - Chairman and CEO

William S. Gorin - President

Stephen D. Yarad - CFO

Craig L. Knutson - EVP

Ron Freydberg - EVP

Harold Schwartz - SVP and General Counsel

Kathleen Hanrahan - SVP and CAO

Shira Finkel - SVP

Goodmunder Christiansen - VP

Alexandra Giladi – Investor Relations


Steven DeLaney - JMP Securities

Ryan O'Steen - Keefe, Bruyette & Woods, Inc.

Douglas Harter - Credit Suisse

Joel Houck - Wells Fargo Securities, LLC, Research Division

Richard Shane - JP Morgan Chase & Co, Research Division

Stephen Laws - Deutsche Bank Securities Inc

Christopher Donat – Sandler O'Neill & Partners L.P., Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division



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

I’d now like to turn the conference over to our host Ms. Alexandra Giladi. Please go ahead.

Alexandra Giladi

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflects 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’re 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 its quarterly report from 10-Q for the quarter ended March 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 second quarter 2012 financial results. Thank you for your time.

I’d now like to turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer.

Stewart Zimmerman

Good morning and welcome to MFA’s second quarter 2012 earnings call. With me this morning are Bill Gorin, President; Steven 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; Shira Finkel, Senior Vice President; and Goodmunder Christiansen, Vice President.

Today we announced financial results for the second quarter ended June 30, 2012. Recent financial results and other significant highlights for MFA include the following. Second quarter net income per common share of $0.20 or earnings per common share. Book value per common share of $7.45 as of June 30, 2012 compared to $7.49 as of March 31, 2012.

We continue to focus on adding longer term financing for our Non-Agency mortgage-backed security holding. On June 29, 2012 we added $350 million three-year repurchase agreement to finance Non-Agency MBS assets.

On July 31, 2012 we paid our second quarter 2012 dividend of $0.23 per share of common stock to stockholders of record as of July 13, 2012. Our REIT taxable income exceeded core earnings in the first half of 2012, primarily due to the fact that for Non-Agency MBS acquired at a discount, core earnings are reduced by credit reserves for estimated future losses while taxable income is reduced by realized losses only when they actually occur.

We typically distribute approximately 100% of a REIT taxable income and consequently, dividends exceeded core earnings in the first two quarters of 2012. We currently anticipate that our REIT taxable income and core earnings will trend closer together in the second half of 2012.

At quarter end our debt-to-EBIDA ratio including the liabilities underlying our linked transactions was 3.6:1. In this low interest rate environment, core earnings per share was $0.20 versus $0.21 in the first quarter. Our Agency portfolio had an average amortized cost of 102.9% of par as of June 30, 2012, and generated a 2.95% yield in the second quarter.

Our Non-Agency portfolio had an average amortized cost of 73.0% of par as of June 30, 2012, and generated a loss-adjusted yield of 6.75% in the second quarter. While housing fundamentals remain moderate to weak, we believe that we’ve appropriately factored this into our cash flow projections and credit reserve estimates. Our Non-Agency mortgage-backed security loss adjusted yield of 6.75% is based on projected defaults that are approximately twice the amount of underlying mortgage loans that are presently 60 plus days delinquent.

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