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Edited Transcript of MFA earnings conference call or presentation 6-Nov-18 3:00pm GMT

Q3 2018 MFA Financial Inc Earnings Call

New York Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of MFA Financial Inc earnings conference call or presentation Tuesday, November 6, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Wulfsohn

MFA Financial, Inc. - SVP

* Craig L. Knutson

MFA Financial, Inc. - President, CEO & Director

* Gudmundur Kristjansson

MFA Financial, Inc. - SVP

* Harold E. Schwartz

MFA Financial, Inc. - Senior VP, General Counsel & Secretary

* Stephen D. Yarad

MFA Financial, Inc. - CFO

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Conference Call Participants

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* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Eric J. Hagen

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Inc. Third Quarter Earnings Call. (Operator Instructions) As a reminder, today's call is recorded. Now I turn the conference over to your host, Hal Schwartz. Please go ahead.

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Harold E. Schwartz, MFA Financial, Inc. - Senior VP, General Counsel & Secretary [2]

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Thank you, operator. Good morning, everyone. The 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, should, could, would 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 those described in MFA's annual report on Form 10-K for the year ended December 31, 2017, and other reports that it may file from time to time with the Securities and Exchange Commission.

These risks, uncertainties and other factors could cause MFA's actual results to differ materially from those projected, expressed or implied in any forward-looking statement it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's third quarter 2018 financial results. Thank you for your time.

I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [3]

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Thank you, Hal. Good morning, everyone. I'd like to thank you for your interest in, and welcome you to MFA Financial's Third Quarter 2018 Financial Results Webcast. With me today are Steve Yarad, CFO; Gudmundur Kristjansson, Senior Vice President; Bryan Wulfsohn, Senior Vice President; and other members of senior management.

MFA had a solid quarter, and we are particularly pleased with our investment activity in the third quarter of 2018. Our investment portfolio centered largely around residential mortgage credit assets continues to produce strong results, while maintaining stable book value. MFA's muted interest rate sensitivity, coupled with our low leverage multiple, provides these returns with a much lower risk profile than many of our peers.

Our investment team spent considerable time and effort last year seeking new counterparties and establishing relationships in order to source loan volume. These efforts are now bearing fruit, as we have been able to acquire meaningful size in each of the last 3 quarters. MFA's reputation as a reliable buyer of residential whole loans has enabled us to purchase significant volume of whole loans, including, in some cases, transactions with limited competition. At the same time, we continue to analyze new investment opportunities. As we have demonstrated over many years, MFA has the intellectual capacity to understand, evaluate and price assets that are difficult to understand and value.

Please turn to Page 3. We generated earnings per share of $0.19 in the second -- in the third quarter and paid a Q3 dividend of $0.20 to common shareholders on October 31. This is the 20th consecutive quarter in which we have paid a $0.20 dividend. Our estimated taxable income for the third quarter was $0.21, and our estimated undistributed taxable income as of September 30 remains $0.11 per common share. We completed a follow-on equity offering in August, raising approximately $389 million, and I'm pleased to report that we made substantial progress in deploying this new capital during the quarter.

Our new investments exceeded our runoff in the third quarter of 2018 by over $1.3 billion, as we purchased or committed to purchase over $700 million in residential whole loans. Our book value declined slightly in the second quarter to $7.46 per share, due primarily to our investment strategy, coupled with low levels of leverage. MFA's book value has been very stable with less than a 4% variance between the high and low book value over the last 8 quarters, and a quarter-over-quarter average book value variance of only 0.75%.

Please turn to Page 4. MFA's residential mortgage credit Investment Strategy continues to provide attractive returns and strong credit fundamentals to drive earnings and support book value. Residential mortgage whole loans, including REO, now total over $4 billion, with over half of our equity allocated to these assets. Most notably, much of the growth in 2018 of our residential whole loan portfolio has been through the purchase of newly originated loans. We now have more than billion dollars invested in these loans. Third quarter acquisitions included approximately $400 million of non-QM loans, $190 million of fix and flip loans, and nearly $25 million of single-family rental loans.

These loans, which we account for at carrying value, have begun to make a meaningful contribution to our net interest income. The process of acquiring these assets is very different from that associated with our other asset classes, as we generally purchase these loans directly from originators, rather than from the Street or through bulk offerings from holders of credit-sensitive whole loans. And our efforts to source these new assets began in early 2017.

In addition, through our willingness and ability to explore various arrangements, including flow agreements, strategic alliances and also minority equity investments, we've been able to partner with originators to source attractive new investments, while enabling them to grow with support from MFA as a reliable provider of capital.

For our credit-sensitive whole loans, we've committed significant resources to our asset management efforts. We recognize that by immersing ourselves in the complicated and sometimes messy details of managing credit-sensitive loans, that we can achieve better outcomes and improved returns. As good as our third-party services are, there's a tangible benefit to direct oversight and involvement in decision-making. And finally, our legacy non-agency portfolio continues to perform well and contribute materially to our financial results, generating a yield in the third quarter of 10.76%. This yield was particularly high in the third quarter due to a call of a bond that resulted in reported interest income equal to the difference between its amortized cost in the par call price.

Please turn to Page 5. We've had good success through our efforts to expand our universe of investment assets. In adding newly originated whole loans to our asset mix, we've added a reliable and consistent source of new investments, while we can still pursue periodic opportunities to add credit-sensitive whole loans. Recent purchases have reduced our excess cash balances, but we have substantial borrowing capability on unlevered assets that we can tap to fund future acquisitions. As we continue to grow our balance sheet, we will begin to add more leverage, particularly on our residential whole loan portfolio. That said, our debt-to-equity ratio is still likely to remain quite low, below 3x, for at least the next couple of quarters. Because MFA has lower leverage, less interest rate exposure and reduced prepayment sensitivity than other similar companies, our returns are achieved with materially less risk. We did make some investments in new production specified 30-year 4.5% Agency MBS in the third quarter. This investment was designed to invest liquidity from our equity raise and does not represent a fundamental shift in our investment strategy. These positions were hedged to minimize duration exposure, and our intention is that as more attractive opportunities arise, these Agency MBS can easily be sold to redeploy this capital.

Please turn to Page 6. We were able to purchase over $2.3 billion of assets in the third quarter, including $700 million of residential whole loans. Efforts that began over a year ago to add new asset classes are beginning to have a material effect on our balance sheet. Our portfolio acquisitions exceeded runoff by approximately $1.3 billion, and we deployed most of the additional capital raised in our equity offering during the quarter. The newly originated residential whole loans that we have purchased are included in residential whole loans at carrying value on our balance sheet. And these assets contributed meaningfully to our income for the quarter. Interest income from residential whole loans held at carrying value was $29.5 million in the third quarter versus $17.9 million in the second quarter.

And finally, the hard work by our asset management team has had a meaningful impact on the outcomes and returns of our existing credit-sensitive whole loan assets.

And now, I'd like to turn the call over to Steve Yarad, who'll provide further details on the financial results for the third quarter.

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Stephen D. Yarad, MFA Financial, Inc. - CFO [4]

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Thanks, Craig. For the third quarter of 2018, MFA's net income to common shareholders was $83.4 million or $0.19 per share. As Craig noted, we're pleased with our efforts to further grow our residential mortgage portfolio, particularly our additions in recent quarters of performing lines are starting to be reflected in our results. Specifically, our earnings this quarter are primarily driven by higher net interest income, reversing the trend observed for several quarters and over the past 2 years. In addition, higher overall other income and lower expenses also drove the sequential quarter increase in our net income.

Please turn to Page 7, where we present additional information on the key items impacting net income this quarter. In reviewing our results, you will note that there were 3 items driving the third quarter increase in net income. The first item, as discussed, was net interest income, which is approximately $9 million higher than the prior quarter. This increase primarily reflects growth in our portfolio of recently originated loans. This includes the impact of loan acquisitions that were pending settlement at the end of last quarter, as we earned income on these assets the most of Q3.

In addition, as a result of our robust Q3 investment activity, we acquired and earned income on over $700 million of loan, as nearly all of these purchases settled during the current quarter.

The second item was the overall level of net other income, which was approximately $7 million higher than the prior quarter. This reflects the continued growth and strong contribution from our fair value loan portfolio, which was $2.5 million higher than the prior quarter. In addition, unrealized gains on CRT securities, which were accounted for at fair value and does flow through the income statement, were almost $4 million higher than the last quarter.

Finally, the net income impact of sales of MBS and CRT securities was over $4 million higher than the prior quarter. As noted in footnote 2 to the summary income statement, we reported realized gains in securities sales for Q3 of $16.4 million. While this is $9 million higher than the prior quarter, the net income impact is lower after reversing previously reported unrealized gains and CRT securities accounted for fair value that was sold during the quarter. Cumulative unrealized gains and securities accounted for at fair value are reversed in the period of securities sold in order to avoid double counting these gains in the determination of current period net income.

And lastly, the third item was lower operating other expenses, which were approximately $1 million lower as the prior quarter was impacted by the timing of recognition of certain share-based compensation awards. With this reduction of expenses and following our August equity raise, the ratio of our annualized G&A expense to shareholders' equity fell this quarter to 1.3%. We would expect our expense run rate to continue at approximately this level for the next few quarters.

And now, I would like to turn the call over to Gudmundur Kristjansson to provide more detail of our investment activity and portfolio performance in the third quarter.

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Gudmundur Kristjansson, MFA Financial, Inc. - SVP [5]

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Thank you, Steve. Turning to Page 8. The third quarter was another highly successful quarter for our investments team, as we acquired over $2.3 billion of assets, and we're active in all of our investment classes, which covers most areas of the residential mortgage universe at this point. We grew our investment portfolio by $1.3 billion in the third quarter and by $1.6 billion year-to-date. And as Steve pointed out on Slide 7, we're starting to see the impact of this portfolio growth in higher interest income. The largest growth was in our whole loans portfolio, which grew by almost $550 million as our new loan initiatives added meaningfully to investment flows.

We purchased approximately $760 million of 30-year 4.5% Agency MBS in the quarter. These are newly issued specified pools with low payouts, which we believe attractive carry versus TPAs and other more expenses specified pool stories in the current low prepayment risk environment. We helped these purchases extensively with long duration swaps and we'll actively manage the risk exposure as rates change. Given the large increase in interest rates over the last few years, we believe the risk-reward of Agency MBS versus credit investments has improved and they can now be a viable option to invest excess liquidity, pending more attractive investment opportunities. We continue to optimize our holdings of CRT securities, as we sold $119 million of older CRT securities at prices in excess of 110, as the spreads have tightened to, over time, to about 100 DM, as they benefited from low delinquencies, lower LTVs and rating upgrades. We replaced them with newly issued bonds with spreads in the low to mid-200s DM.

Turning to Page 9. Despite almost 3 years of rising rates and 8 Fed funds increases, MFA's net interest rate spread on interest-earning assets has remained steady and attractive, while our yields on interest-earning assets has increased by approximately 140 basis points. This is the result of our thoughtful and adaptive investment strategy, which, after the financial crisis, was focused on acquiring credit-sensitive assets that would benefit from an extensive period of easy monetary policy and improving labor market. In addition, our strategy has emphasized the acquisition of assets with short duration, with either through a floating rate coupon or rapid repayment of principal, and supported our portfolio performance in the rising rate environment. Finally, the rise in funding cost has been mitigated with interest rate swaps and the terming out of whole loans financing through securitizations, of which we currently have about $700 million of fixed rate coupon secured as debt outstanding.

Turning to Page 10. Here, we show the yield, cost of funds and spreads for our holdings ordered by equity allocation. As we can see, our more significant holdings continue to generate attractive yields and returns. The leverage on our whole loans at carrying value remains low at only 0.8x debt-to-equity, but as the flow of newly originated loans continues to increase, we expect to utilize more leverage there going forward. Given the current yield of our assets and the yields we're seeing in the marketplace, we believe that with the appropriate amount of leverage, we will continue to generate attractive returns for shareholders.

Turning to Page 11, where we will review MFA's interest rate sensitivity. MFA's asset duration was relatively unchanged in the quarter, rising by 7 basis points to 168 basis points at the end of the quarter. During the quarter, we added $537 million of longer duration hedges, primarily to hedge our acquisition of Agency MBS, while $500 million of short duration swaps matured in the quarter. As a result, a soft notional balance increased by $37 million, while our hedge duration lengthened meaningfully to negative 2.4 from negative 1.7 in the second quarter.

In addition to market value protection, our interest rate swaps currently has approximately 36% of our repurchase agreements. And in addition, our nonrecourse fixed coupon securitized debt of approximately $700 million represents about 9% of our repo and securitized debt financing. As a result of the changes to asset and hedge duration, MFA's net duration was relatively unchanged in the quarter at 114 basis points.

Turning to Page 12. MFA's investment and risk management strategy continues to consistently deliver book value stability, limiting the quarter-over-quarter book value changes we have experienced. As you can see on the graph on this page, since 2014, the largest quarter-over-quarter change to book value has been plus or minus 4%, with the average change of book value of less than 2%. A big factor in achieving this has been our strategy of maintaining a low and stable asset duration, as we can see from the orange line on this graph.

Given the recent high volatility in financial markets, I would like to take the opportunity to remind listeners that MFA's book value performance during large changes in interest rates has been impressive. In the fourth quarter of 2016, the fourth quarter of 2017 and first quarter of 2018, interest rates rose significantly. During these periods, MFA book value was barely changed. This is not the case for many leveraged fixed income investors who experienced large book value declines during these time periods. Importantly, we believe that by consistently protecting book value, MFA will have a staying power to take advantage of new opportunities as they arise.

With that, I'll turn the call over to Bryan Wulfsohn, who will discuss our credit-sensitive assets in more detail.

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Bryan Wulfsohn, MFA Financial, Inc. - SVP [6]

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Thank you, Gudmundur. Please turn to Page 13. The economy and housing fundamentals continue to benefit mortgage credit. The CoreLogic national home price index was up 5.5% in August from a year ago. However, year-over-year growth has been slowing down recently as a result of higher mortgage rates. CoreLogic projects HPI growth over the next year to be 4.7%. The unemployment rate was level at 3.7% in September and October, down from 4.2% a year ago. While we have seen slight increases in housing inventory, overall levels are still historically low on a nationwide basis. We believe these low levels of supply will further support home price growth. According to the latest release from the Federal Reserve Board, mortgage delinquencies are now down to 3.25%.

Turning to Page 14. We were able to source over $700 million of residential whole loans in the third quarter. We have had success in adding new origination partners and grew our existing relationships. Legacy loan supply has been robust. We have seen volumes year-to-date of more than $60 billion, which is an increase over last year. And returns on nonperforming loans continue to be consistent with our expectations of 5% to 7%.

Again, as a reminder, our whole loans appear on our balance sheet on 2 lines, loans held at carrying value, $2.5 billion; and loans held at fair value, $1.4 billion. This election is permanent and is made at the time of acquisition. Typically, we elect carrying value for newly originated and reperforming loans and fair value for nonperforming loans.

Turning to Page 15. Our reperfroming portfolio continues to perform well. Nearly 90% of our portfolio is less than 60 days delinquent. In addition, although 12% of the portfolio is 60 days delinquent or greater, almost 30% of these loans have been making payments over the last 12 months. We are happy to see prepayments fees perform better than expectations. We could see fees remaining in this range as our borrowers gain access to new financing options as a result of improving credit.

Turning to Page 16. We believe our asset managements team's oversight of servicing decisions and active management of the portfolio produces better economic outcomes. The team has worked in concert with our servicing partners to more quickly get loans to reperform as well as limit and reduce timelines to resolution. This slide shows the outcomes for loans that were purchased prior to September month-end 2017, therefore, owned for more than 1 year.

30% of loans that were delinquent at purchase are now either performing or have paid in full. 39% have either liquidated or REO to be liquidated, and 30% are still in nonperforming status. We're very pleased with our performance since modification as over 78% of our modifications are either performing or have paid in full. These results continue to outperform our initial expectations for reperformance.

Turning to Page 17. We have been able to add to our portfolio of newly originated loans that do not meet the qualified mortgage definition as defined by the CFPB. A variety of different loan types can be considered Non-QM, ranging from structural features, such as interest-only period or a term greater than 30 years, to the way income is documented, such as the use of bank statements for self-employed borrowers, or loans with higher debt to income ratios and so on. To date, we have acquired over $1 billion of UPB and are working with origination partners on strategic relationships. We believe underwriting of these loans is prudent. The portfolio has a weighted average loan-to-value of 66% and a FICO of over 700. And leverage is attainable through either warehouse lines and/or securitization, and we target asset yields of approximately 5% and an ROE of low double digits, utilizing appropriate leverage.

And now, I'd like to turn the call back over to Gudmundur to walk you through our fixed input and SFR loans.

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Gudmundur Kristjansson, MFA Financial, Inc. - SVP [7]

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Thanks, Bryan. Turning to Page 18. We're very happy with our progress in building out our business purpose loan program as we have really started to see volumes pick up in the last couple of quarters. We're seeing the benefit of extensive work that has been put into developing strong relationships with a select group of originators, where we collaboratively work to expand volumes and add new loan programs. Since we first began purchasing business purpose loans about 1 year ago, we have acquired approximately 2,500 loans and approximately $600 million in UPB and undrawn commitments.

During the third quarter, we doubled our holdings of fixed and flip loans to $329 million UPB, with additional $44 million in undrawn commitments. Credit metrics and performance continues to be strong and our expectations are that we will earn between 7% and 8% yields in these assets over time. As of the end of the third quarter, we held $80 million in SFR loans. Similar to the fix and flip loans, credit metrics on loan performance continue to be strong. Our target yield for this asset class is around 6%. We're excited about the progress we've made in developing our Non-QM, fix and flip and SFR loan programs, as they become a meaningful part of our portfolio and offer attractive returns.

With that, I will turn the call over to Craig for some final comments.

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [8]

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Thank you, Gudmundur. Turn to Page 19. In summary, we remain active in the investment market, and while we have made excellent progress in growing our asset base, we have substantial capacity to continue to increase our investments by adding leverage to our balance sheet. We have maintained our disciplined pricing approach, which sometimes means we don't win bids. We're investing for the long term, so we are keenly aware that reaching too much for investments can lock in years of suboptimal returns. We've made very good progress in expanding our investment opportunity set within the residential mortgage space by adding what we believe will be reliable, recurring and growing volume of newly originated whole loans.

We cannot always predict what the next attractive investment opportunity will be, but we are quite confident that we will have a seat at the table, the expertise to understand and structure the transaction and ample capital to be able to invest in meaningful size. This concludes our presentation. Operator, would you please open up the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Doug Harter from Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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You guys talked a little bit about the ability to expand leverage on the whole loans. Can you talk about what advance rates are like on the financing and where that leverage could go?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [3]

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Sure, Doug. So I guess, the obvious one would be residential whole loans at carrying value, which we show a debt to equity ratio of a little bit less than 1x. So depending on the loan, they could be -- the haircuts could be anywhere from 10% to 20% or so. So at 20% at the maximum, it could be 4x levered. So as I said, I don't see our leverage increasing substantially. But to increase from 2.3 to 2.6 or 7 or 8 is certainly on the cards.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4]

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Got it. And obviously, good activity this quarter. I guess, as that leverage increases, how do you view kind of the opportunity kind of continuing in the coming quarters, the ability to continue to find assets?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [5]

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Well, we're pretty excited about the newly originated whole loans because unlike our previous purchases of reperforming and nonperforming loans, these originators originate these loans every day, every week, every month. So we see those relationships continuing to grow and we see it as a reliable source of product. It takes time to acquire billions, but if you look at what we've done this year, it's -- I think, those 3 asset classes are about $1.5 billion, and our first purchases were in the fourth quarter of last year. So we're pretty excited about that.

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Operator [6]

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Our next question then will come from the line of Bose George from KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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It's Eric on for Bose. Just a 2-part accounting question. How much discount accretion did you guys capture through earnings during the quarter? And then, did you guys take a credit reserve release during the quarter, and if you did, how big was it?

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Stephen D. Yarad, MFA Financial, Inc. - CFO [8]

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Sure, Eric. So for the quarter, the net amount of discount accretion that went into the quarter was approximately $12.9 million. And in terms of the release of discount, it was approximately $10 million for the quarter.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9]

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Got it. And I'm sort of drawn to Slide 13, where you guys show the national HPA, and a little tick down somewhat recently. I mean, I guess, it begs the question, I mean, how granular do you guys get on the fundamentals in individual housing markets? And I guess, do you have the flexibility and the optionality to sort of build out the portfolio around factors that you really like with regards to things like HPA and employment trends in certain markets or submarkets?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [10]

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Sure. And Eric, we can go all the way back to 2009, when we started buying legacy non-agencies. I think, we've always taken a very granular approach. And we're not looking at national -- yes, we had to put a slide in the deck, so it lends itself to a national HPA. But when we look at loans or when we look at securities, we typically drill down to ZIP Code level. And it's never a question of only buying assets in ZIP Codes where we think house price appreciation is likely. It's really about pricing. Whether it's a security or a loan, it's about pricing. So suffice it to say, we're probably going to -- all else equal, we'll price alone higher in a location where we believe there's more house price appreciation potential than in one with lower home price appreciation. But that's been a consistent part of our whole investment process for almost 10 years.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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Great. That's a helpful answer. And, then on the Non-QM side, can you just talk -- I mean, I assume the exit opportunity there, or the financing anyway, is to do that through securitization eventually. And I assume that you guys have looked at some of the securitizations that have taken place in that market. I mean, what are the levered returns that you expect to get in your portfolio? And is your portfolio any different than, I guess, some of the sort of hallmark deals that have taken place already?

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Gudmundur Kristjansson, MFA Financial, Inc. - SVP [12]

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Yes, as I mentioned in the presentation, I think, the expectation is a low double-digit return. And then, really, when you execute on a securitization, just like anything else, you can sell all the way down to almost retaining just 5%. So that obviously is a lot of leverage. But we probably would take less leverage than that. So again, we think, with appropriate leverage, we could get to those low double-digit returns.

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Operator [13]

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We have a question from the line of Steve Delaney from JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [14]

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Congratulations on your efforts to evolve the strategy. It's some exciting new things happening. Craig, one of the -- when we talk to investors about MFA, one of the things over the last year that people have questioned is that, when they just look at your GAAP, or if they try to calculate the core just by backing out gains on legacy RMBS, they look at that and they see numbers that are coming in below the $0.20 dividend. I really appreciate the disclosure this quarter on Page 3 of the taxable income for the quarter at $0.21, as well as the UTI figure. But looking at it bigger picture, rather than just quarter, I was looking at the June 30 Q, because I absolutely didn't have the September in hand, but it looked to us like -- and I think I'm looking at the right asset class, but I'm trying to peg the legacy RMBS. It looked like it was around $2.2 billion, $2.3 billion in fair value against the cost of about $1.75 billion. So let's just call it roughly $500-and-some-million, at 450 million shares, it's like $1.20 a share. And my point is, help me, if I'm -- how should I understand this. If you're marking the bonds to fair value, then that benefit is in your book value. And I guess, I assume it went to GAAP earnings. But am I correct in thinking that from a taxable standpoint, which is what drives your dividend, that as you sell down that portfolio, it strikes me that you're going to be creating taxable EPS that will not necessarily be reflected in GAAP EPS. Am I correct in that assumption? If you could help clarify that for me?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [15]

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Sure. And I apologize because it is very confusing when you look at the various asset classes and the way that we're required to account for those because it's difficult to understand. I think, first of all, you're right about the legacy cost and the basis versus the fair value, but that difference does not flow through our income statement, right? Because those are held on our balance sheet. So it does flow through book value, but it doesn't flow through our income statement. That said, that discount gets accretive for GAAP over the life of the holding period, and so as that discount gets accreted, it gets recognized into income, but it happens a little bit every single period. Your second question about the taxable income, so unfortunately, the taxable income on many of our assets is very different from GAAP income, and it can be higher and it can be lower. The truth is, on a large part of that legacy book, our tax basis is actually quite a bit higher and it's just because of the quirks of how the tax accounting works. So again, not to generalize about the whole portfolio, but I would say, in general, the gains that we've recognized in legacy sales have been higher than the gains -- the recognized gains for tax purposes. And it's all about how the basis gets accreted for tax versus GAAP.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [16]

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Got it. Okay. Well, that's something I might follow up with Steve off-line on.

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Operator [17]

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(Operator Instructions) We have a question from the line of Rick Shane from JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [18]

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The slides are very helpful. I did want to sort of talk a little bit about Slide 13, and then relate it to some of the strategies related to whole loan. As was pointed out, we're seeing not only a second derivative decrease in home price appreciation, but actually, a first derivative at this point. I am curious, the new strategies are more credit sensitive, more sort of historical in terms of their credit risk. If you think about where we are now, what is different from making these types of investments prior to the previous cycle?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [19]

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Well, thanks for the question, Rick. I mean, I would -- if you look at Slide 17 and 18, I would say that the most stark difference between now and these investment alternatives, it's LTV. It's all about the LTV. So if you look at the Non-QM portfolio, the weighted average LTV is 66%. It's 65% on the fix and flip, and 68% on single-family rental. So I think, like yourselves, we've been around and we've been through these cycles. And I think, for us, that's really the sensitive thing is LTVs. And to your comment about home prices, maybe home prices aren't increasing as much as they were. I mean, recently, we read something that instead of -- last year-over-year, instead of 6%, it's 5.8%. But again, that's -- in our mind, that's really just noise. If house prices start declining by significant amounts, so that it's not a lower increase, it's actually a increase. That could be a little bit more troubling. But again, also keep in mind, if you take the fix and flip portfolio, these loans are very short, they're typically 9 to 12 months. So there's really very little exposure to home prices there when you take the starting LTV and the fact that these loans are typically less than 1 year.

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Gudmundur Kristjansson, MFA Financial, Inc. - SVP [20]

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Also Rick, so even though home prices are kind of appreciating at a slower rate, another important factor is the fact that as you saw in the unemployment report, that the unemployment rate keeps coming down, and there's about 200,000 jobs that are being created each month. And we finally saw, wage is rising above 3%. And at the end of the day, to make mortgage payments, you have to have a job, and it's really helpful if your wages are increasing. So that is a positive factor for mortgage credit in general. And so basically, probably, what we're seeing is the fact that home price appreciation are probably going to level to the trend of wage growth going forward, which is not a bad thing.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [21]

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Got it. So I'm really intrigued by the comment about collateral value, and I think it's a very fair point, which is that the LTVs on these loans are very different from where we were 10-plus years ago. If we think about 3 factors that really contributed, there was ultimately a collateral issue. It was whole price depreciation, and -- but I agree to your point that 5% growth versus 6% growth certainly isn't the end of the world and doesn't suggest anything is unwinding. The second was, previously, there was much less equity upfront. But the third factor was that the appraisals were unreliable. And so I am curious where if that's the weakness in the system, or if that was a weakness in the system previously, what do you think has changed there, because again, that 65% LTV is only -- is good with that appraisal?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [22]

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Yes, you're right. I would say, again, we've learned from what we've seen in the past as well. If you take the fix and flip loans for instance, before we buy those loans, we actually independently do quite a bit of work to satisfy ourselves that those values are solid and that those appraisals are real. So we don't just look at the number that we get from someone. There's a lot of work that goes on here, and part of that's wrapped up into this whole asset management process. And we're doing that before we even acquire these loans.

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Gudmundur Kristjansson, MFA Financial, Inc. - SVP [23]

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By the way, also, what we've seen, I mean, the information we're getting from the originators, whether that's -- I mean, it's appraisal for the most part, but as we look at those and we're seeing people are selecting pretty good comps. It's not something that's really far away and it's a completely different home. So for the most part, we're pretty happy with that information and that process. But as Craig also pointed out, we do a lot of work ourselves to kind of to get comfortable with the values.

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Operator [24]

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And we have a follow-up question from Bose George from KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [25]

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Just given the rotation into longer duration assets, and I guess, what we've observed is some modest spread widening on credit assets during the quarter, can you just -- so far during the quarter. Can you just give us an update on book value, please?

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [26]

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Sure, Eric. So just as a caveat, we don't even have remittance reports on our whole loan portfolio for the month of October yet. So we are at least a week and probably more away from closing our books on the month of October. That said, we do have a few data points, so we know that CRTs are a little bit wider versus the end of September. Legacy Non-Agencies, they might feel a little weaker, but it seems to be doing more to wider bid-ask levels than to actual lower prints. So at this point, any estimate is obviously a very rought estimate, but I would say, if book value was down versus the end of the quarter, that the order of magnitude is probably not more than 1%.

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Operator [27]

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And at this time, I have no further questions in queue.

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Craig L. Knutson, MFA Financial, Inc. - President, CEO & Director [28]

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All right. Thank you all for your interest in MFA, and for joining us today. We look forward to speaking with you again next quarter in February.

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Operator [29]

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Thank you. And ladies and gentlemen, that does conclude our conference for today. The conference will be available for replay after 12:00 p.m. today through December 6. You may access the AT&T TeleConference Replay System at anytime by dialing 1 (800) 475-6701 and entering the access code of 456362. International participants may dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.