MFA Financial's (MFA) CEO Bill Gorin Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: MFA Financial, (MFA)

MFA Financial, Inc. (NYSE:MFA)

Q2 2014 Earnings Conference Call

August 4, 2014 10:00 AM ET

Executives

Danielle Rosatelli – Investor Relations

William S. Gorin – Chief Executive Officer

Gudmundur Kristjansson – Senior Vice President

Craig L. Knutson – President and Chief Operating Officer

Stephen D. Yarad – Chief Financial Officer

Analysts

Daniel Altscher – FBR Capital Markets

Steve C. DeLaney – JMP Securities LLC

Douglas M. Harter – Credit Suisse Securities LLC

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Joel Jerome Houck – Wells Fargo Securities, LLC

Richard Barry Shane – J.P. Morgan Securities LLC

Jason Stewart – Compass Point Research & Trading, LLC

Stephen Laws – Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial Inc., Second Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And also as a reminder, today’s teleconference is being recorded.

At this time, I’d like to turn the conference over to your host, Ms. Danielle Rosatelli. Please go ahead.

Danielle Rosatelli

Good morning. 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 operation.

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 those described in MFA’s Annual Report on Form 10-K for the year ended December 31, 2013 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 statements 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 second quarter 2014 financial results.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2014 earnings release and earnings presentation slides, each of which has been filed with the SEC and posted on our website at mfafinancial.com. Thank you for your time.

I would now like to turn this call over to Bill Gorin, MFA’s Chief Executive Officer.

William S. Gorin

Thank you, Danielle. Good morning, everyone. I’d like to welcome you to MFA’s second quarter 2014 financial results webcast.

With me today are Craig Knutson, MFA’s President and Chief Operating Officer; Gudmundur Kristjansson, Senior Vice President; Steve Yarad, CFO and other members of senior management.

In the second quarter, we generated net income of $75 million or $0.20 per common share. The dividend per share was $0.20 consistent with the first quarter.

Book value per common share increased approximately 2% to $8.37 as of June 30, 2014 from $8.20 as of March 31. Based on continued improvements on the Loan-To-Value Ratio of the loans underlying our Non-Agency MBS portfolio and other factors we again transferred to sizable amount, approximately $25 million from credit reserve to accretable discount.

In the quarter, we continued to identify attractive business opportunities across the residential mortgage asset universe. We’ve expanded our investment team and as a result, were positioned to significantly grow our holdings of securities backed by re-performing/non-performing loans to $495 million while moving forward with the acquisition of approximately $60 million of credit sensitive residential whole loans.

We did acquire a small amount of Non-Agency MBS, $14 million while opportunistically selling $26.5 million of Non-Agency MBS, realizing a gain of $7.9 million. This is the eighth consecutive quarter we’ve realized gains through selected sales of Non-Agency MBS based on our projections of future cash flows relative to market pricing. We did not acquire any Agency MBS in this quarter.

MFA remains positioned for a more variable monetary policy by the Federal Reserve, which will be determined by measures of the labor market or inflation and other incoming economic data. By pursuing our wider residential mortgage strategy, we continue to find opportunities to generate attractive net interest rate spreads without increasing interest rate exposure.

In the quarter, our net interest rate spread remains in excess of 2.4%, while our estimated effective duration measure of our interest rate sensitivity decreased to 0.65. It’s important to remember that equity sensitivity to changes in interest rates is impacted by both duration and the leverage utilized. We continue to maintain a leverage ratio of approximately three times as measured by debt to equity.

Asset selection is what drives both our income and our interest rate sensitivity. I’d like to point out several aspects of MFA, which I believe set us apart. First, we hold $5.6 billion face amount of Non-Agency MBS, with an average amortized cost of approximately of 75% at par and a credit reserve of approximately $1 billion. These assets generated a loss adjusted yield of 7.7% in second quarter.

Second, we continue to maintain our historical preference for adjustable-rate, hybrid and step up MBS. 68% of all MBS fall to these three categories. Third, we continue to acquire residential mortgage credit assets for securities backed by RPLs or NPLs for credit sensitive residential whole loans that deliver attractive yield relative to interest rate exposures. And four, none of our Agency MBS of third year fixed rate.

Moving forward Danielle. So, turning to Slide 4, you see that despite change in interest rates and varying prepayments fees our key metrics again remain generally consistent. Second quarter yield on interest earning assets 4.26%, net interest rate spread 2.42% and debt to equity ratio of 2.8 times.

Turning to Slide 5, you see the book value increased in second quarter due to appreciation in both the Agency and Non-Agency portion of our portfolio.

Turning to Page 6, Gudmundur will give some more detail about the interest rate sensitivity of MFA’s assets and our hedging strategies.

Gudmundur Kristjansson

Thanks, Bill. On Slide 6, we MFA’s net duration as well as the duration of our assets and hedging instruments. The combined effect of lower interest rates, no new Agency MBS purchases and aging of the Agency MBS portfolio reduced our total asset duration to 1.9 in the second quarter from 2.1 in the first quarter.

We had 476 million of short swaps maturing in the second quarter while adding $200 million of five-year and seven-year swaps. The net result was the lengthening of our hedges to minus 3.9 in the second quarter from minus 3.6 in the first quarter and a slight reduction in the notion of balance of our swaps.

In aggregate, our net duration declined modestly in the second quarter to 65 basis points from 83 basis points in the first quarter, primarily due to lower rates. We continue to maintain our net portfolio duration below one and we’ll continue to limit the interest rate risk in MFA’s portfolio through asset selection and interest rate hedges.

Now, I will turn the call back over to Bill who will discuss our asset allocation.

William S. Gorin

Thank you, Gudmundur. So turning to Slide 7, represent our assets, yields and spreads broken out into what is now five categories. These are Agency MBS, seasoned Non-Agency MBS, MBS backed by re-performing loans and non-performing loans, credit sensitive residential whole loan and cash and other.

In the quarter, we continue to find investment opportunities and the market value of our assets including the impact of Linked Transactions grew slightly. While our Agency and Non-Agency MBS holdings declined due to run-off, and some Non-Agency MBS sales, our holdings of securities backed by RPL/NPLs and credit sensitive residential whole loans grew.

The approximately $500 million of RPL/NPL securities shown in comp three are an example of the type of residential mortgage asset that fits very well into our investment strategy when available of advantageous prices. These assets are unrated, senior most tranches backed by re-performing or non-performing loan of the 2005, 2006 and 2007 vintage.

The average credit support is in excess of 50% of unpaid mortgage balance. So we’re comfortable with the mortgage credit exposure. Now the coupon on these securities increased by 300 basis points. If the asset has not been retired by the end of third year, so we are comfortable with the interest rate exposure.

In addition, because these assets trade near par due to their credit enhancement and the three year reset, we are comfortably utilizing the debt equity ratio of approximately four times. Turning to the right column, the total column, you can see that leverage of 2.9%, average yield of 4.27% and interest rates credit 2.42%, are generally in line with the first quarter.

So turning to Slide eight, Craig Knutson will now provide some details as the improving housing metrics impacting MFA’s portfolio.

Craig L. Knutson

Thank you, Bill. The credit metrics on the loans underlying are Non-agency portfolio continue to improve. LTVs continue to decline due to home price depreciation and principal amortization. Delinquencies have declined, as fewer current loans become delinquent and foreclosure pipelines are liquidated and loans on an average 98 months seasoned over eight years. In addition, since over half of these loans were refinancing to previous mortgages, we know that these homeowners have been living in the homes for more than eight years.

As Bill mentioned previously, we again lowered our estimates of future losses in the portfolio and transferred almost $25 million from our credit reserve to accretable discount. All else equal, this increases the yield that we’ll recognize over the remaining life of the bonds.

Turning to Slide 9. So these graphs illustrate the LTV improvements over the last two and half years. On the left, we display the average portfolio of LTV. Note that the green line shows that the total portfolio of LTV has declined from 105% two years ago, to just below 80% today. And the grey line indicates that even the LTV of delinquent loans has dropped from over 100% a year ago to 85% today.

On the right, we depict the percent of loans with LTVs over 100%, while lower average LTVs shown on the left are obviously a good credit metric. We still worry about the underlying loans with LTVs above the average. And in particular, the so called underwater loans are those LTVs over 100% where the loan amount is greater than the value of the property.

Note the orange line on the graph on the right, this portrays the percent of current loans that are underwater, well not the delinquent present, these are loans that we worry about becoming delinquent in the future. A year ago, approximately one third of the current loans in our portfolio were underwater. Today, they declined to nearly 10%, even the delinquent loans – the grey line on the right has seen significant LTV improvement. A year ago, half of the delinquent loans are underwater, today it’s half of that.

Page 10. On Page 10, we illustrate the LTV distribution of current loans in the portfolio. Again, we focused on the at-risk loans where the homeowner owes more on the mortgage than the property is worth. As of June 30, less than $200 million of face amount of current loans had LTVs over 110%. This is only about 4% of the current loans.

On Page 11, we graph the transition rate of loans in the portfolio, that is the rate at which loans transition or deteriorate from current to 60 days delinquent. After peaking in 2009 this credit metric has steadily declined and today is back to the levels exhibited pre-housing crisis in late 2007.

Finally on Page 12, we illustrate the establishment and maintenance of our credit reserve for expected future losses on the non-agency portfolio. Of the approximately $1.4 billion of purchase discounts we still hold nearly $1 billion or 17% of the face amount in credit reserve.

And with that, we’d like to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) First in queue is Dan Altscher with FBR Capital Markets. Please go ahead.

Daniel Altscher – FBR Capital Markets

Hey, good morning. Thank you for taking my call. I appreciate it. First question on the Non-Agency side, good result on bringing more accretable discount in. But it looks like we saw the overall yield on the Non-Agency side compress a little bit. Were there any some of the ARMS that maybe had – that returned maybe from a fixed to now a floating-rate and had a little bit of a step down in the coupon there? Or anything like that that drove the yield down maybe like probably about 11 basis points?

William S. Gorin

So, good question. It could be that some of those have reset and coupons have reset down. It’s more likely do more to the forward curve. So the forward curve is a little bit more flat than it was last quarter. Again, there a lot of moving pieces, but that probably cost about 15 basis points and then we get a slight improvement from assumptions.

Daniel Altscher – FBR Capital Markets

Okay, got it. On the credit-sensitive side, new category there. Is there any intent to maybe look to leverage those because it looks like right now they’re all unlevered?

William S. Gorin

At this point it’s still pretty small. It’s $59 million. But there certainly are opportunities to lever that. And as that portfolio grows we will certainly look to do that.

Daniel Altscher – FBR Capital Markets

Okay. Do you have any sort of sense as to like what you think you should get on those on an unlevered basis or kind of just same 10% to 12% kind of total return goals?

William S. Gorin

Yes, I think it’s safe to assume that we’re low double-digit ROEs. There’s warehouse financing, there’s also RPL securitizations at some point. But the size right now is not really large enough to look at that.

Daniel Altscher – FBR Capital Markets

Okay. And then, maybe just one more on the credit sensitive since it is new. We got the loss adjusted yields there, which look great, but can you maybe just compare what the coupon interest is versus the loss-adjusted?

William S. Gorin

So the coupon, I believe it’s about 5.5% or so. So, obviously we purchased those at a discount as well. Most of it is obviously coupon income.

Daniel Altscher – FBR Capital Markets

Okay. And your loss adjusted assumptions assume up to par or up to 90% of par?

William S. Gorin

It probably assumes about 30% default.

Daniel Altscher – FBR Capital Markets

30% default. Okay. We’ll try back into that number then. Thanks.

William S. Gorin

Sure.

Operator

Thank you. Our next question in queue will come from Steve DeLaney with JMP Securities. Please go ahead.

Steve C. DeLaney – JMP Securities LLC

Thanks, everyone, and congratulations on another solid quarter. Dan covered the new CSL product. Just a couple things to pick up on. First, you gave two leverage measures and the 2.93 for the portfolio, do I assume that includes Linked Transaction and is that why it’s different from the GAAP figure of 2.8?

William S. Gorin

That’s exactly right, Steve.

Steve C. DeLaney – JMP Securities LLC

Okay. So we’ll go with those…

William S. Gorin

And the big difference will be in the RPL/NPL MBS. That’s big difference.

Steve C. DeLaney – JMP Securities LLC

Right. Got it, got it. Okay. And then, Craig, just on market color, we’ve read that BlackRock had done a couple of large block trades and I guess in the last three or four weeks, I think the first one was sub-prime, but then the second was sort of Alt A, Option ARM. Could you just comment on whether those large $3 billion plus trades had any impact on market prices? And in addition, if they presented any buying opportunities for MFA?

Craig L. Knutson

So, Steve we had a pretty light quarter. We did not buy anything on those lists, but they traded exceptionally well and as near as we can tell, the bonds were pretty much all put away to end buyers. So very orderly, albeit large liquidation, but they both traded extremely well.

Steve C. DeLaney – JMP Securities LLC

Okay, great. So no reason to think that after you had a nice move in book value in the second quarter that those large blocks had any adverse impact on the portfolio as we sit today.

Craig L. Knutson

No, they really didn’t.

Steve C. DeLaney – JMP Securities LLC

Okay. And then just one last thing. Craig, you guys have done a great job of showing us how with property improvement that your average LTV has come way down to the 80% range. Could you also comment – on the flip side of credit is sort of borrower behavior and how that improvement in fewer people being underwater. Are you seeing a decline in actual default rates as well and have you done anything to call like change your forward CDR assumption?

William S. Gorin

Well, we did have a slide on the transition rates. So that’s really the key thing that we look at. And, obviously, it’s great that those transition rates have declined, but it’s, I think, it’s about a 0.06% which on annualized basis is probably 7%. So unfortunately I don’t think that number ever goes to zero. Whether it continues to decline from here or not, we’ll just have to see.

The other thing, if I look at our CDR, so the three-month CDR, this the default rate on the whole portfolio, was about 3%. But, again, that’s a somewhat deceiving number, because it really depends on how long loans sit in the foreclosure pipeline. So if a lot of loans get liquidated, that CDR number will be higher. If the foreclosure pipeline just builds, then the CBR number won’t be as high.

Steve C. DeLaney – JMP Securities LLC

Got it. Appreciate the color and good job, guys.

William S. Gorin

Thanks, Steve.

Operator

Thank you. Our next question in queue will come from Douglas Harter with Credit Suisse. Please go ahead.

Douglas M. Harter – Credit Suisse Securities LLC

Thanks. Can you about the attractiveness of the RPL/NPL today? There’s been a lot written about the big run in prices in that asset class since you started talking about it last quarter?

William S. Gorin

Sure, Doug. Well, you’re right. There has been a movement upward in time on these loans. But we continue to find opportunities now. Steve DeLaney asked about the large sales of assets, which were securities. It seems as if very large sales, whether it be securities or loans, tracks a certain buyer category. And with securities and with loans, the smaller sales are attractive to us and continue to find opportunities there.

Douglas M. Harter – Credit Suisse Securities LLC

Got it. And would that be both on the loan side and on the more senior MBS RPL/NPL securities you’re buying as well?

William S. Gorin

Well, on the security side, those are pretty wide last summer. They continue to tighten and they’ve actually widened back out a little bit. So there are actually a couple of deals in the second quarter that we set out on because they got tighter. So, again, that ebbs and flows. Those deals typically aren’t that large although there have been a couple of big ones. But we’ve been pretty in all those new transactions.

Douglas M. Harter – Credit Suisse Securities LLC

Got it. And if you could – I think you talked about it last quarter, but if you could refresh could refresh our memories, what of the types of advance rates that you see in the financing on those securities?

Stephen D. Yarad

On the NPLs?

Douglas M. Harter – Credit Suisse Securities LLC

Yes, in the RPL/NPL. And is there a chance to do, sort of, more permanent financing like you’ve done with some of your Non-Agency MBS?

William S. Gorin

So the haircuts on those typically range from 20% to 25%, because that asset is so short, I don’t think it would make a whole lot of sense to try to re-securitize those and again, they're already securitized and they're non-rated to begin with. So we’re pretty comfortable with running, as Bill has said in his remarks, leverage a little bit higher than we do on regular legacy non-agencies, because it is such a short security.

The other thing is you’ll see in that asset allocation table, which shows a higher leverage number for those RPL/NPLs. That’s really because there is an unsettled trade there that shows up as a liability, it shows up with 100% leverage. So when that trade settles, that number will settle in closer to the high three times leverage.

Douglas M. Harter – Credit Suisse Securities LLC

Got it. Thank you.

Operator

Thank you. Our next question in queue will come from Mike Widner with KBW. Please go ahead.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Hey, thanks guys. I think most of my questions on the RPL/NPL and stuff have been answered. But let me ask you one more. Just thinking about the underlying loans behind the MBS versus the residential whole loans that you’re buying today, are those basically the same kinds of loans? You’re just buying them in different forms? Or is there a distinct difference between the underlying collateral?

William S. Gorin

Most of the NPL/RPL securities portfolios is actually NPLs. So the loans that we bought are re-performing loans, but, yes within the re-performing securities the underlying loans are similar in many ways to the actual loans that we purchase.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Got you. So the residential piece is mostly re-performers, so currently performing?

Craig L. Knutson

Correct.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Okay. Is there a plan to securitize those at some point or if you get big enough obviously I mean this balance would be kind of hard but is that a securitizable market and a big enough market to think about that?

William S. Gorin

Absolutely yes, I think. But as you said, it really depends on size and it depends on spreads in the marketplace as well.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Yes, I mean that seems to be a category that a lot of people have talked about for a year or two now and just wondering, I mean, is that something we should think about growing substantially or is it more kind of – obviously, it’s pretty small right now. And I guess the question is do you envision it potentially getting to be very large and to the point where you can securitize? Or is it sort of just a place to put capital right now, but tough to really make the economics work for huge purchases?

Craig L. Knutson

You’re right. It’s hard to contemplate a securitization with the size that we have now, but they’re opportunistic purchases and to the extent we can continue to purchase those at what we think are good levels, you can expect it to grow.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Great. And then on a different topic, I guess. You’ve got a $0.20 dividend. There’s been some discussion about taxable income versus dividend and core income versus the dividend. How should we think about that now? And I guess specifically, I haven’t gone through all the numbers in detail yet, but there was a time when taxable was running below the core or below the GAAP. So how should we think about that versus the dividend right now?

William S. Gorin

Great. Good question. First of all, we really don’t have a core concept in our press release. So as we did try to point in the press release and in my opening remarks, we have large amount of Non-Agency MBS that are trading well above our cost. And while managing the portfolio, if there are sales, it tends to be a gain. So, therefore, our earnings has included a component of gains eight quarters in a row. And based on the fact that we find assets to buy and assets to sell, it shouldn’t be surprising that we realized gains there.

We had introduced a core concept a couple of years ago when accounting required us to link transactions, that, if you purchased an asset where you financed it, they were Linked Transaction and we found that confusing for the income statement. The good news is, according to our CFO, Linked Transactions should come to an end starting next year. So that’s why we just have a GAAP concept and there’s not a core concept.

In terms of what drives dividend, you’re right. We have to take into account our earnings for GAAP and tax purposes and right now I believe we’re underdistributed or undistributed about $0.11 per share for tax purposes. So long answer. Hopefully I was able to help you with the questions.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

No, I think that helps. I thought now as I think back that I had heard that comment about not having to use Linked Transaction sometime last year and I thought it was sometime this year that that was supposed to disappear. But I guess either I’m misremembering or it’s still off in the future.

William S. Gorin

I think what you might be thinking about with the GAAP guidance on this (indiscernible) during the end of last year and the transition date is January 1, 2015.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Okay. So we’ve been talking about it for a while, it's still a couple of quarters away, I guess?

William S. Gorin

That’s right.

Michael R. Widner – Keefe, Bruyette, & Woods, Inc.

Okay. Well, thanks guys. Appreciate and good job again.

William S. Gorin

Thanks for the questions.

Operator

Thank you. Our next question in queue will come from Joe Houck with Wells Fargo. Please go ahead.

Joel Jerome Houck – Wells Fargo Securities, LLC

Thanks. Have you guys talked already about or given an update on the senior sub, you’re buying a senior portion from the banks supply dynamic pricing. If you have forgive me, I jumped on late, but could you give us an update?

William S. Gorin

I'm sorry, what was the tail end of your question on the pricing?

Joel Jerome Houck – Wells Fargo Securities, LLC

Pricing dynamics to supply available on your activity in the quarter on those transactions?

Craig L. Knutson

On the RPL/NPL securities?

Joel Jerome Houck – Wells Fargo Securities, LLC

Yes, the securities you are buying from the large banks.

Craig L. Knutson

Sure, so I think we added quite a bit during this quarter. We added about $300 million this quarter of those types of securities. So it has been a pretty active market. As I said previously, they actually have widened out a little bit in the last couple of weeks. They got to a point where they tightened and we actually sat out a couple of different deals because the yields really got too low for us. So, again that ebbs and flows, we’ve always said that those are opportunistic purchases and may continue to be.

Joel Jerome Houck – Wells Fargo Securities, LLC

Right. Given the widening we've seen, you would characterize that as attractive today?

Craig L. Knutson

Yes, we would. We still think that we can generate high-single, low double-digit ROEs. And as Bill said, because they have this step up coupon feature at the end of three years, we’re pretty confident in the price stability and the low interest-rate risk associated with these.

Joel Jerome Houck – Wells Fargo Securities, LLC

And just one final one on this topic. So given the lack of interest rate [sensitivity] (ph), is it fair to say that this class of securities is favored over more of a kind of fixed rate pool or a pool that perhaps has a longer duration?

Craig L. Knutson

I think again it would depend on the yield on the fixed rate pool and that’s something that obviously we would hedge. So I think if you’re saying would we buy the RPL/NPL securities over a legacy Non-Agency it would really depend on the two offerings.

William S. Gorin

But Joel, you bring up a good point. When we buy an asset we do look at the ROE, we also look at the incremental interest rate sensitivity we’re adding to portfolio. So other things being equal based of uncertainty as to what’s going to happen over the next couple of years, this does look attractive right now.

Joel Jerome Houck – Wells Fargo Securities, LLC

Yes. Thanks, Bill. I guess that’s what I was trying to get at is like how sensitive you guys are to rising short-term rates over the next couple of years, people all over the place are just trying to get a read on you guys’ perspective?

William S. Gorin

We are very aware – our read is – and the Fed is quite clear. The cost to society of underemployment, whether it be a discouraged worker not looking for a job, or someone not having a job, or someone being underemployed and not working as many hours as they like hours as they like, they believe it’s a very high class society.

As a result they’re ready to take some risk on possible asset inflation and I think that’s what Janet Yellen spoke about that we have this accommodative monetary policy. Perhaps there’s some concern about valuation in biotech stocks, for example, but they know the trade-off. And right now, looks like we still have a lot of runway on where short-term rates are, but who knows two years from now and that’s why we very much like these assets.

Joel Houck – Wells Fargo Securities LLC

Okay, great thank you very much.

William S. Gorin

Thanks.

Operator

Thank you, our next question in queue will come from Rick Shane with J.P. Morgan. Please go ahead.

Richard Barry Shane – J.P. Morgan Securities LLC

Okay. Thanks guys for taking my question this morning. I guess I’m going to revisit everybody’s favorite topic, RPLs/NPLs. Just very quickly, there is a mention in the footnotes that your expectation is that the securities will be called prior to the step up date. Given the amortized costs and the market value, I’m assuming a modest realized gain as that occurs. You guys had also commented they are trading pretty near par, so I’m assuming that there’s not going to be much additional appreciation as you approach step-up or as you approach call date?

Stephen D. Yarad

So Rick, we purchase these securities around about par value and there aren’t – I wouldn’t say there are significant unrealized gains on those securities at this point. And as they approach that callback, I wouldn’t anticipate that either, so we wouldn’t anticipate significant realized gains on the redemption of those securities.

Richard Barry Shane – J.P. Morgan Securities LLC

Got it. Right now it looks like it’s showing a couple of million dollars, between market value and amortized costs. So ultimately, $3 million, $4 million potentially?

William S. Gorin

Yes, they are, I think, a couple of the very early deals we actually bought at a discount. But it’s tiny. You’re talking $2 million on $500 million, right?

Richard Barry Shane – J.P. Morgan Securities LLC

Right.

William S. Gorin

It will probably be marked to par by the time they’re called because the market will anticipate they’re going to be called at par. So…

Craig L. Knutson

That’s already expected.

William S. Gorin

So we would expect much variability off the par price over the three years.

Richard Barry Shane – J.P. Morgan Securities LLC

Got it. Okay, great thank you, guys.

William S. Gorin

Thank you.

Operator

Thank you. (Operator Instructions) Next in queue is Jason Stewart with Compass Point. Please go ahead.

Jason Stewart – Compass Point Research & Trading, LLC

All right. Thank you. One quick follow-up on the RPL segment. You talked about prices moving, but there are other characteristics in the market that have changed, for example, the number of months of re-performance. Could you give us an idea for whether prices have all converged or do you feel like you’re still getting paid to take risk on, for example, shorter RPL periods?

William S. Gorin

Well, the NPLs are typically viewed as much shorter than RPLs just because they’re liquidations and re-performing loans, in particular if they had coupons lowered typically longer assets. But that being said, we do look at the underlying collateral of these deals as well. It’s a similar credit analysis that we do on our securities portfolio. And depending on underlying coupons and LTVs, we might look to have more subordination for instance, or a cheaper pricing. So it’s a somewhat complicated process of evaluating these, but we do take all those things into consideration.

Craig L. Knutson

I would also say, if you’re buying billions, probably all prices converge. But when you’re buying smaller pieces, whether it be loans, or whether it be securities backed by RPLs/NPLs, whether it be seasoned Non-Agency MBS, all prices don’t completely converge. There is variations and the ability to create value by being a selective buyer.

Jason Stewart – Compass Point Research & Trading, LLC

Okay. That’s helpful. And then just one 10,000 foot question, if we were to assume that home price appreciation was flat, what part of the portfolio would keep you up the most at night? Where would you likely look to term risk or what parts look still most attractive to you?

William S. Gorin

Well, the good news is these assets are about eight, nine years old. Many of the loans were actually refi. So people have been in the homes more than eight years. And even if home prices stop going up, we’re now in the amortization schedule for most of these loans. You have about 22 years amortization schedule with low interest rates, which means the principal amortization should improve the LTV 3% to 4% per annum even without home price appreciation. So time is really on our side here.

Jason Stewart – Compass Point Research & Trading, LLC

Okay. Thanks.

Operator

Thank you. Our next question in queue will come from Steven Laws with Deutsche Bank. Please go ahead.

Stephen Laws – Deutsche Bank

Hi, good morning. Thanks for taking my question.

William S. Gorin

Hi, Steve.

Stephen Laws – Deutsche Bank

Frankly, most of them have been addressed already. I did want to follow-up on Mike’s earlier question about undistributed taxable income. I think you said $0.11 at the end of the quarter. I know in 2011 you paid a small special dividend. I think there were two that hit in calendar year 2013. Is there any distribution requirement of, say, September 30 for that income or is this just taxable income that’s in excess of what’s been distributed for this tax year as opposed to last tax year? Can you maybe give us an update on where you stand on the distribution side?

William S. Gorin

Yes, we do have a tax expert here and he’ll correct me, but in terms of taxable income for the year 2014, you really have until September of 2015 when you’re required to file your tax returns to distribute all the income for 2014. So, we’re in good shape distribution-wise and I don’t foresee for tax purposes the new for special dividend.

Stephen Laws – Deutsche Bank

Okay, great. So none of the current UTI is related to calendar year 2013 taxable income, which would have a distribution requirement of this September 30?

William S. Gorin

That is correct.

Stephen Laws – Deutsche Bank

Perfect. Thanks for that clarification and have a good day.

William S. Gorin

You’re welcome. Thank you.

Operator

Thank you. At this time there’s no additional questions in queue. Please continue.

William S. Gorin

I want to thank everyone for listening in on our webcast today and we look forward to speaking to all at the end of the third quarter. So, thanks very much.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 12 PM Eastern Time today running through November 4 at midnight. You may access the AT&T Executive playback service at any time by dialing 800-475-6701 and entering the access code of 333141. International participants may dial 320-365-3844. Once again those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 333141. That does conclude your conference for today. We do thank you for your participation and for using AT&T Executive teleconference. You may now disconnect.

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MFA Financial (NYSE:MFA): Q2 EPS of $0.20 beats by $0.01. Revenue of $90.41M (+4.8% Y/Y) beats by $6.17M.