MFA Financial, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Inc. Second Quarter 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. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Hal Schwartz. Please go ahead.

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 the MFA's annual report on Form 10-K for the year ended December 31, 2019, 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 2020 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

Thank you, Hal. Good morning, everyone. I'd like to thank you for your interest in and welcome you to MFA Financial's second quarter 2020 financial results webcast. Also dialed in with me today are Steve Yarrod, our CFO, Gudmundur Kristiansen, and Bryan Wulfsohn, our co-chief investment officers, and other members of senior management. Before we begin, I'd like to give a shout out to our entire MFA team. The last five months have obviously been extremely challenging. and made exponentially more so by the fact that all of our efforts have been remote as the company fully implemented our business continuity plan during the third week of March. The effort and commitment put forth by our entire team over the last five months has been extraordinary and I have been awed by their dedication. Although the bottom line earnings per share results for the second quarter of 2020 might at first glance appear to be a return to normal for MFA, The second quarter was anything but normal. After a COVID-19-induced mortgage market meltdown that began in mid-March, we were in the middle of negotiating a forbearance agreement with our significant lenders as the second quarter began. These negotiations resulted in our first forbearance agreement, which took effect 10 days into the quarter on April 10th, although our lenders who were party to this agreement had essentially been granting us forbearance since March 23rd. Forbearance agreements were extended on April 27th and again on June 1st, and we exited forbearance on June 26th. So we spent nearly the entire second quarter under forbearance. And while these forbearance agreements were expensive and required a massive effort to manage, they did afford us the time necessary to deliver our balance sheet, generate liquidity, and conduct a thorough and competitive process to source third-party capital. Please turn to page four. Our second quarter financial results were overwhelmingly dominated by unusual events and transactions. Sales of residential mortgage-backed securities in the second quarter generated 177.5 million of net realized gains versus their March 31 marks. The sale of a large non-QM whole loan pool generated a loss of 127.2 million. However, 70.2 million of this loss was booked as an impairment in the first quarter in anticipation of this sale, so the second quarter recognized loss was $57 million. We booked a $49.9 million loss related to swap hedges that were terminated during the first quarter, high forbearance interest expense, and $14.2 million of amortized swap losses generated very high interest expense of $82.1 million for the period that resulted in no net interest income for the quarter. We also recorded 40 million dollars of expenses related to forbearance and portfolio restructuring. So although we earned 19 cents per share in the second quarter, this was the result of many large and unusual items. Gap book value was up primarily due to gap earnings that were not paid out in dividends. Economic book value was up additionally as we saw continued price improvement in our carrying value whole loans. We elected the fair value option to account for all new and reinstated financing. This allows us to expense upfront fees and other costs associated with these transactions, thereby allowing us to present a more true economic go-forward cost of these financing arrangements. Our leverage ratio at June 30 was 2 to 1. and our investment mortgage assets consisted of 5.9 billion of residential whole loans and approximately 400 million of mortgage-backed securities. Please turn to page five. As previously announced, we closed our capital transaction with Apollo and Athene on June 26th. This transaction included a $500 million senior secured term loan, a warrant package to purchase 7.5% of MFA common stock, over $2 billion of new non-mark-to-market financing provided by Apollo and Athene together with Barclays and Credit Suisse. In addition, Apollo and Athene have committed to purchase the lesser of 4.9% or $50 million of MFA common stock in the open market over the next year. And Athene has committed to purchase a portion of MFA's first non-QM securitization. I cannot stress enough that this transaction was about a lot more than a $500 million check. It is very much a holistic solution and a strategic and collaborative partnership.