MFA Financial, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Inc. Third Quarter Earnings Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require offline assistance, you may depress star to zero. As a reminder, today's call is being recorded. I will now turn the call over to Harold Schwartz. Please go ahead, sir.

Thank you, Kevin. 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, 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 third quarter 2020 financial results. Thank you for your time, and 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 third quarter 2020 financial results webcast. Also dialed in with me today are Steve Yared, our CFO, Gudmundur Christensen, and Bryan Wulfsohn, our Co-Chief Investment Officers, and other members of Senior Management. Before we begin, I want to again recognize our entire MFA team. This has obviously been a very challenging year, and despite what the world has thrown at us, our team continues to persevere regardless of the circumstances. Their dedication and commitment has been extraordinary. From a financial results standpoint, the third quarter of 2020 was unquestionably the most normal quarter of 2020, but that's not really saying very much. Financial markets continue to be awash in liquidity, and the interest rate environment continues to feature historically low rates and muted volatility. Yet the third quarter of 2020 was also very much the story of market uncertainty. Between the looming election, still not decided, Government stimulus measures, or not, the second wave of COVID-19 diagnoses, and the possibility of future lockdowns, shutdowns, or other economically restrictive measures, it's clear that we are not out of the woods, and it seems almost impossible to fathom what the upcoming holiday season will be like given this backdrop. Recall that MFA entered the third quarter of 2020 only four days out of forbearance, with a fortified balance sheet and substantial liquidity. Given our experience over the prior four months, we were understandably not inclined to immediately and aggressively pursue new investments and to add leverage. But that decision was even easier given the investment environment, which is challenging both in terms of investment availability and relative cheapness. However, as we mentioned in our second quarter earnings call, we saw significant opportunities to improve our earnings capability through liability management. and I'm happy to report that we have made substantial progress on this front. While the results of these efforts are largely absent from our third quarter financial results, they will be somewhat in evidence in the fourth quarter and very much in evidence in 2021. What is apparent in our third quarter financial results is the continued price appreciation of our whole loan portfolio that we fought so hard to retain through the crisis months earlier in the year. contributing to both material economic book value appreciation on carrying value assets and income on fair value assets. In addition, our ability to actively manage residential mortgage credit assets, a capability that we began to develop as early as 2013, has also been reflected in our financial results as we achieved better than expected results on credit sensitive assets resulting in reversals of prior credit reserves which flow through income. Overall, we are pleased with our progress since July 1st of this year. We have taken definitive steps to enhance our go-forward earnings capability and have a clear path to continue this success over the next several quarters. Our asset-based liabilities are still largely of a very durable nature. We continue to actively manage credit-sensitive assets to achieve good results, and we look forward to continuing to enhance shareholder value. Please turn to page 4. We reported GAAP earnings of $0.17 per share for the third quarter. Unlike the prior two quarters of this year, our third quarter income was influenced by more normal factors and less by one-time noisy elements. These results were largely driven by unrealized gains on our whole loan assets, as well as a reversal in a credit loss provision on whole loan telde carrying value. GAAP book value was up modestly, but economic book value was up over 10% for the quarter. as our carrying value whole loans continued to retrace the write-downs that began with the onset of the pandemic. Our leverage at September 30 was still quite low at 1.9 to 1, and two-thirds of our asset-based financing was non-mark-to-market. We caught up on all preferred dividends in the third quarter, and we paid a 5-cent common dividend on October 30th. Please turn to page 5. Our portfolio, which is also shown in the appendix on page 20, is primarily comprised of residential whole loans, which have experienced substantial value appreciation since the liquidity-induced selloff in March and April. Housing prices are very strong, particularly in suburban neighborhoods outside of major cities. This is obviously a good trend for our credit-sensitive assets. But we've been able to take advantage of this in real time, recording over $90 million of REO sales during the third quarter, which is a record quarter for us.