Danielle Sardone - IR Bill Gorin - Chief Executive Officer Gudmundur Kristjansson - Senior Vice President Bryan Wulfsohn - Senior Vice President Steve Yarad - Chief Financial Officer Craig Knutson - President and Chief Operating Officer.

Jessica Levi-Ribner - FBR Sam Choe - Credit Suisse Eric Hagen - KBW Joel Houck - Wells Fargo.

Thank you, ladies and gentlemen, for standing by. Welcome to the MFA Financial Incorporated First Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a questions-and-answers session instructions will be given at that time. [Operator Instruction] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Danielle Sardone. Please go ahead..

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc. which reflects management's beliefs, expectations and assumptions as to MFA's future performance and operations.

When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, 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 subjected 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 31st, 2016 and other reports that may filed 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 first quarter 2017 financial results. Thank you for your time. I would now like to turn this call over to Bill Gorin, MFA's Chief Executive Officer..

Thanks, Danielle. Welcome, everyone, to MFA's first quarter 2017 financial results webcast. With me are Craig Knutson, MFA's President and Chief Operating Officer; Gudmundur Kristjansson, Senior Vice President; Bryan Wulfsohn, Senior Vice President; Steve Yarad, CFO; and other members of senior management.

In the first quarter of 2017, we continued to execute our strategy of selective investment within the residential mortgage universe. With many years of experience in analyzing and investing of such assets, and thanks to our permanent capital REIT structure, we have the staying power to hold these assets throughout fluctuations in market value.

Turning to Page 3. Despite the period of historically low interest rates, we remain well positioned to generate attractive returns. In the first quarter, we generated earnings per share of $0.20. Book value per share was little change at $7.66 versus $7.62 at the end of the fourth quarter.

As we've said repeatedly, a lower during duration portfolio and lower leverage leads to more stable book value. We continue to identify and acquire attractive, credit sensitive residential mortgage assets such as three years step-up securities and Credit Risk Transfer securities. Turn to Page 4. We began operations nearly 18 years ago.

And the company has generated strong long-term returns to investors through volatile markets and through various interest rate and credit cycles. Since 2000, we've generated annualized shareholder returns of approximately 15% and over the last 10 years has generated annualized shareholder returns of approximately 14%.

Over the last 12 months, total shareholder return is totaled 31%. Turning to Page 5. We lay out MFA's investment strategy. In 2017, we'll continue to focus on credit sensitive residential mortgage assets. The credit assets we've acquired continued to perform well, tend to be short-term and have less interest rate sensitivity.

Many of our assets were purchased at a discount. So we actually benefit from increases in prepayment rates. Investor expectations of more rapid growth due to the potential for tax reform or increased infrastructure spending has positively impacted credit sensitive assets.

Our strategy does require staying power, which gives us the ability to invest in and hold long-term distressed less liquid assets. We have permanent equity capital. Our debt-to-equity ratio is low enough to accommodate potential declines in marks.

MFA is able to invest significant amount at advantageous prices while other investors may be facing capital outflows. We invest with a focus on long-term performance. Turning to Page 6. While the Fed funds rate has increased, yields on credit sensitive assets remained flat as investors have priced in more positive credit scenarios.

In the quarter, we did not replace all of our run off due to credit asset pricing and our strategy of allowing agency MBS run off. However, we are seeing ample supply of credit sensitive loans. We are currently actively engaged with many potential attractive opportunities which we believe will lead to investments later in 2017. Turning to Page 7.

Our mortgage to assets run off due to amortization, paydowns or sale, allowing new investment opportunities in changing interest rate and credit environments. In the first quarter, we were a buyer of three-year step-up securities, and CRTs.

As we expected, the shrinking legacy non-agency universe has produced very strong technical support for this asset. And we're generally more of a seller than a buyer of the asset. We didn't acquire any agencies in the quarter. Turning to Page 8.

As you can see, our yields and spreads have remained attractive and relatively consistent despite the interest rate environment. At the end of the first quarter of 2017, MFAs undistributed taxable income of $0.26 per share of common stock. Turning to Page 9. We present yields and spreads for our more significant holdings.

Giving the leverage we're utilizing and may utilize in the future, each of these asset types of generating attractive returns to MFA shareholders. Gudmundur Kristjansson will now present update on MFA's interest rate sensitivity and the impact of prepayments on MFA's portfolio..

Thank you, Bill. Turning to Page 10. We will review MFA's interest rate sensitivity. MFA's asset duration declined 6 basis points to 129 basis points at the end of the first quarter as repurchases in the quarter consisted of three-year step-up securities and CRT securities, both of which are little sensitivity to interest rates.

Our asset duration continues to remain exceptionally low at 129 basis points is among the lowest levels in the mortgage REIT space. Due to the limited interest rate sensitivity of our acquisitions in the quarter, we had no need to add new interest rate hedges.

Our hedged portfolio currently consists of $2.85 billion of interest rate swaps and has a negative duration of 250 basis points. MFA's net duration was little changed in the quarter and remains exceptionally low at 69 basis points at the end of the first quarter.

With the Fed committed to a sustained gradual tightening of monetary policy and elevated uncertainty around government, tax, infrastructure and trade policies, we believe the potential for large changes in interest rates remains elevated.

Therefore, MFA's investment strategy continues to emphasize low overall interest rate sensitivity, as well as limited sensitivity to long-term interest rate specifically.

We believe our strategy will continue to serve us well in protecting MFA's book value as it did in the fourth quarter of last year and other previous episodes of large changes in interest rates. Turning to Page 11.

As we can see from the graph on Page 11, the discount accretion on our legacy non-agency MBS portfolio continues to dramatically outpace the premium amortization on our agency MBS portfolio, with the gap increasing further in the first quarter.

The primary reason for this continues to be the fact that the 28-point average purchase discount on our legacy non-agency MBS portfolio is significantly larger than the four point average purchase premium on our agency MBS portfolio.

In addition, continued strong home price appreciation and incrementally better access to credit for legacy non-agency borrowers continues to positively impact prepayments on our legacy non-agency MBS. The mortgages backing our agency MBS portfolio are on average 6.5-year old.

These borrowers have seen a record low interest rates and had ample opportunities to refinance over the last seven years but have chosen not to. They have shown less sensitivity to changes in interest rates, and therefore, the prepayment volatility on our agency MBS portfolio has declined over time.

Due to the continued tailwinds from mortgage credit and reduced prepayment volatility on our agency MBS portfolio, we do not expect that changes in interest rate would cause large changes in prepayments that could negatively impact MFA's earnings.

With that, I will turn the call over to our President and Chief Operating Officer, Craig Knutson, who'll talk about our credit assets and credit fundamentals in more detail..

Thank you, Gudmundur. Turning to Page 12. The residential mortgage credit market continues to enjoy both fundamental and technical support. Interest rates and mortgage rates remain low by historical standards.

According to the most recent report from the National Association of Realtors by existing-home sales, total existing-home sales for March increased 4.4% to 5.71 million units. It's the highest level since February of 2007. Median existing single-family home prices in March were up 6.8% versus March of 2016.

This marked the 61st consecutive month of year-over-year gains. Finally, housing inventory continues to decline. Total housing inventory at the end of March was 1.83 million units, which is down 6.6% versus March of 2016.

And according to the March 2017 CoreLogic National Foreclosure Report at year end, there were 1 million US mortgages that were seriously delinquent. This compares to a peak delinquency in January of 2010 of 3.7 million mortgages. Turning to Page 13.

While January was a relatively light month in terms of supply of credit sensitive whole loans, February and March witnessed a return to more normal supply levels. Reperforming whole loans traded at tight levels despite higher funding costs after Fed funds increases in both December and March.

Non-performing whole loans have also traded at expensive levels. This is perhaps due partly to the strong bid from Wall Street banks in order to be able to offer homeowner relief to satisfy settlement agreements with the Department of Justice.

Although we have been an active participant in bidding new whole loan packages, we did not win any of these bids in the first quarter. Although at times frustrating, we have maintained our patience and disciplined investment process.

Nevertheless, we do see ample future supply and we believe that we'll be able to continue to grow this portfolio over the balance of 2017. Turning to Page 14. Although we did not add to this portfolio in the first quarter, our asset management team continues to actively manage our existing portfolio.

During the first quarter, in our non-performing or fair value portfolio, we brought 200 loans, approximately $31 million fair value, that was delinquent at year end to current status as of March 31. We modified 71 loans in our fair value portfolio resulting in unrealized gains of a little over $1 million.

We executed 83 short sales for other non-REO liquidation from our fair value portfolio resulting in realized gains of $900,000. In our reperforming or carrying value portfolio, our current loans increased from 73% to 75% since year end and another 1.5% of the loans that were current at year end paid off during the first quarter.

Finally, we liquidated 84 properties out of our REO portfolio in the first quarter, our best REO liquidation quarter thus far. Again as a reminder, our credit sensitive whole loans appear on balance sheet on 2 lines; loans held at carrying value which is $573 million and loans held at fair value $775 million.

This selection is permanent and is made at the time of acquisition. Typically, we elect carrying value for reperforming loans that we buy and fair value from non-performing loans. Turning to Page 15. We purchased approximately $150 million of three-year step-up securities in the first quarter.

This asset class has seen strong demand in new issue levels, have not really widened by fed funds increases in both December and March. We've seen significant buying from money managers, which has been largely responsible for holding these spreads at tight level. Turn to Page 16.

The credit metrics on the loans underlying our legacy non-agency portfolio continue to improve. 93% of the loans underlying our legacy non-agency portfolio are now amortized. This principal amortization, together with home price appreciation, continues to reduce LTV. Delinquencies continue to cure.

60-plus day delinquencies as of March 31 for the portfolio were down to 12.4%. On this stage, we illustrate the LTV distribution of current loans in the portfolio. The red bars on the right-hand side represent at risk loans where the homeowner owes more on the mortgage than the property is worth.

These are the loans we worry about transitioning to delinquent and defaulting in the future because the borrowers are under water. As you can see, these red bars are disappearing. Please also note the increasingly large black bars on the left side. These are loans with LTVs below 80% and are attractive refinancing candidates.

And 80% of the current loans now has LTVs of 80% or lower. A combination of low rates available today and a 30-year amortization term versus the 20-year remaining term on these loans today can offer homeowners substantially lower monthly payments.

And of course, given our deeply discounted purchase price of these assets, we're very happy when the underlying loans prepay. And with that, I'd like to turn the call back over to Bill..

Thanks, Craig. To remind you, we were probably in transitioning from what is predominantly agency to investment across the residential mortgage sector. We continue to work hard to identify and acquire attractive, credit sensitive residential mortgage assets. In the quarter, those assets were three-year step-up assets and CRTs.

The good news is, since we've been in credit, our credit assets continued to perform very well. We believe we're well positioned for changes in prepayment rates, monetary policy and or interest rates. And that does completes our presentations for today.

And operator, could you please open up the lines for questions?.

[Operator Instructions] Jessica Levi-Ribner, FBR. Please go ahead..

One on the credit sensitive loans that you mentioned. Can you size the pipeline that you think is kind of acquirable, given all the competition in this space? And then, when do you think those could be acquired? You kind of said later in 2017.

Can we take that to mean in the back half of the year?.

This is Bryan Wufsohn. There's going to be ample supply coming through the end of the year. We expect to see naturally many portfolios operate a bid in the coming weeks and months. So it doesn't necessarily have to be the back half of the year. It could be this quarter or in short order..

We're not talking about lead time of quarters. We're talking about lead times and months..

Okay, okay. Understood. And then I guess as a follow on to that, has the pace of capital deployment picked up so far in the quarter? You waiting for some of those bigger portfolios to come online..

We've found investment opportunities in April as we do in every month. But what we're saying is, there is a large supply coming. We don't have to invest a lot to stay in place or to grow somewhat. We're talking about $700 million of quarter here, maybe $800 million a quarter here. There's much more opportunity than our investment needs..

Okay and one on the leverage. Leverage ticked down to 2.9 given the agency run off.

Should we expect it to continue to trend down? Or kind of where can we think about your leverage going?.

That's actually a two-part question in my mind. So if we continue the strategy of investing less in assets that are levered nine to one and assets that were levered 2.5 to one, yes, overall it will trend down. But let's see when the Fed stops reinvesting in agencies. Our view on agencies could change over time.

But other things being equal, yes, if you're not investing in assets that lever nine to one then we are investing in assets that lever 2.5 to one. There should be some downward trend in the overall leverage. That's consistent with the strategy..

Okay, great. Thanks so much..

Douglas Harter, Credit Suisse. Please go ahead..

This is actually Sam Choe filling in. So you guys have really stayed true to the strategy to build out credit sensitive assets. So I was just trying to kind of gauge your philosophy on whether you would approach incremental investments in the agency space.

So I'm trying to get out whether from a tactical standpoint, whether you will consider a temporary deviation from the current strategy..

Well, if it is - it probably won't be temporary nor a deviation. We invest where we find the most attractive assets and risk adjustment yields in the residential mortgage space. And if the non-economic buyer, the Fed backs off, we might find opportunity and it might be opportunity for many, many years. So it's not a deviation strategy.

It's let's get the best risk adjusted yields in the residential space. Certainly, agencies fit there, but we were never comfortable going up against the Fed..

Got it. All right. Thank you..

And next we'll go to Bose George, KBW. Please go ahead..

It's Eric on for Bose.

How do you guys think about taking realized gains in selling securities going forward? Or is the idea just to let that $800 million maybe a $1 billion per quarter just run off and replace?.

In terms of taking gains, we're consistently taking gains in the legacy market.

Part of it is as the overall universe shrink there, we never wanted to be a disproportionate share of that universe because we think as universe shrinks, theoretically, you can reach a point where there is less liquidity or maybe certain street firms no longer are involved in funding. So we sort of taken that down as the markets gone down.

And that's where you've seen us realized gains on legacies because we've done that for years now..

Right, great. On one of your sides, you referred to the technical support in the non-agency market, which I don't think anyone would argue with.

But what do you think would actually change that dynamic now? I guess, maybe put another way, how meaningful would a hiccup in the credit market have to be to disrupt those strong technicals?.

A meaningful would a disrupt in the credit, hiccup in the credit?.

Hiccup in the credit market, disruption in the credit. Yes..

It's really about the home values, right? That's really where the ultimate sensitivity is. And I think the technicals are certainly very good there as well. Housing starts are low. There's a very little inventory.

And I think people might say we've seen a lot of home price appreciation, don't you worry that there's been too much, may be and maybe that argues that values plateau a little bit, but we're a long way away from 2006, 2007 because it's a completely different world. You have much less leverage. LTVs are much lower. There's a lot less speculation.

So I think the fact that mortgage credit today is much more healthy, lending is much more healthy than it was combined with home values, it's a pretty strong metric..

Right. Last question from me. I mean you guys cite your patient and disciplined approach, especially around the RPL/NPL securities.

Does that mean, there's parameters that you adhere to with respect to operating in that market? And maybe you can just give a little bit more color on some of those parameters that you look at closely?.

Well, we certainly look at ROE, taking into account that fund cost may trend up with the Fed. We certainly look at the technical flow, though it's coming, we know the opportunities. You may remember, we were pretty early on three-year step-ups. We will find the next thing to be early in to.

So that - we are working on many investment opportunities within the residential sector, that continues. And I have said this repeatedly, we don't have to replace run off by month or by quarter. We'll get to the right place. And look at the long-term numbers we put up overall within a period of time. It's funny, yes.

You read the paper avail [ph], turn into facts. The great news is total shareholder return is replicable by everybody by looking on the Bloomberg. And boy, I put our numbers against anyone in the sector or anyone that manages money. So we don't sit on the mike too longer. We take our time to make the investments, and we're seeing opportunities now..

Well, nobody would debate that you guys have done a great job..

And next, we'll go to the line of Joel Houck of Wells Fargo..

So you talk about the run off. Obviously, it's higher than what you acquired in Q1 and that you have confidence is that plays out.

How much does the recent acceleration of home prices kind of underpin the fundamental, which give you may be the confidence to get more aggressive in the RPL/NPL strategy? Because what we've kind of consistently heard from companies in the past year figure on the credit side is, if fundamentals are good, spreads are tightening, not really looking to put more capital to work.

I'm not saying that's been what you guys have been saying. But in light, it seems like there's been change here in the last few months, and it's perhaps driven by accelerated HPM.

Just wondering what your views on the recent uptick in HPAR [ph]? What type of assumptions you're making going forward? And then obviously your discount accretion moved up this quarter, which is I think only the second quarter it's done that in the last year, year and a half. Any comments on that would be helpful guys..

So in terms of home price appreciation, I don't think, we don't bake in significant home price appreciation into our modeling when we look at whole loans. And as Bill said before, really the discipline there is ROE. So, yes, you can always pay more to buy something and buy it at a lower yield, but we're very cognizant of the ROE.

And as Bill also said, we know that our funding costs will likely increase in the future. So that's really the discipline that drives the whole loan investing. We don't have hard and fast numbers per se. We buy it here. We don't buy there. But I think being very cognizant of that ROE is sort of how we approach investments.

So it's more than just the yield on the asset. And in terms of the home price appreciation on the legacy non-agency portfolio, it's a number of things. It's home price appreciation, but it's also amortization, I point out a bit 93% of the loans are amortizing and there's still in many cases at very low rates, if you look at post recent hybrids.

So we're getting significant LTV improvement, not only through home price appreciation but also through amortization..

So when we bought assets, there's two assumptions we did not make. We did not make the assumption home prices would go up, we assumed they'll be flat. The other assumption, we did not make was that there will be settlements from banks on the securities in purchase.

Now those settlements have pulled, how much Steve approximately?.

The two that we've had, I think, it close to $100 million..

So about $100 million. Now that $100 million worth settlement do not go through the income statement, Joel. What it did in the main was reduced our amortized cost, and that's why you see more discount accretion. Well, $100 million came in, we didn't book it, got you some with it. We've lowered our amortized cost.

Therefore, there's more of this accretion. But this is a very unique situation. When the companies talk about litigation, settlements, ours is the opposite. Ours is, these large chunks of cash come in. We certainly did not model the name, when we bought the assets because they're working well for MFA and its shareholders..

Would you agree that the overall fundamentals and housing have really accelerated in the past six months? Or you not see it that way?.

No, I think the fundamentals have definitely improved. I don't know that they continue to accelerate. I think there's some pockets maybe that have. But again, the technicals are very good. You read all the time about our housing starts are very low and people sometimes say to us, housing starts are low. Aren't you worried about that.

Our response is well, no, not at all because the houses underlying all the mortgages that we own, those are existing houses. So the fewer - few houses to get build, the stronger that technical is for existing housing..

Okay, great. Thanks a lot guys..

There are no further questions in queue at this time. So please continue..

Great. Well thank you everyone for joining us today. And we of course look forward to speaking to you again next quarter. Thanks..

Ladies and gentlemen, this conference will be available for replay after 1 PM today through August 4, 2017, 11:59 PM. You may access the AT&T teleconference replay system by dialing 1800-475-6701 and entering the access code 423380. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701, and area code 320-365-3844.

Access code 423380. That does conclude our conference..