Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial, Incorporated Second Quarter 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] As a reminder, this conference is being recorded. I'd now like to turn the conference over to our 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 of 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, 2018, 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 that 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 2019 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 2019 financial results webcast. With me today are Steve Yarad, our CFO; Gudmundur Kristjansson and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of senior management. 2019 continues to be a stunning interest rate reversal after a slowly rising, but in retrospect, very benign interest rate environment for much of 2018. 10-year treasuries have rallied 150 basis points since early November, 2018 and two-year treasuries have rallied 140 basis points in the same period. The yield curve has continued to flattened and even invert in the short-end, and one and three-month LIBOR, while lower recently in conjunction with the Fed ease last week, were still higher than all the 30-year treasuries that is until this morning where now even the long bond yields less than one and three-month LIBOR. For levered investors in mortgage assets, this environment has been extremely challenging. While we cannot claim to have anticipated the stunning developments in rates, MFA’s investment strategy is very much intentionally not dependent on accurately predicting interest rate moves. MFA’s investment acquisition strategy, particularly our focus on purchased performing loans in which we include Non-QM, fix and flip and single-family rental loans is proving to be a durable model. The groundwork that we've laid beginning in early 2017 is continuing to gain traction as our origination partners grow their businesses, at least in part through MFA’s consistent capital commitment. MFA’s reputation as a reliable buyer of residential whole loans and dependable capital partners has enabled us to source significant volume of whole loans, including in some cases transactions with limited competition. Despite the difficult mortgage environment, we continue to make investments that provide solid returns on equity.…

Thanks, Craig. For the second quarter of 2019, MFA's net income to common shareholders is $89.3 million or $0.20 per share, which represents a $0.01 increase over the first quarter. In addition, core earnings which excludes the impact of the fair value changes in CRT Securities and Agency MBS and related hedges that are included in GAAP earnings hedge period is also $0.20 of the common share, the sequential quarter improvement $0.03. Please turn to Page 8. Here, we present additional information on the key drivers of net income this quarter, which were as follows. Other income was higher this quarter due to an additional $26 million in net gains on residential whole loans measured at fair value. Loan valuations were higher as yields used to discount estimated cash flows from re-performing loans were just been tighter, in line with the prevailing market pricing. This increase was partially offset by the following. One, lower realized gains on sale to residential mortgage securities, while we continue to opportunistically manage these portfolios, the overall level of sales, particularly for Non-Agency MBS and CRT securities is lower this quarter. Two, a higher net loss in net position in 30-year Agency MBS and related hedges. Lower rates again resulted in unrealized gains in our portfolio of 30-year Agency MBS. With these were offset by realized loss on hedging swaps that were terminated in response to the change in duration profile of this portfolio. And three, relatively flat marks in our portfolio the CRT securities held at fair value. Prior quarter marks were higher due to the reversal in the first quarter of the significant credit spread widening that occurred during the fourth quarter of 2018. Net interest income this quarter was essentially flat to the prior quarter. Portfolio growth drove higher net interest income from purchased performing loans and MSR-related assets. However, these increases were offset or lowered net interest income on residential mortgage securities due to the combined impact of low yields, portfolio sales and runoff. In addition, our net interest expenses quarter also reflects the impact of the convertible bond issued in June. Finally, operating and other expenses declined slightly from the prior quarter due primarily to lower expenses associated with servicing our loan in REO portfolios. We also recorded a lower provision for loan losses this period and have purchased performing loans. And now I would like to turn the call over to Gudmundur Kristjansson, who will provide more details of our investment activity and portfolio performance for the second quarter.

Thank you, Steve. Turning to Page 9. The second quarter was another successful quarter for our investments team as we acquired approximately $1.4 billion of assets and grew our portfolio by $391 million in the quarter. This is the seventh consecutive quarter portfolio growth. As in recent quarters, most of the acquisitions were focused on the whole loans portfolio and in particular on Non-QM and business purpose loans. In addition, we acquired $354 million of MSR-related assets as we saw a healthy supply of attractive transactions in the quarter. We opportunistically sold $195 million of legacy Non-Agency MBS, CRT securities, RPL/NPL MBS and Agency MBS in the quarter. Turning to Page 10. Our strategic initiative which we began in 2017 to add Non-QM, fix and flip and SFR loans to our investment strategy continues to bear fruit. And as you can see from this slide, it has been the primary driver of portfolio growth over the last few quarters. Since the third quarter of 2017, our whole loans portfolio has grown from about 19% of our investments portfolio to approximately 49% or so at the end of the second quarter. The primary reason for this growth has been the Non-QM, fix and flip and SFR loans, which have grown from zero in the third quarter of 2017 to over $3.4 billion at the end of Q2 2019. In addition, Non-QM, fix and flip and SFR loans now account for approximately 55% of the whole loans portfolio and 27% of the total investment portfolio. We are extremely happy with the progress we've made on executing on the strategy we laid out in 2017 and are excited to continue to grow these holdings in the future. Turing to Page 11. From the fourth quarter of 2015 to the fourth quarter of 2018,…

Thank you, Gudmundur. Please turn to Page 15. Current state of the economy and housing continue to benefit mortgage credit. However, the rally in rates accelerating an inversion in parts of the yield curve, we are watching economic indicators closely. Home prices have moderated after several years of outsize growth. CoreLogic National Home Price Index was up 3.6% in May from a year-ago. The unemployment rate continues to hover around historic lows at 3.7% in June and July. Construction in new homes remained at low level, keeping a cap on housing inventory. Limited supply along with lower mortgage rates will continue to provide support for home prices. The last reported 90 day plus mortgage delinquencies are down to pre-crisis levels around 1%. Given that the credit box for new mortgages is still restrictive along with a prudent underwriting practices, we expect only compete to remain at low levels. Turning to Page 16. Our loan strategy had another successful quarter of acquisition. We acquired $1 billion of loans consisting of approximately $510 million of Non-QM loan and over $400 million of business purpose loan and $90 million of non-performing loans. We have seen over $30 billion season loans trade so far in 2019, the bulk being legacy performing and re-performing and less so non-performing. The three performing pools being bid aggressively driving up prices, we became more selective and more successful in adding only one non-performing pool over the quarter. And our seasoned loan portfolio continues to outperform our expectations at the time of purchase, which I will describe in more detail over the coming slides. And again, as a reminder, our whole loans appear on our balance sheet on two lines, loans at carrying value $4.4 billion loans, loans held at fair value $1.5 billion. This election is permanent and…

Thanks, Bryan. Turning to Page 20. Our acquisitions of business purpose loans continued to grow in the second quarter, as we acquired approximately $450 million in UPB and undrawn commitments in the quarter. Since we started acquiring business purpose loans at the end of 2017, we repurchased over 5,700 loans with over $1.7 billion in UPB and fit about our progress and expect to continue to expand our acquisitions of business purpose loans in the second half of 2019. At the end of the second quarter, we held approximately $860 million of UPB of fix and flip loans with additional $100 million of undrawn commitments. Credit metrics continue to be strong and performance has been in line with our expectations. Our target yield for this asset-class remains at around 7%. We held $227 million of SFR loans at the end of the second quarter. Similar to the fix and flip loans, the credit metrics and performance remained strong and in line with expectations. Our target yield for this asset-class remains at around 6%. With that, I will turn the call over to Craig for some final comments.

Thank you, Gudmundur. In summary, we remain very active in the investment market. We purchased over $1.4 billion of assets in the second quarter of 2019 and grew our portfolio by almost $400 million. This growth in our portfolio has resulted in materially higher interest income over the last two quarters and we expect further such increases as we move forward in 2019. While we have made excellent progress in growing our asset base, we have further capacity to continue to increase our investments by adding modestly to our leverage on our balance sheet. This concludes our presentation. Operator, will you please open up the call for questions?

[Operator Instructions] Our first question is from Doug Harter with Credit Suisse.

Hey guys. This is actually Josh on for Doug. I was wondering if you could talk a little bit more about the flow agreements that you have. As you've grown the whole loan portfolio specifically, are you continuing to look for partners to enter into flow agreements with? Are you happy with the volumes you're sourcing from the current partners? And then I guess, have you thought about any sort of strategic partnership or equity investments in a mortgage originator like we've seen from some of your peers? Thanks.

Sure. Thanks for the question. So I guess to answer the last part first, we have said that we have been willing to make a minority equity investments for – I think for a competitive reasons, we haven't taken out any billboards about that, but suffice to say, that's part of our repertoire. In terms of partners, we're always looking for new partners. But that said, we don't really view this as a conduit type of a structure. So I think ideally, it's a handful. It could be 10, 12 partners or so, but it's not 30 or 40. So I think we're very close to all these originators. We've been in their shops, we know the principles, and that's part of what makes us comfortable from a credit standpoint that we think we understand how they look at underwriting and we think we share a similar view with respect to that. So yes, it could increase, but on a modest level.

Thank you. And we'll go to our next question for Eric Hagan with KBW. Please go ahead.

Hey. Thanks guys. Good morning. I know you mentioned that 32% of the repo book is now hedged with swap. So to your point, you'll see that benefit as the Fed cuts shop and funding cost, but how about the asset side, like what percentage of your assets are floating rate that will also presumably reset down as the Fed cuts? Thanks.

Thanks Eric for the question. In terms of the percentage of assets that are floating, we don't have that information in front of us, but what I will say is that, so for example, you could assume obviously the agency arms are floating rate, right. But that's not a significant part of our holdings. Some of the Legacy Non-Agency MBS are floating, but we break that out. For example, on Page 13, we have about $650 million of non-agency fixed rate. The rest would be floating. As it relates to the MSR-related assets, probably about 50% or 60% of that have floating rate coupons. But in terms of the whole loans portfolio, the new loans we're buying, they either have a fixed rate coupon or they are of a hybrid structure where they're fixed for three, five or seven years, so their coupon is not going to reset anytime soon. As in terms of the non-performing and re-performing loans, obviously non-performing loans we own, that's more for a credit bet. So whether the coupon that is floating or not, it really doesn't impact the returns on those asset a lot, and the re-performing loans tends to have a fixed rate coupon for a long period of time. So I know that I didn't give you a precise percentage, but hope that helps.

[Operator Instructions] And I have no further questions in queue at this time.

Okay. So thank you for joining us today and for your interest in MFA Financial. We look forward to speaking with everyone next quarter.

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