MFA Financial, Inc. (MFA) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to MFA Financial Inc. First Quarter Earnings Call. [Operator Instructions]. And as a reminder, today's conference is being recorded. I'd now like to turn the conference over to our host, Hal Schwartz. Please go ahead, sir.

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 SEC. 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 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 First 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. The first quarter of 2019 was a stunning reversal from the fourth quarter of 2018 for financial assets. Stocks recovered most of the losses they suffered during the fourth quarter of 2018, ending the quarter up over 10% versus December 31 levels. Bonds also rallied pushing interest rates down and flattening the yield curve during the first quarter. Volatility declined substantially from the fourth quarter and credit spreads tightened with high yield spreads ending the quarter about 135 basis points tighter than level seen at year-end, although still nearly 100 basis points wider than those observed at the end of the third quarter of 2018. Tighter credit spreads had a visible impact on MFA's CRT portfolio, as they regained much of the market value lost during the fourth quarter. 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 as we grew this asset class by $740 million in our investment portfolio overall by $369 million during the first quarter. The groundwork that we 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 partner has enabled us to source significant volume of whole loans, including, in some cases, transactions with limited competition. Please turn to Page 3. MFA's GAAP earnings per share was $0.19 in the first quarter and we paid a $0.20 dividend to common stockholders on April 30. MFA has paid a $0.20 dividend now for 22 consecutive quarters. We are introducing the concept of core earnings beginning in the first quarter of 2019. This is a non-GAAP measure, which excludes the impact of unrealized gains and losses on certain of our investments for which we use fair value accounting. I will provide further detail of this core earnings concept in the next slide. We acquired over $1.2 billion of assets in the first quarter of 2019, growing our portfolio by approximately $369 million. Our book value declined very slightly to $7.11 from $7.15 and our economic return for the quarter was 2.2%. And finally, our estimated undistributed taxable income was $0.07 per share as of March 31. Please turn to Page 4. As previously mentioned, we have reintroduced a concept of core earnings. Some of you may recall that we used to report core earnings years ago to adjust for what at the time were referred to as Linked Transactions. Our current definition of core earnings is GAAP earnings adjusted for the impact of unrealized gains and losses on certain assets that are accounted for at fair value. Specifically, we eliminate the GAAP earnings impact of price changes on CRT securities and Agency MBS and related hedges that are accounted for at fair value. Please note that our definition of core earnings includes realized gains and losses as well as unrealized gains and losses on residential whole loans at fair value. By reporting core earnings, we hope to provide what the company considers to be our economic earnings. In addition, we expect that our core earnings will serve as an input to dividend determination. We have provided a pro forma analysis on Page 25 of the presentation of what our core earnings would have been had we implemented this measure in both 2017 and 2018. Notably, while our GAAP EPS for 2018 was $0.68, our core earnings would have been $0.79. Further, for 2017 and 2018, core earnings per quarter range from a low of $0.16 to a high of $0.21, whereas GAAP EPS ranged from a low of $0.13 to a high of $0.24. Please turn to Page 5. First quarter investment activity was very strong as we've purchased approximately $1.2 billion of assets and grew our portfolio by $369 million. Our acquisition of purchased performing loans again increased over the fourth quarter to $875 million in Q1. The process of acquiring these assets is very different from that associated with our other asset classes, as we generally purchase loans directly from originators rather than from The Street or through bulk offerings. Through our willingness and ability to explore various arrangements, including flow agreements, strategic alliances and minority equity investments, we've been able to partner with originators to source attractive new investments, while enabling these originators to grow with support from MFA as a reliable provider of capital. We were also able to purchase an additional $220 million of MSR related assets in the first quarter. Please turn to Page 6. As we have shown previously, our expanding investments in newly originated loans or purchased performing loans is beginning to have a meaningful influence on our interest income. These loans are included in our loans held at carrying value on our balance sheet. Please recall that we also include loans purchased as reperforming loans or purchase credit impaired loans in our loans held at carrying value. In the first quarter, all loans at carrying value produced $49.6 million of interest income. This is versus $101 million in all of 2018 and $39.1 million in Q4 of 2018. More notably, $38.2 million of this $49.6 million was from purchased performing loans, up from $27.5 million in the fourth quarter. To put these numbers in perspective, our first quarter interest income from carrying value loans represents an annual run rate of approximately twice what we earned in calendar year of 2018. As we continue to grow our balance sheet, we will add marginally more leverage, particularly on our residential whole loan portfolio. Our debt-to-equity ratio increased slightly from 2.6 to 2.7x in the first quarter. We would expect this leverage ratio will continue to increase modestly as our portfolio assets can easily support leverage of 3 to 4x, whether through repo borrowing or securitizations. For our credit-sensitive loans, we've committed significant resources to over asset management efforts. We recognized that by immersing ourselves in the complicated and sometimes messy details of managing credit-sensitive loans that we can achieve better outcomes and improved returns. As good as our third-party services are, there's a tangible benefit to direct oversight and involvement in decision-making. And finally our legacy Non-Agency portfolio continues to perform well and contribute materially to our financial results, generating a yield in the most recent quarter of 10.45%. Please turn to Page 7. To summarize our strategy and initiatives for 2019, we expect to continue to increase our investments in purchased performing loans, specifically Non-QM, fix and flip and single-family rental. When and if we are able to grow our other existing asset classes at attractive levels, we will obviously continue to do so. An example of this is our investment of $220 million in the first quarter in MSR-related assets. And as always, we are constantly evaluating new investment opportunities. Given our track record, we are usually among the first to see new opportunities as we have demonstrated the ability and willingness to help structure these deals and invest in size. We'll likely continue to execute strategic sales of Legacy Non-Agency MBS. This is part of managing a mature portfolio and it includes sales of bonds at relatively high prices with little additional price upside, sales of callable bonds at a premium and sales of low loan count or odd-lot position sizes at attractive round lot levels. We've managed our CRT portfolio by selling many of the seasoned deals that are trading at very tight spreads and high dollar prices in favor of newer deals with wider spreads and prices closer to par. Notably, the new REMIC structure CRTs will not be accounted for at fair value, but will be treated as available for sale assets. And finally, we'll look to optimize our capital structure through the use of additional leverage, including securitizations. That said, our leverage will likely still be the lowest in the peer group. Please turn to Page 8. The interest rate environment has changed dramatically over the last 2 quarters. At the beginning of the fourth quarter last year, the Fed appeared to be in the middle of a tightening cycle, where the fourth 2018 rate hike expected at the December meeting and as many as 4 Fed Fund increases expected in 2019. After a violent market reaction at the end of the fourth quarter, the Fed quickly changed course, and as communicated a much more diverse stance beginning early in the first quarter of 2019. Continued growth in the U.S. economy with very little evidence of inflation and recent productivity gains has fostered an environment that suggest a continued neutral rate stance. The implications for levered mortgage investors are clear. Low volatility and steady interest rates have diminished the headwinds faced by our business. MFA's investment initiatives are firing on all cylinders. We remain optimistic that we will continue to drive earnings through balance sheet growth. And now I'll turn the call over to Steve Yarad, who will provide further details on the financial results for the most recent quarter.

Thanks, Craig. For the first quarter of 2019, MFA's net income to common shareholders was $85.1 million or $0.19 per share. Earnings rebounded this quarter following the market volatility experienced last quarter. Trading conditions normalized and spreads contracted, which led to the faster recovery of unrealized losses particularly in our CRT portfolio. Our underlying position in 30-year Agency MBS also experienced gains, but this was offset by losses unrelated to swap hedges. This included a realized loss on certain swaps that were terminated following the sharp rally in rate that lead a reduction in duration of our 30-year Agency MBS position. As we have noted on previous earnings call, due to our election of the fair value option on CRT securities and 30-year Agency MBS and because we are not applying hedge accounting to the swaps that economically hedge at these agency bonds, the valuation changes on those positions are recorded in earnings each quarter. Please turn to Page 9, where we present additional information on the key drivers of net income this quarter, which were are as follows. Despite the impact of higher funding costs, our net interest income this quarter was marginally higher than the prior quarter. This reflects, as Craig noted earlier, continued growth in purchased performing loans. Net interest income on purchased performing loans grew over 20% from the prior quarter. Interest income on these loans was $38.2 million, some $10.7 million higher than the last quarter. Other income was significantly higher this quarter, primarily due to the recovery in the value of CRT securities and 30-year Agency MBS as discussed. In addition, gains on sales of residential mortgage securities again made a meaningful contribution to our results, as we continue to selectively harvest gains in our mature Legacy Non-Agency MBS and rebalance our CRT portfolios. Further, the results again reflect a strong contribution from residential whole loans measured at fair value through earnings, which this quarter primarily reflects cash income. Finally, operating and other expenses were approximately $2 million higher than the prior quarter. This is due primarily to higher compensation-related expenses, including nonrecurring costs associated with the early retirement of 1 employee and the termination of another. In addition, costs associated with servicing our REO portfolio were also higher. 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 first quarter.

Thank you, Steve. Turning to Page 10. The first quarter was another successful quarter for our investments team as we acquired approximately $1.2 billion of assets and grew our portfolio by $369 million in the quarter. This is the sixth consecutive quarter of portfolio growth. As in recent quarters, most of the acquisitions were focused on the whole loans portfolio and, in particular, on Non-QM, fix and flip and SFR loans. We opportunistically sold $209 million of Legacy Non-Agency MBS, CRT and RPL/NPL securities in the quarter. Turning to Page 11. Our strategic initiative, which began in 2017 to add Non-QM, fix and flip and SFR loans to our investment strategy, continues to bear fruit and has been the primary driver of portfolio growth over the last few quarters. As you can see on this slide, since the third quarter of 2017, our whole loans portfolio has grown from about 19% of our investment portfolio to approximately 44% as of the end of the first quarter. The primary driver for this growth has been the Non-QM, fix and flip and SFR loans, which have grown from 0 in the third quarter of 2017 to $2.7 billion at the end of the first quarter of 2019. In addition, Non-QM, fix and flip and SFR loans now account for approximately 50% of the whole loans portfolio and 22% of the total investment portfolio. We're very 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 new holdings in the future. Turning to Page 12. The Fed has now raised rates 9 times in the last 3.5 years, raising the Fed Funds rate by approximately 225 basis points. During this period of rising rates, MFA's net interest rate spread has remained attractive and relatively stable. This is primarily due to our investment strategy, which is focused on acquiring credit-sensitive assets, a benefit from positive credit fundamentals as well as emphasizing assets with short duration, which either through a floating rate coupon or rapid repayment of principal have supported our portfolio performance in a rising rate environment. Also importantly, the rise in funding costs has been mitigated with strategic uses of interest rate swaps and terming out of fixed rate whole loan financings through securitizations, of which we currently have about $660 million outstanding. Turning to Page 13. Here we show the yield cost of funds and spreads for our holdings as well as the equity allocated to each asset class. Our largest equity allocation currently at over 40% of our equity continues to be towards whole loans at carrying value, which yielded 5.8% in the quarter. The leverage on our whole loans has increased modestly over the last couple of quarters and was 1.6x in the first quarter. We expect to continue to utilize more leverage for this asset class as the flow of Non-QM, fix and flip and SFR loans continues to expand. Turn to Page 14. Here, we'll review MFA's interest rate sensitivity. Our asset duration changed a little in the quarter and remained relatively low at 158 basis points at the end of the quarter. Our swap notional balance declined by $230 million in the quarter as $100 million of swaps matured and we unwind $130 million of longer-dated swaps as rates rallied and the outlook for interest rate shifted in the quarter. Our net duration was relatively unchanged and remains relatively low at 107 basis points at the end of the quarter. In summary, due to our low asset duration, low leverage and preference for credit-sensitive assets, MFA's interest rate sensitivity remains low both as measured by net duration as well as estimated change of portfolio value for parallel shift in interest rates. Turning to Page 15. MFA's investment and risk management strategy continues to limit quarterly book value fluctuations through various market conditions. Since 2014, the largest quarter-over-quarter decline in book value has been 4%, but the average change in book value of less than 2%. The primary reason in achieving this has been our strategy of maintaining a low and stable asset duration and our investment strategy that prioritizes assets that derive its return from exposure to credit risk over interest rate risk. As before, we continue to believe that by consistently protecting book value, MFA will have the staying power to take advantage of new opportunities as they arise. With that, I will turn the call over to Bryan Wulfsohn.

Thank you, Gudmundur. Please turn to Page 16. The fundamental story remains the same through the first quarter of 2019. The economy and housing continue to benefit mortgage credit. Home price growth continues to normalize after an extended period of significantly outpacing CPI. The CoreLogic National Home Price Index was up 4% in February from a year ago and 3.7% in March. The unemployment rate was down to 3.6% in April, and the last time we saw levels this low were in the late 1960s. We continue to see slight increases in housing inventory. Overall, levels are still historically low on a nationwide basis. We believe these low levels of supply can support further home price growth. And according to the latest release from the New York Fed, the reported 90-day mortgage delinquencies are down to precrisis levels of around 1%. And through the first quarter, we have seen serious delinquency levels continuing to improve. Turning to Page 17. Our strategy of partnering with originators resulted in an another successful quarter of acquisitions. We acquired over $875 million of purchased performing loans consisting of approximately $570 million of Non-QM loans and over $300 million of business purpose loans. We have seen robust supply of seasoned loans to date in 2019 with over $20 billion offered and the majority being legacy performing and reperforming and less so nonperforming loans. We continue to evaluate seasoned loan pools at auction and we'll continue to bid where we see value. The performance of our seasoned loan portfolio continues to outperform our expectation at the time of the purchase. Again, as a reminder, our whole loans appear on our balance sheet on 2 lines: loans held at carrying value $3.7 billion and loans held at fair value $1.5 billion. This election is permanent and is made at the time of acquisition. Typically, we elect carrying value for purchased performing loans and reperforming loans and fair value for nonperforming loans. Turning to Page 18. Our RPL portfolio continues to perform well. 86% of our portfolio remained less than 60 days delinquent. In addition, although 14% of the portfolio is 60 days delinquent or greater, almost 30% of those loans have been making payments over the last 12 months. We continue to see prepayment speeds faster than our expectations. With an amortized cost of 84 cents on the dollar, prepayments are positive. And we could see speeds remaining in this range as our borrowers gain access to new financing options as a result of improving credit. Turning to Page 19. We believe our asset management team's oversight of servicing decisions and active management of portfolio produces better economic outcomes. The team has worked in concert with our servicing partners to more quickly get loans to reperform as well as limit and reduce time line to resolution. This slide shows the outcomes for loans that were purchased prior to March month end 2018, therefore owned for more than one year. 37% of loans that were delinquent at purchase are now either performing or paid in full, and another 37% are either liquidated or REO to be liquidated and 26% are still in nonperforming status. We are pleased with our performance since modification is over 79% of our modifications are either performing or have paid in full. And these results continue to outperform our initial expectations. Turning to Page 20. We had another successful quarter of growth to our Non-QM portfolio. To date, we have acquired over $2.1 billion of UPB, including approximately $700 million so far in 2019. We continue to work with our origination partners on strategic relationships. A variety of different loan types can be considered Non-QM, ranging from structural features, such as interest-only period or a term greater than 30 years, to the way income is documented, such as the use of bank statements for self-employed borrowers or loans with higher debt-to-income ratios and so on. We believe underwriting of these loans is prudent and the portfolio is a weighted average loan-to-value ratio of 66% and the FICO of over 700. And the credit performance, as expected -- is performing as expected, with 0.8% 60 days delinquent or greater. And leverage is attainable through warehouse lines and securitization. Securitization and execution has improved this year and we expect to securitize should conditions warrant. We target asset yields of approximately 5% and an ROE of low-double digits utilizing appropriate leverage. And now I'd like to turn the call back over to Gudmundur to walk you through over fix and flip and SFR loans.

Thanks, Bryan. Turning to Page 21. Our acquisitions of business purpose loans continued to gain momentum in the first quarter as we added new relationships and expanded existing ones. Since we started acquiring business purpose loans at the end of 2017, we repurchased over $1.2 billion in UPB and undrawn commitments. We are excited about our progress and expect to continue to expand our acquisitions of business purpose loans in 2019. At the end of the first quarter, we held $622 million of UPB of fix and flip loans, an additional $53 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 first 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. Please turn to page 22. In summary, we remain very active in the investment market. We purchased over $1.2 billion of assets in the first quarter of 2019 and grew our portfolio by $369 million. This growth in our portfolio has resulted in materially higher interest income over the last 2 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 leverage to our balance sheet. This concludes our presentation. Operator, will you please open up the call for questions?

[Operator Instructions]. At this time, our first question comes from the line of Eric Hagen with KBW.

On the Non-QM side, just what's the nature behind the Non-QM loans that you're acquiring which prevent them from being QM? Or I guess, one other way to phrase that is just which of the Non-QM loans that you bid on which -- which kind do you like the most, I guess is what I'm trying to say.

Yes. So the majority would be alternative documentation, so the use of bank statements and then mixing with that there is a fair amount of just investor properties.

Okay. Okay. Got it. And as the purchased performing loans segment grows, how should we think about servicing expenses in the portfolio?

It really depends how the loans are purchased. If they are purchased servicing retained, you -- all you'll see is the sort of the net coupon flowing through, so the servicing expense won't increase at all. If the purchased servicing released, you'll see an incremental increase to the servicing expense line item.

Okay. And the Non-QM loans that you guys are acquiring, are those servicing retained or released?

It's mixed.

Okay, what's the breakdown?

Most of what we own today are retained.

Okay. Okay. Okay. Great. And then on the fix and flip strategy, is that -- is the growth in there in that segment going to be sensitive to housing prices in certain markets? Or is there some other driver element of sensitivity for the borrower that's going to contribute to stronger growth in that market?

Well, I think, the growth is not necessarily dependent on home prices. Positive home price increases are obviously supportive of all of our credit strategies. But the growth in this asset class primarily comes through existing home, so there's a certain percentage of existing home sales that has gone to fix and flip buyers. Historically, it tends to be anywhere from 4% to 7%, probably at an average 5%. So as you have that turnover, it's just -- there's a natural turnover of the housing stock there. Well, on top of that, what has also happened is historically a lot of fix and flip has been done with cash or friends and family side money. So as financing becomes more readily available and more common in that area, that market will grow over time as well. So it's not just a function of home prices. Because also keep in mind the housing stock in the U.S. is fairly old, so a lot of this activity in this market is basically taking old or worn down homes and making them accessible for new buyers.

Great. And the guidance on leverage going up slightly, can you just maybe give us a little more color as to where you're underlevered right now? Yes, I think, that's the basic question.

Sure. So if you look at the slide where we break down our asset classes, our loans held at carrying value. I think, we have 1.6x leverage on those. So that's really where it is. Those are not fully levered. So -- and again we're not talking about a significant increase, right? We went from 2.6 to 2.7 and could we go into the low 3s? Sure. But that's probably the side where we can add additional leverage.

Okay. And is the leverage going up a function of your comfort level in the cash flows? Or is it haircuts been brought down or financing improved? What -- or it is the combination of the two?

No, I would say, we're just underlevered in that asset class. Because of the short nature of our portfolio, we generate a lot of cash every month. So I think before we run out and borrow, we make sure that we soak up the liquidity that we have. So that's really been the strategy as our -- as this purchased performing loan category has increased, we have less liquidity every day. So it's just managing that liquidity and not taking on leverage where we don't need it.

And next, we'll go to line of Rick Shane with JPMorgan.

I appreciate the transparency on the core income and how that relates to your thinking and also your outlook in terms of leverage in asset growth. I'd just like to sort of think about the interplay of those 2 factors and also the modest but sort of steady declines of the spillover dividend. It's basically been drifting down about $0.01 a quarter. You showed the core income, which is an influence on dividend policy, $0.03 below this quarter, $0.01 above last quarter. Just curious given dividend cuts in the space, how you're feeling about the stability of the dividend and your ability to grow into it as we move through 2019?

Sure. So one of the reasons that we've reintroduced core earnings is that GAAP earnings because we have assets that we account for at fair value. We see greater fluctuations in GAAP income than we did before we saw that. So for instance, if you look back at 2017, I think we had $0.15 in the third quarter because there were two hurricanes and so it affected credit assets and it was $0.24 in the fourth quarter. So it's really an attempt to sort of take some of that noise out and then really just unrealized gains and losses. That said, as I mentioned, it is an input -- core earnings is certainly an input to our dividend. If you look at this most recent quarter, we had a realized loss, which negatively affected both GAAP and core of about $0.02 per share on swaps that we tore up on Agency assets when the market rallied. So again, we include that in core, but I'm not sure that we necessary expect that's a recurring thing. So there are a lot of things that go into the dividend, and again not the least of which is our taxable income, right? And so we've historically been underdistributed for taxable income, and so that necessarily has to drive the dividend decision as well. So it's a good question and it's a complicated process of thinking about it. But I think those are some of the considerations. And then the last thing I would say is and we've been saying this for several quarters, our strategy really is to grow our asset base. And I think we've done a very good job of doing that over the last 4, 5, 6 quarters. And I think you should think about that and when we talk about interest income and the interest income that we generate from especially these new investments, I think that's what we expect to drive our earnings in the future.

Got it. Yes, I mean, look I think, the takeaway is, it's complicated, but there's also pretty strong underlying earning asset growth.

Correct. Yes, very much so. I mean, if you look at that carrying value loans, it was about -- the interest income was about $50 million. So you've seen a big jump in that in the last two quarters. And I think we've been pretty transparent. Our strategy is we're going to drive earnings growth through asset acquisition.

[Operator Instructions]. And next, we go to the line of Steve Delaney with JMP Securities.

I really appreciate the core earnings estimate, very helpful. I wanted to ask about the additional $200-and-some million that you put in MSR-related investments. You'd mentioned these before, but it's obviously somewhere you're still allocating capital. Can you just talk a little bit about the structure of that transaction or the structure that you're investing in, what type of loans and what the expected return profile might be?

Steve, thanks for the question. Sure. Yes, so you're right, we successfully added to that portfolio in the quarter. So just I guess, if you take a step back, so these assets are essentially securities or loans that are backed by MSRs. And so the way this is usually structured is there's a -- the advanced rate to the security or the loan is approximately 60% to 70% on average. So if you think about the different way to haircut on the underlying asset that collateralized the loan of the security is anywhere from 30% to 40%. The asset that we own for the most part is a floating rate security, but in some cases it's also a fixed rate security, but majority of the holdings are floating rate securities. And embedded in these structures, there's also all kinds of features, some sort of a mark-to-market mechanism, that is usually a corporate type of guarantee for the sponsoring entity. So the structure does get a little complicated, but at the end of the day, the security that we have is overcollateralization of the underlying asset as well as a corporate guarantee to the underlying asset. And the return profile here, we think this is solidly low double digits. And to the extent these become available, we continue to play in this asset class, as we think it adds meaningfully to earning and it's a good risk reward.

Yes. If you look at Page 13 and I came up with something north of 12%, if I took the base yield and then the spread with the leverage. Does that sound -- does that hit your low-double digit?

Yes, yes, that's about right. Yes, you did that correctly.

And Steve, these deals, we're typically buying these as new issue deals, and they're not issued that frequently. So there might be a quarter and there might not be a deal. But typically, when these deals do get printed, we're involved.

Right. And so the asset that we added in this quarter -- I mean, so we brought this early in the first quarter kind of when there was a lot of volatility in the marketplace. And since we're familiar with all the structures that these are for us to evaluate those types of opportunities as they arise.

Yes. So I'm just thinking of which the way you described this and the fact that they're sporadic, it doesn't sound like something that a bank would probably do. They own a lot of MSRs, but very cheap cost of capital. It seems like it'd be more PennyMac or Freedom or Quicken somebody like that. Is that more the type of a corporate non-bank owner of the MSR that would be the issue or the corporate notes?

Yes, yes, you're absolutely right. It tends to be the non-bank financial entities that are involved in MSR market.

Okay. And then shifting then over. Eric touched on this with the securitizations, but I just wanted to press a little deeper. So leverage 2.7, and then Craig gave the wideband of 3 to 4. But you just added $875 million of N-QMs, I believe, in the -- in this quarter. I have to think your scale there is getting to the point, where you're approaching the possibility of getting a securitization done. Can you talk a little bit about -- I know what the overall 1.6 leverage is, but maybe if you were to do a securitization, okay, what the leverage in that structure would be relative to how those loans are being financed in the warehouse right now? And can you comment on whether or not there would be a pickup in the levered return on equity on the subject loans that are securitized? Sorry for the long question.

Yes, no problem. I mean, realistically, if you were to dig into that portfolio, what you would see is a mix of assets that are levered and then also many assets that are owned for cash. So if you look at the cost of funds on that Slide 13 that you're referring to earlier, the highest cost of fund sits in that whole loans at carrying value. So when we are taking up leverage to the portfolio, it would make sense that we would add leverage to the highest cost leverage last, right? So that's the way we're thinking about it. But to answer your question on what kind of leverage is achievable through securitization, I mean, really you can take -- you can get a significant amount, so really you're talking between 6, 7, 8 times -- 8 turns of leverage depending on how deep you want to sell and that would be credit leverage. So it's not really through the repo borrowing, it's just through securities, so.

Okay. That's helpful. And my last question. And Steve, I don't want to speed jet -- I don't want to -- I hate stepping into taxes because it can get long and twisty and I'm not trying to do that to you on my third question. But I noticed the UTI, which we appreciate getting every quarter, still $0.01 from $0.08 at 12/31 to $0.07, is it as simple as the fact when we look at that $0.01 dip, would it be reasonable to think that taxable income for the quarter was maybe $0.01 below your dividend of $0.20 and -- or is that too simplified to look it at that way?

Actually Steve, I think, the way you're looking at it is exactly right in this instance because taxable income was consistent with GAAP in this quarter.

[Operator Instructions]. And we have no additional questions. Please continue.

All right. Thank you, everyone. Thanks for your interest in MFA and for joining us today. We look forward to speaking with you again next quarter.

And ladies and gentlemen, this conference will be available for replay after 12 noon Eastern Time today through August 7, 2019. You may access the replay by dialing 800-475-6701 and entering the access code 467266. International participants dial 320-365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Services. You may now disconnect.