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Text: 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.
Little did I know that I would have to compete for airtime with Chairman Powell who is testifying in the Senate at 10:00 AM.
I apologize for those of you who drew the short straw and get stuck on our call.
Before we begin, I want to give a shout out to our entire MFA team.
The last three months have obviously been extremely challenging and made exponentially more so by the fact that all of our efforts have been remote.
The Company fully implemented our business continuity plan during the third week of March and successfully completely transitioned to our remote work environment to address the operating risks associated with the global COVID-19 pandemic.
The effort and commitment displayed by our entire team over the last three months has been extraordinary and I've been humbled by their dedication.
Before we discuss the first quarter of 2020 financial results, which frankly at this point seems like ancient history, I'd like to spend some time discussing what other important work streams have been taking place at MFA since March 23 and I think it will be obvious why we've been silent on so many of these activities.
These critical efforts have been comprised primarily of three things.
One, forbearance; two, balance sheet and liquidity management; and three, sourcing third-party capital.
As arduous that these forbearance agreements have been to negotiate and operate through, they have provided us with the time to manage our balance sheet and liquidity while also working to source third-party capital and we are grateful to our lending counterparties that stuck with us through three versions of forbearance plans.
During April and May, we significantly reduced our balance sheet in an effort to raise liquidity and delever.
Importantly, because we entered into these forbearance plans, we were able to manage our balance sheet in a more judicious fashion, given the time allowed through forbearance.
Many of our asset sales, particularly on mortgage-backed securities, were at prices significantly higher than the price levels that existed in late-March.
Our sales during the month of April alone of legacy non-agencies, CRTs, and MSR-related assets generated over $150 million of realized gains versus March 31 marks.
Now, while still down significantly from values at the end of February, the patience permitted through forbearance enabled us to work hard to lessen book value erosion.
We were also able to manage the sale of a large non-QM whole loan portfolio that traded in late-April and closed in mid-May.
While we realized a significant loss on the sale, we are confident that we achieved a much better execution by controlling and managing the trade than we would have realized had the lender just liquidated the pool.
In the end, all of our lenders will have been fully repaid with no deficiencies, which is another of the design goals of the forbearance plan.
It was clear to us in late March that our situation was not due to bad assets, but the fragile funding and the path forward would require more durable forms of financing.
We also recognize that term financing, margin holiday and/or non-mark-to-market financing would necessarily require higher haircuts and therefore more capital.
Our method for seeking third-party capital began somewhat passively during the last week of March with fielding incoming indications of interest.
As this process intensified with more and more parties together with negotiating NDAs and then responding to voluminous data requests, all the while with our hair on fire negotiating a forbearance agreement while managing our balance sheet and liquidity and we engaged Houlihan Lokey at the end of March to manage this process for us.
Initial indications of interest from a number of capital providers came back in mid-April, but as we continue to delever and raise liquidity, it became evident that our third-party capital needs have already changed.
We extended our initial forbearance agreement at the end of April to June 1 and as we entered May, we began to obtain better price discovery, particularly on our loan portfolio, which gave us more clarity as to our path forward.
We started a second round of proposals from third-party capital providers in mid-May.
And as we held due diligence and informational calls with many of these institutions, we found that there was a competitive dynamic at work and a keen interest in pursuing a transaction with MFA.
We signed a term sheet over Memorial Day weekend and have been working since to negotiate and document this agreement.
For obvious reasons, we could not communicate publicly about these activities and it was frustrating not to be able to provide the public disclosure and transparency on which we pride ourselves.
We signed these agreements last night and we're happy to announce today that we have entered into an agreement with Apollo and Athene, an insurance company affiliate of Apollo, to raise $500 million in the form of a senior secured note.
But this $500 million note is only part of a holistic solution for MFA and a very strategic partnership with Apollo and Athene.
Apollo and Athene together have arranged a committed term borrowing facility with Barclays of approximately $1.65 billion that includes over $500 million for participation from Athene.
This term non-mark-to-market facility will provide us with durable financing for a large portion of our loan portfolio.
In addition, Athene has committed to purchase, subject to certain pricing conditions, a portion of our first securitization of non-QM loans.
And finally, Apollo and Athene are engaged with another of our lenders to structure an additional similar lending facility for our fix and flip portfolio in which Athene also intends to participate.
Pro forma for these facilities, approximately 60% of the Company's financing will be in the form of non-mark-to-market funding, providing shareholders with significant downside protection in the event of future market volatility.
We expect that upon closing and funding of these transactions, we'll be able to satisfy remaining margin calls, which were only $32 million as of June 12 and exit from the current forbearance agreement on or before June 26.
We also anticipate using some of the proceeds to pay accumulated unpaid dividends on our Series B and C preferred stock issues.
And finally, we expect that this transaction will provide us with substantial capital to once again begin to pursue attractive investment opportunities.
As part of this transaction, Apollo and Athene will receive warrants to purchase MFA common stock at varying prices over a five-year period and will appoint a non-voting observer to our Board of Directors.
Apollo and Athene have also committed to purchase the lesser of 4.9% or $50 million of MFA stock in the open market over the next 12 months.
We are extremely excited about this transaction, which we consider to be much more than a capital raise and very much a strategic alliance.
Moving on to the financial results for the first quarter of 2020.
As others have described before us, the first quarter of 2020 was literally a tale of two distinct and utterly different periods in time.
January, February and the first two weeks of March were very normal and a good start to the new year.
And in only a few days, the financial markets and the mortgage market in particular completely collapsed.
With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated.
Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points.
CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days.
MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities.
In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9.
And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.
During those same three months, we initiated 10 reverse margin calls totaling $14 million, meaning we received net $10 million more from our lenders due to price increases.
While we began selling assets during the week of March 16, the dearth of liquidity made this difficult.
We announced on March 24 that we had not met margin calls on March 23 and that we had initiated forbearance discussions with our financing counterparties.
As we began these negotiations, we continued to sell assets to raise liquidity and reduce leverage.
Our first quarter financial results were profoundly affected by realized losses, impairment losses, unrealized losses on loans accounted for at fair value, provisions for credit losses under the new CECL standard and valuation adjustments on assets designated and held-for-sale and resulted in a loss of $914 million or $2.02 per share.
Book value decreased to $4.34 per share at March 31 and economic book value decreased to $4.09 per share.
Steve Yarad will be available to discuss the financial results from the first quarter during the question-and-answer session.
I would now like to spend some time discussing balance sheet changes since March 31 and provide some perspective on what we envision after funding of the Apollo and Athene transaction and exit from forbearance.
Page 7 of the earnings deck shows portfolio activity from December 31 to March 31 and then again from March 31 to May 31.
As you can see from the pie charts, we have sold substantially all of our mortgage-backed securities and our $6.6 billion portfolio is approximately 94% whole loans.
This should not be a surprise as almost all of our portfolio growth and new acquisitions over the last two to three years has been in whole loans.
Mortgage-backed securities are admittedly more liquid and were therefore easier to sell, but we saw improvement in securities pricing through April and May whereas loan pricing changes were less defined and slower to occur, both on the way down and on the way back up.
More importantly, it is more difficult to get non-market -- non-mark-to-market financing on mortgage-backed securities than it is on loans due to certain regulatory issues.
So, the decision was relatively easy.
We view loans as generally more attractive assets and -- than securities and loans are more conducive to more durable financing arrangements.
In rough numbers, our whole loan portfolio today is comprised of non-QM loans, $2.4 billion, loans at fair value, $1.2 billion, fix and flip loans, $850 million, purchase credit impaired or reperforming loans, $660 million, single family rental, $500 million, season performing loans, $150 million, and REO or real estate owned of $375 million.
Looking forward, we will finance a significant portion of this portfolio through term non-mark-to-market financing, including securitization.
With the committed $1.65 billion in our existing securitizations of approximately $500 million, we will have over $2 billion of such financing.
And as mentioned previously, we are working on a similar committed line with Athene and another dealer for our fix and flip portfolio.
We will continue to pursue securitization, particularly for non-QM loans.
Spreads for AAA securities widened out from the 100 area, that's 100 over swaps in early March to as wide as plus 400 at the depth of the crisis, but they've been slowly grinding tighter and are now back to mid-100 levels.
We expect that following the closing and funding of these transactions, we will be able to declare and pay the accumulated dividends on our Series B and Series C preferred stock issues.
As we have disclosed previously, the terms of the forbearance agreement prohibited payments of dividends on any equity interests, including preferred stock.
Once the preferred stock dividends are current, we will no longer be prohibited from paying a common dividend.
As far as the dividend on MFA's common stock, the Board of Directors will determine our dividend policy going forward.
While we do not provide guidance as to expected future dividends, I will share several pertinent facts that will clearly be given consideration in framing dividend discussions with the Board.
One, at present we have undistributed REIT taxable income from 2019 of $0.05 per share.
In order to avoid paying corporate income tax, we are required to declare a dividend for this income prior to filing of our 2019 REIT tax return, which we do in October of this year and pay such dividend before the end of the year.
Two, estimated REIT taxable income or ordinary income for the first quarter of 2020, is approximately $0.10 per share.
In order to avoid paying a 4% excise tax on this amount, we are required to declare dividends in 2020 for at least 85% of our estimated 2020 REIT taxable income.
And three, capital losses, again for tax purposes, generated from sales of residential mortgage assets to date in 2020 are carried forward and offset future capital gains.
However, these capital losses do not offset ordinary REIT taxable income.
While we cannot forecast ordinary REIT taxable income for the balance of 2020, any such income generated will be added to the $0.10 in the first quarter in determining the threshold necessary to avoid the 4% excise tax.
Our other brief update.
At June 12, our unrestricted cash was $242 million.
Book value as of May 31 -- GAAP book value is estimated to have increased by approximately 2% to 3% versus March 31.
Economic book value is estimated to be flat versus March 31.
This is primarily because carrying value loan marks were lower in April than in March and while we have seen some appreciation from April to May, the May loan marks for carrying value loans, which is what determines economic book value for the difference between GAAP and economic book value, those marks are still below the March marks.

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compname posts q1 loss per share of $2.02.
compname announces $500 million capital raise with apollo and athene and $1.65 billion committed term borrowing facility.
q1 loss per share $2.02.
apollo and athene have committed to purchase lesser of 4.9% or $50 million of co's stock in open market over a 12-month period.

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