MFA Financial, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Inc. First Quarter Earnings 2021 Conference Call. At this time, all participants are in a listen-only mode. If you wish to put yourself in the question queue, please press 1 then 0 on your telephone keypad. If you should require assistance during the call, please press star then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Hal Schwartz. Please go ahead, sir.

Hal Schwartz 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 as to MFA's future performance and operations. When used, statements that are not historical in nature, including those containing Words such as will, believe, expect, anticipate, estimate, should, could, would, or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2020, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks, uncertainties, and other factors could cause MFA's actual results to differ materially from those projected, expressed, or implied in any forward-looking statements it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press releases announcing MFA's first quarter 2021 financial results and the acquisition of Lima One Capital. 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 would like to thank you for your interest in and welcome you to MFA Financial's first quarter 2021 financial results webcast. Also with me today are Steve Yarrett, our CFO, Gudmundur Christensen, and Bryan Wulfsohn, our co-chief investment officers, and other members of senior management. As we sit here today to talk about the first quarter of 2021, it's impossible not to recall where we were a year ago, and the difference between the two time periods could not be more stark. A tenacious defensive stance is now a spirited and determined offense. Today we are reporting strong financial results, continued execution of a strategic plan that we implemented early last fall, and a new exciting initiative that we announced today. With vaccinations becoming more prevalent and the gradual easing of restrictions beginning to occur, we have reason to be optimistic about an eventual return to some semblance of ordinary. While it is undoubtedly months away, we are cherishing brief snippets of limited normalcy, and it's great to see our colleagues at work in person rather than on video calls as we have for the last year. A strong economic outlook Additional fiscal stimulus and the expectation of more government spending pushed long rates higher in the first quarter of 2021. Ten-year Treasuries backed up 83 basis points to 1.74 at the end of Q1, which, by the way, is where they were in late January of 2020. And the curve steepened with twos tens widening by about 80 basis points to 158 basis points at March 31. Short rates remain firmly anchored at very low levels, with twos only four basis points wider during the quarter. Interestingly, although 10-year rates at 170 are back to levels seen in late 2019 and early 2020, two-year rates in the low to mid-teens have barely changed in the last year, but twos were at 160 back in late 2019. So clearly the market anticipates some inflationary pressure in the future, but sees Fed policy as anchoring short rates at or around current levels for 2021 and 2022. Agency origination crowded out nonconforming production for much of 2020, but even with a modest increase in agency eligible mortgage rates, we've seen an increase in production from non-QM and business purpose loans in 2021. With short rates at particularly low levels and credit spreads tight, suffice to say there are no cheap assets out there. However, these same market conditions have pushed yields on issued securities to very low levels. So while it is a difficult period for assets, it's an extremely attractive one for liabilities, and MFA has taken advantage of this opportunity to lock in low-cost, term, non-recourse debt, which will substantially reduce interest expense in the future. In addition, a strong housing market, together with our ability to actively manage residential mortgage credit assets, has also been reflected in our financial results as we achieved better-than-expected results on credit-sensitive assets, resulting in reversals of prior credit reserves and sales of REO properties at attractive levels. Please turn to page 4. We reported gap earnings of $0.17 per share in the first quarter. These results were driven by continued price appreciation of loans held at fair value and by further improvement in credit, leading to credit loss reserve reversals. Gap book value was $4.63, up 2% from December 31st, and economic book value was $5.09, up 3.5% from December 31st. Gap economic return for the quarter was 3.6%, but book value economic return was up 5% for the quarter. We repurchased 10.8 million common shares at an average purchase price of $4.14, or 80% of economic book value from March 1st through April 30th. Our leverage declined slightly over the quarter to 1.6 to 1, and we paid a 7.5 cent dividend to shareholders on April 30th. Please turn to page five. Our efforts to lower interest expenses through securitizations had visible impact on our first quarter earnings as interest expense declined by 27% from the fourth quarter of 2020. And the securitizations executed in Q1 had limited impact on the full quarter because they were closed in early February and late March. Net interest income for the first quarter increased by $4 million versus the previous quarter and by $13 million versus Q3 of 2020 after adjusting for a large interest income contribution of $8 million from the payoff of a single non-agency bond with a very low amortized cost during the first quarter. Please turn to page six. Again, continuing the theme of aggressively taking advantage of available market opportunities We have executed three additional securizations on nearly a billion of UPB at attractive levels. As you can see on this page, AAA yields on bonds sold on the INB1 deal with 83 basis points and 112 basis points on the 9QM1 deal, with the blended cost of debt for both deals in the low 1s. The NPL deal that closed in March replaces securitizations sold in 2018 at a blended cost of debt that's over 150 basis points cheaper than that that it replaced. Please turn to page seven. Robust increases in housing prices and strengthening credit fundamentals provide obvious tailwinds for MFA's mortgage credit exposure. Home price increases in the last year are the largest, in some cases in 20 years, and housing supply is at extremely low levels, so this trend is not likely to abate soon. We liquidated 177 REO properties in the first quarter, generating $50 million in proceeds and $2.2 million in gains. These strong housing fundamentals also support the performance of our nonperforming loans as we see more full payoffs and better prices on liquidated properties. Finally, for borrowers still negatively impacted by COVID, we can offer modifications and or repayment plans to allow them to stay in their homes, restore their status to current, and keep the equity in their homes. Please turn to page eight. Under our share repurchase program, we instituted a 10 plan in March that permits share repurchases at any time. Previous to instituting a 10 plan, we were permitted to purchase shares only during open window periods. And because our 10 is filed later in the quarter than our 10 , Our open window period after our fourth quarter earnings call would have been very short. And again, from early March through April 30th, we repurchased 10.8 million shares at an average price of $4.14. Please turn to page nine. We illustrate our investment portfolio and summarize our asset-backed financing on this slide. The investment portfolio has not changed materially since December 31, We did purchase 253 million of loans in the first quarter. Bryan and Gudmundur will discuss additional details about the loan portfolio later in this presentation. And just to review, loans held at carrying value on our balance sheet are represented in three slices of this pie chart. The purple section, PCD, or purchase credit deteriorated loans, that's accounting speak for re-performing loans, and other loans included in this purple slice are seasoned performing loans. The gray slice, business purpose loans, which are fix and flip, and single family rental loans. And the red section, which is non-QM loans. On the financing side, you can see that 68% of our asset-based financing is non-mark-to-market. With the non-QM securitization that we closed in April, it's now over 70%. Please turn to page 10. In addition to announcing first quarter earnings this morning, we also announced that we are acquiring Lima One Holdings. a nationwide leading originator and servicer of business purpose loans. This transaction will significantly enhance our ability to deploy capital in the business purpose space, and we believe that our capital base will fortify Lima One's already strong market presence. We expect that this transaction will be accretive to MFA's earnings by 8 to 12 cents per year. MFA currently owns a 43% equity stake in Lima One, and we have purchased over a billion dollars of business purpose loans from Lima One since 2017. We acquired our initial strategic minority ownership interest in Lima One in 2018 and our partnership with Lima One has grown over the years since. This acquisition includes the Lima One operating platform as well as their billion dollar servicing book. We've issued a separate press release this morning to announce this transaction and we also provided a standalone deck to furnish more detail about Lima One and the strategic advantages of this initiative that we're extremely excited about. I would encourage listeners to review this presentation. Gudmundr will also present additional color about this important transaction during his prepared remarks. And I'll now turn the call over to Steve Yard to discuss additional details of our financial results.