MFA Financial, Inc.

Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Your conference will be underway shortly. Please continue to hold. © transcript Emily Beynon Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Incorporated first quarter earnings conference call. At this time, all participant lines are in a listen only mode. Later, we will conduct a question and answer session. If you have any question, you may press one then zero on your touch tone phone. You may remove yourself from the queue at any time by pressing one then zero again. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Hal Schwartz. Please go ahead.

Thank you, Operator, and 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, 2021, 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 release announcing MFA's first quarter 2022 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knudson.

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 2022 financial results webcast. With me today are Steve Yarrett, our CFO, Gudmundur Christensen, and Brian Wilson, our co-chief investment officers, and other members of senior management. The first quarter of 2022 was a very challenging period for fixed income investors and exceptionally so for mortgage investors. Although a Fed tightening cycle has been anticipated, since the fourth quarter of 2021. The expectations of the timing and magnitude of this tightening have undergone massive revisions. Short rates leaked wider in October and again in December, with two-year Treasury yields rising about 50 basis points during the fourth quarter. Market consensus at the end of last year was generally for three 25 basis point Fed increases during 2022, but these expectations essentially blew up as we entered 2022. With persistently bad inflationary data, a continued very strong labor market, and increasingly hawkish dialogue from Fed officials and other bond market participants, the brewing consensus adjusted quickly, and two-year Treasuries sold off by 40 basis points in January and another 40 basis points in February, before the Russian invasion into Ukraine temporarily pushed two-year yields lower in the last few days of February. The bond market route intensified in March, with two years backing up 60 basis points, and that was before the first Fed increase on March 16th, and then another 52 basis points over the last half of March. The magnitude and speed of this rate sell-off, particularly in the short end of the yield curve, was the most dramatic witness in over 30 years, eclipsing even the rate increases in early 1994. And in a strange way, there are some striking similarities between 1994 and 2022. In February of 1994, the Fed began a tightening cycle in which they raised the Fed funds rate six times during 1994 for a total of 250 basis points. The eerie similarity is that expectations today are quite similar. That is, for approximately a 250 basis point increase in Fed funds during the year 2022. However, in 1994, the bond market only began to adjust to this Fed tightening expectation after the first Fed funds increase on February 4th of that year. Today, the bond markets move much more quickly and price in Fed expectations. Indeed, by March 16th, which was the day the Fed announced its first 25 basis point increase, two-year rates were already at 1.94%, or 170 basis points higher than they were in September. In addition to materially higher rates in the first quarter, the volatile rate environment also led to significant spread widening across the mortgage market. While agency MBS were probably the most visible casualty, this spread widening also impacted loan pricing as securization spreads widened. Although housing fundamentals are still strong, given the strained supply picture, this spread widening was much more about rate moves than credit, as mortgage cash flows extended and rate volatility is never kind to mortgages. We actively managed this rate risk, adding interest rate swaps last year in the fourth quarter and again early in the first quarter to manage our duration exposure. But even with a net duration of just a little over one year and relatively low leverage, market forces had an inevitable negative impact on our fair value assets. Lima 1 was a continued bright spot for MFA as they turned in another record quarter with over $600 million of originations. Because we are intimately involved in the securitization market, we have an instant feedback loop with our business purpose loan originator and can adjust rates in real time, thus greatly reducing the typical drag suffered by originators in a rising rate environment as their pipelines fill with sub-market coupons. Lima One's current origination pipeline has a weighted average coupon today of over 7%. Finally, mortgage credit remains solid despite higher rates and reduced affordability as the housing market remains strong with supply constrained and likely to remain so for the foreseeable future. Please turn to slide three. We reported a gap loss of $91.1 million or 86 cents per share for the first quarter. These results were driven primarily by net losses on fair value loans, which Steve will discuss in more detail. Net interest income for the first quarter was $63.1 million, which is down from $70 million reported in Q4, but the Q4 interest income was bolstered by $8.2 million due to a payoff of an MSR bond that had been impaired in 2020. Our distributable earnings for the first quarter was $66 million, or $0.62 per share. Steve will also explain this earnings measure in more detail, but it is intended to eliminate various non-cash and unrealized gains and losses that impact GAAP earnings but do not necessarily influence dividend determination. We expect that distributable earnings will be one of several inputs considered by our Board in the future in setting dividend policy going forward. Our gap book value was down $1.28, or 6.7%, and our economic book value was down $1.77, or 8.6%. Our leverage increased slightly to 3.1 times, and our recourse leverage at March 31 was 1.9 times. Please turn to slide four. We acquired $1.2 billion of loans in the first quarter, and grew our loan portfolio by $330 million to $8.4 billion after portfolio runoff. These purchases included about $600 million of non-QM loans and $590 million of business purpose loans. We completed two non-QM securizations in the first quarter, selling 514 million UPB of bonds, and we completed two additional securizations of business purpose loans in early April, selling 463 million UPB of bonds. Our team did a fabulous job in a very difficult securitization market, selling nearly a billion dollars of bonds. These transactions add durable non-recourse financing, create additional liquidity, and provide more balance sheet capacity that we can deploy in the future to acquire new loans that are now priced at significantly higher yield levels. Our asset management team has continued to take advantage of a strong housing market with limited supply by liquidating REO properties, posting a net gain of $8.7 million in the first quarter. And finally, we have repurchased stock below book value, 3.2 million shares in the first quarter at an average price of $17.15, and an additional 2.8 million shares in April at an average price of $14.48. Please turn to slide five. This slide illustrates the components of our investment portfolio and also the nature of our asset-based financings. While the liability pie chart shows $2.9 billion of mark-to-market borrowing, about $1.8 billion of this borrowing is at a significant discount to our available borrowing amount. This underlevering creates a cushion that increases the amount of asset price decline that would need to occur before we receive a margin call. Using rough numbers, loan prices would need to drop by more than 10 points from today's pricing before we would receive a margin call. Or said another way, we could also borrow more than $200 million more against this existing pledged collateral. So while this borrowing is technically mark-to-market, our conservative borrowing practice renders this borrowing functionally much more like non-mark-to-market borrowing. And I would now like to turn the call over to Steve Yarrett to discuss additional details of our financial results.