MFA Financial, Inc.

Ladies and gentlemen, thank you for standing by and welcome to MFA financial announces second quarter 2023 earnings. At this time, all participants are in a listen only mode and later we will conduct a question and answer session with instructions being given at that time. Should you require assistance during the conference, please press star and then zero and an operator will assist you offline. As a reminder, today's conference is being recorded and I will now turn the conference over to our host, Mr. Hal Schwartz. Please go ahead, sir.

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, 2022, 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 second quarter 2023 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, and thank you for joining us here today for MFA Financial's second quarter 2023 earnings call. Also with me today are Steve Yarrett, our CFO, Goodmunder Christensen and Brian Wilson are co-chief investment officers and other members of senior management. The interest rate environment in the second quarter of 2023 was another volatile one, with rates grinding higher for most of the quarter. Two-year treasuries were below 4% early in the second quarter after rallying in the aftermath of the banking crisis in March. However, as the fear of additional banking fallout began to fade, the bond market finally seemed to capitulate and began to take Fed Chair Powell's consistent message to heart. We don't hear so much about the false optimism of a rate cut later this year, and bond yields, particularly two years, moved higher throughout the quarter to reflect this reality. Two-year Treasuries ended the quarter almost 100 basis points higher, and the 210-year inversion widened from about 50 basis points at the beginning of the quarter to about 100 basis points at the end of the quarter. This inverted curve together with general interest rate volatility continue to make levered investing in fixed income and in mortgages in particular very challenging. That said, MFA's risk management discipline and strategic initiatives have enabled us to weather this storm extraordinarily well. Our net interest rate spread increased by 40 basis points from 1.74 to 2.14 during the second quarter, despite this challenging backdrop, as we have for several quarters now effectively locked in our funding costs through securitization and interest rate swaps. The yield on our interest-earning assets increased by 41 basis points, while our interest expense increased by only one basis point. We added almost a billion dollars of new investments in the second quarter as we continue to add assets at progressively higher yields. Our distributable earnings for the second quarter was 40 cents, which comfortably exceeded our 35-cent dividend. Our book value was off modestly in the second quarter, but this should not be a big surprise as we have consistently communicated that our net portfolio duration gap has been about one. This duration exposure led to a book value increase in the first quarter and to a book value decline in the second quarter, and we generated a total economic return for the first half of the year of 2%. As we illustrate on page 10 of our earnings deck, our book value is driven overwhelmingly by the higher interest rate impact on the fair value of our loan portfolio, which is marked at a substantial discount to par. Despite the fact that the fair value of these loans is below par, the principal that we receive, whether through payoffs, curtailments, or simply scheduled monthly principal payments, are received at par. We're very pleased with our portfolio credit metrics as we saw loan delinquencies decline during the second quarter in each of our major asset classes. The substantial seasoning of much of this portfolio and current LTV of 59% provide a solid credit backstop that supports the expectation that this principal will be repaid at par. Although the future interest rate outlook is far from certain, it appears that the Fed is at or at least near to the end of the rate tightening cycle. And the consensus at this point seems to be that the Fed will hold rates steady for at least the next few quarters to give the economy and markets the necessary time to feel the cumulative impact of 525 basis points of tighter monetary policy. Fortunately, we continue to benefit from the hard work we did in late 2021 and early 22, which effectively fixed our funding costs, while we now have attractive investment opportunities to add new assets at very accretive yields. As we show on page seven of our earnings deck, very few of our $3 billion of interest rate swaps mature before the fourth quarter of 2024. Finally, Our wholly owned business purpose loan originator, Lima One, continues to shine, producing successively higher volume levels of high yielding and high quality assets. We cannot emphasize enough the inimitable value that this captive originator delivers to MFA shareholders. Not only does it provide a steady and substantial source of internally generated assets, but the significance of the integrated nature of this arrangement is evident in loan performance. One of the underappreciated benefits of a captive originator versus a more broad and fragmented aggregator strategy is that Lima One underwrites these loans, they service the loans, they manage the construction draws, and most importantly, they have a relationship with the borrowers. Now, this is not to suggest that loans will not go delinquent. This is always a risk. but we uniquely control our own outcome, and there is no conflict of interest between the originator servicer and the investor because we all live under the same roof. And I'll now turn the call over to Gudmundur to talk about portfolio activity and additionally about Lima 1.