MFA Financial, Inc.

Greetings and welcome to the MFA Financial Inc. Second Quarter 2025 Financial Results Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star 1 on your telephone keypad. If anyone should require operator assistance, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Al Schwartz, General Counsel. Please go ahead, sir.

Thank you, Kevin, 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, 2024, 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 2025 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO, Craig Knutson.

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's second quarter 2025 earnings call. With me today are Brian Wilson, our President and Chief Investment Officer, Mike Roper, our CFO, and other members of our senior management team. I'll begin with a high-level review of the second quarter market environment and then touch on some of our results, activities, and opportunities. Then I'll turn the call over to Mike to review our financial results in more detail, followed by Brian, who will review our portfolio financing, Lima One, and risk management before we open up the call for questions. I'm sure you will all remember the market turmoil that rang in the second quarter with Liberation Day on April 2nd. Two-year treasuries ended the first quarter at $3.88, rallied to $3.65 by April 4th, sold off to 396 on April 11th, and rallied again to 360 on April 30th, and then subsequently sold off to 405 on May 14th. Ten-year Treasuries followed a similar trajectory, rallying 20 basis points to 399 on April 4th, selling off 50 basis points to 449 on April 11th, closing the month of April at 416, and then selling off to 460 by May 21st. Fortunately, cooler heads appear to have prevailed since then, both in Washington, D.C., and in bond and equity markets. At least until last Friday's employment report revisions, twos and tens had generally each settled into their own 25 basis point ranges since mid-May, and equity markets have continued to grind higher, again, last Friday notwithstanding. Mortgage credit spreads are tracked other risk assets, widening somewhat in April and then retracing back to or near level seen at the end of Q1 by the end of the second quarter. Importantly, the market for securitized mortgage credit assets and non-QM securizations in particular continues to deepen as liquidity increases and investor appetites remain strong. Spreads widen and tighten along with other risk assets, but deals get done and priced in a very orderly fashion. This was decidedly not the case as recently as 2023, when at times demand was weak, spreads were much more volatile, and some deals were pulled from the market. The depth and reliability of this market is a powerful testament to this durable source of financing that we utilize to finance over 80% of our loan portfolio. The economic and macro environments, while never certain, seem a bit more clear as the year progresses. Growth, though slower than originally expected, is remarkably resilient. The passage of the tax and spending bill has removed the market uncertainty that had been associated with that. Inflation fears have moderated, particularly as tariff negotiations begin to get resolved at less draconian levels than originally feared. Employment continues to grow, albeit at a reduced pace, although with the substantial revisions in last Friday's jobs report, a strong case can be made that the jobs market is not as healthy as previously believed. Amidst the drama between the President and the Fed Chair, consensus now seems to be for two rate cuts later this year, and lower short rates is always a helpful tonic for mortgage rates. Finally, housing is languishing somewhat as demand continues to fall off due to interest rate and affordability challenges. Actual home price declines have for the most part been concentrated in specific geographies where new supply has saturated these local markets. There's still a fundamental nationwide supply shortage, so it's hard to envision more than a very modest weakness in home prices nationwide. Homeowners with existing mortgages today are generally not over-levered, and years of substantial HPA coupled with prudent and sensible underwriting practices means that LTVs are low enough that even in the event of a job loss, death, or divorce, borrowers have substantial equity and will sell their property to extract their equity and pay off the lender. In the midst of this environment, our portfolio delivered a total economic return of 1.5% for the second quarter and 3.4% year-to-date, which includes our first two quarterly dividends, which we increased to 36 cents in the first quarter. Our economic book value in the second quarter was down very modestly by 1%. Our distributable earnings for the quarter was 24 cents per share and were negatively affected by credit losses incurred on certain business purpose loans that were realized during the quarter. Absent these credit losses, DE would have been 35 cents. As a reminder, these credit losses do not impact DE until actually realized. And as Mike Roper has emphasized for the last few quarters, these loans were marked down in 2024 and earlier when they went delinquent. Our fair value assets are marked to market every quarter. So the economic credit loss was realized through gap earnings and a reduction in book value a long time ago. Said another way, these realized credit losses that reduced distributable earnings in the second quarter are old news. Mike will provide additional color on the actual resolution amount versus the marks on these loans in his prepared remarks. We were active in the second quarter, sourcing $876 million of loans and securities across our target asset classes. These included $503 million of non-QM loans, $131 million of agency MBS, and $217 million of business purpose loans at Lima One. We issued our 18th non-QM securitization in early May. We sold $38 million of newly originated SFR loans and $24 million of delinquent transitional loans. Our overall leverage at the end of the quarter was 5.2 times and our recourse leverage was 1.8 times. Once again, the second quarter demonstrated that MFA's investment portfolio, our balance sheet composition, and risk management approach are positioned to deliver results across multiple scenarios and weather unexpected market volatility and uncertainty. And I will now turn the call over to Mike Roper to discuss financial results.

Thanks, Craig, and good morning. At June 30th, GAAP book value was $13.12 per share, and economic book value was $13.69 per share, each down about 1% from the end of March. MFA again paid a common dividend of $0.36 and delivered a total economic return of positive 1.5% for the quarter. MFA generated GAAP earnings of $33.2 million, or $0.22 per basic common share in the second quarter. Our gap results were driven by growth in our net interest income to $61.3 million, as well as modest net mark-to-market gains. This marks the third consecutive quarter we've grown our net interest income, driven by additions of higher-yielding assets over the last several quarters. Net interest income also benefited from a non-recurring $2.6 million acceleration of discount accretion on our MSR-related assets, which were redeemed during the quarter. During Q2, we continued to make meaningful progress for resolving non-performing loans, We reduced overall portfolio 60 plus state delinquency from 7.5% to 7.3% and lowered the balance of loans on non-accrual status by 33.6 million compared to last quarter. In addition to our more traditional asset management activities, we resolved approximately 24 million of some of our most challenged transitional loans via loan sale during the quarter. We expect to utilize additional loan sales in the second half of this year to continue to accelerate the resolution of underperforming assets. allowing us to unlock and redeploy capital at mid to high teen ROEs. Importantly, because our assets are predominantly accounted for at fair value, the expected losses associated with these potential sales and resolutions have already been recorded in our gap results and in book value in prior periods, in some cases years ago, as unrealized losses. We mark our portfolio each quarter to what we and our third-party pricing services believe are the levels at which the loans would trade in the secondary markets. to a level net of expected credit losses. Confirming this belief, during the quarter we resolved the rock current approximately 200 million UPV of previously non-performing loans. After reversing previously recognized fair value marks on these assets, the net impact on our GAAP results and our book value for the quarter was a net gain of over three cents per share. We believe this net gain on asset resolution highlights the quality of our loan marks and of our financial reporting. Moving to our distributable earnings, DE for the quarter was $24.7 million, or $0.24 per share, a decline from $0.29 per share in the first quarter. The decline was driven primarily by credit losses on fair value loans, which totaled $0.10 per share for the quarter, approximately $0.06 higher than in Q1, as well as a $0.02 increase in the dividend rate on our Series C preferred, which began floating on March 31st. As Craig mentioned, our DE excluding credit losses was $0.35 per share, nearly in line with our common dividend. For the quarter, our consolidated G&A expenses totaled $29.9 million, a decline from $33.5 million in the first quarter. Second quarter results included severance and related transition costs of $1.2 million, the result of expense reduction initiatives across both MFA and Lima One. We expect that once complete, these initiatives will further improve our cost structure, lowering our run rate G&A expenses by 7% to 10% per year from 2024 levels, or approximately $0.02 to $0.03 per quarter. Though we expect some short-term pressure on our distributable earnings, particularly over the next two quarters, we have confidence in both the current earnings power of the portfolio and the current level of our common dividend. We continue to expect that our DE will begin to reconverge with the level of our common dividend in the first half of 2026. Finally, subsequent to quarter end, we estimate that our economic book value has increased by approximately 1% to 2% since the end of the second quarter. I'd now like to turn the call over to Brian, who will discuss our investment activities in the second quarter.

Thanks, Mike. We grew our investment portfolio to $10.8 billion in the second quarter. We continue to focus on our target asset classes of non-QM loans, business purpose loans, and agency securities. We sourced and purchased over $500 million of non-QM loans during the quarter. These loans carry an average coupon of 7.8% and an average LTV of 66%. We established relationships with two new originators during the quarter and will look to add more moving forward. Underwriting standards in the 9QM space remain prudent, and mid-high teen ROEs remain achievable with securitization funding. The market continues to be supportive of 9QM issuance, as the total bonds sold by all issuers so far this year has already nearly eclipsed the total from all of last year. We completed our 18th 9QM securitization in May, selling 291 million of bonds at an average coupon of 5.76%. As Craig mentioned, credit spreads were volatile during the quarter, especially in April when AAAs widened to as much as 175 basis points over treasuries. But spreads tightened over the remainder of the quarter back to where they were before the trade war turmoil started. On Monday of this week, we priced our 19th 9QM securitization and were able to improve pricing due to strong investor demand. We again added to our agency MBS portfolio during the quarter. growing our position to $1.75 billion. Our focus remains on low pay-up securities, generally 5.5s, that we were able to purchase at modest discounts to par. We plan to grow our agency position further as long as spreads remain attractive. Turning to Lima 1. Lima originated $217 million of business purpose loans during the quarter, a slight uptick from the first quarter. This included $167 million of single-family transitional loans with an average coupon north of 10% and $50 million of new 30-year rental loans with an average coupon of 7.5%. As a reminder, we continue to sell newly originated rental loans to third-party investors. Lima as a whole contributed $6.1 million of mortgage banking income for the quarter, an increase from $5.4 million in the first quarter. Lima again had success adding to its sales force, hiring 15 new loan officers during the quarter. Although origination volumes are down both at Lima as well as across the industry, we expect these new hires, along with significant progress on technology initiatives, to lead growth in origination volume and profitability in the latter half of this year. Moving to our credit performance. As Mike mentioned, the 60 plus day delinquency rate for our entire loan portfolio declined to 7.3% in the second quarter. default rates for our non-QM and rental loans remained exceptionally low at approximately 4% and fell to an all-time low in our legacy RPL-NPL book. We continue to be hard at work addressing our non-performing transitional loans. We sold 24 million of delinquent transitional loans during the quarter and expect to sell more later this year. Although the default rate percentage rose again for our single-family transitional portfolio, it's important to note that loan delinquencies actually declined by 2 million. and we received $269 million of principal repayments up from $249 million in the first quarter. We again resolved $35 million of previously delinquent multifamily loans during the quarter and received $99 million of principal repayments. And with that, we'll turn the call over to the operator for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. Once again, that's star one to be placed in the question queue. Our first question today is coming from Bose George from KBW. Your line is now live.

Hey, guys. Good morning. Actually, first I want to ask about where you see the economic return for the portfolio. So, I mean, like you talked about, there's this 10 cents of credit. There's a couple of cents that we get from the expense side that gets us above the dividend. I mean, is that kind of the economic return or is there sort of incremental upside as you redeploy some of the capital that's in the trouble loans at the moment?

Thanks for the question, Bose. I think a couple parts to your question there. So we talk about the economic return of the portfolio regularly on these calls as well as internally and with our board and setting dividend policy. One of the sort of downsides of DE and really any accounting metric is that it's backwards looking. When we think about the earnings power of the portfolio, we try to think about the go-forward earnings power. And if you think about the sort of ROEs the portfolio is generating on a mark-to-market basis, that's really how we think about the economic earnings power of the portfolio. For example, we have some loans that were purchased in 2021 that are held at a pretty significant discount with a coupon rate of, call it, 4%. Because that asset's accounted for at fair value, if you think about the total economics of that, whether it shows up in interest income or in the mark, that asset clearly is earning more than 4% today. So when we take that sort of mark-to-market ROE and do the same thing on the hedges and the liabilities, and then you layer in your expenses and the P&L that Lima's generating associated with their origination platform assets, the economic earnings power is, you know, much closer to the 10% dividend yield already. I think the second part of your question, as far as additional upside, I think the answer is, you know, definitely yes. I mean, we've been running with quite a bit of dry powder for some time now. Our recourse leverage is 1.8 times and even ignoring the $275 million of cash, we have a lot of capacity to turn up that leverage number a bit. So there's definitely some upside there. And you'll see that we've added a large number of assets again this quarter, as we have for the last several quarters.

Okay.

And folks, just to clarify one thing, when Mike said the 10% dividend yield, he means the 10% dividend yield on our book value, not on the stock price. That's right.

Yeah. Okay. Yep, absolutely. Makes sense. And then In terms of the different areas where you can allocate capital, where do you see the best ROEs at the moment?

I mean, we like really all three. You saw we were most active in non-QM, and all three being non-QM, agency, and business purpose loans. Our hope is over time to sort of grow the business purpose loan originations, which have the highest sort of face ROEs. And, you know, as we've mentioned, we're hiring people down at Lima One, and, you know, we do expect to see growth in that origination. So really it's, you know, continuing to deploy across all those three. But, you know, if Lima could do more origination, we would definitely have, you know, prefer that over the other two.

Okay. Great. Thank you.

Thanks, Boze.

All right. Your next question today is coming from Steve Delaney from Citizens JMP. Your line is now live.

Hey, good morning, everyone. Nice to be on with you today. The 15 new loan officers hired, I understand that's at Lima 1. Could you comment on that? Are these going to be generalist producers? Is there any product specialty that you're trying to develop? And I guess most importantly, is there any new geo? Have you opened offices in any new states as a result of the new producers? Thanks.

Yeah, the focus is generally, you know, I would say West and Midwest in terms of the hires. We believe them to be sort of high quality hires coming over from, you know, competitors. And, you know, if you think about, you know, the ramp process, right, somebody comes online, it takes them a few months to get comfortable with the product and the processes that Lima One has versus where they may have been previously. So, you know, it's sort of, We're seeing growth now, but we do expect to see, you know, much more aggressive growth sort of back half of this year and it's next year as these people really start producing.

Yeah. Okay. So, and how many total producers? You may have mentioned it. I apologize. Now, as we sit today at Lima One.

Yeah, we were pushing, I think, 50. And the goal is to continue growing that, I think, closer to 80. Wow.

Okay, so some runway still to go there. Okay, you know, I think that's good. Thank you for the clarity on the dividend coverage. I was looking at page 16 in the deck, and it's helpful, but, you know, the unrealized and realized gains and losses, you know, don't let us kind of count on our own with the deck without Mike's helped this morning you know really we can't really back into coverage based on you know realized losses so just throw that out for for consideration as far as the way you show it in the deck but um you know good progress all around you know strategically and i realize that the losses are a working process and and we've got a little bit ways to go to get all that behind us but thank you for the for the time this morning thanks steve thanks steve thanks steve

Thank you. Next question today is coming from Jason Stewart from Jenny Montgomery. Scott, your line is now live.

Thank you, Maureen. Thank you. Just to follow a little bit up on Boze's question, you know, you talked about growing Lima One, but as we think about the balance sheet going into the easing cycle and maybe, you know, post-steepener on the yield curve, like how do you envision capital allocation trending between the businesses on the balance sheet?

Yeah, I mean, really, if you think about a steepener, right, Lima 1 is still originating assets that have coupons north of 10%. So if you have a steepener and the short end comes down, maybe that coupon goes from 10 to 9 or to 8.5 or something like that. But the borrowing cost against those is also going to come down commensurate. So Right now, in securitization, you can get funding in the five handles. So if that front end were to come down, you would see that cost of funds drop into probably the low fives, four handles. So it's still very sort of accretive to us to originate those loans. And, you know, when you look across, you know, 9-2-M, it does benefit our existing portfolio and incremental, you know, loans will fund incrementally better. But I would expect those loan prices to be bid up more aggressively, you know, as the curve does deepen. So it may be a more competitive environment and may compress yields somewhat there.

Okay. And then, you know, thinking through, you know, the post-steepener scenario, and I guess more specifically than on the agency, would that be a strategy you de-emphasize at that point in a flatter curve environment and redeploy that capital into Lima One and other strategies?

That's right. You know, it really is. We view the current spread levels as opportunistic to deploy capital in agency MBS. If those spreads were to come in, we would redeploy those assets and that portfolio into our other credit assets.

Okay, that's helpful. Thanks. And then just to follow up from, I think last quarter you had said something about $40 million-ish of discount on multi-transitional. Just comparing quarter to quarter, would that compare to the, I think you had $33.6 million? What's the right comparison to look at there, quarter to quarter?

Yeah, so that number there is effectively the discount in terms of the mark on those assets. So I think... I think it's $34 million this quarter. But, you know, if you think about those transitional loans, they're very short duration, so they are much less sensitive to moves in market interest rates. So I think we sort of think about that discount there as a buyer of these loans as a credit discount effectively.

Okay, gotcha. So you've worked through the vast majority of that this quarter. I gotcha. Okay, thank you.

So just to clarify, that discount has declined from I think it was 40 or 45 to about 35. So, yes, we worked through a lot of it, but there's, as I said in my prepared remarks, there's still some wood to chop over the next couple quarters here.

Okay. Understood. So it's 30. I got it left over. Understood. Thank you.

Thank you. Next question today is coming from Jason Weaver from Jones Trading. Your line is now live.

Hi, guys. Thanks for taking my question. Sort of similar to Steve's there, you know, with the buildup at Lima One, can you comment on the sort of distribution potential for new transitional loans if we were to see a bit more relief in rates ahead, whether you expect, you know, securitization financing or loan sales to become a more attractive option under those conditions?

So we've been selling the rental loans. So those are the term loans. And part of that reasoning is when you originate 30 or 20 million of those a month, it takes some time to get those ready to go into securitization. And taking on that spread risk for an extended period of time doesn't necessarily make sense when you have a bid on the other side that's very strong. So we have been taking advantage of that bid and selling those loans to third parties. When you think about the shorter-term transitional loans, pretty much all of those loans would be eligible to go into securitizations, and those have a revolving structure in nature. So as we sort of do more loans, right, they're really replacing old loans that are paying off. So we have four deals outstanding currently. If we were to grow originations, which we expect to do, maybe you're taking from four deals to five or six outstanding, but you have to make sure that you have that volume in place to fill back the payoff that you're receiving on the other side. And in terms of the split, if you were to look at that breakdown, it's probably, you know, 45% to 50% ground up and then the rest being bridge and traditional fixed type loans.

And, Jason, I'd just add one thing. The 30-year rental product is obviously more rate-sensitive than the transitional loans. So, you know, lower short rates, steeper curve, it's likely that volume would pick up on that product.

Got it. Thank you. That's helpful. And I want to go back to, in the prepared remarks, you mentioned the $24 million in loan sales and you expect to do more in the second half. Talk about the relative merits there. Is that a question of just coincidence you were able to find a buyer on that site, or is that becoming actively more attractive than pursuing the entire sort of workout process?

Yeah, it's just a balance, right? It's you know, you're currently, you're working out loans and you would test the market to see where those bids are. If the bids are attractive, you know, we would look to move on. If the workout's the best outcome, then we'll just work the loan out ourselves. So it's just a balance and we sort of look at every loan individually to determine what's the best outcome.

All right, fair enough. Thanks again, guys.

Thanks, Jason. Thank you.

Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Eric Hagan from BCIG. Your line is now live.

Hey, thanks. Good morning, guys. On the single-family rental and single-family transitional loans, do you think developers are getting the rental income and the exit that they expected, or is there a lot of range around that outcome because of the execution risk is higher with tariffs and other higher input costs and such?

In terms of the execution, a lot of our sort of development loans that we do are really they're billed and flipped to sell, not necessarily rent. So it's really the prices that they are achieving in the market are sort of matching the ARVs set out in the appraisal. So we're not really seeing a ton of pressure in regards to that as it relates to tariffs. Could it potentially impact things down the line? Sure, but we have yet to see material impact thus far, and we sort of track these month to month. So we're not really seeing that. In terms of if we do have rents, we've seen they've been able to cover future debt service because these loans really get refinanced away from us. So that's what we're seeing. I mean, we're, you know, that's what one would expect. We're not really seeing material pressure there either.

Yep. Okay. That's helpful. You know, you guys break out the loan book by origination year, which is really helpful. But, you know, which of the vintages would you maybe label as having higher relative risk versus lower risk just based on when they were originated?

Yeah. I mean, Say for – if you look at the, say, multifamily book, the 23 vintage was probably tougher for us. I mean, if you look at the, you know, the other parts of the book, right, our LTVs are very low, so we're not really, you know, worried about losses there. And when you think about, you know, on the non-QM side, where we've seen some increased delinquencies – you know, it's really, again, 95 times out of 100 when you see delinquency, you see that property gets listed for sale and the borrower just sells it and we don't really even have to go through any loss activities. So, you know, we're sort of, we've been really vintage agnostic as it comes to those portfolios.

Okay. If I could sneak in one more, I mean, is there a catalyst aside from lower interest rates which could accelerate call in the non-QM portfolio, the callability?

I mean, it's really an algebra exercise, Eric. So, you know, it's pretty easy for us to do. So, lower rate environment, yes, theoretically, there are more deals that would be callable. You know, in addition with lower rates, you know, our preferred Series C would reset to a lower coupon. So there's, you know, there's marginal benefits in a few different ways. If you look at the bulk of the floating rate borrowing, it's for the most part offset with swaps. So, you know, lower rate environment is not necessarily going to have a big impact there. But on the, you know, on the edges, lower rates are certainly helpful.

And I think, Eric, just to add, you know, there could be a deal with respect to the call rights that's maybe out of the money. But if you think about the deleveraging embedded in some of those callable deals, it doesn't necessarily have to be a lower rate to reissue it to still increase, you know, the ROE of the portfolio. You're unlocking a lot of capital with the relever.

Yep. Got it. Thank you guys so much.

Thanks, Eric. Thanks, Eric. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Thank you, everyone, for your interest in MFA Financial. We look forward to speaking with you again in November when we announce our third quarter results.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.