MFA Financial, Inc. Q3 FY2025 earnings call

Higher capital deployment

• Over the years, MFA has operated with high liquidity but now, with increased clarity on interest rates and lower market volatility, it has increased confidence to deploy more excess liquidity into target asset classes, including an increased allocation to Agency MBS. Holding excess cash has been a drag on earnings, and investing excess cash will have an immediate impact on earnings and ROE. The ladder of outstanding securitizations is another source of additional capital.

Expense reductions

• Over the last year, MFA has taken a hard look at operating expenses, with most significant reductions being personnel related, and aims to reduce run rate G&A expenses by 7% to 10% versus 2024 levels.

Resolving nonperforming loans

• MFA's team has experience resolving nonperforming loans, and significant progress has been made in resolving the multifamily transitional loan portfolio, which is almost half of what it was a year ago, and delinquent loans are down. These nonperforming loans tie up capital, and resolving them will free up capital for target asset classes.

Capital structure modification

• MFA began a program to modify its capital structure, issuing additional shares of preferred stock and using the proceeds to repurchase common stock at a discount to economic book value, which is accretive and not shrinking the equity base.

In the third quarter, MFA Financial's non-QM portfolio exceeded $5 billion in size and was the largest asset class. During the quarter, $453 million of non-QM loans were acquired, with an average coupon of 7.6% and an LTV of 68%. The agency MBS position was grown to $2.2 billion during the quarter, adding almost $500 million of securities, and subsequent to quarter end, an additional $900 million of Agency securities were acquired. Lima One originated $260 million of business purpose loans during the quarter, a 20% increase from the second quarter, including $200 million of single-family transitional loans and over $60 million of new rental loans, and contributed $5.6 million of mortgage banking income to earnings.

Capital deployment

• MFA has increased confidence to deploy more excess liquidity into target asset classes, including an increased allocation to Agency MBS, and investing excess cash will have a meaningful impact on earnings and ROE.

Securitizations

• The ladder of outstanding securitizations is a potential source of additional capital, as calling and resecuritizing underlying loan collateral can free up capital to deploy into new assets.

Timing

• MFA expects to begin to see the results of these active measures in 2026.

Market-related risks

• MFA's actual results could differ materially from forward-looking statements due to various known and unknown risks, uncertainties, assumptions and other factors, including market volatility and changes in interest rates.

Q: Bose George asked about run rate EAD, if the starting point should be $0.32 after pulling out the loss provision and if the loss provision is reflected in the mark with no book value impact.

A: Michael Roper responded that $0.32 strips out 100% of the losses, it's not a 0 loss business, and the losses have been reflected in the mark with no book value impact.

Q: Mikhail Goberman inquired about margins in Lima One's portfolio and if mortgage banking income can be increased.

A: Bryan Wulfsohn said margins are healthy, growth in origination volume will drive increased mortgage banking income, with margins from loan sales and origination fees being healthy.

Q: Mikhail Goberman asked about Agency MBS capital allocation and future levels.

A: Bryan Wulfsohn said Agency MBS allocation may see marginal growth, and after the additional post quarter end acquisition, it may not change dramatically.

Q: Eric Hagen asked about levered returns in multifamily and credit box changes.

A: Bryan Wulfsohn said mid-teens ROEs are achievable in multifamily, and it's moving up in market and quality, thinking more about bridge versus value add.

Q: Eric Hagen asked about leverage tolerance in Agency MBS portfolio and hedging.

A: Bryan Wulfsohn said leverage is around plus or minus 8, and they use cleared swaps and SOFR futures, with SOFR futures reducing initial margin, which can be redeployed into high-ROE assets.