MFA Financial, Inc. Q4 FY2025 earnings call

Macro environment improved in 2025 with fixed income investors exiting a difficult period, yield curve steepening, and volatility declining. Executed strategic initiatives: deployed over $100 million of excess cash to target assets, acquired $1.9 billion of loans and securities in Q4, resolved over $150 million of delinquent loans, reduced G&A expenses with 2025 G&A at $119 million vs $132 million in 2024; Lima One hired 45 new salespeople in 2025, debuted new wholesale channel and relaunched multifamily lending in Q1 2026, rolled out best-in-class tech platforms; restarted preferred stock issuance and common stock repurchase program with board reauthorization.

In the fourth quarter of 2025, MFA's total economic return was 3.1%, and for the full year was 9%. Net interest income for the quarter was $55.5 million, a modest decline from $56.8 million in the third quarter, mainly due to lower yields on the legacy RPL/NPL loan portfolio and interest reversals associated with increased nonaccrual loans in the multifamily transitional loan portfolio, but offset by higher interest income on Agency MBS and non-QM loans from significant asset purchases during the quarter. As of December 31, GAAP book value was $13.20 per share and economic book value was $13.75 per share. The non-QM whole loan portfolio was the largest asset class at $5.3 billion, and $443 million of new loans were acquired in the fourth quarter. Lima One originated $226 million of new loans in Q4.

Management expects to see results from strategic initiatives in 2026 though it will take several quarters to fully reflect in financials; growth at Lima One in 2026 will materially contribute to MFA's earnings; expects DE to reconverge with common dividend in back half of 2026; may complete several callable deals in coming quarters unlocking $50-100 million of capital for redeployment; expects to target non-QM and BPL asset classes.

Forward-looking statements subject to various known and unknown risks, uncertainties, etc. described in SEC reports which could cause actual results to differ materially; uncertainty in timing of credit loss realization affecting DE; market changes like agency security tightening may impact investment strategy and returns.

Q: Can you just talk about where you see the run rate ROE on your EAD once these loss provisions are through? And then can you remind us also, like there's capital that's tied up with the delinquent loans, how much that's going to sort of contribute to that number as well?

A: Bose, thanks for the question. So I guess a few things. One, it's kind of hard to predict, obviously, when exactly these credit losses will be realized. Bryan alluded to in his remarks that we hold the multifamily transitional loan portfolio at a $42 million discount to par. And given the short duration of those assets, we expect that most of that is attributable to what's eventually going to flush as credit losses through our DE. I think if you think about sort of DE on a loss less basis or DE before credit charges, I think this year, it was in the 8% to 9% range. And I think as we get to the back half of next year, certainly closer to that 10%, 10.5%, 11% range is sort of the run rate. Obviously, we've done a lot of work. And as Craig alluded to, both last time and this time, a number of initiatives take some time to flush through. But if you think about the dividend on our book value, it's about 10.5%. And as I mentioned in my prepared remarks, we expect the DE to reconverge with the level of the dividend in the back half of 2026.

Q: As you think about the deals that are potential -- could potentially be called, how do you think about the returns you're generating on that capital today and where that could be redeployed into?

A: So in terms of -- it's really depending on the deal, right? We're still -- we still could be generating a mid-teen type return on that deal. But in addition, we can unlock, say, incremental whatever, $10 million to $20 million to $30 million of liquidity sort of per deal that can then be reinvested at that -- at our target ROEs of sort of the mid-teens. So it really is -- you think about it as the existing deal is $15 million, then add another $30 million or $40 million of additional sort of equity that could be redeployed to earn another $15 million. So it's all sort of additive.

Q: As you guys went into agency during this quarter, how should we think about capital allocation going forward as you guys do start to call some of these securities, resolve some of the loans and just get capital back?

A: So the expectation is, given the tightening that we've seen in agencies, it would -- we will probably tend to target over time into the non-QM and BPL asset classes. You can't just necessarily go out and buy $1 billion in loans in a day. So initially, you may see some investments increased in the agency portfolio, which would then sort of wind down over time and transfer into the non-QM and BPL space.

Q: The move to issue preferred and buy back the common, can you say which series of the preferred that you're issuing? And then more holistically, like how do you think about the shape of the capital structure and like the right mix of preferred versus common right now?

A: Yes. Eric, thanks for the question. So during the quarter, we did about 160,000 of the C and about 50,000 of the B. And if you think about the issuance, we're selling more of the C pretty regularly. As far as the capital structure, certainly, there's room in the structure to add more preferred. But that market has been somewhat closed for a while now. But given this is an ATM program, it's easy to issue at the margin. But definitely, if the market becomes more attractive, we'd be capable of adding additional preferred to the capital stack.

Q: I hope everyone is doing well. Just swing it back to Lima One real quick. What are you guys' expectations for margins holding up throughout the year, total volumes throughout the year and how that sort of product mix is going to develop as you add in the wholesale and multifamily lending?

A: Yes. I mean in terms of margins; we are seeing healthy spreads when you think about our -- the potential issuance of RTL securitization versus where coupons are today on the short-term loan. So it might be sort of low 5 handle cost of funds and rates on new loans are somewhere between 8% to 11%. So there's a very healthy spread there when you think about ROEs. When we look towards the loan sale pipeline of the term loans, given the demand, given where spreads have gone, we've seen significant premiums. If you sort of look at where it was in the last quarter, sort of north of 103. We're sort of still seeing that type of execution today in the market based upon a mid- to high 6s coupon that's originated. So that continues to be attractive. When we think about sort of the volumes of this year, we would project sort of -- we think there's a lot of potential for growth given that we did sort of 0 in the way of multifamily and didn't really have a wholesale channel in the prior year. So we think there is sort of opportunity for sort of incremental growth, and it could be material growth throughout the year. But these things are sort of just coming online in the first quarter, and it takes some time for them to get up to speed. So we do think it's more of a back half of the year is where we see that incremental growth. So it's unclear what necessarily we'll see for the full year 2026, but I think the run rate will be sort of materially higher in the back half