MFA Financial, Inc. Q1 FY2026 earnings call

Macro and Market Conditions - Fixed income markets started with strong investor demand and low volatility but were disrupted by a war in Iran, causing volatility, rate hikes, and wider mortgage spreads, resulting in a negative 1.2% economic return for MFA in Q1. - Mortgage markets had a strong start with GSEs purchasing $200 billion of agency MBS but were affected by geopolitical events. ### Business Initiatives - Grew investment portfolio to $12.5 billion. - Priced two non-QM securizations in March, including a re-lever of seasoned loans. - Continued expense reduction efforts, including relocating corporate headquarters with expected run rate savings. - Introduced distributable earnings prior to realized credit losses metric. ### Lima One - Originated $219 million of business purpose loans in Q1, sold $81 million of rental loans generating gain on sale income, and mortgage banking income rose 34% from Q4. - Utilizing AI and automation in servicing and underwriting, exploring efficiencies.

Fixed income markets had a mixed first quarter. MFA grew its investment portfolio to $12.5 billion, with $700 million of agencies (including TBAs), $471 million of non-QM loans, and Lima One originated $219 million of business purpose loans. Non-QM is the largest asset class, with a book value of $5.5 billion at quarter end, and credit performance remains strong with a default rate just above 4%. Agency portfolio exceeds $3.5 billion, and Lima One originated $219 million of business purpose loans in the first quarter with mortgage banking income rising to $7.7 million.

Forward-looking Statements - Expect DE to begin reconverging with common dividend level later this year. - Anticipate realized credit losses on legacy transitional portfolio to accelerate meaningfully in Q2 before normalizing in back half of 2026 and first half of 2027, leading to narrowing difference between DE and new supplemental DE measure. - Expect economic book value to be flat to end of first quarter subsequent to quarter end. - Lima One's contribution to earnings expected to grow as wholesale channel is open and multifamily lending is relaunched.

Risks - Market volatility due to geopolitical events (e.g., war in Iran) can spike rates, widen spreads, and impact portfolio value. - Uncertainty in timing and amount of realized credit losses on legacy assets, which can affect DE and book value. - Difficulty in reliably forecasting loan resolutions and resultant credit charges, which can impact earnings projections. - Impact of AI and automation on cost reductions is unclear and may not accrue as expected.

Q: How much capital was tied up in the remaining multifamily transitional portfolio at quarter end and does guidance on DE convergence include redeployment of that?

A: Capital tied up is just over $100 million ($101 million at end of quarter), and forward guidance on DE reconverging by end of year includes anticipated paydowns of troubled assets and redeployment into target assets.

Q: On agency MBS portfolio, how to think about it?

A: Level of exposure will be wound down depending on credit attractiveness, with agency portfolio likely to be reduced as Lima grows production and receives paydowns.

Q: Posture of Lima One on AI and automation, cost target?

A: Utilizing AI like Claude and Anthropix, cost reductions from AI are ongoing but exact percentage not specified.

Q: What drove delinquencies to increase in multifamily quarter over quarter?

A: Loans are coming up on maturity, borrowers having trouble refinancing, leading to potential delinquencies.

Q: Should we expect bringing properties in to stabilize and sell or hit market?

A: Case-by-case basis, some assets may be stabilized if makes sense, others may be sold.

Q: Expectation of DE number similar to 3Q, 2Q last year regarding losses accelerating in 2Q?

A: Hard to reliably forecast, but expect high teens of credit losses in second quarter on multifamily resolutions before normalizing in back half of year and into 2027.

Q: When talking about DE converging with 36-cent dividend, referring to which figure?

A: Referring to 30 cent DE or DE with loss adjustments.

Q: Product mix of Lima One pipeline going forward?

A: Split between transitional and rentals, with potential growth on rental side as wholesale comes online, and multifamily relaunch may accelerate growth later.

Q: On transitional loans, mark level and impact on book value?

A: Marked to fair value, delinquent loans marked on loan-by-loan basis, total discount for multifamily portfolio just over $50 million and single family closer to $15 - $20 million discount, with confidence in mark levels as evidenced by gains from resolving delinquent loans.