MFA Financial, Inc. 8.875% Senior Notes Q4 FY2024 earnings call

• Market Environment: Fixed income markets reversed in Q4 after prior rate cuts, yields rose, yield curve steepened; economy resilient but inflation sticky.
• 2024 Highlights: Assets grew from $10.8B to $11.4B, agency book up over $800M to $1.4B, recourse leverage 1.7x, issued $190M par bonds, paid $1.40 common dividend, executed three securitizations in Q4, mourned Board member Frank Ulrich.
• Financial Results: GAAP book value $13.39/share, economic book value $13.93/share (down 3.7% from Q3), distributable earnings $40.8M ($0.39/share) in Q4, swaps maturing impacting distributable earnings.
• Portfolio Highlights: Added over $1.2B to portfolio in Q4, Lima One originated $235M in Q4, sold SFR and non-QM loans, securitized over $1B in loans, reduced net asset duration to 1.02, delinquencies up to 7.5% but LTV low.

In the fourth quarter, MFA added over $700 million in non-QM and BPL loans and over $450 million of agencies. For the year 2024, assets grew from $10.8 billion to $11.4 billion, with the agency book increasing by over $800 million to end at $1.4 billion. Lima One originated $235 million of loans in the fourth quarter, and totaled $1.4 billion in business purpose loans for 2024. The Non-QM portfolio coupon increased twenty-five basis points to 6.65% after sales. Revenue contribution: Agency book was $1.4 billion out of $11.4 billion total assets, so ~12.3% contribution.

• Swaps: Expect swaps to contribute approximately $0.02 to Q1 distributable earnings, then insignificant impact in Q2.
• Portfolio Earnings: Believes portfolio earnings power remains strong with positively sloped yield curve, expected rate cuts, accommodative financing spreads, liquidity, and strong housing fundamentals.
• Lima One: Expected to grow in 2025, possibly ~$1.5B with growth trending upwards by end of year, first quarter somewhat flattish vs Q4.

• Market Risks: Interest rate fluctuations, yield changes, economic conditions affecting portfolio value.
• Delinquency Risks: Increase in delinquencies in certain loan portfolios, though low LTV mitigates losses.
• Tax Risks: Uncertainty in tax treatment of future dividend payments.

Q: Can you discuss where you see the current economic return of the portfolio? Does that kind of match the EAD this quarter? And also, just from your comments on the EAD, just wanted to clarify, so with the swaps rolling off, is that the comment that you made? Does that go down by a couple of cents in the first quarter based on that?

A: Hey, Bose. Yeah. Thanks for the question. So I think the first one about sort of the economic return. You know, certainly, if you look at the, like, the straight DE ROE, you know, you're in the sort of low teens just based on where it's been. I think we said a couple of times on these earnings calls that, you know, we like to think about the economic return meaning, you know, if you were effectively to, you know, re-strike the assets, re-strike the liabilities and the hedges, and sort of measure what that ROE is, you know, sort of right in that ten-ish percent range. And, you know, I think when we think about the dividend, it sort of aligns really nicely with that economic earnings power. Thinking about your second question, you know, the numbers I gave in my script, we had about nine cents in the fourth quarter. And, you know, we expect those swaps to contribute about two cents to the first quarter before running off. Does that answer your question?

Q: What was behind the increase in the delinquency for single-family and multifamily transitional loans?

A: Yeah. I mean, delinquencies are higher in those portfolios because generally, if you look across our other asset classes that we invest in, those are the riskiest parts. Right? So, you know, when you're lending against either fix and flip or a ground-up or bridge, you know, value-add type projects, there's just additional risk. And then with, you know, sort of the shorter-term nature of those loans, you know, various things can occur in terms of loans breaching maturity, and, you know, the home may not have been sold yet. That loan can enter delinquency if not extended. So there's various things that can happen, but it's not sort of, I guess, unexpected that we're seeing higher levels of delinquency. We'd always like them to be lower, but, you know, it's sort of the nature of the asset class. It comes along with it.

Q: How do you guys see things going for Lima One? What's your outlook for Lima One for the rest of the year? And what kind of product type loans are you currently focused on? Seems like in the fourth quarter, most single-family. Is that going to continue to be the focus going forward?

A: Yeah. It's really single-family continues to be the focus there. Transitional and term rental. We're, you know, we're doing a lot of things there. We've hired additional salespeople to help support growth. We've moved, you know, we're gradually moving into the wholesale channel to grow the rental loan originations, which is sort of coming online now. So we do see prospects for growth in 2025. In terms of the exact number for 2025, you know, wouldn't be surprised if it's somewhere around $1.5 billion, but sort of trending upwards towards the end of the year. Expect, you know, sort of the first quarter to be somewhat flattish versus the fourth quarter.

Q: Going back to the option to call and resecuritize the seasoned deals, I realize the cost of funds would go up relative to the cost on those old deals, but on an economic basis, I mean, don't you think the liquidity benefits and releasing liquidity, resetting the leverage, maybe override that to a large degree? And then, you know, joining question, I mean, what's the right way to think about a pickup in prepays for the non-QM portfolio here? I mean, both in terms of the economic return on the back book and the opportunity to, you know, like, recapture those loans in the portfolio going forward and what the return would look like there.

A: So, Eric, I'll take the call on the securitizations question and then have Bryan talk about non-QM. I think, you know, yes, if you look at some of the coupons on the triple A's that we sold back in 2021, you know, I think there were some deals where those coupons were less than one percent. So clearly, a new securitization would be at a higher rate. But you have to take the whole deal holistically because there may be very little bit of that A1 from a 2021 deal that's left outstanding right now. And so the ability to, you know, to substantially increase the borrowing because those deals delever as time goes on, you know, can be profound from an ROE standpoint. And, you know, trust me, we run the math on those deals. It's a, you know, it's a fairly simple or somewhat complicated algebra problem. But it's, you know, at the end of the day, it's pretty straightforward. As it relates to prepays, so, you know, they did tick up over the quarter and, you know, there's a couple of nuanced things as it relates to that. For prepaid increase in for loans that we currently hold at a discount, actually, that is a positive for book value because that, you know, we get cash for something we had marked at, say, ninety-six cents on the dollar. But as it relates to DE, when we get those prepays, because those loans were purchased at a premium, you know, years ago, there is an amortization of that premium upon prepayment, so that would, you know, incrementally lower DE. But again, we view that as a positive economically for the company.

Q: Can you just share the level of unfunded commitments in the Lima One portfolio and over what time frame you might expect those commitments to get called up?

A: Eric, I'm not sure we have that number handy. It will be in the K. It's, you know, probably in that, you know, $600 million range and sort of guesstimating. So and in terms of, you know, when we expect the funded, you know, let's say over the next year or so. And just to keep in mind, Eric, you know, most of those loans are in revolving securitization, so it effectively self-funds. Right? Like, those paydowns fund those draws. And, obviously, on our warehouse lines, our lenders fund those draws for us as they occur.