MFA Financial, Inc. 9.000% Senior Notes Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Market Environment: Second quarter had market turmoil with treasury yields fluctuating. Mortgage credit spreads widened in April but retraced. Economic and macro environments showed growth resilience, inflation moderation, but jobs market uncertainty remained.
• Portfolio Performance: GAAP earnings for the second quarter were $33.2 million ($0.22 per basic common share), driven by growth in net interest income to $61.3 million and modest net mark-to-market gains. Resolved nonperforming loans, reducing 60-plus day delinquency from 7.5% to 7.3% and lowering nonaccrual loan balances by $33.6 million.
• Investment Activities: Sourced $876 million of loans and securities in the second quarter, including $503 million of non-QM loans, $131 million of Agency MBS, and $217 million of business purpose loans at Lima One. Issued 18th non-QM securitization in early May, sold $38 million of newly originated SFR loans and $24 million of delinquent transitional loans. Leverage at end of quarter was 5.2x, with recourse leverage at 1.8x.
• Lima One: Originated $217 million of business purpose loans, hired 15 new loan officers, and expects growth in origination volume and profitability in the second half of the year due to new hires and technology initiatives.

Segment Performance

• Loan Portfolio: Total economic return for the second quarter was 1.5%, with year-to-date return at 3.4%. GAAP book value at June 30 was $13.12 per share, and economic book value was $13.69 per share, both down ~1% from the end of March. Distributable earnings for the quarter were $0.24 per share, negatively affected by credit losses on certain business purpose loans. Excluding these credit losses, distributable earnings would have been $0.35 per share.
• Non-QM Loans: Sourced $503 million in the second quarter, with an average coupon of 7.8% and average LTV of 66%.
• Agency MBS: Portfolio grew to $1.75 billion, with focus on low pay-up securities generally yielding 5.5% purchased at modest discounts to par.
• Business Purpose Loans (Lima One): Originated $217 million during the quarter, including $167 million of single-family transitional loans (average coupon north of 10%) and $50 million of 30-year rental loans (average coupon of 7.5%). Lima One contributed $6.1 million of mortgage banking income for the quarter, an increase from $5.4 million in the first quarter.

Guidance

• Distributable Earnings: Expect distributable earnings to reconverge with the common dividend level in the first half of 2026.
• Leverage: Recourse leverage at 1.8x, with capacity to increase leverage as there is dry powder available.
• Asset Deployment: Continue deploying capital across non-QM, agency, and business purpose loans, with hope to grow business purpose loan originations for higher return on equity (ROE).

Risks

• Market Volatility: Fluctuations in treasury yields and mortgage credit spreads can impact portfolio value and financial results.
• Credit Losses: Potential for credit losses on business purpose loans if market conditions deteriorate, although credit losses already marked down in prior periods.
• Origination Risks: Execution risks in loan origination, including potential impacts from tariffs and input costs on rental and transitional loans.

Question and Answer Q: Where see economic return for the portfolio?

A: Economic earnings power is close to the 10% dividend yield, with capacity to increase leverage for upside as there is dry powder available.

Q: Capital allocation areas?

A: Active in non-QM, agency, and business purpose loans; hope to grow business purpose loan origination with Lima One hires for higher ROEs.

Q: Lima One loan officers?

A: Hired 15 new loan officers, focus on West and Midwest regions, with goal to grow to ~80 producers.

Q: Capital allocation post steepener?

A: Redeploy Agency MBS capital to other credit assets if spreads come in as market conditions change.

Q: Transitional loans discount?

A: Discount on multi-transitional loans has declined, but some work remains in resolving underperforming assets in the second half.

Q: Rental/transitional loans execution?

A: No material impact from tariffs yet; rents cover debt service as loans are typically refinanced away.

Q: Catalyst for non-QM callability?

A: Lower interest rates could make more deals callable, with marginal benefits in preferred Series C coupon reset.