Q4 2023 MFA Financial Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the MFA financial fourth quarter 2023 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you'd like to ask a question. Please press. One then zero on your Touchtone phone and you will hear an acknowledgment that.

You've been placed into Q, you can't remove yourself from queue at any time by repeating that one zero command should you require assistance during the conference. Please press Star then zero and an operator will assist you offline as a reminder, today's conference is being recorded and I will now turn the conference over to our host Mr. Hal Schwartz. Please go ahead.

Thank you operator, and good morning, everyone. The information discussed on this conference call today may contain or refer to forward looking statements regarding MFA financial Inc, which reflect management's beliefs expectations and assumptions as to Mfa's future performance and operations when used statements that are not historical in nature, including those containing words.

Such as will believe expect anticipate estimate should could would or similar expressions are intended to identify forward looking statements. All forward looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks uncertainties assumptions and other factors, including those described in Mfa's annual report on Form 10-K for the year ended December 31, 2022, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks uncertainties and other factors.

Could cause mfa's actual results to differ materially from those projected expressed or implied in any forward looking statements. It makes for additional information regarding mfa's use of forward looking statements. Please see the relevant disclosure in the press release announcing Mfa's fourth quarter 2023 financial results. Thank you for your time I would now like to.

To turn this call over to Mfa's, CEO and President Craig Knutson.

Thank you Hal.

Good morning, everyone and thank you for joining us here today for MFA Financial's fourth quarter and full year 2023 earnings call with me today are Mike <unk>, our CFO, good Monday, Christiansen and Brian Wilson, our co chief investment officers and other members of our senior management team.

I'll begin with a high level review of the fourth quarter and full year 2023 market environment and <unk> results and then discuss the current macro picture in 2024 outlook, then I'll turn the call over to Mike to review our financial results followed by good Wonder and Brian who will review our portfolio financing at risk manner.

Before we open up the call for questions.

The fourth quarter of 2023 was yet another volatile period for fixed income markets as 10 year Treasury yields rose about 40 basis points in the first two five weeks of the quarter before a furious rally that brought them down by about 110 basis points by the end of the year.

This bond market rally was obviously friendly for mortgage assets and resulted in strong earnings and book value performance for MFA during the quarter, we generated a seven eight economic return for the quarter and reported distributable earnings well in excess of our dividend.

While 2023 was another extremely challenging year for fixed income investors and for Levered mortgage investors in particular, mfa's prudent risk management and continued execution of our strategy produced a two 7% economic return for the year and a total shareholder return of 37%.

As we look forward to 2020 for the fed appears to be in a holding pattern as they await further inflation and other economic data. Although the predominant view is for rate cuts in 2024, it seems pretty clear both from recent economic data and chairman Powell statements that.

As much awaited rate cuts or at least a few months away inflation numbers continue to surprise on the high side labor markets are still strong in the U S economy remains buoyant. Despite recent recession signals from both Japan and England.

While a lower fed funds rate will obviously benefit leveraged fixed income investors and mortgage Reits in particular, mfa's positioning positioning and strategy is decidedly not dependent on rate cuts and the elevated rate environment of the last year, we've continued to add incremental assets at higher yields to.

Execute securitizations as a durable source of financing and earn significant positive carry on our interest rate swap position that we put in place almost two years ago.

We added $860 million of loans in the fourth quarter with an average coupon of 10% and we acquired $3 billion of loans in 2023 with an average coupon of nine 8%.

We completed eight securitizations during the year collateralized by $2 2 billion of loss.

Sure.

QM deals issued just a couple of months prior.

This month, we issued our fourth revolving securitization backed by our transitional loans originated by <unk>.

The $160 million of bonds sold were well received pricing at a coupon of just over 7%, which was 140 basis points lower than the prior deal issued in October alone.

The loans underlying the deal had a weighted average coupon of almost 11%.

We have now issued securitizations backed by over $9 billion in loans since 2020.

And the percentage of our loan portfolio are financed by Securitizations continues to trend higher above 60%.

On page 19 of our presentation you can see that many of our securitization are currently callable and others will become callable in the coming quarters and years.

Those call features provide the potential to re lever our collateral.

Marketing substantial non dilutive capital that can be redeployed at mid teens Roe.

So our strategy is not dependent on lower rates should we find ourselves again in a lower interest rate environment. The call features also provide an optionality to reduce our borrowing costs.

We believe that mortgage securitization will continue to be a significant piece of our loan financing strategy. Since it is nonrecourse non mark to market funding and further insulate the portfolio from volatile markets.

Moving to our credit performance.

The strong labor market and resilient housing backdrop continues to support our credit performance.

Over the quarter, we saw a modest increase in the 60 plus day delinquencies in our purchase performing portfolio, which increased to three 8% from three 1% a quarter ago.

This increase remains well within our expectations when we modeled our expected cash flows for the portfolio.

60, plus day delinquencies in our legacy RPM NPL portfolio declined by over a point to 24, 5% as we continued to achieve positive outcomes for our remaining delinquent loans utilizing our in house expertise in asset management.

Our asset management team works closely closely with our servicers to improve outcomes on defaulted loans, including generating gains on our legacy <unk> and npls and mitigating potential losses on our newly originated loans.

We're proud of our asset management capabilities since that give us comfort growing our purchase performing portfolio and gives us optionality should distress loan opportunities arrive in the future.

Prepayment speeds on our portfolio declined slightly in the quarter, reflecting the higher interest rate environment.

<unk> remain in the mid to high single digits for our non QM <unk> and legacy <unk> NPL portfolios.

For the transitional loan portfolio, we had annualized repayment rate of 33%.

We had total paydowns of over $400 million in the quarter, which continued to be reinvested into higher yielding assets.

Lastly, we continue to reduce our Oreo portfolio over the quarter, we sold 71 properties for $22 6 million, resulting in over $2 million in gains.

And with that we'll turn the call over to the operator for questions.

Yes.

Thank you.

Questions from the phones, it's one zero on your Touchtone phone you will hear the acknowledgment that you've been placed in the queue and you can't remove yourself from.

From the Q by repeating the one zero command.

Once again for questions from the phones and then zero.

We will go to the line of Doug Harter with UBS.

Thanks, Good morning, Doug.

Good morning, hoping you could talk a little bit more about your call strategy.

Is this something that you view as attractive kind of even in the current rates and then lower rates would be upside optionality or just how should we think about how aggressive you would be <unk>.

<unk> those calls.

So it all depends deal to deal for certain deals where they have de levered a significant amount it may make sense for us to call them, even if interest rates aren't necessarily lower than than they were for the deals and they were issued.

But for other deals right, it's going to be opportunistic depending on where where rates are.

Okay.

And then you talked a little bit about your.

Your unsecured issuance during the quarter I guess, how should we think about your appetite for.

Continuing to use that and what that role might be in your capital structure going forward.

So I mean, thanks for the question Doug.

It was a very successful transaction.

Bit of a niche product because of the $25 par amount. So it is a retail product.

But I think we certainly proved it out that it's.

It's a viable source of financing so to the extent that we look to raise additional capital as one of the tools in the toolbox.

Great. Thanks.

Sure.

Thank you we'll go next to the line of.

Steve Delaney with citizens GMP.

Good morning, everyone. Congratulations on a strong close to what was a very good year in a tough tough market.

Thank you Steve.

Hey, Craig so looking at the market obviously.

Everybody is focused on the fed and where.

We may be looking at it slightly different mortgage market at the end of this year than we are right here today.

Just curious what youre seeing out there.

Beyond the Lima, one okay, we believe <unk>.

He is doing great but.

But is there anything emerging out there in terms of non bank originators of.

Specialized product not just obviously not agency flow, but non agency products that.

Have the kind of yield and profile that might be attractive to you guys sort of a sort of a non qualified mortgage in QM kind of product is what I'm, what I'm thinking about just curious what youre seeing out there in terms of product flow.

On the consumer mortgage side. Thanks.

Sure.

I'll speak to that first and then I'll, let Brian address your non QM question.

<unk>.

Steve I know theres been a lot of talk about possible trends emerging in <unk>.

Banks and commercial loan portfolios and.

But at this point I wouldn't say that we've identified any any.

Screaming opportunity right now, obviously that can change and as the year plays out that may be the case.

But I think we're pretty comfortable in the space that we're in.

We've been able to we've been able to add significant amounts of assets over the last two years at successively higher rates.

<unk>.

Until we find that challenging or until we find that something that's better.

We're pretty comfortable where we are.

Okay on your right.

Yes. Please go ahead.

Sure I would say as it relates to non QM right over the last quarter, we bought around say $300 million of newly originated loans and that continues to be at a pace, we haven't really seen.

Tick up in production, but there is still.

A good amount of supply out there to meet our needs in terms of like potentially new products. Yes, we've always looked at sort of seconds. In this environment for a lot of borrowers who have locked in low rates previously, but still can't really do a cash out refinance but it makes sense for them to draw on a second.

Always looked at that market and we do it in some in some small size, but the trick the tricky part is getting to critical mass at loan amounts are generally pretty small and there is just not a ton of that production out there to date.

Got it.

And then my final question is about.

Lima ones.

Bridge products.

And with respect to multifamily.

Yes, I know they do some single family rental, but a little bit of everything I think from an investor.

Loan standpoint, but on the multifamily side.

Where does that kind of cap as far as the size of a project that they would would work on and.

Just the magnitude how large of a loan might they may because we were multifamily we used to think of is bulletproof, but from covering the commercial mortgage Reits were just seeing more and more I mean office is still the real problem, but we're seeing a lot of multifamily distress out there. So I'm just curious if you've got any.

Any concerns about your.

Multifamily Bridge book.

Through Lima, one thank you.

Thanks, Steve.

Question.

Just for some.

Some context, just about the size and I'll give you a little bit of a broader context.

On the multifamily portfolio. So look these are really small balance multifamily loans.

The average loan size is about $3 2 million and so.

We originally indicated that our average LTV of about 65, which means the average property value is probably around the mid fives.

And when you think about the strategies here.

Average profile of this kind of a highly experienced borrower that is looking to renovate some units.

A quick common space improved property management, usually at origination. The average project has some occupancy ranging between 60% to 80% on day. One. So there is some cash flow that helps.

While they're working on the transition.

These projects are all light rehab.

The average we have amount is around kind of 601000, which is roughly about 20% of the loan amount. So we would think about that as a fairly light touch rehab.

If you think about in terms of per unit, that's anywhere from like 7000 to 12000.

Our unit.

The goal is to complete the rehab fully lease up the units and exited in most cases through.

GSE takeout financing.

Which of course is significantly lower than the coupon on the on the bridge loan.

These loans are usually two to three.

Two to three year term loans with.

With a fixed coupon and so if you think about that in the context of the last two years.

Theres a fixed coupon on there hasnt been any code payment shock during the times of term left alone.

And so it doesn't put a pressure on the borrower as long as the project is under an appropriately and.

The project makes sense.

Historically, our underwriting has been fairly conservative in the.

Underwriting statistics kind of bear that out the average assets LTV as I said earlier, it's about 65% and the average <unk> is similar to around six 5% and when we think about in terms of like that yield concept.

The average as stabilized debt yield.

As Ben averaged around nine 5% on the portfolio, but in 'twenty two 'twenty three it's closer to 10, 5% and so in summary, like we think these are underwriting with plenty of borrowers skin in the game and with expected cash flows that can support the refinancing into longer term debt and two <unk>.

Date like.

From a performance perspective.

The 60 plus day delinquency on the on the multifamily part is about 2%.

It is fairly low.

From a vintage perspective, most of our Vista This 22 and 'twenty three.

I think arguably many would argue that the 21, Vince it's probably is the one that would be at most risk across.

The spectrum because rates were low things were underwritten in probably a looser cross here on home price appreciation as well as rent increases and look at it. So as we think about all of these things we feel very comfortable about the portfolio.

Yes.

It sounds like it's rock solid workforce housing with.

Government take out at the back side. So that's very helpful to get the comfort on.

Looking inside that portfolio.

You are pretty solid I appreciate everybody's comments this morning, and congrats again on a really strong close to a good year. Thank you.

Thanks, a lot Steve.

Thank you and once again for questions from the phones at one <unk>.

Zero.

And speakers there are no further questions in queue from the phones at this time.

Alright. Thank you operator, thanks, everyone for your interest in MFA financial we look forward to speaking with you again in May when we announced first quarter results.

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