Q2 2024 MFA Financial Inc Earnings Call

August 8, 2024

Harold Schwartz: Expressions are intended to identify forward-looking statements, but 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, 2023, 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.

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 the NFA's annual report on Form 10-K for the year ended December 31, 2023, 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.

Harold Schwartz: For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's second quarter 2024 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knutson. Thank you, Hal.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's second quarter 2024 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

Craig Knutson: Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's Second Quarter 2024 earnings call. With me today are our CEO, Mike Roper, our CFO, Gudmundur Kristjansson, and Bryan Wulfsohn, our Co-Chief Investment Officers, and other members of our Senior Management team. I'll begin with a high-level review of the second quarter market environment and touch on some of our results, activities, and opportunities. Then I'll turn the call over to Mike to review our financials in more detail, followed by Bryan and Gudmundur, who will review our portfolio, financing, and risk management before we open up the call to questions.

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's second quarter 2024 earnings call. With me today are Mike Roper, our CFO , Gudmundur Kristjansson, and Bryan Wulfsohn, our co-chief investment officers, and other members of our senior management team.

Craig Knutson: The second quarter of 2024 was another pretty volatile period, with two-year Treasuries drifting 40 basis points wider and ending April a little over 5% before rallying back to 475 at the end of the quarter. Similarly, 10-year Treasuries sold off 50 basis points to 470 before rallying back to end the quarter at 440.

I'll begin with a high-level review of the second quarter market environment and touch on some of our results, activities, and opportunities.

Then I'll turn the call over to Mike to review our financials in more detail, followed by Bryan and Gudmundur, who will review our portfolio, financing, and risk management before we open up the call to questions.

The second quarter of 2024 was another pretty volatile period, with two-year treasuries drifting 40 basis points wider and ending April a little over 5% before rallying back to 475 at the end of the quarter.

similarly ten year treasuries sold off fifty basis points to four seventy before ralallying back to in the quarter at four andforty

Despite the volatile rate environment, MFA posted a solid second quarter with distributable earnings of $0.44 and a respectable total economic return of 2.6%, driven by significant credit spread tightening during the quarter.

during the quarter we took advantage this bread ghtening and wewere able to opp tunistically sell certain loans at pricesas well above our marks

Craig Knutson: In April, we completed a second senior unsecured bond offering of $75 million with a coupon rate of 9%. And in June, we paid off the remaining balance of $170 million of our convertible senior notes. In late May, we called an NPL securitization, which generated almost $80 million of liquidity. As we have discussed over the last several quarters, this optionality in the form of our callable securitizations provides us with an often underappreciated capability to optimize our liability framework in the quarters and years ahead and unlock significant capital that we can redeploy at attractive ROEs. We currently have about $1.2 billion UPB of callable securitizations outstanding.

our gaap and economic book values were flat for the quarter

In April , we completed a second senior unsecured bond offering of $75 million with a coupon rate of 9%. And in June , we paid off the remaining balance of $170 million of our convertible senior notes.

Craig Knutson: In late May, we called an NPL securitization, which generated almost $80 million of liquidity. As we have discussed over the last several quarters, this optionality in the form of our callable securitizations provides us with an often underappreciated capability to optimize our liability framework in the quarters and years ahead and unlock significant capital that we can redeploy at attractive ROEs. We currently have about $1.2 billion UPB of callable securitizations outstanding, but there is a more compelling opportunity set in single-family transitional and rental lending.

Craig Knutson: In late May, we called an NPL securitization, which generated almost $80 million of liquidity.

Craig Knutson: as we have discussed over the last several quarters

Craig Knutson: This optionality, in the form of our callable securitizations, provides us with an often underappreciated capability to optimize our liability framework in the quarters and years ahead and unlock significant capital that we can redeploy at attractive ROEs.

Craig Knutson: We currently have about 1.2 billion dollars UPB of callable securitizations outstanding.

Craig Knutson: We continue to execute on our securization strategy in the second quarter with a $365 million non-QM deal in April and a $192 million revolving RTL securization in May. Subsequent to quarter end, in July, we issued a $303 million rated RPL securitization, collateralized in part by loans from the aforementioned NPL deal that we called in May. During the quarter, overall delinquencies in our residential loan portfolio fell to 6.5 percent from 6.9 percent at the end of Q1.

Craig Knutson: We continue to execute on our securization strategy in the second quarter with a $365 million non-QM deal in April and a $192 million revolving RTL securization in May.

Speaker Change: Subsequent to quarter end in July , we issued a $303 million rated RPL securitization collateralized in part by loans from the aforementioned NPL deal that we called in May.

Craig Knutson: During the quarter, overall delinquencies in our residential loan portfolio fell to 6.5% from 6.9% at the end of Q1.

Craig Knutson: However, we did see delinquencies tick up in our multifamily transitional loan book. Like others in the industry, we've been watching this multifamily sector with a growing sense of unease over the last several quarters. Although rents have held steady in most markets, we have seen moderation from the rapid pace of rent appreciation.

Speaker Change: experienced over the last several years additionally the combination of higher cap rates and increased supply has hurt multifamily property values in many markets

Craig Knutson: Even for performing transitional loans, the higher rate environment produces challenges for refinancing these bridge loans as they approach maturity. In our portfolio, the delinquency rate rose to 4.6% from approximately 3% at the end of Q1. In response to our concerns about difficulties in multi-family lending generally, we made the decision during the quarter to temporarily refocus our resources away from multi-family lending at Lima 1. This decision comes after three straight quarters of significant declines in Lima's multi-family origination volumes, and it allows us to concentrate our efforts on what we believe is a more compelling opportunity set in single-family transitional and rental lending.

Craig Knutson: Even for performing transitional loans, the higher rate environment produces challenges for refinancing these bridge loans as they approach maturity.

Craig Knutson: In our portfolio, the delinquency rate rose to 4.6% from approximately 3% at the end of Q1.

Craig Knutson: In response to our concerns about difficulties in multifamily lending generally, we made the decision during the quarter to temporarily refocus our resources away from multifamily lending at Lima One.

Craig Knutson: This decision comes after three straight quarters of significant declines in Lima's multifamily origination volumes, and it allows us to concentrate our efforts on what we believe is a more compelling opportunity set in single-family transitional and rental lending.

Craig Knutson: Transitioning to Lima One more broadly, July 1st marked the three-year anniversary of our acquisition of Lima One Capital, and in that time, we have originated over $6 billion of high-yielding loans for our balance sheet and issued over $3 billion of securiizations backed by Lima One Collateral. Despite the current headwinds we are seeing in the multifamily space, we are excited about the opportunity going forward in both residential transitional and single-family rental lending, the two largest components of Lima's origination volume. Finally, securization spreads have been stable, with the most recent non-QM deals pricing AAAs in the 130s or low 5% yields.

Craig Knutson: Transitioning to Lima One more broadly, July 1st marked the 3-year anniversary of our acquisition of Lima One Capital, and in that time, we have originated over $6 billion of high-yielding loans for our balance sheet and issued over $3 billion of securiizations backed by Lima One Collateral. Despite the current headwinds we are seeing in the multifamily space, we are excited about the opportunity going forward in both residential transitional and single-family rental lending, the two largest components of Lima's origination volume.

Craig Knutson: transitioning to lema one more broadly july first marked the three-year anniversary of our acquisition of lima one capital and in that time we have originated over six billion dollars of high-yielding loans for our balance sheet and issued over three billion dollars of securizations backed by minma one collateral

Craig Knutson: Despite the current headwinds we are seeing in the multifamily space, we are excited about the opportunity going forward in both residential, transitional, and single-family rental lending, the two largest components of Lima's origination volume.

Craig Knutson: As we enter the fourth year of our ownership of Lima One, we are also excited to announce the appointment of Josh Woodward as CEO of Lima One. Josh's appointment follows the retirement of Lima One CEO Jeff Tennyson after six years at the helm. We are grateful for his dedication and the contributions Jeff made during his tenure at Lima One. His leadership was instrumental in transforming Lima into an industry-leading, fully integrated business purpose lending platform. I also look forward to introducing our investors to Josh. Josh has been with Lima One for over 10 years, and during that time, he has overseen Lima's accounting, finance, servicing, treasury, and capital markets team.

Craig Knutson: As we enter the fourth year of our ownership of Lima One, we are also excited to announce the appointment of Josh Woodward as CEO of Lima One.

Josh: Josh's appointment follows the retirement of Lima One CEO Jeff Tennyson after six years at the helm.

Craig Knutson: We are grateful for his dedication and the contributions Jeff made during his tenure at Lima One. His leadership was instrumental in transforming Lima into an industry-leading, fully integrated business purpose lending platform.

Craig Knutson: I also look forward to introducing our investors to Josh. Josh has been with Lima One for over 10 years and during that time has overseen Lima's accounting, finance, servicing, treasury, and capital markets teams.

Craig Knutson: The month of July was very constructive for both rates and spreads and culminated with Chair Powell's press conference last week, which opened the door for a race cut at the Fed's September meeting. This was followed by last Friday's payroll report, which has... Let's start. seismic impact on both equity and race markets. Two-year Treasury yields are now 70 basis points lower than at the end of the second quarter. Two's tens, while slightly inverted, have converged significantly, less than 10 basis points this morning.

Craig Knutson: The month of July was very constructive for both rates and spreads, and culminated with Chair Powell's press conference last week, which opened the door for a rate cut at the Fed's September meeting. This was followed by last Friday's payroll report.

Craig Knutson: which have

Craig Knutson: that start

Speaker Change: seismic impact on both equity and rates markets. Two-year Treasury yields are now 70 basis points lower than at the end of the second quarter. Two's tens, while slightly inverted, have converged significantly, less than 10 basis points this morning, and we will likely see a return to a normal yield curve fairly soon into a Fed easing cycle.

Craig Knutson: And we will likely see a return to a normal yield curve fairly soon in a Fed easing cycle. The yield curve has been inverted for two long years now, so a normal yield curve is going to feel like an exit from a long dark tunnel.

Craig Knutson: The yield curve has been inverted for two long years now, so a normal yield curve is going to feel like an exit from a long, dark tunnel.

Craig Knutson: Finally, securization spreads have been stable, with the most recent non-QM deals pricing AAAs in the 130s or low 5% yields. These are all significant tailwinds for our business and our ability to generate income, and we're excited and energized about the second half of 2024. I will now turn the call over to Mike Roper to discuss our financial results. Thanks, Craig.

Craig Knutson: Finally, securization spreads have been stable, with the most recent non-QM deals pricing AAAs in the 130s or low 5% yields.

Craig Knutson: These are all significant tailwinds for our business and our ability to generate income, and we're excited and energized about the second half of 2024. And I will now turn the call over to Mike Roper to discuss our financial results. Thanks, Craig.

Craig Knutson: These are all significant tailwinds for our business and our ability to generate income, and we're excited and energized about the second half of 2024.

Michael Roper: At June 30th, GAAP book value was $13.80 per common share, and economic book value was $14.34 per common share, each effectively unchanged from March 31st. For the second quarter, MFA generated gap earnings of $41.9 million, or $0.32 per basic common share, an increase from $23.2 million, or $0.14 per basic common share, in the first quarter. Gap earnings included net unrealized gain on our residential home loans of approximately $16 million. The increase in our DEV is driven primarily by six cents of higher net interest income.

mike roper: and i'll now turn the call over to mike roper to discuss our financial results thanks great at june thirtieth gaap book by thirteen dollars eighty cent for common share and economic book value with fourteen dollars and thirty fourcent fora common share each effectively unchanged for march thirty first

Michael Roper: At June 30th, GAAP book value was $13.80 per common share, and economic book value was $14.34 per common share, each effectively unchanged from March 31st. We declared dividends of $0.35 per common share and delivered a quarterly total economic return of approximately 2.6%. For the second quarter, MFA generated gap earnings of $41.9 million, or $0.32 per basic common share, an increase from $23.2 million, or $0.14 per basic common share, in the first quarter.

Michael Roper: We declared dividends of $0.35 per common share and delivered a quarterly total economic return of approximately 2.6%.

Michael Roper: For the second quarter, MFA generated gap earnings of $41.9 million, or $0.32 per basic common share, an increase from $23.2 million, or $0.14 per basic common share in the first quarter.

Michael Roper: Gap earnings included a net unrealized gain on our residential home loans of approximately $16 million. This gain was concentrated primarily in our non-QM and SFR loan portfolios, which benefited from credit spread tightening during the quarter, but was partially offset by unreliable losses on our multifamily transitional loans as a result of the softness Craig mentioned in his earlier remarks. During the quarter, MFA generated distributable earnings of $45.6 million, or $0.44 per basic common share, an increase from $0.35 in the first quarter.

Michael Roper: GAAP earnings included net unrealized gain on our residential home loans of approximately $16 million.

Speaker Change: This gain was concentrated primarily in our non-QM and SFR loan portfolios, which benefited from credit spread tightening during the quarter, but was partially offset by unreliable losses on our multi-family transitional loans as a result of the softness Craig mentioned in his earlier remarks. Thank you for your time. Thank you.

Michael Roper: During the quarter, MFA generated distributable earnings of $45.6 million, or $0.44 per basic common share, an increase from $0.35 in the first quarter.

Michael Roper: The increase in our DEV is driven primarily by six cents of higher net interest income. For the quarter, net interest income was $53.5 million, an increase from $47.8 million last quarter. Net interest income increased across all of our major asset classes, reflecting our success in growing the portfolio over the last several quarters, primarily with high-yielding loans. Additionally, interest income benefited from higher discount accretion related to an uptick and pre-paid speeds on our legacy RPL-NPL loan portfolio, which is carried out at a significant discount to its unpaid principal balance.

Michael Roper: the increase in our de is driven primarily by six sens of higher net interest income

Michael Roper: For the quarter, net interest income was $53.5 million, an increase from $47.8 million last quarter. As a result, realized credit losses on the Fair Value Loan portfolio only impact DE in the period in which such losses are incurred. We now disaggregate what we previously referred to as our purchase-performing loans to provide more product-level information for both our BPL and non-QM portfolios.

Speaker Change: for the quarter net income was fifty-three point five million an increaseed from forty seven point millionin last quarter

Speaker Change: net percentincome creas were increased across all of our major asset classes reflecting our success in growing the portfolio over the last generveral quarters primarily with high-yielding loans

Michael Roper: Net interest income benefited from higher discount accretion related to an uptick in prepay speeds on our legacy RPL-NPL loan portfolio, which is carrying a significant discount to its unpaid principal balance.

Michael Roper: The interest income also benefited from increased collections of loans previously on non-accountable status as a result of higher reinstatement and other resolutions of delinquent loans during the quarter. Credit losses on loan resolutions were approximately $6.6 million for the second quarter versus approximately $1 million in the first quarter.

Michael Roper: Managers' income also benefited from increased collections on loans previously on nonaccrual status as a result of higher reinstatements and other resolutions of delinquent loans during the quarter.

Speaker Change: credit sses onlo resolution for approximately six point six mion for the quarter versus approximately one mion in the first quarter

Michael Roper: In the second quarter, and historically, realized credit losses have been concentrated primarily on our carrying value loan portfolio, which does not have a direct impact on our GAAP or distributable earnings when incurred, as they are reserved in advance by the TPO. Given the timing of our change to fair value accounting, we expect to see a shift in future quarters in the concentration of credit losses away from the carrying value loan portfolio and into the fair value portfolio.

Michael Roper: in the second quarter and historically realized credit losses have been concentrated primarily on our carrying value loan portfolio which is that of a direct impact on our gap or distributable earnings when incurred as reserve in advanced by the ciaful provision

Michael Roper: Given the timing of our change to fair value accounting, we expect to see a shift in future quarters in the concentration of credit losses away from the carrying value loan portfolio and into the fair value portfolio.

Michael Roper: Expected credit losses on our fair value loans are reflected in mark-to-market changes each quarter, which are added back to DE. As a result, realized credit losses on the fair value loan portfolio only impact DE in the period in which such losses are incurred.

Michael Roper: As a result, going forward, we expect to see some level of increased volatility in our reported quarterly DE, driven by the timing of resolutions of our delinquent fair value loans and the amount, if any, of credit losses incurred thereon. Sticking with reporting matters, this quarter, we've made some updates to certain of our loan-related disclosures to better align our disclosures with our focus on non-QM and business purpose lending. Specifically, we've reclassified certain groupings of loans to provide additional information about our portfolio.

Michael Roper: as a result going forward we expect to see some level of increased volatility in our reported quarterly dee driven by the timing of resolutions of our delquent fair value loans and the amount if any of credit losses incurred there own

Michael Roper: We now disaggregate what we previously referred to as our purchase performing loans to provide more product-level information for both a BPL and non-QM portfolio. Additionally, we've disaggregated our transitional loan portfolio into the multi-family transitional loans and single-family transitional loans to bifurcate the portfolio based upon the underlying collateral. We also now combine what were previously referred to as our Season Performing Loans, our Purchase Credit Deteriorated Loans, and our Purchase Non-Performing Loans into a grouping we now refer to as Legacy RPL NPL Loans.

Michael Roper: sticking with reporting matters this quarter we've made some updates to certain of our lo-related disclosures to better align our disclosure with our focus on nonqm and business purpose lending

Michael Roper: Specifically, we've reclassified certain groupings of loans to provide additional information about our portfolio. We now disaggregate what we previously referred to as our purchase-performing loans to provide more product-level information for both our BPL and non-QM portfolios.

Michael Roper: Additionally, we've disaggregated our transitional loan portfolio into multifamily transitional loans and single-family transitional loans to bifurcate the portfolio based upon the underlying collateral.

Michael Roper: We also now combine what were previously referred to as our seasoned performing loans, our purchase credit deteriorated loans, and our purchase non-performing loans in a grouping we now refer to as legacy RPL-NPL loans.

Michael Roper: Finally, subsequent to quarter end, we estimate that our economic book size was increased by approximately 2% to 3% as a result of lower market interest rates. I'd now like to turn the call over to Gudmundur, who will speak to our portfolio highlights and the performance of Lima One.

Michael Roper: Finally, subsequent to quarter end, we estimate that our economic book value has increased by approximately 2 to 3 percent as a result of lower market interest rates. I'd now like to turn the call over to Gudmundur, who will speak to our portfolio highlights and the performance of Lima One.

Gudmundur Kristjansson: continue to add high-yielding loans in the second quarter, where we acquired over $680 million of loans with an average coupon of approximately 9.6%. Credit statistics remain consistent with previous quarters, with an average LTV of 65% and an average FICO score of 750 on loans acquired.

Michael Roper: Thanks, Mike. We continue to add high-yielding loans in the second quarter where we acquired over $680 million of loans with an average coupon of approximately 9.6%.

Michael Roper: Credit statistics remain consistent with previous quarters with an average LTV of 65% and an average FICO score of 750 on loans acquired. The whole loan spread tightened in the quarter, and we took advantage of that and sold 12 million of newly originated Lima One Rent-A-Loans at a healthy premium. Our net duration increased slightly to 112 basis points at the end of the quarter as our swaths shortened naturally with time and our portfolio grew modestly. However, our overall interest rate risk remains modest and little changed.

Michael Roper: Credit statistics remain consistent with previous quarters with an average LTV of 65% and an average FICO score of 750 on loans acquired.

Gudmundur Kristjansson: Lima One originated BPL to account for about 60% of our acquisitions, while non-QM loans accounted for the remaining 40%. Total portfolio runoff increased 60% quarter to quarter with over 640 million paying off in the quarter. The weighted average coupon on loan payout was about 8.6%.

Michael Roper: Lima One originated BPL to account for about 60% of our acquisitions, while non-PM loans accounted for the remaining 40%.

Michael Roper: Total portfolio runoff increased 50% quarter over quarter, with over $640 million paying off in the quarter. The weighted average coupon on loan payoff was about 8.6%.

Gudmundur Kristjansson: Paydowns increased across the portfolio with most of the increase coming from the Transition Loan portfolio, with over $390 million paid off compared to about $240 million in the first quarter. Whole loan spreads tightened in the quarter, and we took advantage of that and sold 12 million of newly originated Lima One Renthal loans at a healthy premium. The recent declining rates and increased expectations around earlier and larger fatter rate cuts have led to a more constructive environment for loan prices.

Michael Roper: Paydowns increased across the portfolio with most of the increase coming from the Transition and Loan portfolio with over $390 million paid off compared to about $240 million in the first quarter.

Speaker Change: hold on spread tiighting in thequarter and we took advantage that and sold twelve million of earlyli originated lema one r alloans a healthy premium the recent decline in rates and increased expectations around earlier and larger fed rate cuts has led to more constructive environment for loan prices

Gudmundur Kristjansson: We believe this will last for some time and that it will be beneficial to the Lima One franchise to add regular loan sales to our capital market activities in addition to regular securitization. We also added $176 million of agency MPS in the quarter, mostly 6% coupons at a yield of just under 6%, and grew that portfolio to about $700 million. We expect the second quarter additions will generate mid-teens ROE for our portfolio.

Michael Roper: we believe this will l for some time and that it will be beneficial to the lema one franchise to add regular loan sales to our capital market activities in addition to a regular securitizations

Speaker Change: we also addedone hundred and seventy-six millionof agency mbs in the quarter most six percent coupons at ayield of tjust under six percent and grew that portfolio to aboutve seven hundred million

Michael Roper: We expect the second quarter editions will generate mid-teens ROE for our portfolio.

Gudmundur Kristjansson: All of these activities resulted in modest portfolio growth to over $10 billion, while our portfolio asset yield increased by 21 basis points to 6.79% in the quarter. Our net duration increased slightly to 112 basis points at the end of the quarter as our swaths shortened naturally with time and our portfolio grew modestly. However, our overall interest rate risk remains modest and little changed. Most new hedges we've added in the last few quarters have been longer-dated swaps, and as some of our short-dated swaps roll off in the next few quarters, we expect to hedge incremental interest rate risk as needed with longer-dated swaps, putting us in a position to benefit on the liability side from potential Fed Fund cuts. Turning to LEMO 1.

Michael Roper: All of these activities resulted in a modest portfolio growth to over $10 billion while our portfolio asset yield increased by 21 basis points to 6.79% in the quarter.

Michael Roper: Our net duration increased slightly to 112 basis points at the end of the quarter as our swap shortened naturally with time and our portfolio grew modestly. However, our overall interest rate risk remains modest and little changed.

Michael Roper: Most new hedges we've added in the last few quarters have been longer-dated swaps, and as some of our short-dated swaps roll off in the next few quarters, we expect to hedge incremental interest rate risk as needed with longer-dated swaps.

Speaker Change: putting us in a position to benefit on the liability side from potential tax fund cuts.

Gudmundur Kristjansson: In the second quarter, Lima won an originator about 410 million BPLs, which was largely in line with our expectations at the end of the first quarter, and Lima has now originated over 6.4 billion since our acquisition three years ago. [inaudible] We saw an increase in longer-term rent-alone demand in the quarter, which accounted for about 30 percent of rich nation volume, up from 15 to 20 percent in the last few quarters As rates have trended down recently, we've seen an uptick in interest for that product, and we expect that to continue into the second half of the year.

Michael Roper: Currently no one.

Michael Roper: In the second quarter, Lima 1 originated about $410 million of BPLs, which was largely in line with our expectations at the end of the first quarter, and Lima has now originated over $6.4 billion since our acquisition three years ago.

Michael Roper: We saw an increase in longer-term rent-alone demand in the quarter, which accounted for about 30 percent of rich nation volume, up from 15 to 20 percent in the last few quarters.

Speaker Change: As rates have trended down recently, we've seen an uptick in interest for that product and expect that to continue into the second half of the year.

Gudmundur Kristjansson: Our multifamily transitional volume has declined from a peak in the third quarter of 2023 and throughout this year as higher calf rates and increased stress in the market have caused more deal fallouts, and multifamily was only above 5% of origination volume in the second quarter. Given the reduction in activity and general stress in that market, we have refocused our resources towards a growing opportunity in the single-family transitional and rental products, which are experiencing positive tailwinds from tighter securitization spreads and increased investor demand. With respect to origination volume, we expect third-quarter origination to be down modestly from the second quarter.

Michael Roper: Our multifamily transitional volume has declined from a peak in the third quarter of 2023 and throughout this year as higher calf rates and increased stress in the market has caused more deal fallouts and multifamily was only about 5% of origination volume in the second quarter.

Michael Roper: Given the reduction in activity and general stress in that market, we have refocused our resources towards a growing opportunity in the single-family transitional and rental products, which are experiencing positive tailwinds from tighter securitization spreads and increased investor demand. The 60-plus-day delinquency rate on business-purpose loans originated by Lima One increased modestly in the quarter to 4.8%. The increase was primarily focused on the multifamily transitional loans, while we saw modest declines in delinquency rates for single-family transitional loans and longer-term rental loans. We now have approximately 1 billion of these securitizations outstanding and have financed about 1.7 billion of loans to these revolving structures.

Michael Roper: Given the reduction in activity and general stress in that market, we refocused our resources towards a growing opportunity in the single-family transitional and rental products, which are experiencing positive tailwinds from tighter securitization spreads and increased investor demand.

Michael Roper: With respect to origination volume, we expect third quarter origination to be down modestly from the second quarter.

Gudmundur Kristjansson: The 60-plus-day delinquency rate on business-purpose loans originated by Lima One increased modestly in the quarter to 4.8%. The increase was primarily focused on multifamily transitional loans while with a modest decline in delinquency rates for single-family transitional loans and longer-term rental loans. Credit monitoring and asset management are important parts of our DPL strategy, and with MFA's extensive asset management experience and Lima's experience in servicing DPLs, we believe you are well set up to identify problems early and actively manage them, which allows us to deal with the link effectively and efficiently.

Michael Roper: the sixty plus delqucy rate on a business purpose loans originated by lema one increed modest in the quarter to four pointtwenty percent

Michael Roper: The increase was primarily focused in the multi-family transition loans while with a modest decline in delinquency rates for single-family transition loans and longer-term rental loans.

Speaker Change: Credit monitoring and asset management are important parts of our BPL strategy and with MFA's extensive asset management experience

Michael Roper: In Lima's experience in servicing BPLs, we believe we are well set up to identify problems early and actively manage them, which allows us to deal with delinquencies effectively and efficiently.

Gudmundur Kristjansson: Finally, we expanded our transitional loan financing capacity in the quarter as we priced our fifth unrelated revolving transitional loan securitization. We now have approximately 1 billion of these securitizations outstanding and have financed about 1.7 billion of loans to these revolving structures. I will now turn the call over to Bryan Wulfsohn, who will discuss MFA's credit performance and securitization activities in more detail.

Michael Roper: Finally, we expanded our transitional loan financing capacity in the quarter as we price our fifth unrated revolving transitional loan securitization.

Michael Roper: we now now approximately one billing of these securitizations outstanding has have beenfinanceded about one point seven billion of loans to these revolving structures

Bryan Wulfsohn: I will now turn the call over to Bryan Wulfsohn, who will discuss MFA's credit performance and securitization activities in more detail.

Bryan Wulfsohn: Securitization markets have performed well this year despite significantly increased supply. Year-to-date issuance of private label RMBS is about to eclipse all of the issuance in 2023, and spreads have remained attractive for well-established issuers like MFA.

Speaker Change: thanks good won

Michael Roper: securitizvation markets have performed well this year despite significantly increased supply year-to-ate issuance of private label rmbs is about to ecliseall of the issuance in two thousand and twenty three and spreads have remained attractive for well established issu like ma

Bryan Wulfsohn: In April, we launched our 14th non-comps curitization selling 330 million ponds back by 365 million. The bonds sold had a coupon of 6.7%, and the loans underlying the transaction had a weighted average coupon of 8.4%. In addition, we issued our fifth transitional loan deal in May, selling $164 million in bonds at a coupon of 7.25%, where the underlying loans had a coupon north of 10% Craig mentioned we called PONS from our outstanding unrated NPL securitization in May, generating $80 million in liquidity.

Michael Roper: In April , we launched our 14th non-QM securitization, selling 330 million bonds backed by 365 million in loans.

Michael Roper: the bond sold had a coupon of six point seven percent in the loans underline of transaction had a weighted average cou on of eight point four percent

Michael Roper: In addition, we issued our fifth transitional loan deal in May, selling $164 million in bonds at a coupon of 7.25%.

Speaker Change: where the underlying loans had to cou on north of ten percent

Michael Roper: As Craig mentioned, we called FONS from our outstanding unrated NPL securitization in May, generating $80 million in liquidity.

Bryan Wulfsohn: Subsequent to quarter end, we took the re-performing loans from that call deal and combined them with additional performing loans to issue a rated RPL securitization, selling 259 million bonds at a cost of debt of approximately 5.8%. In the coming months, we expect to issue an unrated NPL securitization with the remaining loans together with other legacy loans currently in warehouse. We now have issued securitizations backed by over $9.5 billion in loans since 2020, and the percentage of our loan portfolio financed by securitizations stands at approximately 65%. On slide 20 of our earnings presentation, you can see that many of our securitizations are currently callable, and others will become callable in the coming quarters and years.

Michael Roper: subsequent to quarter-end we took the reforming loans from that call deal and combinine them with additional performing loans to issue a rated rpl securitization selling two hundred and fifty nine million of bonds at a cast of debt approximately five pointyeight percent

Michael Roper: In the coming months, we expect to issue an unrated NPL securitization with the remaining loans together with other legacy loans currently on warehouse lines.

Michael Roper: We now have issued securitizations backed by over $9.5 billion in loans since 2020, and the percentage of our loan portfolio financed by securitizations stands at approximately 65%.

Michael Roper: slide 20 of our earnings presentation. You can see that many of our securitizations are currently callable, and others will become callable in the coming quarters and years, further inflating our portfolio from volatile markets. Moving to our asset and credit performance, prepayments in our non-QM and legacy RPL-NPL portfolios increased moderately to 11 CPR. Lastly, our SFR loan portfolio exhibited a slight increase to 7 CPR from 6 CPR a quarter ago. As a reminder, our legacy loans were primarily originated before the financial crisis and purchased by MFA between 2014 and 2019. We have and will continue to leverage our asset management capabilities to improve outcomes across our entire loan portfolio, including working through delinquent transitional loans with our in-house servicing team at Lima One.

Michael Roper: toslide twenty of our nings presentation you can see that many of our securitizations are currently callable and others will become callable in the coming quarters and years

Bryan Wulfsohn: As evidenced in the second quarter, we have the ability to call our collateral and unlock substantial, non-delutive capital that can then be redeployed at mid-teens ROE. If interest rates continue to drop, as they have in recent weeks, these call features could also provide optionality to reduce our borrowing costs.

Speaker Change: as evidence in the second quarter we have ability to call our platal and unlock substantial non-dilutive capital that can then be redeployed mid-teenss always

Speaker Change: this interest rates continue to drop as they have in recent weeks these call features could also provide optionality to reduce our borrowing costs we expect that mortgage accuritization will continue to be a significant component of our loan financing strategy since its non recourse non-mark -market funding

Bryan Wulfsohn: We expect that mortgage securitization will continue to be a significant component of our low-infinancing strategy since it's non-recourse, non-marked market funding and further insulates our portfolio from volatile markets. Moving on, to our asset and credit performance. Pre-payment speeds increased in the second quarter throughout our portfolio. The single and multi-family transitional loan portfolios saw large increases, and the average turn to maturity in both these portfolios was less than one year. Prepayments in our non-QM and legacy RPL-NPL portfolios increased moderately to 11 CPR.

Michael Roper: and further insulates our portfolio from volatile markets.

Michael Roper: moving to our asset and credit performance.

Michael Roper: prepayment speeds increased in the second quarter throughout our portfolio

Michael Roper: The Single and Multifamily Transitional Loan Portfolios saw large increases.

Michael Roper: as the average turned to maturity in those these portfolios less than one year

Michael Roper: Pre-payments in our non-QM and legacy RPL-NPL portfolios increased moderately to 11 CPR. Lastly, our SFR loan portfolio exhibited a slight increase to 7 CPR from 6 CPR a quarter ago.

Bryan Wulfsohn: Lastly, our SFR loan portfolio exhibited a slight increase to 7 CPR from 6 CPR a quarter ago. Translating this into dollar terms, paydowns for the quarter were up 50% to over $600 million, which we then reinvested into higher-yielding assets.

Michael Roper: Translating this into dollar terms, paydowns for the quarter were up 50% to over 600 million, which we then reinvested into higher yielding assets.

Bryan Wulfsohn: Craig mentioned 60-day delinquencies for our entire loan portfolio decreased to 6.5% from nearly 7% in the first quarter. Although multi-family delinquencies rose 4.5% from 3% last quarter, we did see modest improvements in our 9QM, SFR, and single-family transitional loan portfolio. Delinquencies in our legacy RPL NPL portfolio declined by over one and a half points during the quarter as our asset management team continues to work to achieve positive resolutions.

Michael Roper: ass craig mentioned sixty datadelinquencies for our entire alan portfolio decrease to six and a half percent from nearly seven percent in the first quarter

Michael Roper: Although multifamily delinquencies rose four and a half percent from three percent last quarter, we did see modest improvements in our 9QM, SFR, and single-family transitional loan portfolios.

Michael Roper: Delinquencies in our legacy RPL NPL portfolio declined by over one and a half points during the quarter as our asset management team continues to work to achieve positive resolutions.

Bryan Wulfsohn: As a reminder, our legacy loans were primarily originated before the financial crisis and purchased by MFA between 2014 and 2019, typically at very substantial discounts to par. Our in-house asset management team has worked through billions of dollars of defaulted loans in concert with our third-party servicers to obtain successful modifications and other workouts to the benefit of our borrowers and shareholders. We have and will continue to leverage our asset management capabilities to improve outcomes across our entire loan portfolio, including working through delinquent transitional loans with our in-house servicing team down in Lima. We believe the combined expertise and experience of these teams puts MFA in a unique position to deliver for our investors. And with that, we'll turn the call over to the operator for questions. (Inaudible)

Michael Roper: As a reminder, our legacy loans were primarily originated before the financial crisis and purchased by MFA between 2014 and 2019.

Michael Roper: typically at very substantial discounts to par. Our in-house asset management team has worked through billions of dollars of defaulted loans in concert with our third-party servicers to obtain successful modifications and other workouts to the benefit of our borrowers and shareholders.

Michael Roper: We have and will continue to leverage our asset management capabilities to improve outcomes across our entire loan portfolio, including working through delinquent transitional loans with our in-house servicing team down at Lima One.

Michael Roper: We believe the combined expertise and experience of these teams puts MFA in a unique position to deliver for our investors.

Michael Roper: And with that, we'll turn the call over to the operator for questions.

Operator: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press 1, then 0 on your telephone keypad. You may remove yourself from that queue by repeating the 1-0 command. However, if you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers. Once again, to place yourself in a queue, you may press 1, then 0 at this time. We will begin with the line for Stephen Laws with Raymond James, please go ahead.

Michael Roper: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press 1 then 0 on your telephone keypad.

Speaker Change: you may remove yourself from that cube by repeating the one zero command

Speaker Change: If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers. Once again, to place yourself in a queue, you may press 1 then 0 at this time. We will begin with the line of Stephen Laws with Raymond James. Please go ahead.

Operator: We will begin with the line from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws: Good morning. Nice TQ results, top and bottom line. I wanted to touch, maybe dig in a little on the multifamily delinquencies. It seems like you pulled back on new originations, but as you managed through the existing portfolio, what do you expect those to do near term? When do you expect those DQs to peak, and can you talk about your resolution efforts to push down that DQ number?

Stephen Laws: Hi, good morning. Nice TQ results, top and bottom line.

Stephen Laws: I wanted to touch, maybe dig in a little on the multifamily delinquencies, you know, it seems like you pulled back on New Originations, but as you managed through the existing portfolio,

Stephen Laws: You know, when do you expect those to do near-term, you know, when do you expect those DQs to peak and kind of can you talk about your, you know, your resolution efforts to push down that DQ number?

Craig Knutson: Sure. I was going to say it's hard to forecast when delinquencies would peak, but it's impossible. But just to put the delinquency numbers in perspective, the total 60-day delinquency balance as of June 30 was a little over $50 million, and the increase from March 31 was about $20 million on a portfolio of over a billion dollars. So, yes, it increased, but the numbers are obviously somewhat manageable. As Bryan mentioned, we have an asset management team that has a stellar record of working through billions of dollars of delinquent loans for over a decade, right?

Speaker Change: Sure, so I was going to say it's hard to forecast when delinquencies would peak, but it's impossible. But just to put the delinquency numbers in perspective, the total 60-day delinquency balance as of June 30 was a little over $50 million.

Speaker Change: And the increase from March 31st was about $20 million on a portfolio of over a billion dollars. So, you know, yes, it increased, but the numbers are obviously somewhat manageable. As Bryan mentioned,

Speaker Change: You know, we have an asset management team that has a stellar record of working through billions of dollars of delinquent loans for over a decade, right? We started purchasing NPLs and RPLs back as early as 2014.

Craig Knutson: We started purchasing NPLs and RPLs back as early as 2014. And because of this expertise and track record, I think we're uniquely capable of revolving the challenging situations that arise with delinquent or defaulted borrowers. I'll also point out that our multi-family loan portfolio is different from most others in that these are small-balanced, transitional multi-family loans with an average balance of about 3.2 million. That said, the properties that collateralize these loans are often unique situations, and the outcome from defaulted loans is one-off circumstances, which makes it really difficult to forecast.

Speaker Change: and because of this expertise and track record i think we're uniquely capable of evolving the challenging situations that arise with the linqun or defaulted borrowers

Michael Roper: I'll also point out that our multifamily loan portfolio is different from most others in that these are small balance transitional multifamily loans with an average balance of about $3.2 million. That said, the properties that collateralize these loans are often unique situations, and the outcome from defaulted loans is one-off circumstances, which makes it really difficult to forecast. These resolutions could occur quickly, or they could take months or years to resolve, and the outcomes could range from a full payoff to a loss. So it's difficult to forecast the timing and severity in any sort of accurate fashion.

Michael Roper: That said...

Michael Roper: The properties that collateralize these loans are often unique situations, and the outcome from defaulted loans are one-off circumstances, which makes it really difficult to forecast.

Michael Roper: These resolutions could occur quickly, or they could take months or years to resolve. And the outcomes could range from a full payoff to a loss. So it's difficult to forecast the timing and severity in any sort of accurate fashion.

Stephen Laws: Great. I understand and appreciate the comments around that.

Speaker Change: Great. I understood and appreciate the comments around that. I want to touch a little bit on just the shift in interest rate and outlook. I appreciate the update on post-order book value and the sensitivity table in the press release. Can you talk about, you know, on that,

Craig Knutson: I want to touch a little bit on just the shift in interest rates and outlook. I appreciate the update on post-order book value and the sensitivity table in the press release. Can you talk about that, does that sensitivity table really look at existing fair value marks, or can you talk about how a shift in prepayment speeds might allow you to recover some of the portfolio discount at a faster pace and kind of how you think about it? This is what we're right at.

Speaker Change: Does that sensitivity table really look at existing fair value marks or can you talk about how a shift in prepayment speeds might allow you to recover some of the portfolio discount at a faster pace and kind of how you think about, you know, the lower rate out.

Craig Knutson: Yeah, so I think you're referring to, are you referring to the, I guess, the shock table and the pressure release, which shows the sensitivity to changes in interface? That's right. Yeah, so at the end of the day, you know, we do have positive interest rate duration. And so, you know, to that extent, if rates are coming down, that tends to be positive for our book value. But the other thing is, you know, we do have, and as rates come down as well, on top of that, you may see an increase in prepayment and prepayment activity.

Michael Roper: hel

Speaker Change: Yeah, so I think you're referring to, are you referring to, I guess, the shock table in the press release, which shows the sensitivity to changes in interest rates?

Michael Roper: That's right

Michael Roper: At the end of the day, we do have positive interest rate duration. To that extent, if rates are coming down, that tends to be positive for our book value.

Speaker Change: You know, we do have, and as the rates come down as well, on top of that, you know, you may see an increase in prepayment and prepayment activity, and because of our loan book is marked at a discount, you know, any prepayments there tend to be positive both to income and book value.

Michael Roper: And as it relates to just the curve in general, steepening up the curve is going to help from lowering our cost of funds perspective. And as we mentioned in the...

Craig Knutson: And because our loan book is marked at a discount, you know, any prepayments there tend to be positive both for income and book value. And as it relates to just the curve in general, you know, steepening up the curve is going to help from a lowering our cost of funds perspective. And as we mentioned in the opening remarks, we are, from a hedging perspective, have been focused on and will be focused more on hedging the long end of the curve and, you know, creating some optionality on the front end to allow the liabilities to reprice. And so I think, you know, there are a couple of things that one, just the book value, but also, you know, as loans at a discounted prepay, it's positive for income.

Speaker Change: in the opening remarks we are from a heading perspective

Speaker Change: have been focused and will be focused more on hedging the long end of the curve and you know creating some optionality on the front end to allow the liabilities to reprice and so I think you know so there's a couple of things there one just the book value but also you know as loans that a discount prepay it's positive for income

Craig Knutson: Great. I appreciate the comments this morning. Thank you.

Stephen Laws: Great. I appreciate the comments this morning. Thank you.

Craig Knutson: great appreciate comments this morning thank you

Operator: We'll now go to the line of Bose George with KBW. Please go ahead.

Speaker Change: ex steason

Craig Knutson: We'll now go to the line of Bose George with KBW. Please go ahead. Hey guys, good morning. As you noted, the non-QM activity has been really robust this year. As rates go down, can you just talk about your expectations for that market? Presumably increased strength, but just any thoughts about how that plays out, especially as the conforming market might become a little stronger as well.

Bose George: Hey guys, good morning. As you noted, the non-QM activity has been really robust this year. As rates go down, can you just talk about your expectations for that market, presumably increased strength, but just any thoughts about how that plays out, especially as the, you know, the conforming market might become a little stronger as well?

Craig Knutson: Yeah, I mean, on the non-QM side, what we have seen is rates have sort of come down a bit, and we've seen, you know, spreads tighten on the securitization side, and demand for the loans has picked up significantly. So we have seen, you know, premiums on that paper reach levels that we haven't seen in the past, you know, say several years.

Bryan Wulfsohn: Yeah, I mean, on the non-QM side, what we have seen, we were able to be pretty active in the second quarter and add. What we have seen is rates have sort of come down a bit, and we've seen, you know, spreads tighten on the securitization side. Demand for the loans has picked up significantly. So we have seen, you know, premiums on that paper reach levels that we haven't seen in the past, you know, say several years.

Bryan Wulfsohn: Yeah, I mean, on the non-QM side, what we have seen, we were able to be pretty active in the, you know, in the second quarter in adding.

Bryan Wulfsohn: What we have seen is rates have sort of come down a bit, and we've seen spreads tighten on the securitization side. Demand for the loans has picked up significantly.

Bryan Wulfsohn: So, we have seen, you know, premiums on that paper reach levels that we haven't seen in the past.

Craig Knutson: And because of that, because of that competitiveness, we're sort of, you know, we're somewhat sanguine on, you know, adding to that portfolio significantly, given the premiums that are out there in the marketplace. We have other ways, you know, multiple ways to source loans. So, you know, one way is flow, another is bulk.

Bryan Wulfsohn: And because of that, because of that competitiveness, we're sort of, you know, we're somewhat sanguine on, you know, adding to that portfolio significantly, given the premiums that are out there in the marketplace. We have other ways, you know, multiple ways to source loans. So, you know, one way is flow, another is bulk.

Bryan Wulfsohn: you know, say several years.

Bryan Wulfsohn: and because of that because of that competitiveness

Bryan Wulfsohn: We're sort of, you know, we're...

Speaker Change: we or some it sang went on on adding to that portfolio is significantly given that the premium that are out there inthe marketplace we have other ways multiple ways of source loans

Bryan Wulfsohn: So, you know, one way is flow, another is bulk.

Craig Knutson: So we're focusing more now on flow channels versus bulk as just the bulk bids are very competitive. And as rates come down, we do expect to see more supply of non-QM. And, you know, we're hopeful that, you know, premiums will moderate somewhat in the coming months and quarters, and that will allow us to be, you know, a bit more competitive and add to that portfolio as well. And Boaz, I think

Bryan Wulfsohn: So we're focusing more now on flow channels versus bulk as just the bulk bids are very competitive. And as rates come down, we do expect to see more supply of non-QM. And, you know, we're hopeful that, you know, premiums will moderate somewhat in the coming months and quarters, and that will allow us to be, you know, a bit more competitive and add to that portfolio as well. And Boaz, I think

Bryan Wulfsohn: So we're focusing more so now on flow channels versus bulk as just the, you know, bulk bids are very competitive. And as, you know, rates come down, you know, we do expect to see more supply of non-QM and, you know, we're hopeful that, you know, premiums will moderate somewhat in the coming months and quarters and that will allow us to be, you know, a bit more competitive and adding to that portfolio as well.

Craig Knutson: I suppose I think some of those premiums that Bryan talked about are just, you know, loans that were originated recently but probably at higher rates than where they'd get originated today. So, you know, it stands to reason with race rallying that those are going to command premiums. But I think the origination coupons, if you will, are likely going to trace rates.

Bose George: I suppose I think some of those premiums that Bryan talked about are just, you know, loans that were originated recently but probably at higher rates than where they'd get originated today. So, you know, it stands to reason with race rallying that those are going to command premiums. But I think the origination coupons, if you will, are likely going to trace rates.

Bose George: And Bose, I think some of those premiums that Bryan talked about are just...

Bose George: You know, they're loans that were originated recently, but probably at higher rates than where they'd get originated today, so it, you know, it stands to reason with rates rallying that those are going to command premiums. But I think the origination coupons, if you will, are likely going to trace rates.

Bose George: Okay, that makes sense. Thanks.

Speaker Change: Okay, that makes sense. Thanks. And then I had a question on table six, where you have the LTV by the different credit buckets, for the single family rental,

Bose George: And then I actually had a question on table six, where you have the LTV by the different credit buckets. For the single family rental credit bucket, the 60 plus LTV, you know, that's a lot higher than the LTV of the typical portfolio. So is that, I mean, are borrowers who have the higher LTV, you know, going delinquent more, or just curious why that's the case, where it's not that, you know, the case isn't similar for the other categories?

Speaker Change: Credit Bucket, 60 plus LTV, you know, that's a lot higher than the LTV of the typical portfolio. So is that, I mean, are borrowers who have the higher LTV, you know, going delinquent more or just curious why that's the case where it's not that, you know, the case isn't similar for the other categories.

Craig Knutson: Yeah, Bose, no, thanks for the question. Yeah, I think so the LTVs there are related to a delinquent situation with respect to, you know, a handful of borrowers where it's concentrated in areas that have experienced economic stress and kind of lower home price appreciation. And so it's more of a unique situation with respect to that. But, you know, it is loans that are in the foreclosure process and that we're working through, but that's what that relates to.

Bose George: Yeah, Bose, no, thanks for the question. Yeah, I think, so, the LTVs there are related to a delinquent situation with respect to, you know, a handful of borrowers.

Bose George: where...

Speaker Change: it's concentrated an areas that have experienced economic stress and kind a lower home ice appreciations and so it's more for a unique situation with respect to that but you know if it is loans that are in the for cootional process and then we're working through but ' that's that place

Bose George: Okay, great. Thanks.

Operator: We'll next go to a line by Eric Hagen with BTIG. Please go ahead.

Speaker Change: Okay, great. Thanks.

Speaker Change: We'll next go to a line of Eric Hagen with BTIG. Please go ahead.

Jake Katsikas: Good morning, this is Jake Katsikas on for Eric. Thanks for taking my questions. Do you guys have a rough estimate for how much mark to market upside you would experience in the portfolio if the Fed were to cut rates by 50 basis points next month?

Jake Katsikis: Hi, good morning. This is Jake Katsikis on for Eric. Thanks for taking my questions. Do you guys have a rough estimate for how much mark-to-market upside you would experience in the portfolio if the Fed were to cut rates by 50 basis points next month?

Craig Knutson: Yes, we show a shock table on Table 7 of the press release, which we were actually referring to earlier. I think you said a 50 basis point cut would imply about a 3% upside in our equity.

Speaker Change: Yes, we show a shock table on table 7 of the press release, which we were actually referring to earlier. I think you said a 50 bits cut would imply about a 3% upside in our equity.

Jake Katsikas: Great, thank you. And then, shifting back over to the non-QM portfolio, how do you think delinquency rates would respond to higher levels of unemployment? And how much production of non-QM do you expect we would see in the market in general under those conditions of higher unemployment?

Speaker Change: All right, thank you. And then shifting back over to the non-QM portfolio, how do you think delinquency rates would respond to higher levels of unemployment and how much production of non-QM do you expect we would see in the market in general under those conditions of higher unemployment? Thank you.

Craig Knutson: Thank you.

Craig Knutson: Yeah, I mean, if we saw higher levels of unemployment, obviously, we would expect delinquencies to go up. What gives us comfort there is, you know, the LTVs on our non-QM portfolio are pretty low. If you look at the presentation, somewhere HPA adjusted in the mid-50s.

Speaker Change: yeah i mean

Speaker Change: If we saw higher levels of unemployment, obviously we would expect delinquencies to go up. What gives us comfort there is the LTBs on our non-QM portfolio are pretty low. If you look at the presentation, somewhere HPA adjusted in the mid-50s.

Craig Knutson: So for our existing book, you know, we're really not, you know, not all that concerned if there was an uptick in delinquencies. You know, as it relates to new, new origination, yeah, sure, I'm sure if the economy was to struggle more, right, as you know, non-QM loans are made to a lot of, you know, business owners and the like. And if they're, if they're seeing stress, you know, maybe there would be a little bit less production.

Speaker Change: So, for our existing book, you know, we're really not, you know, not all that concerned if there was an uptick in delinquencies.

Speaker Change: As it relates to new origination, I'm sure if the economy was to struggle more, as you know, non-QM loans are made to a lot of business owners and the like, and if they're seeing stress, maybe there would be a little bit less production.

Craig Knutson: But, you know, at the same time, if a business sort of continues to need to run, and they need financing, and they have a lot of trapped equity in their homes, cash out refinance or potentially a second lien is a lifeline for them to keep the business going. So there are sort of offsetting factors that we could see that would impact non-QM production going forward.

Bose George: you know, at the same time.

Speaker Change: If a business sort of continues to need to run, and they need financing, and they have a lot of trapped equity in their homes.

Bose George: You know, a cash out refinance or potentially a second lien is a lifeline for them to keep the business going. So there's sort of offsetting factors that we could see that would impact 9-QM production going forward.

Jake Katsikas: Alright, thank you guys. (Inaudible) Thanks.

Bose George: Hi.

Speaker Change: Alright, thank you guys.

Operator: We'll now go to the line of Doug Harter with UBS. Please go ahead.

Bose George: thanks

Speaker Change: We'll now go to the line of Doug Harter with UBS. Please go ahead.

Douglas Harter: On the potential for re-securitizing, you know, can you talk about the, you know, kind of try to help us size the puts and takes of freeing up equity versus a lot of those deals that are much lower coupon, you know, just how you're thinking about it, how close you are to, you know, being able to execute profitably some of those re-securitizations. Sure, Doug.

Bose George: Thanks.

Speaker Change: on the potential for re-securitizing.

Speaker Change: You know, can you talk about the, you know, kind of try to help us size the puts and takes of freeing up equity versus a lot of those deals are much lower coupon, you know, just how you're thinking about it, how close you are to, you know, being able to execute profitably some of those re-securitizations? Yeah. Yeah. Yeah.

Craig Knutson: Sure, Doug. Obviously, the coupon on the outstanding securities factors into the decision about whether to call deals. I'll just point out that, you know, the lowest coupons are obviously on the most senior bonds, those sold as AAA bonds typically, and those are the first ones to pay down. So while we might have a pretty low coupon on the AAAs that are outstanding, you know, we might have a small amount of that outstanding.

Speaker Change: Sure, Doug. So, you know, obviously the, you know, the coupon on the outstanding security factors into the decision about whether to call deals.

Speaker Change: I'll just point out that, you know, the lowest coupons are obviously on the most senior bonds, the sold-as AAA bonds typically, and those are the first ones to pay down. So while we might have a pretty low coupon on the AAAs that are outstanding,

Craig Knutson: So we, you know, we really look at the whole deal in totality, but, you know, rest assured, you know, we run the numbers. And if some of those deals that I think that we did back in early 21, where we sold AAAs below 1% yields, you know, those probably aren't in the money until those AAAs pay down more. So it's just, it's part of the calculus that goes into it.

Speaker Change: You know, we might have a small amount of that outstanding. So, you know, we really look at the whole deal in totality. But, you know, rest assured, you know, we run the numbers. And if, you know, some of those deals, I think, that we did back in early 21, where we sold AAAs below 1% yields,

Craig Knutson: But, you know, the example that we used in this corner of calling an NPL deal. So that's an NPL deal that's been out for quite some time. We called that deal, and many of the loans in that deal are now re-performing, right, which is a testament to our asset management group that we turn non-performing loans into re-performing loans. And we're then able to securitize those into a re-performing loan deal, which is a rated deal. So it obviously trades at lower yields than a non-rated deal would. So that's just, you know, one other example of some of the optionality that we have in that portfolio.

Speaker Change: You know, those probably aren't in the money until those AAAs pay down more. So it's just, it's part of the calculus that goes into it.

Bose George: But, you know, the example that we used in this quarter of calling an NPL deal, so that's an NPL deal that's been out for quite some time. We called that deal. Many of the loans in that deal are now re-performing, right, which is a testament to our asset management group that

Speaker Change: We turn non-performing loans into re-performing loans, and we're then able to securitize those into a re-performing loan deal, which is a rated deal, so it obviously trades at lower yields than a non-rated deal would. So that's just, you know, one other example of some of the optionality that we have in that portfolio.

Craig Knutson: Great. And then obviously, it's still kind of early days from the recent volatility. But, you know, kind of what is your outlook for securitization spread, you know, kind of as we move forward here in the third quarter?

Speaker Change: great um and then i guess obviously it's still kind of

Speaker Change: early days from the recent volatility, but you know kind of what is your outlook for for securitization spreads you know kind of as we as we move forward here in the third quarter?

Craig Knutson: So they've been, as I said in my prepared remarks, the securitization spreads have been pretty stable lately. I think, you know, if you see a big rally in rates, you'll probably at least see an, you know, intermediate term, you'll probably see a little wider spread on securitizations just because of the yield sticker shock. But the demand has been really good. You know, Bryan mentioned that we've already eclipsed 2023's volume of securitization.

Bose George: Okay, that makes sense. Thanks.

Bose George: And then I actually had a question on table six, where you have the LTV by the different credit buckets. For the single family rental credit buckets, the 60 plus LTV, you know, that's a lot higher than the LTV of the typical portfolio. So is that, I mean, are borrowers who have the higher LTV, you know, going delinquent more, or just curious why that's the case, where it's not that, you know, the case isn't similar for the other categories?

Michael Roper: Yeah, Bose, no, thanks for the question. Yeah, I think the LTVs there are related to a delinquent situation with respect to, you know, a handful of borrowers where it's concentrated in areas that have experienced economic stress and kind of lower home price appreciation. And so it's more of a unique situation with respect to that. But, you know, it is loans that are in the foreclosure process. And then we're working through it, but that's that, that's what that relates to. Okay.

Bose George: All right, thank you. And then, shifting back over to the non-QM portfolio, how do you think delinquency rates would respond to higher levels of unemployment? And how much production of non-QM do you expect we would see in the market in general under those conditions of higher unemployment?

Operator: Thank you.

Speaker Change: So they've been, as I said in my prepared remarks, the securitization spreads have been pretty stable lately. I think, you know, if you see a big rally in rates, you'll probably at least see a, you know, intermediate term, you'll probably see a little bit wider spreads on securitizations.

Operator: Thanks.

Operator: Sure, Doug.

Craig Knutson: Early days from the recent volatility. But, you know, kind of what is your outlook for securitization spread, you know, kind of as we move forward here in the third quarter?

Craig Knutson: So they've been, as I said in my prepared remarks, the securitization spreads have been pretty stable lately. I think, you know, if you see a big rally in rates, you'll probably at least see an intermediate term. You'll probably see a little wider spread on securitizations just because of the sort of yield sticker shock, but the demand has been really good. You know, Bryan mentioned that we've already eclipsed 2023's volume of securitization.

Craig Knutson: just because of the sort of yield sticker shock.

Brian: But the demand has been really good. You know, Brian mentioned that we've already eclipsed 2023's volume of securitization. So the buyers are there and deals are typically oversubscribed, so it's a pretty good dynamic for that market. But I think, you know, a strong rally in rates, you could see a temporary...

Craig Knutson: So, you know, the buyers are there, and deals are, tranches are typically oversubscribed. So, you know, it's a pretty good dynamic for that market. But I think, you know, a strong rally in rates could see a temporary, you know, modest widening of spreads.

Craig Knutson: So, you know, the buyers are there, and deals are typically oversubscribed. So, you know, it's a pretty good dynamic for that market. But I think, you know, a strong rally in rates could see a temporary, you know, modest widening of spreads.

Craig Knutson: One of the important aspects of it is that the risk of higher rates is kind of off the table for a lot of investors, which caused spreads to widen mostly in 2022 and 2023. So we probably saw a peak of securitization spreads in, call it, September and October of 2023. And so as rates have come down, and the fear of further Fed hikes is off the table, and we're now firmly focused on rates lower, you know, that has brought spreads lower and stability. Yes, there will be pockets of volatility, but, you know, I think that's very constructive for spreads and securitizations going forward.

Craig Knutson: modest widening of spread

Craig Knutson: you oneedof the important aspect always like the risk of higher rate if 's kind of off the table for a lot of investors

Craig Knutson: which cost spreads to widen mostly in two twentytwo and twothousand and twenty three

Craig Knutson: andso we probably saw a peak up securitization breread and call it september october and twothousand andtwentythree years as rates and come down

Speaker Change: and the fear of further fhehikes is off the table every we're now firmly focused on race lower that has broad stress lower ren stability yes it will be pockets of volatility but you know i think that's very contructive or prospeciiveand securitizations going for

Douglas Harter: Great. I appreciate it. Thank you.

Craig Knutson: Thank you for your time.

Craig Knutson: appreciate thank you

Speaker Change: Thanks Doug. And as a reminder if you'd like to place yourself in the queue you may press 1 then 0 at this time. We'll now go to the line of Steve DeLaney with Citizens JMP. Please go ahead.

Steven DeLaney: Good morning. Hello, everybody.

Speaker Change: Good morning. Hello, everybody. Look, congratulations on a strong quarter and building your portfolio to $10 billion. That's a nice round number.

Steven DeLaney: Look, congratulations on a strong quarter and building your portfolio to $10 billion. That's a nice round number. How much? Yeah, how much? Twenty, I guess is the next one, right, Craig?

Operator: That's a nice round number. How much additional... Yeah, how much? 20 I guess is the next one, right, Craig?

Operator: Yeah, how much, 20 I guess is the next one, right, Craig? How much additional investment capacity do you guys think you have, you know, with your current capital base and liquidity? And as part of that.

Craig Knutson: You sold some loans. So are there additional underperforming loans in the portfolio that you might be able to sell to upgrade, you know, the overall portfolio return? Thanks.

Craig Knutson: Sure. So, where we currently sit and where leverage sits, I'm not sure there's room to grow the portfolio materially, certainly not to $20 billion and not to $15. But you're right, Steve, there are always tweaks, and there are maybe loan sales or collapsed securitizations that unlock equity. And so I think future portfolio growth is probably going to be around that. I think each of the asset classes I think are appropriately levered. So while there could be some growth, absent additional equity or outside capital, I think portfolio growth will be modest at best.

Speaker Change: Sure. So, you know, I think...

Craig Knutson: where we currently sit and where leverage sits, you know, I'm not sure there's...

Craig Knutson: There's room to grow the portfolio materially, certainly not to $20 billion, and not to $15.

Craig Knutson: But you're right, Steve. There are always tweaks and there are maybe loan sales or collapsing securitizations that unlock equity. And so I think...

Speaker Change: You know, future portfolio growth is probably going to be around that. I think, you know, each of the asset classes are, you know, I think are appropriately levered.

Speaker Change: So, you know, while there could be some growth, you know, absent additional equity or, you know, outside capital, you know, I think portfolio growth will be modest at best.

Craig Knutson: I just want to touch on the loan sales that we did in the quarter. These were newly originated loans where we just saw an increased premium in the marketplace, as we mentioned on the call, and good execution to sell those.

Operator: And just, Steve, on the loan sales that we did in the quarter, these were newly originated loans where we just saw an increased...

Craig Knutson: as you mentioned on the call and good execution to sell those, so it's ultimately healthy premium.

Speaker Change: as you mentioned that that is an important part of flexibility and think you are going forward you will probably have more of those things where previouslythey elevated in this rate environment in terms of rest alone sales

Steven DeLaney: Well, it looks like the yield curve, we're going to get benefits both in the short term and, I think, longer term as well. I'm kind of focused on the fixed rate side, and for you guys right now, and for you guys, it's the single family rental product, right? That is your primary fixed rate product, am I right on that? Of course, you're, I'm talking about the origination side with Lima; I'm not talking about buying, you know, NQMs and that type of thing. So is that where, you know, a lower coupon on fixed rate, SFR, you know, investor loans, is that an opportunity, a segment of your business that could really, could really pick up with the lower rates?

Craig Knutson: Well, it looks like the yield curve, we're going to get benefit both on short term and I think longer term as well. I'm kind of focused on the fixed rate side and for you guys right now, and for you guys, it's the single-family rental product, right, that is your primary fixed rate.

Craig Knutson: Am I right on that? Of course, I'm talking about the origination side with Lima. I'm not talking about buying, you know, NQMs and that type of thing. So is that where, you know, a lower coupon on fixed rate SFR, you know, investor loans?

Craig Knutson: Is that an opportunity, a segment of your business that could really pick up with the lower rates?

Craig Knutson: Yeah, that's correct. I think as rates come down, there will be more opportunities there simply because, you know, that's a debt service coverage ratio product, and so, you know, as that debt service cost comes down, more loans make sense, more deals make sense, and there's also going to be more activity in the marketplace. You know, that product was a much larger part of our origination mix on the Lima side back in 21 and 22.

Craig Knutson: Yeah, that's correct. I think as rates come down, there's going to be more opportunities there.

Craig Knutson: Simply because, you know, the debt service covers ratio product, and so, you know, as the debt service cost comes down, you know, more loans make sense, more deals make sense, and there's also going to be more activity in the marketplace.

Speaker Change: You know, that product was a much larger part of our origination mix on the Lima side back in 21 and 22.

Craig Knutson: It was closer to like 30 to 35 percent of the origination volume, as opposed to in 2023 when it was closer to, you know, 15 to 20 percent. And so, yeah, we do think that there's potential optionality there from a volume perspective.

Speaker Change: It was closer to like 30-35% of the origination volume, as opposed to in 2023 when it was closer to 15-20%. And so yeah, we do think that there's potential optionality there from a volume perspective.

Operator: And you expect, you think you could have some sort of the fix and flips or the residential bridge, you know, those people might be still looking at SOFR-based products, but, you know, as rates come down, you think that you can see some flipping there. And how does that work play into, you know, an improved securitization opportunity if that trend occurs?

Craig Knutson: And you expect, you think you could have some sort of the fix and flips or the residential bridge, you know, those people might be still looking at SOFR-based products, but, you know, as rates come down, you think that you can see some flipping there. And how does that work play into, you know, an improved securitization opportunity if that trend occurs?

Operator: and you expect news do you think you could have some sort of

Operator: the fix and flips or the residential bridge.

Operator: those people might be still carrying at super-based product but as rate come down you think that you can see some clipping there

Operator: and how does that work play into you?

Operator: you know.

Operator: an improved securitization opportunity if that trend occurs.

Craig Knutson: So, Arkell, our fixed and flipped loans, they have a fixed rate coupon, and so really, yeah. But you're right. I mean, what we're seeing in the marketplace is, you know, securitization execution has improved a lot throughout this year. And on the RTL side, you know, spreads have come in probably from the high 200s all the way down to, you know, 200 or even inside of that on new deals. So I think, you know, that is an opportunity to improve the liability side as well, because some of our older deals will get callable and so on and so forth.

Speaker Change: So, RTL, our Fixed and Flipped Loans, they have a Fixed Rate Coupon, and so really, yeah.

Speaker Change: Okay. But you're right. I mean, so what we're seeing in the marketplace is, you know, securitization execution has improved a lot throughout this year. And on the RTL side, you know, spreads have come in probably from the high 200s.

Operator: All the way down to, you know, 200 or even inside of that on new deals. So, I think, you know, that is an opportunity to improve the liability side as well, because some of our older deals will get callable and so on and so forth.

Craig Knutson: But, you know, I think with respect to the RTL market at large, there's also increased competition. You know, you see newer entrants come in, and kind of older hands that were dormant in 22 and 23 kind of resurface. So I would expect, you know, coupons have come down a little bit on the RTL product itself on the loan side, and there will probably be more competition, but, you know, we should also see increased activity on the flipping side throughout the year, as we started to see a little bit in the latest data that has come out.

Speaker Change: But, you know, I think with respect to the RTO market at large, there's also increased competition. You know, you see newer entrants come in and kind of older hands that were dormant in 22 and 23 kind of resurface. So I would expect...

Operator: And we should see increased activity on the flipping side throughout the year, as we started to see a little bit in the latest data that has come up.

Steven DeLaney: Appreciate all the comments and congrats again on a strong quarter. Thanks for staying with me.

Operator: I appreciate all the comments and congrats again on a strong quarter.

Operator: Appreciate all the comments and congrats again on a strong quarter.

Speaker Change: penschsteay c x

Operator: And at this time, there are no further participants in the queue. You may continue.

Speaker Change: And at this time there are no further participants in queue. You may continue.

Craig Knutson: All right, thank you everyone for your interest in MFA Financial. We look forward to speaking with you again in November when we announce our third quarter results.

Speaker Change: All right. Thank you everyone for your interest in MFA Financial. We look forward to speaking with you again in November when we announce third quarter results.

Operator: This conference will be available for replay after 12 p.m. Eastern today through November 8th at midnight. You may access the AT&T Replay system at any time by dialing 1-866-433-4232. 207-1041 and entering the access code 871-2998. International participants may dial 1-402-8111 or 970-0847. Those numbers again are 1-866-207-1041 or 1-402-970-0847 with an access code of 871-2998. That does conclude your conference call for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Speaker Change: And this conference will be available for replay after 12 p.m. Eastern today through November 8th at midnight. You may access the AT&T Replay system at any time by dialing 1-877-423-4243.

Operator: 207-1041 and entering the access code 871-2998. International participants may dial 1-402-8333 or 970-0847. Those numbers again are 1-866-207-1041 or 1-402-970-0847 with an access code of 871-2998. That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Operator: eight six six two zero seven one zero four one and enteruring the access code eight seven one two nine nine eight international participants may dial one four zero two

Operator: nine seven zero zero eight four seven those numbers again are one eight six six

Operator: 207

Operator: 1041 or 1-402-970-0847 with an access code of 871-2998.

Operator: That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Craig Knutson: Despite the volatile rate environment, MFA posted a solid second quarter with distributable earnings of 44 cents and a respectable total economic return of 2.6 percent driven by significant credit spread tightening during the quarter. During the quarter, we took advantage of this spread tightening, and we were able to opportunistically sell certain loans at prices well above our mark. Our gap in economic book values was flat for the quarter.

Craig Knutson: However, we did see delinquencies tick up in our multi-family transitional loan book. Like others in the industry, we've been watching this multi-family sector with a growing sense of unease over the last several quarters. Although rents have held steady in most markets, we have seen moderation from the rapid pace of rent appreciation experienced over the last several years. Additionally, the combination of higher cap rates and increased supply has hurt multi-family property values in many markets.

Craig Knutson: These resolutions could occur quickly, or they could take months or years to resolve, and the outcomes could range from a full payoff to a loss. So it's difficult to forecast the timing and severity in any sort of accurate fashion.

Craig Knutson: So it's ultimately a healthy premium. And I think, as you mentioned, that is an important part of our flexibility. And I think going forward, we probably have more of those things where if premiums stay elevated in this rate environment, in terms of, you know, breathing a long sale.

Q2 2024 MFA Financial Inc Earnings Call

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