Q4 2024 MFA Financial Inc Earnings Call
[music].
Greetings and welcome to the MFA financial fourth quarter 2024 earnings conference call and webcast.
At this time all participants are in a listen only mode.
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Hal Schwartz: As a reminder, this conference is being recorded its now my pleasure to trouble call over to Hal Schwartz General Counsel. Please go ahead.
Hal Schwartz: 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 reflects management's beliefs expectations and assumptions as to Mfa's future performance and operations. When used statements that are not historical in nature include.
Hal Schwartz: 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.
Hal Schwartz: 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.
Hal Schwartz: Makes for additional.
Hal Schwartz: Information regarding Mfa's use of forward looking statements. Please see the relevant disclosure in the press release announcing Mfa's fourth quarter 2024 financial results. Thank you for your time I would now like to turn this call over to Mfa's CEO Craig Knutson.
Craig Knutson: Thank you Hal.
Craig Knutson: Good morning, everyone and thank you for joining us for MFA Financial's fourth quarter 2024 earnings call with me today are Brian Wilson, our President and Chief Investment Officer, Mike Roper, our CFO and other members of our senior management team.
Craig Knutson: I'll begin with a high level review of the fourth quarter market environment, and then review 2024 highlights following my prepared remarks, I'll turn the call over to Mike to review our financial results in more detail followed by Bryan who will review our portfolio financing we move one in risk management before we open up the call for questions.
Craig Knutson: Fixed income markets reverse direction in the fourth quarter of 2024 after rallying strongly at the end of the third quarter. Following the fed's long awaited rate cut of 50 basis points on September 18th despite two.
Craig Knutson: Two additional 25 basis point rate reductions in November and December yields grows steadily higher during the fourth quarter with only a short lived rally after the election in November thankfully the yield curve steepened in the fourth quarter with two year yields rising 60 basis points, while 10 year rates rose nearly 80 basis points.
Craig Knutson: The economy has remained resilient and the labor market continues to show strength and inflation, while down materially from the highs still exhibits a persistent stickiness.
Craig Knutson: A shift in tone from the fed in the face of this data together with market concerns about deficits and anticipated treasury supply push rates higher in the fourth quarter.
This sell off in rates led to a modest economic book value decline for MFA and Q4 are a little less than 4% we.
Craig Knutson: We remained active during the quarter, adding over $700 million in loans, non QM and BPL and over $450 million of agencies, we executed three securitizations in Q4 on over $1 billion of loans, including RTL, non QM and NPL loans on <unk>.
Speaker Change: Sad note, but more.
Speaker Change: Be more in the sudden and unexpected passing of board member Frank All Rick on December 2nd.
Speaker Change: Our management team and board members will Miss Franks valuable insights Sage advice and quick when he was a trusted colleague and a dear friend of mine for over 40 years, our deepest sympathies are with his wife, Mary and Theyre large family.
Speaker Change: For the year 2024, we grew our assets from $10 8 billion to $11 4 billion, including an increase in our agency book of over 800 million ending the year at $1 4 billion.
Speaker Change: We believe that this agency position provides an attractive return profile, while increasing our liquidity and enabling us to easily complement the volume and timing of our loan acquisitions, which can vary month to month and quarter to quarter.
Speaker Change: Our recourse leverage remained at one seven times at year end same as at the end of 2023. This is primarily due to our reliance on securitization, which provides fixed and term nonrecourse financing.
Speaker Change: On page 21 in the appendix of our earnings deck, we show all of our outstanding Securitizations, including outstanding amounts weighted average coupon on sold bonds and the call ability of each deal. We believe that this is an underappreciated optionality that we have to call. These securitizations when it makes sense.
Speaker Change: So unlock additional liquidity and increased Roe.
Speaker Change: We also issued $225 par bonds early in 2024 totaling $190 million at an average coupon of just under 9%. These are five year bonds, but they are callable at par after two years.
Speaker Change: Specifically February and August of 2026.
Speaker Change: We also paid $1 40 in common dividends in 2024, which was the same as 2023 and the tax treatment of a substantial portion of these dividends is somewhat unique and we believe confers a material benefit to shareholders, which Mike <unk> will explain in more detail.
Finally, as we discussed on our third quarter earnings call in November we affected some management changes both at <unk> and MFA during 2024, and we are excited and confident in our leadership team for 2025 in the years ahead.
Speaker Change: And I'll now turn the call over to micro <unk> to talk about financial results. Thanks, Greg and good morning at December 31, GAAP book value was $13 39 per share and economic book value was $13 93 per share a decrease of approximately three 7% from $14 46 at the end of September.
Speaker Change: We delivered a total economic return of negative one 2% for the quarter and positive five 2% for the year.
Speaker Change: As Craig mentioned, we again declared dividends of 35 per share for the fourth quarter and $1 40 per share for the full year.
Speaker Change: We were happy to report in late January at approximately 40% of our 2020 for common dividends are treated as a non taxable return of capital to our shareholders.
Speaker Change: This was the fifth straight year that a substantial portion of our common dividend were treated as non taxable distributions.
Speaker Change: This favorable tax treatment substantially increases the after tax dividend yield realized by holders of our common stock.
Speaker Change: At December 31, we had a fully reserved the remaining deferred tax assets totaling $62 7 million.
Speaker Change: Which was carried at zero on our balance sheet.
Speaker Change: This DTA offer significant protection from future tax obligations, which allows us additional flexibility to efficiently structured transactions to minimize the total tax burden on our shareholders.
Speaker Change: So there can be no assurances about the tax treatment of potential future dividend payments. We believe that this favorable tax treatment has been an often underappreciated benefit of owning MFA is common stock.
Speaker Change: Switching back to our quarterly results for.
Speaker Change: For the fourth quarter MFA generated GAAP earnings of $5 9 million or a loss of <unk> <unk> per basic common share.
Speaker Change: Our GAAP earnings were negatively impacted by higher rates across the yield curve.
Speaker Change: Distributable earnings for the fourth quarter were $40 8 million or <unk> 39 per basic common share up from 37 in the third quarter.
Speaker Change: The quarterly increase in our day was driven primarily by a <unk> <unk> reduction in realized credit losses on our fair value loans, a <unk> reduction in our provision for income taxes, and an offsetting <unk> <unk> reduction in the carry earned on our interest rate swaps.
Speaker Change: Swap carry in the quarter was lower primarily as a result of lower average sulfur rates. Following the recent series of cuts in the federal funds rate.
Speaker Change: Additionally, near the end of the quarter interest rate swaps with a notional value of $450 million and a fixed pay rate of approximately 90 basis points reached a maturity.
Speaker Change: As we highlight on slide eight of the presentation, we have an additional $550 million of swaps that will mature in the first quarter and a further $125 million that will mature in the second quarter.
Speaker Change: Collectively this $1 1 billion notional of expiring or expired swaps contributed approximately <unk> <unk> to our fourth quarter distributable earnings.
Speaker Change: Based on current swap rates, we expect that the same cohort of swaps will contribute approximately <unk> <unk> to our first quarter day, followed by an insignificant impact in the second quarter.
Speaker Change: Although the exploration of these swaps will reduce our reported distributable earnings and increase our reported cost of funds, we feel better about the fundamental long term earnings power of our portfolio today than we have in quite some time.
The positively sloped yield curve additional rate cuts expected increasingly accommodative financing spreads our significant liquidity and strong housing fundamentals should all serve as tailwind for our business moving forward.
Speaker Change: While <unk> is one of several factors that our board considers in setting dividend policy. We believe that the earnings power of the portfolio remains strong today and the aforementioned macroeconomic tailwind are far more indicative of the earnings power of our portfolio and the impact of the expiration of the legacy interest rate swaps.
Speaker Change: Finally, subsequent to quarter end, we estimate that our economic book value was effectively unchanged since the end of the year.
Brian Wilson: I'd now like to turn the call over to Brian who will talk through our portfolio highlights in the performance of <unk>.
Brian Wilson: Thanks, Mike.
Brian Wilson: We continue to have success, adding to our $10 $5 billion investment portfolio acquiring over $1 $2 billion between loans and securities in the fourth quarter.
Brian Wilson: $470 million of the additions were non QM loans carrying a coupon of seven 8% and an LTV of 67% <unk>.
Brian Wilson: The majority of those loans were acquired through our bulk channel.
Brian Wilson: We were active again purchasing agency securities growing the portfolio by almost 50% to $1 4 billion at the end of the year.
Brian Wilson: MBS acquired over the quarter were no to low pay up five five at modest discounts to par.
Brian Wilson: We believe spreads and Carrie and agency MBS are attractive in addition to providing liquidity benefits to our portfolio.
Speaker Change: Lehman one originated $235 million of loans in the quarter with an average coupon of nine 5% and an LTV of 67%.
Speaker Change: For the total of 2020 for Nemo originated $1 4 billion and business purpose loans.
Speaker Change: Although origination may not have been as high as we would've liked.
Speaker Change: We have high confidence in the team of people down at Lehman, one and believe.
Speaker Change: The process and technological improvements being implemented will show growth throughout 2025.
Speaker Change: We continue to sell newly originated <unk> loans from Lima one.
Speaker Change: Over the quarter, we sold $111 million contributing $3 9 million to mortgage banking income.
Speaker Change: In addition, we sold $141 million of season, low coupon unsecured <unk> non QM loans.
Speaker Change: The sale combined with new additions increased our non QM portfolio coupon 25 basis points to 665.
Speaker Change: On the financing front, we finished the year strong issuing three securitizations in the fourth quarter are backed by over 1 billion <unk> of loans.
Speaker Change: Our legacy Rps NPL portfolio is now 98% securitized after our issuance of a non rated NPL deal.
Speaker Change: Important for MFA and Lima, one we were able to issue our first rated RTL securitization.
Speaker Change: Issuing over $200 million of bonds at a coupon just under 6% the rated nature of the transaction allows us to lower our cost of fund significantly from our last non rated RTL deal the.
Speaker Change: The senior tranche and a rated deal traded 75 basis points tighter than our last non rated transaction.
Speaker Change: And in December we completed our 16th non QM securitization backed by $380 million of loans.
After these three transactions over three quarters of our loan portfolio financed through securitization. Our funding profile has undergone a gradual yet significant transformation, making it much more resilient compared to previous years.
Speaker Change: We reduced our net asset duration modestly in the fourth quarter to one point or two from $1, one six a quarter ago.
Speaker Change: As a reminder, we primarily hedge our interest rate exposure through two key tools issuing fixed rate securitizations and utilizing interest rate swaps.
Speaker Change: Currently we have $5 9 billion in outstanding bonds from the Securitizations and $3 3 billion notional value of interest rate swaps as at the end of the year.
Speaker Change: Over the next two quarters 675 million of these swaps will be rolling off now.
Speaker Change: And as we continue to expand our portfolio with additional agencies, you can anticipate heightened swap activity and an increased utilization of longer dated swaps to ensure our portfolio remains balanced.
Speaker Change: Moving to our credit performance.
Speaker Change: 60, plus day delinquencies for our entire portfolio rose to seven 5% from six 7% a quarter ago.
Speaker Change: While we have observed an increase in portfolio delinquencies are low LTV ratios have played an important role in mitigating potential losses. The combination of our experienced asset management team and a low portfolio LTV gives us confidence that even with elevated delinquencies losses can be mitigated.
Speaker Change: And with that I will turn the call over to the operator for questions.
Speaker Change: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from a Q1 moment. Please while we poll for questions.
Speaker Change: First question today is coming from Bose George from <unk>. Your line is now live.
Bose George: Yes, good morning.
Speaker Change: Well Scott.
Speaker Change: Can you discuss where you see the current economic return of the portfolio.
Speaker Change: Is that kind of match this quarter and also just from your comments on the EDI just wanted to clarify so the swaps rolling off does that.
Speaker Change: Is that the comment that amendment does that go down by a couple of a couple of points.
Speaker Change: In the first quarter based on that.
Bill: Hey, Bill Thanks for the question.
So I think the first one about sort of the economic return.
Bill: Certainly if you look at the like the straight day Roe.
Bill: You are in the sort of low teens, just based on where it's been but I think we said a couple of times on these earnings calls that we'd like to think about.
Bill: The economic return, meaning if you were effectively to reshape the assets reshaped the liabilities and the hedges.
Bill: And sort of measure what that ROE is.
Bill: Turner right in that 10 ish percent range.
Bill: And I think when we think about the dividend sort of aligns really nicely with that economic earnings power.
Bill: Thinking about your second question.
Bill: The numbers I gave you my script, we had about nine in the fourth quarter.
Bill: We expect those swaps to contribute about <unk> <unk> for the first quarter before running off.
Bill: Does that answer your question.
Bill: Yes.
Bill: The impact on the day.
Bill: The difference between the nine and the <unk>.
Bill: For the first quarter is that right.
Bill: Exactly okay.
Bill: Okay.
Bill: And both of those.
Bill: Just mentioned in terms of day I think.
Bill: We felt that the GE was rather important, particularly when the fed was in the middle of a raising cycle, where they raised rates by 500 basis points because of using fair value accounting. There's just so much noise in the GAAP earnings due to fair value changes that I think we rely on another measure.
Speaker Change: Or is it more constant I think in a different rate environment as Mike said I think we think.
Speaker Change: We consider a lot of things and obviously the board considers a lot of things, but I think the.
Speaker Change: Economic earnings power of the portfolio when we when we say that we strike everything at market essentially that's what we do on our book value rates, our book value is mark to market.
Speaker Change: And so so that's sort of I think more of how we think about it than just being just married to a particular day number.
Speaker Change: Yes, no that makes sense, yes, so just to clarify so the the economic return is not declining by the differences in the data that <unk> is declining economic exactly.
Speaker Change: That's exactly right.
Speaker Change: The swaps 30 in book value right. So.
Speaker Change: The roll off of those swaps doesn't impact anything from an economic perspective.
Speaker Change: Okay. That's great. Thanks, and then just one more the agency MBS. Since you guys are putting on what's the return on those assets.
Speaker Change: Yes, we see has return in the mid teens.
Speaker Change: Okay, great. Thanks.
Bose George: Thanks Bose.
Speaker Change: Thank you. Your next question today is coming from Douglas Harter from UBS. Your line is now live.
Bose George: Hi, This is actually a Cory Johnson on for Doug.
Bose George: I just wanted to get at what was behind the increase in the delinquencies for single family and multifamily transitional loans.
Bose George: Why are those.
Delinquency tired.
Bose George: And I guess the other portfolio.
Bose George: Yes.
Speaker Change: Delinquencies are higher in those portfolios because Jeremy if you look across the our other asset classes that we invest in those are the riskiest parts right. So when you when you are lending against either fix and flip or ground up or bridge.
Bose George:
Bose George: Value add type projects. There is just additional risk and then with sort of the shorter term nature of those loans various things can occur in terms of loans, reaching maturity.
Bose George: And.
Bose George: Home may not have been sold yet so that loan can enter delinquency.
Bose George: If not extended so there's various things that can happen, but it's not sort of I guess unexpected that we're seeing higher levels of delinquency, we'd always like them to be lower.
Bose George: It's sort of the nature of the asset class comes along with it.
Bose George: Got it and then.
Bose George: What is like what is the.
Bose George: Loss.
Bose George: Experiencing on those portfolios and what type of loss.
Bose George: Our delinquencies are kind of assumed at the time of underwriting.
Speaker Change: Yes, I mean, we expect in terms of.
Bose George: Like underwritten losses.
Bose George: When we make loans, we kind of make somewhere between 50 and 100 basis points.
Bose George: Loss.
Speaker Change: On average.
Speaker Change: If you look back historically, given how much HPA we have had.
Speaker Change: We look at.
Speaker Change: Sort of a net losses type number where you offset that with other delinquent interest that's collected and extension fees collected.
Speaker Change: That number historically has been very low.
Speaker Change: Close to de Minimis now with HP.
Speaker Change: HPA sort of flattening out in certain areas, we do expect those loss numbers to sort of trend towards our expectation of 50 to 100 basis points.
Speaker Change: So that's kind of what we do expect going forward.
Speaker Change: Got it. Thank you appreciate that.
Speaker Change: Thank you. Your next question today is coming from Macau Goldman from Stephens. Your line is now live.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: If I could just follow up on Lima, one perhaps.
Speaker Change: How do you guys see things going whats your outlook for <unk> for the rest of the year.
Speaker Change: And what kind of product type loans are currently focused on it seems like the fourth quarter, most with single family transition.
Speaker Change: Sort of continue it's going to continue to be the focus going forward.
Speaker Change: Yeah, It's really single family continues to be the focus there.
Speaker Change: Transitional and term rental.
Speaker Change: We're doing a lot of things there we've hired additional salespeople to help support growth.
Speaker Change: We've moved we're gradually moving into the.
Speaker Change: The wholesale channel to grow the rental loan originations, which is sort of coming online now.
Speaker Change: Now so we do see prospects for growth in 2025.
Speaker Change: In terms of an exact number for 2025.
Speaker Change: <unk> be surprised if it's somewhere around $1 5 billion, but sort of trending up words towards the end of the year.
Speaker Change: Sort of the first quarter to be somewhat flattish versus the fourth quarter.
Speaker Change: Gotcha.
Speaker Change: As the management team from that unit now reporting directly to you Brian.
Speaker Change: Okay.
It reports up that the MFA collectively myself Craig.
Speaker Change: Laurie samples as well.
Speaker Change: Great. Thank you for that color and.
Speaker Change: Could I squeeze in a question about current book value maybe.
Speaker Change: Yes, we mentioned in the prepared remarks, we think it's effectively flat from.
Speaker Change: At the end of the year.
Speaker Change: And that's net of the dividend accrual.
Speaker Change: Got it. Thank you guys best of luck going forward.
Speaker Change: Thank you thanks for the questions.
Speaker Change: Thank you as a reminder, that star one to be placed in the question queue are.
Speaker Change: Next question is coming from Eric Hagen from <unk>. Your line is now live.
Eric Hagen: Hey, Thanks, I appreciate you guys.
Speaker Change: I've got a color on non QM. Good morning, I've got a couple of non QM I think I'll, probably just ask them together and then going back to the option to call on re securitize. The season deals I realize the cost of funds would go up relative to the cost on those old deals.
Eric Hagen: But on an economic business and indulgent the liquidity benefits in <unk>.
Eric Hagen: Leasing liquidity resetting the leverage maybe override that to a large today.
Eric Hagen: And then.
Eric Hagen: Joining question, what's the right way to think about a pickup in prepays for the non QM portfolio here both.
Both in terms of the economic return on the back book and the opportunity to recapture those loans in the portfolio going forward and what the return would look like there.
Speaker Change: So Eric I'll take the call or in the Securitizations question, and then and then have Brian talk about non QM I think.
Speaker Change: Yes, if you look at some of the coupons on some of the Triple plays that we sold back in 2021 I think there were some deals are those coupons were less than 1%.
Speaker Change: So clearly a new securitization would be at a higher rate, but you have to take the whole field holistically because there may be very little bit of that a one from a 'twenty one deal that's left outstanding right now.
Speaker Change: And so the ability to to substantially increase the borrowing because those deals delever as time goes on.
Speaker Change: It can be profound for Monroe standpoint, and Trust me we will.
Speaker Change: We run the math on those deals.
Speaker Change: It's fairly simple or somewhat complicated algebra problem.
Speaker Change: But at the end of the day, it's pretty straightforward.
Speaker Change: As it relates to Prepays.
Speaker Change: Sure.
Speaker Change: They did tick up in over the quarter.
Speaker Change: And there's a couple of nuance things as it relates to that.
Speaker Change: Prepays increasing for loans that we currently hold at a discount actually that is a positive for book value.
Speaker Change: Because of that.
Speaker Change: We get cash for something we hadn't marked at say 96 cents on the dollar.
Speaker Change: But for as it relates to day, when we get those prepaid because those loans were purchased at a premium years ago. There is an amortization amortization of that premium upon prepayments of that that Wood, Inc.
Speaker Change: Incrementally lower day.
Speaker Change: But again, we view that as a positive economically for the company.
Speaker Change: Yes, okay. Good stuff good answers there I appreciate it.
Speaker Change: Last one I mean can you just share the level of unfunded commitments in the range of one portfolio and over what timeframe you might expect those commitments. So you guys called out.
Speaker Change: Thank you Eric I'm not sure we have that number handy.
Speaker Change: It'll be in the K, it's probably in that $600 million range and sort of estimating.
Speaker Change: And in terms of.
Speaker Change: When we expect the funded.
Speaker Change: Okay over the next year or so.
Speaker Change: And just to keep in mind, Eric most of those loans are in revolving securitization. So it effectively self funds right like those pay downs from those drugs and obviously on our warehouse lines are lenders from those draws for us as they occur.
Speaker Change: Yes. Good reminder, about the securitization structure. Thank you guys appreciate it.
Speaker Change: Thank you Sir.
Speaker Change: Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any closing comments.
Speaker Change: Alright. Thank you everyone for your interest in MFA financial we look forward to speaking with you again in May when we announce our first quarter results.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day.
Speaker Change: Thank you for your participation today.