Q1 2025 MFA Financial Inc Earnings Call
and many more. Thank you. Thank you.
Speaker Change: Greetings and welcome to the MFA Financial First Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.
Speaker Change: I will now turn the conference over to our host, Hal Schwartz, General Counsel. Thank you, you may begin.
Speaker Change: When used, statements that are not historical nature, including those containing words such as will, believe, expect, anticipate, estimate, should, could, would, or similar expressions are intended to identify forward-looking statements.
Speaker Change: Offward Looking Statements, Speak Only As Of The Date On Which They Are Made [inaudible]
Speaker Change: These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors, including those described in the MFA's annual report on Form 10K for the year end of December 31st, 2024, and other reports that it may file from time to time with the Securities and Exchange Commission.
Speaker Change: These risks on certainties 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.
Speaker Change: For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's first quarter 2025 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. Good morning, everyone, and thank you for joining us for MFA Financial's first quarter 2025 earnings call. With me today, our Bryan Wulfsohn, 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 first quarter market environment and then touch on some of our results, activities and opportunities.
Speaker Change: Then 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, Lehman One and Risk Management before we open up the call for questions.
Speaker Change: I must admit, it feels a little strange to talk about the first quarter of 2025, given the market turmoil that ensued on and after April 2nd.
Speaker Change: But despite the fact that it is not possible to unsee market development since April 2nd, it is instructive in the context of first quarter financial results.
Speaker Change: to recall the market environment in which these results were achieved
Speaker Change: and I promise that we'll also address market developments since quarter end later in this call.
Speaker Change: Fixed income markets were generally constructive throughout the first quarter of 2025. The 10-year-yield peak at 479 on January 14 and rallied to close the quarter at 420.
Speaker Change: Credit spreads tight and somewhat over January and February , but widened modestly in March as the market began to anticipate and focus on the upcoming trade policy announcements.
Speaker Change: MFA Sportfolio delivered a total economic return of 1.9% for the first quarter, which includes our first quarter dividend that we increase to 36 cents. This dividend increase reflects what we believe is the earnings power of our portfolio, which Mike will explain more fully in his prepared remarks.
Speaker Change: Our economic book value was down very modestly in the first quarter by 0.6%.
Speaker Change: We were active in the quarter, sourcing 875 million of loans and securities across our target asset classes.
Speaker Change: These included 383 million of Don QM loans, 268 million of agency MBS, and 223 million of business purpose loan funded originations and draws on existing loans that we more want.
Speaker Change: We issued our 17th non-QM Securization in early March and we also sold 70 million of newly originated SFR loans at attractive levels.
Speaker Change: Our overall leverage at the end of the quarter was 5.1 times and our recourse leverage was 1.8 times, both only slightly higher than a year end by one tenth of a turn each.
Speaker Change: The real fund started in April , with the tariff circus kicking off on April 2nd.
Speaker Change: Corporate Earnings, Consumer Confidence, Fed Action, and even Housing are all considerably more uncertain, as is always the case, increased uncertainty and volatility are never friendly for fixed income and particularly for mortgages.
Speaker Change: As we reflect on this volatility and uncertainty, however, I'd like to highlight the benefits of this summer phase investment strategy, risk management, and financing rigor.
Speaker Change: Since the onset of market disruptions and the heightened market volatility following Liberation Day, MFA has experienced total margin calls of just under 20 million dollars, which were satisfied with 18 and a half million of cash and 1.3 million of unpleasured agency bonds.
Speaker Change: At the height of the impact of the volatility, when the 10-year treasury sold off by nearly 20 basis points on April 7th, we were net receivers of margin, as the cash received on our swaps exceeded the collateral posted for repo margin calls [inaudible]
Speaker Change: On the other hand, during the largest rally in rates that we saw since April 2nd, with the 10 year down nearly 12 basis points on April 14th, we posted a total of just 1.5 million of net margin.
Speaker Change: There's no better testament to the effectiveness of our strategic emphasis on securization, non-marked market financing, and the diversification into agency MBS that we initiated in December of 2022.
Speaker Change: At March 31st, 83% of our loan financing and 70% of all of our liabilities were non-marked to market in nature.
Speaker Change: with more than half of the Mark-to-market financing coming from extremely liquid agency MBS.
Although recent volatility has led to modest, cred spread widening
Craig Knutson: I'll now turn the call over to Mike Roper to discuss financial results. Thanks, Craig, and good morning. At March 31st, Gap Book Cahee was $13.28 per share, and economic Book Cahee was $13.84 per share. Each town listened 1% since December .
Speaker Change: For the first quarter, MFA generated gap earnings of $41.2 million or $0.32 per basic common share. Our strong gap earnings were driven by growth in our net interest income, $57.5 million as well as modest net market market gains.
Speaker Change: Lima won, contributed 5.4 million of mortgage banking income for the quarter, a decline from 8.5 million in the fourth quarter, driven by modestly lower origination volumes, and a decline in gains on sales of single-family rental loans, a sales volume declined from 111 million in the fourth quarter to 70 million in the first quarter.
Craig Knutson: As Craig mentioned earlier, MFA declared an increased dividend of 36 cents per common share for the first quarter. The increase in our dividend is reflective of our continuing and increasing confidence in the long-term earnings power of our portfolio.
Craig Knutson: This confidence is informed by our success at and high yielding assets and the resultant growth in our net interest income, the increasingly positive slope of the yield curve,
Craig Knutson: We continue to see ample opportunities to add our target assets amid the high-teen ROEs, which we believe is one of the best proxies for the current earnings power of our portfolio.
Craig Knutson: Distributable earnings for the quarter were 30.5 million, or 29 cents for basic common chair, down from 39 cents in the fourth quarter.
Craig Knutson: The decrease in our distributable earnings was primarily due to the expiration of 1 billion and notional of interest rate swaps over the course of the 4th quarter of 2024 and the 1st quarter of 2025.
Craig Knutson: D.E. was also impacted by the decline in lemon-wond mortgage banking income, as well as increased credit-related charges for the quarter, associated with resolutions of certain non-performing assets.
Craig Knutson: As we continue to work through some of the challenge assets in our transitional loan portfolio, we expect to see some short-term increases in realized credit losses in the quarters ahead, as many of these trouble assets are approaching resolution via foreclosure.
Craig Knutson: As a result, we expect that our distributable earnings will be increasingly volatile and less indicative of the current earnings power of our portfolio over the next several quarters.
Craig Knutson: Importantly, we believe that these headwinds are short-term in nature and economically we emphasize that this is old news.
Craig Knutson: Our expected credit exposure was already recorded in our book value and in our gap earnings as unrealized losses several quarters and in some cases several years ago. So we don't expect these resolutions to have any impact on our book value or on our gap results, as the impact is limited to the reporting of our distributable earnings.
Craig Knutson: As we continue to resolve these challenge loans and redeploy the capital into higher yielding performing assets, we believe that our DE will begin to converge with our dividend over the back half of the next 12 months.
Craig Knutson: Finally, subsequent to quarter end, we estimate that our economic book value is down approximately 2% to 4% since the end of the first quarter, primarily as a result of wider spreads.
Craig Knutson: I'd now like to turn the call over to Bryan, who will discuss our investment activities in the first quarter.
Thank you, Mike.
Q1 marks another quarter for growth in our investment portfolio.
Craig Knutson: We focus on our target asset classes, acquiring 875 million of loans and securities which grew the portfolio net of runoffs and sails to 10.7 billion from 10 and a half billion a year end.
Craig Knutson: Our current focus remains in three strategies, non-QM, BPL, and agency MBS.
Craig Knutson: We source 383 million of non-QM loans during the quarter. Those loans carry an average coupon of 7.8% and a weighted average LTV of 65%.
Craig Knutson: Underrunning standards have a main prudent and mid-the-high double digit ROEs are achievable with securitization financing.
Craig Knutson: We should our 17th securitization of non-QM loans in March, selling 283 million of bonds at an average coupon of 5.58%.
Craig Knutson: Since quarter-end, we've seen AAA spreads widened from 135 to as much as 175, but it's important to note that throughout the broader market disruption, liquidity has remained in an IQM space as market participants have been eager to participate in new offerings at wider spread levels.
Craig Knutson: In the last few weeks, we've seen Triple A's Titan to 160 and that trend could continue if the macro backdrop continues to stabilize.
Craig Knutson: We again added to our agency MBS portfolio during the quarter.
Craig Knutson: growing our position to 1.6 billion. Our focus there continues to be on low pay-up 5.5
Craig Knutson: We plan to continue to grow the segment of our portfolio as long as spreads remain attractive.
Research currently shows mutual funds are already overweight agencies.
Craig Knutson: Which tells us that spreads could persist at these levels for some time given the backdrop of rate volatility That said there are potential catalysts for agency spread tightening Particularly it banks receive leverage ratio relief and are able to add more aggressively, or if the Fed elects to adjust its balance sheet policy [inaudible] to do so.
Craig Knutson: We have to make our nepteration drop slightly in the first quarter to 0.96 from 1.02 at year end As a reminder, we primarily hedge our interest rate exposure by issuing fixed rate securitized debt and by utilizing interest rate swaps.
Craig Knutson: We had 5.9 billion outstanding bonds from these securitizations and 3.4 billion national value swaps at quarter-end.
Craig Knutson: If we continue to add agencies, expect to see our net asset duration drop again as we want to maintain a similar level of exposure or equity to interest rate changes given the higher leverage associated with agencies.
Speaker Change: Turning to Lima 1. Lima originated 213 million of business-purpose loans during the quarter with an average coupon of 9.7% and LTV is 65%.
Speaker Change: We continue to sell newly originated rental loans. During the first quarter we sold 70 million of these loans which contributed 2 million of mortgage banking income.
Speaker Change: Overall, origination volume was down slightly from Q4, the first few months of the year are historically slower
Speaker Change: We've taken action down at the image to improve volume growth without sacrificing credit quality.
Speaker Change: We hired nine loan officers in Q1 and seven so far in Q2.
Speaker Change: We continue to attract both sales and underwriting talent to Lima and expect our efforts to bear fruit in the second half of the year.
Moving to our credit performance
Speaker Change: 60-plus data linkancies for our entire loan portfolio remain stable at 7.5%.
Speaker Change: Delinquency rates on our non-QM, SFR, legacy RPL, NPL books were essentially unchanged from year end, and LTVs remain exceptionally low.
Speaker Change: The delinquency rate did jump in our single-family transitional portfolio, but that's because repayment outpaced origination volume causing the denominator to shrink. Actual delinquent loans rose by only $2 million on our $1 billion portfolio.
Speaker Change: Finally, we continue to make progress in our multi-family book, resolving 35 million of previously delinquent loans in addition to receiving over 100 million of repayments in a quarter.
Speaker Change: And with that, we'll turn the call over to the operator for questions.
Speaker Change: Thank you. And at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation term will indicate that your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before press the star keys. Once again, tap the question, press star 1 on your telephone's keypad. We'll pause for a moment to pull for questions.
Boza George: And our first question comes from Bose George with KBW, please take your question.
Boza George: Hey guys, good morning. It turns out the impact from the swap, you know, the runoff. Can you talk about the second quarter versus first quarter, you know, what the incremental sort of impact is going to be?
Boza George: Hey, Bose, thanks for the question. Yeah, the impact for the second quarter is kind of in line with what we said for the fourth quarter for that sort of remaining runoff. We expect that the impact of that, the expiration from the first quarter, and I think there's another hundred million that expires in the second quarter. It's going to be about two cents in terms of the sort of Q1 versus Q2 impact.
Speaker Change: Okay, great. And then you noted the impact from the loans that are going to work its way through as well. Is there any way to kind of, for us to quantify that in terms of modeling or is it just going to be kind of random in terms of when it actually flows through? Yeah.
Speaker Change: Yeah, I think unfortunately the timing is just going to be a little bit difficult, right? We're sort of at the mercy of the courts in some states and borrowers and a lot of other factors.
Speaker Change: I mean, I think it's safe to say, you know, thinking about the multi-family delinquency, the overwhelming majority of that is in foreclosure and in many states it can be very quick but, you know, there can be tactics from borrowers to delay that. I think in terms of the best way to sort of think about that.
Speaker Change: So I think the tightening might be a little tough, but in terms of the overall dollar amount, call it over the next year or so, we expect to see the majority of that credit discounts flush out [inaudible]
Speaker Change: Okay, great, that's helpful. And then just one quick question just on the returns. You noted the mid to high teams returns. Can you just break that out between the agency, some of the other asset classes?
Speaker Change: Yeah, I mean, really mid-the-high teens are achievable both in agencies and on QM, and then on the BPL side, on the short-term nature, those 10% coupons, given the revolving nature of our securitizations, those Arlees could be, you know, above 20.
Okay, great, thanks.
Thanks, Coles.
Speaker Change: Your next question comes from Doug Harter with UBS, please state your question.
Doug Harder: Thanks. On the loan resolutions, just a follow up. You know, can you just talk about when you're seeing resolutions, you know, kind of where those are coming out relative to where you had the loan smart?
Doug Harder: Yeah, I think in general we've seen them basically resolve at the mark or near the mark. We haven't had a ton of these given when we started originating some of these loans.
Doug Harder: You know, I think we're really starting to see some of that, you know, troubled pipeline being resolved now, but in general we're, you know, very, very comfortable with where things have been marked. It's not like we're, you know, continuously marking things down.
Doug Harder: We use multiple pricing services and we have a team that reviews all those marks and constantly is reviewing the value of the underlying collateral So there's still more to come in terms of the total amount of these resolutions but from what we've seen so far we feel very, very comfortable with where we have the mark [inaudible]
Doug Harder: And Doug, as Mike said before, the majority of the fair value write downs on these assets took place last year. I mean, I think it was actually in the third quarter of last year. And as I'm sure you know, on loans that are ultimately headed to foreclosure.
Speaker Change: BPL, Originations You're Doing, you just highlight kind of what sector, what pieces of that market you're kind of focused on today and kind of how you expect that opportunity to continue to present.
Speaker Change: Yeah, I mean, really, it continues to be similar to what it was in prior quarters.
Speaker Change: Real-State Transaction Levels are down and home prices have gone up considerably that there's just the opportunity to do sort of the quick flip type transactions are much smaller than it was previously. So the focus has been more on ground up and or bridge.
Great. Thank you.
Thanks a ton.
Speaker Change: Your next question comes from Steve DeLaney with Citizens' JMP Securities. Please state your question.
Steve DeLaney: Hey, good morning, everyone. Thanks for the question. For starters, just
Steve DeLaney: To be sure, I've got the right numbers on your comments about changes in each book value in the second quarter. First, is that relative to economic book value, not gap, and the figure at March was 1384, is that correct? [inaudible]
Speaker Change: That's right on both accounts, Steve. Okay, great. And you said down two to four percent. Okay, so there's something in there. You'll also add that that two to four percent is net of the dividend accrual. Sorry to cut you off there. Oh, no, I appreciate you.
Steve DeLaney: You throwing that out of pay, net of the dividend. Okay. Thanks.
Speaker Change: Obviously, great progress on building the Incumen and the DPL, the Incumen Program.
Speaker Change: How many sellers approved loan sellers, and I don't know whether that includes servicing, but let's just focus on sellers. How many counterparties do you have out there in the marketplace actually originating those loans for you to purchase?
Speaker Change: Yeah, it varies from quarter to quarter. Really, so any quarter could be as few as four and as high as eight.
Speaker Change: But, you know, historically, we've tended to have sort of deeper relationships with fewer counter-parties versus, you know, blasting out a guideline setting up a conduit and dealing with, you know, a lot of smaller, less well-capitalized originators.
Speaker Change: Got it. So I mean, how would you just generally say that your opportunity there has grown in the last year or so and is there?
Speaker Change: Further uncapped growth potential in that sector or do you feel like you're kind of at a run rate that you're getting your fair share of what's out there and there's maybe it's going to sort of flat line in terms of volumes.
Speaker Change: So, we think there's definitely opportunity to grow, right? Really, it's just capital and, and obviously, it competes with our, our other, you know, asset class in terms of, you know, opportunity just to deploy. So, if we, if we wanted to grow non to them, we definitely have the ability to do so.
Speaker Change: about it. And then don't know when you priced your last incertization.
Speaker Change: but you know, all the disruption in the ball market with following tariffs, etc.
Your last execution [inaudible]
in the NQM.
Speaker Change: MBS market? Can you comment on that as to whether that was in line with previous deals or whether it was price wider? How are you seeing the opportunity to secure ties as in Q&M loans that you have acquired given the kind of disruption in fixed income markets? Thank you.
Speaker Change: Sure, so the last deal we did, I believe it was 135 over for Triple A, that's sort of where the market was at the end of March
and then...
And then now...
Speaker Change: It's, it's widened. Say, it widened. The Y is limited in 175. Maybe there was a deal that printed not, not to worry. They have 180. It's coming in since there. You've seen deals price between 160 and 170, sort of regularly. And, you know, deals continue to over-subscribe
Got it. Thank you so much for the call.
Bye, Steve.
Speaker Change: Second, a reminder to the audience to ask a question, press star one on your telephone keypad to remove yourself from the queue, press star two.
Speaker Change: Our next question comes from Jason Stewart with Janie Montgomery Scott, please state your question.
Speaker Change: Hey, thank you. Question on Lima 1. The rate volatility and the impact there, maybe you could give us more color on, you know, what's happened in terms of demand for loan products, the competitive environment, and whether loan buyers, you know, particularly insurance companies have changed their appetite, given that the rate was all.
Speaker Change: Yeah, I mean, we're obviously, we're in close contact with Lehman to make sure that we're all in tune with the market in terms of setting rates to borrowers.
Speaker Change: But we continue to see sort of strong demand from insurance companies that really hasn't changed. They like the duration that comes with the longer lockdown assets in terms of DSCR and rental loans. So the demand continues to be strong there.
Speaker Change: Okay. And in terms of competition, is there any shake out there in the competitive environment?
Speaker Change: I have seen a really good market for them to produce and earn, so I believe that the capital situation of these originators is such that they don't necessarily have to pull back. Everybody has to adjust to market pricing, which they do, but we haven't seen really the originators step away.
Speaker Change: Okay, got it. And then one question on the agency book, could you just remind me whether you look at the agency portfolio relative to swaps or treasuries and how that determines you know, sort of ultimate sizing of portfolio allocation goes?
Speaker Change: So, we hedge with silver slops, but the market generally looks at a spread of series, but yes, you do get some additional spread hedging with silver and barring against silver
Speaker Change: versus the, you know, the quoted spread to treasury. So it might be an extra 20, 30 basis points from time to time that we see in the market that you're picking up kind of hedging the silver versus treasury.
Speaker Change: Yeah, I mean, obviously you hedge with swaps and it looks much better against swaps, so given that outlook does that change how big how big could agents to get in terms of portfolio allocation?
Speaker Change: I mean, we're sort of taking this, we're not rushing into it, what we've told people in the past that we can see the portfolio getting to $2 billion, and then we'll sort of reassess Mark conditions at that point, but that's sort of over a few quarter period.
Got it. Okay. Thanks a lot.
Thank you.
Speaker Change: And your next question comes from Eric Hagen with BTIG, please say your question.
Eric Hagen: Hi, thanks, good morning, guys. We're looking at the interest rate sensitivity table on the press release. I guess we're a little surprised to see that much convexity risk in the portfolio for an up-moving race. Is that being driven by the agency MBS portfolio, or how meaningfully is the non-QM portfolio contributing to that sensitivity?
Dr. Katsikas, Dr. Katsikas, Dr. Katsikas, Dr. Katsikas,
Eric Hagen: So it's not just the agency portfolio, it's also the non-QM. Obviously, when we've taken up, you know, incrementally taken up leverage, write that there's a little more exposure there, but...
It's generally all model-driven.
Eric Hagen: You know, so we're using proxies to calculate, you don't necessarily have the, you know, the perfect model to determine when you're trying to look at 9QM loans because you don't have.
Eric Hagen: You know, the history kind of goes back to 2017. So you don't have sort of the perfect crystal ball going forward. So but we generally are, you know, we take a more conservative approach to how we calculate convexity. So that's why you met C, you know, it may appear more negatively convex and. [inaudible]
You know what may actually end up happening, who knows.
Speaker Change: Yep, okay, that's helpful. On the delinquency pipeline and the nature of the defaults, right? Specifically in the Lima-1 portfolio, are the defaults being driven because the borrowers are like upside down and interest expenses crowded out their return?
Speaker Change: Or is the project improvement component of the timeline just significantly delayed and like how do you think about the impact of tariffs and the impact that could have on the credit performance in the timeline?
for the Project Improvement Component.
Speaker Change: So, in terms of the delinquencies on the BPL side, it's really, it's...
Speaker Change: There's not one reason, right? Some of it is exactly, you know, there is a high interest expense that goes along with it, and if the project takes [inaudible]
You know, longer than one might expect. There could end up being liquidity pressure on the borough, which could cause the linkancies.
Speaker Change: And as you also mentioned, if a project is promised with Permit,
Speaker Change: or issues getting materials, or there was some unexpected occurrence to happen where Sunday opened the walls and something was there that they didn't expect. You could have defaults to solve out projects.
and as it relates to tariffs.
Speaker Change: Like the amount, say lumber, as it relates to the...
Speaker Change: Costs of a home, and the cost of a renovation, it's a smaller percentage in terms of what actually goes into it versus labor, so we don't expect tariffs to have a material impact in delinquencies, but we are accounting for larger contingencies in the budget in that nature just to make sure and to be safe.
Speaker Change: If those things, you know, do impact, you know, project in terms of cost and what not.
Yeah, that's helpful. Thanks, Brian .
Thank you, sir.
Speaker Change: Thank you. And ladies and gentlemen, that was our final question for today. We have no more further questions at this time, so at this point we will conclude today's call. Thank you for participating and have a good day.