MFA FINANCIAL, INC. Q4 FY2023 earnings call

• Fourth quarter 2023 was volatile for fixed income markets, but MFA had strong earnings and book-value performance, with a 7.8% economic return. 2023 had a 2.7% economic return and 30.7% total shareholder return.
• In 2024, Fed is in a holding pattern with rate cuts expected but delayed. MFA added $860 million of loans in Q4 2023 with average coupon 10%, and $3 billion in 2023 with average coupon 9.8%. Completed eight securitizations in 2023, including a $450 million non-QM deal in Q4. Issued an unsecured senior bond in January 2024, upsized to $115 million. Repurchased over $60 million of convertible bond in secondary market.
• Fourth quarter net interest income was $46.5 million, inclusive of swap carry $77 million. GAAP book value at Dec 31 was $13.98 per share, economic book value $14.57 per share. Declared dividend of $0.35 per share for Q4 and $1.40 per share for full year.
• Portfolio highlights: Acquired $880 million of assets in Q4 2023, $3.5 billion in 2023, growing portfolio by 7% in Q4 and 20% in full year. Business purpose and non-QM loans major acquisitions, also added $450 million of agency MBS. Lima One originated over $590 million of BPL in Q4 2023, $2.3 billion in 2023. 60-plus day delinquency rate on BPL loans originated by Lima One ticked up to 3.9% but remained low.
• Securitization activities: Issued over $450 million in bonds through two securitizations in Q4, including a $160 million revolving securitization. Over $9 billion in loans securitized since 2020, over 60% of loan portfolio financed by securitizations.

For the fourth quarter, MFA generated GAAP earnings of $81.5 million, or $0.80 per basic common share and distributable earnings of $49.7 million, or $0.49 per basic common share. Net interest income for the fourth quarter was $46.5 million, with net interest income inclusive of swap carry being approximately $77 million, an increase of $2 million from the third quarter. Full year net interest income plus positive carry on swaps was $283.6 million, a 21% increase from 2022. Asset yield increased from 5.69% in Q1 to 6.46% in Q4. In 2023, MFA acquired $3 billion of loans with an average coupon of 9.8%, completed eight securitizations collateralized by $2.2 billion of loans.

• Fed appears to be in a holding pattern with rate cuts at least a few months away. MFA's positioning and strategy not dependent on rate cuts. Continued to add incremental assets at higher yields, execute securitizations as financing source. Already off to strong start in 2024 with unsecured bond issuance and convertible bond repurchases. Expect to benefit from carry on swaps in 2024, and lower funding costs as swaps mature. First quarter BPL origination expected to be lower at around $450 million.

• Market volatility in fixed income markets. Interest rate risk management challenges. Credit risks in loan portfolio, including potential increases in delinquencies. Uncertainty in economic data and Fed policy affecting market conditions.

Q: Hoping you could talk a little bit more about your call strategy. Is this something that you view as attractive kind of even in the current rates and then lower rates would be upside optionality? Or just how should we think about how aggressive you would be on exercising those calls?

A: So it all depends deal to deal, price for certain deals where they have delevered a significant amount. It may make sense for us to call them even if interest rates aren't necessarily lower than the than they were for the deals and they were issued but for other deals, right it's going to be opportunistic depending on where rates are.

Q: You talked a little bit about your unsecured issuance during the quarter. I guess how should we think about your appetite for continuing to use that and what that role might be in your capital structure going forward?

A: It was a very successful transaction on. It's a little bit of a niche product because it's a $25 par amount. So it's a retail product but I think, we certainly proved it out that it's a viable source of financing. So to the extent that we look to raise additional capital in fields one of the tools in the toolbox.

Q: Looking at the market, obviously, you know everybody's focused on the Fed and where you were maybe looking at it slightly different mortgage market at the end of this year than we are right here today. I'm just curious, what you're seeing out there beyond Lima One. Ok Lima One is -- is doing great but is there anything emerging out there in terms of non-bank originators of specialized product not just obviously not agency flow but non-agency products that you don't have the kind of yield and profile that might be attractive to you guys sort of a sort of a non qualified mortgage in QM kind of product is what I'm -- what I'm thinking about. Just curious, what you're seeing out there in terms of product flow on the on the consumer mortgage side banks?

A: I'll speak to that first, and then I'll let Brian address your done Q1 question on Steve. I know, there's been a lot of talk about possible trends emerging in banks and commercial loan portfolios. And but at this point, I wouldn't say that we've identified any on screening opportunity right now. Obviously, that can change. And as the year plays out that may be the case on. But I think we're pretty comfortable in the space that we're in. And we've been able to -- we've been able to add significant amounts of assets over the last two years that successively higher rates on. So it took until, we find that challenging or until we find that something that's better I think we're pretty comfortable where we are.

Q: Lima One's bridge products. And with respect to multifamily you know they do some single-family rental. That was a little bit of everything I think from an investor loan standpoint. But on the multi-family side, where does that kind of tap as far as the size of a project that they would work on? And the just the magnitude how large of a loan might they make because we were seeking a multi-family. We used to think of as bullet proof. But you know from covering the commercial mortgage rates we're just seeing more and more. I mean, office is still the real problem, but we've seen a lot of multifamily distress out there. So I'm just curious, if you've got any -- any concerns about your multifamily bridge book that you may have through Lima One.

A: Hey, Steve. Great question. Just for -- just for some context about the size and I'll give you a little bit of broader context also on the on the multifamily portfolio. So look these are really small balance multifamily loans. The average loan size is about $3.2 million and so we're originating is that our average LTV of about 65% which means the average property values broadly around the mid-fives. And when you think about the strategies here the average profile is kind of a highly experienced borrower that is looking to renovate some units. Some of the common space improved property management. Usually, at origination the average project has some occupancy ranging between 60%, 80% on day one. So there's some cash flow that helps the borrower while they're working on the transition and these projects are all light. We have a view of the average we have amount is around kind of $600,000 which is roughly about kind of 20% of the loan amount. So we would think about that as fairly light-touch we have. And you know if you think about in terms of per unit that's anywhere from like $7,000 to $12,000 per unit from the goal is to complete the we have fully lease up the units and an exit in most cases through a GSE takeout financing, which of course, is significantly lower than the coupon on the bridge loan. These loans are usually two to three year term loans with a fixed coupon. And so if you think about that in the context of the last two years because there's a fixed coupon on there, there hasn't been any co-payment shock during the times term of the loan and so it doesn't put a pressure on the borrower as long as the project is underwritten appropriately and the project makes sense. Historically, our underwriting has been fairly conservative and the underwriting statistics kind of bear that out. The average assets LTV as I said earlier about 65% and the average asset [indiscernible] to be similar at around 6.5%. And when we think about it in terms of like that yield concept, the average as stabilized debt yield has been averaged around 9.5% on the portfolio, but in 2023 it's close to 10.5%. And so in summary like we think these are underwritten with plenty of borrowers skin in the game and with expected cash flows that can support the refinancing into long-term debt. And to-date like you know from a performance perspective the 60-plus day delinquency on the multifamily part is about 2%, so is fairly low. And it from a vintage perspective, most of our vintages 22 and 23, I think arguably many would argue that the 21 vintages probably is the one that would be at most risk across the spectrum because rates were low things were underwritten, probably looser across your home price appreciation as well as rent increases. And look as we think about all these things, we feel very comfortable about the portfolio.