MFA FINANCIAL, INC. Q2 FY2024 earnings call

• Market Environment: Second quarter 2024 was volatile with treasury yields fluctuating, but MFA posted solid results due to credit spread tightening.
• Financial Results: Declared dividends of $0.35 per common share, with GAAP earnings up from $23.2 million in Q1. Net interest income increased to $53.5 million from $47.8 million, driven by higher discount accretion and increased collections on delinquent loans.
• Portfolio Activities: Took advantage of spread tightening to sell loans, completed bond offerings, and called an NPL securitization for $80 million liquidity. Executed securitization deals like $365 million Non-QM and $192 million revolving RTL.
• Lima One Changes: Refocused resources from multifamily lending to single-family transitional and rental lending. Appointed Josh Woodward as CEO of Lima One, following Jeff Tennyson's retirement.
• Rate Outlook: July was constructive for rates and spreads, with expectations of a rate cut in September and a return to a normal yield curve soon.

In the second quarter, MFA Financial reported GAAP earnings of $41.9 million (or $0.32 per basic common share) and distributable earnings of $45.6 million (or $0.44 per basic common share). GAAP book value was $13.80 per common share and economic book value was $14.34 per common share at June 30, each effectively unchanged from March 31. The residential loan portfolio delinquencies fell to 6.5% from 6.9% at the end of Q1, while multifamily transitional loan book delinquencies rose to 4.6%. Lima One originated over $6 billion of high-yielding loans since its acquisition three years ago, with BPL accounting for about 60% of acquisitions and Non-QM loans 40%. The portfolio grew modestly to over $10 billion, with an asset yield of 6.79% and net duration of 112 basis points.

• Rate Cut Impact: Anticipation of a rate cut in September, with two-year treasury yields down 70 basis points from the end of Q2.
• Book Value: Economic book value increased approximately 2%-3% post quarter end due to lower market interest rates.
• Securitization: Securitization spreads stable, with Non-QM deals pricing AAAs in the 130s or low 5% yields, and demand for securitizations remaining strong.

• Multifamily Delinquencies: Delinquencies rose in the multifamily transitional loan book, with resolution timing and severity difficult to forecast.
• Interest Rate Volatility: Volatile rate environment in Q2, with potential securitization spread widening in the event of a strong rate rally.
• Delinquency Uncertainty: Higher LTVs in single-family rental credit bucket related to unique borrower situations in economically stressed areas, making delinquency prediction challenging.

Q: Hi, good morning. This is Jake Katsikas on for Eric. Thanks for taking my questions. 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?

A: Yes. We show a shock table on table seven of the press release, which we’re actually referring to earlier. I think you said a 50 bps cut would imply about a 3% upside in our equity.

Q: Hey, guys. Good morning. As you noted, the Non-QM’s 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?

A: Yes. I mean, on the Non-QM side, what we have seen, we were able to be pretty active in the second quarter and adding what we have seen as 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. So we have seen premiums on that paper reach levels that we haven’t seen in the past, say, several years. We have other ways, multiple ways to source loans. So one way is flow, another is bulk. So we’re focusing more so 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 we’re hopeful that premiums will moderate somewhat in the coming months and quarters, and that will allow us to be a bit more competitive in adding to that portfolio as well.

Q: Okay. Great. Thanks. And then, actually, I 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, that’s a lot higher than the LTV of the typical portfolio. So is that, I mean, are borrowers who have the higher LTV, going delinquent more, or just curious why that’s the case where it’s not that – the case isn’t similar for the other categories?

A: Yes. Bose, thanks for the question. Yes, I think so. The LTVs there are related to a delinquent situation with respect to a handful of borrowers where it’s concentrated in areas that have experienced economic stress and kind of lower home price appreciations. And so it’s more of a unique situation with respect to that. But it is loans that are in the foreclosure process and then we’re working through. But that’s what that relates to.