MFA FINANCIAL, INC. Q1 FY2024 earnings call

• First quarter 2024 began with benign market conditions until February, then saw resilient economic data and stubborn inflation, pushing rates higher. 2-year and 10-year treasuries ended the quarter up 37 and 32 basis points respectively.
• MFA added over $650 million of high-yielding assets, majority from Lima One with average coupon 10.4%. GAAP and economic book value down 1.3% and 1.7% respectively due to higher rates but benefited from credit spreads tightening.
• Issued $115 million senior unsecured bond in January with 8.875% coupon and $75 million in April with 9% coupon, enabling payoff of remaining $169.7 million convertible bond due in June. Valuable optionality with securitizations as many are callable, allowing optimization of liability framework.
• Mike Roper discussed financial results: GAAP earnings $15 million or $0.14 per share, distributable earnings $36.1 million or $0.35 per share. Board authorized $200 million share repurchase program and filed $300 million at-the-market program.
• Gudmundur Kristjansson discussed portfolio highlights: added ~$650 million loans with average coupon ~10%, Lima One originated ~$430 million, 60-plus day delinquency rate on BPL loans increased modestly to 4.7% but remains low. Expanded RTL financing capacity with fourth unrated revolving RTL securitization.
• Bryan Wulfsohn discussed securitization activities: issued fourth unrated revolving securitization in February and another non-QM securitization in April. Credit performance saw normalization in delinquencies, with 60-plus day delinquencies in purchase performing portfolio increasing to 4.3%. Sold 73 REO properties for $24.2 million, resulting in $2 million gains.

MFA Financial posted solid first quarter results. Distributable earnings were $0.35. GAAP book value was $13.80 per common share and economic book value was $14.32 per common share, down 1.3% and 1.7% from December 31 respectively. Net interest income for the first quarter was $47.8 million, increasing from $46.5 million in the fourth quarter. Net interest income inclusive of swap carry was approximately $77 million for the first quarter, unchanged from last quarter and up ~$15.7 million from Q1 2023. The portfolio remained relatively unchanged at $10 billion, with portfolio asset yield increasing by 12 basis points to 6.58% in the quarter. Lima One originated about $430 million in the first quarter, with shorter-term transitional loans accounting for 80% of origination. Over $650 million of high-yielding assets were added, majority from Lima One with an average coupon of 10.4%.

• Board authorized a $200 million share repurchase program and filed a $300 million at-the-market program, not yet utilized but offering flexibility.
• Potential to call securitizations to unlock liquidity and redeploy at attractive ROEs.
• Expect origination volume for Lima One to be roughly unchanged in the second quarter in the mid-$400 million range.

• Interest rate uncertainty: Path of interest rates is uncertain, market has crossed out many rate cuts expected at the beginning of the year.
• Market volatility: Bond market volatility experienced over the last 2 years could impact results.
• Credit risks: Normalization in delinquencies with potential for losses, depending on loan types and resolution timelines.

Q: Follow up on credit performance, where will it peak or plateau and timeline of resolution?

A: Craig Knutson said it depends on loan types; Bryan Wulfsohn and Gudmundur Kristjansson discussed normalization, varying by product type, geography, judicial vs nonjudicial, and depending on state of project.

Q: Thoughts on dividend sustainability, swaps maturing, and maintaining dividend?

A: Craig Knutson said earnings capability is solid with solid net interest income.

Q: Typical losses on resolution and comparison with fair value?

A: Craig Knutson and Gudmundur Kristjansson discussed losses depending on loan type, factoring in credit costs and assumptions about yields, with some good outcomes but credit costs associated.

Q: Expense line, comp and benefits higher, will it normalize?

A: Gudmundur Kristjansson said nonrecurring adjustment in fourth quarter, acceleration of amortization of noncash stock-based comp, with remaining expense for second quarter then returning to 0.

Q: Comment on Lima securitization product mix and mid-teen returns?

A: Gudmundur Kristjansson discussed securitization spreads, product mix, and competition in the space.

Q: Potential to call prior securitizations, investment opportunities and accretion?

A: Bryan Wulfsohn and Craig Knutson discussed potential to call deals to unlock liquidity, cost of funds, and optionality.

Q: Notable extension or modification activity in transitional book?

A: Gudmundur Kristjansson said about 12% of transitional book was extended, normal course of business.

Q: Thoughts on stock repurchase and ATM program?

A: Craig Knutson said programs are administrative, not capital constrained, and recent bond issuance better than issuing common stock at discount.