MFA Financial, Inc. (NYSE:MFA) Q4 2024 Earnings Call Transcript

MFA Financial, Inc. (NYSE:MFA) Q4 2024 Earnings Call Transcript February 19, 2025

MFA Financial, Inc. misses on earnings expectations. Reported EPS is $0.39 EPS, expectations were $0.4.

Operator: 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. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It’s now my pleasure to turn the 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, including 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 those described in MFA’s annual report on Form 10-Ks 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 it makes. For additional 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 CEO, Craig Knutson.

Craig Knutson: Thank you, Hal. Morning, everyone, and thank you for joining us for MFA Financial’s fourth quarter 2024 earnings call. With me today are Bryan Wulfsohn, our President and Chief Investment Officer, Mike Roper, our CFO, and other members of our senior management team. 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, Lima One, and risk management before we open up the call for questions. Fixed income markets reversed 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 fifty basis points on September 18th.

Despite two additional twenty-five basis point rate reductions in November and December, yields ground 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 sixty basis points while ten-year rates rose nearly eighty basis points. The economy has remained resilient, the labor market continues to show strength, and inflation, while down materially from the highs, still exhibits a persistent stickiness. A shift in tone from the Fed in the face of this data, together with market concerns about deficits and anticipated treasury supply, pushed rates higher in the fourth quarter. This sell-off in rates led to a modest economic book value decline for MFA in Q4 of a little less than four percent.

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 a billion dollars of loans, including RTL, Non-QM, and NPL loans. On a sad note, we mourn the sudden and unexpected passing of Board member Frank Ulrich on December 2nd. Our management team and board members will miss Frank’s valuable insights, sage advice, and quick wit. He was a trusted colleague and a dear friend of mine for over forty years. Our deepest sympathies are with his wife, Mary, and their large family. 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.

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. Our recourse leverage remained at 1.7 times at year-end, the same as at the end of 2023. This is primarily due to our reliance on securitization, which provides fixed and term non-recourse financing. 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 callability of each deal. We believe that this is an underappreciated optionality that we have to call these securitizations when it makes sense to unlock additional liquidity and increase ROEs. We also issued $25 par bonds early in 2024, totaling $190 million at an average coupon of just under nine percent.

These are five-year bonds, but they’re callable at par after two years, specifically February and August of 2026. We also paid $1.40 in common dividends in 2024, which is the same as 2023, and the tax treatment of a substantial portion of is somewhat unique and we believe confers a material benefit to shareholders. Mike Roper will explain in more detail. Finally, as we discussed on our third quarter earnings call in November, we effected some management changes both at Lima One and at MFA during 2024. We are excited and confident in our leadership team for 2025 and the years ahead. And I’ll now turn the call over to Mike Roper to talk about financial results.

Mike Roper: Thanks, Craig, and good morning. At December 31st, GAAP book value was $13.39 per share. Economic book value was $13.93 per share, a decrease of approximately 3.7% from $14.46 at the end of September. We delivered a total economic return of negative 1.2% for the quarter, and positive 5.2% for the year. As Craig mentioned, we again declared dividends of $0.35 per share for the fourth quarter, $1.40 per share for the full year. We were happy to report in late January that approximately 40% of our 2024 common dividends were treated as a non-taxable return of capital to our shareholders. This is the fifth straight year that a substantial portion of our common dividend was treated as non-taxable distributions. This favorable tax treatment substantially increases the after-tax dividend yield realized by holders of our common stock.

At December 31st, we had a fully reserved remaining deferred tax asset totaling $62.7 million, which was carried at zero on our balance sheet. This DTA offers significant protection from future tax obligations, which allows us additional flexibility to efficiently structure transactions to minimize the total tax burden on our shareholders. Though 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’s common stock. Switching back to our quarterly results, for the fourth quarter, MFA generated GAAP earnings of $5.9 million or a loss of $0.02 per basic common share. Debt earnings were negatively impacted by higher rates across the yield curve.

Distributable earnings for the fourth quarter were $40.8 million or $0.39 per basic common share, up from $0.37 in the third quarter. The quarterly increase in our DE was driven primarily by a four-cent reduction in realized credit losses on our fair value loans, a four-cent reduction in our provision for income taxes, and an offsetting five-cent reduction in the carry earned on our interest rate swaps. Swap carry in the quarter was lower primarily as a result of lower average SOFR rates following the recent series of cuts to the capital funds rate. Additionally, near the end of the quarter, interest rate swaps with a notional value of $450 million and a fixed pay rate of approximately ninety basis points reached their maturity. 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.

Collectively, this $1.1 billion notional of expiring or expired swaps contributed approximately nine cents to our fourth quarter distributive earnings. Based on current SOFR rates, we expect that the same cohort of swaps will contribute approximately $0.02 to our first quarter DE, followed by an insignificant impact in the second quarter. Although the expiration of these swaps will reduce our reported distributive 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. A positively sloped yield curve, additional rate cuts expected, increasingly accommodative financing spreads, our significant liquidity, and strong housing fundamentals should all serve as tailwinds for our business moving forward.

While DE 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 tailwinds are far more indicative of the earnings power of our portfolio than the impact of the expiration of these legacy interest rate swaps. Finally, subsequent to quarter-end, we estimate that our economic book value is effectively unchanged since the end of the year. I’d now like to turn the call over to Bryan Wulfsohn, who will talk through our portfolio highlights and the performance of Lima One.

Bryan Wulfsohn: Thanks, Mike. 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. Four hundred and seventy million of the additions were non-QM loans carrying a coupon of 7.8% and an LTV of 67%. The majority of those loans were acquired through our bulk channel. We were active again purchasing agency securities, growing the portfolio by almost 50% to $1.4 billion at the end of the year. MBS acquired over the quarter were no to low pay-up five and a half at modest discounts to par. We believe spreads and carry in agency MBS are attractive, in addition to providing liquidity benefits to our portfolio. Lima One originated $235 million of loans in the quarter with an average coupon of 9.5% and LTV of 67%.

For the total of 2024, Lima originated $1.4 billion in business purpose loans. Although origination may not have been as high as we would have liked, we have high confidence in the team of people down at Lima One and believe the process and technological improvements being implemented will show growth throughout 2025. We continue to sell newly originated SFR loans from Lima One. Over the quarter, we sold $111 million, contributing $3.9 million to mortgage banking income. In addition, we sold $141 million of seasoned low coupon unsecuritized non-QM loans. The sale combined with new additions increased our Non-QM portfolio coupon twenty-five basis points to 6.65%. On the financing front, we finished the year strong, issuing three securitizations in the fourth quarter backed by over $1 billion UPB of loans.

Our legacy RPL NPL portfolio is now 98% securitized after our issuance of a non-rated NPL deal. Important for MFA and Lima One, we were able to issue our first rated RTL securitization, 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 funds significantly from our last non-rated RTL deal. The senior tranche in our rated deal traded seventy-five basis points tighter than our last non-rated transaction. In December, we completed our sixteenth non-QM securitization backed by $380 million of loans. After these three transactions, over three-quarters of our loan portfolio is financed through securitization. Our funding profile has undergone a gradual yet significant transformation, making it much more resilient compared to previous years.

We reduced our net asset duration modestly in the fourth quarter to 1.02 from 1.16 a quarter ago. As a reminder, we primarily hedge our interest rate exposure through two key tools: issuing fixed-rate securitizations and utilizing interest rate swaps. Currently, we have $5.9 billion in outstanding bonds from these securitizations and $3.3 billion notional value of interest rate swaps as of the end of the year. Over the next two quarters, $175 million of these swaps will be rolling off. 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. Moving to our credit performance, sixty-plus day delinquencies for our entire portfolio rose to 7.5% from 6.7% a quarter ago.

While we have observed an increase in portfolio delinquencies, our 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. And with that, we’ll turn the call over to the operator for questions.

Q&A Session

Operator: Thank you. We’ll now be conducting a question and answer session. Our first question today is coming from Bose George from KBW. Your line is now live.

Bose George: Yes. Good morning. Can you discuss where you see the current economic return of the portfolio? You know, does that kind of match the EAD this quarter? And also, just from your comments on the EAD, just wanted to clarify, so with the swaps rolling off, is that the comment that you made? Does that go down by a couple of cents in the first quarter based on that?

Mike Roper: Hey, Bose. Yeah. Thanks for the question. So I think the first one about sort of the economic return. You know, certainly, if you look at the, like, the straight DE ROE, you know, you’re in the sort of low teens just based on where it’s been. I think we said a couple of times on these earnings calls that, you know, we like to think about the economic return meaning, you know, if you were effectively to, you know, re-strike the assets, re-strike the liabilities and the hedges, and sort of measure what that ROE is, you know, sort of right in that ten-ish percent range. And, you know, I think when we think about the dividend, it sort of aligns really nicely with that economic earnings power. Thinking about your second question, you know, the numbers I gave in my script, we had about nine cents in the fourth quarter. And, you know, we expect those swaps to contribute about two cents to the first quarter before running off. Does that answer your question?

Bose George: Yes. So just the impact on the DE is the difference between the nine cents and the two cents for the first quarter. Is that right?

Mike Roper: Exactly.

Craig Knutson: Okay. And Bose, I’ll just mention in terms of DE, I think, you know, we felt that the DE was rather important, particularly when the Fed was in the middle of a raising cycle where they raised rates by five hundred basis points. Because of using fair value accounting, there’s just so much noise in the GAAP earnings due to fair value changes. That, you know, I think, you know, we rely on another measure as a more constant. You know, I think in a different rate environment, as Mike said, I think we think, you know, we consider a lot of things and obviously the board considers a lot of things, but I think the, you know, the economic earnings power of the portfolio when we say that we, you know, we strike everything at market. Essentially, that’s what we do in our book value. Right? So book value is marked to market. And so that’s sort of, I think, more of how we think about it than just being just married to a particular DE number.

Bose George: Yeah. Yeah. No. That makes sense. And yeah. So just to clarify, so the economic return is not declining by the differences in the nine and the two cents. It’s just that the DE is declining, not the economic return.

Mike Roper: That’s exactly right, Bose. Like, the swaps, they’re already in book value. Right? So the roll-off of those swaps doesn’t impact anything from, you know, an economic perspective.

Bose George: Okay. That’s great. Thanks. And then just one more. The agency MBS that you guys are putting on, what’s the return on those assets?

Bryan Wulfsohn: Yeah. We see hedge return in the mid-teens.

Bose George: Okay. Great. Thanks.

Operator: Thanks, Bose. Next question today is coming from Douglas Harter from UBS. Your line is now live.

Corey Townsend: Hi. This is actually Corey Townsend, on for Doug. I just wanted to ask, you know, what was behind the increase in the delinquency for single-family and multifamily transitional loans?

Bryan Wulfsohn: Yeah. I mean, delinquencies are higher in those portfolios because generally, if you look across our other asset classes that we invest in, those are the riskiest parts. Right? So, you know, when you’re lending against either fix and flip or a ground-up or bridge, you know, value-add type projects, there’s just additional risk. And then with, you know, sort of the shorter-term nature of those loans, you know, various things can occur in terms of loans breaching maturity, and, you know, the home may not have been sold yet. That loan can enter delinquency 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, but, you know, it’s sort of the nature of the asset class. It comes along with it.

Corey Townsend: Got it. And then what has, like, the loss experience been on those portfolios, and what type of losses or, you know, delinquencies are kind of assumed at the time of underwriting?

Bryan Wulfsohn: Yeah. I mean, we expect in terms of, you know, like, underwritten losses, when we make the loans, we kind of expect somewhere between fifty and a hundred basis points of loss. You know, on average, if you look back historically, given how much HPA we have had, if, you know, we look at sort of a net losses type number where you offset that with other delinquent interest that’s collected and extension fees collected, you know, that number historically has been very low, close to de minimis. Now with HPA sort of flattening out and in certain areas, we do expect those loss numbers to sort of trend towards our expectation of fifty to a hundred basis points. So that’s kind of what we do expect going forward.

Corey Townsend: Got it. Thank you. Appreciate that.

Operator: Thank you. Next question today is coming from Michelle Goldman from Citizens. Your line is now live.

Michelle Goldman: Hey, good morning, guys. Thanks for taking the questions. If I could just follow up on Lima One perhaps. How do you guys see things going? What’s your outlook for Lima One for the rest of the year? And what kind of product type loans are you currently focused on? Seems like in the fourth quarter, most single-family. Is that going to continue to be the focus going forward?

Bryan Wulfsohn: Yeah. It’s really single-family continues to be the focus there. Transitional and term rental. We’re, you know, we’re doing a lot of things there. We’ve hired additional salespeople to help support growth. We’ve moved, you know, we’re gradually moving into the wholesale channel to grow the rental loan originations, which is sort of coming online now. So we do see prospects for growth in 2025. In terms of the exact number for 2025, you know, wouldn’t be surprised if it’s somewhere around $1.5 billion, but sort of trending upwards towards the end of the year. Expect, you know, sort of the first quarter to be somewhat flattish versus the fourth quarter.

Michelle Goldman: Gotcha. And is the management team from that unit now reporting directly to you, Bryan?

Bryan Wulfsohn: Yeah. It reports up to MFA, you know, collectively, myself, Craig, you know, Lori Samuels as well.

Michelle Goldman: Great. Thank you for that, Bryan. And can I squeeze in a question about current book value maybe?

Mike Roper: Yeah. We mentioned in the prepared remarks. We think it’s effectively flat from the end of the year. And that’s net of the dividend accrual.

Michelle Goldman: Got it. Thank you, guys. Best of luck going forward.

Bryan Wulfsohn: Thank you. Thanks for the questions.

Operator: Our next question is coming from Eric Hagen from BTIG. Your line is now live.

Eric Hagen: Hey, thanks. Appreciate you guys. Got a couple on non-QM. Good morning. I’ve got a couple on non-QM, and I think I’ll probably just ask them together. I mean, going back to the option to call and resecuritize the seasoned deals, I realize the cost of funds would go up relative to the cost on those old deals, but on an economic basis, I mean, don’t you think the liquidity benefits and releasing liquidity, resetting the leverage, maybe override that to a large degree? And then, you know, joining question, I mean, what’s the right way to think about a pickup in prepays for the non-QM portfolio here? I mean, both in terms of the economic return on the back book and the opportunity to, you know, like, recapture those loans in the portfolio going forward and what the return would look like there.

Craig Knutson: So, Eric, I’ll take the call on the securitizations question and then have Bryan talk about non-QM. I think, you know, yes, if you look at some of the coupons on the triple A’s that we sold back in 2021, you know, I think there were some deals where those coupons were less than one percent. So clearly, a new securitization would be at a higher rate. But you have to take the whole deal holistically because there may be very little bit of that A1 from a 2021 deal that’s left outstanding right now. And so the ability to, you know, to substantially increase the borrowing because those deals delever as time goes on, you know, can be profound from an ROE standpoint. And, you know, trust me, we run the math on those deals. It’s a, you know, it’s a fairly simple or somewhat complicated algebra problem. But it’s, you know, at the end of the day, it’s pretty straightforward.

Bryan Wulfsohn: As it relates to prepays, so, you know, they did tick up over the quarter and, you know, there’s a couple of nuanced things as it relates to that. For prepaid increase in for loans that we currently hold at a discount, actually, that is a positive for book value because that, you know, we get cash for something we had marked at, say, ninety-six cents on the dollar. But as it relates to DE, when we get those prepays, because those loans were purchased at a premium, you know, years ago, there is an amortization of that premium upon prepayment, so that would, you know, incrementally lower DE. But again, we view that as a positive economically for the company.

Eric Hagen: Yep. Okay. Good stuff. Good answers here. I appreciate you. Last one. I mean, can you just share the level of unfunded commitments in the Lima One portfolio and over what time frame you might expect those commitments to get called up? Thank you, guys.

Mike Roper: Eric, I’m not sure we have that number handy. It will be in the K. It’s, you know, probably in that, you know, $600 million range and sort of guesstimating. So and in terms of, you know, when we expect the funded, you know, let’s say over the next year or so. And just to keep in mind, Eric, you know, most of those loans are in revolving securitization, so it effectively self-funds. Right? Like, those paydowns fund those draws. And, obviously, on our warehouse lines, our lenders fund those draws for us as they occur.

Eric Hagen: Yep. Good reminder about the securitization structure. Thank you, guys. Appreciate you.

Craig Knutson: Thanks, Eric. Thank you.

Operator: Thank you. We have reached the end of our question and answer session. I’d like to turn the floor back over for any further or closing comments.

Craig Knutson: All right. 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.

Operator: Thank you. This concludes today’s teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.