Ladies and gentlemen, thank you for standing by. Welcome to the MFA Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Hal Schwartz. Please go ahead.

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 reflect 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-K 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 second quarter 2024 financial results. Thank you for your time. I would now like to turn this call over to MFA’s CEO and President, Craig Knutson.

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's second quarter 2024 earnings call. With me today are Mike Roper, our CFO; Gudmundur Kristjansson and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of our senior management team. I'll begin with a high level review of the second quarter market environment and touch on some of our results, activities and opportunities. Then I'll turn the call over to Mike to review our financials in more detail, followed by Bryan and Gudmundur, who will review our portfolio, financing and risk management before we open up the call to questions. The second quarter of 2024 was another pretty volatile period, with two-year treasuries drifting 40 basis points wider and ending April a little over 5% before rallying back to 475 at the end of the quarter. Similarly, 10-year treasuries sold off 50 basis points to 470 before rallying back to end the quarter at 440. Despite the volatile rate environment, MFA posted a solid second quarter with distributable earnings of $0.44 and respectable total economic return of 2.6%, driven by significant credit spread tightening during the quarter. During the quarter, we took advantage of this spread tightening and were able to opportunistically sell certain loans at prices well above our marks. Our GAAP and economic book values were flat for the quarter. In April, we completed a second senior unsecured bond offering of $75 million with a coupon rate of 9%, and in June, we paid off the remaining balance of $170 million of our convertible senior notes. In late May, we called an NPL securitization, which generated almost $80 million of liquidity. As we have discussed over the last several quarters, this optionality in the form of our callable securitizations provides us with an…

Thanks Craig. At June 30, GAAP book value was $13.80 per common share and economic book value was $14.34 per common share, each effectively unchanged from March 31. We declared dividends of $0.35 per common share and delivered a quarterly total economic return of approximately 2.6%. For the second quarter, MFA generated GAAP earnings of $41.9 million, or $0.32 per basic common share, an increase from $23.2 million, or $0.14 per basic common share in the first quarter. GAAP earnings included net unrealized gain on our residential whole loans of approximately $16 million. This gain was concentrated primarily in our Non-QM and SFR loan portfolios, which benefited from credit spread tightening during the quarter, but was partially offset by unrealized losses on our multifamily transitional loans as a result of the softness Craig mentioned in his earlier remarks. During the quarter, MFA generated distributable earnings of $45.6 million or $0.44 per basic common share, an increase from $0.35 in the first quarter. The increase in our DE was driven primarily by $0.06 of higher net interest income. For the quarter, net interest income was $53.5 million, an increase from $47.8 million last quarter. Net interest income increased across all of our major asset classes, reflecting our success in growing the portfolio over the last several quarters, primarily with high yielding loans. Net interest income benefited from higher discount accretion related to an uptick in prepay speeds on our legacy RPL/NPL loan portfolio, which has carried at a significant discount to its unpaid principal balance. Net interest income also benefited from increased collections on loans previously on non-accrual status as a result of higher reinstatements and other resolutions of delinquent loans during the quarter. Credit losses on loan resolutions were approximately $6.6 million for the second quarter versus approximately $1 million…

Thanks, Mike. We continue to add high yielding loans in the second quarter where we acquired over $680 million loans with an average coupon of approximately 9.6%. Credit statistics remain consistent with previous quarters with an average LTV of 65% and an average FICO score of 750 on loans acquired. Lima One originated BPL to accounted for about 60% of our acquisitions while Non-QM loans accounted for the remaining 40%. Total portfolio runoff increased 50% quarter-over-quarter with over $640 million paying off in the quarter. The weighted average coupon on loan payout was about 8.6%. Paydowns increased across the portfolio with most of the increase coming from transitional loan portfolio with over $390 million paid off compared to about $240 million in the first quarter. Whole loan spreads tightened in the quarter and we took advantage of that and sold $12 million of newly originated Lima One rental loans at a healthy premium. The recent decline in rates and increased expectations around earlier and larger Fed rate cuts has led to more constructive environment for loan prices. We believe this will last for some time and that it will be beneficial to the Lima One franchise to add regular loan sales to our capital market activities in addition to a regular securitizations. We also added $176 million of Agency MBS in the quarter, mostly 6% coupons at a yield of just under 6% and grew that portfolio to about $700 million. We expect the second quarter additions will generate mid-teens ROE for our portfolio. All of these activities resulted in a modest portfolio growth to over $10 billion, while our portfolio asset yield increased by 21 basis points to 6.79% in the quarter. Or net duration increased slightly to 112 basis points at the end of the quarter as our…

Thanks, Gudmundur. Securitization markets have performed well this year despite significantly increased supply year-to-date issuance of private label RMBS is about to eclipse all of the issuance in 2023 and spreads have remained attractive for well established issuers like MFA. In April, we launched our 14th Non-QM securitization selling $330 million bonds backed by $365 million in loans. The bonds sold have a coupon of 6.7% and the loans underlying the transaction had a weighted average coupon of 8.4%. In addition, we issued our fifth transitional loan deal in May, selling $164 million in bonds at a coupon of 7.25% [ph], where the underlying loans had a coupon north of 10%. As Craig mentioned, we called bonds from our outstanding unrated NPL securitization in May, generating $80 million in liquidity. Subsequent to quarter end, we took the reperforming loans from that called deal and combined them with additional performing loans to issue a rated RPL securitization selling $259 million bonds at a cost of debt at approximately 5.8%. In the coming months, we expect to issue an unrated NPL securitization with the remaining loans, together with other legacy loans currently on warehouse lines. We now have issued securitizations backed by over $9.5 billion in loans since 2020, and the percentage of our loan portfolio financed by securitizations stands at approximately 65%. Slide 20 of our earnings presentation, you can see that many of our securitizations are currently callable and others will become callable in the coming quarters and years. As evidenced in the second quarter, we have the ability to call our collateral and unlock substantial non-dilutive capital that can then be redeployed at mid-teens ROEs. If interest rates continue to drop as they have in recent weeks these call features could also provide optionality to reduce our borrowing costs.…

Thank you. [Operator Instructions] We will begin with the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Nice DQ results, top and bottom line. I wanted to touch, maybe dig in a little on the multifamily delinquencies. It seems like you pulled back on new originations, but as you manage through the existing portfolio, what do you expect those to do near term? When do you expect those DQs to peak? And kind of can you talk about your resolution efforts to push down that DQ number?

Sure. So I mean it’s – I was going to say it’s hard to forecast when delinquencies would peak, but it’s impossible. But just to put the delinquency numbers in perspective, the total 60-day delinquency balance as of June 30 was a little over $50 million and the increase from March 31 was about $20 million on a portfolio of over $1 billion. So yes, it increased, but the numbers are obviously somewhat manageable. As Bryan mentioned, we have an asset management team that has a stellar record of working through billions of dollars of delinquent loans for over a decade, right. We started purchasing NPLs and RPLs back as early as 2014. And because of this expertise and track record, I think we’re uniquely capable of revolving the challenging situation that arise with delinquent or defaulted borrowers. I’ll also point out that our multifamily loan portfolio is different from most others in that these are small, balanced, transitional multifamily loans with an average balance of about 3.2 million. That said, the properties that collateralize these loans are often unique situations and the outcome from defaulted loans are one off circumstances which makes it really difficult to forecast. These resolutions could occur quickly or they could take months or years to resolve and the outcomes could range from a full payoff to a loss. So it’s difficult to forecast the timing and severity in any sort of accurate fashion.

Great. I understood and appreciate the comments around that. I want to touch a little bit on just the shift in interest rate and outlook. Appreciate the update on post quarter book value and the sensitivity table in the press release. Can you talk about on that? Is that sensitivity table really look at existing fair value marks? Or can you talk about how a shift in prepayment speeds might allow you to recover some of the portfolio discount at a faster pace and kind of how you think about the lower rate out?

Yes. So I think you’re referring to, are you referring to, I guess the shock table in the press release which shows the sensitivity to changes in interest rates?

That’s right.

Yes. Yes. So I mean, at the end of the day, we do have positive interest rate duration. And so to that extent, if rates are coming down, that tends to be positive for our book value. The other thing is we do have, and as rates come down as well, on top of that, you may see an increase in prepayments and prepayment activity. And because of our loan book is marked at a discount any prepayments there tend to be positive both to income and book value. And as it relates to just the curve in general, steepening off the curve is going to help from lowering our cost of funds perspective. And as we mentioned in the opening remarks, we are, from a hedging perspective, have been focused, and will be focused more on hedging the long end of the curve and creating some optionality on the front end to allow the liabilities to reprice. And so I think – so there’s a couple of things here. One, just the book value, but also as loans that are discount prepay, it’s positive for income.

Great. Appreciate the comments this morning. Thank you.

Thanks, Stephen.

We’ll now go to the line of Bose George with KBW. Please go ahead.

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?

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. And because of that, because of that competitiveness, we’re sort of – we’re somewhat sanguine on adding to that portfolio significantly, given that the premiums that are out there in the marketplace. 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.

And Bose, I think some of those premiums that Bryan talked about are just, they’re loans that were originated recently, but probably at higher rates than where they’d get originated today. So it stands to reason, with rates rallying, that those are going to command premiums. But I think the origination coupons, if you will, are likely going to trace rates.

Okay. That makes sense. 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?

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.

Okay. Great. Thanks.

We’ll next go to the line of Eric Hagen with BTIG. Please go ahead.

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?

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.

All right. Thank you. And then shifting back over to the Non-QM portfolio, how do you think delinquency rates would respond to higher levels of unemployment? And how much production of Non-QM do you expect we would see in the market in general under those conditions of higher unemployment? Thank you.

Yes. I mean, if we saw higher levels of unemployment, obviously we would expect delinquencies to go up. What gives us comfort there is the LCD’s on our Non-QM portfolio are pretty low. If you look at the – in the presentation somewhere, HPA adjusted in the mid-50s. So for our existing book, we’re really not all that concerned if there was an uptick in delinquencies as it relates to new origination. Yes, sure. I’m sure. If the economy was to struggle more, right, as you know, Non-QM loans are made to a lot of business owners and the like, and if they’re seeing stress, maybe there would be a little bit less production. But at the same time, if a business sort of continues to need to run and they need financing and they have a lot of trapped equity in their homes, cash out refinance or potentially a second lien is a lifeline for them to keep the business going. So there’s sort of offsetting factors that we could see that would impact Non-QM production going forward.

Great. Thank you guys.

Thanks.

We’ll now go to the line of Doug Harter with UBS. Please go ahead.

Thanks. On the potential for resecuritizing, can you talk about the – kind of try to help us size the puts and takes of freeing up equity versus a lot of those deals are much lower coupon. Just how you’re thinking about it, how close you are to being able to execute profitably, some of those resecuritizations?

Sure, Doug. So obviously the coupon on the outstanding securities factors into the decision about whether to call deals, I'll just point out that the lowest coupons are obviously on the most senior bonds, sold us [ph] AAA bonds typically, and those are the first ones to pay down. So while we might have a pretty low coupon on the AAAs that are outstanding, we might have a small amount of that outstanding. So we really look at the whole deal in totality, but rest assured we run the numbers. And if some of those deals I think that we did back in early 2021 where we sold AAAs below 1% yields, those probably aren't in the money until those AAAs pay down more. So it's just, it's part of the calculus that goes into it. But, the example that we used in this quarter of calling an NPL deal, so that's an NPL deal that's been out for quite some time. We called that deal. Many of the loans in that deal are now re-performing. Right, which is a testament to our asset management group that we turn non-performing loans into re-performing loans and we're then able to securitize those into a re-performing loan deal, which is a rated deal. So it obviously trades at lower yields than a non-rated deal would. So that's just one other example of some of the optionality that we have in that portfolio.

Great. And then I guess obviously it's still kind of early days from the recent volatility, but kind of what is your outlook for securitization spreads kind of as we move forward here in the third quarter?

So they've been, as I said in my prepared remarks, the securitization spreads have been pretty stable lately. I think if you see a big rally in rates, you'll probably at least see intermediate term, you'll probably see a little bit wider spreads on securitizations just because of the sort of yield sticker shock. But the demand has been really good. Bryan mentioned that we've already eclipsed 2023s volume of securitization. So the buyers are there and deals or tranches are typically oversubscribed. So it's a pretty good dynamic for that market, but I think a strong rally in rates, you could see a temporary, modest widening of spread.

One of the important aspects is the risk of higher rates, it's kind of off the table for a lot of investors, which cost spread to widen, mostly in 2022 and 2023. And so we probably saw a peak of securitization spreads, call it September and October and 2023. And so as rates have come down and the fear of further fed hikes is off the table, and we're now firmly focused on rates lower, that has broad spreads lower and stability. Yes, it will be pockets of volatility, but I think that's very constructive for spreads and securitizations going forward.

Great. Appreciate it. Thank you.

Thanks, Doug.

[Operator Instructions] We'll now go to the line of Steve Delaney with Citizens JMP. Please go ahead.

Good morning. Hello, everybody. Look, congratulations on a strong quarter and building your portfolio to $10 billion. That's a nice round number. How much additional tax? Yes. How much, $20, I guess, is the next one. Right, Craig, investment capacity, do you guys think you have with your current capital base and liquidity? And as part of that, you sold some loans. So are there additional underperforming loans in the portfolio that you might be able to sell to upgrade the overall portfolio return? Thanks.

Sure. So I think where we currently sit and where leverage sits, I'm not sure there's room to grow the portfolio materially, certainly not to $20 billion and not the $15 billion. But you're right, Steve, there are always tweaks and there are maybe loan sales or collapsing securitizations that unlock equity. And so I think future portfolio growth is probably going to be around that. I think each of the asset classes are, I think, are appropriately levered. So while there could be some growth absent additional equity or outside capital, I think portfolio growth will be modest at best.

And just Steve, on the loan sales that we did in the quarter, these were newly originated loans where we just saw an increased premium in the marketplace, as we mentioned on the call, and a good execution to sell those at a healthy premium. And I think as you mentioned that that is an important part of our flexibility. And I think going forward, we'll probably have more of those things where, if premiums stay elevated in this rate environment in terms of rental loan sales.

Yes. Well, it looks like the yield curve we're going to get benefit both on short-term and I think longer term as well. I'm kind of focused on the fixed rate side. And for you guys right now, and for you guys, it's the single-family rental product, right? That is your primary fixed rate product. Am I right on that? Of course you're – I'm talking about the origination side with Lima. I'm not talking about buying, NQMs and that type of thing. So is that where, a lower coupon on fixed rate SFR, investor loans, is that an opportunity, a segment of your business that could really, could really pick up with the lower rates?

Yes, that's correct. I think as rates come down, there's going to be more opportunities there simply because that's a debt service coverage ratio product. And so as that debt service cost comes down, more loans make sense. More deals make sense, and there's also going to be more activity in the marketplace. That product was a much larger part of our origination mix on the Lima side. Back in 2021 and 2022, it was closer to like, 30% to 35% of the origination volume. And as opposed to in 2023, when it was closer to, 15% to 20%. And so, yes, we do think that there's, there's potential optionality there from a volume perspective.

And you expect, you think you could have some sort of the fix and flips or the residential bridge, those people might be still carrying SOFR based products, but as rates come down, you think that you can see some flipping there. And how does that work, play into an improved securitization opportunity if that trend occurs?

So RTL or fix and flip loans, they have a fixed rate coupon. And so. Really? Yes. Okay. But you're right. I mean, what, so what we're seeing in the marketplace is, you know, securitization execution has improved a lot throughout this year. And on the RTL side, spreads have come in probably from the high-200s all the way down to, 200 [ph] or even inside of that on new deals. So I think, that is an opportunity to improve the liability side as well, because some of our older deals will get callable and so on and so forth. But I think with respect to the RTL market at large, there's also increased competition. You've seen new entrants come in and kind of older hands that were dormant in 2022 and 2023 kind of resurface. So I would expect coupons to come down a little bit on the RTL product itself, on the loan side, and probably more competition. But we should also see increased activity on the flipping side throughout the year as we started to see a little bit and the latest data has come out.

Appreciate all the comments and congrats again on a strong quarter.

Thanks, Steve.

Thanks.

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All right, thank you everyone for your interest in MFA Financial. We look forward to speaking with you again in November when we announce third quarter results.

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