MFA Financial Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 19, 2025

There are 8 speakers on the call.

Operator

Greetings and welcome to the MSA Financial Fourth Quarter twenty twenty four Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Hal Schwartz, General Counsel.

Operator

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 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.

Operator

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 12/31/2023, 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 twenty twenty four financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO, Craig Knudsen.

Speaker 1

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's fourth quarter twenty twenty four earnings call. With me today are Brian Wolfson, 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 Brian who will review our portfolio, financing, Lima One and risk management before we open up the call for questions.

Speaker 1

Fixed income markets reversed direction in the fourth quarter of twenty twenty four after rallying strongly at the end of the third quarter following the Fed's long awaited rate cut of 50 basis points on September 18. Despite two additional 25 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 60 basis points, while ten year rates rose nearly 80 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.

Speaker 1

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 4%. We remained active during the quarter adding over $700,000,000 in loans, Non QM and BPL and over $450,000,000 of agencies. We executed three securitizations in Q4 on over $1,000,000,000 of loans including RTL, NonQM and NPL loans. On a sad note, we mourn the sudden and unexpected passing of Board member Frank Ulrich on December 2.

Speaker 1

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 $10,800,000,000 to $11,400,000,000 including an increase in our agency book of over $800,000,000 ending the year at 1,400,000,000 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, same as at the end of twenty twenty three.

Speaker 1

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 two $25 par bonds early in 2024, totaling $190,000,000 at an average coupon of just under 9%. These are five year bonds, but they're callable at par after two years, specifically February August of '20 '20 '6.

Speaker 1

We also paid $1.4 in common dividends in 2024, which is the same as 2023. And the tax treatment of a substantial portion of these dividends is somewhat unique and we believe confers a material benefit to shareholders, which Mike Roper will explain in more detail. Finally, as we discussed on our third quarter earnings call in November, we affected some management changes both at Lima One and at MFA during 2024 and 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. Thanks, Greg, and good morning.

Speaker 2

At December 31, GAAP book value was $13.39 per share and economic book value was $13.93 per share, a decrease of approximately 3.7% from $14.46 at the 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 and $1.4 per share for the full year. We were happy to report in late January that approximately 40% of our twenty twenty four common dividends were treated as a nontaxable return of capital to our shareholders. This was the fifth straight year that a substantial portion of our common dividends were treated as nontaxable distributions.

Speaker 2

This favorable tax treatment substantially increases the after tax dividend yield realized by holders of our common stock. At December 31, we had a fully reserved remaining deferred tax asset totaling $62,700,000 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.

Speaker 2

For the fourth quarter, MFA generated GAAP earnings of $5,900,000 or a loss of $0.02 per basic common share. Our GAAP earnings were negatively impacted by higher rates across the yield curve. Distributable earnings for the fourth quarter were $40,800,000 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 $0.04 reduction in realized credit losses on our fair value loans, a $0.04 reduction in our provision for income taxes and an offsetting $0.05 reduction in the carry earned on our interest rate swaps. Swap carry in the quarter was lower primarily as a result of lower average SOFA rates following the recent series of cuts of the federal funds rate.

Speaker 2

Additionally, near the end of the quarter, interest rate swaps with a notional value of $450,000,000 and a fixed pay rate of approximately 90 basis points reached their maturity. As we highlight on Slide eight of the presentation, we have an additional $550,000,000 of swaps that will mature in the first quarter and a further $125,000,000 that will mature in the second quarter. Collectively, this $1,100,000,000 notional of expiring or expired swaps contributed approximately $0.09 to our fourth quarter distributable earnings. Based on current sulfur 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 distributable 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.

Speaker 2

The positively slowed 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 Brian, who will talk through our portfolio highlights and

Speaker 3

the performance of Lima One. Thanks, Mike. We continue to have success adding to our 10,500,000,000 investment portfolio acquiring over $1,200,000,000 between loans and securities in the fourth quarter. '4 '70 million dollars 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.

Speaker 3

We were active again purchasing agency securities, growing the portfolio by almost 50% to $1,400,000,000 at the end of the year. MBS acquired over the quarter were no to low pay up 5.5 at modest discounts to par. We believe spreads and carry and Agency MBS are attractive in addition to providing liquidity benefits to our portfolio. Lima One originated $235,000,000 of loans in the quarter with an average coupon of 9.5% and an LTV of 67%. For the total of twenty twenty four, Lima originated $1,400,000,000 in business purpose loans.

Speaker 3

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 $111,000,000 contributing $3,900,000 to mortgage banking income. In addition, we sold $141,000,000 of seasoned low coupon unsecuritized NonQM loans. The sale combined with new additions increased our NonQM portfolio coupon 25 basis points to to 6.65%.

Speaker 3

On financing front, we finished the year strong issuing three securitizations in the fourth quarter backed by over 1,000,000,000 UPB of loans. Our legacy RPLNPL 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 $200,000,000 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 75 basis points tighter than our last non rated transaction.

Speaker 3

In December, we completed our sixteenth nine QM securitization backed by $380,000,000 of loans. After these three transactions, over three quarters of our loan portfolio 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.

Speaker 3

Currently, we have $5,900,000,000 in outstanding bonds from these securitizations and $3,300,000,000 notional value of interest rate swaps as of the end of the year. Over the next two quarters, six seventy five million dollars 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.

Speaker 3

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.

Operator

Thank you. You. Our first question today is coming from Bose George from KBW. Your line is now live.

Speaker 4

Yes, good morning. Can you discuss where you see the current economic return of the portfolio? Is 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, does that is that the comment that you made was, does that go down by a couple of point in the first quarter based on that?

Speaker 2

Hey, both. Yes, thanks for the question. So I think the first one about sort of the economic return. Certainly, if you look at the straight DE ROE, you're in the sort of low teens just based on where it's been. But I think we said a couple of times on these earnings calls that we like to think about the economic return, meaning, if you were effectively to restrike the assets, restrike the liabilities and the hedges and sort of measure what that ROE is, sort of right in that 10 ish percent range.

Speaker 2

And I think when we think about the dividend, it sort of aligns really nicely with that economic earnings power. Thinking about your second question, the numbers I gave in my script, we had about $0.09 in the fourth quarter, and we expect those swaps to contribute about 0.02 to the first quarter before running off. Off. Does that answer your question?

Speaker 4

Yes. So just the impact on the DE is the difference between the $0.09 and the $0.02 for the first quarter. Is that right?

Speaker 3

Exactly. Okay. And Bose, I'll

Speaker 1

just mention in terms of DE, I think 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 500 basis points because of using fair value accounting. There's just so much noise in the GAAP earnings due to fair value changes that I think we rely on another measure as a more constant. I think in a different rate environment as Mike said, I think we consider a lot of things and obviously the Board considers a lot of things, but I think the economic earnings power of the portfolio when we say that we strike everything at market, essentially that's what we do in our book value, right? So our book value is mark 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.

Speaker 4

Yes, no, that makes sense. And yes, so just to clarify, so the economic return is not declining by the differences in the $0.09 and the $0.02 it's just that DE is declining the economic return.

Speaker 2

Exactly. 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 an economic perspective.

Speaker 4

Okay, that's great. Thanks. And then just one more, the agency MBS that you guys are putting on, what's the return on that those assets?

Speaker 3

Yes. We see a hedge return in the mid teens.

Speaker 4

Okay, great. Thanks.

Speaker 2

Thanks, Bo.

Operator

Thank you. Next question today is coming from Douglas Harter from UBS. Your line is now live.

Speaker 5

Hi. This is actually Corey Johnson on for Doug. I just wanted to ask, what was behind the increase in delinquencies for single family and multifamily transitional loans? And

Speaker 3

why

Speaker 5

are those delinquencies higher than I guess the other portfolio?

Speaker 3

Yes. I mean, delinquencies are higher in those portfolios because generally if you look across the our other asset classes that we invest in, those are the riskiest parts, right? So when you're lending against either fix and flip or ground up or bridge value add type projects, there is just additional risk. And then with sort of the shorter term nature of those loans, various things can occur in terms of loans breaching maturity and a home may not have been sold yet. So that loan can enter delinquency, if not extended.

Speaker 3

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 it's sort of the nature of the asset class comes along with it.

Speaker 5

Got it. And then what has like the what is the loss experienced in on those portfolios and what type of losses or delinquencies are kind of assumed at the time of underwriting?

Speaker 3

Yes. I mean, we expect in terms of like underwritten losses, when we make the loans, we kind of expect somewhere between 5,100 basis points of loss on average. If you look back historically given how much HPA we have had, if 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, that number historically has been very low, close to de minimis. Now with which HPA sort of flattening out and certain areas we ramped, we do expect those loss numbers to sort of trend towards our expectation of 50 to 100 basis points. So that's kind of what we do expect going forward.

Speaker 5

Got it. Thank you. Appreciate that.

Operator

Thank you. Next question today is coming from Mikhail Goberman from Simmons. Your line is now live.

Speaker 6

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?

Speaker 6

And what kind of product type loans are you currently focused on? It seems like in the fourth quarter, most was single family transition. Is that sort of continued is going to continue to be the focus going forward?

Speaker 3

Yes. It's really single family continues to be the focus there, transitional and term rental. We're doing a lot of things there. We've hired additional salespeople to help support growth. We've moved we're gradually moving into the wholesale channel to grow the rental loan originations, which is sort of coming online now.

Speaker 3

So we do see prospects for growth in 2025. In terms of an exact number for 2025, I wouldn't be surprised if it's somewhere around $1,500,000,000 but sort of trending upwards towards the end of the year. We expect sort of the first quarter to be somewhat flattish versus the fourth quarter.

Speaker 6

Got you. And is the management team from that unit now reporting directly to you, Brian?

Speaker 3

Yes. It reports of that the MFA collectively, myself, Craig, Laurie Samuels as well.

Speaker 6

Great. Thank you for that color. And could I squeeze in a question about current book value maybe?

Speaker 2

Yes. 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.

Speaker 6

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

Speaker 2

Thank you. Thanks for the questions.

Operator

Thank you. Our next question is coming from Eric Hoggman from BTIG. Your line is now live.

Speaker 7

Hey, thanks. Appreciate you guys. I've got a couple on non Q good morning. I've got a couple on non QM, I think I'll probably just ask them together. I mean going back to the option to call and re securitize the season deals, I realize the cost of funds would go up relative to the cost on those old deals.

Speaker 7

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, like as an adjoining question, I mean, what's the right way to think about a pickup in prepays for the NonQM portfolio here? I mean, both in terms of the economic return on the back book and the opportunity to like recapture those loans in the portfolio going forward and what the return would look like there?

Speaker 1

So Eric, I'll take the call it the securitizations question and then have Brian talk about NonQM. I think yes, if you look at some of the coupons on some of the AAAs that we sold back in 2021, I think there were some deals where those coupons were less than 1%. 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 substantially increase the borrowing because those deals delever as time goes on can be profound from an ROE standpoint.

Speaker 1

And trust me, we run the math on those deals. It's a fairly simple or somewhat complicated algebra problem. But at the end of the day, it's pretty straightforward.

Speaker 3

And as it relates to prepays, so they did tick up and over the quarter and there's a couple of nuance things as it relates to that. For prepays increasing for loans that we currently hold at a discount, Actually that is a positive for book value, because that we get cash for something we had marked at say $0.96 on the dollar. But for as it relates to DE when we get those prepays, because those loans were purchased at a premium years ago, there is an amortization of that premium upon a prepayment. So that would incrementally lower DE. But again, we view that as a positive economically for the company.

Speaker 7

Yes. 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 timeframe you might expect those commitments to get called up?

Speaker 7

Thank you, guys.

Speaker 2

Eric, I'm not sure we had that number handy. It's in the it will be in the K. It's probably in that $600,000,000 range and sort of guesstimating. And in terms of when we expect to fund it, let's say over the next year or so. And just to keep in mind, Eric, most of those loans are in revolving securitization.

Speaker 2

So it effectively self funds, right? Like those pay downs fund those draws. And obviously on our warehouse lines, our lenders fund those draws for us as they occur.

Speaker 7

Yes. Good reminder about the securitization structure. Thank you guys. Appreciate you.

Speaker 1

Thanks, sir. 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.

Speaker 1

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. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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