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MFA Financial remains confident in its strategy and portfolio, especially the multifamily bridge loans managed through Lima One. The company highlighted the conservative nature of their underwriting process and the low delinquency rates as indicators of a stable portfolio. With an average loan size of $600,000 and a focus on experienced borrowers for property renovations, MFA Financial is looking to fully lease up units and exit through GSE takeout financing. The next earnings announcement is scheduled for May, and the conference call will be available for replay until May 22nd.
MFA Financial, Inc. (MFA) has demonstrated a commitment to growth and shareholder returns, as evidenced by their latest earnings call. To provide further context to their financial health and future prospects, here are some key insights based on real-time data from InvestingPro:
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Operator: Ladies and gentlemen thank you for standing by. Welcome to the MFA Financial Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder today’s conference is being recorded. And I will now turn the conference over to our host Mr. Hal Schwartz. 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 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, 2022 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 2023 financial results. Thank you for your time. I would now like to turn this call over to MFA’s CEO and President Craig Knutson.
Craig Knutson: Thank you, Hal. Good morning everyone and thank you for joining us here today for MFA Financial’s fourth quarter and full year 2023 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 fourth quarter and full year 2023 market environment and MFA’s results and then discuss the current macro picture and 2024 outlook. Then I’ll turn the call over to Mike to review our financial results followed by good Gudmundur and Brian who will review our portfolio, financing, and risk management before we open up the call for questions. The fourth quarter of 2023 was yet another volatile period for fixed income markets, as 10-year treasury yields rose about 40 basis points in the first two and a half weeks of the quarter before a furious rally that brought them down by about 110 basis points by the end of the year. This bond market rally was obviously friendly for mortgage assets and resulted in strong earnings and book-value performance for MFA during the quarter. We generated a 7.8% economic return for the quarter and reported distributable earnings well in excess of our dividend. While 2023 was another extremely challenging year for fixed income investors and for levered mortgage investors in particular, MFA’s prudent risk management and continued execution of our strategy produced a 2.7% economic return for the year and a total shareholder return of 30.7%. As we look forward to 2024, the Fed appears to be in a holding pattern as they await further inflation and other economic data. Although the predominant view is for rate cuts in 2024, it seems pretty clear both from recent economic data and Chairman Powell’s statements that these much awaited rate cuts are at least a few months away. Inflation numbers continue to surprise on the high side, labor markets are still strong, and the U.S. economy remains buoyant despite recent recession signals from both Japan and England. While a lower Fed funds rate will obviously benefit levered fixed income investors and mortgage REITs, in particular, MFA’s positioning and strategy is decidedly not dependent on rate cuts. In the elevated rate environment of the last year, we’ve continued to add incremental assets at higher yields to execute securitizations as a durable source of financing and earn significant positive carry on our interest rate swap position that we put in place almost two years ago. We added $860 million of loans in the fourth quarter with an average coupon of 10% and we acquired $3 billion of loans in 2023 with an average coupon of 9.8%. We completed eight securitizations during the year collateralized by $2.2 billion of loans, including an issuance of over $450 million of securitized debt in the fourth quarter, which included a non-QM deal in mid-December that price over 50 basis points tighter and 100 basis points lower in yield than similar deals in October. Our strategic objectives and risk management initiatives have afforded us the opportunities and liquidity to grow our portfolio and materially increase its yield, which we believe sets us up well for 2024 and beyond. And finally, we’re already off to a strong start to 2024, we issued an unsecured senior bond early in January. That was a very successful transaction, as we were able to upsize the deal to $115 million and tighten the yields into very strong demand. And this was no accident. We began working with underwriters in November and into December, and we specifically targeted an early January deal launch date to take advantage of investor appetites at the beginning of the year. And finally, we repurchased in the secondary market a little over $60 million of our convertible bond that’s due in June. These repurchases together with the proceeds from our bond deal largely covered this convertible bond maturity. And I’ll now turn the call over to Mike Roper to discuss our financial results.
Mike Roper: Thanks, Craig. As Craig highlighted in his opening remarks, during the quarter MFA again delivered strong results in challenging market conditions. For the fourth quarter, MFA generated GAAP earnings of $81.5 million, or $0.80 per basic common share and distributable earnings of $49.7 million, or $0.49 per basic common share. The increase orders to distributable earnings versus Q3 was driven primarily by $7.9 million, or $0.08 per share related to the release of CECL reserves on our carrying value loan portfolio. DE also benefited from a $3.2 million, or $0.03 per share reduction in our G&A expenses in the fourth quarter related to the finalization of incentive compensation accruals for 2023. The CECL reserve release reflects an update to our modeling assumptions due to continued macroeconomic resilience as well as the significant accumulated home price appreciation and strong credit performance of our seasoned carrying value loan portfolio. Net interest income for the fourth quarter was $46.5 million, an increase from $46.1 million in the third quarter. As a reminder, our GAAP net interest income does not include the benefit of positive carry on our interest rate swaps. Net interest income inclusive of this carry was approximately $77 million for the fourth quarter, an increase of $2 million from the same metric in the third quarter. For the full year, our net interest income plus the positive carry on our swaps was $283.6 million, an increase of over $50 million, or 21% from the same metric in 2022. Our strategic focus on hedging and liability management along with our disciplined asset acquisition strategy allowed us to achieve this increase in net interest income. Although, markets were experiencing the most aggressive Fed tightening cycle of the last four decades. At December 31, GAAP book value was $13.98 per common share and economic book value was $14.57 per common share representing increases from September 30 of 3.7% and 5.3% respectively. MFA declared a dividend of $0.35 per common share for the fourth quarter and $1.40 per common share for the full year. The change in our economic book value along with these dividends led to a total economic return of 7.8% for the fourth quarter and 2.7% for the full year. Finally, subsequent to year end, we estimate that as of earlier this week, our economic book value declined by approximately 1% to 2% as a result of higher market interest rates. I’d now like to turn the call over to Gudmundur, who will speak to our portfolio highlights and the performance of Lima One.
Gudmundur Kristjansson: Thanks, Mike. We remain very excited about our ability to deploy capital at attractive returns and continued to grow our portfolio in the quarter. We acquired $880 million of assets in the fourth quarter and $3.5 billion in 2023, growing our portfolio by $600 million, or 7% in the quarter and by $1.9 billion, or 20% in the full year. Business purpose loans and non-QM loans accounted for majority of our acquisitions in 2023, while we also added about $450 million of agency MBS and continue to approach them opportunistically as we believe they offer attractive returns, while also providing risk management benefits to our credit-focused portfolio. We expect our fourth quarter acquisitions to deliver around mid-teens s return on equity and continue to see similar attractive returns in 2024. Our ability to source high-yielding high-quality loans has led to significant benefits for our shareholders. Looking at Page 20 in our investor presentation, we can see that our asset yield has increased steadily in the year up 77 basis points from 5.69% in Q1 to 6.46% in Q4. This combined with a relatively stable cost of funds have positively impacted our distributable earnings throughout the year. The US economy remains strong at the end of 2023 with fourth quarter GDP growth of over 3% and the unemployment rate remaining close to historical lows at 3.7%. Home price proved resilient in 2023, rising by over 5% in the year as low supply of homes continues to outweigh low affordability. This backdrop of ongoing housing and labor market resilience continues to provide support to our credit portfolio. The market outlook for the economy continues to shift quickly, which has led to significant interest rate volatility and challenges from interest rate risk management. Our risk management approach has been to maintain a relatively short net duration and prioritize stability of funding costs through securitization issuance and swap hedges that mostly cover our floating rate liabilities. This approach was successful in 2023 and we believe it will continue to be successful in 2024, if as the market expects the Fed stops cutting rates in the second half of 2024, we believe we will benefit from the extensive carry on our swaps for most of the year. We’ll also be able to gain from lower funding costs next year as $1 billion for swaps mature at the end of 2024 and early 2025, and with a net duration of about 90 basis points, we believe we are appropriately protected against unexpected increases in interest rates. Turning to Lima One, Lima One close the year out strongly, originating over $590 million of BPL in the fourth quarter and $2.3 billion for the full year with an average coupon of over 10%. Since our acquisition 2.5 years ago, Lima has originated about $5.6 billion of BPLs for our balance sheet, it’s robust origination activity has been key to growing our portfolio and asset yields in 2022 and 2023 with Lima One originated loans accounting for over 70% of our loan acquisitions in 2023. Credit quality and Lima’s origination remained strong and consistent throughout the year with average LTV of 65% and average FICO score of 745 on loans originated. Fourth quarter originations remain concentrated in the shorter term transitional loans, which accounted for about 85% of volume. Demand for Lima’s products remained strong with disruptions in the private lending space, providing opportunities to grow market share and attract talent. The first quarter has historically been the slowest quarter for BPO origination and we expect volumes to be lower at around $450 million in the first quarter. The 60-plus day delinquency rate on our BPL loans originated by Lima One ticked up to 3.9% in the quarter, but remained low and consistent with our modeling expectations for this asset class. As always, we remain laser focused on credit monitoring and loss mitigation strategies. Lima One has originated and serviced BPL loans since 2010 can have extensive servicing and construction management capabilities, which we believe when combined with MFA’s own extensive credit and asset management experience allows us to manage delinquencies effectively and efficiently. In continued support of Lima’s origination activities. We increased our BPL financing capacity by about $400 million in the fourth quarter and further expanded this month when we price or fourth revolving transitional loan securitization collateralized by about $200 million of loans. I will now turn the call over to Bryan Wulfsohn who will discuss MFA’s credit performance and securitization activities in more detail.
Bryan Wulfsohn: Thanks, Gudmundur. We successfully navigated another volatile quarter issuing over $450 million in bonds through two securitizations. In October, we issued our third RTL revolving securitization, selling $184 million of bonds and an 8.5% coupon backed by $230 million of collateral, carrying weighted average coupon of over 10%. Subsequently in December we opportunistically issued our 13th non-QM deal after a significant spreads rallied selling $268 million of bonds with a coupon in the low mid-sixes, which as Craig previously mentioned was 100 basis points lower than other non-QM deals issued just a couple of months prior. This month we issued a fourth revolving securitization backed by our transitional loans originated by Lima One. $160 million of bonds sold were well-received pricing at a coupon of just over 7%, which was 140 basis points lower than the prior deal issued in October. The loans underlying the deal had a weighted average coupon of almost 11%. We have now issued securitizations backed by over $9 billion in loans since 2020. And the percentage of our loan portfolio financed by securitizations continues to trend higher above 60%. On page 19 of our presentation, you can see that many of our securitizations are currently callable and others will become callable in the coming quarters and years. Those call features provide the potential to relever our collateral unlocking substantial non-dilutive capital that can be redeployed at mid-teens ROE. So our strategy is not dependent on lower rates, should we find ourselves again in a lower interest rate environment. The call features also provide an optionality to reduce our borrowing costs. We believe that mortgage securitization will continue to be a significant piece of loan financing strategy since it is non-recourse, non-mark-to-market funding and further insulates the portfolio from volatile markets. Moving to our credit performance. The strong labor market and resilient housing backdrop continues to support our credit performance. Over the quarter, we saw a modest increase in 60 plus day delinquencies in our purchase performing portfolio, which increased to 3.8% from 3.1% a quarter ago. This increase remains well within our expectations when we model our expected cash flows for the portfolio. 60 plus day delinquencies in our legacy RPL NPL portfolio declined by over a point to 24.5% as we continue to achieve positive outcomes for our remaining delinquent loans utilizing our in-house expertise and asset management. Our asset management team worked closely with our servicers to improve outcomes on defaulted loans including generating gains on our legacy RPLs and NPLs and mitigating potential losses on our newly originated loans. We’re proud of our asset management capabilities since that give us comfort, growing our purchase performing portfolio and gives us optionality, should distressed loan opportunities arise in the future. Prepayment speeds in our portfolio declined slightly in the quarter reflecting the higher interest rate environment. CPRs remained in the mid to high single-digits for our non-QM SFR and legacy RPL and NPL portfolios. For the transitional loan portfolio, we had annualized repayment rate of 33%. We had total paydowns of over $400 million in the quarter, which continued to be reinvested into higher yielding assets. Lastly, we continued to reduce our REO portfolio. Over the quarter, we sold 71 properties for $22.6 million resulting in over $2 million in gains. And with that we’ll turn the call over to the operator for questions.
Operator: [Operator Instructions] We’ll go to the line of Doug Harter with UBS.
Doug Harter: Thanks.
Craig Knutson: Good morning, Doug.
Doug Harter: Good morning. Hoping you could talk a little bit more about your call strategy. Is this something that you view as attractive kind of even in the current rates and then lower rates would be upside optionality? Or just how should we think about how aggressive you would be on exercising those calls?
Bryan Wulfsohn: So it all depends deal to deal, price for certain deals where they have delevered a significant amount. It may make sense for us to call them even if interest rates aren’t necessarily lower than the than they were for the deals and they were issued but for other deals, right it’s going to be opportunistic depending on where rates are.
Doug Harter: Okay. And then you talked a little bit about your unsecured issuance during the quarter. I guess how should we think about your appetite for continuing to use that and what that role might be in your capital structure going forward?
Craig Knutson: So I mean thanks for the question, Doug. It was a very successful transaction on. It’s a little bit of a niche product because it’s a $25 par amount. So it’s a retail product but I think, we certainly proved it out that it’s a viable source of financing. So to the extent that we look to raise additional capital in fields one of the tools in the toolbox.
Doug Harter: All right. Great. Thanks.
Craig Knutson: Sure.
Operator: Thank you. We’ll go next to the line of Steve Delaney with Citizens JMP.
Steve Delaney: Good morning, everyone. Congratulations on a strong close to what was a very good year in a tough – tough market.
Craig Knutson: Hey, Steve.
Steve Delaney: Hey, Craig. So looking at the market, obviously, you know everybody’s focused on the Fed and where you were maybe looking at it slightly different mortgage market at the end of this year than we are right here today. I’m just curious, what you’re seeing out there beyond Lima One. Ok Lima One is — is doing great but is there anything emerging out there in terms of non-bank originators of specialized product not just obviously not agency flow but non-agency products that you don’t have the kind of yield and profile that might be attractive to you guys sort of a sort of a non qualified mortgage in QM kind of product is what I’m — what I’m thinking about. Just curious, what you’re seeing out there in terms of product flow on the on the consumer mortgage side banks? Thanks.
Craig Knutson: So I’ll speak to that first, and then I’ll let Brian address your done Q1 question on Steve. I know, there’s been a lot of talk about possible trends emerging in banks and commercial loan portfolios. And but at this point, I wouldn’t say that we’ve identified any on screening opportunity right now. Obviously, that can change. And as the year plays out that may be the case on. But I think we’re pretty comfortable in the space that we’re in. And we’ve been able to — we’ve been able to add significant amounts of assets over the last two years that successively higher rates on. So it took until, we find that challenging or until we find that something that’s better I think we’re pretty comfortable where we are.
Bryan Wulfsohn: As it relates to non-QM, right. Over the last quarter we bought around say $300 million of newly originated loans and that and that continues to be at a pace. We haven’t really seen a tick-up in production, but they’re still you know a good amount of supply out there to meet our needs, in terms of like potentially new products. Yeah, we’ve always looked at sort of second in this environment for a lot of borrowers, who have locked in low rates previously, but still can’t really do a cash-out refinance but it makes sense for them to draw on it on a second. We’ve always looked at that market and we do it in some in some small size. But the trick the tricky part is getting to critical mass of loan amounts are generally pretty small and there’s just not a ton of that production out there to date.
Steve Delaney: Got it. And then my final question is about Lima One’s bridge products. And with respect to multifamily you know they do some single-family rental. That was a little bit of everything I think from an investor loan standpoint. But on the multi-family side, where does that kind of tap as far as the size of a project that they would work on? And the just the magnitude how large of a loan might they make because we were seeking a multi-family. We used to think of as bullet proof. But you know from covering the commercial mortgage rates we’re just seeing more and more. I mean, office is still the real problem, but we’ve seen a lot of multifamily distress out there. So I’m just curious, if you’ve got any — any concerns about your multifamily bridge book that you may have through Lima One. Thank you.
Gudmundur Kristjansson: Hey, Steve. Great question. Just for — just for some context about the size and I’ll give you a little bit of broader context also on the on the multifamily portfolio. So look these are really small balance multifamily loans. The average loan size is about $3.2 million and so we’re originating is that our average LTV of about 65% which means the average property values broadly around the mid-fives. And when you think about the strategies here the average profile is kind of a highly experienced borrower that is looking to renovate some units. Some of the common space improved property management. Usually, at origination the average project has some occupancy ranging between 60%, 80% on day one. So there’s some cash flow that helps the borrower while they’re working on the transition and these projects are all light. We have a view of the average we have amount is around kind of $600,000 which is roughly about kind of 20% of the loan amount. So we would think about that as fairly light-touch we have. And you know if you think about in terms of per unit that’s anywhere from like $7,000 to $12,000 per unit from the goal is to complete the we have fully lease up the units and an exit in most cases through a GSE takeout financing, which of course, is significantly lower than the coupon on the bridge loan. These loans are usually two to three year term loans with a fixed coupon. And so if you think about that in the context of the last two years because there’s a fixed coupon on there, there hasn’t been any co-payment shock during the times term of the loan and so it doesn’t put a pressure on the borrower as long as the project is underwritten appropriately and the project makes sense. Historically, our underwriting has been fairly conservative and the underwriting statistics kind of bear that out. The average assets LTV as I said earlier about 65% and the average asset [indiscernible] to be similar at around 6.5%. And when we think about it in terms of like that yield concept, the average as stabilized debt yield has been averaged around 9.5% on the portfolio, but in 2023 it’s close to 10.5%. And so in summary like we think these are underwritten with plenty of borrowers skin in the game and with expected cash flows that can support the refinancing into long-term debt. And to-date like you know from a performance perspective the 60-plus day delinquency on the multifamily part is about 2%, so is fairly low. And it from a vintage perspective, most of our vintages 22 and 23, I think arguably many would argue that the 21 vintages probably is the one that would be at most risk across the spectrum because rates were low things were underwritten, probably looser across your home price appreciation as well as rent increases. And look as we think about all these things, we feel very comfortable about the portfolio.
Steve Delaney: Yes, that sounds like it’s a rock-solid workforce housing with a with a government takeout at the backside. So, that’s very helpful to get there. The comfort on which we’re looking inside that portfolio I think is pretty solid. Appreciate everybody’s comments this morning and congrats again on a really strong close and to a good year. Thank you.
Craig Knutson: Thanks a lot Steve.
Operator: Thank you. [Operator Instructions] And speakers, there are no further questions in queue from the phones at this time.
Craig Knutson: All right. Thank you operator. Thanks everyone for your interest in MFA Financial. We look forward to speaking with you again in May when we announce first quarter results.
Operator: Thank you. And ladies and gentlemen today’s conference will be available for replay beginning at 1 P.M. Eastern Time today and running through May 22nd at midnight. You may access the AT&T replay system by dialing 1866-207-1041 and entering the access code of 7388327. International participants may dial 1402-970-0847. Those numbers again are 1866-207-1041 or 1402-970-0847 with the access code of 7388327. That does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
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