MFA Financial (MFA) 7 Nov 232023 Q3 Earnings call transcript

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Third Quarter 2023 Earnings Conference Call. [Operator Instructions].

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Hal Schwartz. ahead. go Please

beliefs, MFA's in statements of and expressions and this risks, operator, XX-K to in statements. Form materially annual the they made. used, everyone. information implied expect, operations. reflect assumptions The statements Commission. MFA's as Thank report it year factors, performance uncertainties, future could, should, anticipate, call forward-looking makes. for good historical which other those today on and management's which only XXXX factors are XX, ended from Inc. conference subject MFA to described refer to and words other and reports may that discussed file statements assumptions statements forward-looking nature, regarding speak similar to identify you, When Financial, morning, intended expectations contain in unknown forward-looking These may that forward-looking the cause statements Exchange not such and of results to MFA's risks, containing various time Securities other expressed uncertainties known All types it or estimate, on and those would and are including the projected, are actual date as believe, as or will, with on to December those are These any time could from differ including or

see statements, MFA's information time. Thank relevant additional for third results. For financial please in the XXXX you the MFA's forward-looking of release quarter use disclosure press announcing regarding your

Knutson. MFA's to call Craig like President, I to would now this and over turn CEO

I would for Financial's Wulfsohn, our are Kristjansson was years, during of last for MFA Earnings conferences before look Quarter as to Roper, and X Good joining equity Accounting our calls. to Third I our Investment as been Hal. also forward morning, years Officer Bryan thank Call. our professionals And X has you, research everyone, for like to that With in Chief served Mike us and Mike here September. XXXX. appointed who coverage upcoming Co-Chief and controller introducing welcome Mike with And Financial you is the today and Chief MFA has for Officers. phone Thank Officer me our shareholders Gudmundur since XXXX and more

end appear XX notion like environment challenging It's the the recent most in rate record. the be quarter to most extremely for beginning months since this was again, at to interest began to sound continues and XXXX does year or longer. while a hire the of of Fed ago. the bond near tightening Fed perhaps tightening cycle, once to most current difficult broken Certainly of The volatile. But the quarter adjust cycle the the quarter of market the

years addition, In buyers anticipated where market these and exploding the domestic largest on the banks, to borrowings over of world weighed Fed, and deficits a treasuries XX foreseeable treasury of the a future on the X are has find the as wall home budget over investors in last a foreign the need heavily sidelines.

nervous uncertainty. before in global wars place active similar its world wide the XX other the to no absence Mortgage historical and very back least at XXXX X than are But XXXX is first spreads round in the with the again, look end true, to last of Agency QE. MBS week. in XXXX historical still and doubt needs at would the they earnings which XXXX years buyers on and suggest indeed today, is at economic range have major and also You of are heard prior began the over calls Fed last wides further that of were The XXXX. 'XX, but that levels a

envision bond to market difficult mellow a it's anytime So, soon. completely

The XX-year curve. in flattened interest third rates, the which XXXX characterized of significantly increase was notably sharp the by quarter

and yield year. ] yet And of not and economic spread points book forward, GAAP investments levered curve XX should the was market [ less last of September, much it quarter. marks tightening rapid just volatility end. has MFA's while the up as going fixed inverted We month in improve the the a rates than for over the XX the particular. returns book probably month maybe third slightly and basis value of as our down heightened in and less the X.X% have inverted, punished rally was in still is our X% mortgage loan been X.X%, Although income value XX. do investments week, last investor basis rate inverted outlook September October now X/XX for rise that is during XX But long points, values of book for since to X% flat or or which mostly credit given occurred is much mortgage and value down

Distributable at losses unrealized the value and covered our comfortably the did in performing, share spots $X.XX Despite have on per third that are came in for loans earnings quarter. bright second the substantially some we fair $X.XX consecutive dividend. quarter

again XXX Our points, margin increased spread to to net and XXX basis our interest net again basis increased interest points.

our was net basis interest year ago, basis spread margin points, points. our interest was XXX a reference, and For XXX net

points during these funds points the basis the increased to year. basis of by rate than where last of over September Fed more period XX by a measures raised going back both And XXX So year. the XX last have this

portfolio XX%, This was quarter, collateralized with quarter from continue to the substantial executing securitizations X of maintaining the increasing million during fortify single-family rental $XXX non-QM non-mark-to-market ending liquidity, million unrestricted We of balance cash. to $XXX our due sheet to in part our loans. by and while on financing XX% loan

an very the transitional coupon end, Subsequent delinquencies in continues in acquired We on agencies strong executed with only of our the loan Credit a average loan performing increase QX to purchased in QX. $XXX of X.X%. from quarter X.X% another of performance $XXX million purchases with portfolio small in quarter to of October in and X.X% $XXX be of to loans we million million securitization loans. during

Fortunately, late effectively the funding add attractive from our which while to assets fixed and very hard now accretive did work investment we costs, opportunities continue at in XXXX new have we benefit we early to yields. 'XX,

our As very few rate we interest X show fourth before XXXX. the quarter of on Page of earnings of $X-plus deck, of billion swaps our matured

as wholly to our Finally, internally levels successively Lima of loan and higher originator, generated significant shareholders business and substantial continues source delivers high-quality Lima purpose One, of MFA high-yielding assets. produce value a serviced to volume assets. owned

to and Lima turn now portfolio call details. activity in more to Gudmundur discuss And our over the will One I

acquired few over acquisitions Business Craig. a we and majority have LTV XXX. of coupon and Thanks, the time million approximately Similar FICO non-QM over XX% sourcing assets and $X.X of success a the long seen to with X% to average a highest had and average we've million. loans an quarters, in of the to securities third $XXX high-yielding loans by The growing our billion. of accounted high-quality, average of at $XXX profile continue in credit for new coupons acquisitions loan with some our of purpose quarter, strong X.X% portfolio last in investment and

strategy execute and levels, to we potential on improving basis, provide perform and Agency about that also the that management MBS continued remaining quarter, stand-alone softness. growing million liquidity having on well our $XXX over believe portfolio X.XX% credit-focused also the but $XXX added million. MBS is by Agency MBS periods at MBS the our Agency yielding benefits economic of that to historically attractive to We spread and in portfolio they during Agency of a to wide risk portfolio,

be tightened XX rallied MBS XX on the points to thesis You quarter when leverage, out equity factor about our as sharply that we X in play weeks levels When softer by the we modestly saw prospect mid-teens data that done with and return for XXXX expect Significantly purpose last originator, rates assets rates. XX throughout assets to Fed faster our year. combined financing and Lima and over the third the to us raising adding appropriate economic on basis compared and similar Agency this might balance levels has owned One, quarter. business last the our see we're to to additions unique our high-yielding fourth allowed sheet rates credit own years, our return spreads wholly higher than create add loan in through spreads ability in with

ago. quarter in We the third This We from quarter a the sat the up to points has significant loans billion led of One had that. $X.X a coupon an about of acquired over on assets. loans at and XXXX average in our basis to X.XX% Lima points compared approximately year with XXX of basis XX% for increase accounting up with is X.X% in second originated XX yield interest-earning

with As rate Craig basis remarks, the rates about up mentioned a significantly treasury his in in XX-year points. rose XX opening quarter

securitized total million executing X a We mostly about $XXX securitizations of in for end of the non-QM million and of continue swaps. quarter SFR our points at basis our and adding about points second rate net duration duration the to loans XXX basis and actively UPB down We're to the quarter. from XXX of XX-year longer of risk loans rate manage interest $XXX interest reduced

remained in remains has in swaps, about payroll our hot basis rate was quarter loans in manage rate over XXX The bringing on down in with further the market but expectations. million X.X%. unemployment excess market $XXX economy completing the the and points. robust late $XXX,XXX of X.X%, bit X-month we risk third of $XXX securitization another cooled and coming adding of GDP labor with at resilient to quarter, transitional quarter and average of XX-year Fourth XXXX to of interest XXXX, pace continued the nonfund of The red end, growth it by million third from significantly duration a

housing provide continue well year-to-date low The outweighing affordability. up and The high strength affordability. credit this are lack despite ongoing resilience support about rates prices low housing to labor and general X% portfolio. markets has low Home inventory market performed and of and the supply to our of mortgage housing year with

of purpose our of acquisitions One. second the the million quarter. company. continues Lima quarter and balance third over Lima a achievement which at majority billion the third third Turning in sheet demonstrate our the has to for to its providing opportunities banks, accounting talent strong over regional acquisitions market competition increase in the ago, products with X a for and of our Lima for in XX% space. quarter, focused Demand from excess in loans, loan Lima for originated services since the origination. the the loans expectations $XXX private Lima's time. to disruption business and record and for in about of transitional over originated our accounted lending One great XX% a value about attract quarter XX% in The remain Lima's origination purpose business years quarter and grow shorter-term of loans in less asset of was this MFA's space acquisition share $X quarter strategy. to

fourth mostly and of quality quarter $X.X Lima's billion. year X.X% up of respect, with be XX% expect the around on was XX-plus borrowers statistics the delinquency expectations FICO our In quarter, and rental average increase due origination million with rate in $XXX XXXX strategy for in on loans. be strong small and but that loans delinquency to well subset LTV on primarily low modeling We about fundamental a originated overall ticked $XXX this third average with to very quarter mostly remain our longer-term modestly that remained lower levels line idiosyncratic was quarter expectations. day XXX credit BPL One became the origination delinquent to and loans originated. by to at in of the our to volume million asset The class. within BPL full Lima increase on The Credit remains the to Score

delinquency relates a since servicer, is to in and that One, which serviced it loans With Lima general, credit management mitigation combined with XXXX. experienced asset emphasize all As highly is loans and has One our loss to and Lima manage BPL BPL it important we own and have of extensive believe servicing us and delinquencies management allows MFA's to and asset this, in-house, experience, management construction effectively. we management efficiently BPL originated

quarter. no net and Historically, of capacity in billion portfolio, includes billion delinquent our BPL over We XXXX. in acquisition support seriously also BPL out the which on $X we originated of our of liquidity by loans of rental and availability of seventh financing MFA has remain to securitization had million million financing $XX liquidations over $X of the focused since our our over and We in losses securitized payoffs where REO and issued expanded quarter, Lima loan origination. aggregates $XXX loans the loan transitional One and

Fourth quarter bringing securitization, the that of $XXX that to securitizations revolving we loans asset for of nature transitional we transactions Lima originated construction can loan outstanding $XXX we and over class new older loans third revolving securitized pay The priced finance million. off. as securitation these end, loans, million total our One over in means draws efficiently

over now detail. credit and MFA portfolio And Wulfsohn, to will in Bryan securitization I the turn activities more call will discuss performance who

In spread Lima Gudmundur. in pricing collateral X securitization securitizations execute with in a in markets Thanks, resembling August of the at coaster We end September one with $XXX originated elevated third supply cost them ride SFR of out able Agency locking August, roller of by the spreads the rallied to widening along and exhibited a over a due some X.X% quarter, to X.X% by as securitization of combined something respectively. were sympathy subsequently non-QM into of movement. debt, of million in quarter, One and loans $XXX September, followed backed million widened

And with that as these loans post substitute transitional loans. million $XXX loans the end, we new originated provide worth draws able immense MFA generated mentioned, existing backed again third revolving as from One. subsequent payoffs securitization cash to Lima structures previously issued It's value by mentioning of in quarter and a by to we are Gudmundur

And loans in of sometimes over securitizations spreads are performing through would committed by the now loans XXXX fourth is We be although of and market have we and percentage now again the over to issued securitization more XX%. funding wider to we $X.X of MFA's may to than since billion backed come purchase out terming like, by securitization financed our quarter. expect

from part strategy nonrecourse We to that for continue our markets. as business it further is which an portfolio provides insulates financing believe volatile mortgage of securitization non-mark-to-market important the

Moving our to performance. credit

credit With continues the of supply homes backdrop of portfolio sale, strong continued limited market well. for do to labor a and the our in

performing for we Over from in cash the quarter, expectations to day second the portfolio again This legacy to the by XX.X%. delinquencies had modeled increase expected slight XX-plus X.X points within quarter well flows purchase when our our portfolio deliquencies remains portfolio. out our in improved our uptick we a X.X% in the RPL in NPL quarter. X.X% over XX-plus

has assets $X management NPL asset the well. our newly resolve has and management on working of billion of in-house benefited not to And with distressed through loans, RPL as our third-party originated in the asset only our to legacy portfolio that team remains over but Our our working investors. gained benefit vast portfolio expertise focused portfolios experience, in servicers which our remaining delinquent

SFR our in-house group digits legacy NPL when portfolios. and quarter-over-quarter. our management team our As in remained portfolio our high in risk an our One, single reduce mid- relatively and helps CPRs non-QM in servicing example, well Prepayment which stable the asset BPL with arise Lima delinquencies for speeds portfolio. at to were works RPL

XX%. the reinvested quarter, repayment portfolio, points a approximately million carrying paydowns an of loan we into which over were XXX rate Total of for the were higher. transitional loans $XXX again For basis annualized had coupon

of Lastly, to we of market, the selling take continue REO properties in portfolio. our lack the supply out housing of advantage

portfolio our $X questions. we positioned believe XX well We operator current call the economic the $XX I'll sold the over the low credit And underwriting million that, LTV million, portfolio prudent Over combined properties resulting over our in in the to turn environment. of of gains. for with quarter, for for with

from comes Instructions] George from line KBW. of question Your the [Operator first Bose

have you book you of us value fully recoverable? can quarter, -- sort negative, guys mark terms of just upside well? is of In that usually as for slide fair took Is much tell stands this you can sort book how that that to that where And value is the value. of that

Ken Mike but and the is let is I'll This XXX. losses, about XXX Roper. number talk unrealized that

vast for majority know, you part, most as loans, that so par. on get back is at we the And Bose, the of which,

time to part overwhelmingly. interest did. recoup change as they once things fair it the movement as value But fast in to don't takes rate in because really the So obviously, environment rate market current was due interest prepay

just of Okay. of then multifamily, transitional for GSE the to actually, Great. financing? permanent switching multifamily, Yes, takeout loan that And that's to that The is that sense. XX% makes portfolio. the most

Yes, part $X.X transitional loans, this of if is multifamily small Gudmundur. Yes, the is balance about that's vast agency multifamily of for are correct. these qualify majority all, small not The think loan balance that, And size if about loans. million. you The average the takeout.

loans really are that context. these small So in

South kind they are things and small that the and where the concentrated trends nature. demographic the for there's And of and qualify so would of yes, of all in them most And balance Southeast great takeout. almost

JMP Your next line from the Delaney question from of Steve comes Securities.

live curious mortgage like like with And is. X nice business? Lima particular as given kind CRE there, on about kind I'd Roper to market out go it attribute so how to the just in there? and Mike broader why had the of the broadly. if meet it we're competitors that the I'm for I'd call. strategically like environment, in just are you to or to performing well -- -- you Maybe remarkable. is I things. to numbers clearly mean of some Lima Are Are and X color you of seeing you Craig, just recruiting start

Sure.

and Steve, Gudmundur So I'll add. I'll start, let then

either diminished been Lima experienced I think has have answer hiring people your to hiring and in been former or from competitors. and question, they yes, yes competitors

reasons, bought One that of them. interact one long right? grab operation, One share organization. way knew that before is we expand others some a the also that's which we really fact the and Lima faded I tight And MFA But to to and very It's continued has degree. think where lot I have Lima for market think a

it's very loans. very so operation we an securitization what a originating and originator price going obviously in of those not they're and integrated to loans sort with involved And that's market. we're wondering It's do together loans the

loan And in so terms immediate of loop have feedback an we pricing.

worked So obviously, it's it's well. things. of But extraordinarily a lot

And how great -- ahead. sorry. go I'm

[indiscernible] brought sorry, important mean No, Craig really has I point. a added. up is what been

aligned. organizations moving same the in thing the They're fully like are direction. the is So all

micro. the macro that that of a have have skill are things unique that one we is that and we is combination of So set quite both

finding lessons nature we last so changing And They're what to been of learn years a more XXXX, was organization. loans quickly. do operating active rising from were Lima hard were create and originators but The space to MFA learn in deals. buy have able getting People over that do MFA think because independently. that that especially securitization usually robust away. important And things to are and loans quite markets rates was in to low before were Lima I to borrowers rapidly. is X.X moved buying values the and all those take from the It

XXXX it And strategic the make our in enough tremendous credit that terms was business. to liquidity, with us exiting had XXXX. actually So able were on in the also we effort, in to originators focus was combined allowed focus smaller amount but that we what upstream sure go borrowers do on high-quality disruption of were a and when quality of --

time, And volume. the but expertise, clothing of Lima's housing credit has borrowers, and underwriting could think efforts, years, X so and kind not front, improved our our the front. of sourcing same and And securitization on combined on over last the the MFA's macroeconomic you we've loan the expertise at also then unless I tremendously quality but increased the have transitional portfolio that happened

important So really I point. really, think that is a

is thing that other diversified. One, are about they is which Lima highly unique The a

market. really be often a specialized in products. will so is the of it smaller certain diversified And well But segment the across Lima lenders

able What So in to terms and too concentration are concentration also as is so -- distribution, really, it these demand big. that's have we of sizable estate a of terms that with attractive in of geography of is for terms our in real and important the to really any to credit diverse the like shifts volumes future borrower maintain Lima portfolio. investors, continue product, concept means in of isn't they markets don't growing

So in ahead years there is well. tremendous upside as the for us

all what on one quick there you've Well, for accomplished around. Craig, congratulations you. one

you valuation the dividend market on Looking what are far And Board's now can at the given the a balance your the between trading thinking as of and share yield your XX as current book kind and up share around your XX, buybacks, thoughts? anything valuation?

Sure, Steve.

probably about maybe think But that actually like it's XX%. it's where our So XX%, place, book in the And if at about Gudmundur on dividend, third think annualized I feels to I sort it's look our economic that putting closer you acquisitions dividend are I value, high-teen mentioned given think to the of right right? up ROEs. mid-teens, trading. quarter

are the So least level. as think it versus as and far feels share decisions. buybacks, dividend -- like I at Board right these And again,

a have And mean, value meeting share smaller more sure the that I'm board much. was that book that thing a company. it's not We what's be necessarily I think just feeling in at seem that buybacks, the December. to world, better around with to all recently, help least happened a didn't with we But I tried

I that's So into that that process. things thought one the goes whole think of

Raymond James. from next of Laws from the Stephen Your line comes question

follow to question. discussion wanted your first up I on

in continued credit, how answer this, you ways do competitive believe, get points a as loan of trade-off I a to attachment what's think not have around for -- you higher, touched lower coupons about move finding pushing other As on in you about coupons higher? looking much or and as coupons lower pushing Kind better there but your credit the environment. think to less

Sure.

So more purpose question? you're I focus assume with on that business loans probably

was on maybe something it like up the that. think from recent or XX.X stuff, Yes. X.X Yes, I

scores the Gudmundur either you've you've seen go the right? years, FICO Over mentioned on certainly LTVs higher, this, thing, go or not lower and here's seen increase. X portfolio So last and overall that

fix-and-flip before or forget was money purpose has terms back Wall the business a aspect This business of in quality of So of I to people sort And and decades, loans Street or business. because specifically always been so. for that loan itself. rate, in Stephen, it around the XXXX speaks discovered think hard

of that so has much typical the this never the of -- type -- to what operate of interest the really a right? operators doing profitability fix-and-flip function for most buying in do, property rate, really space, too And -- of been about And the work project the appropriately. knowing work not it's much right, pricing rate. It's been really knowing work, hasn't it what never of it

are So rates, where there obviously, have it's you yes, some but that you are deals would expect. there to not be on more competitive sensitivity same the

The said as other the and the I LTV thing add the around remarks, about FICO opening would XX% were also, is just you average in acquisitions of XXX. the

we're those last just And the LTV we or FICO position pushing on year or so. boundaries the not really with had have same scores. so that's And the simple for statistics, clearly

about deal revolving Great. light period them of I the asset revolving to as securitization. switch many associated compared previous financing is recent of if what you terms the want period remind And balance might mean typical the to well? I deals? And the me you did are turns and slide and those you most And your talk the can had in? long Can a get with how price versus that? recent now these of how the with the how

Right.

loans, transitional have the the on So done securitization are that revolving. we all

on period so revolving average, X tends be the And about years. to

tends there's a borrower that followed period period were add which years, a the the is the off incentivizing for over and and you to that can to things replace X a the new loans be the means by to amortize, X-month years, of transaction what in course coupon so step-up call those that to then sent transaction. of after loans X in that, And pay effectively

The XX% of XX% execution outstanding. anywhere have are The and such the you're bonds we selling execution about that that of $XXX to like million issued. as I from usually mentioned, those securitizations

XX% the rate XX% the we to is which we to about of was XX% on And on about sold AX transaction that the in So UPB this was coupon X.X%. sell. what depending the advance deal

Your next the Eric Hagen from BTIG. question line from comes of

interests from for securitization this much pledged how point? retained So at repo financing of the are

but investment-grade offline. have as but We've not for you pledged to don't we the first and of exact pull as know, I answer, assets -- I I'm we pledged. loss we could say talk an far sure have some would that you pieces together any

flavor to you the whether leverage. the Yes, and attractive mean unsecured structure about for debt how how trying kind the Or refinance that that of the Okay. I to liability of next a to levels of you'd we've get get point, of structure? route potentially And that that's want to I got just sense a kind might the to for the coming plan you be piece current looks kind you're even convertible thinking market looking go what again? at just of your June.

given not below relative all where to is still well tell, say to market, trading is would premium, to the the probably So book viable XX%, because even I a bit that be stock but mean, again, it, it's call conversion convertible early suffice little value. a high book

the radar screen. on So it's

are secondary buy of it. we but quarter You'll away in that And during back to the third see in the $XX secondary the it market at big market. from to over It's there chips discount time so. a the little a or opportunities million bought not that queue in that at time

Eric, goes a take as how by But bankers that. approach we with don't we that to I that there's idea some think another month to or have one with meeting that -- don't a

definitely to and But on exactly fund to it. radar on don't definitely it's plan early tell. screen. going that to pay We we're how default it's So the it too off,

business the mean, it, kind would turn REIT for characteristics to piece I or differentiation call of in the differentiation mortgage Last if enough. Fair you're if highlight kind of what potentially? right. investor All that an looking question. Like will. portfolios that like for, you to you purpose and apart across was space, investors non-QM the

Sure.

delinquencies So I'll right? start you portfolio, mentioned, Bryan And of chime very in. mentioned one, that, at and say, that I let number look continue it, low. quality can to be Bryan mentioned the and the Gudmundur I would Gudmundur

from do nonperforming that. record assets have loans optimize We of go working a out outcomes doing our lot of history of reperforming and a delinquent proven track that to buying experience and

you I the the And highlight would haven't spike quality. seen that you've So in seen delinquencies elsewhere.

to guys anything? want You add

Yes.

would And a I add keep is I think And mean pointed the in I that. leverage recourse of I substantial the kind things leverage couple that we organization. to just Xx. in mind think amount. we of think that out about it's important a to inherent as our

portfolio loan whole our is non of XX% think I a form. mark-to-market

liability structure. a So strong that is very

from mentioned things a $X.X of of slots also, assets of you got financing. rate $X that mark-to-market perspective, One billion the against billion were roughly we

rate liquidity perspective, good a a from balance. that's So

As it call, themselves, of touched space. Lima the the item best I One. wholly mean of our relates credit mean, in the we've is is I owned on this kind subsidiary, throughout important which one to BPL an here the elite, assets originator

return to years. the last in our the to We where probably are assets XX credit have the own ability in XX that and been an profiles create of coupons they've environment one best

many think coupons create when the at look you I the that with other of to borrower, the we quality find that the property, you'll can in so point places. don't And attachment the

differentiating think factor. And that's really so a I would really,

Yes.

and shops -- happens so and spamming just the just went we benefit there's non-QM As the a to across right, conduit XXX out it to know with a try that originated be loan relates We we have that relationships sourcing, country deep of several know guidelines. is there really never us XX taking in sellers. any principles to versus fit of to serve to relationships. the out very We to there really believe to the guidelines to credit the getting getting those to the

So we a any we way XX% It's in aren't there to have going perform FICO would aggregating LTV, we're when really is comfort our a that a XXX portfolio. expect. -- not loans, really surprises

any Operator, more questions?

this there no At questions. time, are further

Okay. for year you Financial. full MFA year we you, interest forward everyone, to when next look thank again early in Well, XXXX with speaking announce your We results.

Teleconference. conference does participation today. conclude for Ladies you and that gentlemen, AT&T for and your using for your Thank

You may now disconnect.