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Greetings, and welcome to the MFA Financial First Quarter 2025 Financial Results Conference Call.

[Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to our host, Hal Schwartz, General Counsel. Thank you. You may begin.

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 you use 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, 2024, 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 first quarter 2025 financial results.

Thank you for your time. I would now like to turn this call over to MFA's CEO, Craig Knutson.

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's first quarter 2025 earnings call. With me today are Bryan Wulfsohn, our President and Chief Investment Officer; Mike Roper, our CFO; and other members of our senior management team.

I'll begin with a high-level review of the first quarter market environment and then touch on some of our results, activities and opportunities. Then I'll turn the call over to Mike to review our financial results in more detail, followed by Bryan who will review our portfolio, financing, Lima One and risk management, before we open up the call for questions.

I must admit it feels a little strange to talk about the first quarter of 2025 given the market turmoil that ensued on and after April 2. But despite the fact that it is not possible to unsee market developments since April 2, it is instructive in the context of first quarter financial results to recall the market environment in which these results were achieved. And I promise that we'll also address market developments since quarter-end later in this call.

Fixed income markets were generally constructive throughout the first quarter of 2025. The 10-year yield peaked at 4.79% on January 14 and rallied to close the quarter at 4.20%. Credit spreads tightened somewhat over January and February, but widened modestly in March as the market began to anticipate and focus on the upcoming trade policy announcements.

MFA's portfolio delivered a total economic return of 1.9% for the first quarter, which includes our first quarter dividend that we increased to $0.36. This dividend increase reflects what we believe is the earnings power of our portfolio, which Mike will explain more fully in his prepared remarks. Our economic book value was down very modestly in the first quarter by 0.6%.

We were active in the quarter, sourcing $875 million of loans and securities across our target asset classes. These included $383 million of non-QM loans, $268 million of agency MBS and $223 million of business purpose loan, funded originations and draws on existing loans at Lima One. We issued our 17th non-QM securitization in early March and we also sold $70 million of newly originated SFR loans at attractive levels.

Our overall leverage at the end of the quarter was 5.1x, and our recourse leverage was 1.8x, both only slightly higher than at year-end by 1/10 of a turn each.

The real fun started in April with the tariff circus kicking off on April 2. While the ultimate U.S. trade policy will undoubtedly take months to be determined, the day-to-day impacts have been a rollercoaster for financial markets. Expectations for inflation, the economy, employment, corporate earnings, consumer confidence, Fed action and even housing are all considerably more uncertain. As is always the case, increased uncertainty and volatility are never friendly for fixed income and particularly for mortgages.

As we reflect on this volatility and uncertainty, however, I'd like to highlight the benefits of MFA's investment strategy, risk management and financing rigor. Since the onset of market disruptions and the heightened market volatility following Liberation Day, MFA has experienced total margin calls of just under $20 million, which were satisfied with $18.5 million of cash and $1.3 million of unpledged agency bonds.

At the height of the impact of the volatility, when the 10-year treasury sold off by nearly 20 basis points on April 7, we were net receivers of margin as the cash received on our swaps exceeded the collateral posted for repo margin calls. On the other hand, during the largest rally in rates that we saw since April 2, with the 10-year down nearly 12 basis points, on April 14, we posted a total of just $1.5 million of net margin.

There is no better testament to the effectiveness of our strategic emphasis on securitization, non-mark-to-market financing and the diversification into agency MBS that we initiated in December of 2022.

At March 31, 83% of our loan financing and 70% of all of our liabilities were non-mark-to-market in nature, with more than half of the mark-to-market financing coming from extremely liquid agency MBS. Although recent volatility has led to modest credit spread widening and higher rates, securitization markets are seeing strong demand and deals continued to be oversubscribed. Even on some of the most volatile trading sessions, non-QM securitizations continued to price and clear in an orderly fashion.

MFA's investment portfolio, balance sheet composition and risk management approach are positioned to deliver results across multiple scenarios and weather unexpected market volatility and uncertainty.

I'll now turn the call over to Mike Roper to discuss the financial results.

Thanks, Craig, and good morning. At March 31, GAAP book value was $13.28 per share and economic book value was $13.84 per share, each down less than 1% since the end of December.

For the first quarter, MFA generated GAAP earnings of $41.2 million or $0.32 per basic common share. Our strong GAAP earnings were driven by growth in our net interest income, $57.5 million, as well as modest net mark-to-market gains. The growth in net interest income was driven by our additions of higher-yielding assets over the last several quarters and lower interest expense, primarily due to rate cuts in November and December and lower day count for our repo liabilities during the month of February.

Lima One contributed $5.4 million of mortgage banking income for the quarter, a decline from $8.5 million in the fourth quarter, driven by modestly lower origination volumes and a decline in gains on sales of single-family rental loans as sales volume declined from $111 million in the fourth quarter to $70 million in the first quarter.

As Craig mentioned earlier, MFA declared an increased dividend of $0.36 per common share for the first quarter. The increase in our dividend is reflective of our continuing and increasing confidence in the long-term earnings power of our portfolio.

This confidence is informed by our success adding high-yielding assets and the resulting growth in our net interest income, the increasingly positive slope of the yield curve, resilient housing fundamentals and wider spreads available on assets today. We continue to see ample opportunities to add our target assets at mid- to high-teen ROEs, which we believe is one of the best proxies for the current earnings power of our portfolio.

Distributable earnings for the quarter were $30.5 million or $0.29 per basic common share, down from $0.39 in the fourth quarter. The decrease in our distributable earnings was primarily due to the expiration of $1 billion notional of interest rate swaps over the course of the fourth quarter of 2024 and the first quarter of 2025. DE was also impacted by the decline in Lima One's mortgage banking income as well as increased credit-related charges for the quarter associated with resolutions of certain nonperforming assets.

As we continue to work through some of the challenged assets in our transitional loan portfolio, we expect to see some short-term increases in realized credit losses in the quarters ahead as many of these troubled assets are approaching resolution via foreclosure. As a result, we expect that our distributable earnings will be increasingly volatile and less indicative of the current earnings power of our portfolio over the next several quarters.

Importantly, we believe that these headwinds are short term in nature, and economically, we emphasize that this is old news. Our expected credit exposure was already recorded in our book value and in our GAAP earnings as unrealized losses several quarters and, in some cases, several years ago. So we don't expect these resolutions to have any impact on our book value or on our GAAP results as the impact is limited to the reporting of our distributable earnings.

As we continue to resolve these challenged loans and redeploy the capital into higher-yielding performing assets, we believe that our DE will begin to converge with our dividend over the back half of the next 12 months.

Finally, subsequent to quarter-end, we estimate that our economic book value is down approximately 2% to 4% since the end of the first quarter, primarily as a result of wider spreads.

I'd now like to turn the call over to Bryan, who will discuss our investment activities in the first quarter.

Thanks, Mike. Q1 marked another quarter for growth in our investment portfolio. We focused on our target asset classes, acquiring $875 million of loans and securities, which grew the portfolio net of runoff in sales to $10.7 billion from $10.5 billion at year-end. Our current focus remains in 3 strategies: non-QM, BPL and agency MBS.

We sourced $383 million of non-QM loans during the quarter. Those loans carry an average coupon of 7.8% and a weighted average LTV of 65%. Underwriting standards have remained prudent and mid- to high double-digit ROEs are achievable with securitization financing. We issued our 17th securitization of non-QM loans in March, selling $283 million of bonds at an average coupon of 5.58%.

Since quarter-end, we've seen AAA spreads widen from 1.35% to as much as 1.75%. But it's important to note that throughout the broader market disruption, liquidity has remained in the non-QM space as market participants have been eager to participate in new offerings at wider spread levels. In the last few weeks, we've seen AAAs tighten to 1.60%, and that trend could continue if the macro backdrop continues to stabilize.

We again added to our agency MBS portfolio during the quarter, growing our position to $1.6 billion. Our focus there continues to be on low pay-up 5.5s purchased at modest discounts to par. We plan to continue to grow this segment of our portfolio as long as spreads remain attractive.

Research currently shows mutual funds are already overweight agencies, which tells us that spreads could persist at these levels for some time given the backdrop of rate volatility. That said, there are potential catalysts for agency spread tightening, particularly if the banks receive leverage ratio relief and are able to add more aggressively, or if the Fed elects to adjust its balance sheet policy.

We estimate our net duration dropped slightly in the first quarter to 0.96 from 1.02 at year-end. As a reminder, we primarily hedge our interest rate exposure by issuing fixed rate securitized debt and by utilizing interest rate swaps. We had $5.9 billion of outstanding bonds from these securitizations and $3.4 billion of notional value swapped at quarter-end.

If we continue to add agencies, we expect to see our net asset duration drop again as we maintain -- as we want to maintain a similar level of exposure of our equity to interest rate changes given the higher leverage associated with agencies.

Turning to Lima One. Lima originated $213 million of business purpose loans during the quarter with an average coupon of 9.7% and an LTV of 65%. We continue to sell newly originated rental loans. During the first quarter, we sold $70 million of these loans, which contributed $2 million of mortgage banking income.

Overall origination volume was down slightly from Q4 as the first few months of the year are historically slower. We've taken action down at Lima to improve volume growth without sacrificing credit quality. We hired 9 loan officers in Q1 and 7 so far in Q2. We continue to attract both sales and underwriting talent to Lima and expect our efforts to bear fruit in the second half of the year.

Moving to our credit performance. 60-plus day delinquencies for our entire loan portfolio remained stable at 7.5%. Delinquency rates on our non-QM, SFR, legacy RPL/NPL books were essentially unchanged from year-end, and LTVs remained exceptionally low. The delinquency rates did jump in our single-family transitional portfolio, but that's because repayments outpaced origination volume, causing the denominator to shrink. Actual delinquent loans rose by only $2 million on our $1 billion portfolio.

Finally, we continue to make progress in our multifamily book, resolving $35 million of previously delinquent loans in addition to receiving over $100 million of repayments in the quarter.

And with that, we'll turn the call over to the operator for questions.

[Operator Instructions] And our first question comes from Bose George with KBW.

In terms of the impact from the swap, the runoff, can you talk about the second quarter versus the first quarter, what the incremental sort of impact is going to be?

Bose, thanks for the question. Yes, the impact for the second quarter is kind of in line with what we said for the fourth quarter for that sort of remaining runoff. We expect that the impact of that -- the expirations from the first quarter, I think there's another $100 million that expires in the second quarter, is going to be about $0.02, in terms of the sort of Q1 versus Q2 impact.

Okay. Great. And then you noted the impact from the loans that are going to work its way through as well. Is there any way to kind of -- for us to quantify that just in terms of modeling? Or is it just going to be kind of random in terms of when it actually flows through?

Yes. I think -- unfortunately, the timing is just going to be a little bit difficult, right? We're sort of at the mercy of the courts in some states and the borrowers and a lot of other factors. I mean I think it's safe to say of thinking about the multifamily delinquency, the overwhelming majority of that is in foreclosure. And in many states, it can be very quick. But there can be tactics from borrowers to delay that.

I think in terms of the best way to sort of think about that, we have that multifamily transitional book at a $40 million discount. And given the short nature of those assets, we attribute that discount almost entirely to credit. So I think the timing might be a little tough, but in terms of the overall dollar amount, call it over the next year or so, we expect to see the majority of that credit discount flush out.

Okay. Great. That's helpful. And then just one quick question just on the returns. You noted the mid- to high-teens returns. Can you just break that out between the agency, some of the other asset classes?

Yes. I mean really, mid- to high teens are achievable both in agencies and non-QM. And then on the BPL side, on the short-term nature, those 10% coupons, given the revolving nature of our securitizations, those ROEs could be above 20%.

Your next question comes from Doug Harter with UBS.

On the loan resolutions, just a follow-up. Can you just talk about when you're seeing resolutions, kind of where those are coming out relative to where you had the loans marked?

Yes. I think in general, we've seen them basically resolve at the mark or near the mark. We haven't had a ton of these given when we've started originating some of these loans. I think we're really starting to see some of that troubled pipeline being resolved now.

But in general, we're very, very comfortable with where things have been marked. It's not like we're continuously marking things down. We use multiple pricing services and we have a team that reviews all those marks and constantly is reviewing the value of the underlying collateral. So there's still more come in terms of the total amount of these resolutions, but from what we've seen so far, we feel very, very comfortable with where we have them marked.

And Doug, as Mike said before, the majority of the fair value write-downs on these assets took place last year. I mean I think it was actually in the third quarter of last year. And as I'm sure you know, on loans that are ultimately headed to foreclosure, the largest determinant of your ultimate resolution value is the value of the property. So we were pretty focused on that.

Great. And on the new BPL originations you're doing, can you just highlight kind of what sector -- what pieces of that market you're kind of focused on today and kind of how you expect that opportunity to continue to present?

Yes. I mean really, it continues to be similar to what it was in prior quarters, with the focus being on ground-up, bridge and fix/flip. I mean the bulk of the new origination over the past quarter was ground-up. And that's where we see sort of the biggest opportunity given that real estate transaction levels are down and home prices have gone up considerably, that there's just the opportunity to do sort of the quick flip type transactions, is much smaller than it was previously. So the focus has been more on ground-up and/or bridge.

Your next question comes from Steve Delaney with Citizens JMP Securities.

For starters, just to be sure I've got the right numbers on your comments about changes in book value in the second quarter. First, is that relative to economic book value, not GAAP? And the figure at March was 1,384, is that correct?

That's right on both accounts, Steve.

Okay. Great. And you said down 2% to 4%. Okay. So something in...

Steve, I'll also add that that 2% to 4% is net of the dividend accrual. Sorry to cut you off there.

Oh, no, I appreciate you throwing that out. Okay, net of the dividend. Okay.

Obviously, great progress on building the NQM and the BPL. The NQM program, how many sellers, approved loan sellers, and I don't know whether that includes servicing, but let's just focus on sellers, how many counterparties do you have out there in the marketplace actually originating those loans for you to purchase?

Yes, it varies from quarter-to-quarter. Really it's -- so any quarter it could be as few as 4 and as high as 8. But historically, we've tended to have sort of deeper relationships with fewer counterparties versus blasting out guidelines, setting up a conduit and dealing with a lot of smaller, less well-capitalized originators.

Got it. So I mean, how would you just generally say that your opportunity there has grown in the last year or so? And is there further untapped growth potential in that sector, or do you feel like you're kind of at a run rate that you're getting your fair share of what's out there and there's maybe -- it's going to sort of flat-line in terms of volumes?

So we think there's definitely opportunity to grow, right? Really it's just capital and, obviously, it competes with our other asset classes in terms of opportunities to deploy. So if we wanted to grow non-QM, we definitely have the ability to do so.

Got it. And I don't know when you priced your last securitization, but all the disruption in the bond market with -- following tariffs, et cetera, your last execution in the NQM, MBS market, can you comment on that as to whether that was in line with previous deals or whether it was priced wider? How are you seeing the opportunity to securitize those NQM loans that you have acquired given the kind of disruption in fixed income markets?

Sure. So the last deal we did, I believe it was 1.35% over for AAA. That's sort of where the market was at the end of March. And then now it's widened, say, it widened -- the wides might have been 1.75%, maybe there was a deal that printed not too widely at 1.80%. It's come in since there. We've seen deals priced between 1.60% and 1.70% sort of regularly and deals continue to be oversubscribed, well bid. So we're sort of -- we're constructive there.

So when you think about it, right, maybe it's a bit wider, but where we've seen assets trade, they're also trading wider and commensurate with those widened securitization spreads. So the ROEs are basically -- think about the spread, the securitization kind of remains the same and you're earning an extra maybe 25 basis points, 30 basis points on the asset.

[Operator Instructions] Our next question comes from Jason Stewart with Janney Montgomery Scott.

A question on Lima One. Just the rate volatility and the impact there, maybe you could give us more color on what's happened in terms of demand for loan products, the competitive environment and whether loan buyers, particularly insurance companies, have changed their appetite given the rate vol.

Yes. I mean we're obviously -- we're in close contact with Lima to make sure that we're all in tune with the market in terms of setting rates to borrowers. But we continue to see sort of strong demand from insurance companies, that really hasn't changed. They like the duration that comes with the longer locked-out assets in terms of DSCR, rental loans. So the demand continues to be strong there.

Okay. And in terms of competition, is there any shakeout there in the competitive environment?

Not really. I mean the originators over the past sort of year have seen a really good market for them to produce and earn. So I believe that they have -- the capital situation of the originator is such that they don't necessarily have to pull back. Everybody has to sort of adjust to market pricing, which they do. But we haven't seen really originators step away.

Okay. Got it. And then one question on the agency book. Could you just remind me whether you look at the agency portfolio relative to swaps or treasuries and how that determines sort of ultimate sizing as portfolio allocation goes?

So we hedge with SOFR swaps, but the market generally looks at spread to treasuries. But yes, you do get some additional spread hedging with SOFR and borrowing against SOFR versus the quoted spread to treasury. So might be an extra 20, 30 basis points from time to time that we see in the market as you're picking up kind of hedging with SOFR versus treasuries.

Yes. I mean obviously, you hedge with swaps, and it looks much better against swaps. So given that outlook, does that change how -- how big could agency get in terms of portfolio allocation?

I mean we're sort of taking this -- we're not rushing into it. What we've told people in the past, that we can see the portfolio getting to $2 billion, and then we'll sort of reassess market conditions at that point. But that's sort of over a few-quarter-period.

Your next question comes from Eric Hagen with BTIG.

We're looking at the interest rate sensitivity table in the press release. I guess we're a little surprised to see that much convexity risk in the portfolio for an up move in rates. Is that being driven by the agency MBS portfolio? Or how meaningfully is the non-QM portfolio contributing to that sensitivity?

So it's not just the agency portfolio. It's also the non-QM. Obviously, when we've taken up -- incrementally taken up leverage, right, that there's a little more exposure there. But it's generally all model-driven. So we're using proxies to -- you don't necessarily have the perfect model to determine when you're trying to look at non-QM loans because you don't have -- the history kind of goes back to 2017. So you don't have sort of the perfect crystal ball going forward.

But we generally are -- we take a more conservative approach to how we calculate convexity. So that's why you may see -- may appear more negatively convex than what may actually end up happening, who knows.

Yes. Okay. That's helpful. On the delinquency pipeline and the nature of the defaults, right, specifically in the Lima One portfolio, are the defaults being driven because the borrowers are like upside-down and interest expense has crowded out their return? Or is the project improvement component of the timeline just significantly delayed? And how do you think about the impact of tariffs and the impact that could have on the credit performance and the timeline for the project improvement component?

So in terms of the delinquencies on the BPL side, it's really -- there's not one reason, right? Some of it is exactly there is a high interest expense that goes along with it. And if a project takes longer than one might expect, there could end up being liquidity pressure on the borrower, which could cause delinquencies.

And as you also mentioned, right, like if a project, problems with permits, or issues getting materials, or there was some unexpected occurrence to happen where somebody opened the walls and something that's there that they didn't expect, you could have defaults due to stalled-out projects.

And as it relates to tariffs, like the amount, say, lumber as it relates to the cost of a home, and the cost of a renovation, sort of it's a smaller percentage in terms of what actually goes into it versus labor. So we don't expect tariffs to have a material impact in delinquencies, but we are accounting for in larger contingencies in the budget and that nature just to make sure and to be safe, if those things do impact projects in terms of costs and whatnot.

Thank you. And ladies and gentlemen, that was our final question for today. We have no more further questions at this time. So at this point, we will conclude today's call. Thank you for participating, and have a good day.