MFA - NYSE

Greetings, and welcome to the MFA Financial Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note that 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 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, 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 fourth quarter and full year 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 fourth quarter and year-end 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 some general remarks on 2025, touch on the macro and political landscapes and will then provide an update on MFA's initiatives to foster earnings growth and increase ROEs. I will then turn the call over to Mike, followed by Bryan, before we open up for questions. After 3 very difficult years for fixed income investors, 2025 felt like an exit from a dark tunnel. The Bloomberg U.S. Aggregate Index was up 7.3% in 2025 after being down 7.1% for the prior 3 years or just under 2.5% annually. Following a 100 basis point reduction in the Fed funds rate via 3 rate cuts in the last 3 months of 2024, we had to wait 9 months until September of 2025 for the next rate cut, which was quickly followed by 2 more in October and December. Treasury rates also declined during the year, with 2-year yields dropping 77 basis points and 10-year yields dropping by 39 basis points. More importantly, the 210 spread steepened from 32 basis points at the beginning of the year to 70 basis points at the end of the year. This positively sloped yield curve, while perhaps somewhat modest, is a welcome change from the environment we faced from 2022 to 2024. Additionally, volatility has declined. The MOVE index began 2025 at just under 100, 98.8 before briefly spiking after Liberation Day in early April to almost 140 and then trended down for the succeeding months, ending the year at just under 64. Now to put this in context, the MOVE index was above 100 for almost the entirety of 2022, 2023 and 2024. The combination of lower rates, lower volatility and a positively sloped yield curve are all favorable for the mortgage market and for our business. With recent developments in Washington, D.C. and a strong focus on housing affordability, it seems likely that government policy, while certainly never certain, will continue to be supportive for our markets. The recent initiative for the GSEs to buy $200 billion of Agency MBS, the nomination of a new Fed chair with the expectation of further rate cuts later in 2026 and the repeated mantra of do no harm with respect to the mortgage market are all constructive for our market and for our business. We are excited about 2026 as we start the year with these tailwinds at our back. In the fourth quarter of 2025, MFA continued to execute on our strategic initiatives to cap off a solid year of performance. Our total economic return in the fourth quarter was 3.1% and 9% for the full year of 2025. Total shareholder return for the year was 6%. During our last earnings call in November, I provided details on several strategic actions that we were initiating to increase earnings and grow ROEs over the coming year. I'm happy to report material progress on these fronts. While the results will take several quarters to be fully reflected in our financials, the building blocks are in place. As discussed on our last call, we have deployed over $100 million of excess cash into our target assets in order to reduce the cash drag on earnings. We acquired $1.9 billion of loans and securities in the fourth quarter, including $1.2 billion of agencies purchased early in the quarter, $443 million of non-QM loans and Lima One also originated $226 million of new business purpose loans in Q4. We have highlighted the underappreciated optionality in our outstanding securitization ladder for quite some time now. With a constructive rate environment and tight securitization spreads, we believe we will have significant opportunity to call some of these deals and relever the underlying loans, reducing our cost of funds, while also generating incremental cash to redeploy. We're also excited about the prospects for 2026 at Lima One. We hired 45 new salespeople in 2025. We are debuting a new wholesale channel, and we are relaunching multifamily lending in the first quarter of 2026. In addition, we have rolled out several best-in-class technology platforms to enhance the borrower experience and drive operational efficiencies at Lima. The results of these initiatives are not immediate, but we again feel that the building blocks are in place. A number of us visited Greenville in late January to attend Lima's annual meeting, and the energy and enthusiasm at Lima One is palpable. Growth at Lima One in 2026, we believe will contribute materially to MFA's earnings. We continue to work diligently to resolve delinquent loans in the portfolio. This can be maddeningly time-consuming, but our team has been working out delinquent loans for over a decade, the majority of which, by the way, were purchased as nonperforming loans. And our team is the best in the business at this and uniquely suited to the task. We resolved over $150 million of delinquent loans in the fourth quarter, unlocking substantial capital to be redeployed at mid-teen ROEs. We've made substantial progress in reducing G&A expenses, both at Lima and at MFA. 2025 G&A was $119 million, down from $132 million in 2024. Many of these actions take some time to be realized depending on when in the year they occur and whether or not there are severance expenses associated with them. We're confident that we will continue to make progress on expense reductions in 2026. Finally, our listeners will recall that we began a program in the third quarter of 2025 to issue additional shares of our 2 preferred stock issues via an ATM and use the proceeds to repurchase our common stock at a significant discount to book. The stock buyback authorization expired at the end of last year, but our Board has reauthorized this program, and we expect that we will continue to utilize these 2 programs when the trading window opens after we file our 10-K. While this program is modest in size thus far, this is very accretive. And importantly, because we are issuing equity in the form of preferred stock, we are not shrinking our equity base despite repurchasing common stock. In the aggregate, we believe we are taking meaningful active measures to materially increase earnings and ROEs, and we expect to begin to see these results in 2026. And I'll now turn the call over to Mike to discuss the financial results.

Thanks, Craig, and good morning, everyone. At December 31, GAAP book value was $13.20 per share and economic book value was $13.75 per share, each up modestly from the end of September. For the quarter, MFA again paid a common dividend of $0.36 and delivered a total economic return of 3.1%. For the full year, MFA paid common dividends of $1.44 and delivered a total economic return of approximately 9%. We were happy to report in late January that approximately 40% of our 2025 common dividends were treated as a tax-deferred return of capital to our shareholders. This is the sixth straight year that a substantial portion of our common dividends were treated as a nontaxable distribution. This preferential tax treatment is the result of meticulous tax planning and a significant fully reserved deferred tax asset that gives us additional flexibility to efficiently structure transactions to minimize or deferred tax burden for our shareholders. Though there can be no assurances about the tax treatment of future distributions, this favorable tax treatment has substantially increased the after-tax dividend yield realized by holders of our common stock. Switching back to our results. For the fourth quarter, MFA generated GAAP earnings of $54.3 million or $0.42 per basic common share. Net interest income for the quarter was $55.5 million, a modest decline from $56.8 million in the third quarter, driven primarily by lower yields on our legacy RPL/NPL loan portfolio and interest reversals associated with increased nonaccrual loans in our multifamily transitional loan portfolio. These declines were largely offset by higher interest income on both Agency MBS and non-QM loans as a result of our significant asset purchases during the quarter. In the fourth quarter, we again improved our operational efficiency with further progress on our expense reduction initiatives. Quarterly G&A expenses totaled $27 million, a $2 million decline from approximately $29 million last quarter. For the full year, G&A expenses were $119.4 million versus $131.9 million in 2024, a decline of approximately 9.5% at the high end of the 7% to 10% reduction we had previewed earlier this year. We continue to make progress on additional initiatives that we expect will bring further reductions to our run rate expenses during 2026. Distributable earnings for the fourth quarter were approximately $27.8 million or $0.27 per share, an increase from $0.20 per share in the third quarter. The increase was primarily attributable to $0.09 of lower credit-related charges, which were partially offset by $0.03 of lower gains from sales of REO during the quarter. We continue to see progress from our efforts to grow our return on equity, and we expect our DE to reconverge with our common dividend in the back half of 2026. Moving to our capital. As Craig alluded to, during the quarter, we sold approximately 163,000 shares of our Series C preferred stock and approximately 53,000 shares of our Series B preferred stock for cumulative proceeds of approximately $5 million. We used these proceeds to repurchase approximately 540,000 shares of our common stock at a weighted average discount to our economic book value of approximately 33%. Given current market conditions and the trading level of our common stock, we expect to continue to issue preferred shares and repurchase our common shares as a way to enhance returns to our common shareholders without sacrificing scale. Finally, subsequent to quarter end, we estimate that our economic book value has increased by approximately 3% since the end of the year. I'd now like to turn the call over to Bryan, who will discuss our investment portfolio and Lima One.

Thanks, Mike. We acquired nearly $2 billion of residential mortgage assets in the fourth quarter. As Craig mentioned, this included $1.2 billion of Agency securities, $443 million of non-QM loans and $226 million of business purpose loans originated by Lima One. We grew our agency book by over 50% to $3.3 billion during the quarter. Most of our investments were made in late October before spreads tightened significantly. We continue to focus on low pay-up spec pools that offer some prepay protection. Our agency portfolio is comprised mostly of 5.5% purchased at par or at a slight discount to par. We've slowed purchases since the tightening that occurred in late 2025 and especially into the year after the President's directed to the GSEs to buy mortgage bonds. That said, it still remains possible to generate a low double-digit ROE on levered agency investments, and we may buy more depending on capital needs elsewhere in the business. Our non-QM whole loan portfolio remains our biggest asset class at $5.3 billion, and we had another successful quarter sourcing, buying, managing and securitizing non-QM loans. We acquired $443 million of new loans with an average coupon of 7.3% and an LTV just shy of 69%. We remain laser-focused on credit quality. We buy loans from only select counterparties and still review every loan prior to acquisition. Turning to Lima One. Lima originated $226 million of new loans in the fourth quarter. This included $83 million of new construction loans, $48 million of rehab loans, $25 million of bridge loans and $70 million of rental term loans. We continue to sell Lima's production of those longer duration rental loans at a premium to third-party investors. This quarter, we sold $45 million, generating $1.4 million of gain on sale income. Lima as a whole produced $5.7 million of mortgage banking income. Although origination volume was lower in the fourth quarter due to seasonality, we continue to make progress positioning Lima for growth. We are relaunching multifamily lending with an entirely new underwriting team, and our wholesale channel is now live. We've also made further investments in Lima's sales force and technology capabilities and expect all of these efforts to bear fruit in 2026. Moving to our credit performance. We made good progress throughout 2025, resolving nonperforming loans on our balance sheet. The delinquency rates across our entire loan portfolio ended the year at just over 7%, down from 7.5% a year ago. We did see a 30 basis point increase during the fourth quarter, which was driven primarily by several defaults in our legacy multifamily portfolio. As a reminder, we have been actively managing the runoff of that book for the past 2 years, and as we start to approach the tail of that process, we expect that delinquency rate in the legacy portfolio to remain elevated, particularly as loans pay off and its overall size continues to decline. It's important to note that these assets are accounted for at fair value, and the remaining loans were held at a $42 million discount to par at year-end. We will continue to work hard to wrap up the resolution of that book. Finally, moving to our financing. We issued our 21st non-QM securitization in December, selling $424 million of bonds at an average cost of 5.26%. Securitization spreads have tightened in recent months and remain highly attractive for regular issuers such as ourselves. And once again, I'd like to thank many of our investors who have consistently supported our non-QM program and look forward to seeing some of you at the conference next week. As Craig highlighted earlier, given the recent movement in credit spreads, we continue to relever and look at -- to relever some of our securitizations in the months ahead. We currently have $2.3 billion of currently callable securitized debt outstanding, which, in some instances, has materially delevered since issuance. We expect that calling and reissuing deals will be a significant source of liquidity for us in 2026 and will unlock appreciable equity to be deployed in our target assets in the months ahead. And with that, we'll turn the call over to the operator for questions.

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

Can you just talk about where you see the run rate ROE on your EAD once these loss provisions are through? And then can you remind us also, like there's capital that's tied up with the delinquent loans, how much that's going to sort of contribute to that number as well?

Bose, thanks for the question. So I guess a few things. One, it's kind of hard to predict, obviously, when exactly these credit losses will be realized. Bryan alluded to in his remarks that we hold the multifamily transitional loan portfolio at a $42 million discount to par. And given the short duration of those assets, we expect that most of that is attributable to what's eventually going to flush as credit losses through our DE. I think if you think about sort of DE on a loss less basis or DE before credit charges, I think this year, it was in the 8% to 9% range. And I think as we get to the back half of next year, certainly closer to that 10%, 10.5%, 11% range is sort of the run rate. Obviously, we've done a lot of work. And as Craig alluded to, both last time and this time, a number of initiatives take some time to flush through. But if you think about the dividend on our book value, it's about 10.5%. And as I mentioned in my prepared remarks, we expect the DE to reconverge with the level of the dividend in the back half of 2026.

Okay. Great. That's helpful. And then can you just discuss the reentry into the multifamily market? Are you focusing on the different loan types? Or is the underwriting process different? Just yes, can you just talk about the 2.0 version versus the older version?

Sure. So we're sort of targeting up in quality a little bit and up in unit size and value size. So when you think about the prior instance, average loan amounts might have been between 3 and 10. Now we're sort of targeting between 5 and 25. So moving up a Tier 2 in quality. And sort of the idea behind the program is it's similar to the rental loans, it's an originate-to-sell model, so to sort of capture the origination fees and then capture some servicing fee on the back end, not necessarily to put on MFA's balance sheet.

Okay. Okay, great.

Thanks, Bose.

And your next question comes from Doug Harter with UBS.

As you think about the deals that are potential -- could potentially be called, how do you think about the returns you're generating on that capital today and where that could be redeployed into?

So in terms of -- it's really depending on the deal, right? We're still -- we still could be generating a mid-teen type return on that deal. But in addition, we can unlock, say, incremental whatever, $10 million to $20 million to $30 million of liquidity sort of per deal that can then be reinvested at that -- at our target ROEs of sort of the mid-teens. So it really is -- you think about it as the existing deal is $15 million, then add another $30 million or $40 million of additional sort of equity that could be redeployed to earn another $15 million. So it's all sort of additive.

Got it. And how should we think about the sizing? I mean, you mentioned the large potential that could be called. How should we think about timing and the magnitude that you guys could get done this year?

So I mean, realistically, we could get done several deals in the coming quarters, which could unlock sort of, say, $50 million to $100 million of capital that can then be redeployed. So it's a this year activity.

Your next question comes from Matthew Erdner with JonesTrading.

As you guys went into agency during this quarter, how should we think about capital allocation going forward as you guys do start to call some of these securities, resolve some of the loans and just get capital back?

So the expectation is, given the tightening that we've seen in agencies, it would -- we will probably tend to target over time into the non-QM and BPL asset classes. You can't just necessarily go out and buy $1 billion in loans in a day. So initially, you may see some investments increased in the agency portfolio, which would then sort of wind down over time and transfer into the non-QM and BPL space.

Got it. That's helpful. And then kind of switching gears to the rental product now. What's come out of the administration, the potential institutional ban, what kind of clients are you guys dealing with? And would that have kind of any impact on your day-to-day?

It's pretty unclear whether anything is going to happen, but we don't lend to the largest buyers of single-family homes to rent. So we do believe sort of whatever comes of this, theoretically, right, could be an opportunity for the more mom-and-pops to absorb some more market share, which could be beneficial to Lima One from a lending perspective. But there's still -- it's very unclear what will come of this.

Right. Right. That's helpful. Appreciate the comments, guys.

Thanks, Matthew.

Your next question comes from Eric Hagen with BTIG.

The move to issue preferred and buy back the common, can you say which series of the preferred that you're issuing? And then more holistically, like how do you think about the shape of the capital structure and like the right mix of preferred versus common right now?

Yes. Eric, thanks for the question. So during the quarter, we did about 160,000 of the C and about 50,000 of the B. And if you think about the issuance, we're selling more of the C pretty regularly. As far as the capital structure, certainly, there's room in the structure to add more preferred. But that market has been somewhat closed for a while now. But given this is an ATM program, it's easy to issue at the margin. But definitely, if the market becomes more attractive, we'd be capable of adding additional preferred to the capital stack.

Got it. Okay. That's helpful. Following up on the resecuritization opportunity, I mean, how tight do non-QM spreads really need to be in order for you to see like a benefit? Is there a way to sensitize the opportunity relative to where non-QM spreads are currently? And does that opportunity necessarily go away if spreads are wider? Or is there still some capital that you can draw out of that portfolio even if spreads are a little wider than they are today?

So there's sort of 2 reasons the opportunity exists. One is that spreads are attractive in a lot of cases to reissue. However, just the natural delevering that occurs in the structure is also creates the opportunity. So it's just sort of an equation and spreads could -- it probably still works if spreads are even 25, 30, 40, 50 wider depending on the amount of delevering that has occurred in a deal. There might be 1 or 2 deals at the margin that are more attractive to do given that spreads are tighter. But realistically, it doesn't change our strategy materially if there was a widening in spreads from here.

Right. Got you.

Thanks, Eric.

Thanks, Eric.

[Operator Instructions] Your next question comes from Mikhail Goberman with Citizens JMP.

I hope everyone is doing well. Just swing it back to Lima One real quick. What are you guys' expectations for margins holding up throughout the year, total volumes throughout the year and how that sort of product mix is going to develop as you add in the wholesale and multifamily lending?

Yes. I mean in terms of margins; we are seeing healthy spreads when you think about our -- the potential issuance of RTL securitization versus where coupons are today on the short-term loan. So it might be sort of low 5 handle cost of funds and rates on new loans are somewhere between 8% to 11%. So there's a very healthy spread there when you think about ROEs. When we look towards the loan sale pipeline of the term loans, given the demand, given where spreads have gone, we've seen significant premiums. If you sort of look at where it was in the last quarter, sort of north of 103. We're sort of still seeing that type of execution today in the market based upon a mid- to high 6s coupon that's originated. So that continues to be attractive. When we think about sort of the volumes of this year, we would project sort of -- we think there's a lot of potential for growth given that we did sort of 0 in the way of multifamily and didn't really have a wholesale channel in the prior year. So we think there is sort of opportunity for sort of incremental growth, and it could be material growth throughout the year. But these things are sort of just coming online in the first quarter, and it takes some time for them to get up to speed. So we do think it's more of a back half of the year is where we see that incremental growth. So it's unclear what necessarily we'll see for the full year 2026, but I think the run rate will be sort of materially higher in the back half.

That's very helpful.

Thank you.

Thank you.

Thank you. And there are no further questions at this time. So I'll now hand the floor back to Craig Knutson for closing remarks.

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.