Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Incorporated First Quarter Earnings Conference Call. At this time, all participants lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Hal Schwartz. Please go ahead.

Thank you, operator, and good morning, everyone. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which 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, 2021, 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 2022 financial results. Thank you for your time. I would now like to turn this call over to MFA’s CEO and President, Craig Knutson.

Thank you, Hal. Good morning, everyone. I would like to thank you for your interest in and welcome you to MFA Financial’s first quarter 2022 financial results webcast. With me today are Steve Yarad, our CFO; Gudmundur Kristjansson, and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of senior management. The first quarter of 2022 was a very challenging period for fixed income investors and exceptionally so for mortgage investors. Although a Fed tightening cycle has been anticipated since the fourth quarter of 2021. The expectations of the timing and magnitude of this tightening have undergone massive revisions. Short rates leaked wider in October and again in December with two-year treasury yields rising about 50 basis points during the fourth quarter. Market consensus at the end of last year was generally for 325 basis point Fed increases during 2022, but these expectations essentially blew up as we entered 2022. With persistently bad inflationary data, a continued very strong labor market and increasingly hawkish dialogue from Fed officials and other bond market participants. The brewing consensus adjusted quickly and two-year treasury sold off by 40 basis points in January and another 40 basis points in February before the Russian invasion into Ukraine temporarily pushed two-year yields lower in the last few days of February. The bond market route intensified in March with two years backing up 60 basis points and that was before the first Fed increase on March 16 and then another 52 basis points over the last half of March. The magnitude and speed of this rate selloff, particularly in the short end of the yield curve was the most dramatic witness in over 30 years eclipsing even the rate increases in early 1994. And in a strange way, there are some striking similarities between 1994 and 2022.…

Thanks, Craig. Please turn to Slide 6 for an overview of our first quarter 2022 financial results. As Craig outlined in his opening remarks, MFA’s results for the quarter were impacted by the prevailing interest rate environment as a dramatic increase in interest rates across the yield curve, combined with spread widening resulted in net valuation declined in our investment portfolio, despite significant additions to our swap hedges that we proactively made early in the first quarter. As a reminder, we elected the fair value option for all loans that we have acquired since the second quarter of 2021, consequently valuation changes on these loan acquisitions, in addition to loans that were purchased previously as non-performing loans flow directly through our income statement. We have also elected the fair value option on liabilities issued in connection with loan securitizations, where we also use fair value accounting on the underlying loan collateral in order to provide symmetric accounting on the financing. Valuation changes for these liabilities, in addition to swaps and short TBA positions, which are also subject to fair value accounting, provided a partial offset to the decline in loan values. These valuation changes created significant volatility in our Q1 earnings. As Craig also noted, we are introducing distributable earnings this quarter, which is a non-GAAP measure that adjusts GAAP earnings to exclude fair value changes and certain expense items. I will discuss distributable earnings in more detail shortly, but first, I’ll discuss the more significant drivers of our Q1 GAAP results. GAAP earnings were negative $91.1 million or negative $0.86 per common share. Net interesting income $63.1 million, was $6.8 million lower than the prior quarter, primarily because the prior quarter included $8.2 million of income from an MSR bond redemption. Residential whole loan net interest income marginally increased.…

Thank you, Steve. Turning to Slide 8. Home prices continue their upward trend in the first quarter year-over-year home price growth hitting over 20% in March. The lack of housing inventory continues to be a major driver of these increases as we are at historic lows and supply. The unemployment picture – the employment picture remain strong and delinquencies remain low. That said, mortgage rates have repriced rapidly since the beginning of the year and are now 200 basis points higher. The increase in mortgage rates combined with HPA has significantly impacted the affordability of housing. The typical principle and interest payment for a perspective purchase money borrower is almost 40% higher than the beginning of the year. Overall, we are comfortable with the credit in our portfolio, but given the dramatic rise in interest rates, we believe it is prudent to be cautious over the intermediate term as economic prospects become increasingly uncertain. Turning to Slide 9. The first quarter brought volatility to the non-QM market. We saw spreads widen approximately 100 basis points on the AAA rated part of the capital structure, in addition to the move higher in rates. Due to the increased uncertainty, we slowed purchases of non-QM loans in the first quarter by approximately one-third or $300 million less than the previous quarter. We successfully executed two securitizations over the quarter in a challenging market totaling over $500 million UPB sold. Serious delinquencies continue to decrease in the non-QM portfolio as a percentage of loans 60 days delinquent greater drop two-tenths of a percent to 3.3%. The weighted average original LTV for borrowers that are 60 days delinquent is 65% and that does not account for any potential home price appreciation post origination, many loans that experience delinquencies end up being paid in full as…

Thanks, Bryan. Turning to Page 12, despite the move higher in rates this year, Lima One has continued to see strong demand for its BPL products. And the first quarter was the third consecutive record quarter originations with over $660 million originated. Lima One continues to benefit from its reputation as a leading lender for real estate investors in its diverse product offerings of short and long-term transitional and rental loans backed by single and multifamily properties. Both of which contribute to approximately 50% loan volume coming from repeat borrowers. Loan demand has remained strong in the second quarter with originations succeeding $200 million in April. We had high hopes for Lima One, we acquired them in July of 2021, but the results have exceeded our expectations as Lima has originated over $1.6 billion of high yielding high quality BPL loans for MFA’s balance sheet over the last three quarters. We expect origination volumes to continue to benefit from strong loan demand in the BPL space and expect Lima One to originate in excess of $2 billion in 2022. The first quarter was a challenging quarter for most originators, as a rate grows rapidly and spreads on securitizations widened in the quarter. During 2022, we have appreciated the benefits of a fully integrated origination platform as we have been able to raise origination rates quickly in response to changing market conditions, raising the average coupon of Lima’s origination pipeline by over 100 basis points to over 7% currently. In addition, our strong balance sheet allowed Lima to operate smoothly in the quarter, where many originators struggled with managing their loan sales and warehouse lines and puts Lima in an excellent position to take advantage of higher rates going forward. We completed two business purpose loan securitizations in the month of…

Thank you, Gudmundur. So the first quarter of 2022 was obviously a challenging period in the fixed income and mortgage markets, but our active risk management practice lessened the impact on MFA through interest rate swaps, securitizations, and relatively low leverage. In addition, we increase liquidity and freed up balance sheet capacity that we can now deploy as market opportunities arise. Lima One continues to achieve excellent results despite raising rates to adjust to market conditions and a continued strong housing market, benefits our mortgage credit exposure, despite developing affordability issues for home buyers due to higher rates. Leila, would you please open up the line for questions?

Thank you. [Operator Instructions] Our first question comes from line of Bose George with KBW. Please go ahead.

Hey, guys. This is actually Mike Smyth on for Bose. I’m just wondering if you could provide some more color on…

Hey, Mike.

Hey, Craig. How’s it going? Just wondering if you could provide some color on the volatility and the securitization markets, just kind of wondering if some of the older inventory has cleared or – and if the worst is behind you or do you expect some of the volatility to persist. And then as a follow-up, have you seen any changes to loan prices to reflect some of the wider spreads in the securitization market?

I’m sorry, the last part of the question.

Have you seen any changes to loan prices to reflect the wider spreads in the market?

Sure. So looking at the securitization market, we definitely saw major volatility in the first quarter. AAA spreads were wider by 100 basis points. Since the end of the quarter, we’ve seen some retracement levels. So spreads are probably 30-ish basis points inside of the wide. Now it’s still a very uncertain time, but it seems like the market has found its footing. So it is more beneficial than it was to securitize. As it relates to loan prices, we have seen pricing adjust. There is still an overhang of loans that were originated at lower coupons that originators weren’t able to move as quickly as they would otherwise would like. So those still need to work their way through the market, but we have seen coupons adjust to the new prevailing rates and spreads. And we do think the current pricing does make sense, but as we mentioned previously, there’s still a lot of uncertainty around rates and where spreads will go from here.

Great, great. That’s really helpful color. And then just one in the buyback, just kind of wondering how you’re thinking about the balancing act between the incremental investments and buying back the stock at 11% or 12% dividend yield. Just trying to get a sense for the go forward cadence there.

Sure. Well, so we still have a little over $200 million of stock buyback authorization under the board’s recent increase. And as I indicated on the call, we’ve already bought this year nearly $100 million worth of stock pack. So clearly, we’re not afraid to buy back stock. But as you correctly point out, we evaluate stock repurchases alongside other investment opportunities and also with consideration to available liquidity.

Great. That’s helpful. And then just one more, have you seen any changes here at book value so far in the second quarter?

So just to caution you this, it’s an estimate, because we don’t even have all the remittance reports from loans for the month of April and never mind loan marks. We don’t have those either, but I guess, just looking at rate moves in 2s, 3s, and 5s, we would estimate that book value is probably down approximately 3% plus or minus for the month of April.

Great. Thank you so much for taking the questions.

Sure, Mike,

And our next question is from Steve DeLaney with JMP Securities. Please go ahead.

Thanks. Hi, good morning, everyone. Steve, thanks for the questions. So Gudmundur made some comments about on your initial I guess it was your fix and flip securitization that it kind of modeled out to a 20% ROE. And then I think Bryan may have mentioned that the SFR – no, excuse me, that was Gudmundur as well, but he mentioned a 15% ROE. I’m just curious about so it sounds like the bus – the Lima products, the bus – the BPLs are kind of have adjusted enough to where they’re not just a source of financing, but also an effective structure for earnings at a very attractive ROE. How about the NQM market? It sounds like maybe that’s just been a little slower to catch up to the re-pricing and recalibration. I’m just curious if NQM rates now, I think Bryan may have mentioned over 6% coupons. How do you view the efficiency of an NQM securitization today, and is it viable in today’s market?

Yes. For new assets being purchased today, we would probably view it as a low to mid double digit ROE execution. So we do think looking at BPLs fix and flip it’s a little bit more attractive for us, but it’s still viable. Now, the question is right, there’s still time that it takes that you’re exposed to spread movements when you commit to buy loans and you settle and you get them into a deal. So just given the uncertainty, right, the – when we say low-to-mid, or we’re talking about if you bought a loan today and you did a securitization today. Now you are somewhat exposed to that spread risk over time, which is why we sort of slowdown purchase in the first quarter and we just want to be make sure we’re prudent going forward in terms of additional assets and that lag time to get to the market to securitize the assets.

Okay. And obviously, I guess you could hedge some coupons a bit, but it sounds like the BPL and the Lima acquisition is paying huge dividends because that as we sit today, that that market is a little more transparent to you and a little more approachable than the NQMs, where you’re out there in a very competitive market having to bid for those loans. Is that a fair statement that you sort of control your destiny?

That’s right. That’s right, Steve. As I mentioned, right, we have this instant feedback loop with Lima One, because we’re involved in the market with securitizations, almost every single day. And so it’s just I can’t emphasize enough how important that is to be able to adjust coupons on the origination side in real time, because that’s how you avoid the age old problem that originators always have in a rising rate environment, where they get stuck with pipelines with submarket coupons. So we’re really happy about that.

And Steve just there’s also one additional component to this. Since we control the originator, we are acquiring the loans at cost. So Lima has originated a cost to us. We’re not going out in the secondary market and paying premiums for them. So in a volatile market that, that does give us a little bit of additional kind of spread or yield to play with to absorb some of the volatility, as opposed to, if you’re paying premiums and competing for those assets, your room for error, so to speak is less. So I think that’s also a very important thing to keep in mind and Lima by itself, when they look at the cost and the income they generate from fees and origination fees and servicing fees and other fees, like we almost think about them as breaking even from a cost perspective. And so we’re creating then these assets essentially at costs, which is very powerful.

Yes. Right. And thank you for the comments. All of you in a props to management and the Board on the buybacks, that’s greatly appreciated in these challenging times and at 80% a book or something, I think it’s a great use of your capital. Thanks.

Thanks a lot, Steve.

And we have no other questions. You may continue.

Okay. Well, thank you, everyone for your interest in MFA Financial, and we’ll look forward to our next update when we announce second quarter results in early August.

Thank you. Ladies and gentlemen, this conference is available for digitized replay after 12:00 PM Eastern Time today through August 4 at midnight. You may access the digitized replay service by dialing 1866-207-1041 and enter the access code 4874177. Again, that dial-in number is 866-207-1041 with the access code of 4874177. And that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.