Ladies and gentlemen, thank you for standing by, and welcome to the MFA First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to our host, Harold 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, 2022, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks, uncertainties and other factors could cause MFA's actual results to differ materially from those projected, expressed or implied in any forward-looking statements it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's first quarter 2023 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

Thank you, Hal. Good morning, everyone, and thank you for joining us here today for MFA Financial's First Quarter 2023 Earnings Call. Also 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 2023 started on a promising note with treasuries rallying modestly and credit spreads becoming progressively more constructive through the month of January. This utopia was short-lived, however, when a blowout payroll number on February 3 shot yields sharply higher. Two-year treasury sold off nearly 100 basis points through the month of February as the bond market priced an additional expected Fed tightening. Then queue up the banking crisis of 2023 in early March as Silicon Valley Bank and Signature Bank were shut down over the weekend of March 11 and 12. Two-year treasuries rallied over 100 basis points between March 8 and March 13. And any notion that bond market volatility was just a 2022 phenomenon was quickly dispelled. As if we did not have enough to worry about with persistently high inflation numbers of Fed that is still very focused on inflation and a geopolitical environment that has not improved in the last year, we now add concerns of banking sector liquidity and possible asset sales to the mix. It's difficult to know in what inning the banking crisis is but it's very clear that banks will be less willing to extend credit for at least the short term and quite possibly longer. As Fed Chair, Powell, has acknowledged in press conferences, reduced bank lending will tighten financial conditions, which could do some of the work for the Fed in its effort to curb inflation, but the magnitude of these impacts is unknowable at this time. Long story short,…

Thanks, Craig. We continue to take advantage of the attractive investment landscape and acquired approximately $630 million of loans and securities in the first quarter, growing our portfolio by 6% to about $8.4 billion at the end of the quarter. We believe the current environment of rapid monetary policy tightening, where market participants have had to grapple with high volatility, lack of liquidity and reduced access to leverage, benefits experienced market participants like MFA that have managed leveraged mortgage assets through various cycles and have the ability to source their own high-quality credit assets in size. The combination of high interest rates, wide spreads and our unique ability to source loans continues to provide us with great opportunities to add high-yielding loans to our balance sheet. This is especially apparent with our originator, Lima One, where we remain one of the few companies that can create our own high-quality business purpose loans in size. We added over $450 million of loans in the quarter with an average coupon of approximately 10% and excellent credit characteristics, with average LTV of 66% and average FICO score of 744. $364 million or about 80% of our loan additions were business purpose loans originated by Lima One, which is where we continue to find the best opportunities to deploy capital. With current warehouse and securitization levels, we see return on equity around mid-teens for the first quarter additions, and that continues to be the case for loans that we're currently adding in the second quarter. We also opportunistically added about $174 million of Agency MBS in the latter part of the quarter when spreads had widened substantially from earlier in the quarter, bringing our total holdings of Agency MBS to about $300 million at the end of the quarter. Our holdings are concentrated in…

Thanks, Gudmundur. The securitization market, like all markets, continued to exhibit volatility in the first quarter. Our valiant spreads and rates in January offered an opportunity to execute at attractive borrowing costs relative to the fourth quarter of 2022. We were able to issue over $500 million in bonds through 3 securitizations, 1 each backed by Non-QM, SFR, transitional loans in the first 2 months of the quarter prior to the bank turmoil in March, which resulted in spread widening. On a positive note, securitization execution levels have the tailwind of a tactical supply picture, which continues to be an important force in helping spreads narrow this year. Expected annual supply of non-agency residential bond issuance is forecasted to be less than half of the volume from the prior year. We're pleased to report that over the quarter, 23 bonds issued from our securitization program were upgraded by rating agencies. These upgrades were across our non-QM and SFR platforms and are another positive illustration of our continued focus on credit. Looking ahead, we believe that mortgage securitization will continue to be an important part of our business strategy as it provides for nonrecourse, non-mark-to-market financing, which will further insulate the portfolio from volatile markets. Moving to our credit performance. Our strategy of targeting high-FICO borrowers and an emphasis on lower LTVs and our loan originations and acquisitions have created a resilient portfolio to weather uncertain economic environments. Our credit quality remained strong through the first quarter, 60-plus day delinquencies in our purchased performing portfolio were unchanged from the prior quarter at 3%. The components of that portfolio being non-QM, transitional loan and SFR portfolios all remained unchanged. The 60-plus day delinquencies in our legacy RPL/NPL portfolio improved slightly from the prior quarter down to 30.6%. Prepayment speeds on our portfolios are relatively unchanged from the prior quarter. The non-QM and SFR portfolios exhibited a 3-month CPR of 8% and 5%, respectively, and a 3-month CPR for our legacy RPL portfolio was unchanged. Transitional loan portfolio 3-month repayment rate increased to 40%. With the spring selling season upon us, we wouldn't be surprised to see prepayment rates increase modestly in Q2. Lastly, we continue to have success with our REO portfolio. It continues to shrink as fewer properties are entering REO status than are being sold out of the portfolio. Over the quarter, we sold 93 properties for $34 million, resulting in $5 million in gains. Overall, we believe the credit in our portfolio is well positioned for the current economic environment. And with that, I'll turn the call over to the operator for questions.

[Operator Instructions]. Our first question is from Steve Delaney from JMP Securities.

Congrats on the strong start to 2023. It sounds like Lima is just kind of on fire down there. You were talking about quarter-over-quarter, year-over-year for 1Q. Are you at a point at this point in May, where you can give us some sense of what your estimated range for origination volume from Lima might be for 2023? And how that would compare to 2022 on a full year basis?

Thanks, Steve. No, it's a great question. Yes, we're very happy with how Lima is performing and some of the things that are creating challenges in the marketplace currently, the volatility, the reduced access to leverage and some of the banking turmoil, and we think that continues to create good opportunities for Lima One as they lend in the business purpose space. And so as we think about the volume, yes, we think volume will continue to increase throughout the year. Based on what we're seeing, March, April, May, probably Q2 is going to be, let's say, around $500 million, probably a little shy of $500 million. And we would expect, as we go into the second half of the year, we kind of get back to a run rate of perhaps $600 million a quarter. And so if you add that up $500 million for Q2 and $600 million each quarter in the second half of the year, we're probably looking at around $2 billion for full 2023 and so I think that's kind of a modest expectation. And yes, I think there's room for upside, too, depending on how the market evolves, but we think that's a really good performance in the context of kind of a challenging backdrop in the overall market.

Great. Remind me, Gudmundur, what 2022 was. I'm sure it's in my model. I just -- I don't have that open.

Yes, it was $2.3 billion.

$2.3 billion, so down just a touch and obviously, a higher rate market, for sure. And we were pleasantly surprised to be beaten on your book value number, up 3%. to $16. Can you comment -- Craig, you mentioned $2.50 of per share discount accretion. When we think about 1Q, obviously, you had discount accretion but were there actually -- were you observing any secondary trades, market price indications that was there any positive price adjustment on which you own in addition to your discount?

Yes, Steve, thanks for the question. So the answer is yes. There was some price appreciation during the quarter. The loan book overall, I would say, was probably up 1.5 points or so. Obviously, we gave some of that back on the hedges that we had and on the securitized debt. So that's really how the book value shook out. I mean overall, I think it was primarily due to rates and I think we showed at the end of the fourth quarter that we had a positive duration. So it wasn't necessarily a big surprise. But those are sort of the key components.

[Operator Instructions]. And at this time, no one is queuing up for a question.

All right. Well, thank you, operator. Thanks, everyone, for listening today, and we'll look forward to our next update in August.

Thank you. And ladies and gentlemen, this conference is available for replay beginning at 12 Eastern today, running through August 5 at midnight. You may access the AT&T replay system by dialing 866-207-1041 and entering the access code 6223657. International callers can dial 402-970-0847. And that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.