Greetings, and welcome to the MFA Financial, Inc. Second Quarter 2025 Financial Results Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Hal Schwartz, General Counsel. Please go ahead, sir.

Thank you, Kevin, 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 second quarter 2025 financial results. Thank you for your time. I would like -- 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 Second 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 second 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'm sure you will all remember the market turmoil that ran in the second quarter with Liberation Day on April 2. 2-year treasuries ended the first quarter at 3.88%, rallied to 3.65% by April 4, sold off to 3.96% on April 11 and rallied again to 3.60% on April 30 and then subsequently sold off to 4.05% on May 14. 10-year treasuries followed a similar trajectory, rallying 20 basis points to 3.99% on April 4, selling off 50 basis points to 4.49% on April 11, closing the month of April at 4.16% and then selling off to 4.60% by May 21. Fortunately, cooler heads appear to have prevailed since then, both in Washington, D.C. and in bond and equity markets. At least until last Friday's employment report revisions, 2s and 10s have generally each settled into their own 25 basis point ranges since mid-May and equity markets have continued to grind higher, again, last Friday, notwithstanding. Mortgage spreads -- mortgage credit spreads track other risk assets widening somewhat in April and then retracing back to or near levels seen at the end of Q1 by the end of the second quarter. Importantly, the market for…

Thanks, Craig, and good morning. At June 30, GAAP book value was $13.12 per share and economic book value was $13.69 per share, each down about 1% from the end of March. MFA again paid a common dividend of $0.36 and delivered a total economic return of positive 1.5% for the quarter. MFA generated GAAP earnings of $33.2 million or $0.22 per basic common share in the second quarter. Our GAAP results were driven by growth in our net interest income to $61.3 million as well as modest net mark-to-market gains. This marks the third consecutive quarter we've grown our net interest income, driven by additions of higher-yielding assets over the last several quarters. Net interest income also benefited from a nonrecurring $2.6 million acceleration of discount accretion on our MSR- related assets, which were redeemed during the quarter. During Q2, we continued to make meaningful progress resolving nonperforming loans. We reduced overall portfolio 60-plus day delinquency from 7.5% to 7.3% and lowered the balance of loans on nonaccrual status by $33.6 million compared to last quarter. In addition to our more traditional asset management activities, we resolved approximately $24 million of some of our most challenged transitional loans via loan sale during the quarter. We expect to utilize additional loan sales in the second half of this year to continue to accelerate the resolution of underperforming assets, allowing us to unlock and redeploy capital at mid- to high-teen ROEs. Importantly, because our assets are predominantly accounted for at fair value, the expected losses associated with these potential sales and resolutions have already been recorded in our GAAP results and in book value in prior periods, in some cases, years ago as unrealized losses. We mark our portfolio each quarter to what we and our third-party pricing services believe are…

Thanks, Mike. We grew our investment portfolio to $10.8 billion in the second quarter. We continue to focus on our target asset classes of non-QM loans, business purpose loans and agency securities. We sourced and purchased over $500 million of non-QM loans during the quarter. These loans carry an average coupon of 7.8% and an average LTV of 66%. We established relationships with 2 new originators during the quarter and we will look to add more moving forward. Underwriting standards in the non-QM space remain prudent and mid- to high-teen ROEs remain achievable with securitization funding. The market continues to be supportive of non-QM issuance as the total bonds sold by all issuers so far this year has already nearly eclipsed the total from all of last year. We completed our 18th non-QM securitization in May, selling $291 million of bonds at an average coupon of 5.76%. As Craig mentioned, credit spreads were volatile during the quarter, especially in April when AAAs widened to as much as 175 basis points over treasuries. But spreads tightened over the remainder of the quarter back to where they were before the trade war turmoil started. On Monday of this week, we priced our 19th non-QM securitization and were able to improve pricing due to strong investor demand. We again added to our Agency MBS portfolio during the quarter, growing our position to $1.75 billion. Our focus remains on low pay-up securities, generally 5.5% that we were able to purchase at modest discounts to par. We plan to grow our agency position further as long as spreads remain attractive. Turning to Lima One. Lima originated $217 million of business purpose loans during the quarter, a slight uptick from the first quarter. This included $167 million of single-family transitional loans with an average coupon north…

[Operator Instructions] Our first question today is coming from Bose George from KBW.

Actually, first, I'm going to ask about where you see the economic return for the portfolio. So the -- like you talked about there's this $0.10 of credit. There's a couple of cents that we get from the expense side that gets us above the dividend. I mean, is that kind of the economic return? Or is there sort of incremental upside as you redeploy some of the capital that's in the troubled loans at the moment?

Thanks for the question, Bose. I think a couple of parts to your question there. So we talk about the economic return of the portfolio regularly on these calls as well as internally and with our Board and setting dividend policy. And one of the sort of downsides of DE and really any accounting metric is that it's backward looking. When we think about the earnings power of the portfolio, we try to think about the go-forward earnings power. And if you think about the sort of ROEs the portfolio is generating on a mark-to-market basis, that's really how we think about the economic earnings power of the portfolio. For example, we have some loans that were purchased in 2021 that are held at a pretty significant discount with a coupon rate of, call it, 4%. Because that asset is accounted for at fair value, if you think about the total economics of that, whether it shows up in interest income or in the mark, that asset clearly is earning more than 4% today. So when we take that sort of mark-to-market ROE and do the same thing on the hedges and the liabilities and then you layer in your expenses and the P&L that Lima is generating associated with their origination platform, the economic earnings power is much closer to the 10% dividend yield already. I think the second part of your question as far as additional upside, I think the answer is definitely yes. I mean we've been running with quite a bit of dry powder for some time now. Our recourse leverage is 1.8x. And even ignoring the $275 million of cash, we have a lot of capacity to turn up that leverage number a bit. So there's definitely some upside there. And you'll see that we've added a large number of assets again this quarter as we have for the last several quarters.

And Bose, just to clarify one thing, Mike said that the 10% dividend yield, he means the 10% dividend yield on our book value, not on the stock price.

That's right.

Okay. Yes, absolutely makes sense. And then in terms of the different areas where you can allocate capital, like where do you see the best ROEs at the moment?

I mean, we still -- we like really all 3. You saw we were most active in non-QM and all 3 being non-QM, agency and business purpose loans. Our hope is over time to sort of grow the business purpose loan originations, which have the highest sort of face ROE. And as we've mentioned, we're hiring people down in Lima One, and we do expect to see growth in that origination. So really, it's continuing to deploy across all those 3. But if Lima could do more origination, we would definitely have -- prefer that over the other 2.

Next question today is coming from Steve Delaney from Citizens JMP.

The 15 new loan officers hired, I understand that's at Lima One. Could you comment on that? Are these going to be generalist producers? Is there any product specialty that you're trying to develop? And I guess, most importantly, is there any new geo? Have you opened offices in any new states as a result of the new producers?

Yes. The focus is generally, I would say, West and Midwest in terms of the hires. We believe them to be sort of high-quality hires coming over from competitors. And if you think about the ramp process, right, somebody comes online, it takes them a few months to get comfortable with the product and the processes that Lima One has versus where they may have been previously. So it's sort of -- we're seeing growth now, but we do expect to see much more aggressive growth sort of back half of this year and into next year as these people really start producing.

Yes. Okay. And how many total producers, you may have mentioned it, I apologize, now as we sit today at Lima One?

Yes. We were pushing, I think, 50, and the goal is to continue growing that, I think, closer to 80.

Okay. So there's some runway still to go there. Okay. I think that's good. Thank you for the clarity on the dividend coverage. I was looking at Page 16 in the deck, and it's helpful, but the unrealized and realized gains and losses don't let us kind of count on our own with the deck and without Mike help this morning, really -- we can't really back into coverage based on realized losses. So just throw that out for consideration as far as the way you show it in the deck. But good progress all around strategically, and I realize that the losses are a work in process, and we've got a little bit ways to go to get all that behind us. But thank you for the time this morning.

Thanks, Steve.

Thanks, Steve.

Thanks, Steve.

Your next question today is coming from Jason Stewart from Janney Montgomery Scott.

Just to follow a little bit on Bose's question. You talked about growing Lima One. But as we think about the balance sheet going into the easing cycle and maybe post steepener on the yield curve, like how do you envision capital allocation trending between the businesses on the balance sheet?

Yes. I mean, really, if you think about a steepener, right, Lima One is still originating assets that have coupons north of 10%. So if you have steepener and the short end comes down, maybe that coupon goes from 10% to 9% or to 8.5% or something like that. But the borrowing costs against those is also going to come down commensurate. So right now, in securitization, you can get funding in the 5 handles, right? So if that front end were to come down, you would see that cost of funds drop into probably the low 5s, 4% handle. So it's still very sort of accretive to us to originate those loans. And when you look across non-QM, it does benefit our existing portfolio and incremental loans will fund incrementally better, but I would expect those loan prices to be bid up more aggressively as the curve does steepen. So it may be a more competitive environment and may compress yields somewhat there.

Okay. And then thinking through the post steepener, and I guess more specifically then on the agency, would that be a strategy you deemphasize at that point in a flatter curve environment and redeploy that capital into Lima One and other strategies?

That's right. It really is -- we view these current spread levels as opportunistic to deploy capital in Agency MBS. If those spreads were to come in, we would redeploy those assets and that portfolio into our other credit assets.

Okay. That's helpful. And then just a follow-up from -- I think last quarter, you had said something about $40 million-ish of discount on multi-transitional. Just comparing quarter-to-quarter, would that compare to the -- I think you had $33.6 million. What's the right comparison to look at there quarter-to-quarter?

Yes. So that number there is effectively the discount in terms of the mark on those assets. So I think it is $34 million this quarter. But if you think about those transitional loans, they're very short duration. So they are much less sensitive to moves in market interest rates. So I think we sort of think about that discount there as does buyer of these loans as a credit discount effectively.

Okay. Got you. So you've worked through the vast majority of that this quarter. I got you.

So just to clarify, that discount has declined from, I think it was 40% or 45% to about 35%. So yes, we worked through a lot of it, but there's -- as I said in my prepared remarks, there's still some wood to chop over the next couple of quarters here.

The next question today is coming from Jason Weaver from JonesTrading.

Sort of similar to Steve's there, with the buildup at Lima One, can you comment on the sort of distribution potential for new transitional loans if we were to see a bit more relief in rates ahead, whether you expect securitization financing or loan sales to become a more attractive option under that -- under those conditions?

So on the -- we've been selling the rental loans. So those are the term loans, right? And part of that reasoning is when you originate $30 million or $20 million of those a month, it takes some time to get those ready to go in securitization. And taking on that spread risk for an extended period of time doesn't necessarily make sense when you have a bid on the other side that's very strong. So we have been taking advantage of that bid and selling those loans to third parties. When you think about the shorter-term transitional loans, pretty much all of those loans are -- would be eligible to go into securitizations. And those have a revolving structure in nature. So as we sort of do more loans, right, they're really replacing old loans that are paying off. So we have 4 deals outstanding currently. If we were to grow originations, which we expect to do, maybe you're taking from 4 deals to 5 or 6 outstanding. But you have to make sure that you have that volume in place to fill back the payoff that you're receiving on the other side. And in terms of the split, if you were to look at that breakdown, it's probably 45% to 50% ground up and then the rest being bridge and traditional Fix and Flip type loans.

And Jason, I'd just add one thing. The 30-year rental product is obviously more rate sensitive than the transitional loans. So lower short rates, steeper curve, it's likely that volume would pick up on that product.

Got it. That's helpful. And I want to go back to in the prepared remarks, you mentioned the $24 million in loan sales and you expect to do more in the second half. Talk about the relative merits there. Is that a question of just coincidence you were able to find a buyer on that side? Or is that becoming actively more attractive than pursuing the entire sort of workout process?

Yes. It's just a balance, right? It's -- you're currently -- you're working out loans and you would test the market to see where those bids are. If the bids are attractive, we would look to move on. If the workout is the best outcome, then we'll just work the loan out ourselves. So it's just a balance, and we sort of look at every loan individually to determine what's the best outcome.

[Operator Instructions] Our next question is coming from Eric Hagen from BTIG.

On the single-family rental and single-family transitional loans, do you think developers are getting the rental income in like the exit that they expected? Or is there a lot of range around that outcome because of the execution risk is higher with tariffs and other higher input costs and such?

In terms of the execution, right, a lot of our sort of development loans that we do are really -- they're build and flip to sell, not necessarily rent. So it's really -- the prices that they are achieving in the market are sort of matching the ARV set out in the appraisal. So we're not really seeing a ton of pressure in regards to that as it relates to tariffs. Could it potentially impact things online? Sure, but we have yet to see a material impact thus far, and we sort of track these month-to-month. So we're not really seeing that. In terms of the -- if we do have rents, we've seen -- they've been able to cover future debt service because these loans really get refinanced away from us. So that's what we're seeing. I mean we're -- that's what one would expect. We're not really seeing material pressure there either.

Yes. Okay. That's helpful. You guys break out the loan book by origination year, which is really helpful. But which of the vintages would you maybe label as having higher relative risk versus lower risk just based on when they were originated?

Yes. I mean I'd say for -- if you look at the, say, multifamily book, the '23 vintage was probably tougher for us. I mean if you look at the other parts of the book, right, our LTVs are very low. So we're not really worried about losses there. And when you think about on the non-QM side where we've seen some increased delinquencies, it's really, again, 95 times out of 100, we see delinquency, you see that property gets listed for sale and the borrower just sells it, and we don't really even have to go through any loss mit activities. So we're sort of -- we've been really vintage agnostic as it comes to those portfolios.

Okay. If I could sneak in one more. I mean, is there a catalyst aside from lower interest rates, which could accelerate the call in the non-QM portfolio, the callability?

I mean it's really an algebra exercise, Eric. So it's pretty easy for us to do. So lower rate environment, yes, theoretically, there are more deals that would be callable. In addition, with lower rates, our preferred Series C would reset to a lower coupon. So there's marginal benefits in a few different ways. If you look at the bulk of the floating rate borrowing, it's for the most part, offset with swaps. So lower rate environment is not necessarily going to have a big impact there. But on the edges, lower rates are certainly helpful.

And I think, Eric, just to add, there could be a deal with respect to the call rights that's maybe out of the money. But if you think about the deleveraging embedded in some of those callable deals, it doesn't necessarily have to be a lower rate to reissue it to still increase the ROE of the portfolio because you're unlocking a lot of capital with the relever.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you, everyone, for your interest in MFA Financial. We look forward to speaking with you again in November when we announce our third quarter results.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.