Transcript: MFA Finl Q1 2026 Earnings Conference Call

MFA Finl (NYSE:MFA) reported first-quarter financial results on Tuesday. The transcript from the company's first-quarter earnings call has been provided below. Benzinga APIs provide real-time access to earnings call transcripts and financial data. Visit https://www.benzinga.com/apis/ to learn more. View the webcast at https://event.choruscall.com/mediaframe/webcast.html?webcastid=gPDAxTgM Summary MFA Finl reported a negative economic return of 1.2% for Q1 2026, impacted by market volatility due to geopolitical tensions and higher interest rates. The company's investment portfolio grew to $12.5 billion, with significant additions in non-QM loans, agency securities, and business purpose loans. Management introduced a new Distributable Earnings (DE) metric to give investors a clearer view of portfolio earnings, expecting DE to align with the common dividend later in 2026. Cost reduction initiatives at MFA Finl and Lima One have led to an estimated $20 million in annual savings, with further reductions expected from a corporate headquarters relocation. The company successfully completed two non-QM securitizations in March, demonstrating resilience in market operations despite widened spreads. Lima One had strong origination activity, generating $7.7 million in mortgage banking income, with expectations for continued growth. Delinquencies rose to 7.8% in the residential loan portfolio, primarily due to legacy multifamily book issues, but are expected to normalize as troubled assets resolve. Management remains confident in their asset mark process, noting gains from resolutions of delinquent loans. Full Transcript OPERATOR Greetings and welcome to the MFA Financial first quarter 2026 financial results. At this time all participants are in a listen only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Hal Schwartz, General Counsel, to begin. Hal Schwartz (General Counsel) Thank you, 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 10K for for the year ended December 31, 2025 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 2026 results. Thank you for your time. I would now like to turn this call over to MFA CEO Craig Knudsen. Craig Knudsen (Chief Executive Officer) Thank you, Hal Good morning everyone and thank you for joining us for MFA Financial's first quarter 2026 earnings call. With me today are Brian Wolfson, our President and Chief Investment Officer, Mike Roper, our Chief Financial Officer and other members of our senior management team. I will offer some general remarks on the macro, economic and political landscapes and will then provide an update on MFA's business initiatives and portfolio activities. Then I'll turn the call over to Mike followed by Brian before we open up the call for questions. Moving to market conditions in the first quarter of 2026, it was very much a tale of two market environments. Fixed income markets began the year with a continuation of strong investor demand and low volatility that we experienced in the second half of 2025. The economy continued to exhibit resiliency and the labor market seemed to stabilize, particularly with a surprisingly robust January non farm payroll print in early February. Mortgages performed particularly well, aided also by a directive for the GSEs to purchase $200 billion of agency mortgage backed securities in early January. Unfortunately, the party ended abruptly with the onset of a war in Iran, which spiked volatility, pushed rates sharply higher and dramatically raised oil prices, higher energy prices, renewed fears of inflation and markets adjusted expectations for fewer or even no rate cuts later this year. Mortgage spreads widened significantly against this backdrop and and contributed to an economic return for MFA in the first quarter of -1.2%. However, despite the market volatility and heightened geopolitical tension, markets remained open and orderly. We priced two non QM securitizations in March and while spreads were modestly wider, the market functioned normally. This is a testament to the expansion, maturity and and depth of these markets over the last four years. The second of these two non QM securitizations was a re lever of two previous deals, which is a good example of what we often refer to as an underappreciated source of optionality that our ability to call these deals as they season and pay down, enabling us to lower borrowing costs and unlock additional capital. We grew our investment portfolio to $12.5 billion in the first quarter and adding almost $700 million of agencies including To Be Announced (TBAs), $471 million of non QM loans and Lima One originated $219 million of business purpose loans. Our asset management team continues 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 were purchased as non performing loans and they're the best in the business at this and uniquely suited to the task. Finally, our listeners will recall that we began a program in the third quarter of last year to issue additional shares of our two outstanding preferred stock issues via an ATM and use the proceeds to repurchase common shares at a significant discount to book. 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. Finally, we continue to pursue expense reductions both at MFA and at Lima one, which Mike will discuss shortly. I will note that we have added an additional distributable earnings metric that we are introducing in response to requests from analysts and investors. Distributable Earnings prior to Realized Credit losses and Mike will describe this in more detail shortly. We believe that this new DE metric offers a useful representation of how we think about the earnings power of the portfolio and for those of you that follow Commercial Mortgage REITs, this should be a very familiar concept. Taken together, MFA has a diversified business strategy that includes multiple attractive target asset classes with a robust ability to source these assets, a reliable and proven ability to obtain durable non recourse leverage to generate attractive ROEs, a highly competent in house asset management capability, a keen focus on expense management and a demonstrated responsible capital issuance philosophy. And I'll now turn the call over to Mike to discuss our financial results. Mike Roper (Chief Financial Officer) Thanks Craig and good morning everyone. At March 31, GAAP book value was $12.70 per share and economic book value was $13.22 per share each down approximately 3.8% from the end of 2025. MFA again paid a common dividend of $$0.36 and delivered a quarterly total economic return of negative 1.2%. For the first quarter, MFA generated a GAAP loss of approximately $1 million or $$0.11 per basic common share. Our GAAP results for the quarter were adversely impacted by net mark to market losses on the portfolio of approximately 28.8 million driven by higher rates and wider spreads. On March 31, net interest income for the quarter was 59.2 million, an increase from 55.5 million in the fourth quarter driven by rate cuts late last year and growth in our investment portfolio. These benefits were partially offset by interest income reversals totaling $3.5 million associated with loans moving to non accrual status in our transitional loan portfolio during the quarter. On the G and A front, we're happy to report that we again made significant progress with our cost reduction initiatives. In February we entered into a series of agreements to relocate our corporate headquarters to a new location here in New York without paying any early lease termination fees. As a result of these agreements, we expect some short term noise in our reported G&A including 2.4 million of accelerated non cash depreciation expense recognized this quarter and an additional 5 million expected in the second quarter. Following these accelerated non-cash charges, we expect to realize run rate expense reductions of approximately 4 million per year related to the move or nearly 40 million in total over the remaining term of our prior lease. Including the expected savings from the relocation, we now estimate that our expense reduction initiatives have achieved nearly $20 million per year of run rate overhead savings versus 2024 levels. Moving to our DE distributable earnings for the first quarter were approximately 31.1 million or $0.30 per share, up from $0.27 per share in the fourth quarter. The increase was primarily attributable to a $0.03 benefit associated with the lease modification and approximately $0.02 of higher mortgage banking income at Lima One. These benefits were partially offset by an aggregate $0.02 charge related to higher carrying costs on REO and and higher realized credit losses on our fair value loans. We remain focused on growing ROEs and we continue to expect that our DE will begin to reconverge with the level of our common dividend later this year. As Craig mentioned earlier this quarter, we are introducing an additional non GAAP measure which further adjusts our distributable earnings to exclude realized credit losses on our residential whole loans held at fair value. We're providing this new disclosure to give additional context around our distributable earnings as credit losses on our legacy multifamily portfolio continue to flow through our DE. As we've noted on prior calls, because resolving NPLs doesn't impact our DE until long after the loan has been marked down in our GAAP results and book value, these losses can potentially obscure the current earnings power of the portfolio. While credit losses are a normal and recurring part of investing in credit assets, we expect that the resolution of the legacy multifamily portfolio and improvements in processes and underwriting more broadly at Lima One should result in significantly lower loss rates across more recent vintages of origination. As a result, we believe this new metric alongside our reported GAAP results and our existing DE disclosure can give investors a clearer view of the underlying earnings capacity of our investment portfolio as we work through the resolution of these troubled legacy assets. While the timing of loan resolutions and resultant credit charges can be difficult to reliably forecast, we expect realized credit losses on the legacy transitional loan portfolio to accelerate meaningfully in the second quarter before beginning to normalize as we move through the back half of 2026 and into the first half of 2027. As a result, we expect that the difference between distributable earnings (DE) and this new supplemental distributable earnings (DE) measure will narrow considerably over time, and we anticipate reassessing the usefulness of this new measure as the runoff transitional portfolio continues to wind down. Finally, subsequent to quarter end, we estimate that as of the close of business on Friday, our economic book value was approximately flat to the end of the first quarter. I'd now like to turn the call over to Brian who will discuss our investment portfolio and Lima One. Brian Wolfson (President and Chief Investment Officer) Thanks, Mike. We acquired over 1 billion of residential mortgage assets in the first quarter. This included 471 million of non-QM loans, nearly $400 million of agency securities in addition to $300 million of To Be Announced (TBAs) and $219 million of business purpose loans originated by Lima. One non QM remains our largest asset class. During the quarter we grew our non QM book to $5.5 billion. We added $471 million new loans with an average coupon of 7% and an LTV of 68%. Although our portfolio has grown significantly in recent years along with the broader non QM industry, we remain highly focused on credit quality and continue to review every loan prior to acquisition. Credit performance in our non QM book remains strong with a default rate just above 4%. During the quarter we issued two securitizations. First, in early March we issued our 22nd non QM deal selling 326 million of bonds at an average coupon of 5.12%. The newly originated loans in that deal carry an average coupon above 7%. Later in March we re securitized over 400 million of seasoned non QM loans that had been in two deals we issued several years ago. This re lever unlocked approximately 40 million of cash and additional financing capacity. We expect this move to be accretive to our earnings moving forward. During the quarter we continue to grow our agency portfolio which now exceeds 3.5 billion in size. Our investments this quarter continue to focus on low payout spec pools after the escalation in the Middle East unleashed a broader sell off. Spreads widened by nearly 40 basis points from the tights and we took advantage of the volatility establishing a 300 million TVA position in late March. Since quarter end, spreads have tightened about 10 basis points. We expect to add to the portfolio depending on market conditions and excess investment capacity. Turning to Lima One, Lima originated $219 million of business purpose loans during the first quarter. This included $145 million of new transitional loans and $74 million of rental term loans. We continue to sell the longer duration rental loans at a premium to third party investors. This quarter we sold 81 million, generating $2.7 million of gain on sale income. Mortgage banking income at Lima rose to 7.7 million, an increase of 34% from the fourth quarter. During the quarter, Lima's monthly submissions and origination pipeline reached their highest level since 2024 with the recent opening of our wholesale channel and the relaunch of multifamily lending underway. We expect Lima's contribution to our earnings to grow from here. Lastly, touching on our credit performance, during the quarter, delinquencies rose in our residential loan portfolio to 7.8%. The increase was Driven primarily by elevated default activity in our legacy multifamily book, which as a reminder has been in runoff mode for the past two years. We've made further progress shrinking that multifamily book and resolving nonperforming loans since quarter end. And our delinquency rate has already fallen back to 7.3%. We look forward to recycling that capital back into income producing assets as we move through the year. In summary, Q1 was a productive quarter for our investment platform. We grew the portfolio, we executed two non QM securitizations, saw strong momentum at Lima 1 and continued to move our credit borrowings towards non mark to market financing. We believe the current environment positions us well for the year ahead. And with that we'll turn the call over to the operator for questions. OPERATOR Thank you. Ladies and gentlemen, at this time we would like to begin the Q and A session. If you'd like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, ask a question, press star one on your phone. We'll pause for a moment while we pull for questions. Your first question comes from Boaz George with kbw. Please state your question. Boaz George (Equity Analyst) Yes, good morning. Actually, how much capital was tied up in the remaining multifamily transitional portfolio at quarter end? And does your guidance on the convergence between the DE and the dividend sort of include the redeployment of that as well? Hey, Bo. Yes? To answer your second question first, the forward guidance on DE reconverging by the end of the year does include anticipated pay downs of some of the troubled assets and redeploying into our target assets. To answer your question on how much capital is locked in that multifamily book, it's just over 100 million. 101 million at the end of the quarter. Okay, great, thanks. And then on the expenses. So after the second quarter and that sort of noise is over with the depreciation, what's kind of a decent run rate for expenses going forward? Mike Roper (Chief Financial Officer) Yeah, so I think there's always a little bit of noise from quarter to quarter in our G&A for various reasons. So, you know, for example, this quarter we had about $4 million of accelerated non cash stock based comp charges, which is consistent with the first quarter of the past few years. And then the 2.4 of the accelerated depreciation. So if you sort of take this quarter and sort of normalize for those one timers and then it's about a penny a quarter for the, or a million bucks a quarter for the lease changes, I think that's a pretty good start for, you know, the run rate of gna. Boaz George (Equity Analyst) Okay. And each one Q will have that, that non cash comp piece that kind of bumps it up a little bit. Yeah, exactly. So the accounting rules require us to expense awards made to retirement eligible employees on the grant date instead of over the three year service period. Okay. Okay, great. Thank you. OPERATOR Your next question comes from Marissa Wilbos with ubs. Please state your question. Marissa Wilbos (Equity Analyst) Thank you. And good morning. On the agency MBS portfolio, how should we think about it? Is it ultimately something that you're going to rotate back into non QM and bpl or is this a strategic reweighting in the portfolio? Brian Wolfson (President and Chief Investment Officer) Yeah, I would think we'll most likely have some exposure, but the level of exposure will be wound down a bit depending on the attractiveness on the credit side. So as Lima does grow their production, you could expect that agency portfolio as we receive pay downs. And we could also sell bonds to help fund the growth at Lima One, you know, in addition to non QM purchases as well. Marissa Wilbos (Equity Analyst) Okay, great. And for Lima One, you know, what is its posture on AI and automation, you know, with servicing underwriting? I mean, is there a cost target that you're willing to share for 26, 27 there? Brian Wolfson (President and Chief Investment Officer) I know we were, you know, trying to reduce G and A there by sort of 10 plus percent and we were on, we're sort of on the way doing that. We had some efficiencies gained in Q1. We are utilizing AI down there, you know, utilizing the quad and Anthropic AI infrastructure to help accelerate those moves. You know, it's unclear at what point, you know, if there was an exact percentage of cost reductions. We can say AI will accrue to the business, but you know, it's one of those things that we're exploring and will be sort of ongoing benefits as we, as we utilize the AI code and agents down there. Marissa Wilbos (Equity Analyst) Okay, great. Thank you. OPERATOR Your next question comes from Matthew Erdner with Jones Trading. Please state your question. Matthew Erdner (Equity Analyst) Hey, good morning guys. Thanks for taking the question like you touched on the multifamily. Is there anything that specifically drove the delinquencies to increase quarter over quarter significantly? Brian Wolfson (President and Chief Investment Officer) Well, the whole portfolio is really, you know, the loan structure was the three year, was sort of two year extensions. So they're all really coming up on maturity and have been extended. So, you know, at this point there might be some where the borrower has been out trying to get refinancing and they realize they can't get the same amount of proceeds that they borrowed initially. So then they sort of call it a day and we have to deal with the property or work out a mutual resolution. But really I think it's the fact that they're sort of towards the end of life, you're going to see more delinquencies in certain cases where the borrower isn't able to refi or sell the property timely. Matthew Erdner (Equity Analyst) Got it. And then as it relates to that, should we expect you guys to kind of bring some of these properties in, stabilize and then sell, or are you guys going to look for them to kind of just hit the market, go out, see what they can get and then move on from the asset? Brian Wolfson (President and Chief Investment Officer) I mean, it's really a case by case basis. Some assets we will try to stabilize where it makes sense depending on the time and the capital required to do so. But in some instances it just makes sense to hit the bid and move on. Matthew Erdner (Equity Analyst) Got it. That's helpful. And then one last one for me as it relates to this, I appreciate you throwing in the adjustment there for should we expect a number kind of similar to 3Q 2Q of last year when you say you expect the losses to accelerate meaningfully at 2Q? Brian Wolfson (President and Chief Investment Officer) Yeah. So listen, as I said in my prepared remarks, it's really hard to have a reliable forecast of when exactly the losses are going to hit. Every foreclosure process is different, every borrower is different, and there can be some timing differences from quarter to quarter pretty easily. I think with that said in the immediate term, and we expect this primarily in the second quarter, we're expecting somewhere in in the high teens of credit losses on multifamily resolutions. Like I said, and part of the reason why our guidance is the back half of 2026 is one of these bad multifamily loans rolling through the next quarter can be a 3 or 4 cent swing in distributable earnings (DE) or let's say timing of that resolution. But you know, our base case is somewhere in the mid to high teens of credit losses for the second quarter before beginning to normalize in the back half of the year and into 27. Matthew Erdner (Equity Analyst) I appreciate the comments. That's helpful. OPERATOR Thank you. Mikhail Goberman (Equity Analyst) Your next question comes from Mikhail Goberman with Citizens jmp. Please state your question. Hey, good morning guys. Hope everybody's doing well. Craig Knudsen (Chief Executive Officer) Good morning. Mikhail Goberman (Equity Analyst) If I could just to clear up one thing. When you talk about distributable earnings converging with the 36 cent dividend in the latter half of the year, are you referring to the current 30 cent figure you printed in Q1 or the 34 cent prior realized credit losses figure? Mike Roper (Chief Financial Officer) Yeah, that's referring to our 30 cent DE or the DE with loss adjustments. Mikhail Goberman (Equity Analyst) Thank you for that. And sort of looking at the Lima 1 pipeline, what do you guys see the products, product mix of that going forward? Obviously a very good quarter to start the year. Do you guys see momentum picking up in Q2, Q3 and yeah, just kind of your thoughts on the product mix there going forward? Mike Roper (Chief Financial Officer) Yes. I mean, so right now the mix is really split between the transitional and the rentals as we sort of bring wholesale more online. We could see growth on the rental side, which could accelerate, but we're also seeing great growth on the transitional. So when we said pipeline, sort of the highest it's been in the past couple years, that's plus or minus 200 million at the moment. And you think about what pipeline converts to actual loans usually might be, say, 50 to 60 to 75% depending on coupon timing, what have you. So that might go to 100 million plus or minus per month in the near term and we still expect to grow from there. And you know, one thing we haven't really hit upon yet is multifamily is relaunched, but the pipeline and submissions, that's really not including the multifamily figures. So we still think it's, you know, it's sort of, we're in slow growth mode. We looked at a lot of loans, but we haven't really, we haven't closed anything yet. So, you know, the hope is that that really comes online, you know, maybe back half of the year. That could really help, you know, accelerate sort of the, the growth on top of what we're doing on the transitional and rental side. Mikhail Goberman (Equity Analyst) Thank you, guys. Thanks, Mikhail. Thank you. OPERATOR And just a reminder to the audience to ask a question. Press Star one on your phone. Your next question comes from Doug Harder with btig. Please state your question. Doug Harder (Equity Analyst) Thanks. On the transitional loans, if you could just remind us sort of at what level those are marked and just how we should think about resolutions and working through that book and any impact that should have on book value. Brian Wolfson (President and Chief Investment Officer) Yeah, I'll speak to the second half of your question first. We mark these loans every quarter to fair value. And that's not just what we would Expect in a credit loss situation. It's what we think we could sell the loan for. So, you know, there's not a huge market for delinquent transitional loans. So a loan rolling delinquent can have a pretty big impact on its fair value, even if, you know, we think the LTV is good enough to be piffed on that asset. As far as the, you know, the mark level, you know, I think, as I kind of said a second ago, it's a story of, you know, the current loans versus the delinquent loans. You know, the current loans with their, you know, call it 10, 11% coupon tend to be marked just slightly below par. Whereas the delinquent loans, it's really on a loan by loan basis. I think the weighted average for the portfolio, or I should say the total discount for the portfolio in multifamily is just over 50 million. And then single family is probably closer to about 15 to 20 million dollars discount. So I mean, I guess so. It just depends on the ultimate resolution. But you feel like on the delinquent loans you've been fairly conservative. Doug Harder (Equity Analyst) Yes, for sure. You know, we've always taken great pride in our marks process and have extreme Brian Wolfson (President and Chief Investment Officer) confidence in the level of our marks. I think we've said over the last few quarters that as we've resolved some of these delinquent loans were, you know, generally not generally, almost, almost entirely generating gains. You know, this quarter we resolved another. I think it's 160 million of delinquent loans and the P&L versus our prior mark on those assets generated a gain of about 14 million this quarter. So, you know, again, all of the empirical evidence, including where we've executed loan sales in prior quarters, gives us a lot of confidence in where we have these assets marked. Doug Harder (Equity Analyst) Thank you. Thanks, Doug. OPERATOR Thank you. And there are no further questions at this time. So I'll hand it back to Craig Knudsen for closing remarks. Thank you. Craig Knudsen (Chief Executive Officer) All right, well, thanks everyone for your interest in MFA Financial and we look forward to speaking with you again in August when we announce second quarter results. Thank you. Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.