MFA Financial(MFA) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a GAAP loss of $108.6 million in Q2 2022, primarily due to unrealized losses on residential whole loans at fair value [29] - Distributable earnings were $47.2 million or $0.46 per share, exceeding the common dividend of $0.44 [46] - Book value declined by 8% for both GAAP and economic book value, standing at $1.42 and $1.56 respectively [28] - Leverage increased from 3.1 times to 3.3 times, primarily due to book value decline [29] Business Line Data and Key Metrics Changes - The acquisition pace slowed, with nearly 70% of loan acquisitions coming from Lima One, resulting in a slight decrease in the overall loan portfolio [30] - Lima One originated approximately $600 million in loans during the quarter, with a current origination pipeline of about $450 million at a weighted average coupon of approximately 8% [26][67] - The company executed three securitizations in the quarter and two more in July, totaling nearly $4 billion in securitized debt [31] Market Data and Key Metrics Changes - The S&P 500 Index was down over 16% in Q2 2022, marking its worst first half in over 50 years [12] - Bond markets experienced a selloff, with indices generally down about 10% for the first half of the year [13] - Mortgage spreads widened materially, with high yield spreads increasing by nearly 300 basis points year-to-date [13] Company Strategy and Development Direction - The company has prioritized liquidity, ending both Q1 and Q2 with close to $400 million in cash to cushion against market volatility [22] - The strategy includes managing interest rate risk through interest rate swaps and securitizations, with over 95% of asset-based financing now fixed [17] - The company aims to take advantage of opportunities arising from market conditions while maintaining a cautious approach to acquisitions [22][50] Management's Comments on Operating Environment and Future Outlook - Management noted that the investment environment has been exceptionally challenging, with high inflation and aggressive Fed tightening impacting financial markets [12][14] - Future home price appreciation is expected to slow, but significant declines are not anticipated due to strong demand factors still in play [25] - The company remains cautious over the intermediate term as economic prospects become increasingly uncertain [50] Other Important Information - The company liquidated $40 million of REO properties in Q2, posting a net gain of $7 million [32] - The CECL provision for credit losses was $30.4 million, primarily due to a reserve adjustment for a mortgage originator that ceased operations [39] - Serious delinquencies in the non-QM portfolio decreased to 2.6%, indicating strong credit performance [53] Q&A Session Summary Question: What is the normalized level for leverage and what are the plans for capital deployment? - Management indicated that leverage typically falls in the low-to-mid-3s range and is influenced by asset purchases and financing methods [85][86] Question: Can you provide a quarter-to-date book value update? - Management estimated that book value is likely up about 1% since June 30 [87] Question: Can you comment on the relationship with warehouse lenders? - Management reported strong relationships with lenders, indicating no issues with liquidity or margin calls, and noted a recourse leverage of 1.8 times [99][100] Question: How do you view the profitability of Lima One in the current market? - Management emphasized the long-term potential of Lima One to generate attractive assets, with a focus on portfolio growth rather than quarterly profitability [124][126]