Participants

Harold Schwartz; Senior Vice President, General Counsel, Secretary; MFA Financial Inc

Craig Knutson; President, Chief Executive Officer, Director; MFA Financial Inc

Michael Roper; Chief Financial Officer, Senior Vice President; MFA Financial Inc

Bryan Wulfsohn; President & Chief Investment Officer; MFA Financial Inc

Bose George; Analyst; Keefe, Bruyette & Woods, Inc.

Corey Johnson; Analyst; UBS Securities LLC

Mikhail Goberman; Analyst; Citizens JMP Securities

Eric Hagen; Analyst; BTIG

Presentation

Operator

Greetings and welcome to the MSA Financial fourth-quarter 2024 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.
It's now my pleasure to turn over to Hal Schwartz, General Counsel. Please go ahead.

Harold Schwartz

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 reflects 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 the MFA's annual report on Form 10-K for the year end of December 31, 2023, 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 fourth-quarter 2024 financial results.
Thank you for your time. I would now like to turn this call over to MFA's CEO, Craig Knutson.

Craig Knutson

Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial's fourth-quarter 2024 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 fourth-quarter market environment, and then review 2024 highlights. Following my prepared remarks, 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.
Fixed income markets reversed direction in the fourth quarter of 2024, after rallying strongly at the end of the third quarter following the Fed's long-awaited rate cut of 50 basis points on September 18. Despite two additional 25 basis point rate reductions in November and December, yields ground steadily higher during the fourth quarter, with only a short-lived rally after the election in November. Thankfully, the yield curve steepened in the fourth quarter, with to-year yields rising 60 basis points, while 10-year rates rose nearly 80 basis points.
The economy has remained resilient. The labor market continues to show strength. And inflation, while down materially from the highs, still exhibits a persistent stickiness. A shift in tone from the Fed in the face of this data, together with market concerns about deficits and anticipated Treasury supply, pushed rates higher in the fourth quarter.
This sell-off in rates led to a modest economic book value decline for MFA in Q4 of a little less than 4%. We remained active during the quarter, adding over $700 million in loans, non-QM and BPL, and over $450 million of agencies. We executed three securitizations in Q4 on over $1 billion of loans, including RTL, non-QM, and NPL loans. On a sad note, we mourn the sudden and unexpected passing of board member Frank Ulrich on December 2.
Our management team and board members will miss Frank's valuable insights, sage advice, and quick wit. He was a trusted colleague and a dear friend of mine for over 40 years. Our deepest sympathies are with his wife Mary and their large family.
For the year 2024, we grew our assets from $10.8 billion to $11.4 billion, including an increase in our agency book of over $800 million, ending the year at $1.4 billion.
We believe that this agency position provides an attractive return profile while increasing our liquidity and enabling us to easily complement the volume and timing of our loan acquisitions, which can vary month to month and quarter to quarter.
Our recourse leverage remained at 1.7 times at year end, same as at the end of 2023. This is primarily due to our reliance on securitization, which provides fixed and term non-recourse financing. On page 21 in the appendix of our earnings deck, we show all of our outstanding securitizations, including outstanding amounts, weighted average coupon on sold bonds, and the callability of each deal. We believe that this is an underappreciated optionality that we have to call these securitizations when it makes sense to unlock additional liquidity and increase ROEs.
We also issued two $25 par bonds early in 2024, totaling $190 million at an average coupon of just under 9%. These are five-year bonds, but they're callable at par after two years, specifically February and August of 2026. We also paid $1.40 in common dividends in 2024, which is the same as 2023, and the tax treatment of a substantial portion of these dividends is somewhat unique, and we believe confers a material benefit to shareholders, which Mike Roper will explain in more detail.
Finally, as we discussed on our third-quarter earnings call in November, we affected some management changes both at Lima One and at MFA during 2024, and we are excited and confident in our leadership team for 2025 and the years ahead.
And I'll now turn the call over to Mike Roper to talk about financial results.

Michael Roper

Thanks, Craig, and good morning. At December 31, GAAP book value was $13.39 per share, and economic book value was $13.93 per share; a decrease of approximately 3.7% from $14.46 at the end of September.
We delivered a total economic return of negative 1.2% for the quarter, and positive 5.2% for the year. As Craig mentioned, we again declared dividends of $0.35 per share for the fourth quarter and $1.40 per share for the full year. We were happy to report in late January that approximately 40% of our 2024 common dividends were treated as a non-taxable return of capital to our shareholders.
This was the fifth straight year that a substantial portion of our common dividends were treated as non-taxable distributions. This favorable tax treatment substantially increases the after-tax dividend yield realized by holders of our common stock.
At December 31, we had a fully reserved remaining deferred tax asset, totaling $62.7 million, which was carried at zero on our balance sheet. This DTA offers significant protection from future tax obligations, which allows us additional flexibility to efficiently structure transactions to minimize the total tax burden on our shareholders.
Though there can be no assurances about the tax treatment of potential future dividend payments, we believe that this favorable tax treatment has been an often underappreciated benefit of owning MFA's common stock.
Switching back to our quarterly results. For the fourth quarter, MFA generated GAAP earnings of $5.9 million or a loss of $0.02 per basic common share. Our debt earnings were negatively impacted by higher rates across the yield curve. Distributable earnings for the fourth quarter were $40.8 million or $0.39 for basic common share, up from $0.37 in the third quarter.
The quarterly increase in our DE was driven primarily by a $0.04 reduction in realized credit losses on our fair value loans, a $0.04 reduction in our provision for income taxes, and an offsetting $0.05 reduction in the carry earned on our interest rate swaps. Swap carry in the quarter was lower primarily as a result of lower average SOFR rates, following the recent series of cuts to the federal funds rate.
Additionally, near the end of the quarter, interest rate swaps with a notional value of $450 million and a fixed pay rate of approximately 90 basis points reached their maturity. As we highlight on slide 8 of the presentation, we have an additional $550 million of swaps that will mature in the first quarter and a further $125 million that will mature in the second quarter. Collectively, this $ 1.1 billion notional of expiring or expired swaps contributed approximately $0.09 to our fourth-quarter distributable earnings.
Based on current SOFR rates, we expect that this same cohort of swaps will contribute approximately $0.02 to our first quarter DE, followed by an insignificant impact in the second quarter. Although the expiration of these swaps will reduce our reported distributable earnings and increase our reported cost of funds, we feel better about the fundamental long-term earnings power of our portfolio today than we have in quite some time.
The positively sloped yield curve, additional rate cuts expected, increasingly accommodative financing spreads, our significant liquidity and strong housing fundamentals should all serve as tailwinds for our business moving forward.
While DE is one of several factors that our Board considers in setting dividend policy, we believe that the earnings power of the portfolio remains strong today, and the aforementioned macroeconomic tailwinds are far more indicative of the earnings power of our portfolio than the impact of the expiration of these legacy interest rate swaps.
Finally, subsequent to quarter end, we estimate that our economic book value is effectively unchanged since the end of the year.
I'd now like to turn the call over to Bryan, who will talk through our portfolio highlights and the performance of Lima One.

Bryan Wulfsohn

Thanks, Mike. We continue to have success adding to our $10.5 billion dollar investment portfolio, acquiring over $1.2 billion between loans and securities in the fourth quarter. $470 million of the additions were non-QM loans carrying a coupon of 7.8% and an LTV of 67%. The majority of those loans were acquired through our bulk channel.
We were active again purchasing agency securities, growing the portfolio by almost 50% to $1.4 billion at the end of the year. MBS acquired over the quarter were no-to-low pay up 5.5% at modest discounts to par. We believe spreads and carry in agency MBS are attractive in addition to providing liquidity benefits to our portfolio.
Lima ONE originated $235 million of loans in the quarter with an average coupon of 9.5% and an LTV of 67%. For the total of 2024, Lima originated $1.4 billion in business purpose loans. Although origination may not have been as high as we would have liked, We have high confidence in a team of people down at Lima One and believe.
The process and technological improvements being implemented will show growth throughout 2025. We continue to sell newly originated SFR loans from Lima One. Over the quarter, we sold $111 million, contributing $3.9 million to mortgage banking income. In addition, we sold $141 million of seasoned low coupon unsecuritized non-QM loans. The sale combined with new additions increased Our Non-QM portfolio coupon 25 basis points to 6.65%.
On the financing front, we finished the year strong, issuing three securitizations in the fourth quarter backed by over $1 billion UPB of loans. Our legacy RPL NPL portfolio is now 98% securitized after our issuance of a nonrated NPL deal. Important for MFA and Lima One, we were able to issue our first rated RTL securitization, issuing over $200 million of bonds at a coupon just under 6%. The rated nature of the transaction allows us to lower our cost of funds significantly from our last nonrated RTL deal.
The senior tranche in our rated deal traded 75 basis points tighter than our last nonrated transaction. And in December, we completed our 16th non-QM securitization backed by $380 million of loans.
After these three transactions, over three-quarters of our loan portfolio is financed through securitization. Our funding profile has undergone a gradual yet significant transformation, making it much more resilient compared to previous years.
We reduced our net asset duration modestly in the fourth quarter to 1.02 from 1.16 a quarter ago. As a reminder, we primarily hedge our interest rate exposure through two key tools, issuing fixed rate securitizations and utilizing interest rate swaps. Currently, we have $5.9 billion in outstanding bonds from these securitizations and $3.3 billion notional value of interest rate swaps as of the end of the year.
Over the next two quarters, $675 million of these swaps will be rolling off. And as we continue to expand our portfolio with additional agencies, you can anticipate heightened swap activity and an increased utilization of longer-dated swaps to ensure our portfolio remains balanced.
Moving to our credit performance. 60-plus day delinquencies for our entire portfolio rose to 7.5% from 6.7% a quarter ago. While we have observed an increase in portfolio delinquencies, our low LTV ratios have played an important role in mitigating potential losses. The combination of our experienced asset management team and a low portfolio of LTV gives us confidence that even with elevated delinquencies, losses can be mitigated.
And with that, we'll turn the call over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Bose George, KBW.

Bose George

Yeah, good morning. Can you discuss where you see the current economic return of the portfolio? Does that match the EAD this quarter? And also just from your comments on the EAD, just wanted to clarify, so with the swaps rolling off, does that -- is that -- the comment that you made, does that go down by a couple of cents in the first quarter based on that?

Michael Roper

Hey Bose, yeah, thanks for the question. So I think the first one about the economic return, certainly, if you look at the -- like the straight DE ROE, you're in the low-teens just based on where it's been. But I think we said a couple of times on these earnings calls that we like to think about the economic return, meaning if you were effectively to restrike the assets, restrike the liabilities and the hedges and measure what that ROE is, right in that 10%-ish range. And I think when we think about the dividend, it aligns really nicely with that economic earnings power.
Thinking about your second question, the numbers I gave in my script, we had $0.09 in the fourth quarter, and we expect those swaps to contribute about $0.02 for the first quarter before running off. Does that answer your question?

Bose George

Yes. So just the impact on the DE is the difference between the $0.09 and the $0.02 for the first quarter. Is that right? Just --

Harold Schwartz

Exactly.

Bose George

Okay. And then --

Craig Knutson

And Bose, I'll just mention in terms of DE, I think, we felt that the DE was rather important, particularly when the Fed was in the middle of a raising cycle, where they raised rates by 500 basis points. Because of using fair value accounting, there's just so much noise in the GAAP earnings due to fair value changes that I think we rely on another measure as a more constant. I think in a different rate environment, as Mike said, I think -- we think -- we consider a lot of things.
And obviously, the Board considers a lot of things, but I think the economic earnings power of the portfolio when we say that we strike everything at market, essentially, that's what we do in our book value, right? So our book value is mark-to-market. And so that's, I think, more of how we think about it than just being -- just married to a particular DE number.

Bose George

Yeah, no, that makes sense. And yes, so just to clarify, so the economic return is not declining by the difference between the $0.09 and the $0.02, it's just the DE is declining the economic return?

Michael Roper

Exactly. That's exactly right, Bose. Like the swaps, they're already in book value, right? So the roll-off of those swaps doesn't impact anything from an economic perspective.

Bose George

Okay. That's great. Thanks. And then just one more. The Agency MBS that you guys are putting on, what's the return on that -- those assets?

Bryan Wulfsohn

Yeah, we see hedge return in the mid-teens.

Bose George

Okay, great. Thanks.

Operator

Douglas Harter, UBS.

Corey Johnson

This is actually Corey Johnson on for Doug. I just wanted to ask what was behind the increase in the delinquencies for single-family and multifamily transitional loans? And why are those delinquencies higher than, I guess, the other portfolios?

Bryan Wulfsohn

Yeah, I mean delinquencies are higher in those portfolios because generally, as you look across the -- our other asset classes that we invest in, those are the riskiest parts, right? So when you're lending against either fix and flip or ground up or bridge value-add type projects, there's just additional risk. And then with the shorter-term nature of those loans, various things can occur in terms of loans reaching maturity, and a home may not have been sold yet, so that loan can enter delinquency if not extended.
So there's various things that can happen, but it's not sort of, I guess, unexpected that we're seeing higher levels of delinquency. We'd always like them to be lower, but it's sort of the nature of the asset class comes along with it.

Corey Johnson

Got it. And then what has like the loss experienced on those portfolios? And what type of losses or delinquencies are kind of assumed at the time of underwriting?

Bryan Wulfsohn

Yeah, I mean we expect -- in terms of like underwritten losses, when we make the loans, we expect somewhere between 50 and 100 basis points of loss on average. If you look back historically, given how much HPA we have had, we look at sort of a net losses type number where you offset that with other delinquent interest that's collected and extension fees collected.
That number historically has been very low, close to de minimis. Now with HPA flattening out in certain areas, we do expect those loss numbers to trend towards our expectation of 50 to 100 basis points. So that's what we do expect going forward.

Corey Johnson

Got it, thank you. Appreciate it.

Operator

Mikhail Goberman, Citizens

Mikhail Goberman

Hey, good morning, guys. Thanks for taking the questions. If I could just follow up on Lima One perhaps, how do you guys see things going? What's your outlook for Lima One for the rest of the year? And what product type loans are you currently focused on? It seems like, in the fourth quarter, most was single-family transition that continue -- is going to continue to be the focus going forward?

Bryan Wulfsohn

Yeah, it's really -- single-family continues to be the focus there. Transitional and term rental, we're doing a lot of things there. We've hired additional salespeople to help support growth. We've moved -- we're gradually moving into the wholesale channel to grow the rental loan originations, which is coming online now. So we do see prospects for growth in 2025.
In terms of an exact number for 2025, I wouldn't be surprised if it's somewhere around $1.5 billion, but trending upwards towards the end of the year. We expect the first quarter to be somewhat flattish versus the fourth quarter.

Mikhail Goberman

Got you. And is the management team from that unit now reporting directly to you, Bryan?

Bryan Wulfsohn

Yeah, it reports to MFA collectively, myself, Craig, Lori Samuels as well.

Mikhail Goberman

Great, thank you for that color. And could I squeeze in a question about current book value maybe?

Michael Roper

Yeah, we mentioned in the prepared remarks, we think it's effectively flat from the end of the year. And that's net of the dividend accrual.

Mikhail Goberman

Got it. Thank you guys. Best of luck going forward.

Michael Roper

Thank you. Thanks for the questions.

Operator

(Operator Instructions) Eric Hagen, BTIG

Eric Hagen

Hey, thanks, appreciate you guys. I've got a couple on non-QM, I think I'll probably just ask them together. And then going back to the option to call and resecuritize the seasoned deals, I realize the cost of funds would go up relative to the cost on those old deals. But on an economic basis, I mean, don't you think the liquidity benefits in releasing liquidity, resetting the leverage, maybe override that to a large degree?
And then like as an adjoining question, I mean, what's the right way to think about a pickup in prepays for the non-QM portfolio here? I mean both in terms of the economic return on the back book and the opportunity to like recapture those loans in the portfolio going forward? And what the return would look like there?

Craig Knutson

So Eric, I'll take the, call it, the securitizations question and then have Bryan talk about non-QM. I think, yes, if you look at some of the coupons on some of the AAAs that we sold back in 2021, I think there were some deals where those coupons were less than 1%. So clearly, a new securitization would be at a higher rate. But you have to take the whole deal holistically because there may be very little bit of that A1 from the '21 deal that's left outstanding right now.
And so the ability to substantially increase the borrowing because those deals delever as time goes on can be profound from an ROE standpoint. And trust me, we run the math on those deals. It's a fairly simple or somewhat complicated algebra problem. But it's -- at the end of the day, it's pretty straightforward.

Bryan Wulfsohn

And as it relates to prepays, so they did pick up over the quarter. And there's a couple of nuanced things as it relates to that. For prepays increasing for loans that we currently hold at a discount, obviously, that is a positive for book value because that we get cash for something we had marked at, say, $0.96 on the dollar.
But as it relates to DE when we get those prepays because those loans were purchased at a premium years ago, there is an amortization of that premium upon a prepayment. So that would incrementally lower DE. But again, we view that as a positive economically for the company.

Eric Hagen

Yeah. Okay. Good stuff. Good answers. I appreciate. Last one, I mean, can you just share the level of unfunded commitments in the Lima One portfolio, and over what time frame you might expect those commitments to get called up?

Michael Roper

Thank you Eric, I'm not sure we have that number handy. It's in the -- it will be in the Ks, it's probably in that $600 million range, I'm guesstimating. And in terms of when we expect to fund it, let's say, over the next year or so. And just to keep in mind, Eric, most of those loans are in revolving securitization. So it effectively self funds, right? Like those paydowns fund those draws. And obviously, on our warehouse lines, our lenders fund those draws for us as they occur.

Eric Hagen

Yeah, good a reminder about the securitization structure. Thank you guys. I appreciate you.

Craig Knutson

Thank you.

Operator

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

Craig Knutson

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

Operator

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.