Earnings call transcript: MFA Financial Q1 2025 shows mixed results

MFA Financial Inc. reported its Q1 2025 earnings with a mixed performance, missing EPS forecasts but exceeding revenue expectations. The company posted an EPS of $0.29, below the anticipated $0.35, while revenue reached $81.9 million, surpassing the forecast of $70.3 million. Despite the revenue beat, the stock saw a pre-market decline of 4.44%, reflecting investor concerns over the earnings per share shortfall. According to InvestingPro analysis, MFA currently trades below its Fair Value, suggesting potential upside opportunity. Two key InvestingPro metrics stand out: the company’s impressive 14.5% dividend yield and its attractive P/E ratio of 11.8x.

Key Takeaways

• MFA Financial missed EPS expectations by $0.06 but exceeded revenue forecasts by $11.6 million.
• The stock price dropped 4.44% in pre-market trading following the earnings announcement.
• The company declared an increased dividend of $0.36 per share.
• Net interest income grew to $57.5 million, supporting revenue growth.
• The economic book value saw a slight decline of less than 1% since December.

Company Performance

MFA Financial’s overall performance in Q1 2025 was characterized by strong revenue growth driven by higher-yielding assets and reduced interest expenses. The EPS miss highlights ongoing challenges in managing profitability. The company continues to maintain a diversified portfolio, with significant contributions from its Non-QM and business purpose lending markets. InvestingPro data reveals the company maintains strong financial health with a GOOD overall score, and has consistently paid dividends for 28 consecutive years. For deeper insights into MFA’s financial health and valuation metrics, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.

Financial Highlights

• Revenue: $81.9 million, up from the forecasted $70.3 million.
• Earnings per share: $0.29, below the forecasted $0.35.
• Net interest income: $57.5 million.
• GAAP earnings: $41.2 million ($0.32 per share).
• Economic book value: $13.84 per share, down slightly since December.

Earnings vs. Forecast

MFA Financial’s Q1 2025 earnings per share of $0.29 fell short of the forecasted $0.35, marking a miss of approximately 17.1%. In contrast, the company significantly outperformed on revenue, with actual figures of $81.9 million exceeding expectations by 16.5%. This divergence between EPS and revenue highlights mixed investor sentiment.

Market Reaction

Following the earnings announcement, MFA Financial’s stock experienced a 4.44% decline, dropping $0.44 from the previous close of $9.91. This negative market reaction reflects concerns over the EPS miss, despite the positive revenue performance. The stock’s movement is notable, especially given its position within a 52-week range of $7.85 to $13.45. InvestingPro analysis indicates the stock’s high beta of 1.77 contributes to its volatility, while its price-to-book ratio of 0.55 suggests the stock may be undervalued relative to its assets.

Outlook & Guidance

Looking forward, MFA Financial anticipates continued volatility in distributable earnings but remains optimistic about its diversified portfolio. The company is targeting mid-to-high teen ROEs across asset classes and expects potential growth in its agency MBS portfolio to $2 billion. Economic book value is estimated to have decreased by 2-4% since the quarter-end.

Executive Commentary

CEO Craig Knutson emphasized the company’s strategic positioning, stating, "Our investment portfolio, balance sheet composition, and risk management approach are positioned to deliver results across multiple scenarios." CFO Mike Roper highlighted opportunities for asset acquisition, noting, "We continue to see ample opportunities to add our target assets at mid to high teen ROEs."

Risks and Challenges

• Continued volatility in distributable earnings could impact future profitability.
• Economic book value has decreased slightly, indicating potential valuation concerns.
• Market volatility and credit spread fluctuations pose ongoing risks.
• The impact of swap expirations is expected to affect Q2 earnings.

Q&A

During the earnings call, analysts inquired about the impact of swap expirations on future earnings and the progress in resolving challenged loans in the multifamily transitional portfolio. Executives reassured that loan resolutions are tracking close to existing marks, and demand for business purpose loans remains strong.

Full transcript - MFA Financial Inc (MFA) Q1 2025:

Conference Operator: Greetings, and welcome to the MFA Financial First Quarter twenty twenty five Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Hal Schwartz, General Counsel.

Thank you. You may begin.

Hal Schwartz, General Counsel, MFA Financial: 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 ks for the year ended 12/31/2024, 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 first quarter twenty twenty five financial results. Thank you for your time. I would now like to turn this call over to MFA’s CEO, Craig Knutson.

Craig Knutson, CEO, MFA Financial: Thank you, Hal. Good morning, everyone, and thank you for joining us for MFA Financial’s first quarter twenty twenty five earnings call. With me today are Brian Wilson, 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 first 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 Brian, who will review our portfolio, financing, Lima One and risk management before we open up the call for questions.

I must admit, it feels a little strange to talk about the first quarter of twenty twenty five given the market turmoil that ensued on and after April 2. But despite the fact that it is not possible to unsee market development since April 2, it is instructive in the context of first quarter financial results to recall the market environment in which these results were achieved. And I promise that we’ll also address market developments since quarter end later in this call. Fixed income markets were generally constructive throughout the first quarter of twenty twenty five. The ten year yield peaked at 4.79 on January 14 and rallied to close the quarter at 4.2.

Credit spreads tightened somewhat over January and February, but widened modestly in March as the market began to anticipate and focus on the upcoming trade policy announcements. MFA’s portfolio delivered a total economic return of 1.9% for the first quarter, which includes our first quarter dividend that we increased to $0.36 This dividend increase reflects what we believe is the earnings power of our portfolio, which Mike will explain more fully in his prepared remarks. Our economic book value was down very modestly in the first quarter by 0.6%. We were active in the quarter sourcing $875,000,000 of loans and securities across our target asset classes. These included $383,000,000 of non QM loans, $268,000,000 of agency MBS and $223,000,000 of business purpose loan funded originations and draws on existing loans at Lima One.

We issued our seventeenth non QM securitization in early March and we also sold $70,000,000 of newly originated SFR loans at attractive levels. Our overall leverage at the end of the quarter was 5.1 times and our recourse leverage was 1.8 times, both only slightly higher than at year end by one tenth of a turn each. The real fund started in April with the tariff circus kicking off on April 2. While the ultimate U. S.

Trade policy will undoubtedly take months to be determined, the day to day impacts have been a roller coaster for financial markets. Expectations for inflation, the economy, employment, corporate earnings, consumer confidence, Fed action and even housing are all considerably more uncertain. As is always the case, increased uncertainty and volatility are never friendly for fixed income and particularly for mortgages. As we reflect on this volatility and uncertainty, however, I’d like to highlight the benefits of MFA’s investment strategy, risk management and financing rigor. Since the onset of market disruptions and the heightened market volatility following Liberation Day, MFA has experienced total margin calls of just under $20,000,000 which was satisfied with $18,500,000 of cash and $1,300,000 of unpledged agency bonds.

At the height of the impact of the volatility, when the ten year treasury sold off by nearly 20 basis points on April 7, we were net receivers of margin as the cash received on our swaps exceeded the collateral posted for repo margin calls. On the other hand, during the largest rally in rates that we saw since April 2, with the ten year down nearly 12 basis points on April 14, we posted a total of just $1,500,000 of net margin. There’s no better testament to the effectiveness of our strategic emphasis on securitization, non mark to market financing and the diversification into agency MBS that we initiated in December of twenty twenty two. At March 31, ’80 ’3 percent of our loan financing and 70% of all of our liabilities were non mark to market in nature, with more than half of the mark to market financing coming from extremely liquid agency MBS. Although recent volatility has led to modest credit spread widening and higher rates, securitization markets are seeing strong demand and deals continue to be oversubscribed.

Even on some of the most volatile trading sessions, non QM securitizations continue to price and clear in an orderly fashion. MFA’s investment portfolio, balance sheet composition and risk management approach are positioned to deliver results across multiple scenarios and weather unexpected market volatility and uncertainty. I’ll now turn the call over to Mike Roper to discuss financial results. Thanks, Craig,

Mike Roper, CFO, MFA Financial: and good morning. At March 31, GAAP book value was $13.28 per share and economic book value was $13.84 per share, each down less than 1% since the December. For the first quarter, MFA generated GAAP earnings of $41,200,000 or $0.32 per basic common share. Our strong GAAP earnings were driven by growth in our net interest income to $57,500,000 as well as modest net mark to market gains. The growth in net interest income was driven by our additions of higher yielding assets over the last several quarters and lower interest expense, primarily due to rate cuts in November and December and lower day count for our repo liabilities during the month of February.

Lima ’1 contributed $5,400,000 of mortgage banking income for the quarter, a decline from $8,500,000 in the fourth quarter, driven by modestly lower origination volumes and a decline in gains on sales of single family rental loans as sales volume declined from $111,000,000 in the fourth quarter to $70,000,000 in the first quarter. As Craig mentioned earlier, MFA declared an increased dividend of $0.36 per common share for the first quarter. The increase in our dividend is reflective of our continuing and increasing confidence in the long term earnings power of our portfolio. This confidence is informed by our success adding high yielding assets and the resultant growth in our net interest income, the increasingly positive slope of the yield curve, resilient housing fundamentals, and wider spreads available on assets today. We continue to see ample opportunities to add our target assets at mid to high teen ROEs, which we believe is one of the best proxies for the current earnings power of our portfolio.

Distributable earnings for the quarter were $30,500,000 or $0.29 per basic common share, down from $0.39 in the fourth quarter. The decrease in our distributable earnings was primarily due to the expiration of $1,000,000,000 notional of interest rate swaps over the course of the fourth quarter of twenty twenty four and the first quarter of twenty twenty five. DE was also impacted by the decline in Lima One’s mortgage banking income as well as increased credit related charges for the quarter associated with resolutions of certain non performing assets. As we continue to work through some of the challenged assets in our transitional loan portfolio, we expect to see some short term increases in realized credit losses in the quarters ahead as many of these troubled assets are approaching resolution via foreclosure. As a result, we expect that our distributable earnings will be increasingly volatile and less indicative of the current earnings power of our portfolio over the next several quarters.

Importantly, we believe that these headwinds are short term in nature and economically, we emphasize that this is old news. Our expected credit exposure was already recorded in our book value and in our GAAP earnings as unrealized losses several quarters and in some cases several years ago, so we don’t expect these resolutions to have any impact on our book value or on our GAAP results as the impact is limited to the reporting of our distributable earnings. As we continue to resolve these challenged loans and redeploy the capital into higher yielding performing assets, we believe that our DE will begin to converge with our dividend over the back half of the next twelve months. Finally, subsequent to quarter end, we estimate that our economic book value is down approximately 2% to 4% since the end of the first quarter, primarily as a result of wider spreads. I’d now like to turn the call over to Brian, who

Brian Wilson, President and Chief Investment Officer, MFA Financial: will discuss our investment activities in the first quarter. Thanks, Mike. Q1 marked another quarter for growth in our investment portfolio. We focused on our target asset classes, acquiring $875,000,000 of loans and securities, which grew the portfolio net of runoff and sales to $10,700,000,000 from $10,500,000,000 at year end. Our current focus remains in three strategies: NonQM, BPL and Agency MBS.

We sourced $383,000,000 of NonQM loans during the quarter. Those loans carry an average coupon of 7.8% and a weighted average LTV of 65%. Underwriting standards have remained prudent and mid to high double digit ROEs are achievable with securitization financing. We issued our seventeenth securitization of non QM loans in March, selling $283,000,000 of bonds at an average coupon of 5.58%. Since quarter end, we’ve seen AAA spreads widen from 135 to as much as 175.

But it’s important to note that throughout the broader market disruption, liquidity has remained in the non QM space as market participants have been eager to participate in new offerings at wider spread levels. In the last few weeks, we’ve seen AAAs tighten to 160 and that trend could continue if the macro backdrop continues to stabilize. We again added to our Agency MBS portfolio during the quarter, growing our position to $1,600,000,000 Our focus there continues to be on low pay up 5.5s purchased at modest discounts to par. We plan to continue to grow this segment of our portfolio as long as spreads remain attractive. Research currently shows mutual funds are already overweight agencies, which tells us that spreads could persist at these levels for some time given the backdrop of rate volatility.

That said, there are potential catalysts for agency spread tightening, particularly if banks receive leverage ratio relief and are able to add more aggressively or if the Fed elects to adjust its balance sheet policy. We estimate our net duration dropped slightly in the first quarter to 0.96 from 1.02 at year end. As a reminder, we primarily hedge our interest rate exposure by issuing fixed rate securitized debt and by utilizing interest rate swaps. We had $5,900,000,000 outstanding bonds from these securitizations and 3,400,000,000 notional value of swaps at quarter end. If we continue to add agencies, expect to see our net asset duration drop again as we maintain so we want to maintain a similar level of exposure of our equity to interest rate changes given the higher leverage associated with agencies.

Turning to Lima One. Lima originated $213,000,000 of business purpose loans during the quarter with an average coupon of 9.7% and LTV of 65%. We continue to sell newly originated rental loans. During the first quarter, we sold $70,000,000 of these loans, which contributed $2,000,000 of mortgage banking income. Overall origination volume was down slightly from Q4 as the first few months of the year are historically slower.

We’ve taken action down at Lima to improve volume growth without sacrificing quality. We hired nine loan officers in Q1 and seven so far in Q2. We continue to attract both sales and underwriting talent to Lima and expect our efforts to bear fruit in the second half of the year. Moving to our credit performance. Sixty plus day delinquencies for our entire loan portfolio remained stable at 7.5.

Delinquency rates on our non QM, SFR, legacy RPL, NPL books were essentially unchanged from year end and LTVs remain exceptionally low. The delinquency rates did jump in our single family transitional portfolio, but that’s because repayments outpaced origination volume causing the denominator to shrink. Actual delinquent loans rose by only $2,000,000 on our $1,000,000,000 portfolio. Finally, we continue to make progress in our multifamily book resolving $35,000,000 of previously delinquent loans in addition to receiving over $100,000,000 of repayments in the quarter. And with that, we’ll turn the call over to the operator for questions.

Conference Operator: Thank you. And at this time, we’ll conduct our question and answer session. And our first question comes from Bose George with KBW. Please state your question.

Bose George, Analyst, KBW: Hey guys, good morning. In terms of the impact from the swap, the runoff, can you talk about the second quarter versus first quarter, what the incremental impact is going to be?

Mike Roper, CFO, MFA Financial: Bose. Thanks for the question. Yes, the impact for the second quarter is kind of in line with what we said for the fourth quarter for that remaining runoff. We expect that the impact of that, the expirations from the first quarter, and I think there’s another $100,000,000 that expires in the second quarter. It’s going to be about $02 in terms of the Q1 versus Q2 impact.

Bose George, Analyst, KBW: Okay, great. And then you noted the impact from the loans that are going to work its way through as well. Is there any way to kind of for us to quantify that just in terms of modeling or is it just going to be kind of random in terms of when it actually flows through?

Mike Roper, CFO, MFA Financial: Yes. I think unfortunately, timing is just going be a little bit difficult, right? We’re sort of at the mercy of the courts in some states and the borrowers and a lot of other factors. I mean, I think it’s safe to say, thinking about the multifamily delinquency, the overwhelming majority of that is in foreclosure and in many states it can be very quick, but there can be tactics from borrowers to delay that. Think in terms of the best way to sort of think about that, we have that multifamily transitional book at a $40,000,000 discount.

And given the short nature of those assets, we attribute that discount almost entirely to credit. So I think the timing might be a little tough, but in terms of the overall dollar amount, call it over the next year or so, we expect to see the majority of that credit discount flush out.

Bose George, Analyst, KBW: Okay. Okay, great. That’s helpful. And then just one quick question just on the returns. You noted the mid to high teens returns.

Can you just break that out between the agencies, some of the other asset classes?

Brian Wilson, President and Chief Investment Officer, MFA Financial: Yes. I mean really mid to high teens are achievable both in agencies and non QM. And then on the BPL side, on the short term nature those 10% coupons given the revolving nature of our securitizations those ROEs could be above 20%.

Bose George, Analyst, KBW: Okay, great. Thanks. Thanks, Bose.

Conference Operator: Your next question comes from Doug Harter with UBS. Please state your question.

Doug Harter, Analyst, UBS: Thanks. On the loan resolutions, just a follow-up. Can you just talk about when you’re seeing resolutions kind of where those are coming out relative to where you had the loans marked?

Mike Roper, CFO, MFA Financial: Yes. I think in general, we’ve seen them basically resolve at the mark, or near the mark. We haven’t had a ton of these, given when we started originating some of these loans. I think we’re really starting to see some of that troubled pipeline being resolved now. But in general, we’re very, very comfortable with where things have been marked.

It’s not like we’re continuously marking things down. We use multiple pricing services and we have a team that reviews all those marks and constantly is reviewing the value of the underlying collateral. So there’s still more to come in terms of the total amount of these resolutions, but from what we’ve seen so far, we feel very, very comfortable with where we have them marked.

Craig Knutson, CEO, MFA Financial: Doug, as Mike said before, the majority of the fair value write downs on these assets took place last year. I mean, I think it was actually in the third quarter of last year. And as I’m sure you know, on loans that are ultimately headed to foreclosure, the largest determinant of your ultimate resolution value is the value of the property. So we were pretty focused on that.

Doug Harter, Analyst, UBS: Great. And on the new BPL originations you’re doing, can you just highlight kind of what sector what pieces of that market you’re kind of focused on today? And kind of how you expect that opportunity to continue to present?

Brian Wilson, President and Chief Investment Officer, MFA Financial: Yes. I mean, really it continues to be similar to what it was in prior quarters with the focus being on ground up bridge and fix and flip. I mean, the bulk of the new origination over the past quarter was ground up. And that’s where we see sort of the biggest opportunity given that real estate transaction levels are down and home prices have gone up considerably, that there’s just the opportunity to do sort of the quick flip type transactions is much smaller than it was previously. So the focus has been more on ground up and or bridge.

Great. Thank you.

: Thanks, Doug.

Conference Operator: Your next question comes from Steve Delaney with Citizens JMP Securities. Please state your question.

Steve Delaney, Analyst, Citizens JMP Securities: Hey, good morning, everyone. Thanks for the question. For starters, just to be sure I’ve got the right numbers on your comments about changes in book value in the second quarter. First, is that relative to economic book value not GAAP and the figure at March was $13.84 is that correct?

Mike Roper, CFO, MFA Financial: That’s right on both accounts, Steve.

Steve Delaney, Analyst, Citizens JMP Securities: Okay, great. And you said down 2% to 4%. Okay. So something in there.

Mike Roper, CFO, MFA Financial: And I’ll also add that that 2% to 4% is net of the dividend accrual. Sorry to cut you off there.

Steve Delaney, Analyst, Citizens JMP Securities: No, appreciate you throwing that out. Okay, net of the dividend. Okay. Thanks. Obviously, great progress on building the NQM and the VPL.

The NQM program, how many sellers, approved loan sellers, and I don’t know whether that includes servicing, but let’s just focus on sellers. How many counterparties do you have out there in the marketplace actually originating those loans for you to purchase?

Brian Wilson, President and Chief Investment Officer, MFA Financial: Yes. It varies from quarter to quarter. Really, it’s so any quarter could be as few as four and as high as eight. But historically, we’ve tended to have sort of deeper relationships with fewer counterparties versus blasting out a guideline, setting up a conduit and dealing with a lot of smaller, less well capitalized risk centers.

Steve Delaney, Analyst, Citizens JMP Securities: Got it. So I mean, how would you just generally say that your opportunity there has grown in the last year or so? And is there further untapped growth potential in that sector? Or do you feel like you’re kind of at a run rate that you’re getting your fair share of what’s out there and there’s maybe it’s going to sort of flat line in terms of volumes?

Brian Wilson, President and Chief Investment Officer, MFA Financial: So we think there’s definitely opportunity to grow, right? Really, it’s just capital and obviously it competes with our other asset classes in terms of opportunities to deploy. If we wanted to grow non QM, we definitely have the ability to do so.

Steve Delaney, Analyst, Citizens JMP Securities: Got it. And I don’t know when you priced your last securitization, but all the disruption in the bond market with following tariffs, etcetera. Your last execution in the AQM MBS market, can you comment on that as to whether that was in line with previous deals or whether it was priced wider? How are you seeing the opportunity to securitize those NQM loans that you have acquired given the kind of disruption in fixed income markets? Thank you.

Brian Wilson, President and Chief Investment Officer, MFA Financial: Sure. So the last deal we did I believe was 135 over for AAA. That’s sort of where the market was at the March. And it’s widened, say it widened the wise might have been 175 maybe there was deal that printed not too widely at 180. It’s come in since there.

We’ve seen deals price between 160 and 170 sort of regularly and deals continue to be oversubscribed well bid. So we’re sort of we’re constructive there. So when you think about it, right, maybe it’s a bit wider, but where we’ve seen assets trade, they’re also trading wider and commensurate with those widened securitization spread. So the ROEs are basically, you think about the spread to securitization kind of remains the same and you’re earning an extra maybe 25 basis points, 30 basis points on the asset.

Steve Delaney, Analyst, Citizens JMP Securities: Got it. Thank you so much for the color.

Craig Knutson, CEO, MFA Financial: Thanks, Steve.

Conference Operator: Thank you. Our next question comes from Jason Stewart with Janney Montgomery Scott. Please state your question.

Jason Stewart, Analyst, Janney Montgomery Scott: Hi, thank you. A question on Lima One. Just the rate volatility and the impact there, maybe you could give us some more color what’s happened in terms of demand for loan products, the competitive environment and whether loan buyers, particularly insurance companies have changed their appetite given the rate vol?

Brian Wilson, President and Chief Investment Officer, MFA Financial: Yes. I mean, we’re obviously we’re in close contact with Nima to make sure that we’re all in tune with the market in terms of setting rates to borrowers. But we continue to see sort of strong demand from insurance companies that really hasn’t changed. They like the duration that comes with this, the longer locked down assets in terms of DSCR and rental loans. So the demand continues to be strong there.

Jason Stewart, Analyst, Janney Montgomery Scott: Okay. And in terms of competition, is there any shakeout there in the competitive environment?

Brian Wilson, President and Chief Investment Officer, MFA Financial: Not really. I mean the originators over the past sort of year have seen a really good market for them to produce and earn. So I believe that they have the capital situation of these originators such that they don’t necessarily have to pull back. Everybody has to sort of adjust to market pricing, which they do, but we haven’t seen really originators step away.

Jason Stewart, Analyst, Janney Montgomery Scott: Okay, got it. And then one question on the agency book. Could you just remind me whether you look at the agency portfolio relative to swaps or treasuries and how that determines sort of ultimate sizing as portfolio allocation goes?

Brian Wilson, President and Chief Investment Officer, MFA Financial: So we hedge with silver swaps, but the market generally looks at spread to treasuries. But yes, you do get some additional spread hedging with silver and borrowing against silver versus the quoted spread to treasuries. So it might be an extra twenty, thirty basis points from time to time that we see in the market that you’re picking up hedging with silver versus treasuries.

Jason Stewart, Analyst, Janney Montgomery Scott: Yes. Mean, you hedge with swaps and it looks much better against swaps. So given that outlook, does that change how big could agency get in terms of portfolio allocation?

Brian Wilson, President and Chief Investment Officer, MFA Financial: I mean, we’re sort of taking this we’re not rushing into it. What we’ve told people in the past that we can see the portfolio getting to $2,000,000,000 and then we’ll sort of reassess market conditions at that point. But that’s sort of over a few quarter period.

: Got it. Okay. Thanks a lot.

Brian Wilson, President and Chief Investment Officer, MFA Financial: Thank you.

Conference Operator: And your next question comes from Eric Hagen Please state your question.

: Hey, thanks. Good morning, guys. We’re looking at the interest rate sensitivity table in the press release. I guess we’re a little surprised to see that much convexity risk in the portfolio for an up move in rates. Is that being driven by the agency MBS portfolio or how meaningfully is the non QM portfolio contributing to that sensitivity?

Brian Wilson, President and Chief Investment Officer, MFA Financial: So it’s not just the agency portfolio, it’s also the non QM. We’ve taken up incrementally taken up leverage, right, that there’s a little more exposure there. But it’s generally all model driven. So we’re using proxies to calculate. You don’t necessarily have the perfect model to determine when you’re trying to look at non QM loans because you don’t have the history kind of goes back to 2017.

So you don’t have sort of the perfect crystal ball going forward. So but we generally are we take a more conservative approach to how we calculate convexity. That’s why you may see may appear more negatively convex than what may actually end up happening, who knows.

: Yes. Okay. That’s helpful. On the delinquency pipeline and the nature of the defaults, specifically in the Lima One portfolio, are the defaults being driven because the borrowers are like upside down and interest expenses crowded out their return? Or is the project improvement component of the timeline just significantly delayed?

And like how do you think about the impact of tariffs and the impact that could have on the credit performance and the timeline for the progress improvement component?

Craig Knutson, CEO, MFA Financial: So in terms of the delinquencies

Brian Wilson, President and Chief Investment Officer, MFA Financial: on the BPL side, it’s really there’s not one reason, right? Some of it is exactly there is a high interest expense that goes along with it. And if the project takes longer than one might expect, there could end up being liquidity pressure on the borrower, which could cause delinquencies. And as you also mentioned, right, like if a project problems with permits or issues getting materials or there was some unexpected occurrence to happen where if somebody opened the walls and something was there that they didn’t expect,

Mike Roper, CFO, MFA Financial: you could

Brian Wilson, President and Chief Investment Officer, MFA Financial: have defaults due to solve out projects. And as it relates to tariffs, like the amount, say, lumber as it relates to the cost of a home, it’s and the cost of a renovation, it’s sort of it’s a smaller percentage in terms of what actually goes into it versus labor. So we don’t expect tariffs to have a material impact in delinquencies, but we are accounting for larger contingencies in the budget and that nature just to make sure and to be safe if those things do impact projects in terms of costs and whatnot.

: Yes, that’s helpful. Thanks, Brian.

Brian Wilson, President and Chief Investment Officer, MFA Financial: Thank you. Thanks, Herb.

Conference Operator: Thank you. And ladies and gentlemen, that was our final question for today. We have no more further questions at this time. So at this point, we will conclude today’s call. Thank you for participating and have a good day.

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