MFA Financial, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2023. MFA is an internally managed mortgage REIT investing on a leveraged basis in residential whole loans, mortgage securities and related assets. Its Lima One subsidiary originates and services business-purpose loans. Residential whole loans made up approximately 84% of the $9.3 billion asset base.
Financial results and position
- Revenue and earnings: Interest income was $132.2 million and interest expense was $92.8 million, producing net interest income of $39.4 million. GAAP net income was $72.8 million; income available to common stock and participating securities was $64.6 million, or $0.63 basic and $0.62 diluted EPS. Distributable earnings, a non-GAAP measure, were $30.8 million, or $0.30 per basic share.
- Margins: Net interest spread including swap carry was 1.74%; net interest margin was 2.64%. Management reported a 1.74% spread on investments including swaps. The common dividend declared was $0.35 per share.
- Cash flow and liquidity: Operating activities used $12.7 million; investing activities used $142.1 million; financing activities provided $188.3 million. Cash, cash equivalents and restricted cash increased $33.5 million to $527.6 million, including $362.5 million of cash and cash equivalents. Management reported $2.0 billion of unused financing capacity and $43.2 million of unencumbered residential whole loans.
- Assets, debt and equity: Total assets were $9.31 billion; financing agreements were $7.10 billion; stockholders’ equity was $2.02 billion. GAAP book value per common share was $15.15 and economic book value per share, a non-GAAP measure, was $16.02. Debt-to-equity was 3.5x and recourse leverage was 1.6x. MFA reported compliance with all financial covenants.
- Portfolio: Residential whole loans and REO plus securities totaled approximately $8.4 billion. Residential whole loans were $7.79 billion, securities were $504.6 million, and REO was $121.2 million. The loan allowance for credit losses was $33.1 million.
Material changes versus comparable periods
- Year over year, net income available to common stock and participating securities improved from a $91.1 million loss to $64.6 million of income. This primarily reflected a $417.1 million swing in fair-value gains/losses on loans, including a $129.2 million loan gain in Q1 2023 versus a $287.9 million loss in Q1 2022.
- Net interest income declined 37.6% year over year to $39.4 million, despite higher interest income, as interest expense rose $49.5 million to $92.8 million. Management attributed the increase mainly to higher financing rates and average financing balances.
- Compared with Q4 2022, common earnings improved from a $1.5 million loss to $64.6 million of income, largely due to the swing to fair-value gains on loans. Net interest income fell $16.3 million sequentially, while interest expense increased $5.6 million.
- GAAP book value per common share increased from $14.87 at year-end 2022 to $15.15; economic book value per share increased from $15.55 to $16.02. Management attributed the gains primarily to higher loan valuations following interest-rate declines.
Outlook, management commentary and risks
- No specific earnings or operating guidance is provided. Management said it prioritized liquidity and active portfolio management amid interest-rate and credit-spread volatility and banking-sector uncertainty. It completed three loan securitizations backed by $668.2 million of loans, moving financing toward longer-term, non-recourse funding, and maintained approximately $3.0 billion of interest-rate swaps.
- Q1 other income included significant fair-value movements: a $129.2 million gain on loans, a $51.7 million loss on securitized debt and a $21.2 million loss on derivatives. These marks make GAAP results sensitive to market movements; distributable earnings excludes specified unrealized/realized items and other adjustments and should not be treated as GAAP earnings or operating cash flow.
- Key risks include rising funding costs, margin calls and renewal risk on short-term or uncommitted financing, changes in collateral values and credit spreads, borrower delinquencies/defaults, prepayment behavior, and fair-value estimation. At March 31, 60-plus-day delinquencies were 7.8% of loan UPB, versus 8.1% at year-end. The filing notes estimates are sensitive to economic assumptions and that substantial loan valuations use Level 3 inputs.
- MFA had $546.6 million of unfunded commitments on Transitional loans. It reported no material unsettled loan-sale or securitization repurchase claims requiring a reserve and no material pending legal proceedings. The filing reports no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- How much Q1 earnings and book-value growth depended on fair-value changes, and whether distributable earnings and cash generation support the common dividend over time.
- Loan delinquency, default, foreclosure and recovery trends, particularly in non-performing and credit-deteriorated loans and the Transitional loan portfolio.
- Funding costs, financing maturities and renewal terms, available capacity, collateral haircuts and potential margin-call needs under stressed market conditions.
- Assumptions and sensitivity behind Level 3 loan valuations, credit-loss estimates and the reported economic book value.