MFA Financial, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. MFA is an internally managed mortgage REIT investing primarily in residential whole loans, including loans originated by its Lima One subsidiary, and in residential mortgage securities.
Financial performance and position
| Metric | 2022 | 2021 comparable |
|---|---|---|
| Interest income | $482.4 million | $362.3 million |
| Interest expense | $258.8 million | $120.4 million |
| Net interest income | $223.6 million | $241.9 million |
| Net income (loss) | $(231.6) million | $328.9 million |
| Net income (loss) available to common stock and participating securities | $(264.5) million; $(2.57) per share | $296.0 million; $2.66 per share |
| Net interest spread and margin, including swap impact | 1.74% and 2.52% | 2.79% and 3.57% |
| Operating cash flow | $366.1 million | $120.3 million |
Management’s non-GAAP distributable earnings were $190.7 million for 2022; the filing cautions that this measure is not a substitute for GAAP earnings or operating cash flow. GAAP results included $866.8 million of net losses on residential whole loans measured at fair value, partly offset by $255.2 million of derivative gains and $290.6 million of gains on securitized debt measured at fair value.
At year-end, total assets were $9.1 billion, including $7.5 billion of residential whole loans. Stockholders’ equity was $2.0 billion. GAAP book value per common share was $14.87, down from $19.12 a year earlier; non-GAAP economic book value was $15.55, down from $20.58.
Cash, cash equivalents and restricted cash increased by $89.6 million to $494.1 million. This included $334.2 million of cash and cash equivalents; restricted cash is not available for general corporate purposes. MFA reported $38.2 million of unencumbered residential whole loans and approximately $1.2 billion of unused financing capacity. Debt-to-equity was 3.5x and recourse leverage was 1.8x, versus 2.5x and 1.5x, respectively, at year-end 2021. Financing agreements totaled $6.8 billion on the balance sheet, including $3.4 billion of securitized debt; MFA reported compliance with financing covenants at year-end.
Material changes from 2021
- Net interest income declined $18.3 million as financing costs rose faster than asset income. Interest expense more than doubled, while net interest margin contracted by 105 basis points.
- The company moved from GAAP net income to a substantial net loss, primarily due to fair-value losses on whole loans amid sharply higher interest rates and wider mortgage and credit spreads.
- Residential whole-loan acquisitions were $3.1 billion; portfolio runoff and valuation declines left year-end whole loans and REO at $7.6 billion, down from $8.1 billion. Residential whole loans remained the dominant asset exposure.
- MFA completed nine loan securitizations in 2022 with $2.7 billion of loan UPB, increasing securitized debt to $3.4 billion. It also reduced Agency-eligible investor loans by about $780 million through sales and deconsolidation transactions.
- Liquidity and balance-sheet book value came under pressure, while MFA increased use of swaps and longer-term, non-recourse, non-mark-to-market securitization financing.
Outlook, commentary and risks
Management said 2022 was exceptionally challenging for mortgage investors, citing higher rates, volatility and wider spreads. Its response emphasized liquidity, active portfolio management, increased interest-rate swaps and securitizations to replace some floating-rate, recourse, mark-to-market funding. MFA expected to focus primarily on residential whole-loan opportunities in 2023, subject to economic and market conditions; the filing provides no quantified earnings or dividend guidance.
After year-end, MFA completed three additional securitizations totaling $668.2 million of loan UPB. In February 2023, the Board authorized repurchases of up to $100 million of its 6.25% Convertible Senior Notes due 2024.
- Interest-rate, spread and funding risk: Shorter-term borrowing costs can rise faster than asset yields; mark-to-market financing can prompt margin calls, and uncommitted facilities may not renew. The year-end sensitivity analysis estimated a $110.6 million decline in net interest income under an immediate 100-basis-point rate increase, subject to management assumptions.
- Credit and concentration risk: Whole loans dominate the portfolio, with 31.5% of interest-bearing loan UPB concentrated in California. Borrower defaults, declining home prices, servicing issues and lengthy foreclosure processes could increase losses.
- Valuation and estimates: Much of the loan portfolio is valued using Level 3 inputs and management estimates. The auditor identified fair value measurement of whole loans and the allowance for credit losses as critical audit matters.
- Liquidity and leverage: At year-end, $2.2 billion of asset-backed financing had mark-to-market collateral provisions. Swaps can require collateral, may not fully hedge exposures and may create counterparty risk.
- Other considerations: REIT qualification and Investment Company Act exemptions constrain operations; mortgage regulation and the transition away from LIBOR create uncertainty. MFA also disclosed $553.4 million of unfunded commitments on purchased transitional loans. It reported no material unsettled loan repurchase claims requiring a reserve and no material legal proceedings.
Common dividends declared totaled $1.67 per share in 2022, and the company repurchased approximately $102.1 million of common stock. The Board retains discretion over future common dividends; there is no established minimum payout. The audited financial statements received an unqualified opinion, and the auditor and management reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- How much of the reported GAAP loss reflects valuation changes versus realized credit losses, and how the non-GAAP distributable earnings adjustments are calculated.
- Whether loan fair values and the $35.3 million allowance for credit losses remain appropriate as home prices, delinquencies and economic forecasts change.
- Current liquidity, collateral needs, refinancing access and the terms and maturity profile of mark-to-market and non-mark-to-market borrowings.
- The sustainability of common dividends relative to REIT taxable income, cash available for distribution and financing needs. The filing estimates 2022 REIT taxable income of $28.3 million, distinct from GAAP results.
- Progress and economics of post-year-end securitizations, performance of Lima One’s business-purpose loans, and the status of the authorized convertible-note repurchase program.