MFA Financial, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. MFA is an internally managed mortgage REIT investing on a leveraged basis in residential mortgage assets and, through Lima One, originates and services business-purpose loans. Per-share amounts reflect the 1-for-4 reverse stock split effective April 4, 2022.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Prior comparable period / December 31, 2021 |
|---|---|---|
| Net income (loss) | $(82.9) million; $(0.86) per diluted common share | Q1 2021: $85.5 million; $0.67 diluted EPS |
| Net interest income | $63.1 million | Q1 2021: $51.0 million |
| Net interest margin | 2.63%, including net swap expense | Q1 2021: 3.29% |
| Other income (loss), net | $(107.5) million | Q1 2021: $34.3 million |
| Operating and other expense | $42.0 million | Q1 2021: $22.5 million |
| Total assets | $9.925 billion | $9.140 billion |
| Residential whole loans | $8.262 billion | $7.913 billion |
| Financing agreements | $7.028 billion | $6.379 billion |
| Stockholders’ equity | $2.349 billion | $2.543 billion |
| GAAP book value per common share | $17.84 | $19.12 |
Interest income rose to $106.3 million from $81.1 million, while interest expense increased to $43.3 million from $30.1 million. MFA recorded a $3.5 million reversal of credit-loss provision, versus a $22.8 million reversal in Q1 2021. Operating cash flow was $133.6 million; investing cash flow was $(583.5) million and financing cash flow was $601.0 million. Cash, cash equivalents and restricted cash totaled $555.5 million at quarter-end, including $410.9 million of cash and cash equivalents and $144.6 million of restricted cash.
Material changes and management commentary
- Net loss reflected a $288.4 million mark-to-market loss on residential loans measured at fair value, compared with a $31.5 million gain in Q1 2021. Derivative gains of $94.1 million and fair-value gains on securitized debt of $64.1 million partly offset the loss.
- Management described Q1 as exceptionally difficult for mortgage investors amid rapid interest-rate increases and wider credit spreads. It added $1.5 billion of interest-rate swaps and completed additional securitizations; management said these actions mitigated the market impact and helped limit the book-value decline.
- Economic book value per common share, a non-GAAP measure, was $18.81, down from $20.58 at year-end. GAAP book value declined to $17.84 from $19.12.
- Loan acquisitions and originations totaled approximately $1.2 billion, including $617.4 million of Non-QM loans and $589.4 million of business-purpose loans, including rehabilitation-loan draws. The portfolio expanded, while the weighted-average residential whole-loan yield eased to 4.94% from 5.03% in Q1 2021.
- Q1 results include Lima One, acquired July 1, 2021. Its origination, servicing and fee income contributed $14.5 million; the prior-year quarter did not include Lima One results. Higher compensation, servicing costs and $3.3 million of acquired-intangible amortization also increased expenses.
- Distributable earnings, a non-GAAP measure, were $66.0 million, or $0.62 per basic share, compared with $38.9 million, or $0.34, in Q1 2021. Management cautions that this measure is not a substitute for GAAP earnings or operating cash flow.
Liquidity, leverage, risks and other items
- Debt-to-equity multiple increased to 3.1x from 2.5x at year-end. MFA reported compliance with all financial covenants. It cited $62.4 million of unencumbered residential loans and approximately $250 million of unused borrowing capacity, in addition to cash and cash equivalents.
- Financing includes short-term and renewable borrowings, some subject to mark-to-market margin calls. Management warns that falling collateral values, tighter liquidity, increased haircuts or lenders not renewing facilities could pressure liquidity and financing access.
- Interest-rate shock analysis estimated that an immediate 100-basis-point increase would reduce portfolio value by 1.49% while increasing projected net interest income by 2.72%; the filing notes these are model-based estimates, not forecasts. Interest-rate and spread changes can affect asset values, funding costs and margins differently.
- Credit and valuation risks include delinquencies, defaults, foreclosure timelines, home values and assumptions used to value Level 3 loans. Loans more than 90 days delinquent had $744.2 million of unpaid principal balance at quarter-end. California accounted for 36.6% of loan UPB.
- At quarter-end, MFA had $355.0 million of unfunded rehabilitation-loan commitments. It reported no material unsettled loan repurchase claims requiring a reserve and no material pending legal proceedings.
- After quarter-end, MFA completed two business-purpose-loan securitizations totaling $509.5 million, including its first securitization of approximately $250.0 million of rehabilitation loans. The company also declared a $0.11-per-share common dividend before the reverse split and authorized up to $250 million of share repurchases through 2023.
- No quantitative earnings or dividend guidance is provided. Management says results depend on interest rates, spreads, prepayments, credit performance, financing availability and other market conditions. The filing also identifies uncertainty around LIBOR’s planned cessation after June 30, 2023 and possible regulatory changes.
Important facts for investors to verify
- How much of the fair-value loan loss reflects market-rate and spread movements versus changes in expected credit performance, and how sensitive are the valuations to management assumptions?
- Whether available cash, unencumbered collateral and borrowing capacity remain sufficient if margin calls rise or counterparties reduce or decline to renew financing.
- Whether loan portfolio growth and Lima One originations can sustain earnings as funding costs rise and net interest margins compress.
- How delinquencies, foreclosure timelines, geographic concentration and rehabilitation-loan commitments affect realized credit losses and cash flows.
- Whether securitizations provide durable funding on acceptable terms, and how the subsequent transactions affect leverage and liquidity.
- How non-GAAP distributable earnings compare with GAAP results and cash generation when assessing dividend coverage; confirm the post-reverse-split share and dividend basis when comparing per-share data.