MFA FINANCIAL, INC. annual report, FY2021

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MFA Financial, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. MFA is an internally managed mortgage REIT investing primarily in residential whole loans and financing them with secured borrowings and securitizations.

Business context and portfolio

  • Total assets were $9.14 billion, up from $6.93 billion at year-end 2020. Residential whole loans were $7.91 billion, approximately 87% of total assets; the portfolio grew 49% year over year.
  • MFA acquired more than $4.5 billion of residential whole loans and completed its acquisition of the remaining 57% of Lima One on July 1, 2021, bringing ownership to 100%. Lima One originates and services business-purpose loans.
  • MFA completed eight loan securitizations totaling $2.6 billion of residential whole loans during 2021. Management said securitization generally lowers funding costs, extends funding terms, and provides non-recourse financing without mark-to-market collateral provisions.

Financial performance and key metrics

  • Earnings: Net income was $328.9 million; net income available to common stock and participating securities was $296.0 million, or $0.67 per basic share and $0.66 diluted. In 2020, the comparable common-stock measure was a loss of $709.2 million, or $1.57 per share.
  • Interest income and margins: Total interest income was $362.3 million, down from $432.8 million. Net interest income rose 47.4% to $241.9 million from $164.1 million. Full-year net interest spread was 2.81% versus 0.87%, and net interest margin was 3.58% versus 1.94%. For fourth-quarter 2021, spread was 2.98% and margin was 3.60%.
  • Credit provision: MFA recorded a $44.9 million reversal of provision for credit losses on residential whole loans held at carrying value, compared with a $22.4 million provision in 2020. The year-end allowance on those loans was $39.4 million.
  • Cash flow: Operating activities provided $120.3 million; investing activities used $2.17 billion; financing activities provided $1.63 billion. Cash, cash equivalents, and restricted cash declined $417.1 million. Year-end cash and cash equivalents were $304.7 million; restricted cash was an additional $99.8 million.
  • Debt and liquidity: Financing agreements totaled $6.38 billion, including $2.65 billion of securitized debt and $3.50 billion of asset-backed financing agreements. Debt-to-equity multiple was 2.5x versus 1.7x at year-end 2020. MFA reported $280.2 million of unencumbered residential whole loans and approximately $350 million of unused capacity in certain borrowing lines, and said it was in compliance with financing covenants.
  • Capital and book value: Stockholders’ equity was $2.54 billion. GAAP book value per common share was $4.78, compared with $4.54 a year earlier and $4.82 at September 30, 2021. Non-GAAP economic book value per share was $5.15, versus $4.91 a year earlier and $5.25 at September 30, 2021.
  • Dividends and repurchases: Common dividends declared totaled $169.3 million, or $0.385 per share, in 2021. The fourth-quarter dividend was $0.11 per share, declared in December and paid January 31, 2022. MFA repurchased 20.1 million shares for approximately $85.6 million during 2021.

Changes versus 2020 and unusual items

  • The earnings recovery principally reflects the exceptional 2020 pandemic-related losses and financing disruption, lower funding costs after MFA exited lender forbearance, greater use of securitization, and the 2021 credit-loss reversal.
  • 2020 included $188.8 million of realized losses on asset sales, $425.1 million of impairment and other losses, $57.0 million of losses on terminated swaps, $25.3 million of expense related to early repayment of a senior secured credit agreement, and $44.4 million of restructuring and forbearance-related costs.
  • 2021 other income included a $38.9 million gain from remeasuring MFA’s previously held Lima One interest, $22.6 million of Lima One origination, servicing and other fee income, and $33.956 million of impairment reversals and other gains on securities and other assets. The $38.9 million remeasurement gain is a notable acquisition-related, non-recurring item.
  • Residential whole-loan interest income was $303.5 million, down from $332.2 million, while average loan balances declined and yield edged up to 5.26% from 5.19%. Interest expense fell to $120.4 million from $268.8 million; average borrowing cost declined to 2.56% from 4.24%.
  • Residential mortgage securities and MSR-related assets totaled $256.7 million at year-end, down from $400.0 million. MFA sold its remaining RPL/NPL MBS by the second quarter of 2021 and had previously exited Agency and Legacy Non-Agency MBS during 2020.

Outlook, risks, and contingencies

  • Management said it expected to continue pursuing residential whole-loan opportunities in 2022, subject to supportive economic and market conditions, using warehouse financing, repurchase agreements, and securitizations. The filing provides no numerical earnings, margin, or dividend guidance.
  • Interest-rate and funding risk are central: short-term borrowing costs may rise faster than asset yields, while asset values and liquidity can be affected by rate, spread, and housing-market changes. The Federal Reserve’s late-2021 shift toward tapering and projected rate increases added uncertainty; inflation and a flatter yield curve could pressure results.
  • MFA’s portfolio is concentrated in credit-sensitive, comparatively illiquid residential loans. California represented 36.8% of loan unpaid principal balance; Florida, 10.9%. At year-end, $800.1 million of loan unpaid principal balance was 90 or more days delinquent, including $94.8 million of Non-QM loans and $103.0 million of Rehabilitation loans.
  • Financing risks include margin calls, non-renewal of uncommitted repurchase facilities, counterparty concentration, and leverage. At year-end, Credit Suisse, Barclays, and Wells Fargo each represented more than 5% of stockholders’ equity at risk; the largest exposures were 21.9%, 21.1%, and 9.9%, respectively.
  • LIBOR was scheduled to cease or become non-representative after June 30, 2023. MFA had approximately $900 million of SOFR-based swaps at year-end and was evaluating transition impacts; mismatches in timing or replacement rates could complicate hedging and raise costs.
  • Other material risks include borrower defaults, servicing and foreclosure delays, COVID-19-related hardship and regulatory measures, valuation and credit-model uncertainty, Lima One integration and performance, and continued compliance with REIT and Investment Company Act requirements. The filing reported no material legal proceedings or material unsettled loan-securitization repurchase claims requiring a reserve.

Important facts for investors to verify

  • Separate recurring earnings from the Lima One remeasurement gain, asset-related gains, and other non-recurring items; review the complete statement of operations and footnotes.
  • Track delinquency, nonaccrual, foreclosure, loss severity, and CECL allowance trends by loan type, particularly for Non-QM and Rehabilitation loans.
  • Assess refinancing and margin-call resilience using the debt maturity and collateral terms, unencumbered assets, available borrowing capacity, and lender exposures.
  • Confirm the sustainability of common dividends against REIT taxable income, cash generation, preferred dividend obligations, and the Board’s discretion. The filing estimated 2021 REIT taxable income at approximately $72.2 million.
  • Review the assumptions behind Level 3 loan valuations and economic book value; these depend on forecast prepayments, defaults, property values, discount rates, and liquidation timelines. KPMG issued unqualified opinions on the financial statements and internal control; Lima One’s controls were excluded from the year-end internal-control assessment.