MFA Financial, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. MFA is a leveraged residential mortgage REIT. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results and position
- Income: Interest income was $61.9 million and interest expense was $30.1 million, producing net interest income of $31.8 million, down 48% from $61.7 million a year earlier. Net interest margin was 2.46%, versus 2.20%; net interest spread was 1.86%, versus 1.82%.
- Profit: Net income was $85.5 million, or $0.17 per diluted share, compared with a net loss of $909.0 million, or $2.02 per diluted share, in Q1 2020. Other income was $53.5 million, including a $49.8 million gain on residential loans carried at fair value. The $22.8 million reversal of loan credit-loss provision also supported results.
- Cash flow: Operating activities provided $24.2 million; investing activities provided $345.5 million; financing activities used $405.3 million. Cash, cash equivalents and restricted cash declined $35.7 million to $785.9 million. Cash and cash equivalents alone were $780.7 million.
- Balance sheet and debt: Total assets were $6.72 billion and total liabilities were $4.18 billion at March 31. Financing agreements totaled $4.00 billion, down from $4.34 billion at year-end. Stockholders’ equity was $2.54 billion. Debt-to-equity multiple was 1.6x, compared with 1.7x at December 31.
- Liquidity and collateral: MFA reported $780.7 million in cash and cash equivalents, $73.9 million of unencumbered residential loans, and believed it had unused borrowing capacity. Approximately $3.8 billion of assets and $5.2 million of restricted cash were pledged. MFA was in compliance with its financial covenants at quarter-end.
- Book value and distributions: GAAP book value per common share was $4.63, up from $4.54 at year-end; non-GAAP economic book value was $5.09, up from $4.92. A $0.075-per-share common dividend was declared. MFA repurchased 5.95 million shares for approximately $24.3 million during the quarter.
Material changes versus Q1 2020
- The substantial earnings recovery largely reflects the prior-year COVID-related market disruption and associated impairment charges, asset-sale losses and loan-loss provisioning. In Q1 2020, MFA recorded $419.7 million of impairment and other losses, $238.4 million of net realized losses on asset sales, and a $150.7 million credit and valuation loss provision; Q1 2021 had no comparable impairment or realized-sale losses and instead recorded a provision reversal.
- Net interest income fell as the average balances of residential loans and securities were materially lower following portfolio sales and changes made during 2020. Interest expense also declined, reflecting lower average borrowings and redemption of $100 million of 8% senior notes in January 2021.
- Residential whole loans, net, were $5.19 billion, compared with $5.33 billion at year-end. Securities at fair value were $350.1 million, compared with $400.0 million. The portfolio’s reported 22.25% securities yield included $8.1 million of discount accretion from a redeemed RPL/NPL security; excluding it, the yield was 11.26%.
Outlook, commentary and risks
- Outlook: The filing provides no specific earnings or dividend guidance. Management describes continued focus on residential mortgage investments and more durable financing, including securitizations. A subsequent $394.2 million Non-QM loan securitization had a 1.37% weighted-average bond cost and was expected to reduce financing costs by approximately 203 basis points.
- Subsequent acquisition: After quarter-end, MFA agreed to acquire substantially all of Lima One Holdings, parent of business-purpose lender and servicer Lima One Capital. The all-cash transaction was expected to close in Q3 2021, subject to regulatory approvals and third-party consents.
- Credit and pandemic exposure: At March 31, Non-QM loans with $135.3 million amortized cost and Rehabilitation loans with $137.0 million amortized cost were more than 90 days delinquent. Management noted that some borrowers remained financially affected by COVID-19 and that loss estimates depend on economic forecasts and other sensitive assumptions. The total allowance on loans held at carrying value was $63.2 million.
- Funding and market risks: MFA uses short-term and renewable financing, including mark-to-market facilities; falling collateral values, margin calls, higher haircuts or non-renewal could pressure liquidity. The filing also highlights credit, prepayment, interest-rate and credit-spread risks. Its interest-rate sensitivity analysis estimated that a 100-basis-point increase could reduce portfolio value by 1.77%, while increasing projected net interest income by 6.68%; these are scenario estimates, not forecasts.
- Other items: MFA relocated its headquarters and entered a new approximately 15-year lease, with estimated annual lease expense of about $4.6 million before specified escalations and incentives. Management reported effective disclosure controls, no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether reported earnings and the credit-loss reversal are repeatable, particularly given the one-time $8.1 million securities discount accretion.
- Trends in delinquencies, foreclosures, recoveries and allowance estimates for Non-QM and Rehabilitation loans, including sensitivity to economic assumptions.
- Liquidity headroom under mark-to-market financing, unused facility capacity, collateral requirements and upcoming financing renewals.
- Progress, financing economics and regulatory or consent conditions for the Lima One acquisition and subsequent securitization activity.
- Common and preferred dividend sustainability, share repurchases and the effect of capital allocation on book value and liquidity.