MFA Financial, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2020, compared with Q1 2019 where applicable. MFA is a leveraged residential mortgage investor and REIT. The company filed on June 22, 2020, relying on SEC relief after COVID-19-related market disruption diverted management resources.
Key financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Interest income | $145.5 million | $141.0 million, Q1 2019 |
| Interest expense | $83.8 million | $79.0 million, Q1 2019 |
| Net interest income | $61.7 million | $61.9 million, Q1 2019 |
| Net interest spread / margin | 1.82% / 2.20% | 1.98% / 2.41%, Q1 2019 |
| Net loss | $909.0 million; $2.02 loss per diluted share | Net income of $88.9 million; $0.19 diluted EPS, Q1 2019 |
| Total assets | $11.13 billion | $13.57 billion, December 31, 2019 |
| Total liabilities / stockholders’ equity | $8.69 billion / $2.44 billion | $10.18 billion / $3.38 billion, December 31, 2019 |
| Repurchase agreements | $7.77 billion | $9.14 billion, December 31, 2019 |
| Cash and cash equivalents / restricted cash | $116.5 million / $216.9 million | $70.6 million / $64.0 million, December 31, 2019 |
| GAAP / economic book value per common share | $4.34 / $4.09 | $7.04 / $7.44, December 31, 2019 |
Cash, cash equivalents and restricted cash increased $198.7 million in Q1. Operating activities provided $13.2 million, investing activities provided $822.2 million and financing activities used $636.8 million. The company reported a 3.4x leverage multiple at quarter-end, versus 3.0x at year-end 2019. Q1 operating and other expense was $29.1 million, compared with $23.4 million in Q1 2019.
Material changes and unusual items
- COVID-19-driven market volatility and illiquidity prompted asset sales, margin calls and sharp valuation declines. MFA recorded $790.8 million of net other losses, including $419.7 million of impairment and other losses, $238.4 million of realized sale losses, $78.0 million of unrealized securities losses and $52.8 million of losses on loans measured at fair value.
- The $419.7 million impairment and other-loss line included $280.8 million on MSR-backed term notes, $63.5 million on residential mortgage securities, $58.1 million on loan-originator investments and a $7.2 million goodwill impairment. The filing attributes the charges primarily to market dislocation, liquidity constraints and COVID-19 economic expectations.
- Credit and valuation loss provision was $150.8 million, versus $0.8 million in Q1 2019. This included a $74.9 million CECL provision on loans held at carrying value and a $70.2 million valuation allowance on Non-QM loans classified as held for sale. The allowance for credit and valuation losses on residential whole loans was $218.0 million at quarter-end. MFA adopted CECL on January 1, 2020; the transition reduced retained earnings by $8.3 million.
- MFA sold approximately $2.1 billion of residential mortgage securities and whole loans during Q1, realizing losses to raise liquidity and reduce leverage. The company unwound approximately $4.1 billion of swaps late in the quarter; $71.2 million of related losses remained in accumulated other comprehensive income at March 31.
- Common book value fell materially: GAAP book value per share declined to $4.34 from $7.04 at year-end, while economic book value per share declined to $4.09 from $7.44.
Liquidity, outlook, risks and subsequent events
- Financing stress: MFA reported that it could not meet all repurchase-agreement margin calls in March, effectively triggering defaults under numerous agreements. At March 31, repurchase agreements were $7.77 billion and securitized debt was $533.7 million. The company estimated available liquidity of more than $176.1 million, excluding restricted cash, and also reported $682.7 million of unencumbered residential whole loans.
- Forbearance: After quarter-end, counterparties entered forbearance agreements. The June 1 agreement extended forbearance through June 26, 2020, subject to earlier termination conditions. It covered all remaining repo counterparties, according to the filing. Forbearance terms restrict dividend payments and included security interests in previously unencumbered assets.
- Proposed financing, not yet completed at filing: On June 15, MFA entered into an agreement for a $500 million senior secured term loan, expected to fund on or about June 26, at an initial 11% annual rate, with possible capitalization of part of the interest and scheduled amortization. Lenders also committed, subject to conditions, to an asset-level facility of up to $1.65 billion. The company’s expected exit from forbearance and the facilities’ closing remained conditional. Warrants to purchase approximately 37.0 million common shares were part of the related investment agreement.
- Portfolio repositioning: Through May 31, post-quarter asset sales generated approximately $3.2 billion of proceeds and, together with runoff and payments, reduced repo balances by approximately $3.9 billion. MFA had sold substantially all Agency and Legacy Non-Agency MBS and reduced MSR-related and CRT holdings. At May 31, its $6.6 billion mortgage-asset portfolio was primarily residential whole loans and REO; repo financing was approximately $3.8 billion and total debt was about 1.9x equity. As of June 19, cash balances were $343.6 million, including $103.5 million on deposit with repo counterparties; unpaid margin calls were $29.1 million.
- Dividends: MFA revoked its declared Q1 common and Series B preferred dividends to preserve liquidity and later suspended Q2 Series B and Series C dividends. Preferred dividends accumulate without interest; common dividends cannot resume until cumulative preferred dividends are paid or provided for. As of May 31, accrued and unpaid dividends were $6.3 million on Series B and $4.4 million on Series C. Forbearance terms generally prohibited dividends.
- Outlook and risks: The filing gives no quantitative earnings or dividend guidance. Management said it expected the financing transactions, if completed, to support an exit from forbearance and resolve financing issues; completion was subject to conditions. Key risks include COVID-19 effects on borrowers, delinquencies, home values and asset liquidity; margin calls and lender renewals; refinancing and higher financing costs or haircuts; portfolio valuation and CECL assumptions; interest-rate and prepayment exposure; and execution of the financing and reinstatement agreements. Management stated disclosure controls were effective at March 31, 2020.
Most important facts for investors to verify
- Whether the $500 million term loan and up-to-$1.65 billion asset-level facility funded as expected, and whether MFA exited forbearance on agreed terms.
- Current repo balances, collateral encumbrances, liquidity, unpaid margin calls, lender terms and compliance with financing covenants.
- Subsequent portfolio-sale proceeds, realized and unrealized gains or losses, and the resulting asset mix and leverage.
- Residential loan delinquencies, defaults, forbearance activity, CECL assumptions and adequacy of credit and valuation reserves.
- Status and amount of accumulated preferred dividends, any dividend restrictions, and potential common-share dilution from the warrants.