MFA Financial, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. MFA is a REIT investing primarily in residential Agency and Non-Agency mortgage-backed securities (MBS), financed principally with repurchase agreements. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $122.7 million | $123.5 million in Q1 2012 |
| Interest expense | $40.2 million | $40.1 million in Q1 2012 |
| Net interest income | $82.6 million | $83.4 million in Q1 2012 |
| Net income | $77.4 million; $0.21 per common share, basic and diluted | $84.7 million; $0.23 per share in Q1 2012 |
| Net interest spread / margin | 2.32% / 2.69% | 2.54% / 2.96% in Q1 2012 |
| Total assets | $13.653 billion | $13.518 billion at December 31, 2012 |
| MBS portfolio, fair value | $12.542 billion: $7.154 billion Agency and $5.388 billion Non-Agency | $12.608 billion at December 31, 2012 |
| Cash and cash equivalents | $601.6 million | $401.3 million at December 31, 2012 |
| Repurchase agreements | $8.903 billion | $8.752 billion at December 31, 2012 |
| Securitized debt / Senior Notes | $542.0 million / $100.0 million | $646.8 million / $100.0 million at December 31, 2012 |
| Stockholders’ equity / book value per common share | $3.266 billion / $8.84 | $3.311 billion / $8.99 at December 31, 2012 |
| Cash flow | $71.2 million operating; $349.0 million investing; $219.9 million used in financing; cash increased $200.3 million | Operating cash flow was $79.9 million in Q1 2012 |
Comprehensive income available to common stock and participating securities was $205.7 million, including $130.4 million of other comprehensive income, primarily unrealized MBS and hedge gains. These valuation changes are distinct from net income.
Changes versus comparable periods
- Net income available to common stock and participating securities declined to $75.3 million from $82.7 million in Q1 2012. Management attributed the decline mainly to lower gains and net interest income from Linked Transactions and a higher share count.
- Net interest income fell $0.8 million. Lower Agency MBS yields contributed: Agency MBS yield was 2.42% versus 3.15% in Q1 2012. Non-Agency MBS interest income rose, but its yield edged down to 6.80% from 6.95%.
- Other income declined to $3.2 million from $10.7 million, chiefly because Linked Transaction gains and income were lower. Operating and other expenses were broadly flat at $8.5 million.
- Debt-to-equity leverage increased to 3.1x from 3.0x at year-end. Book value per share fell to $8.84; management said the $0.50 special dividend was the primary cause and that book value would have increased excluding it.
- No credit-related OTTI losses were recognized in Q1 2013, compared with $0.9 million in Q1 2012. Non-Agency MBS net unrealized gains increased to $769.2 million from $623.9 million at year-end.
Outlook, commentary, risks and unusual items
- Management intended to continue selectively acquiring Agency and Non-Agency MBS during the remainder of 2013, expecting Agency MBS to remain the majority of assets. It described Non-Agency MBS as offering attractive loss-adjusted returns, citing a discounted average amortized cost of 73% of face value. No specific earnings or return guidance was provided.
- Management reported a $1.055 billion liquidity “Cushion” at quarter-end: $601.6 million cash, $410.7 million unpledged Agency MBS and $43.0 million excess Agency collateral. It also reported $182.1 million of unpledged and $342.1 million of excess-pledged Non-Agency MBS.
- Key exposures include short-term, renewable repo funding against longer-duration assets; collateral margin calls and changing haircuts; rising rates and asset/liability repricing mismatch; prepayment and reinvestment risk; Non-Agency mortgage credit losses; and concentration in Southern California, Northern California and Florida. Management warned that falling collateral values or tighter funding markets could materially impair liquidity and leverage capacity.
- At quarter-end, $2.514 billion notional of interest-rate swaps hedged funding exposure; swaps had a $50.5 million net unrealized liability. The filing’s rate-shock analysis estimated that an immediate 100-basis-point rise would reduce projected 12-month net interest income by 7.43% and portfolio value by 1.08%; these are model estimates, not guidance.
- A tax-calculation review identified previously undistributed REIT taxable income for 2010–2011 and a potential shortfall for 2012. MFA declared a $0.50-per-share special dividend, paid April 10, 2013, and expected additional 2013 dividends may be needed. The 2012 tax return was not yet final.
- After quarter-end, MFA issued 8.0 million Series B preferred shares, with estimated net proceeds of $193.3 million, and announced redemption of all Series A preferred shares for approximately $97.0 million on May 16, 2013.
- Disclosure controls were deemed ineffective as of March 31, 2013 because remediation of a material weakness in controls over MBS taxable-income calculations remained ongoing. Management gave no assurance remediation would succeed. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Progress and effectiveness of remediation for the material weakness, and the resulting reliability of taxable-income calculations and future REIT distributions.
- Final 2012 REIT taxable income, any additional dividends needed for prior-year undistributed income, and the effect of the preferred-stock issuance and Series A redemption on funding costs and capital.
- Repo renewals, counterparty concentration, collateral haircuts and margin-call capacity, particularly under adverse market conditions.
- Non-Agency MBS cash-flow assumptions, credit-reserve releases, realized losses and regional mortgage performance; management’s estimates are judgmental and may change.
- Interest-rate, prepayment and reinvestment outcomes versus the filing’s modeled sensitivities; actual results may differ materially.