MFA Financial, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. MFA is a REIT investing primarily in residential mortgage-backed securities (MBS), using leverage to earn the spread between investment income and financing costs. At quarter-end, MBS were 92.5% of total assets.
Key financial metrics
| Metric | Q1 2011 / March 31, 2011 | Comparable / prior period |
|---|---|---|
| Interest income | $109.9 million | $107.7 million in Q1 2010 |
| Net interest income | $75.2 million | $69.2 million in Q1 2010 |
| Net income | $82.9 million | $82.7 million in Q1 2010 |
| Net income available to common stock and participating securities | $80.8 million; $0.27 per diluted share | $80.6 million; $0.29 per diluted share in Q1 2010 |
| Net interest spread / margin | 2.87% / 3.31% | 2.73% / 3.29% in Q1 2010 |
| Cash and cash equivalents | $629.4 million | $345.2 million at December 31, 2010 |
| Total assets / stockholders’ equity | $11.44 billion / $2.89 billion | $8.69 billion / $2.25 billion at December 31, 2010 |
| Repurchase agreements / securitized debt | $7.65 billion / $663.4 million | $5.99 billion / $220.9 million at December 31, 2010 |
| GAAP debt-to-equity leverage | 2.9x | 2.8x at December 31, 2010 |
| Operating cash flow | $62.1 million | $60.4 million in Q1 2010 |
Cash increased by $284.2 million in the quarter. Investing activities used $2.075 billion, primarily for MBS purchases; financing activities provided $2.297 billion. The common dividend declared for Q1 was $0.235 per share. MFA issued 74.75 million shares in a March public offering, raising approximately $605 million net.
Material changes versus Q1 2010 and the prior quarter-end
- Net interest income rose 8.6%, principally reflecting a substantially larger Non-Agency MBS portfolio and lower funding costs. Net income was nearly flat, while diluted EPS declined from $0.29 to $0.27, reflecting the larger weighted-average share count.
- Agency MBS interest income declined 23.5% to $60.2 million; reported drivers included lower yields and a smaller average portfolio. Non-Agency MBS interest income increased to $49.6 million from $29.0 million as average investment more than doubled, although its net yield fell to 8.58% from 10.46%.
- Interest expense fell to $34.7 million from $38.5 million, despite higher average borrowings. The effective funding rate decreased to 1.99% from 2.40%.
- MBS fair value rose to $10.58 billion from $8.06 billion at year-end. Cash, equity, and borrowings also increased, reflecting the equity raise, portfolio purchases, and February resecuritization.
- Other income included $14.9 million from Linked Transactions. No MBS were sold in Q1 2011; Q1 2010 included MBS sale gains and losses on terminated repurchase agreements.
Outlook, commentary, risks, and unusual items
- Management said it intended to continue investing in Agency and Non-Agency MBS and viewed market opportunities as attractive, while noting that Non-Agency purchase discounts had narrowed. It expected most assets to remain in Agency MBS. No specific earnings or dividend guidance was provided.
- The February resecuritization generated $488.4 million of third-party senior debt and cash proceeds, while MFA retained substantial subordinate/support interests and first-loss economic exposure. The consolidated VIE assets are restricted to settling VIE obligations; senior bondholders have no general recourse to MFA, subject to specified repurchase obligations for representation-and-warranty breaches.
- Liquidity included a reported $1.208 billion cushion: $629.4 million cash, $504.2 million unpledged Agency MBS, and $74.5 million excess collateral. Management believed resources were adequate, but warned that falling collateral values, margin calls, tighter markets, or lenders declining to renew short-term repo financing could materially pressure liquidity and leverage.
- Interest-rate exposure remains material: repo costs can reset faster than asset yields, and swaps hedge only part of borrowings. The filing’s modeled +100-basis-point shock projected an 8.93% decrease in net interest income and a 1.19% decrease in portfolio value; management cautioned that the estimates depend on assumptions and are not forecasts.
- Non-Agency MBS carry credit and cash-flow estimation risk. Credit Reserve and impairment-related discounts totaled about $945.9 million for reported Non-Agency MBS, and no OTTI loss was recognized in Q1. Actual defaults, loss severities, prepayments, or property values could differ from management estimates.
- Lealand Place, a 191-unit apartment property, was classified as held for sale on March 31; management found fair value exceeded carrying value less selling costs. Dodd-Frank implementation and other regulatory changes could increase compliance costs or affect financing, securitization, and investment markets.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether portfolio expansion and the lower Non-Agency yields sustain net interest income and per-share earnings after the large equity issuance.
- Repo renewal terms, collateral haircuts, margin-call capacity, and the company’s actual leverage, including borrowings embedded in Linked Transactions.
- Non-Agency MBS performance versus cash-flow assumptions, including credit reserves, delinquencies, realized losses, and any future impairment charges.
- How the resecuritizations’ retained interests, debt amortization, and representation-and-warranty obligations affect risk and cash flows.
- Whether the declared dividend is supported by REIT taxable income and available cash; GAAP earnings and REIT taxable income may differ materially.