MFA Financial, Inc. — 2020 Form 10-K Summary
Business and reporting period. MFA is an internally managed REIT investing with leverage in residential mortgage assets. This annual report covers the fiscal year ended December 31, 2020; quarterly results below include the fourth quarter. The COVID-19 market disruption drove a major portfolio and financing restructuring. At year-end, residential whole loans were the dominant investment.
Financial performance and position
| Metric | 2020 / Dec. 31, 2020 | 2019 / Dec. 31, 2019 |
|---|---|---|
| Interest income | $359.4 million | $581.7 million |
| Net interest income | $90.6 million; net interest margin 1.24%, spread 0.66% | $249.4 million; margin 2.35%, spread 1.96% |
| Net loss available to common stock and participating securities | $709.2 million loss; diluted EPS loss of $1.57 | $363.1 million income; diluted EPS $0.79 |
| Cash from operations | $38.4 million | $215.8 million |
| Total assets | $6.93 billion | $13.57 billion |
| Stockholders’ equity | $2.52 billion | $3.38 billion |
| Cash and cash equivalents | $814.4 million | $70.6 million |
| Debt-to-equity multiple | 1.7x | 3.0x |
| GAAP book value per common share | $4.54 | $7.04 |
At year-end, residential whole loans were $5.33 billion net, approximately 77% of total assets; residential mortgage securities were $161 million and MSR-related assets were $239 million. Total cash, cash equivalents and restricted cash rose $686.9 million during 2020. Investing activities provided $6.38 billion, while financing activities used $5.74 billion.
Fourth-quarter net income was $45.8 million before preferred dividends; net income available to common stock and participating securities was $37.6 million, or $0.08 per share. Fourth-quarter net interest income was $19.4 million and net interest margin was 1.49%.
Material changes and unusual items
- Residential mortgage assets declined from $13.06 billion to $5.98 billion during 2020. MFA sold all Agency MBS and Legacy Non-Agency MBS and substantially reduced CRT securities and MSR-related assets, shifting the portfolio toward whole loans.
- Asset sales and impairments, including impairment charges on securities and MSR-related assets, produced substantial losses. MFA reported $188.9 million of net realized losses on sales, $344.4 million of impairment losses on securities and MSR-related assets, and $65.3 million of impairment charges on loan-originator investments. It also recorded $94.2 million of gains on whole loans measured at fair value.
- MFA recorded $44.4 million of restructuring and forbearance-related costs, a $57.0 million loss on terminated swaps, and $25.3 million of expenses associated with early repayment of a senior secured credit agreement. It sold $1.8 billion of Non-QM loans at an amortized cost basis, recognizing $273.0 million of losses.
- CECL adoption and updated credit estimates resulted in an $86.8 million year-end allowance for credit losses on whole loans held at carrying value; the company recorded $22.4 million of credit-loss provisions for loans and other financial instruments during 2020.
- Common dividends were reduced to $0.125 per share for 2020 from $0.80 in 2019; the first-quarter 2020 common dividend was revoked and payments later resumed. Preferred dividends were also temporarily suspended and subsequently reinstated.
Liquidity, financing, outlook and risks
During the 2020 market turmoil, MFA faced unprecedented margin calls and entered temporary forbearance arrangements with lenders. It subsequently refinanced much of its portfolio and pursued more durable, longer-term funding. At year-end, $2.5 billion was outstanding under asset-backed financing agreements and $1.5 billion in securitized debt. The company reported compliance with all financial covenants. It completed three whole-loan securitizations in the second half of 2020; management said these reduced funding costs and lengthened funding terms. In January 2021, MFA redeemed its $100 million 8.00% Senior Notes and completed a $217.5 million business-purpose rental-loan securitization, which generated about $48.4 million of liquidity.
Management expected to focus primarily on residential whole-loan opportunities in 2021, conditional on stabilizing economic conditions and increased Non-QM and business-purpose loan originations. No quantitative earnings or dividend guidance is provided. MFA said distributions remain at the Board’s discretion and depend on taxable income, results, liquidity and other factors.
- Credit risk remains significant: at year-end, Non-QM loans with $148.4 million amortized cost and rehabilitation loans with $136.3 million amortized cost were more than 90 days delinquent. California represented 35.1% of whole-loan interest-bearing UPB.
- Liquidity and refinancing risks persist, including potential margin calls on mark-to-market financing, lender non-renewal, asset illiquidity and dependence on securitization markets. Only 30.9% of financing agreements were described as shorter-term repurchase agreements with mark-to-market collateral provisions at year-end.
- Other material risks include COVID-19 effects on borrowers, housing and servicers; uncertain collateral valuations and credit-loss estimates; interest-rate, spread and prepayment exposure; geographic concentration; and legal, regulatory, REIT-qualification and Investment Company Act requirements.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified the loan-loss allowance and fair value of whole loans as critical audit matters due to estimation uncertainty. The filing reports no material legal proceedings.
Key facts for investors to verify
- Whether loan delinquencies, forbearance outcomes, foreclosures and realized credit losses improve or worsen, particularly in Non-QM and rehabilitation loans.
- Whether the $86.8 million loan allowance and the Level 3 whole-loan valuations adequately reflect current economic, home-price and recovery assumptions.
- Whether MFA sustains liquidity and secures financing on acceptable terms, including through future securitizations, and how much exposure remains to margin calls and counterparties.
- Whether management’s 2021 loan acquisition plans are supported by originations and market conditions, and whether funding-cost reductions translate into improved net interest margins.
- The sustainability of common and preferred dividends; the filing does not establish a minimum common dividend.
- The effects of the portfolio shift, asset sales and unusual 2020 charges on recurring earnings, book value and future distributable income.