MFA Financial, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. MFA is a REIT investing, on a leveraged basis, in residential mortgage assets. Figures below are in millions of dollars except per-share amounts and percentages.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Prior comparable / December 31, 2017 |
|---|---|---|
| Interest income | $103.8 | $117.3 in Q1 2017 |
| Net interest income | $53.2 | $66.9 in Q1 2017 |
| Net income | $83.4 | $78.1 in Q1 2017 |
| Net income available to common stock and participating securities | $79.6; $0.20 per diluted share | $74.3; $0.20 per diluted share |
| Net interest spread / margin | 2.25% / 2.64% | 2.27% / 2.63% in Q1 2017 |
| Total assets / stockholders’ equity | $10,615.2 / $3,235.4 | $10,954.7 / $3,261.6 |
| Repurchase agreements and other advances | $6,558.9 | $6,614.7 |
| Cash and cash equivalents | $214.7 | $449.8 |
| Book value per common share | $7.62 | $7.70 |
Operating cash flow was $5.9, versus $44.4 in Q1 2017. Investing activities used $116.2 and financing activities used $131.0; cash, cash equivalents and restricted cash declined $241.3 during the quarter to $221.8. Management estimated available liquidity above $838.3, excluding restricted cash. The debt-to-equity multiple was 2.2x, down from 2.3x at year-end. The common dividend declared was $0.20 per share, equal to reported diluted EPS.
Material changes and management commentary
- Common-available net income increased about 7% year over year, while diluted EPS remained $0.20. Higher other income—especially gains on fair-value residential whole loans—more than offset lower net interest income.
- Net interest income fell 20.5%, primarily as average Agency and Non-Agency MBS balances declined and funding costs rose. The average cost of interest-bearing liabilities increased to 2.90% from 2.34% a year earlier.
- Other income rose to $47.7 from $28.0, including $38.5 of gains on residential whole loans held at fair value and $8.8 of realized gains on investment-security sales. The whole-loan gain included $13.7 of unrealized fair-value gains and $6.4 of gains on transfers to real estate owned (REO).
- Residential whole loans grew to about $2.7 billion from $2.2 billion at year-end. MFA purchased or committed to purchase approximately $521.8 of such loans during the quarter. REO increased to $182.9 from $152.4, with 845 properties at quarter-end.
- Management said it expects to continue investing in residential mortgage assets, with emphasis on residential whole loans, RPL/NPL MBS and MSR-related assets, subject to market conditions. It described market pricing as high and attractive risk/reward opportunities as challenging. No quantitative earnings or return guidance is provided.
- Management attributed the book-value decline mainly to fair-value changes in Agency and Legacy Non-Agency MBS and distribution of discount-accretion income, partly offset by higher swap values. It released $7.1 of Non-Agency MBS credit reserve into accretable discount, citing improved expected collateral performance; the filing says the income effect is expected largely over the next ten years.
Risks, contingencies and unusual items
- Short-term, renewable repurchase financing funds longer-term assets. Non-renewal, increased haircuts, margin calls or counterparty distress could constrain liquidity or force asset sales. At quarter-end, $6.6 billion of repo borrowings were spread across 29 counterparties; the filing reports no covenant breaches.
- Interest-rate, spread, prepayment and credit risks can affect funding costs, asset values, income and collateral requirements. The filing’s modeled +100-basis-point shock estimated a 3.37% decline in next-12-month net interest income and a 1.05% decline in portfolio value; actual results may differ materially.
- Credit and valuation exposure is meaningful in Non-Agency MBS and whole loans. About $996.0 of fair-value whole loans were at least 90 days past due, and formal foreclosure proceedings were in process on loans with approximately $869.3 of fair value. Fair-value whole loans and MSR term notes include Level 3 estimates.
- Accumulated other comprehensive income declined $26.5 in Q1, chiefly reflecting unrealized MBS losses, despite a $19.7 gain on hedging swaps. No OTTI charge was recorded in Q1 2018, versus $0.4 in Q1 2017.
- MFA estimated Q1 REIT taxable income of $66.1 and undistributed taxable income of $40.5, or $0.10 per share; taxable income can differ materially from GAAP earnings. The filing identifies no material pending legal proceedings, no material changes to previously disclosed risk factors, and no reserve for loan-securitization repurchase claims.
Important facts for investors to verify
- Whether the $38.5 whole-loan gain, including unrealized and transfer-related gains, is repeatable and how much reflects cash realization.
- How repo funding costs, collateral haircuts, liquidity availability and counterparty exposures evolve as rates and markets change.
- Whether whole-loan delinquencies, foreclosure timelines, REO levels and collateral recovery estimates remain consistent with management’s assumptions.
- Whether the $7.1 credit-reserve release and related projected discount accretion are supported by subsequent loan performance and cash flows.
- How GAAP earnings, REIT taxable income, cash generation and dividend coverage compare in future periods; Q1 operating cash flow was $5.9 versus $79.8 of cash dividends and equivalents paid.