MFA Financial, Inc. — Q2 2023 Form 10-Q
Business context and period. MFA is a mortgage REIT investing on a leveraged basis in residential whole loans, mortgage securities and related assets. Its wholly owned Lima One subsidiary originates and services business-purpose loans. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons below are with Q2 2022, the prior quarter, or December 31, 2022, as specified.
Financial performance and position
- Q2 earnings: Interest income was $144.4 million and net interest income was $44.5 million. Net loss was $25.9 million; loss available to common stockholders and participating securities was $34.1 million, or $0.34 per basic and diluted share.
- Six-month earnings: Interest income was $276.6 million and net interest income was $83.9 million. Net income was $46.9 million; income available to common stockholders and participating securities was $30.4 million, or $0.30 basic and $0.29 diluted per share.
- Spreads and margin: Q2 net interest spread, including swap carry, was 2.14%, versus 1.74% in Q1 2023 and 1.37% in Q2 2022. Net interest margin was 2.99%, versus 2.64% in Q1 2023 and 2.13% in Q2 2022.
- Q2 non-GAAP measure: Distributable earnings were $40.4 million, or $0.40 per basic share, compared with a $0.35 common dividend per share. The company reports this as a non-GAAP measure; it is not a substitute for GAAP income or operating cash flow.
- Balance sheet at June 30: Total assets were $9.74 billion, including $8.14 billion of residential whole loans and $594.3 million of securities. Total liabilities were $7.79 billion and stockholders’ equity was $1.94 billion. At December 31, 2022, these were $9.11 billion, $7.12 billion and $1.99 billion, respectively.
- Debt and leverage: Financing agreements were $7.57 billion on the balance sheet, compared with $6.81 billion at year-end; unpaid principal balance was $7.79 billion. Debt-to-equity leverage was 3.9x and recourse leverage was 1.9x, versus 3.5x and 1.8x at year-end. Weighted average funding cost was 3.96%, including the reported net swap carry benefit.
- Liquidity and cash flow: Cash and cash equivalents were $329.4 million and restricted cash was $174.0 million. For the six months, operating cash flow was $65.1 million, investing cash flow was negative $692.2 million, and financing cash flow was positive $636.4 million. Cash, cash equivalents and restricted cash rose $9.3 million to $503.4 million. Management reported $1.5 billion of unused financing capacity and $49.0 million of unencumbered residential whole loans; the company was in compliance with financial covenants.
- Book value: GAAP book value per common share was $14.42, down from $15.15 at March 31, 2023; economic book value was $15.12, down from $16.02. Management attributed the decline primarily to lower residential loan fair values amid rising interest rates.
Material changes and management commentary
- Q2 net loss available to common shareholders swung from income of $64.6 million in Q1 2023. Other income moved from a $75.3 million gain to a $28.3 million loss, principally due to a $130.7 million fair-value loss on residential whole loans. Gains on risk-management derivatives ($60.5 million) and securitized debt measured at fair value ($27.4 million) partly offset that loss.
- Against Q2 2022, Q2 2023 net loss narrowed from $100.4 million. However, net interest income fell to $44.5 million from $52.6 million, as higher funding costs outweighed growth in interest income.
- For the first six months, results improved from a $183.3 million net loss in 2022 to $46.9 million net income in 2023, primarily because fair-value losses on residential loans were much lower. Net interest income nevertheless declined $31.8 million year over year as financing costs increased.
- Management said it prioritized liquidity and actively managed the portfolio amid volatile rates and credit spreads. In Q2, MFA acquired or originated nearly $1.0 billion of residential whole loans and securities, including $523 million of business-purpose loans through Lima One and $345 million of Non-QM loans; it also completed a Non-QM securitization backed by $371.6 million of unpaid principal balance.
- The common dividend was $0.35 per share for Q2, paid July 31, 2023. No common shares were repurchased under the repurchase program during the six months; $202.5 million remained authorized.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key exposures include interest-rate and credit-spread movements, loan delinquencies and defaults, prepayment behavior, fair-value estimation, and the cost and availability of financing. Rising rates can increase borrowing costs faster than asset yields and reduce asset values; collateral declines can trigger margin calls. Repo and other collateralized facilities are uncommitted and may not be renewed.
- At June 30, 60-plus-day delinquencies were 2.8% for purchased performing loans, 16.7% for purchased credit-deteriorated loans and 34.3% for purchased non-performing loans. The total residential whole-loan allowance for credit losses on loans held at carrying value was $31.0 million. Unfunded transitional-loan commitments were $587.2 million.
- Management’s interest-rate shock analysis estimated that a 100-basis-point increase would reduce net portfolio value by about $138.0 million and increase net interest income by 0.96%; actual outcomes may differ materially and depend on model assumptions.
- The company reported no material pending legal proceedings, no material unsettled loan repurchase claims requiring a reserve, and no material changes to the risk factors in its 2022 Form 10-K. Series C preferred dividends are expected to transition from LIBOR to a successor benchmark before March 2025; management presently expects three-month SOFR, but no replacement had yet been selected.
Important facts for investors to verify
- Review the composition, delinquency trends, collateral values and fair-value assumptions for the loan portfolio, particularly non-performing and credit-deteriorated loans.
- Assess whether net interest spread and distributable earnings remain resilient as borrowing costs, asset yields and swap carry change; reconcile the non-GAAP measure to GAAP results.
- Check financing maturities, counterparties, collateral haircuts, margin-call exposure and the availability of reported unused financing capacity.
- Evaluate the sustainability of the $0.35 common dividend against taxable income, cash needs, leverage and future results; distributable earnings are not GAAP cash flow.
- Monitor unfunded transitional-loan commitments, REO resolutions, securitization performance and the effects of market-rate changes on book value.