MFA Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. MFA is an internally managed mortgage-focused REIT investing primarily in residential whole loans, with a business-purpose loan origination and servicing business through Lima One.
Financial results and key metrics
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Interest income | $123.9 million | $90.9 million in Q3 2021 |
| Net interest income | $52.3 million | $61.8 million in Q3 2021; $52.6 million in Q2 2022 |
| Net loss | $55.0 million; common loss $63.2 million, or $0.62 per share | Net income of $132.5 million; common earnings of $124.3 million, or $1.12 per share, in Q3 2021 |
| Distributable earnings | $28.2 million, or $0.28 per share | Non-GAAP measure; management cautions it is not a substitute for GAAP results or operating cash flow |
| Net interest spread and margin | 1.64% and 2.43% | 2.98% and 3.70% in Q3 2021; margin was 2.13% in Q2 2022 |
| Cash, cash equivalents and restricted cash | $601.4 million total, including $434.1 million cash and equivalents | Cash and equivalents were $304.7 million at December 31, 2021; restricted cash is not generally available for corporate purposes |
| Debt and equity | $7.29 billion financing agreements on the balance sheet; $2.03 billion stockholders’ equity | Debt-to-equity multiple was 3.6x versus 2.5x at year-end 2021 |
For the nine months, interest income was $339.5 million, net interest income $167.9 million, and net loss $238.3 million; loss available to common stockholders was $262.9 million, or $2.54 per share. Operating cash flow was $361.6 million; investing used $1.04 billion and financing provided $876.0 million. Cash, cash equivalents and restricted cash increased $196.9 million.
At September 30, total assets were $9.52 billion, including $8.19 billion of residential whole loans and $227.4 million of securities. The quarterly GAAP net loss included $291.9 million of losses on residential whole loans measured at fair value, partly offset by $111.8 million of derivative gains and $98.9 million of gains on securitized debt measured at fair value. For the first nine months, the corresponding loan loss was $796.7 million, versus derivative gains of $253.7 million and securitized-debt gains of $247.5 million.
Changes and notable developments
- Q3 net interest income was nearly unchanged sequentially, but higher borrowing rates raised interest expense to $71.6 million from $56.7 million in Q2. Higher asset yields helped lift the quarterly net interest margin from 2.13% to 2.43%.
- Compared with the first nine months of 2021, net interest income declined $3.8 million while total interest expense more than doubled, to $171.6 million. The company reported a $248.2 million net loss in other income, versus $150.4 million of other income in the prior-year period, principally reflecting fair-value losses on loans.
- GAAP book value per common share fell to $15.31 from $16.42 at June 30 and $19.12 at December 31, 2021. Economic book value, a non-GAAP measure, was $15.82, down from $17.25 at June 30. Management attributed the declines primarily to higher interest rates and wider spreads reducing loan values.
- MFA completed three Q3 loan securitizations totaling $893.1 million of loan UPB, adding longer-term, non-recourse, non-mark-to-market financing. A further $234.8 million single-family rental loan securitization closed after quarter-end. Securitized debt rose to $3.8 billion from $2.7 billion at year-end 2021.
- The company repurchased 6.48 million common shares for approximately $102.1 million in the first nine months; no shares were repurchased in Q3. Approximately $202.5 million remained under the repurchase authorization. A $0.44-per-share Q3 common dividend was paid October 31, 2022.
Outlook, risks and contingencies
- Outlook: The filing provides no quantified earnings or portfolio guidance. Management described Q3 as an exceptionally challenging period for mortgage investors, citing rising rates and wider mortgage and credit spreads. It said liquidity prioritization, hedging and securitizations helped mitigate the environment.
- Liquidity and financing: MFA reported approximately $1.4 billion of unused financing capacity across arrangements, and compliance with all financial covenants. Financing lines are generally uncommitted and renewable at lenders’ discretion; mark-to-market facilities can require additional collateral as asset values decline. Management also cited $39.2 million of unencumbered residential whole loans and approximately $125 million of unused capacity in certain borrowing lines.
- Market and valuation risk: Rising rates can increase funding costs faster than asset yields, while rate and credit-spread movements can create material fair-value volatility and margin calls. Much of the fair value of loan assets uses Level 3 inputs and management estimates. The filing’s rate-sensitivity analysis estimates that a 100-basis-point increase would reduce portfolio value by 1.18% while increasing projected net interest income by 1.58%; management cautions actual results may differ materially.
- Credit and other items: The allowance for credit losses on loans held at carrying value was $37.2 million. Residential whole loans 90 or more days delinquent had $614.2 million of UPB, down from $800.1 million at year-end 2021. MFA recorded a $28.6 million impairment on one loan-origination partner investment in Q2, reducing its carrying value to zero; there was no such impairment in Q3.
- Contingencies and governance: MFA reported no material unsettled loan repurchase claims requiring a reserve and no material pending legal proceedings. It disclosed regulatory uncertainty, including potential effects of the CFPB funding-structure ruling and ongoing mortgage-finance regulation. Management reported effective disclosure controls as of September 30 and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of GAAP earnings and book-value volatility reflects fair-value accounting, and how sensitive are Level 3 loan marks to discount rates, defaults, home prices and liquidation assumptions?
- Whether rising funding costs, loan prepayments and credit performance support future net interest margins and distributable earnings; review the non-GAAP reconciliation and its exclusions.
- How quickly MFA can meet collateral calls or replace financing if counterparties tighten terms or do not renew, including the distinction between stated unused capacity and immediately available liquidity.
- Whether delinquency trends, foreclosure timelines, loan-origination partner exposure and the $542.8 million of unfunded residential transition loan commitments affect expected credit losses and cash needs.
- How securitization growth changes recourse exposure, funding costs and retained first-loss risk; confirm the effect of subsequent transactions and the LIBOR-to-SOFR transition on relevant contracts and preferred-stock terms.