MFA FINANCIAL, INC. quarterly report, Q1 FY2024

Full document

MFA Financial, Inc. — Q1 2024 Form 10-Q

Business context and reporting period

MFA is an internally managed mortgage REIT investing primarily in residential whole loans and mortgage securities, with business-purpose loan origination and servicing through Lima One. This unaudited filing covers the quarter ended March 31, 2024; comparisons below are year over year unless stated otherwise.

Financial and operating performance

  • Income and earnings: Interest income was $176.8 million, up 33.8% from $132.2 million. Net interest income was $47.8 million, up 21.5% from $39.4 million. Net income was $23.2 million, versus $72.8 million; income available to common stock and participating securities was $15.0 million, or $0.14 per diluted share, versus $64.6 million, or $0.62 per diluted share.
  • Net interest margins: Net interest margin, including swap carry, was 2.88%, versus 2.64% a year earlier and 2.96% in Q4 2023. Net interest spread was 2.06%, versus 1.74% a year earlier and 2.13% in Q4.
  • Non-GAAP results: Distributable Earnings were $36.1 million, or $0.35 per basic share, versus $31.0 million, or $0.30, a year earlier. This measure excludes specified fair-value movements and other items and is not a substitute for GAAP earnings or cash flow.
  • Fair-value and other income: Other income, net, was $22.4 million, down from $75.1 million. Q1 included $11.5 million of losses on residential loans measured at fair value and $22.5 million of losses on securitized debt, partly offset by $49.9 million of derivative gains. The corresponding loan and securitized-debt marks were substantially more favorable in Q1 2023.
  • Expenses and credit losses: Operating and other expense was $46.4 million, up from $41.7 million; compensation and benefits rose to $25.5 million from $20.6 million. MFA recorded a $0.5 million reversal of residential loan credit-loss provisions and a $1.1 million provision against an uncollectible receivable from a third-party servicer. Residential loan allowance was $19.6 million at quarter-end.
  • Cash flow and liquidity: Operating cash flow was $53.5 million, investing cash flow was negative $91.4 million, and financing cash flow was positive $78.9 million. Cash and cash equivalents were $306.3 million; restricted cash was $222.9 million and is not available for general corporate purposes. MFA reported approximately $2.4 billion of unused financing capacity and $35.5 million of unencumbered residential loans.
  • Debt and leverage: Financing agreements were $8.69 billion on the balance sheet; debt principal was approximately $8.81 billion. Debt-to-equity leverage was 4.6x, versus 4.5x at year-end 2023; recourse leverage was 1.8x, versus 1.7x. The weighted average funding cost, including net swap carry, was 4.52%, up from 4.33% at year-end. MFA said it was in compliance with all financial covenants.
  • Portfolio and book value: Total assets were $10.87 billion, including $9.12 billion of residential whole loans and $737.0 million of securities. GAAP book value per common share was $13.80, down from $13.98 at year-end; Economic book value, a non-GAAP measure, was $14.32, down from $14.57. The common dividend was $0.35 per share.

Material changes and management commentary

  • Compared with Q1 2023, higher loan balances and yields lifted net interest income, but the decline in fair-value-related income drove lower GAAP earnings. Compared with Q4 2023, net income available to common holders fell from $81.5 million, or $0.80 per basic share, primarily due to less favorable fair-value results.
  • Management described Q1 as more challenging for fixed-income investors: persistent inflation pushed Treasury yields up roughly 30–40 basis points, while tighter credit spreads partly offset higher rates. MFA said portfolio mark-to-market losses affected GAAP results and that it was monitoring Federal Reserve policy and market impacts.
  • MFA acquired or originated approximately $652 million of residential loans during the quarter, including $465 million of business-purpose loans, and securitized $192.5 million of Transitional loans. It issued $115 million of 8.875% senior notes due 2029 and repurchased $39.9 million principal amount of its 6.25% convertible notes due June 2024.

Outlook, risks, contingencies, and unusual items

  • The filing gives no specific earnings or portfolio guidance. Management cautions that quarterly results should not be taken as indicative of full-year results.
  • Key exposures include interest-rate and credit-spread movements, loan delinquencies and defaults, prepayments, real-estate values, fair-value estimation, and the effectiveness of hedges. MFA’s interest-rate sensitivity analysis estimates that a parallel 100-basis-point increase would reduce portfolio value by $131.2 million and increase projected 12-month net interest income by 0.79%; a 100-basis-point decrease would increase portfolio value by $80.6 million and reduce projected net interest income by 1.13%. These are modeled estimates, not forecasts.
  • Liquidity is exposed to margin calls and the renewal or availability of short-term, uncommitted financing. MFA had $2.5 billion of mark-to-market asset-backed financing, and noted that collateral declines or tighter lending terms could adversely affect liquidity and leverage.
  • At March 31, $527.0 million of Transitional loan commitments remained unfunded. MFA also guaranteed up to $42.5 million of a loan-origination partner’s warehouse financing; no liability was recorded. The company reported no material unsettled loan-sale or securitization repurchase claims requiring a reserve and no material pending legal proceedings.
  • Subsequent to quarter-end, MFA completed a securitization backed by $365.2 million UPB of Non-QM loans and issued $75 million of 9.00% senior notes due 2029, with approximately $72 million net proceeds. A new $200 million common-stock repurchase authorization runs through 2025; a $300 million at-the-market issuance program was also established. No shares were sold under the ATM or repurchased under the new program in Q1.

Important facts for investors to verify

  • How much of reported earnings and Distributable Earnings reflects recurring net interest income versus fair-value movements, and how the non-GAAP adjustments reconcile to GAAP results.
  • Trends in delinquencies, nonaccrual loans, realized losses, and collateral values; total residential loans 60 days or more delinquent were reported at 6.9% of UPB, versus 6.6% at year-end 2023.
  • Funding costs, financing renewal terms, margin-call capacity, unused financing availability, and the effect of new 8.875% and 9.00% senior notes on interest expense and leverage.
  • Cash available for general purposes versus restricted cash, and the liquidity needed for $527.0 million of unfunded Transitional loan commitments and shareholder distributions.
  • Management’s fair-value assumptions for the predominantly Level 3 residential loan portfolio, and the potential effects of interest rates, credit spreads, prepayments, and housing-market changes.
  • The June 2024 maturity and settlement of the remaining convertible notes, plus the actual use of the ATM and stock-repurchase authorizations.