MFA Financial, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. MFA is a leveraged mortgage REIT investing primarily in residential whole loans, mortgage securities and real estate assets; its Lima One subsidiary originates and services business-purpose loans.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparable period or change |
|---|---|---|
| Interest income | $159.2 million | Q3 2022: $123.9 million |
| Net interest income | $46.1 million | Q3 2022: $52.3 million; nine-month 2023: $130.0 million versus $167.9 million |
| Net loss / loss per common share | $(56.4) million / $(0.64) | Q3 2022: $(55.0) million / $(0.62). Nine-month 2023 loss: $(9.6) million, or $(0.34) per share, versus $(238.3) million, or $(2.54), in 2022. |
| Net interest spread / margin | 2.17% / 3.02%, including swap carry | Q2 2023: 2.14% / 2.99% |
| Distributable earnings | $41.1 million, or $0.40 per basic share | Non-GAAP; common dividend was $0.35 per share, an 88% payout ratio on this measure |
| Total assets / stockholders’ equity | $10.10 billion / $1.85 billion | December 31, 2022: $9.11 billion / $1.99 billion |
| Cash / restricted cash | $300.1 million / $153.4 million | Restricted cash is not available for general corporate purposes |
| Financing agreements | $8.04 billion carrying value; $8.30 billion unpaid principal balance | Carrying value at December 31, 2022: $6.81 billion |
For the nine months, operating cash flow was $104.9 million, investing activities used $1.24 billion, and financing activities provided $1.09 billion. Cash, cash equivalents and restricted cash declined $40.5 million to $453.5 million. At quarter-end, unused financing capacity was approximately $1.7 billion; unencumbered residential whole loans were $30.5 million. Debt-to-equity leverage was 4.3x and recourse leverage 2.0x. MFA reported compliance with its financing covenants.
Material changes and management commentary
- Q3 GAAP book value per common share fell to $13.48 from $14.42 at June 30; economic book value, a non-GAAP measure, declined to $13.84 from $15.12. Management attributed the declines primarily to lower residential loan values as interest rates rose.
- Management described Q3 as a difficult fixed-income quarter amid resilient economic data, hawkish Federal Reserve commentary and a steepening yield curve. It reported adding nearly $1 billion of target assets, including business-purpose loans and Agency MBS.
- Interest income increased year over year, but higher financing costs reduced net interest income. Q3 interest expense was $113.0 million versus $71.6 million in Q3 2022; for the first nine months it was $305.7 million versus $171.6 million.
- Fair-value movements remained significant: Q3 included a $132.9 million loss on residential whole loans measured at fair value, partly offset by $34.9 million of derivative gains and $36.4 million of gains on securitized debt measured at fair value.
- MFA completed two Q3 securitizations backed by $601.5 million of loan UPB, increasing the share of loan financing that was non-mark-to-market to 77%. It completed another $225.5 million UPB Transitional-loan securitization after quarter-end.
- The company declared a Q3 common dividend of $0.35 per share, paid October 31, 2023. It repurchased $10.4 million principal amount of its 2024 convertible notes for $10.3 million during September; no common shares were repurchased in the first nine months.
Outlook, risks and contingencies
The filing provides no quantitative earnings or book-value guidance. Management’s forward-looking discussion emphasizes sensitivity to interest rates, credit spreads, prepayments, borrower defaults, property values, funding costs and access to financing. Repurchase agreements are generally uncommitted and renewable at lenders’ discretion; mark-to-market financing can require additional collateral when asset values fall. A modeled immediate 100-basis-point rate increase indicated a 1.32% decline in net interest income and a $129.1 million reduction in estimated net portfolio value; these are scenario estimates, not forecasts.
Residential whole loans totaled $8.42 billion, including $699.8 million of purchased non-performing loans. Loans at least 60 days delinquent represented 6.4% of total loan UPB, versus 8.1% at December 31, 2022; delinquency varies substantially by loan category. The company had $587.4 million of unfunded Transitional-loan commitments. It reported no material unsettled securitization repurchase claims requiring a reserve and no material pending legal proceedings. A new Lima One office lease carries an expected average annual rental expense of approximately $3.0 million, with relocation currently expected in Q1 2025. The filing reports no material change in risk factors from the 2022 Form 10-K.
Important facts for investors to verify
- How much of the reported loss and book-value decline reflects fair-value marks, and how sensitive are loan and securitized-debt valuations to market assumptions?
- Whether distributable earnings remain sufficient to cover common dividends; this is a non-GAAP measure and differs from GAAP net income and operating cash flow.
- Whether financing costs, lender renewals, collateral haircuts and margin calls affect liquidity or leverage, despite reported unused capacity and covenant compliance.
- Credit performance and valuation assumptions for delinquent and non-performing loans, including the $587.4 million of unfunded Transitional-loan commitments.
- The effects of interest rates, prepayments, credit spreads and the planned LIBOR replacement for Series C preferred dividends beginning in 2025.