MFA Financial, Inc. — Q2 2021 Form 10-Q
Business and period: MFA is a leveraged residential mortgage investor and REIT. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020.
Financial performance and position
| Metric | Q2 / June 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $84.5 million | $102.8 million in Q2 2020 |
| Net interest income | $59.0 million; spread 3.02%, margin 3.86% | $14.8 million; spread (0.88)%, margin 0.81% in Q2 2020 |
| Net income | $66.7 million; $58.5 million available to common stock and participating securities; diluted EPS $0.13 | $96.6 million; $88.4 million available to common; diluted EPS $0.19 in Q2 2020 |
| Six-month net income/(loss) | $152.2 million; diluted EPS $0.30 | $(812.4) million; diluted EPS $(1.82) in H1 2020 |
| Cash flows, six months | Operating +$96.6 million; investing +$39.5 million; financing −$42.4 million; cash, cash equivalents and restricted cash increased $93.7 million | Ending cash, cash equivalents and restricted cash: $915.2 million |
| Total assets / equity | $7.21 billion / $2.53 billion | $6.93 billion / $2.52 billion at Dec. 31, 2020 |
| Financing agreements | $4.43 billion | $4.34 billion at Dec. 31, 2020 |
| Liquidity and leverage | $906.4 million cash and cash equivalents; debt-to-equity multiple 1.8x | Debt-to-equity multiple 1.7x at Dec. 31, 2020 |
| Book value per common share | GAAP $4.65; economic book value $5.12 | GAAP $4.54 and economic $4.92 at Dec. 31, 2020 |
Q2 credit-loss provision reversal was $8.9 million; for the first half it was $31.6 million. The allowance for credit losses on loans held at carrying value was $54.3 million at quarter-end. The company reported compliance with all financial covenants.
Material changes versus comparable periods
- Q2 net income available to common fell from Q2 2020, chiefly because the prior-year quarter included a much larger credit-loss reversal and higher other income, including realized gains on asset sales. The 2020 comparison also included swap termination losses and $40.0 million of forbearance and financing-related costs.
- H1 2021 returned to profit from the exceptional H1 2020 loss, which included $424.7 million of impairment and other losses, $188.9 million of realized losses on asset sales, a $65.3 million credit-loss provision, and $44.4 million of forbearance-related costs.
- Q2 2021 net interest income improved substantially year over year as financing costs and borrowing balances declined. The effective interest rate on borrowings was 2.49% in Q2 2021 versus 6.19% in Q2 2020.
- Residential whole loans were $5.55 billion at June 30, versus $5.33 billion at year-end. Securities at fair value declined to $302.8 million from $400.0 million. Beginning in Q2, MFA elected fair value accounting for all new loan purchases.
Outlook, commentary, risks and unusual items
- On July 1, 2021, MFA completed its acquisition of Lima One Holdings, parent of Lima One Capital. Management expects the deal to be accretive and business-purpose loans held on balance sheet to increase; results will be consolidated beginning in Q3. Management also expects higher future G&A expenses. Benefits and integration are not assured.
- MFA completed two Q2 securitizations: $395.1 million of Non-QM loans, producing about $88.6 million of additional liquidity and reducing the funding rate by 203 basis points; and $473.2 million of previously securitized and other re-performing loans, reducing the funding rate by 85 basis points.
- Credit stress remained notable: Non-QM loans with $140.3 million UPB (6.2% of that portfolio) and rehabilitation loans with $108.9 million UPB (26.5%) were more than 90 days delinquent at June 30. MFA described continuing loss-mitigation, foreclosure and other resolution efforts.
- Key risks include borrower defaults and home prices, interest-rate and prepayment movements, mark-to-market margin calls, refinancing and counterparty risk, and dependence on short-term financing for longer-lived assets. $1.4 billion of asset-backed financing had mark-to-market collateral provisions. Cash and liquidity buffers may be insufficient in a severe market dislocation.
- The company had $150.8 million of unencumbered residential whole loans and $8.8 million restricted cash. It had $89.7 million of unfunded rehabilitation-loan commitments and a $131.3 million unsettled loan-purchase commitment. No reserve was recorded for loan securitization repurchases, and MFA reported no known material unsettled claims.
- No quantitative earnings guidance was provided. Management cautions that interim results are not necessarily indicative of full-year results. The filing also discusses COVID-19-related borrower and housing-market effects, LIBOR transition uncertainty, and regulatory changes affecting mortgage finance.
Important facts for investors to verify
- Whether delinquency trends, foreclosures and loan-loss assumptions improve or worsen, especially in Non-QM and rehabilitation portfolios.
- Whether the Q2 earnings and unusually high securities yield persist: the reported 24.57% Q2 yield included $8.4 million of one-time accretion; excluding it, the filing gives 11.13%.
- Whether securitization funding remains available on favorable terms and whether short-term lenders renew facilities without materially tighter haircuts or margin demands.
- Integration costs, origination growth and realized accretion from Lima One relative to management’s expectations.
- How repurchases, dividends, and required REIT distributions affect liquidity and per-share value; MFA repurchased 11.6 million shares for $48.1 million in H1 and declared a Q2 common dividend of $0.10 per share.