MFA Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet figures are as of September 30, 2021. MFA is a mortgage- and specialty-finance REIT investing primarily in residential whole loans and financing them on a leveraged basis. Lima One, a business-purpose loan originator and servicer, was consolidated beginning July 1, 2021.
Financial performance and position
| Metric | Q3 2021 | Comparable period / other |
|---|---|---|
| Interest income | $90.9 million | $82.6 million in Q3 2020 |
| Net interest income | $61.8 million | $26.7 million in Q3 2020 |
| Net interest margin / spread | 3.70% / 2.98% | 1.59% / 0.27% in Q3 2020 |
| Other income, net | $94.4 million | $60.6 million in Q3 2020 |
| Net income | $132.5 million | $87.2 million in Q3 2020 |
| Net income available to common stock and participating securities | $124.3 million; $0.28 basic and $0.27 diluted EPS | $79.0 million; $0.17 basic and diluted EPS in Q3 2020 |
- For the first nine months, net income was $284.7 million, or $0.58 basic and $0.57 diluted EPS, versus a $725.2 million net loss and $1.65 loss per share in 2020. Net interest income was $171.8 million versus $125.7 million.
- Nine-month net cash from operations was $109.1 million; investing used $1.226 billion and financing provided $876.9 million. Cash, cash equivalents and restricted cash fell by $239.8 million to $581.7 million.
- Total assets were $8.488 billion, including $7.081 billion of residential whole loans. Financing agreements were $5.551 billion; total stockholders’ equity was $2.601 billion. Cash and cash equivalents were $526.2 million, excluding $55.5 million of restricted cash.
- Debt-to-equity leverage was 2.2x, up from 1.7x at December 31, 2020. GAAP book value per common share was $4.82; economic book value, a non-GAAP measure, was $5.27.
Material changes and notable items
- Q3 net interest income rose 131.8% year over year, reflecting lower financing costs and higher whole-loan yields. Q3 interest expense declined to $29.1 million from $56.0 million; the effective borrowing rate was 2.40% versus 4.43%.
- Q3 earnings included a $38.9 million gain from revaluing MFA’s previously held Lima One equity interest and a $10.0 million reversal of prior impairment. Lima One also contributed $9.6 million of origination, servicing and other fee income during the quarter. Acquisition-related amortization and higher compensation and administrative costs partly offset these benefits.
- MFA acquired the remaining Lima One interests for $57.3 million in cash plus restricted stock awards, and recorded $61.6 million of goodwill and $28.0 million of finite-lived intangible assets. Management said it was still optimizing financing and capital for Lima One; future results may differ materially.
- Q3 included a $9.7 million reversal of credit and valuation loss provisions; the nine-month reversal was $41.3 million. The allowance for credit losses on loans held at carrying value was $44.1 million at quarter-end.
- The company declared a Q3 common dividend of $0.10 per share, paid October 29, 2021. It repurchased 11.6 million shares for $48.1 million during the first nine months; no repurchases occurred in Q3.
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 risks include borrower delinquencies and credit losses, changes in home prices and interest rates, prepayments, fair-value estimation, and the availability and renewal terms of short-term or collateralized financing. Mark-to-market borrowings can trigger margin calls; lenders may decline to renew facilities. MFA reported compliance with all financial covenants at September 30.
- At quarter-end, $872.6 million of loans were 90 or more days delinquent by unpaid principal balance. This included $126.5 million of Non-QM loans and $103.7 million of rehabilitation loans. Management described ongoing loss-mitigation, modification and foreclosure efforts.
- Management’s rate sensitivity analysis estimated that an immediate 100-basis-point increase could reduce portfolio value by 1.52%, while increasing projected net interest income by 2.78%; a 100-basis-point decrease was estimated to reduce net interest income by 5.06%. These are model-based estimates, not forecasts.
- Other risks include COVID-19 effects on borrowers, regulatory changes affecting mortgage origination, servicing and securitization, LIBOR transition, and integration and financing risks related to Lima One. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Commitments included $186.5 million of unfunded rehabilitation-loan commitments and $163.0 million of loan purchases pending closing, subject to due diligence and customary conditions. MFA reported no material unsettled representation-and-warranty repurchase claims requiring a reserve.
Most important facts for investors to verify
- How much reported income reflects recurring net interest earnings versus the Lima One revaluation gain, impairment reversal and securities accretion.
- Whether delinquency trends, realized losses and CECL assumptions support the loan portfolio’s carrying values and the $44.1 million allowance.
- Funding maturity, renewal, margin-call and collateral requirements as leverage rises; verify liquidity available apart from restricted cash.
- Lima One’s post-acquisition profitability, capital needs, integration costs and ability to sustain origination and servicing growth.
- Dividend coverage against REIT taxable income and cash generation, noting that GAAP earnings and REIT taxable income may differ materially.