MFA Financial, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2015, with balance-sheet comparisons to December 31, 2014 and operating comparisons to Q1 2014. MFA is a REIT investing primarily, on a leveraged basis, in residential mortgage-backed securities (MBS), credit risk transfer (CRT) securities and residential whole loans.
Key financial results
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $129.9 million | $121.2 million in Q1 2014 |
| Interest expense | $43.9 million | $40.9 million in Q1 2014 |
| Net interest income | $86.0 million | $80.3 million in Q1 2014 |
| Net interest spread / margin | 2.44% / 2.77% | 2.44% / 2.84% in Q1 2014 |
| Net income | $82.2 million | $76.2 million in Q1 2014 |
| Net income available to common stock and participating securities | $78.4 million; diluted EPS $0.21 | $72.4 million; diluted EPS $0.20 in Q1 2014 |
| Common dividend declared per share | $0.20 | $0.20 in Q1 2014 |
| Operating cash flow | $51.8 million | $48.3 million in Q1 2014 |
| Cash and cash equivalents | $168.7 million | $182.4 million at December 31, 2014 |
| Total assets / stockholders’ equity | $13.90 billion / $3.21 billion | $12.35 billion / $3.20 billion at December 31, 2014 |
| Repurchase agreements / securitized debt / Senior Notes | $9.81 billion / $91.3 million / $100 million | Repurchase agreements $8.27 billion / securitized debt $110.6 million / Senior Notes $100 million at December 31, 2014 |
| Book value per common share | $8.13 | $8.12 at December 31, 2014 |
| Debt-to-equity leverage multiple | 3.3x | 2.8x reported at year-end; 3.3x on a comparable basis after accounting reclassification |
Portfolio, liquidity and cash flow
- MBS totaled $12.53 billion, about 90% of assets: $5.67 billion Agency and $6.86 billion Non-Agency. Non-Agency included $4.54 billion Legacy and $2.32 billion RPL/NPL MBS. Residential whole loans totaled $387.3 million; CRT securities were $127.2 million.
- Q1 cash and cash equivalents decreased $13.7 million. Operating activities provided $51.8 million, investing activities provided $46.7 million and financing activities used $112.3 million. Investing cash flow included $588.1 million of MBS and CRT principal payments and $518.1 million of MBS and CRT purchases; financing included $74.3 million of common dividends and DERs and $3.8 million of preferred dividends.
- Management estimated available liquidity above $859.8 million: $168.7 million cash, $375.4 million estimated financing capacity from Agency collateral and $315.7 million from unpledged Non-Agency MBS. Restricted cash of $93.3 million was pledged collateral and was not generally available for corporate purposes.
- Repurchase borrowings had a 0.94% weighted-average interest rate and 29-day weighted-average remaining term to interest-rate reset. Including swaps, the effective repricing period was 17 months. Repurchase financing is uncommitted and renewable at lenders’ discretion.
Material changes versus Q1 2014
- Net income available to common stock and participating securities rose to $78.4 million from $72.4 million; diluted EPS increased to $0.21 from $0.20. Net interest income increased 7.2% to $86.0 million.
- Net interest margin declined to 2.77% from 2.84%, while spread was unchanged at 2.44%. Agency MBS yield fell to 2.22% from 2.39%; Legacy Non-Agency yield fell to 7.64% from 7.80%; and RPL/NPL yield fell to 3.62% from 4.30%.
- Other income increased to $9.0 million from $6.4 million, reflecting $6.4 million of MBS sale gains and $2.6 million of income on whole loans at fair value. The prior-year period included $3.3 million of income from Linked Transactions, an accounting presentation that ended in 2015.
- Comprehensive income available to common stock and participating securities decreased to $82.8 million from $126.9 million, primarily reflecting a much smaller increase in other comprehensive income, including larger swap-related unrealized losses.
- Effective January 1, 2015, new accounting guidance ended Linked Transaction accounting. It brought related MBS and repurchase agreements onto the balance sheet separately and changed presentation of related interest income and expense. Adoption reclassified $1.913 billion of Non-Agency MBS, $4.6 million of CRT securities and $1.520 billion of liabilities; it had no net impact on total stockholders’ equity. This affects comparisons of reported balances and income line items.
- Q1 included $407,000 of credit-related impairment losses on Non-Agency MBS, versus none in Q1 2014, and $2.3 million of other investment-related operating expenses related to whole-loan activities.
Outlook, management commentary and risks
- Management said it intended to continue selectively acquiring MBS and residential whole loans during the remainder of 2015, and believed available liquidity supported continued investment. No earnings or dividend guidance was provided.
- Management cited improved Legacy Non-Agency collateral performance, including lower estimated loan-to-value ratios and faster voluntary prepayments. It transferred $22.3 million from credit reserve to accretable discount in Q1; this is expected to increase interest income over time, but remains dependent on future cash-flow estimates.
- Interest-rate sensitivity estimates projected that an immediate 100-basis-point increase could reduce next-12-month net interest income by 6.82% and portfolio value by 0.66%; a 100-basis-point decrease could reduce net interest income by 9.92% and increase portfolio value by 0.39%. These are model-based estimates, not forecasts, and depend on assumptions including prepayments and funding costs.
- Key risks include higher or changing interest rates, prepayment speeds, credit deterioration in Non-Agency MBS and whole loans, short-term repo renewal and margin-call risk, higher collateral requirements, and counterparty default. Repo lenders may reduce or end funding access; a sudden decline in collateral values could materially pressure liquidity.
- Management reported compliance with financial covenants through March 31, 2015. There were no material pending legal proceedings, and the filing reported no material changes to the risk factors in the 2014 Form 10-K. The company also disclosed potential repurchase obligations for breaches of representations and warranties in certain resecuritizations.
- The company is a REIT and generally must distribute at least 90% of annual REIT taxable income. Management estimated Q1 taxable income at approximately $76.9 million and undistributed taxable income at approximately $10.1 million, or $0.03 per share, based on dividends paid or declared through the quarter. Taxable income can differ materially from GAAP income.
Most important facts for investors to verify
- Assess earnings quality and comparability: separate underlying portfolio performance from the 2015 Linked Transaction accounting change and the new whole-loan income contribution.
- Track repo funding availability, maturities, collateral haircuts, margin calls and counterparty concentration alongside the reported $859.8 million liquidity estimate.
- Review the assumptions supporting Legacy Non-Agency credit reserves, expected cash flows and the $22.3 million reserve release; monitor subsequent delinquencies, defaults and recoveries.
- Compare actual interest-rate and prepayment outcomes with management’s modeled sensitivity estimates, including the impact of the rate floor and swap positions.
- Monitor taxable income, required REIT distributions, dividend coverage and book value per share; the declared $0.20 common dividend exceeded Q1 diluted EPS of $0.21 only modestly, with a reported payout ratio of 0.95.