MFA Financial, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are noted separately. MFA is a mortgage REIT investing primarily in leveraged residential Agency and Non-Agency mortgage-backed securities (MBS), with a stated objective of generating income for stockholders.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Interest income | $496.7 million | $391.3 million |
| Interest expense | $149.4 million | $145.1 million |
| Net interest income | $347.3 million | $246.2 million |
| Net income | $316.4 million | $269.8 million |
| Net income available to common stock and participating securities | $308.3 million | $261.6 million |
| Basic and diluted EPS | $0.90 | $0.93 |
| Common dividends declared per share | $1.005 | $0.890 |
| Net interest spread / margin | 2.62% / 3.00% | 2.47% / 3.02% |
For fourth-quarter 2011, net interest income was $85.2 million, net income was $70.6 million, common and participating-security income was $68.5 million, and EPS was $0.19. Fourth-quarter 2010 figures were $62.1 million, $61.6 million, $59.5 million, and $0.21, respectively.
At year-end, total assets were $11.75 billion, including an MBS portfolio of $10.91 billion: $7.14 billion Agency and $3.78 billion Non-Agency. Stockholders’ equity was $2.50 billion. Repurchase agreements were $7.81 billion and securitized debt was $875.5 million; reported debt-to-equity leverage was 3.6x, up from 2.8x.
Operating cash flow was $334.4 million; investing activities used $2.38 billion, mainly for MBS purchases; financing activities provided $2.10 billion. Cash and cash equivalents ended the year at $394.0 million. MFA reported a $953.6 million liquidity cushion for potential margin calls, plus $799.8 million of unpledged Non-Agency MBS.
Changes versus the prior comparable period
- The MBS portfolio increased to $10.91 billion from $8.06 billion, supported by purchases and a March 2011 common-stock offering that raised $605 million net.
- Annual net interest income rose 41%, principally because of portfolio growth and higher-yielding Non-Agency holdings. However, EPS fell from $0.93 to $0.90 as the share count increased.
- Portfolio yields declined: Agency MBS net yield was 3.50% versus 4.03%, and Non-Agency MBS net yield was 7.55% versus 9.79%. Full-year common dividends declared increased to $1.005 per share from $0.890.
- Non-Agency MBS market weakness drove a $381.4 million net unrealized loss in OCI on those securities; year-end Non-Agency MBS had $160.8 million of net unrealized losses. Agency MBS had $216.3 million of net unrealized gains.
- Net impairment losses recognized in earnings were $10.6 million, compared with $12.3 million in 2010. Other income declined to $10.8 million from $62.2 million, which had included larger linked-transaction gains and MBS sale gains in 2010.
Outlook, commentary, risks, and unusual items
- Management expected to pursue selective Agency and Non-Agency MBS investments in 2012, using cash, unpledged assets, repurchase financing, and securitizations. Its stated long-term goal was to generate double-digit returns on equity; this is a goal, not formal earnings guidance.
- Management viewed discounted Non-Agency MBS as attractive on a loss-adjusted basis, while acknowledging lower expected yields. It anticipated most assets would remain Agency MBS.
- Key risks include leverage and short-term, uncommitted repurchase funding; collateral calls and forced-sale risk; interest-rate, yield-curve and prepayment changes; Non-Agency credit losses and geographic concentration; counterparty exposure; and market-value volatility.
- Management reported that market weakness in Non-Agency MBS during 2011 was more severe than it believed underlying mortgage fundamentals warranted. Book value per common share was $6.74 at December 31 and had risen to $7.10 at January 31, 2012, principally due to a market rebound.
- Two 2011 resecuritizations increased securitized debt and provided non-recourse financing, but MFA retained exposure to first losses on the underlying assets. Multi-year financing was stated to cost 100–150 basis points more than short-term repo financing.
- The company sold its apartment-property investment in the fourth quarter for $11.4 million cash, recognizing a $430,000 gain. No material legal proceedings were reported. The filing identifies uncertainty around GSE reform, Dodd-Frank implementation, and SEC review of the Investment Company Act exemption used by mortgage REITs.
Important facts for investors to verify
- Whether reported liquidity and unpledged collateral remain sufficient under larger market-value declines, increased repo haircuts, or reduced lender access.
- How falling portfolio yields, prepayment speeds, interest-rate movements, and swap expirations affect net interest income and dividend coverage.
- Whether Non-Agency MBS credit assumptions, credit reserves, and impairment estimates remain supported by actual loan performance and collateral values.
- How the increase in leverage and reliance on repo and resecuritization financing affect book value, refinancing risk, and returns.
- Whether taxable income, which can differ materially in timing from GAAP income, supports future common dividends; the filing states that dividends are discretionary and no minimum payout is established.
- Potential effects of GSE changes, regulatory developments, and continued European financial-market stress on asset values, financing, and the company’s operating structure.