MFA Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. MFA is a leveraged residential mortgage REIT. Its portfolio had shifted substantially toward residential whole loans following major asset sales and financing changes in response to COVID-19 market disruption.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $66.1 million | $142.7 million | $298.9 million | $428.6 million |
| Net interest income | $10.1 million | $56.9 million | $71.2 million | $178.7 million |
| Net income/(loss) | $87.2 million | $95.6 million | $(725.2) million | $277.5 million |
| Net income/(loss) available to common stock and participating securities | $79.0 million | $91.8 million | $(746.8) million | $266.2 million |
| Basic and diluted EPS | $0.17 | $0.20 | $(1.65) | $0.59 basic; $0.58 diluted |
- Margins: Q3 net interest spread was 0.03% and net interest margin was 0.76%, versus 1.82% and 2.19%, respectively, a year earlier. Nine-month spread and margin were 0.65% and 1.25%, versus 1.90% and 2.29%.
- Balance sheet at September 30: Assets were $7.48 billion, down from $13.57 billion at December 31, 2019. Stockholders’ equity was $2.57 billion. Residential whole loans totaled $5.62 billion net; mortgage securities were $152.8 million; MSR-related assets were $252.2 million.
- Debt and liquidity: Financing agreements totaled $4.85 billion, versus $10.03 billion at year-end 2019. Debt-to-equity leverage was 1.9x, down from 3.0x. Cash and cash equivalents were $884.2 million; management reported total available liquidity above $940.2 million, including $56.0 million of unused financing capacity. Restricted cash was excluded.
- Cash flow, nine months: Operating activities provided $16.8 million; investing activities provided $5.87 billion, primarily reflecting asset sales and runoff; financing activities used $5.13 billion. Cash, cash equivalents and restricted cash increased by $754.8 million.
- Book value: GAAP book value per common share was $4.61, compared with $7.04 at December 31, 2019. Management’s non-GAAP economic book value was $4.92 per share, versus $7.44 at year-end.
Material changes and unusual items
- Q3 net interest income fell 82% year over year, principally reflecting asset sales that reduced interest-earning securities and MSR-related assets, lower whole-loan yields, and higher financing costs. Interest expense included $13.8 million for the senior secured credit facility.
- Q3 results included a $76.9 million gain on residential whole loans carried at fair value and a credit/valuation reversal. Management cited a $30.5 million Q3 reversal for whole loans held at carrying value; the income statement reports a combined $27.2 million net reversal for credit and valuation losses across loans and other financial instruments.
- The nine-month net loss reflected $425.0 million of impairment and other losses on securities and other assets, $188.8 million of net realized losses on sales of mortgage securities and whole loans, $57.0 million of losses transferred from terminated swaps, and $44.4 million of restructuring/forbearance-related costs. These were partly offset by $44.4 million of gains on whole loans measured at fair value.
- MFA sold all remaining Agency MBS, substantially reduced other securities and MSR-related assets, and sold its remaining Legacy Non-Agency MBS in Q3. Residential whole loans became its principal investment asset.
- The company adopted CECL on January 1, 2020. The allowance for credit losses on whole loans at carrying value was $106.2 million at quarter-end. Management said COVID-related economic uncertainty makes forecasts sensitive to assumptions and expects delinquencies and defaults to remain above historical levels for an extended period. Non-QM loans with $163.9 million amortized cost, or 6.7% of that portfolio, were over 90 days delinquent.
- Dividends suspended early in 2020 were reinstated during Q3. MFA declared a $0.05 common dividend, payable October 30, 2020, and paid accumulated preferred dividends. A new $250 million common-stock repurchase authorization was approved in November, subsequent to quarter-end.
Outlook, risks and contingencies
- No earnings or portfolio guidance was provided. Management described efforts to secure more durable, lower-cost financing. A September $390 million Non-QM securitization generated $92.7 million of liquidity and reduced funding costs on related assets by about 165 basis points. A further $570 million securitization after quarter-end generated $125.1 million and was expected to reduce related funding costs by about 179 basis points.
- After quarter-end, MFA repaid the remaining $481.25 million senior secured loan and terminated the facility. Management estimated this would reduce financing costs by about $9.4 million in Q4 and $53 million annually. Cash was approximately $641.1 million after these transactions and the common dividend payment, per management.
- Key exposures include COVID-related borrower payment stress, home-price and credit deterioration, interest-rate and prepayment movements, fair-value estimation, and reliance on secured financing. Mark-to-market lenders can demand additional collateral; short-term facilities may not be renewed. MFA had unwound all swaps in Q1 and had no swaps outstanding at September 30.
- Management reported compliance with financial covenants at September 30. The filing disclosed no material pending legal proceedings and no material changes to previously reported risk factors. MFA estimated REIT taxable income of $56.6 million for the nine months; taxable income can differ significantly from GAAP results and affects distribution requirements.
Important facts for investors to verify
- Whether borrower delinquencies, especially in Non-QM loans, translate into higher losses, foreclosures or additional CECL provisions.
- Whether reported liquidity and funding-cost savings persist after the securitizations, loan repayment and dividend payment, and how financing maturities and collateral requirements evolve.
- How much of Q3 earnings and book-value recovery depends on fair-value gains, model assumptions and credit-loss reversals, rather than recurring net interest income.
- The company’s future dividend capacity, including REIT taxable income, preferred obligations and the effect of the new repurchase authorization on liquidity and capital.