MFA FINANCIAL, INC. annual report, FY2013

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MFA Financial, Inc. — 2013 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. MFA is a mortgage REIT investing primarily, on a leveraged basis, in residential Agency and Non-Agency mortgage-backed securities (MBS).

Financial performance and position

  • Income: 2013 interest income was $482.9 million, down from $499.2 million in 2012. Net interest income declined 2.6% to $318.9 million from $327.5 million. Net income was $302.7 million; net income available to common stock and participating securities was $285.0 million, or $0.78 per diluted share, versus $298.7 million, or $0.83, in 2012.
  • Fourth quarter: Net interest income was $77.6 million; net income was $78.6 million and earnings per share were $0.20.
  • Margins and yields: Full-year net interest spread was 2.32%, compared with 2.38% in 2012; net interest margin was 2.70%, down from 2.78%. Agency MBS net yield fell to 2.28% from 2.83%; Non-Agency MBS net yield increased to 7.25% from 6.76%.
  • Portfolio: Total assets were $12.47 billion, including $11.37 billion of MBS: $6.52 billion Agency and $4.85 billion Non-Agency. The MBS portfolio declined from $12.61 billion at year-end 2012, principally as repayments exceeded purchases.
  • Profitability and equity: Total stockholders’ equity was $3.14 billion, versus $3.31 billion a year earlier. Book value per common share fell to $8.06 from $8.99, reflecting special dividends and lower Agency MBS values, partly offset by Non-Agency MBS appreciation.
  • Debt and liquidity: Repurchase agreements were $8.34 billion; securitized debt was $366.2 million; $100 million of 8% Senior Notes due 2042 remained outstanding. Debt-to-equity leverage was 2.9x, down from 3.0x. Cash and cash equivalents were $565.4 million; management reported a $970.9 million liquidity cushion for potential margin calls, including unpledged Agency MBS.
  • Cash flow: Operating activities provided $298.1 million; investing activities provided $1.60 billion, mainly reflecting MBS principal payments; financing activities used $1.73 billion. Cash increased by $164.1 million.
  • Dividends: Common dividends declared totaled $1.64 per share in 2013, including $0.78 in special dividends. The Board retains discretion over future dividends; no minimum common dividend is established.

Material changes versus 2012

  • Common EPS declined from $0.83 to $0.78, and net interest income decreased, reflecting lower Agency MBS yields and spread compression. Lower Agency funding costs partly offset the reduction.
  • Non-Agency MBS yield improved, supported in part by stronger credit performance and the release of $207.9 million from credit reserve to accretable discount. The reserve release is expected to increase interest income over time and depends on estimated future cash flows.
  • MFA recorded no credit-related OTTI charges through earnings in 2013, compared with $1.2 million in 2012. Non-Agency MBS net unrealized gains were $738.5 million at year-end.
  • Agency MBS fair value and net unrealized gains weakened during the year; the company reported a $186.6 million decrease in Agency MBS net unrealized gains.
  • MFA issued $200 million of 7.50% Series B preferred stock and redeemed all $96 million liquidation preference of Series A preferred stock. It also raised $77.6 million through its dividend reinvestment/direct stock purchase plan.
  • The company identified a prior material weakness in controls over REIT taxable-income calculations and related GAAP-to-tax reconciliations. Management said remediation was completed during 2013; management and the independent auditor concluded year-end internal control over financial reporting was effective.

Outlook, commentary and principal risks

  • Management intended to continue selectively acquiring Agency and Non-Agency MBS in 2014 and said it believed the Non-Agency portfolio offered attractive loss-adjusted returns. No quantified earnings, spread, or dividend guidance was provided.
  • Management cited improving home prices, lower estimated loan-to-value ratios and declining delinquency transitions as supportive of Non-Agency credit performance. These are estimates and may not persist.
  • Interest-rate and spread volatility, prepayments, and the mismatch between shorter-term repo funding and longer-term MBS can pressure earnings and asset values. The filing’s rate-shock analysis estimated that a 100-basis-point increase would reduce portfolio value 1.03% and next-12-month net interest income 0.94%; a 100-basis-point decrease would reduce estimated net interest income 8.58% and increase portfolio value 0.76%. These modeled estimates rely on assumptions and are not forecasts.
  • Repo facilities are uncommitted and renewable at lenders’ discretion. Falling collateral values can trigger margin calls or forced asset sales. Non-Agency MBS financing generally requires higher haircuts and costs than Agency financing. MFA reported 26 repo lenders and concentration of counterparty exposure.
  • Non-Agency MBS carry credit risk, including geographic concentration in California, Florida, New York, Virginia and Maryland. Credit losses exceeding assumptions or reserve levels could reduce income and asset values.
  • Other material risks include hedge effectiveness and counterparty risk; changes in Fannie Mae and Freddie Mac support or mortgage regulations; REIT qualification and distribution requirements; and uncertainty over the company’s exemption from the Investment Company Act.
  • Tax and unusual items: After identifying prior taxable-income calculation shortfalls, MFA paid special 2013 dividends. It estimated 2013 REIT taxable income of approximately $374 million and said approximately $313 million of dividends had been distributed for 2013, excluding amounts allocated to prior years; additional distribution decisions remained. The filing also recorded a $2.0 million impairment of resecuritization-related costs and a $2.25 million excise-tax-and-interest expense.

Key facts for investors to verify

  • Whether subsequent results support the $207.9 million credit-reserve release and the estimated Non-Agency MBS cash flows.
  • How Agency and Non-Agency yields, net interest spreads, prepayments and funding costs develop, particularly if interest rates or volatility rise.
  • Current repo lender concentration, haircuts, refinancing availability, margin-call exposure and liquidity cushion.
  • Actual REIT taxable income and required distributions, including the outcome of the tax-calculation remediation and any remaining distributions.
  • Book value, common dividend sustainability, share issuance and the effect of preferred-stock dividends on common shareholders.