MFA Financial, Inc. — Q2 2022 Form 10-Q
Business and period: MFA is a mortgage-focused REIT investing in residential whole loans, mortgage securities and related assets; its Lima One subsidiary originates and services business-purpose loans. This unaudited filing covers the quarter and six months ended June 30, 2022. Per-share figures reflect the April 2022 1-for-4 reverse stock split.
Financial performance
| Metric | Q2 2022 | Comparison |
|---|---|---|
| Interest income | $109.3 million | $84.5 million in Q2 2021; $106.3 million in Q1 2022 |
| Net interest income | $52.6 million | Down from $59.0 million in Q2 2021 and $63.1 million in Q1 2022 |
| Net interest margin / spread | 2.13% / 1.37% | 2.63% / 1.96% in Q1 2022; 3.86% / 3.02% in Q2 2021 |
| Net loss | $100.4 million; common loss $108.6 million, or $1.06 per diluted share | Net income of $66.7 million and $0.53 per diluted share in Q2 2021 |
| Distributable earnings (non-GAAP) | $47.2 million, or $0.46 per share | $66.0 million, or $0.62 per share, in Q1 2022 |
| Six-month results | Net loss $183.3 million; common loss $199.7 million, or $1.91 per diluted share | Net income $152.2 million and diluted EPS $1.20 in first half 2021 |
Q2’s $216.4 million fair-value loss on residential whole loans was partly offset by $47.8 million of derivative gains and $84.6 million of gains on securitized debt measured at fair value. The quarter also included a $28.6 million credit-loss provision that reduced one loan-originator investment’s carrying value to zero. These items, along with higher funding costs, drove the GAAP loss despite positive distributable earnings.
Balance sheet, cash flow and liquidity
- At June 30, total assets were $9.48 billion, including $8.19 billion of residential whole loans. Stockholders’ equity was $2.15 billion, down from $2.54 billion at year-end 2021.
- Financing agreements totaled $7.13 billion, including $3.37 billion of securitized debt and $3.53 billion of collateralized financing agreements. Debt-to-equity leverage was 3.3x, versus 2.5x at December 31, 2021; recourse leverage was 1.8x.
- Cash and cash equivalents were $385.6 million; restricted cash was $159.7 million and was not available for general corporate purposes. MFA also reported $63.6 million of unencumbered residential loans and approximately $150 million of unused borrowing capacity. It was in compliance with financing covenants at quarter-end.
- For the first six months, operating cash flow was $209.9 million, investing cash outflow $747.6 million, and financing cash inflow $678.6 million. Cash, cash equivalents and restricted cash increased $140.9 million to $545.3 million.
- GAAP book value per common share was $16.42, down from $17.84 in Q1 2022; economic book value, a non-GAAP measure, was $17.25, down from $18.81.
Changes, outlook and risks
- Market conditions: Management cited rising interest rates and wider credit spreads as sources of valuation pressure. It said additional hedging and funding changes moderated the book-value decline; book value nevertheless fell during the quarter.
- Funding and hedging: MFA added $0.7 billion of interest-rate swaps and continued shifting from recourse mark-to-market funding toward non-recourse securitized debt. Q2 interest expense rose 31% sequentially, and the net interest margin declined to 2.13% from 2.63%.
- Securitizations: MFA completed business-purpose and Non-QM loan securitizations during Q2. After quarter-end, it completed two more securitizations totaling $550.2 million, generating approximately $64.8 million of additional liquidity.
- Portfolio and credit: Residential whole loans were 86% of total assets. Approximately $690.9 million of loan unpaid principal balance was at least 90 days delinquent. California represented 35.1% of portfolio interest-bearing unpaid principal balance. The company recorded a $36.9 million allowance for credit losses on loans held at carrying value.
- Capital returns: MFA declared a Q2 common dividend of $0.44 per share, paid July 29, 2022. It repurchased 6.48 million shares for approximately $102.1 million in the first half, with $202.5 million remaining under its authorization at June 30.
- Risks and contingencies: Results remain sensitive to interest rates, spread movements, loan performance, prepayments, collateral values, margin calls and lenders’ renewal decisions. MFA had $432.9 million in unfunded rehabilitation-loan commitments. It reported no material unsettled loan-repurchase claims requiring a reserve and no material pending legal proceedings. Management provided no specific earnings guidance; it cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of the reported GAAP loss reflects fair-value volatility versus recurring operating performance, and how MFA’s non-GAAP distributable earnings are calculated.
- Whether higher funding costs continue to compress net interest margins and whether hedges offset asset and liability movements as intended.
- Liquidity and collateral headroom under further spread widening or asset-value declines, including dependence on short-term financing and securitization access.
- Loan delinquency, foreclosure, recovery and loss trends, especially in concentrated geographic and non-performing-loan exposures.
- The sustainability of the common dividend relative to distributable earnings, cash needs, leverage and REIT distribution requirements.