MFA Financial, Inc. — Q1 2019 Form 10-Q Summary
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018 unless otherwise stated. MFA is a leveraged residential mortgage REIT investing in mortgage securities, whole loans and MSR-related assets. At quarter-end, assets were $12.8 billion; residential whole loans and REO continued to grow.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Prior comparable period / December 31, 2018 |
|---|---|---|
| Interest income | $141.0 million | $103.8 million |
| Interest expense | $79.0 million | $50.6 million |
| Net interest income | $61.9 million | $53.2 million |
| Other income, net | $51.2 million | $47.7 million |
| Net income | $88.9 million | $83.4 million |
| Net income available to common and participating securities | $85.1 million; $0.19 per diluted share | $79.6 million; $0.20 per diluted share |
| Core earnings, non-GAAP | $77.6 million; $0.17 per share | $80.5 million; $0.20 per share |
| Net interest spread / margin | 1.98% / 2.41% | 2.25% / 2.64% |
| Total assets / stockholders’ equity | $12.80 billion / $3.40 billion | $12.42 billion / $3.42 billion |
| Repurchase agreements | $8.51 billion | $7.88 billion |
| Cash and cash equivalents; restricted cash | $76.6 million; $42.0 million | $52.0 million; $36.7 million |
| Book value per common share | $7.11 | $7.15 |
| Debt-to-equity / leverage multiple | 2.7x | 2.6x at year-end |
Net cash provided by operating activities was $37.1 million, versus $5.9 million in Q1 2018. Investing activities used $497.5 million, while financing activities provided $490.2 million; cash, cash equivalents and restricted cash increased $29.9 million to $118.6 million. The filing estimates available liquidity above $217.4 million, excluding restricted cash, and reports $1.1 billion of unencumbered residential whole loans.
Material changes and management commentary
- Net income rose about 6.5% and net interest income rose 16.4%, primarily as whole-loan and RPL/NPL MBS investments expanded. Common earnings per share declined from $0.20 to $0.19, alongside a substantial increase in weighted-average common shares.
- Interest expense increased 56.3%; the effective borrowing cost rose to 3.49% from 2.90%. Higher funding costs compressed spread and margin despite higher asset yields.
- Residential whole loans at carrying value increased to $3.72 billion from $3.02 billion; MSR-related assets rose to $825.4 million from $611.8 million. REO increased to $290.6 million from $249.4 million.
- Other income included $24.6 million of realized gains on mortgage-security sales, $8.7 million of unrealized gains on securities measured through earnings, and an $8.9 million loss on non-hedge-designated swaps, including a $7.8 million realized loss on swap unwinds. Gains on whole loans measured at fair value were $25.3 million, down from $38.5 million.
- Comprehensive income available to common stock and participating securities was $79.4 million, versus $53.2 million, as the $5.7 million other comprehensive loss was smaller than the $26.5 million loss in Q1 2018.
Outlook, risks and unusual items
- No specific quantitative earnings or full-year financial guidance is provided. Management expected to continue pursuing residential whole-loan investments, with selective investments in mortgage securities and MSR-related assets as opportunities arise.
- Management cited repo-financing renewal, collateral values and margin calls as key liquidity risks. Repo borrowing is short-term and uncommitted; falling asset values or tighter markets could raise collateral requirements or limit financing access. The company reported compliance with financial covenants at quarter-end.
- Interest-rate exposure remains material. The filing’s modeled +100-basis-point shock estimates a 3.32% decline in net interest income and a 1.32% decline in portfolio value; these are scenario estimates, not forecasts. Net effective duration was 1.07.
- Credit, prepayment and valuation risks affect Non-Agency MBS, CRT securities and whole loans. The company held a $501.6 million Non-Agency MBS credit reserve and OTTI discount and recorded no credit-related OTTI losses in Q1. Fair-value estimates for whole loans and MSR term notes include significant judgment and Level 3 inputs.
- At March 31, whole loans at fair value included $989.1 million of principal 90 or more days past due. Purchased Performing Loans had $26.3 million of loans on non-accrual; provisions for loan losses were recorded in the quarter. The filing also reports $53.5 million of unfunded rehabilitation-loan commitments.
- Common dividends declared were $0.20 per share; preferred dividends were $0.46875 per share. Management estimated Q1 taxable income of $88.7 million and undistributed taxable income of approximately $32.0 million, or $0.07 per share. Taxable income may differ significantly from GAAP income.
- The company reported no material pending legal proceedings and no material changes to the risk factors in its 2018 Form 10-K. No reserve was established for loan-securitization repurchase claims; management was unaware of material unsettled claims requiring one.
Important facts for investors to verify
- Whether portfolio growth and loan acquisitions can sustain earnings as funding costs and repo balances rise, and as net interest spread remains below the prior-year level.
- How much of GAAP earnings and dividends is supported by recurring income versus realized security-sale gains, fair-value changes and other items; review the company’s non-GAAP Core earnings reconciliation.
- Liquidity available under stress, repo renewal terms, collateral haircuts, counterparty exposures and the ability to finance the $1.1 billion of unencumbered whole loans.
- Performance, delinquency trends, collateral values and loss assumptions for whole loans, REO, Non-Agency MBS and CRT holdings, including the Level 3 valuation assumptions.
- Dividend coverage, REIT taxable income and the potential effect of taxable-income timing differences on required distributions.