MFA Financial, Inc. — FY 2018 Form 10-K
Business and period. MFA is an internally managed mortgage REIT investing with leverage in residential mortgage securities, whole loans and MSR-related assets. This annual report covers the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Interest income | $455.7 million | $433.4 million |
| Interest expense | $232.2 million | $197.1 million |
| Net interest income | $223.5 million | $236.3 million |
| Other income, net | $158.0 million | $158.0 million |
| Net income | $301.8 million | $322.4 million |
| Net income available to common stock and participating securities | $286.8 million; $0.68 per share | $307.4 million; $0.79 per share |
| Net interest spread / margin | 2.23% / 2.64% | 2.09% / 2.55% |
| Common dividend declared per share | $0.80 | $0.80 |
- At year-end, total assets were $12.42 billion, total liabilities $9.00 billion and stockholders’ equity $3.42 billion. Book value per common share was $7.15, down from $7.70.
- Debt-to-equity leverage was 2.6x, versus 2.3x at year-end 2017. Repurchase agreements totaled $7.88 billion; securitized debt was $684.4 million, and senior notes had a $100 million principal amount.
- Cash and cash equivalents were $52.0 million, with $36.7 million of restricted cash. Management estimated available liquidity above $316.7 million, in addition to $1.2 billion of unencumbered residential whole loans.
- Cash, cash equivalents and restricted cash decreased $375.0 million during the year. Operating activities provided $147.9 million, investing activities used $2.16 billion and financing activities provided $1.63 billion.
- Residential whole loans and REO reached about $4.9 billion, approximately 40.9% of the residential mortgage asset portfolio. Residential mortgage securities were about $6.5 billion, or 52.4% of total assets.
- FY 2018 return on average equity was 9.02%, down from 10.06%; the common dividend payout ratio was 1.18, based on declared dividends divided by EPS.
Material changes and fourth-quarter results
- Common earnings fell: net income available to common holders declined about 6.7%, while EPS decreased from $0.79 to $0.68. The filing attributes the decline principally to lower net interest income and fair-value losses on mortgage securities, partly offset by higher fair-value gains on whole loans and realized securities gains.
- Net interest income decreased 5.4% despite a wider annual net interest spread. Funding costs rose: the effective borrowing rate increased to 3.14% from 2.58%, and total interest expense rose 17.8%.
- Whole loans expanded sharply: year-end residential whole loans were about $4.7 billion versus $2.2 billion in 2017. MFA issued approximately 50.9 million common shares in a public offering, generating net proceeds of about $389.4 million.
- At year-end, leverage and repo borrowings were higher than in 2017, while unrestricted cash was lower. Two 2018 loan securitizations generated $420 million of third-party senior bond proceeds from loans with $666.8 million aggregate unpaid principal balance.
- In the fourth quarter, net income available to common holders was $57.1 million, or $0.13 per share, compared with $96.8 million, or $0.24, in Q4 2017. Q4 net interest income was $61.8 million versus $52.4 million. Other income was negative $39.4 million in Q4 2018, including fair-value and other losses.
- Other comprehensive income was a loss of $188.9 million for 2018, compared with income of $35.5 million in 2017, primarily reflecting lower unrealized values on Non-Agency MBS, CRT securities and related assets.
Outlook, commentary and risks
- Management expected to focus investment opportunities in 2019 primarily on residential whole loans, with selective purchases of mortgage securities and MSR-related assets. It anticipated a moderate increase in leverage, using repo financing and securitizations. No specific earnings or dividend guidance is provided.
- Management cited improving U.S. employment and home prices as supportive of borrower performance. It also reported stronger Legacy Non-Agency MBS collateral performance and transferred $25.6 million from credit reserve to accretable discount; the anticipated income benefit is expected over time, principally over the next ten years.
- Key risks include short-term, renewable repo funding against longer-term assets; margin calls and forced-sale risk; rising borrowing costs and yield-curve changes; credit losses, foreclosure delays and illiquid whole loans; volatile or judgment-sensitive fair values; prepayment risk; and counterparty concentration. At year-end, four repo counterparties each represented more than 5% of stockholders’ equity at risk.
- Credit-sensitive investments represented 68.4% of total assets. Whole-loan and legacy mortgage exposure includes geographic concentrations, notably California, Florida, New York and New Jersey. REO carrying value rose to $249.4 million from $152.4 million.
- The common dividend remained $0.20 quarterly, but declared dividends exceeded GAAP EPS for the year. REIT distribution requirements are based on taxable income, which may differ materially from GAAP income; the Board retains discretion over dividends.
- Unusual items included $137.6 million of gains on whole loans measured at fair value, $36.8 million of unrealized losses on mortgage securities measured through earnings, and $9.6 million of losses on swaps not designated as accounting hedges. The company also received about $14.8 million from RMBS litigation settlements, reflected in purchase-discount accounting.
- A new 15-year headquarters lease was signed, with estimated annual rent of approximately $4.6 million before escalation charges; relocation was expected in Q4 2020. The filing reports no material legal proceedings and unqualified audit opinions on the financial statements and internal controls.
Investor verification priorities
- Review the sustainability of the $0.80 annual common dividend against taxable income, cash generation, leverage and the 1.18 GAAP payout ratio.
- Assess liquidity under stress: repo renewal terms, collateral haircuts, margin-call capacity, unencumbered assets and counterparty exposures.
- Test assumptions behind whole-loan and REO valuations, expected credit losses, servicing and foreclosure timelines, and the $137.6 million fair-value gain.
- Reconcile the decline in book value and comprehensive income with portfolio marks, realized gains and losses, and the treatment of fair-value changes.
- Track execution of the planned 2019 loan-focused growth and moderate leverage increase, including funding costs and securitization access.