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MFA Financial, Inc. Announces Fourth Quarter 2019 Financial Results

Cision

NEW YORK , Feb. 20, 2020 /PRNewswire/ -- MFA Financial, Inc. (NYSE: MFA) today announced its financial results for the fourth quarter ended December 31, 2019.

Fourth Quarter 2019 and other highlights:

  • MFA generated fourth quarter GAAP net income of $96.9 million , or $0.21 per common share. Core earnings, a non-GAAP financial measure of MFA's operating performance that is calculated by adjusting GAAP net income to exclude the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges, was also $0.21 per common share.
  • MFA acquired approximately $1.7 billion of residential mortgage assets in the fourth quarter, including $1.5 billion of residential whole loans. During 2019, residential whole loan acquisitions of approximately $4.3 billion drove net portfolio growth exceeding $1.0 billion .
  • Interest income on MFA's purchased performing loan portfolio increased 15.6% from the prior quarter to $61.9 million . For the full year, this portfolio generated $200.6 million in interest income, more than triple the prior year.
  • GAAP book value per common share during the quarter continued to be stable and was $7.04 at December 31, 2019 . GAAP book value decreased from $7.15 at December 31, 2018 , primarily due to discount accretion and realized gains on sales of Legacy Non-Agency MBS that were distributed as dividends.
  • Economic book value per common share, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on residential whole loans held at carrying value for GAAP reporting, was $7.44 at December 31, 2019 . Economic book value increased marginally during the quarter and by approximately 1% during 2019.
  • On January 31, 2020 , MFA paid its fourth quarter 2019 dividend of $0.20 per share of common stock to shareholders of record as of December 30, 2019 .
  • Economic return (a measure of changes in MFA's GAAP book value plus dividends for a period) was 2.1% for the fourth quarter and 9.7% for the full year. When calculated using Economic book value, economic return was 3.1% for the fourth quarter and 12.1% for the full year.

Craig Knutson , MFA's CEO and President, said, "MFA's investment portfolio activity in the fourth quarter of 2019 was fueled by acquisitions of $1.7 billion of new assets.  Our residential whole loan and REO portfolio increased during the quarter in excess of $1 billion and by nearly $3 billion for the year, primarily due to investments in purchased performing loans.  Our growth in purchased performing loans was driven by the acquisition of Non-QM, fix and flip and single-family rental loans, as we continue to cultivate the strategic relationships with select loan origination partners that have been developed over the past several years.  Through our willingness and ability to explore and enter into various arrangements, including flow agreements, strategic alliances and also minority investments, we have been able to partner with originators to source attractive investments, while enabling them to grow with support from MFA as a reliable provider of capital.  During the quarter we made an additional $25 million investment, bringing total capital contributions across five different loan origination partners to approximately $148 million at year-end.  These investments generated $3.7 million of income in the form of interest and dividends (before allocation of profits) during the quarter."

Mr. Knutson added, "Through our asset selection and hedging strategy, our estimated net effective duration, a gauge of our portfolio's sensitivity to interest rates, remained relatively low and measured 1.36 at quarter-end.  Our portfolio continues to deliver GAAP book value stability.  In addition, MFA's Economic book value was $7.44 at December 31, 2019 and has increased by approximately 1% during 2019.  Leverage, which reflects the ratio of our financing obligations to equity, was 3.0:1 at quarter-end, up from 2.8:1 at the end of the third quarter, as we accessed additional borrowing capacity to fund loan growth."

At December 31, 2019, our investments in residential whole loans totaled $7.5 billion .  Of this amount, $6.1 billion is recorded at carrying value and $1.4 billion is recorded at fair value on our consolidated balance sheet.  Loans held at carrying value generated an overall yield of 5.31% during the quarter, with purchased performing loans generating a yield of 5.24% and purchased credit impaired loans generating a yield of 5.80%.  Net gains for the quarter on residential whole loans measured at fair value through earnings were $41.4 million , primarily reflecting coupon interest payments and other cash received during the quarter together with changes in the fair value of the underlying loans.  In addition, as of the end of the quarter, we held approximately $412 million of REO properties.  MFA's proactive asset management team has been able to shorten liquidation timelines and increase property sale proceeds, leading to improved outcomes and better returns.

MFA's Legacy Non-Agency MBS had a face amount of $1.6 billion with an amortized cost of $1.0 billion and a net purchase discount of $526.6 million at December 31, 2019.  This discount consists of a $436.6 million credit reserve and other-than-temporary impairments and a $90.0 million net accretable discount.  We believe this credit reserve appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows.  Including the impact of bond redemptions, this portfolio generated a yield of 14.76% for the quarter.  Eliminating the impact of these redemptions, the portfolio generated a yield in the fourth quarter of 10.60%.  The portfolio continues to outperform our credit assumptions and has underlying mortgage loans that are on average nearly fourteen years seasoned and only 10.5% are currently 60 or more days delinquent.

As of December 31, 2019, the Agency MBS portfolio totaled $1.7 billion , had an amortized cost basis of 103.9% of par and generated a yield of 2.38% for the fourth quarter.  At the end of the fourth quarter, MFA held approximately $635.0 million of RPL/NPL MBS.  These securities had an amortized cost basis of 99.9% of par and generated a yield of 5.17% for the quarter.  In addition, our investments in MSR-related assets at December 31, 2019 totaled $1.2 billion and generated a yield of 4.88% for the fourth quarter.  Our investments in CRT securities totaled $255.4 million at December 31, 2019, and generated a yield of 3.98% for the fourth quarter.  During the quarter we opportunistically sold residential mortgage securities for $169.8 million , realizing gains of $12.0 million .  Sale activity included $123.3 million of CRT securities that realized gains of $3.0 million , of which $2.5 million had been recorded in prior periods as unrealized gains as we had elected fair value accounting on these securities.

For the three months ended December 31, 2019 , MFA's costs for compensation and benefits and other general and administrative expenses were $12.7 million , or an annualized 1.50% of stockholders' equity as of December 31, 2019.

The following table presents MFA's asset allocation as of December 31, 2019, and the fourth quarter 2019 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

Table 1 - Asset Allocation

At December 31, 2019

Agency
MBS

Legacy

Non-
Agency
MBS

RPL/NPL
MBS

Credit
Risk
Transfer
Securities

Residential
Whole

Loans, at
Carrying

Value (1)

Residential
Whole

Loans, at

 Fair

Value

MSR-
Related
Assets

Other,

net (2)

Total

($ in Millions)










Fair Value/Carrying Value

$

1,665

$

1,429

$

635

$

255

$

6,066

$

1,382

$

1,217

$

767

$

13,416

Less Repurchase Agreements

(1,558)

(1,122)

(495)

(204)

(4,088)

(653)

(963)

(57)

(9,140)

Less Securitized Debt

(130)

(441)

(571)

Less Convertible Senior Notes

(224)

(224)

Less Senior Notes

(97)

(97)

Net Equity Allocated

$

107

$

307

$

140

$

51

$

1,848

$

288

$

254

$

389

$

3,384

Debt/Net Equity Ratio (3)

14.6 x

3.7 x

3.5 x

4.0 x

2.3 x

3.8 x

3.8 x


3.0 x











For the Quarter Ended December 31, 2019








Yield on Average Interest Earning Assets (4)(5)

2.38%

14.76%

5.17%

3.98%

5.31%

N/A

4.88%


5.66%

Less Average Cost of

  Funds (6)

(2.33)

(3.18)

(2.78)

(2.71)

(3.59)

(3.73)

(2.82)


(3.33)

Net Interest Rate Spread

0.05%

11.58%

2.39%

1.27%

1.72%

N/A

2.06%


2.33%



(1)

Includes $3.7 billion of Non-QM loans, $1.0 billion of Rehabilitation loans, $460.7 million of Single-family rental loans, $176.6 million of Seasoned performing loans and $698.5 million of Purchased Credit Impaired loans.  At December 31, 2019, the total fair value of these loans is estimated to be approximately $6.2 billion.

(2)

Includes cash and cash equivalents, restricted cash, other assets and other liabilities.

(3)

Represents the sum of borrowings under repurchase agreements and securitized debt as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity Ratio also includes Convertible Senior Notes and Senior Notes.

(4)

Yields reported on our interest earning assets are calculated based on the interest income recorded and the average amortized cost for the quarter of the respective asset.  At December 31, 2019, the amortized cost of our interest earning assets were as follows: Agency MBS - $1.7 billion; Legacy Non-Agency MBS - $1.0 billion; RPL/NPL MBS - $631.8 million; Credit Risk Transfer securities - $249.2 million; Residential Whole Loans at carrying value - $6.1 billion; and MSR-related assets - $1.2 billion.  In addition, the yield for residential whole loans at carrying value was 5.27%, net of 4 basis points of servicing fee expense incurred during the quarter.  For GAAP reporting purposes, such expenses are included in Loan servicing and other related operating expenses in our statement of operations.

(5)

Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans measured at fair value through earnings in our statement of operations.  Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.

(6)

Average cost of funds includes interest on repurchase agreements, the cost of swaps, Convertible Senior Notes and Senior Notes and securitized debt.  Agency MBS cost of funds includes 24 basis point and Legacy Non-Agency MBS cost of funds includes 36 basis point associated with swaps to hedge interest rate sensitivity on these assets.  Residential Whole Loans at Carrying Value cost of funds includes 5 basis points associated with swaps to hedge interest rate sensitivity on these assets.

The following tables present information on our investments in residential whole loans.

Residential Whole Loans, at Carrying Value at December 31, 2019 and 2018:

Table 2 - Portfolio composition


(Dollars In Thousands)


December 31, 2019


December 31, 2018

Purchased Performing Loans:





Non-QM loans


$

3,706,857


$

1,354,774

Rehabilitation loans


1,023,766


494,576

Single-family rental loans


460,679


145,327

Seasoned performing loans


176,569


224,051

Total Purchased Performing Loans


5,367,871


2,218,728

Purchased Credit Impaired Loans


698,474


797,987

Total Residential whole loans, at carrying value


$

6,066,345


$

3,016,715






Number of loans


17,082


11,149

 

 

Table 3 - Yields and average balances




For the Year Ended December 31,

(In Thousands)


2019


2018



Interest


Average
Balance


Average
Yield


Interest


Average
Balance


Average
Yield

Purchased Performing Loans:













Non-QM loans


$

116,282


$

2,305,593


5.04%


$

31,036


$

584,388


5.31%

Rehabilitation loans


54,419


817,307


6.66%


15,975


210,745


7.58%

Single-family rental loans


17,742


295,384


6.01%


3,315


58,571


5.66%

Seasoned performing loans


12,191


202,471


6.02%


5,818


99,035


5.87%

Total Purchased Performing Loans


200,634


3,620,755


5.54%


56,144


952,739


5.89%

Purchased Credit Impaired Loans


43,346


750,176


5.78%


44,777


786,131


5.70%

Total Residential whole loans, at carrying value


$

243,980


$

4,370,931


5.58%


$

100,921


$

1,738,870


5.80%

 

 

Table 4 - Credit related metrics




Carrying
Value


Unpaid
Principal
Balance
("UPB")


Weighted
Average
Coupon
(1)


Weighted
Average
Term to
Maturity
(Months)


Weighted
Average
LTV
Ratio (2)


Weighted
Average
Original
FICO (3)


Aging by UPB











Past Due Days

(Dollars In Thousands)








Current


30-59


60-89


90+

Purchased

   Performing Loans:





















Non-QM loans (4)


$

3,707,245


$

3,592,701


5.96%


368


67%


716


$

3,492,533


$

59,963


$

19,605


$

20,600

Rehabilitation loans (4)


1,026,097


1,026,097


7.30


8


64


717


868,281


67,747


27,437


62,632

Single-family rental loans (4)


460,741


457,146


6.29


324


70


734


432,936


15,948


2,047


6,215

Seasoned performing loans


176,569


192,151


4.24


181


46


723


187,683


2,164


430


1,874

Purchased Credit Impaired Loans (5)


698,474


873,326


4.46


294


81


N/A


N/A


N/A


N/A


108,998

Residential whole loans, at carrying value, total or weighted average


$

6,069,126


$

6,141,421


5.96%


288















(1)

Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.

(2)

LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated "after repaired" value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $269.2 million, an after repaired valuation was not obtained and the loan was underwritten based on an "as is" valuation.  The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 69%.  Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

(3)

Excludes loans for which no FICO score is available. 

(4)

Carrying value of Non-QM, Rehabilitation and Single-family rental loans excludes an allowance for loan losses of $388,000, $2.3 million and $62,000, respectively, at December 31, 2019.

(5)

Purchased Credit Impaired Loans tend to be characterized by varying performance of the underlying borrowers over time, including loans where multiple months of payments are received in a period to bring the loan to current status, followed by months where no payments are received.  Accordingly, delinquency information is presented for loans that are more than 90 days past due that are considered to be seriously delinquent. 

 

 

Residential Whole Loans, at fair value at December 31, 2019 and 2018:

Table 5 - Credit related metrics


  (Dollars in Thousands)


December 31, 2019


December 31, 2018 (1)

Less than 60 Days Past Due:





Outstanding principal balance


$

666,026


$

610,290

Aggregate fair value


$

641,616


$

561,770

Weighted Average LTV Ratio (2)


76.69%


76.18%

Number of loans


3,159


2,898






60 Days to 89 Days Past Due:





Outstanding principal balance


$

58,160


$

63,938

Aggregate fair value


$

53,485


$

54,947

Weighted Average LTV Ratio (2)


79.48%


82.86%

Number of loans


313


285






90 Days or More Past Due:





Outstanding principal balance


$

767,320


$

970,758

Aggregate fair value


$

686,482


$

854,545

Weighted Average LTV Ratio (2)


89.69%


90.24%

Number of loans


2,983


3,531

    Total Residential whole loans, at fair value


$

1,381,583


$


1,471,262



(1)

Excluded from the table above are approximately $194.7 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of December 31, 2018.

(2)

LTV represents the ratio of the total unpaid principal balance of the loan, to the estimated value of the collateral securing the related loan.  Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

 

 

Table 6 - Net gain on residential whole loans measured at fair value through earnings




For the Year Ended December 31,

 (In Thousands)


2019


2018

Coupon payments and other income received (1)


$

82,168


$

70,515

Net unrealized gains


47,849


36,725

Net gain on payoff/liquidation of loans


9,270


11,087

Net gain on transfers to REO


19,043


19,292

    Total


$

158,330


$

137,619



(1)

Primarily includes recovery of delinquent interest upon the liquidation of non-performing loans, recurring coupon interest payments received on mortgage loans that are contractually current, and cash payments received from private mortgage insurance on liquidated loans.

 

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, February 20, 2020, at 10:00 a.m. (Eastern Time) to discuss its fourth quarter 2019 financial results. The live audio webcast will be accessible to the general public over the internet at http://www.mfafinancial.com  through the "Webcasts & Presentations" link on MFA's home page.  To listen to the conference call over the internet, please go to the MFA website at least 15 minutes before the call to register and to download and install any needed audio software.  Earnings presentation materials will be posted on the MFA website prior to the conference call and an audio replay will be available on the website following the call.

Cautionary Language Regarding Forward-Looking Statements
When used in this press release or other written or oral communications, statements which are not historical in nature, including those containing words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "could," "would," "may," or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market (i.e., fair) value of MFA's MBS, residential whole loans, CRT securities and other assets; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in its portfolio and could require MFA to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA's portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows or, in certain circumstances, impairment on certain Legacy Non-Agency MBS purchased at a discount; credit risks underlying MFA's assets, including changes in the default rates and management's assumptions regarding default rates on the mortgage loans securing MFA's Non-Agency MBS and relating to MFA's residential whole loan portfolio; MFA's ability to borrow to finance its assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation of or changes in government regulations or programs affecting MFA's business; MFA's estimates regarding taxable income, the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by MFA to accrete the market discount on Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA's Agency MBS, Non-Agency MBS and residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFA's Board of Directors and will depend on, among other things, MFA's taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as MFA's Board of Directors deems relevant; MFA's ability to maintain its qualification as a REIT for federal income tax purposes; MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (or the "Investment Company Act"), including statements regarding the concept release issued by the Securities and Exchange Commission ("SEC") relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are engaged in the business of acquiring mortgages and mortgage-related interests; MFA's ability to continue growing its residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on MFA's investments in nonperforming residential whole loans ("NPLs"), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; targeted or expected returns on MFA's investments in recently-originated loans, the performance of which is, similar to MFA's other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with MFA's investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the SEC, could cause MFA's actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements are based on beliefs, assumptions and expectations of MFA's future performance, taking into account all information currently available.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect MFA. Except as required by law, MFA is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

...

MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS


 (In Thousands, Except Per Share Amounts)


December 31,
2019


December 31,
2018



(Unaudited)



Assets:





Residential mortgage securities:





Agency MBS, at fair value ($1,658,614 and $2,575,331 pledged as collateral, respectively)


$

1,664,582


$

2,698,213

Non-Agency MBS, at fair value ($2,055,802 and $3,248,900 pledged as collateral, respectively)


2,063,529


3,318,299

Credit Risk Transfer ("CRT") securities, at fair value ($252,175 and $480,315 pledged as collateral, respectively)


255,408


492,821

Residential whole loans, at carrying value ($4,847,782 and $1,645,372 pledged as collateral, respectively) (1)


6,066,345


3,016,715

Residential whole loans, at fair value ($794,684 and $738,638 pledged as collateral, respectively) (1)


1,381,583


1,665,978

Mortgage servicing rights ("MSR") related assets ($1,217,002 and $611,807 pledged as collateral, respectively)


1,217,002


611,807

Cash and cash equivalents


70,629


51,965

Restricted cash


64,035


36,744

Other assets


784,251


527,785

Total Assets


$

13,567,364


$

12,420,327