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MFA Financial, Inc. Announces Second Quarter 2018 Financial Results

NEW YORK, Aug. 2, 2018 /PRNewswire/ -- MFA Financial, Inc. (MFA) today announced its financial results for the second quarter ended June 30, 2018.

Second Quarter 2018 and other highlights:

  • MFA generated second quarter GAAP net income of $66.6 million, or $0.17 per common share.  As of June 30, 2018, book value per common share was $7.54.
  • Asset acquisitions exceeded run-off during the quarter.  MFA purchased or committed to purchase in excess of $1.1 billion of residential mortgage assets in the second quarter, including $898 million of residential whole loans.
  • Recent growth in MFA's residential whole loan portfolio has been largely through purchases of newly originated performing whole loans, including Non-QM loans, rehabilitation or "fix and flip" loans and single family rental loans.
  • Net Income was $0.03 per common share lower than the first quarter of 2018, primarily due to:
  • On July 31, 2018, MFA paid its second quarter 2018 dividend of $0.20 per share of common stock to shareholders of record as of June 29, 2018.

Craig Knutson, MFA's CEO and President, said, "In the second quarter, we continued to execute our strategy of targeted investment within the residential mortgage universe with a focus primarily on residential whole loans.  We again grew our portfolio this quarter, as acquisitions exceeded run-off and sales. To date in 2018, and particularly in the second quarter, much of the growth in the residential whole loan portfolio has been through purchases of newly originated performing whole loans, including Non-QM loans, fix and flip loans and single family rental loans.  We are pleased to have gained traction on these new acquisition efforts, which involve relationships cultivated over the past year or more.  Through our willingness and ability to explore and enter into various arrangements, including flow agreements, strategic alliances and also minority equity investments, we have been able to partner with originators to source attractive new investments, while enabling them to grow with support from MFA as a reliable provider of capital.

"MFA remains well-positioned to generate attractive returns despite higher funding cost due to Fed Funds increases and continued elevated asset prices.  Through our asset selection and hedging strategy, the estimated net effective duration, a gauge of our portfolio's sensitivity to interest rates, remains relatively low and measured 1.19 at quarter-end.  MFA's book value per common share decreased slightly to $7.54 from $7.62 as of March 31, 2018, due primarily to dividend distributions exceeding GAAP earnings by $0.03. Leverage, which reflects the ratio of our financing obligations to equity, was 2.3:1 at quarter-end."

Mr. Knutson added, "MFA's portfolio asset selection process continues to emphasize residential mortgage credit exposure while seeking to minimize sensitivity to interest rates.  As housing prices maintain their upward trend and borrowers repair their credit and balance sheets, the performance of our credit sensitive residential whole loan portfolio benefits from this fundamental strength.  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.  Additionally, MFA's Legacy Non-Agency MBS portfolio continues to outperform our credit assumptions.  In the second quarter of 2018, we reduced our credit reserve on this portfolio by $8.0 million and these assets generated a yield of 9.89% for the quarter."

During the second quarter MFA purchased or committed to purchase more than $1.1 billion of residential mortgage assets, including $898 million of residential whole loans.  This acquisition activity exceeded portfolio run-off and sales by almost $150 million.

At June 30, 2018, our investments in residential whole loans totaled $3.4 billion.  Of this amount, $1.9 billion is recorded at carrying value and generated a yield of 5.84% (5.60% net of servicing costs) during the quarter, and $1.5 billion is recorded at fair value on our consolidated balance sheet.  On this portion of the portfolio, we recorded gains for the quarter of approximately $32.4 million, primarily reflecting coupon interest payments and other cash received during the quarter and changes in the fair value of the underlying loans.

MFA's Legacy Non-Agency MBS had a face amount of $2.5 billion with an amortized cost of $1.8 billion and a net purchase discount of $754.0 million at June 30, 2018.  This discount consists of a $553.6 million credit reserve and other-than-temporary impairments and a $200.4 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.  Our Legacy Non-Agency MBS have underlying mortgage loans that are on average approximately twelve years seasoned and approximately 11.6% are currently 60 or more days delinquent.

As of June 30, 2018, the Agency MBS portfolio totaled $2.4 billion, had an amortized cost basis of 103.9% of par and generated a 2.03% yield in the second quarter.  During the quarter we sold $75.3 million of lower yielding 15-Year Fixed Rate Agency MBS, realizing $3.8 million in losses.  The Legacy Non-Agency MBS portfolio had an amortized cost of 70.0% of par as of June 30, 2018, and generated a loss-adjusted yield of 9.89% in the second quarter.  At the end of the second quarter, MFA held approximately $907.9 million of RPL/NPL MBS.  These securities had an amortized cost of 99.80% of par and generated a 4.52% yield for the quarter.  Our investments in CRT securities totaled $572.0 million at June 30, 2018, and generated a yield of 6.34% in the second quarter.  Pricing this quarter of CRT securities was again relatively stable.  During the quarter we opportunistically sold $104.0 million of CRT securities, realizing gains of $11.2 million.

For the three months ended June 30, 2018, MFA's costs for compensation and benefits and other general and administrative expenses were $12.6 million, or an annualized 1.57% of stockholders' equity as of June 30, 2018.

The following table presents the weighted average prepayment speed on MFA's MBS portfolio.

Table 1












Second Quarter
2018 Average CPR


First Quarter
2018 Average CPR

Agency MBS


16.2%


12.7%

Legacy Non-Agency MBS


15.8%


14.9%

RPL/NPL MBS (1)


20.4%


14.0%








(1)

All principal payments are considered to be prepayments for conditional prepayment rate ("CPR") purposes.  RPL/NPL MBS are securitized financial instruments that are primarily backed by securitized re-performing and non-performing loans.  The majority of these securities are structured such that the coupon increases up to 300 basis points at 36 months from issuance or sooner.

As of June 30, 2018, under its swap agreements, MFA had a weighted average fixed-pay rate of interest of 2.07% and a floating receive rate of 2.08% on notional balances totaling $2.6 billion, with an average maturity of 22 months.

The following table presents MFA's asset allocation as of June 30, 2018, and the second quarter 2018 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

Table 2


ASSET ALLOCATION


At June 30, 2018

Agency
MBS

Legacy

Non-Agency
MBS

RPL/NPL
MBS

Credit Risk
Transfer
Securities

MSR
Related
Assets

Residential
Whole
Loans, at
Carrying
Value (1)

Residential
Whole
Loans, at Fair
Value

Other,

net (2)

Total

($ in Millions)










Fair Value/Carrying Value

$

2,363


$

2,335


$

908


$

572


$

381


$

1,906


$

1,503


$

315


$

10,283


Less Payable for 
  
Unsettled Purchases



(61)




(473)


(34)



(568)


Less Repurchase 
  Agreements

(2,112)


(1,585)


(499)


(410)


(297)


(318)


(671)



(5,892)


Less Securitized Debt






(167)


(352)



(519)


Less Senior Notes








(97)


(97)


Net Equity Allocated

$

251


$

750


$

348


$

162


$

84


$

948


$

446


$

218


$

3,207


Debt/Net Equity Ratio (3)

8.4x


2.1x


1.6x


2.5x


3.5x


1.0x


2.4x



2.3x












For the Quarter Ended June 30, 2018








Yield on Average Interest 
  Earning Assets (4)

2.03%


9.89%


4.52%


6.34%


6.88%


5.84%


N/A


—%


5.35%


Less Average Cost of

  Funds (5)

(2.04)


(3.30)


(3.19)


(2.97)


(3.16)


(3.86)


(3.91)



(3.05)


Net Interest Rate Spread

(0.01)%


6.59%


1.33%


3.37%


3.72%


1.98%


N/A


—%


2.30%





(1)

Includes $804.8 million of purchased credit impaired loans, $626.9 million of Non-QM loans, $162.7 million of Rehabilitation loans, $55.6 million of Single-family rental loans and $256.2 million of seasoned performing loans.  At June 30, 2018, the total fair value of these loans is estimated to be approximately $2.0 billion.

(2)

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

(3)

Represents the sum of borrowings under repurchase agreements, securitized debt and payable for unsettled purchases as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity Ratio also includes the obligation to return securities obtained as collateral of $253.7 million 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 June 30, 2018, the amortized cost of our interest earning assets were as follows: Agency MBS - $2.4 billion; Legacy Non-Agency MBS - $1.8 billion; RPL/NPL MBS - $907.5 million; Credit Risk Transfer securities - $528.7 million; and Residential Whole Loans at carrying value - $1.9 billion. In addition, the yield for residential whole loans at carrying value was 5.60% net of 24 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.  Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans held at fair value in our statement of operations.  Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.

(5)

Average cost of funds includes interest on repurchase agreements, the cost of swaps, Senior Notes and securitized debt.  Agency MBS cost of funds includes 28 basis points and Legacy Non-Agency MBS cost of funds includes 31 basis points associated with swaps to hedge interest rate sensitivity on these assets.

At June 30, 2018, MFA's $4.7 billion of Agency and Legacy Non-Agency MBS were backed by hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:

Table 3




Agency MBS


Legacy Non-Agency MBS (1)


Total (1)














Time to Reset


Fair
Value
(2)

Average
Months
to Reset
(3)

3 Month
Average
CPR (4)


Fair
Value

Average
Months
to Reset
(3)

3 Month
Average
CPR (4)


Fair
Value
(2)

Average
Months
to Reset
(3)

3 Month
Average
CPR (4)

($ in Millions)













< 2 years (5)


$

1,276


6

21.2%


$

1,539


5

16.2%


$

2,815


5

18.4%

2-5 years


147


45

13.2




147


45

13.2

> 5 years


10


84

11.5




10


84

11.5

ARM-MBS Total


$

1,433


11

20.3%


$

1,539


5

16.2%


$

2,972


8

18.1%

15-year fixed (6)


$

929



10.4%


$

2



4.0%


$

931



10.3%

30-year fixed (6)





758



15.2


758



15.2

40-year fixed (6)





36



14.2


36



14.2

Fixed-Rate Total


$

929



10.4%


$

796



15.1%


$

1,725



12.6%

MBS Total


$

2,362



16.2%


$

2,335



15.8%


$

4,697



16.0%




(1)

Excludes $907.9 million of RPL/NPL MBS.

(2)

Does not include principal payments receivable of $1.2 million.

(3)

Months to Reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps.  Months to Reset does not reflect scheduled amortization or prepayments.

(4)

3 month average CPR weighted by positions as of beginning of each month in the quarter.

(5)

Includes floating rate MBS that may be collateralized by fixed-rate mortgages.

(6)

Information presented based on data available at time of loan origination.

 

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, August 2, 2018, at 10:00 a.m. (Eastern Time) to discuss its second quarter 2018 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 the mortgage loans securing MFA's MBS, an increase of which could result in a reduction of the yield on MBS in our portfolio and an increase of which could require us to reinvest the proceeds received by us as a result of such prepayments in MBS with lower coupons; 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 modification, foreclosure and liquidation; 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 successfully implement its strategy to grow 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 our investments in non-performing 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; risks associated with our investments in MSR related assets, including servicing, regulatory and economic risks, 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)


June 30,
 2018


December 31,
2017



(Unaudited)



Assets:





Mortgage-backed securities ("MBS") and credit risk transfer ("CRT") securities:





Agency MBS, at fair value ($2,286,409 and $2,727,510 pledged as collateral, respectively)


$

2,362,897


$

2,824,681

Non-Agency MBS, at fair value ($2,447,432 and $2,379,523 pledged as collateral, respectively)


3,242,967


3,533,966

CRT securities, at fair value ($516,486 and $595,900 pledged as collateral, respectively)


571,955


664,403

Mortgage servicing rights ("MSR") related assets ($381,390 and $482,158 pledged as collateral,





  respectively)


381,390


492,080

Residential whole loans, at carrying value ($396,856 and $448,689 pledged as collateral, respectively) (1)


1,906,242


908,516

Residential whole loans, at fair value ($952,335 and $996,226 pledged as collateral, respectively) (1)


1,502,986


1,325,115

Cash and cash equivalents


54,880


449,757

Restricted cash


3,298


13,307

Other assets


618,148


742,909

Total Assets


$

10,644,763


$

10,954,734






Liabilities:





Repurchase agreements


$

5,892,228


$

6,614,701

Payable for unsettled MBS and residential whole loans purchases


567,915


Other liabilities


978,007


1,078,397

Total Liabilities


$

7,438,150


$

7,693,098






Stockholders' Equity:





Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized;







  8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)


$

80


$

80

Common stock, $.01 par value; 886,950 shares authorized; 398,533 and 397,831 shares issued





  and outstanding, respectively


3,985


3,978

Additional paid-in capital, in excess of par


3,230,055


3,227,304

Accumulated deficit


(592,218)


(578,950)

Accumulated other comprehensive income


564,711


609,224

Total Stockholders' Equity


$

3,206,613


$

3,261,636

Total Liabilities and Stockholders' Equity


$

10,644,763


$

10,954,734




(1)

Includes approximately $199.8 million and $183.2 million of Residential whole loans, at carrying value and $476.2 million and $289.3 million of Residential whole loans, at fair value transferred to consolidated VIEs at June 30, 2018 and December 31, 2017, respectively. Such assets can be used only to settle the obligations of each respective VIE.

 

MFA FINANCIAL, INC

CONSOLIDATED STATEMENTS OF OPERATIONS




Three Months Ended
 June 30,


Six Months Ended
 June 30,

(In Thousands, Except Per Share Amounts)


2018


2017


2018


2017



(Unaudited)

Interest Income:









Agency MBS


$

13,170


$

16,587


$

28,463


$

34,481

Non-Agency MBS


55,043


70,269


111,145


149,477

CRT securities


8,695


7,846


18,191


14,222

MSR related assets


6,219


5,905


13,842


10,639

Residential whole loans held at carrying value


17,935


8,503


32,264


17,193

Cash and cash equivalent investments


685


1,047


1,594


1,402

Interest Income


$

101,747


$

110,157


$

205,499


$

227,414










Interest Expense:









Repurchase agreements and other advances


$

46,234


$

46,802


$

91,951


$

95,141

Other interest expense


5,576


2,220


10,413


4,230

Interest Expense


$

51,810


$

49,022


$

102,364


$

99,371










Net Interest Income


$

49,937


$

61,135


$

103,135


$

128,043










Other-Than-Temporary Impairments:









Total other-than-temporary impairment losses


$


$


$


$

(63)

Portion of loss reclassed from other comprehensive income



(618)



(969)

Net Impairment Losses Recognized in Earnings


$


$

(618)


$


$

(1,032)










Other Income, net:









Net gain on residential whole loans held at fair value


$

32,443


$

16,208


$

70,941


$

29,981

Net gain on sales of investment securities


7,429


5,889


16,246


15,597

Other, net


1,134


14,847


1,479


19,359

Other Income, net


$

41,006


$

36,944


$

88,666


$

64,937










Operating and Other Expense:









Compensation and benefits


$

7,038


$

7,573


$

13,786


$

15,366

Other general and administrative expense


5,582


5,754


9,414


9,979

Loan servicing and other related operating expenses


7,928


4,199


14,811


8,608

Operating and Other Expense


$

20,548


$

17,526


$

38,011


$

33,953










Net Income


$

70,395


$

79,935


$

153,790


$

157,995

Less Preferred Stock Dividends


3,750


3,750


7,500


7,500

Net Income Available to Common Stock and Participating
 Securities


$

66,645


$

76,185


$

146,290


$

150,495










Earnings per Common Share - Basic and Diluted


$

0.17


$

0.20


$

0.36


$

0.39










Dividends Declared per Share of Common Stock


$

0.20


$

0.20


$

0.40


$

0.40

 

INVESTOR CONTACT:

InvestorRelations@mfafinancial.com


212-207-6488


www.mfafinancial.com



MEDIA CONTACT:

Abernathy MacGregor


Tom Johnson


212-371-5999

 

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