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MFA Financial, Inc. Announces Third Quarter 2021 Financial Results

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Cision

$2.0 billion in asset acquisitions continues to drive higher net interest income

Earnings of $0.28 per basic common share, resulting in strong book value growth

Significant contribution from Lima One acquisition

NEW YORK, Nov. 5, 2021 /PRNewswire/ -- MFA Financial, Inc. (NYSE:MFA) today provided its financial results for the third quarter ended September 30, 2021.

Third Quarter 2021 financial results update:

  • MFA generated third quarter net income of $124.3 million, or $0.28 per basic common share ($0.27 per diluted common share), including $43.9 million or $0.10 per common share of purchase accounting related gains recorded on closing of the Lima One acquisition.

  • GAAP book value at September 30, 2021 was $4.82 per common share, while Economic book value, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized market value changes in residential whole loans held at carrying value for GAAP reporting, was $5.27 per common share at quarter-end.

  • Completed the acquisition of Lima One Capital, a leading nationwide originator and servicer of business purpose loans (BPLs) on July 1, 2021. Lima One's financial results are consolidated into MFA's results from that date. In connection with the closing of the transaction, we recorded purchase accounting related gains totaling $38.9 million as accounting standards require that we reflect our previously recorded investment in Lima One common equity at the fair value implied by the transaction. Further, we recorded a $5.0 million gain to reverse a prior impairment of our investment in Lima One preferred equity that was repaid concurrent with transaction closing. In addition to these purchase accounting related gains, origination, servicing and other investment activity related to Lima One meaningfully contributed to our consolidated net income for the quarter.

  • Net interest income increased on a sequential quarterly basis to $61.8 million as asset acquisitions and higher net interest spreads resulted in a 15% increase in net interest income from our portfolio of residential whole loans. In addition, during the quarter, we completed a securitization of $289.3 million of Non-QM Loans, with a weighted average coupon of bonds sold of 1.23%, lowering the funding rate of the underlying assets by more than 100 basis points. For the third quarter, the net interest spread generated by our residential whole loan portfolio increased to 3.32%, while the overall net interest spread generated by all of our interest bearing assets was 2.98%, almost unchanged from the prior quarter.

  • Loan acquisition activity of $2.0 billion is the highest quarterly total in our history, including approximately $695 million of Non-QM and $485 million of Business Purpose loans. In addition, we purchased over $820 million of "Agency eligible investor loans", which are residential mortgage loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). This purchase activity exceeded portfolio run-off, resulting in net loan portfolio growth of approximately $1.5 billion.

  • Subsequent to the end of the quarter, we completed our first securitization of $312.3 million of Agency eligible investor loans.

  • MFA paid a regular cash dividend for the third quarter of $0.10 per share of common stock on October 29, 2021.

Commenting on the third quarter 2021 results, Craig Knutson, MFA's CEO and President said, "We are very pleased with our third quarter results and activity. MFA acquired $2 billion of loans during the third quarter, the highest quarterly total in our history, and grew our loan portfolio by $1.5 billion after runoff. We earned $0.28 per common share, which was bolstered by gains of $43.9 million associated with our acquisition of Lima One as well as by increased net interest income. Our book value increased by 3.7% to $4.82 per share (economic book value increased by 2.9% to $5.27) and we generated an economic return for the quarter of 5.8% (GAAP) and 4.9% (Economic Book Value). Net interest income on our loan portfolio increased by 15% from $48 million to $55 million, driven by increased loan purchases and by continued interest expense reductions due to securitizations. Finally, on July 1, 2021, we completed the acquisition of Lima One Capital, a leading nationwide originator and servicer of business purpose loans (BPLs). MFA's financial statements for the third quarter reflect consolidation of Lima One."

Mr. Knutson added, "Our third quarter results were driven by strong portfolio performance, with improving mortgage credit leading to a release of CECL reserves of $9.7 million. On the liability side, we continue to execute on our plan to reduce funding costs through securitizations. We completed a Non-QM securitization in August and subsequent to quarter end, our first Agency eligible investor loan securitization in October. These transactions deliver a meaningful benefit by terming out non-mark-to-market financing while significantly reducing borrowing costs and also generating more liquidity. We expect to execute additional securitizations in the fourth quarter."

Mr. Knutson continued, "We also took advantage of a strong housing market to continue to reduce our REO portfolio, selling 151 properties for aggregate proceeds of $45.4 million and generating $7.3 million of gains."

Q3 2021 Portfolio Activity

MFA's residential mortgage investment portfolio increased by $1.5 billion during the third quarter, as record high loan purchase activity significantly exceeded portfolio run-off. Loan acquisitions were nearly double the prior two quarters combined, with $820.2 million of Agency eligible investor loans, $694.5 million of Non-QM loans and $485.1 million of Business Purpose loans acquired during the quarter.

At September 30, 2021, our investments in residential whole loans totaled $7.1 billion. Of this amount, $5.4 billion are Purchased Performing Loans, $551.2 million are Purchased Credit Deteriorated Loans and $1.1 billion are Purchased Non-performing Loans. During the quarter, we recognized approximately $79.6 million of Interest Income on residential whole loans in our consolidated statements of operations, representing a yield of 5.52%. Purchased Performing Loans generated a yield of 4.56%, Purchased Credit Deteriorated Loans generated a yield of 7.08% and Purchased Non-performing Loans generated a yield of 8.81%. Overall loan portfolio yields were four bps higher than the prior quarter. Significant acquisitions of purchased performing loans drove a sequential quarter increase in interest income from our residential whole loan portfolio of approximately $10.6 million. Overall delinquency rates across our residential whole loan portfolio declined compared to the prior quarter. The amount of Non-QM loans that were 60 or more days delinquent, measured as a percentage of the unpaid principal balance, decreased during the quarter and was 5.3% at September 30, 2021, compared to 7.8% at June 30, 2021. In addition, the amount of Purchased Credit Deteriorated loans that were 90 or more days delinquent, measured as a percentage of the unpaid principal balance, increased slightly during the quarter and was 18.3% at September 30, 2021, compared to 18.0% at June 30, 2021. Delinquency levels for our Rehabilitation loans decreased from the prior quarter, with loans that were 60 or more days delinquent totaling $107.1 million, compared to $120.4 million at June 30, 2021. The percentage amount of Purchased Non-performing Loans that were 90 or more days delinquent decreased to 42.5% at September 30, 2021 from 43.7% at June 30, 2021.

For the third quarter, a reversal of the provision for credit losses of $9.7 million was recorded on residential whole loans held at carrying value, primarily reflecting continued run-off of the carrying value portfolio and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. The total allowance for credit losses recorded on residential whole loans held at carrying value at September 30, 2021 was $44.1 million. In addition, as of September 30, 2021, reserves for credit losses totaling approximately $355,000 were recorded related to undrawn commitments on loans held at carrying value.

Our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition, with changes in the fair value and other non-interest related income from these loans recorded in Other income, net each period. For the third quarter, net gains of $21.8 million were recorded, primarily reflecting unrealized fair value changes in the underlying loans.

In addition, as of the end of the quarter, we held approximately $179 million of REO properties, which decreased from $205 million as of the end of the second quarter. MFA's proactive asset management team continues to take advantage of current market conditions and has been able to shorten liquidation timelines and increase property sale proceeds, leading to improved outcomes and better returns.

At the end of the third quarter, MFA held approximately $283 million of Securities, at fair value, including $178 million of MSR-related assets and $105 million of CRT securities.

General and Administrative and other expenses

For the three months ended September 30, 2021, MFA's costs for compensation and benefits and other general and administrative expenses were $24.9 million. Expenses this quarter include $10.4 million compensation and other general and administrative expenses recorded at Lima One.

The following table presents MFA's asset allocation as of September 30, 2021, and the third quarter 2021 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 September 30, 2021


Purchased
Performing
Loans (1)


Purchased
Credit
Deteriorated
Loans (2)


Purchased
Non-
Performing
Loans


Securities, at
fair value


Real Estate
Owned


Other,
net (3)


Total

($ in Millions)















Fair Value/Carrying Value


$

5,389



$

551



$

1,141



$

283



$

179



$

772



$

8,315


Payable for Unsettled Purchases


(163)













(163)


Financing Agreements with non-
mark-to-market collateral provisions


(486)



(130)



(223)





(9)





(848)


Financing Agreements with mark-to-
market collateral provisions


(2,006)



(102)



(139)



(172)



(12)





(2,431)


Less Securitized Debt


(1,446)



(209)



(368)





(23)





(2,046)


Less Convertible Senior Notes












(226)



(226)


Net Equity Allocated


$

1,288



$

110



$

411



$

111



$

135



$

546



$

2,601


Debt/Net Equity Ratio (4)


3.2x



4.0x



1.8x



1.5x



0.3x





2.2x

















For the Quarter Ended September 30, 2021









Yield on Average Interest Earning
Assets (5)


4.56%



7.08%



8.81%



18.78%



N/A





5.38%


Less Average Cost of

Funds (6)


(2.14)



(2.18)



(2.43)



(1.61)



(2.49)





(2.40)


Net Interest Rate Spread


2.42%



4.90%



6.38%



17.17%



(2.49)%





2.98%



(1)

Includes $2.8 billion of Non-QM loans, $587.5 million of Rehabilitation loans, $739.4 million of Single-family rental loans, $110.1 million of Seasoned performing loans, and $1.1 billion of Agency eligible investor loans. At September 30, 2021, the total fair value of these loans is estimated to be approximately $5.5 billion.

(2)

At September 30, 2021, the total fair value of these loans is estimated to be approximately $661.9 million.

(3)

Includes $526.2 million of cash and cash equivalents, $55.5 million of restricted cash, and $53.5 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.

(4)

Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements noted above as a multiple of net equity allocated.

(5)

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 September 30, 2021, the amortized cost of our securities, at fair value, was $222.7 million. In addition, the yield for residential whole loans at carrying value was 5.48%, net of four 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. Yield reported on Securities, at fair value, includes $4.0 million of accretion income recognized on the redemption at par of a MSR-related asset that had been held at amortized cost basis below par due to an impairment charge recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.63%.

(6)

Average cost of funds includes interest on financing agreements, Convertible Senior Notes and securitized debt.

The following table presents the activity for our residential mortgage asset portfolio for the three months ended September 30, 2021:

Table 2 - Investment Portfolio Activity Q3 2021

(In Millions)


June 30, 2021


Runoff (1)


Acquisitions


Other (2)


September 30, 2021


Change

Residential whole loans and REO


$

5,756



$

(544)



$

2,001



$

47



$

7,260



$

1,504


Securities, at fair value


303



(20)







283



(20)


Totals


$

6,059



$

(564)



$

2,001



$

47



$

7,543



$

1,484



(1)

Primarily includes principal repayments and sales of REO.

(2)

Primarily includes changes in fair value, draws on previously originated Rehabilitation loans, and changes in the allowance for credit losses.

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

Residential Whole Loans at September 30, 2021 and December 31, 2020:

Table 3 - Portfolio composition



Held at Carrying Value


Held at Fair Value


Total

(Dollars In Thousands)


September 30,
2021


December 31,
2020


September 30,
2021


December 31,
2020


September 30,
2021


December 31,
2020

Purchased Performing Loans:













Non-QM loans


$

1,683,025



$

2,357,185



$

1,152,547



$



$

2,835,572



$

2,357,185


Rehabilitation loans


294,622



581,801



301,602





596,224



581,801


Single-family rental loans


368,927



446,374



372,135





741,062



446,374


Seasoned performing loans


110,162



136,264







110,162



136,264


Agency eligible investor loans






1,126,477





1,126,477




Total Purchased Performing Loans


$

2,456,736



$

3,521,624



$

2,952,761



$



$

5,409,497



$

3,521,624















Purchased Credit Deteriorated Loans


$

575,230



$

673,708



$



$



$

575,230



$

673,708















Allowance for Credit Losses


$

(44,102)



$

(86,833)



$



$



$

(44,102)



$

(86,833)















Purchased Non-Performing Loans


$



$



$

1,140,837



$

1,216,902



$

1,140,837



$

1,216,902















Total Residential Whole Loans


$

2,987,864



$

4,108,499



$

4,093,598



$

1,216,902



$

7,081,462



$

5,325,401















Number of loans


10,361



13,112



12,307



5,622



22,668



18,734


Table 4 - Yields and average balances



For the Three-Month Period Ended

(Dollars in Thousands)


September 30, 2021


June 30, 2021


September 30, 2020



Interest


Average
Balance


Average
Yield


Interest


Average
Balance


Average
Yield


Interest


Average
Balance


Average
Yield

Purchased Performing Loans:



















Non-QM loans


$

23,891



$

2,482,917



3.85%



$

21,968



$

2,327,256



3.78%



$

25,884



$

2,534,967



4.08%


Rehabilitation loans


9,918



557,635



7.11%



7,329



454,939



6.44%



10,863



802,661



5.41%


Single-family rental loans


9,497



659,046



5.76%



6,906



479,233



5.76%



6,917



489,536



5.65%


Seasoned performing loans


1,728



114,102



6.06%



1,540



125,056



4.93%



1,945



153,002



5.08%


Agency eligible investor loans


3,360



426,986



3.15%



262



32,114



3.26%







—%


Total Purchased Performing Loans


48,394



4,240,686



4.56%



38,005



3,418,598



4.45%



45,609

...