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Understanding MFA Financial as part of the REIT landscape

Brent Nyitray, CFA, MBA

Must-know: MFA Financial maintains its current dividend in 2Q14 (Part 1 of 5)

MFA Financial

MFA Financial (MFA) is a mortgage real estate investment trust (or REIT) that invests in both agency (government-guaranteed) and non-agency (non-guaranteed) mortgage-backed securities. Its portfolio is primarily invested in hybrids, adjustable-rate mortgages (ARM), and 15-year fixed-rate mortgages.

The company chooses to invest in these types of assets in order to minimize interest rate risk. As a REIT, it must distribute 90% of its income to its shareholders and it isn’t subject to income tax at the corporate level. This means it has outsized dividend yields, which can be volatile. Over the past 12 months, MFA has paid a dividend yield of 9.4%.

The mortgage REIT strategy can generate outsized returns

As you can see from the chart above, mortgage REITs like Annaly can generate outsized returns over the long haul. Part of this ability is due to their tax structure. They don’t pay U.S. federal taxes, so there isn’t the double taxation effect that most corporations have to deal with. It’s important to remember that this period of outperformance takes place during what we can consider one of the greatest bond bull markets of all time.

Still, as a REIT, the company has to pay out 90% of its earnings as dividends, so you often get “paid to wait.” In other words, you have a great dividend yield to compensate you while you wait for the stock to take off.

The REIT landscape

There are two basic flavors of mortgage REITs—agency REITs and non-agency REITs. Agency REITs invest in mortgages guaranteed by the government. Non-agency REITs don’t, which means they take credit risk.

The best comparable for MFA Financial is Hatteras (HTS), another mortgage REIT that invests primarily in ARMS.  Some REITs—like Annaly Capital (AGNC) and American Capital Agency (AGNC)—invest primarily in agency fixed-rate mortgages. Finally, non-agency REITs like Redwood Trust (RWT) invest in non-guaranteed MBS, so they bear credit risk.

Continue to Part 2

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