MFA Financial, Inc. (MFA) is a leading specialty finance company that invests in residential mortgage loans, residential mortgage-backed securities, and other real estate-related assets. The company's diversified investment portfolio and vertically integrated lending arm, Lima One Capital, have helped it navigate the challenges of the residential mortgage market and deliver consistent returns to its shareholders.
Business Overview and History: MFA Financial was incorporated in Maryland on July 24, 1997, and began operations on April 10, 1998. The company has elected to be treated as a real estate investment trust (REIT) for U.S. federal income tax purposes. To maintain its REIT qualification, MFA must comply with federal tax law requirements, including distributing at least 90% of its annual REIT taxable income to stockholders.
MFA's principal business objective is to deliver shareholder value through the generation of distributable income and asset performance linked to residential mortgage credit fundamentals. The company selectively invests in residential mortgage assets, focusing on credit analysis, projected prepayment rates, interest rate sensitivity, and expected return.
Throughout its history, MFA has faced various challenges. In the late 2000s, the company experienced losses due to the subprime mortgage crisis, which impacted the performance and valuation of its residential mortgage-backed securities portfolio. MFA worked to reposition its portfolio and strengthen its balance sheet during this period. More recently, the company has navigated a rising interest rate environment, which has affected the value of its assets and increased its borrowing costs.
Despite these challenges, MFA has continued to grow and evolve its business. The company has been active in the securitization market, using this financing channel to fund its residential whole loan portfolio. As of September 30, 2024, MFA has grown its investment portfolio to over $11 billion in assets, with a focus on residential whole loans, both performing and non-performing, as well as business purpose loans originated through its wholly-owned subsidiary, Lima One Capital.
Financials As of September 30, 2024, MFA reported total assets of $11.16 billion, with residential whole loans and REO comprising $9.15 billion, or 82% of the total. The company's debt-to-equity ratio stood at 4.80x, with a recourse leverage multiple of 1.80x. MFA's GAAP book value per common share was $13.77, while its economic book value per common share, a non-GAAP metric that adjusts for the fair value of the company's residential whole loans and securitized debt, was $14.46.
For the nine months ended September 30, 2024, MFA reported net interest income of $151.93 million and distributable earnings, a non-GAAP measure, of $88.69 million, or $0.85 per basic common share. The company's net interest spread and net interest margin, including the impact of interest rate swaps, were 2.14% and 2.96%, respectively, during the same period.
In the most recent quarter, MFA reported revenue of $331,421,000 and net income of $48,183,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter were both -$11,274,000. MFA's investment portfolio and business activities generated $151.9 million in net interest income and $92.5 million in other income/loss, net, for the nine months ended September 30, 2024.
Liquidity MFA has been active in the securitization market, using this financing channel to fund its residential whole loan portfolio. The company's focus on diversifying its investment portfolio and expanding its lending capabilities through Lima One Capital has helped maintain a strong liquidity position. Additionally, MFA has been proactive in accessing the securitization markets to optimize the funding of its assets and manage its interest rate risk.
Regulatory and Operational Challenges MFA, like other residential mortgage REITs, has faced a number of regulatory and operational challenges in recent years. The company has had to adapt to changes in the regulatory landscape, including the Dodd-Frank Act and the ongoing uncertainty surrounding the future of Fannie Mae and Freddie Mac. Additionally, the company has had to navigate the economic impacts of the COVID-19 pandemic, which led to increased delinquencies and defaults in its residential whole loan portfolio.
To address these challenges, MFA has focused on diversifying its investment portfolio, expanding its lending capabilities through Lima One Capital, and enhancing its risk management practices. The company has also been proactive in accessing the securitization markets to optimize the funding of its assets and manage its interest rate risk.
Outlook and Guidance In the third quarter of 2024, MFA reported solid financial results, with GAAP net income of $48.2 million, or $0.38 per basic common share, and distributable earnings of $38.6 million, or $0.37 per basic common share. The company also declared a regular cash dividend of $0.35 per common share, payable on October 31, 2024.
MFA's management team is optimistic about the company's growth prospects, particularly in the business purpose loan market. The company has seen strong demand for its transitional and rental loan products and expects to continue expanding its origination platform through Lima One Capital. However, the company also acknowledges the potential risks associated with rising interest rates and increased competition in the residential mortgage market.
MFA estimates that its economic book value has decreased by approximately 3% to 4% subsequent to the third quarter end due to higher market interest rates. The company expects that personnel changes resulting in non-recurring separation, severance, and retirement related charges of approximately $3.3 million in the third quarter will lead to a modest reduction in its quarterly G&A and a benefit to its distributable earnings beginning in the first quarter of 2025.
The company is optimistic about the opportunities that lower interest rates and a steepening yield curve will generate for its business model, including for its subsidiary Lima One. In the third quarter of 2024, MFA delivered a quarterly total economic return of approximately 3.3%.
Overall, MFA Financial's diversified investment portfolio, vertically integrated lending arm, and focus on risk management have positioned the company well to navigate the challenges of the residential mortgage market and deliver value to its shareholders. As the company continues to execute on its growth strategy, investors will be closely watching its ability to maintain its strong financial performance and capitalize on new opportunities in the evolving mortgage finance landscape.
Business Segments MFA Financial operates two main business segments: Mortgage-Related Assets and Lima One.
The Mortgage-Related Assets segment represents the core of MFA's business, accounting for the majority of its total assets and earnings. This segment includes investments in residential whole loans, mortgage-backed securities (MBS), and other real estate-related assets.
As of September 30, 2024, MFA's residential whole loan portfolio totaled $9.03 billion, representing 81% of its total assets. This portfolio is diversified across several loan types:
1. Non-QM Loans: $4.17 billion, with a weighted average coupon of 6.26% and a weighted average loan-to-value (LTV) ratio of 64%. 2. Single-Family Transitional Loans: $1.15 billion, with a weighted average coupon of 10.46% and a weighted average LTV of 67%. 3. Multifamily Transitional Loans: $1.06 billion, with a weighted average coupon of 9.06% and LTV of 67%. 4. Single-Family Rental Loans: $1.47 billion, with a 6.43% weighted average coupon and 68% LTV. 5. Legacy Re-Performing/Non-Performing Loans: $1.12 billion, with a 5.15% weighted average coupon and 55% LTV.
In addition to whole loans, MFA had $1.14 billion invested in securities as of September 30, 2024. This included $993.5 million in Agency mortgage-backed securities, $54.5 million in term notes backed by mortgage servicing rights, $68.2 million in credit risk transfer securities, and $23.8 million in non-Agency MBS. The overall securities portfolio had a weighted average yield of 6.48%.
The Lima One segment operates as a business purpose loan origination and servicing platform through MFA's wholly-owned subsidiary, Lima One Capital, LLC. For the three months ended September 30, 2024, Lima One originated $312.3 million in business purpose loans, contributing $8.92 million in mortgage banking income to MFA's results. This segment provides diversification and an additional source of earnings for the company.
MFA Financial's diversified investment approach across these segments allows the company to adapt to changing market conditions and maintain a strong financial position in the competitive residential mortgage market.