Company Overview
MFA Financial, Inc. (MFAN) is a specialty finance company that has established itself as a leading player in the residential mortgage market. With a diverse portfolio of investments, including residential whole loans, securities, and other real estate assets, MFA has demonstrated its ability to adapt to the ever-changing landscape of the industry.
Founded in 1997 and headquartered in New York City, MFA has a long and storied history of delivering value to its shareholders. The company has navigated numerous economic cycles, weathering challenges and seizing opportunities along the way. MFA's core objective is to generate distributable income and capitalize on the performance of its residential mortgage assets, with a focus on credit analysis, prepayment rates, interest rate sensitivity, and expected returns.
Historical Development
MFA Financial, Inc. has evolved significantly since its inception, starting operations in 1998 as a real estate investment trust (REIT) primarily focused on residential mortgage-backed securities (MBS), both agency and non-agency. The company successfully navigated the global financial crisis of 2008-2009, demonstrating resilience in the face of significant turmoil in the mortgage and securitization markets. In the early 2010s, MFA expanded its investment strategy to include residential whole loans, leveraging its credit analysis capabilities to selectively invest in non-qualified mortgage (Non-QM) loans and business purpose loans secured by residential properties.
A significant milestone in MFA's history came in 2021 with the acquisition of Lima One, a leading nationwide originator and servicer of business purpose loans. This strategic move transformed MFA into an integrated mortgage REIT, combining both investment and origination platforms. The integration of Lima One has enhanced MFA's ability to control the sourcing and underwriting of its business purpose loan investments, providing additional avenues for growth and value creation.
Throughout its history, MFA has successfully adapted to regulatory changes, such as the Dodd-Frank Act and the establishment of the Consumer Financial Protection Bureau. The company's ability to navigate these challenges while maintaining a focus on disciplined risk management and capital preservation has been a key factor in its long-term success.
Investment Portfolio
As of September 30, 2024, MFA had total assets of approximately $11.2 billion, with $9.0 billion, or 81%, representing residential whole loans. The company's loan portfolio is primarily composed of i) Non-QM loans, ii) Single-family and Multifamily transitional loans, iii) Single-family rental loans, and iv) Legacy re-performing and non-performing loans. This diversified approach has allowed MFA to navigate the evolving market conditions and capitalize on the opportunities presented by different segments of the residential mortgage landscape.
Financials
In the third quarter of 2024, MFA generated GAAP earnings of $0.38 per basic common share and Distributable Earnings, a non-GAAP financial measure, of $0.37 per basic common share. The company's GAAP book value remained relatively flat at $13.77 per common share, while its Economic book value, another non-GAAP measure, increased by approximately 1% to $14.46 per common share. MFA's dividend payout ratio for the quarter was 0.92, reflecting its commitment to delivering value to its shareholders.
For the three months ended September 30, 2024, MFA reported net interest income of $50.62 million and net income available to common stockholders of $39.96 million, or $0.38 per basic common share. The company's operating cash flow (OCF) and free cash flow (FCF) for the most recent quarter were both $111,447,000, indicating strong cash generation from its operations.
While specific year-over-year growth figures were not provided, it was noted that there was growth compared to the previous year. The company's revenue for the most recent quarter was reported as $0, which may indicate that MFA's primary source of income is derived from its investment activities rather than traditional revenue streams.
Investment Strategy
MFA's investment strategy is centered on actively managing its portfolio to capitalize on market conditions. During the third quarter, the company added approximately $565.2 million of residential mortgage loans and $293.9 million of Agency MBS with an average coupon of 9.4% and 5.5%, respectively. Additionally, MFA completed two securitizations collateralized by $245.4 million of performing Legacy re-performing and non-performing loans and $398.0 million of Non-QM loans, providing longer-term, non-recourse financing.
The company's overall residential mortgage asset portfolio, including residential whole loans and REO, and Securities, at fair value, grew to approximately $10.3 billion as of September 30, 2024, compared to $10.2 billion as of June 30, 2024. This growth was driven by strategic acquisitions and originations, as well as changes in the fair value of the company's investments.
Credit Performance
MFA's credit performance has remained relatively stable, with delinquency on its Residential whole loans increasing modestly during the quarter from 6.5% at June 30, 2024 to 6.7% at September 30, 2024. The increase was primarily driven by higher delinquency on the company's Non-QM and Multifamily transitional loan portfolios. Subsequent to the quarter-end, Multifamily transitional loan delinquency increased to 8.1% as of October 31, 2024, as an additional net $32.6 million of loans, primarily to one sponsor, went from 30 days delinquent to 60 or more days delinquent.
Risk Management
MFA's interest rate risk management strategy, which includes the use of interest rate swaps, has helped the company navigate the volatile interest rate environment. As of September 30, 2024, the company's net interest spread and margin, including the impact of swaps, were 2.18% and 3.0%, respectively, compared to 2.16% and 3.01%, respectively, for the prior quarter.
Liquidity
The company's liquidity position remains strong, with $305.6 million in cash and cash equivalents and $197.3 million in restricted cash as of September 30, 2024. MFA also had unused financing capacity of approximately $3.1 billion across its financing arrangements for all collateral types.
Business Segments
MFA Financial operates through two main business segments: Mortgage-Related Assets and Lima One.
Mortgage-Related Assets Segment This segment forms the core of MFA's business, comprising the majority of its assets and operations. It includes investments in residential whole loans, residential mortgage securities, and other real estate-related assets. As of September 30, 2024, the residential whole loan portfolio accounted for approximately 81% of total assets and included the following sub-categories:
- Non-QM Loans: $4.17 billion (46% of total residential whole loan portfolio)
- Single-family Transitional Loans: $1.15 billion (13%)
- Multifamily Transitional Loans: $1.06 billion (12%)
- Single-family Rental Loans: $1.47 billion (16%)
- Legacy RPLNPL Loans: $1.13 billion (13%)
- Other Loans: $55.91 million
The company's securities portfolio, valued at $1.14 billion as of September 30, 2024, represented approximately 10% of total assets. This portfolio includes Agency MBS, Term Notes backed by Mortgage Servicing Rights (MSR) collateral, Credit Risk Transfer (CRT) securities, and Non-Agency MBS.
Lima One Segment This segment encompasses the mortgage origination and servicing business of MFA's wholly-owned subsidiary, Lima One. It focuses on originating and servicing business purpose loans, such as Single-family Transitional loans and Multifamily Transitional loans, which are subsequently included in MFA's Mortgage-Related Assets segment.
Conclusion
Despite the challenges posed by the evolving market conditions, MFA has demonstrated its ability to adapt and capitalize on opportunities. The company's diversified investment strategy, disciplined risk management, and strong liquidity position have positioned it well to navigate the current environment and continue delivering value to its shareholders.
Looking ahead, MFA remains focused on identifying and executing on strategic opportunities, while maintaining a prudent approach to risk management. The company's leadership team, with its deep industry expertise, is well-equipped to guide MFA through the complexities of the residential mortgage market and continue its track record of success.