Business Overview and History
MFA Financial, Inc. (MFA) is a leading specialty finance company that has established itself as a prominent player in the residential mortgage space. With a diversified portfolio spanning residential whole loans, mortgage-backed securities, and business purpose loans, MFA has demonstrated its ability to navigate challenging market environments and deliver consistent returns for its shareholders.
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, which requires it to distribute at least 90% of its annual REIT taxable income to its stockholders. Over the past two and a half decades, MFA has evolved into a diversified specialty finance firm, investing in a wide range of residential mortgage assets, including non-qualified mortgages (Non-QM), single-family transitional loans, multifamily transitional loans, single-family rental loans, and legacy non-performing and re-performing loans.
MFA has demonstrated its resilience and adaptability throughout various market cycles and challenges. During the 2008 financial crisis, the company successfully navigated the turbulent market environment by focusing on credit analysis, projected prepayment rates, interest rate sensitivity, and expected returns. This approach helped MFA identify and invest in the right residential mortgage assets during this challenging period.
More recently, MFA faced the impact of the COVID-19 pandemic on its portfolio, which led to increased delinquencies and defaults in certain segments of the company’s loan portfolio. However, the company leveraged the expertise of its asset management team to work through these issues and mitigate losses. MFA’s diversified investment strategy and active risk management practices played a crucial role in weathering the pandemic-related disruptions.
In 2021, MFA expanded its business model with the acquisition of Lima One Capital, LLC, a leading nationwide originator and servicer of business purpose loans. This strategic move has provided MFA with the ability to organically create high-yielding assets, giving the company greater control over its loan portfolio and positioning it as a vertically integrated mortgage REIT.
Financial Performance and Metrics
As of September 30, 2024, MFA had total assets of approximately $11.20 billion, of which $9.00 billion, or 81%, represented residential whole loans. The company’s GAAP book value stood at $13.77 per common share, while its economic book value, a non-GAAP metric, was $14.46 per common share, reflecting a 1% increase from the prior quarter.
For the nine months ended September 30, 2024, MFA generated GAAP net income of $113.34 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 margin, including the impact of interest rate swaps, were 2.14% and 2.96%, respectively, during the period.
For the most recent quarter ended September 30, 2024, 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 negative at $(11,274,000).
MFA reported solid results in the third quarter of 2024, with distributable earnings of $0.37 per share, down from $0.45 per share in the second quarter. This decrease was primarily driven by $0.07 of realized credit losses during the quarter, mainly on their transitional loans at fair value. GAAP earnings for the third quarter were $0.38 per basic common share, up from $0.32 per basic common share in the second quarter.
The company delivered a quarterly total economic return of approximately 3.3%. However, subsequent to the third quarter end, MFA estimates that its economic book value has decreased by approximately 3% to 4% due to higher market interest rates.
Liquidity
MFA’s financial ratios demonstrate its strong liquidity and solvency position. As of September 30, 2024, the company’s debt-to-equity ratio was 4.80x, and its recourse leverage multiple was 1.80x, indicating a prudent approach to managing its capital structure.
The company’s current ratio and quick ratio both stood at 2.28, reflecting a healthy short-term liquidity position. At the end of the quarter, MFA had $502.91 million in cash, cash equivalents, and restricted cash.
Operational Highlights and Strategic Initiatives
During the third quarter of 2024, MFA continued to execute on its growth strategy, acquiring over $550 million of loans with an average coupon of 9.4% and adding nearly $300 million in Agency mortgage-backed securities. The company also made progress in its securitization efforts, issuing several transactions across its loan portfolios, including a rated deal backed by residential transition loans originated by its subsidiary, Lima One.
MFA’s ownership of Lima One has proven to be a strategic differentiator, providing the company with the ability to organically create high-yielding business purpose loans and leverage its in-house servicing capabilities to manage delinquencies and maximize returns. During the third quarter, Lima One originated $312 million in loans, with 75% of the volume in short-term transitional loans and 25% in longer-term rental loans. MFA has also started to selectively sell Lima One-originated rental loans to third parties, diversifying its distribution channels and enhancing the franchise value of the platform.
Product Segments
MFA’s primary investment focus is on residential whole loans, which make up a significant portion of its total assets. This segment includes several types of loans:
At September 30, 2024, MFA had approximately $9.03 billion, or 81% of its total assets, invested in residential whole loans. The yield on the residential whole loan portfolio was 6.74% for the third quarter of 2024.
In addition to residential whole loans, MFA also invests in various types of securities, including:
At September 30, 2024, MFA had approximately $1.14 billion, or 10% of its total assets, invested in securities. The net yield on the securities portfolio was 6.48% for the third quarter of 2024.
Challenges and Risks
Like many financial institutions, MFA faces interest rate risk, as changes in market interest rates can affect the value of its asset portfolio and the cost of its borrowings. The company mitigates this risk by using interest rate swaps and issuing fixed-rate securitized debt. However, as the Federal Reserve continues to navigate the path of monetary policy, MFA’s earnings and book value may be subject to volatility.
Additionally, MFA’s exposure to credit risk through its investments in residential whole loans and certain securities, such as credit risk transfer (CRT) securities, could pose challenges if economic conditions deteriorate and borrower creditworthiness declines. The company’s focus on sound underwriting, low loan-to-value ratios, and active asset management, however, have helped it manage credit risk effectively.
The ongoing competition in the business purpose lending space, particularly as Lima One looks to expand its origination volumes, may also present headwinds for MFA. The company’s ability to attract and retain talent, as well as to innovate its product offerings and marketing strategies, will be crucial in maintaining its competitive edge.
Future Outlook
While MFA did not provide explicit forward guidance for future quarters, management expressed optimism about the business model and opportunities in the current environment of lower interest rates and a steepening yield curve. The company expects a modest reduction in quarterly G&A expenses and a benefit to distributable earnings starting in the first quarter of 2025, due to recent personnel changes.
Conclusion
MFA Financial has established itself as a leading specialty finance company, with a diversified portfolio and a vertically integrated business model that provides it with a strategic advantage. The company’s strong financial position, disciplined risk management, and innovative initiatives, such as its ownership of Lima One, position it well to navigate the current market volatility and continue delivering value to its shareholders. As MFA navigates the evolving landscape, investors will likely keep a close eye on the company’s ability to adapt, capitalize on new opportunities, and maintain its position as a premier player in the residential mortgage space.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.