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MFA-PB: A Detailed Look at This Preferred Stock's Attractive Yield and Stability
Published on September 24, 2024 | Ticker: MFA-PB

MFA Financial, Inc. (NYSE:MFA-PB) is a specialty finance company that invests in and finances residential mortgage assets. The company's 7.50% Series B Cumulative Redeemable Preferred Stock (MFA-PB) offers investors an attractive dividend yield and stability within MFA's diversified portfolio.

MFA Financial's business model focuses on generating distributable income and asset performance linked to residential mortgage credit fundamentals. The company selectively invests in residential whole loans, residential mortgage securities, and other real estate assets, with a focus on credit analysis, prepayment rates, interest rate sensitivity, and expected return.

At the end of the first quarter of 2024, MFA Financial had total assets of approximately $10.9 billion, of which $9.1 billion, or 84%, represented residential whole loans. The company's residential whole loan portfolio includes primarily non-QM loans, transitional loans, single-family rental loans, agency eligible investor loans, seasoned performing loans, and re-performing loans (RPLs) and non-performing loans (NPLs).

In addition to its residential whole loan portfolio, MFA Financial had approximately $737.0 million in investments in securities, including Agency MBS, term notes backed by mortgage servicing rights (MSR) collateral, credit risk transfer (CRT) securities, and non-Agency MBS.

For the full year 2023, MFA Financial reported annual net income of $80,164,000 and annual revenue of $205,457,000. The company's annual operating cash flow and free cash flow were both $108,739,000.

In the first quarter of 2024, MFA Financial generated GAAP earnings of $15 million, or $0.14 per common share, and distributable earnings of $36.1 million, or $0.35 per common share. The company's GAAP book value per common share was $13.80, and its economic book value per common share, a non-GAAP measure, was $14.32 as of March 31, 2024.

MFA Financial's management team highlighted the company's solid first-quarter performance, with the addition of over $650 million in high-yielding assets, the majority of which came from the company's wholly-owned subsidiary, Lima One, a leading nationwide originator and servicer of business purpose loans. The average coupon on these new acquisitions was 10.4%.

While higher interest rates did modestly impact MFA's book value in the first quarter, with GAAP and economic book value declining by 1.3% and 1.7%, respectively, the company continued to execute securitizations, including a $193 million transitional loan securitization in early February and a $365 million non-QM securitization in April.

On the capital front, MFA Financial issued $115 million of 8.875% senior unsecured notes due in 2029 in January 2024 and an additional $75 million of 9.00% senior unsecured notes due in 2029 in April 2024. These issuances enabled the company to raise $190 million with a weighted average coupon below 9%, setting it up to pay off the remaining $169.7 million of its convertible bonds due in June 2024.

MFA Financial's management team also highlighted the company's optionality in its liability structure, with a total of 30 securitizations outstanding. Many of these securitizations have call features that provide the potential to "relever" the underlying collateral, unlocking substantial non-dilutive capital that can be redeployed at attractive returns on equity.

The company's interest rate risk management approach continues to emphasize protecting the portfolio and cost of funds from interest rate volatility, with a relatively short net duration and a focus on stability of funding costs through securitization issuance and swap hedges.

MFA Financial's wholly-owned subsidiary, Lima One, remains a key driver of the company's growth, originating $430 million in business purpose loans in the first quarter, with shorter-term transitional loans accounting for 80% of the origination volume and longer-term DSCR and rental loans making up the remaining 20%. The credit profile of Lima One's originations remained strong, with an average LTV of 65% and an average FICO score of 749.

The 60-plus day delinquency rate on MFA's business purpose loan portfolio increased modestly to 4.7% in the first quarter, but management noted that this increase was primarily concentrated in the shorter-term transitional loans, while the longer-term rental loans decreased modestly. The company's in-house asset management team continues to work closely with servicers to improve outcomes on delinquent loans.

MFA Financial's securitization activities have also been a key focus, with the company issuing its fourth unrated revolving securitization of transitional loans originated by Lima One in February 2024 and another non-QM securitization in April 2024. These securitizations have provided the company with non-recourse, non-mark-to-market financing, further insulating the portfolio from volatile markets.

Looking ahead, MFA Financial's management team remains optimistic about the company's ability to continue generating attractive risk-adjusted returns, with expected returns on equity in the mid-teens area for the first-quarter additions to the portfolio. The company's diversified business model, focus on credit analysis, and in-house asset management capabilities position it well to navigate the current market environment.

For investors seeking exposure to the residential mortgage market with an attractive dividend yield, MFA-PB's 7.50% coupon and MFA Financial's demonstrated ability to maintain its dividend make this preferred stock an intriguing option to consider.

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