MFA Financial, Inc. Announces Fourth Quarter 2018 Financial Results

NEW YORK, Feb. 21, 2019 /PRNewswire/ -- MFA Financial, Inc. (NYSE: MFA) today announced its financial results for the fourth quarter ended December 31, 2018.

Fourth Quarter 2018 and other highlights:

• MFA generated fourth quarter GAAP net income of $57.1 million, or $0.13 per common share. As of December 31, 2018, book value per common share was $7.15.
• Net Income was $0.06 per common share lower than the third quarter of 2018, primarily due to unrealized losses on CRT securities and 30-Year Agency MBS and related swap hedges, as market volatility and risk-off sentiment widened credit spreads and mortgage basis. Use of fair value accounting requires quarterly valuation changes on these investments to be included in earnings.
• Continued success in growing the investment portfolio, for the fifth consecutive quarter. MFA added approximately $1.6 billion of residential mortgage assets in the fourth quarter, including $1.0 billion of residential whole loans, increasing the investment portfolio by $565 million.
• Recent growth in MFA's residential whole loan portfolio and net interest income has been largely through acquisition of purchased performing loans, including Non-QM loans, rehabilitation or "fix and flip" loans and single family rental loans.
• On January 31, 2019, MFA paid its fourth quarter 2018 dividend of $0.20 per share of common stock to shareholders of record as of December 28, 2018.

Craig Knutson, MFA's CEO and President, said, "The fourth quarter of 2018, particularly November and December, was a very volatile period for financial assets, as concerns about global growth slowdown increased volatility and led to risk-off investment flows, widening credit spreads.  2019 has thus far been a much more constructive trading environment, and since year-end we have seen a partial recovery in the prices of our assets, particularly those accounted for at fair value. MFA's investment team was very active in the fourth quarter, acquiring nearly $1.6 billion of new assets and growing our investment portfolio by $565 million. Our residential whole loan and REO portfolio increased by $788 million, largely due to acquisitions of purchased performing loans.  RPL/NPL MBS increased by $215 million, and MSR-related investments increased by $47 million. As was the case for the third quarter of 2018, the majority of the growth in our residential whole loan portfolio has been through purchases of Non-QM loans, fix and flip loans and single family rental loans.  We continue to gain traction on these new acquisition efforts, which involve relationships cultivated over the past year or more.  Through our willingness and ability to explore and enter into various arrangements, including flow agreements, strategic alliances and also minority equity investments, we have been able to partner with originators to source attractive new investments, while enabling them to grow with support from MFA as a reliable provider of capital."

"MFA remains well-positioned to generate attractive returns after substantial growth of over $2 billion in our investment portfolio in 2018.  With a marked change in expectations around Fed monetary policy for 2019 and beyond, we believe that the investment horizon looks very favorable for levered entities.  We expect that we will modestly increase leverage to support further asset growth in 2019, both through repo borrowing and securitization."

Mr. Knutson added, "Through our asset selection and hedging strategy, our estimated net effective duration, a gauge of our portfolio's sensitivity to interest rates, remained relatively low and measured 0.96 at quarter-end.  MFA's book value per common share decreased to $7.15 from $7.46 as of September 30, 2018, due primarily to a net reduction in unrealized gains on Legacy Non-Agency MBS and dividend distributions exceeding our GAAP net income.  Leverage, which reflects the ratio of our financing obligations to equity, was 2.6:1 at quarter-end."

At December 31, 2018, our investments in residential whole loans totaled $4.7 billion.  Of this amount, $3.0 billion is recorded at carrying value and generated a yield of 5.77% during the quarter, and $1.7 billion is recorded at fair value on our consolidated balance sheet.  On this portion of the portfolio, we recorded gains for the quarter of approximately $31.7 million, primarily reflecting coupon interest payments and other cash received during the quarter together with changes in the fair value of the underlying loans.  In addition, as of the end of the quarter we held approximately $249 million of REO properties.  MFA's proactive asset management team has been able to shorten liquidation timelines and increase property sale proceeds, leading to improved outcomes and better returns.

MFA's Legacy Non-Agency MBS had a face amount of $2.2 billion with an amortized cost of $1.5 billion and a net purchase discount of $670.5 million at December 31, 2018.  This discount consists of a $516.1 million credit reserve and other-than-temporary impairments and a $154.3 million net accretable discount.  We believe this credit reserve appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows.  Our Legacy Non-Agency MBS generated a yield of 10.65% for the quarter.  The portfolio continues to outperform our credit assumptions and has underlying mortgage loans that are on average approximately thirteen years seasoned and 11.1% are currently 60 or more days delinquent.

As of December 31, 2018, the Agency MBS portfolio totaled $2.7 billion, had an amortized cost basis of 103.9% of par and generated a yield of 2.72% for the fourth quarter. At the end of the fourth quarter, MFA held approximately $1.4 billion of RPL/NPL MBS.  These securities had an amortized cost basis of 99.95% of par and generated a yield of 4.82% for the quarter.  Our investments in CRT securities totaled $492.8 million at December 31, 2018, and generated a yield of 5.88% for the fourth quarter. During the quarter we opportunistically sold residential mortgage securities for $197.1 million, realizing net gains of $28.6 million ($7.8 million of which had previously been recorded as unrealized gains on CRT securities for which we had elected fair value accounting).

For the three months ended December 31, 2018, MFA's costs for compensation and benefits and other general and administrative expenses were $11.9 million, or an annualized 1.39% of stockholders' equity as of December 31, 2018.

The following table presents the weighted average prepayment speed on MFA's MBS portfolio.

As of December 31, 2018, under its swap agreements, MFA had a weighted average fixed-pay rate of interest of 2.42% and a floating receive rate of 2.56% on notional balances totaling $3.2 billion, with an average maturity of 32 months.

The following table presents MFA's asset allocation as of December 31, 2018, and the fourth quarter 2018 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

At December 31, 2018, MFA's $4.6 billion of Agency and Legacy Non-Agency MBS were backed by hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, February 21, 2019, at 10:00 a.m. (Eastern Time) to discuss its fourth quarter 2018 financial results. The live audio webcast will be accessible to the general public over the internet at http://www.mfafinancial.com through the "Webcasts & Presentations" link on MFA's home page.  To listen to the conference call over the internet, please go to the MFA website at least 15 minutes before the call to register and to download and install any needed audio software.  Earnings presentation materials will be posted on the MFA website prior to the conference call and an audio replay will be available on the website following the call.

Cautionary Language Regarding Forward-Looking Statements
When used in this press release or other written or oral communications, statements which are not historical in nature, including those containing words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "could," "would," "may" or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market (i.e., fair) value of MFA's MBS, residential whole loans, CRT securities and other assets; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in our portfolio and could require us to reinvest the proceeds received by us as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in our portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows or, in certain circumstances, other-than-temporary impairment on certain Legacy Non-Agency MBS purchased at a discount; credit risks underlying MFA's assets, including changes in the default rates and management's assumptions regarding default rates on the mortgage loans securing MFA's Non-Agency MBS and relating to MFA's residential whole loan portfolio; MFA's ability to borrow to finance its assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation of or changes in government regulations or programs affecting MFA's business; MFA's estimates regarding taxable income, the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by MFA to accrete the market discount on Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA's Agency MBS, Non-Agency MBS and residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFA's Board of Directors and will depend on, among other things, MFA's taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as MFA's Board of Directors deems relevant; MFA's ability to maintain its qualification as a REIT for federal income tax purposes; MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (or the "Investment Company Act"), including statements regarding the concept release issued by the Securities and Exchange Commission ("SEC") relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are engaged in the business of acquiring mortgages and mortgage-related interests; MFA's ability to continue growing its residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on our investments in nonperforming residential whole loans ("NPLs"), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; targeted or expected returns on MFA's investments in recently-originated loans, the performance of which is, similar to MFA's other mortgage loan investments, subject to, among other things, prepayment risk, credit risk and financing cost associated with such investments; risks associated with our investments in MSR-related assets, including servicing, regulatory and economic risks, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the SEC, could cause MFA's actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements are based on beliefs, assumptions and expectations of MFA's future performance, taking into account all information currently available.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect MFA. Except as required by law, MFA is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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SOURCE MFA Financial, Inc.