MFA Financial, Inc. Announces Fourth Quarter 2019 Financial Results

NEW YORK, Feb. 20, 2020 /PRNewswire/ -- MFA Financial, Inc. (NYSE: MFA) today announced its financial results for the fourth quarter ended December 31, 2019.

Fourth Quarter 2019 and other highlights:

• MFA generated fourth quarter GAAP net income of $96.9 million, or $0.21 per common share. Core earnings, a non-GAAP financial measure of MFA's operating performance that is calculated by adjusting GAAP net income to exclude the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges, was also $0.21 per common share.
• MFA acquired approximately $1.7 billion of residential mortgage assets in the fourth quarter, including $1.5 billion of residential whole loans. During 2019, residential whole loan acquisitions of approximately $4.3 billion drove net portfolio growth exceeding $1.0 billion.
• Interest income on MFA's purchased performing loan portfolio increased 15.6% from the prior quarter to $61.9 million. For the full year, this portfolio generated $200.6 million in interest income, more than triple the prior year.
• GAAP book value per common share during the quarter continued to be stable and was $7.04 at December 31, 2019. GAAP book value decreased from $7.15 at December 31, 2018, primarily due to discount accretion and realized gains on sales of Legacy Non-Agency MBS that were distributed as dividends.
• Economic book value per common share, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on residential whole loans held at carrying value for GAAP reporting, was $7.44 at December 31, 2019. Economic book value increased marginally during the quarter and by approximately 1% during 2019.
• On January 31, 2020, MFA paid its fourth quarter 2019 dividend of $0.20 per share of common stock to shareholders of record as of December 30, 2019.
• Economic return (a measure of changes in MFA's GAAP book value plus dividends for a period) was 2.1% for the fourth quarter and 9.7% for the full year. When calculated using Economic book value, economic return was 3.1% for the fourth quarter and 12.1% for the full year.

Craig Knutson, MFA's CEO and President, said, "MFA's investment portfolio activity in the fourth quarter of 2019 was fueled by acquisitions of $1.7 billion of new assets.  Our residential whole loan and REO portfolio increased during the quarter in excess of $1 billion and by nearly $3 billion for the year, primarily due to investments in purchased performing loans.  Our growth in purchased performing loans was driven by the acquisition of Non-QM, fix and flip and single-family rental loans, as we continue to cultivate the strategic relationships with select loan origination partners that have been developed over the past several years.  Through our willingness and ability to explore and enter into various arrangements, including flow agreements, strategic alliances and also minority investments, we have been able to partner with originators to source attractive investments, while enabling them to grow with support from MFA as a reliable provider of capital.  During the quarter we made an additional $25 million investment, bringing total capital contributions across five different loan origination partners to approximately $148 million at year-end.  These investments generated $3.7 million of income in the form of interest and dividends (before allocation of profits) during the quarter."

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 1.36 at quarter-end.  Our portfolio continues to deliver GAAP book value stability.  In addition, MFA's Economic book value was $7.44 at December 31, 2019 and has increased by approximately 1% during 2019.  Leverage, which reflects the ratio of our financing obligations to equity, was 3.0:1 at quarter-end, up from 2.8:1 at the end of the third quarter, as we accessed additional borrowing capacity to fund loan growth."

At December 31, 2019, our investments in residential whole loans totaled $7.5 billion.  Of this amount, $6.1 billion is recorded at carrying value and $1.4 billion is recorded at fair value on our consolidated balance sheet.  Loans held at carrying value generated an overall yield of 5.31% during the quarter, with purchased performing loans generating a yield of 5.24% and purchased credit impaired loans generating a yield of 5.80%.  Net gains for the quarter on residential whole loans measured at fair value through earnings were $41.4 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 $412 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 $1.6 billion with an amortized cost of $1.0 billion and a net purchase discount of $526.6 million at December 31, 2019.  This discount consists of a $436.6 million credit reserve and other-than-temporary impairments and a $90.0 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.  Including the impact of bond redemptions, this portfolio generated a yield of 14.76% for the quarter.  Eliminating the impact of these redemptions, the portfolio generated a yield in the fourth quarter of 10.60%.  The portfolio continues to outperform our credit assumptions and has underlying mortgage loans that are on average nearly fourteen years seasoned and only 10.5% are currently 60 or more days delinquent.

As of December 31, 2019, the Agency MBS portfolio totaled $1.7 billion, had an amortized cost basis of 103.9% of par and generated a yield of 2.38% for the fourth quarter.  At the end of the fourth quarter, MFA held approximately $635.0 million of RPL/NPL MBS.  These securities had an amortized cost basis of 99.9% of par and generated a yield of 5.17% for the quarter.  In addition, our investments in MSR-related assets at December 31, 2019 totaled $1.2 billion and generated a yield of 4.88% for the fourth quarter.  Our investments in CRT securities totaled $255.4 million at December 31, 2019, and generated a yield of 3.98% for the fourth quarter.  During the quarter we opportunistically sold residential mortgage securities for $169.8 million, realizing gains of $12.0 million.  Sale activity included $123.3 million of CRT securities that realized gains of $3.0 million, of which $2.5 million had been recorded in prior periods as unrealized gains as we had elected fair value accounting on these securities.

For the three months ended December 31, 2019, MFA's costs for compensation and benefits and other general and administrative expenses were $12.7 million, or an annualized 1.50% of stockholders' equity as of December 31, 2019.

The following table presents MFA's asset allocation as of December 31, 2019, and the fourth quarter 2019 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

The following tables present information on our investments in residential whole loans.

Residential Whole Loans, at Carrying Value at December 31, 2019 and 2018:

 

 

 

 

 

 

Residential Whole Loans, at fair value at December 31, 2019 and 2018:

 

 

 

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, February 20, 2020, at 10:00 a.m. (Eastern Time) to discuss its fourth quarter 2019 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 its portfolio and could require MFA to reinvest the proceeds received by it 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 MFA's portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows or, in certain circumstances, 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 MFA's 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, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with MFA's investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, 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.

 

Non-GAAP Financial Measures

Reconciliation of GAAP net income available to common stock and participating securities to non-GAAP Core earnings

"Core earnings" is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission.  Core earnings excludes certain unrealized gains and losses on investments in residential mortgage securities and related hedges that we are required to include in GAAP Net Income each period because management believes that these items, which to date have typically resulted from short-term market volatility or other market technical factors and not due to changes in fundamental asset cash flows, are not reflective of the economic income generated by our investment portfolio.  Accordingly, we believe that the adjustments to compute Core earnings specified below better allow investors and analysts to evaluate our financial results, including by analyzing changes in our Core earnings between periods.   In addition to using Core earnings in the evaluation of investment portfolio performance over time, management considers estimates of periodic Core earnings as an input to the determination of the level of quarterly dividends to common shareholders that are recommended to the Board of Directors for approval and in its forecasting and decision-making processes relating to the allocation of capital between different asset classes.

We believe that Core earnings provides useful supplemental information to both management and investors in evaluating our financial results.  Core earnings should be used in conjunction with results presented in accordance with GAAP.  Core earnings does not represent and should not be considered as a substitute for Net Income or Cash Flows from Operating Activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP net income available to common stock and participating securities to our non-GAAP Core earnings for each fiscal quarter of 2019 and for the fourth fiscal quarter of 2018:

Reconciliation of GAAP Book Value per Common Share to non-GAAP Economic Book Value per Common Share

"Economic book value" is a non-GAAP financial measure of our financial position.  To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans.  This adjustment is also reflected in our end of period stockholders' equity in the table below.  Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage assets, irrespective of the accounting model applied for GAAP reporting purposes.  Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share for the quarterly periods below:

 

 

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SOURCE MFA Financial, Inc.