Classified in: Business, Covid-19 virus
Subjects: ERN, CCA, DIV

MFA Financial, Inc. Announces Second Quarter 2020 Financial Results and declares $0.05 common dividend

NEW YORK, Aug. 6, 2020 /PRNewswire/ -- MFA Financial, Inc. (NYSE: MFA) today provided its financial results for the second quarter ended June 30, 2020.

Second Quarter 2020 financial results update:

• MFA generated second quarter net income of $88.4 million, or $0.19 per common share.
• During the second quarter, we continued to take actions to preserve book value, reduce leverage, generate liquidity and stabilize our financial position. MFA sold approximately $3.2 billion of residential mortgage assets, realizing net gains of $49.5 million for the quarter. In addition, overall asset prices recovered appreciably during this period, resulting in a partial recovery of the significant losses recorded in the first quarter. Unrealized gains on residential mortgage securities accounted for at fair value were $64.4 million during the quarter and the overall price appreciation of residential mortgage assets drove the positive changes in our book value.
• As previously announced, on June 26, 2020 we finalized a number of financing transactions, including a $500 million capital raise through a private senior secured loan agreement and approximately $2.0 billion of non-mark-to-market term borrowing facilities. In conjunction with the completion of the transactions, we also entered into agreements to reinstate our repurchase agreement financings with certain of our financing counterparties on an ongoing basis on renegotiated terms and to terminate the forbearance agreements we initially entered into on April 10, 2020.
• After taking into consideration dividends payable on our Series B and Series C Preferred Stock that were reinstated and declared on July 1, 2020 and paid on July 31, 2020, estimated undistributed REIT taxable income as of June 30, 2020 is $0.16 per common share.
• GAAP book value at June 30, 2020 was $4.51 per common share, while Economic book value, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized market value changes in residential whole loans held at carrying value for GAAP reporting, was $4.46 per common share at quarter-end.
• MFA also announced today that it has declared a regular cash dividend of $0.05 per share of common stock. The dividend will be paid on October 30, 2020, to stockholders of record on September 30, 2020.

Commenting on the second quarter 2020 results, Craig Knutson, MFA's CEO and President said, "The second quarter of 2020 was anything but  "business as usual" for MFA Financial.  The global COVID-19 pandemic led to unprecedented market conditions late in the first quarter of this year, and as we entered the second quarter, we were negotiating with our lender counterparties to seek forbearance, while simultaneously working to raise liquidity and de-lever our portfolio.  We entered into an initial forbearance agreement on April 10, at which time we had already reduced our repurchase obligations to $5.8 billion from $9.5 billion on March 20.  Through the rest of April and into May, we continued to generate liquidity and reduce our exposure to mark-to-market financing by selling assets.  The initial forbearance period was extended on April 27 to June 1, and again on June 1 to June 26.  When we emerged from forbearance on June 26, our balance sheet was materially different than at the beginning of the quarter, and our assets are now primarily comprised of residential whole loans.  On the liability side, we have profoundly altered the nature of our financings to be more durable, with approximately two-thirds of our asset-based (secured) financing now containing non-mark-to-market collateral provisions."

Mr. Knutson continued, "While MFA spent nearly the entire second quarter in forbearance, these agreements enabled us to liquidate assets at higher prices than would have been achievable in late March, through more judicious and orderly sales.  Sales of residential mortgage securities and MSR-related assets in the second quarter generated net gains of approximately $177.5 million versus their March 31 marks, preserving significant book value relative to a sale of these securities in March.  In addition, we were able to sell a large pool of Non-QM whole loans in the second quarter through a broad and competitive process.  While this sale generated a significant loss of $127.2 million ($57.0 million of which was reflected in second quarter earnings), this sale process likely produced an execution that was significantly better than would have been achieved through a less orderly and non-competitive process, again preserving book value.  Finally, the patience afforded us through forbearance also benefited the Company and its shareholders by permitting us to conduct a very competitive third party capital search that resulted not only in a capital investment, but also a strategic and collaborative partnership with Apollo and Athene."

Mr. Knutson added, "MFA's second quarter financial results were overwhelmingly driven by unusual events and transactions.  In addition to the significant realized gains and losses through asset sales, we incurred substantial expenses associated with our capital raise, exit from forbearance and balance sheet restructuring.  Further, we recognized losses associated with the termination of our interest rate swap position and we recorded a partial reversal of allowance for credit loss.  It should also be noted that MFA's interest expense for the second quarter was driven by expensive forbearance interest expense that is not indicative of borrowing expense on an ongoing basis.  GAAP book value was up largely due to earnings for the quarter, but Economic book value was also up as a result of continued asset price appreciation on our residential whole loans held at carrying value.  Finally, we are pleased to report that in addition to reinstating preferred stock dividends, we will resume paying a common stock dividend, as today we declared a cash dividend of $0.05 per share, payable on October 30, 2020 to stockholders of record on September 30, 2020."

Q2 2020 Portfolio Activity

MFA's residential mortgage investment portfolio decreased by $3.4 billion during the second quarter, primarily due to asset sales and portfolio run-off.  Assets with an amortized cost basis totaling $3.2 billion were sold for $3.3 billion, resulting in net realized gains of $49.5 million.

At June 30, 2020, the net carrying value of our investments in residential whole loans totaled $5.9 billion.  Of this amount, $4.7 billion is recorded at carrying value and $1.2 billion is recorded at fair value on our consolidated balance sheet.  Loans held at carrying value generated an overall yield of 5.15% during the quarter, with purchased performing loans generating a yield of 5.17% and purchased credit deteriorated loans generating a yield of 5.07%.  Rehabilitation loans that were more than 60 days delinquent increased to 21.1% at June 30, 2020, from 11.3% at March 31, 2020.  The amount of purchased credit deteriorated loans that were more than 90 days delinquent, measured as a percentage of the unpaid principal balance, increased during the quarter and was 15.3% at June 30, 2020, compared to 12.4% at March 31, 2020.  During the quarter loans held at carrying value with an amortized cost basis of $955.4 million were sold, realizing a loss of $127.2 million. However, after the reversal of a $70.2 million valuation allowance that was recorded at the end of the first quarter on certain loans that were designated as held for sale, the resulting net loss for the second quarter on the sale of loans was $57.0 million.

Net gains for the quarter on residential whole loans measured at fair value through earnings were $20.3 million, including unrealized gains in the fair value of the underlying loans of $2.0 million, and $18.3 million of coupon interest payments and other gains realized during the quarter.  The percentage amount of fair value loans that were more than 90 days delinquent marginally increased to 48.8% at June 30, 2020 from 48.2% at March 31, 2020.

In addition, as of the end of the quarter, we held approximately $349 million of REO properties, which has decreased from $411 million as of the end of the first quarter as foreclosure activity slowed, while asset sales continued.  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.

During the quarter, the Company disposed of approximately $1.0 billion of Legacy Non-Agency MBS, realizing net gains of $163.8 million.  In addition, the Company sold $535.7 million of Agency MBS, realizing a gain of $3.6 million.  With these sales, MFA has exited its remaining Agency MBS and the substantial majority of its Legacy Non-Agency MBS.

At the end of the second quarter, MFA held approximately $51.5 million of RPL/NPL MBS.  During the quarter, the Company sold $37.0 million of these securities, realizing a loss of $12.7 million.  In addition, our investments in MSR-related assets totaled $254.2 million at June 30, 2020.  During the quarter, the Company sold $574.9 million of term notes backed by MSR-related collateral, realizing a gain of $53.3 million. Our investments in CRT securities totaled $94.1 million at June 30, 2020.  During the quarter the Company sold $207.4 million of CRT securities, realizing a loss of $25.0 million.

Included in Other income, net for the second quarter are $49.9 million of losses transferred from other comprehensive income, a component of shareholders' equity, on previously unwound swaps that had been designated as a hedge for accounting purposes.  These losses were required to be recognized in earnings as the Company concluded that due to the closing of new term financing transactions late in the second quarter, certain repurchase agreement financing repricings on a monthly basis that were expected to occur in future periods and that were intended to be hedged, are no longer considered probable of occurring.

For the second quarter, a reversal of the provision for credit losses of $15.2 million was recorded on residential whole loans held at carrying value.  In addition, the valuation allowance to reduce the carrying value of Non-QM loans designated as held for sale at the end of the first quarter of $70.2 million was reversed as this loan sale was completed during the second quarter. The total allowance for credit losses recorded on residential whole loans held at carrying value at June 30, 2020 was $136.6 million.  In addition, as of June 30, 2020, reserves for credit losses totaling approximately $2.1 million were recorded related to undrawn commitments on loans held at carrying value.

General and Administrative and other expenses

For the three months ended June 30, 2020, MFA's costs for compensation and benefits and other general and administrative expenses were $16.2 million, or an annualized 2.64% of average stockholders' equity for the quarter ended June 30, 2020.  In addition, professional services and other costs of $40.0 million were incurred during the quarter related to negotiating forbearance arrangements with our lenders, entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance.  Going forward, we do not anticipate incurring any significant additional expenses related to exiting forbearance or refinancing activity.

The following table presents MFA's asset allocation as of June 30, 2020, and the second quarter 2020 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

 

 

The following table presents the activity for our residential mortgage asset portfolio for the three months ended June 30, 2020:

 

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

Residential Whole Loans, at Carrying Value at June 30, 2020 and December 31, 2019:

 

 

 

 

 

 

 

Residential Whole Loans, at fair value at June 30, 2020 and December 31, 2019:

 

 

 

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, August 6, 2020, at 11:30 a.m. (Eastern Time) to discuss its second quarter 2020 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," the negative of these words 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. These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives.  Statements regarding the following subjects, among others, may be forward-looking: risks related to the ongoing spread of the novel coronavirus and the COVID-19 pandemic, including its effect on the general economy and our business, financial position and results of operations (including, among other potential effects, increased delinquencies and greater than expected losses in our whole loan portfolio);changes in interest rates and the market (i.e., fair) value of MFA's residential whole loans, MBS 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; credit risks underlying MFA's assets, including changes in the default rates and management's assumptions regarding default rates on the mortgage loans in 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 residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA's 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 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 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.

 

 

 

 

 

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:

 

Earnings Release

SOURCE MFA Financial, Inc.

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