Highlights of the quarter
MFA Financial reported net income of $0.20 a share. This was higher than the Wall Street estimate of $0.19 per share. Book value per share increased 2.1%, to $8.37 per share. Fixed-rate agency mortgage-backed securities accounted for 54% of the portfolio, while non-agency MBS accounted for 42%. Re-performing and non-performing whole loans accounted for the rest.
MFA was less leveraged than its peer group, with a debt-to-equity ratio of 2.8:1. Since MFA has a lot of non-agency exposure, it bears credit risk, and mortgage backed securities with credit risk tend to have higher yields. This makes the use of high leverage both unnecessary and risky.
The average interest rate spread was 2.59%—about twice what an agency REIT like Annaly (NLY) or American Capital Agency (AGNC) would have. The yield on MFA’s portfolio was 4.36%, while its cost of funds was 1.77%. By category, the agency portion of the portfolio yielded 2.26%, the non-agency portion yielded 7.69%, and the non-performing/re-performing portion yielded 3.8%.
William Gorin, MFA’s CEO, said this about how the portfolio changed over the quarter: “In the second quarter, we continued to identify attractive investment opportunities across the residential mortgage asset universe. We have expanded our investment team and as a result, were positioned to significantly grow our holdings of securities backed by re-performing/non-performing loans to $495.1 million while moving forward with the acquisition of non-securitized re-performing loans, bringing our holdings of credit sensitive residential whole loans to $59.7 million. In addition, we acquired $14.2 million of Non-Agency MBS while opportunistically selling $26.5 million of Non-Agency MBS, realizing a gain of $7.9 million.”
The company paid a quarterly dividend for the fourth quarter of 20 cents a share—flat with last quarter and down 15 cents from a year ago. Given that REITs like Annaly (NLY), American Capital Agency (AGNC), MFA Financial (MFA), Capstead (CMO), and Hatteras (HTS) must pay out 90% of their income as dividends, they tend to have volatile dividend streams.