Highlights of the income statement
MFA Financial’s (MFA) average asset yield in 2Q15 was 4.07%, a decrease from 4.22% in the first quarter. The company’s average cost of funds derived from repurchase agreements, swaps, and other borrowings decreased from 1.78% to 1.74%. Its net interest spread fell from 2.44% to 2.33%, primarily as a result of the company reducing its dollar roll exposure and increasing its repo funded assets. Interest rates generally rose during the quarter. Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).
For the quarter, MFA generated net income of $74 million or about 20 cents per share. Interest income was $124 million and interest expense was $42.8 million. Its gain on its sale income was $10 million. Operating expenses (compensation, SG&A[1. Selling, general, and administrative expenses], and servicing costs) totaled $12.9 million.
MFA ended up declaring a dividend of $0.20 per share for the second quarter. This was flat with what it had been paying for the past seven quarters. MFA Financial has had a relatively stable dividend compared to other REITs—particularly the big agency REITs, which have gotten hammered as rates have been rising and volatility has increased. The big agency REITs are particularly sensitive to interest rate volatility and adjusting duration hedges is costly.
If we look at the big agency REITs, we see that American Capital Agency (AGNC) pays a current yield of 12.4%, Annaly Capital (NLY) pays 11.9%, Redwood Trust pays 7.2%, and Hatteras Financial (HTS) pays 12.3%. The volatility of dividends is a critical factor for investors to remember when looking at the mortgage REIT sector. One of the biggest mistakes an investor can make with these stocks is to fall in love with a fat current yield. Often that yield is too good to be true and the stock price is forecasting a future dividend cut. Investors interested in trading in the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).