MFA Financial: Book Value per Share Dropped as MBS Values Fell



MFA Financial’s book value falls

MFA Financial’s (MFA) book value per share fell from $7.70 in the third quarter of 2015 to $7.47 in 4Q15. Losses on agency and non-agency MBS (mortgage-backed securities) drove the drop. MBS spreads also widened during the quarter, largely because of the volatility in global financial markets.

The ten-year bond yield rose from 2.04% to 2.27% over the quarter, which negatively affected the value of MFA’s MBS portfolio. However, as with most REITs that have announced earnings so far, MFA Financial’s book value fell.

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Book value per share: A critical metric for mortgage REITs

Because REITs are financials, they tend to trade off of two important metrics: dividend yield and book value per share. The dividend yield is typically why investors buy REITs in the first place. REITs tend to have much higher dividend yields than a typical S&P 500 stock. This is because they must distribute 90% of their earnings as dividends. Investors interested in trading in the mortgage REIT sector as a whole can look at the iShares Mortgage Real Estate Capped ETF (REM).

That said, investors often think of book value per share as a floor level for the stock. In other words, if dividends are high, the stock may trade in excess of book value. However, REITs generally tend to trade at or just under book value. This reflects the lack of liquidity of MBS. In theory, book value per share is the amount equity holders would receive if the entire portfolio were liquidated, but illiquid investments tend to have a small discount in sale price to compensate investors.

MFA is less sensitive to interest rates than most other mortgage REITs

MFA Financial is different from large agency REITs such as American Capital Agency (AGNC) and Annaly Capital Management (NLY). These two companies primarily invest in 30-year fixed-rate mortgages. They experienced declines in book value per share in late 2013 and early 2014, when interest rates ticked up.

These REITs have a higher interest rate risk than MFA Financial (MFA), Hatteras Financial Corp. (HTS), and Capstead Mortgage Corporation (CMO), which invest primarily in adjustable-rate MBS. MFA Financial invests in mortgage-backed securities that bear credit risk, which lowers the interest rate risk. Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).


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