Highlights of the income statement
MFA Financial’s (MFA) average asset yield in 4Q15 was 4.15%, an increase from 4.05% in the third quarter. The company’s average cost of funds derived from repurchase agreements, swaps, and other borrowings increased from 1.8% to 1.94%. Its net interest spread fell from 2.25% to 2.22%.
Interest rates generally fell during the quarter, but MBS spreads widened. Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).
For the quarter, MFA Financial generated net income of $69.7 million, or about 19 cents per share. Interest income was $118.5 million, and interest expense was $46.5 million. Its gain on its sale income was $7 million. Operating expenses (compensation, SG&A [selling, general, and administrative expenses], and servicing costs) totaled $14.3 million.
MFA Financial ended up declaring a dividend of $0.20 per share for 4Q15, which works out to a 12.2% current yield. This was flat with what it had been paying for the past couple of years. MFA Financial has had a relatively stable dividend compared to those of other REITs—particularly the big agency REITs, which have been hammered by rising rates and increasing volatility. 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 13.7%, Annaly Capital Management (NLY) pays 12.1%, Redwood Trust (RWT) pays 11%, and Hatteras Financial Corp. (HTS) pays 14.5%. 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 forecasts a future dividend cut. Investors interested in trading in the mortgage REIT sector as a whole can look at the iShares Mortgage Real Estate Capped ETF (REM).