UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 3, 2016
MFA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland |
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1-13991 |
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13-3974868 |
(State or other jurisdiction |
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(Commission File Number) |
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(IRS Employer |
of incorporation |
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Identification No.) |
or organization) |
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350 Park Avenue, 20th Floor |
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New York, New York |
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10022 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (212) 207-6400
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition and
Item 7.01 Regulation FD Disclosure
MFA Financial, Inc. (MFA) issued a press release, dated November 3, 2016, announcing its financial results for the quarter ended September 30, 2016, which is attached hereto as Exhibit 99.1 and is incorporated herein by reference. In addition, in conjunction with the announcement of its financial results, MFA issued additional information relating to its 2016 third quarter financial results. Such additional information is attached to this report as Exhibit 99.2 and is incorporated herein by reference.
The information referenced in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2) is being furnished and, as such, shall not be deemed to be filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that Section. The information set forth in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2) is and will not be incorporated by reference into any registration statement or other document filed by MFA pursuant to the Securities Act of 1933, as amended (the Securities Act), except as may be expressly set forth by specific reference in such filing.
As discussed therein, the press release contains forward-looking statements within the meaning of the Securities Act and the Exchange Act and, as such, may involve known and unknown risks, uncertainties and assumptions. These forward-looking statements relate to MFAs current expectations and are subject to the limitations and qualifications set forth in the press release as well as in MFAs other documents filed with the SEC, including, without limitation, that actual events and/or results may differ materially from those projected in such forward-looking statements.
Exhibit |
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99.1 |
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Press Release, dated November 3, 2016, announcing MFAs financial results for the quarter ended September 30, 2016. |
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99.2 |
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Additional information relating to the financial results of MFA for the quarter ended September 30, 2016. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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MFA FINANCIAL, INC. | |
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(REGISTRANT) | |
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By: |
/s/ Harold E. Schwartz |
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Name: Harold E. Schwartz |
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Title: Senior Vice President and |
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General Counsel |
Date: November 3, 2016
EXHIBIT INDEX
Exhibit No. |
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Description |
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99.1 |
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Press Release, dated November 3, 2016, announcing MFA Financial Inc.s financial results for the quarter ended September 30, 2016. |
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99.2 |
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Additional information relating to the financial results of MFA Financial, Inc. for the quarter ended September 30, 2016. |
Exhibit 99.1
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MFA |
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FINANCIAL, INC. |
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350 Park Avenue |
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New York, New York 10022 |
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PRESS RELEASE |
FOR IMMEDIATE RELEASE |
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November 3, 2016 |
NEW YORK METRO |
INVESTOR CONTACT: |
InvestorRelations@mfafinancial.com |
NYSE: MFA |
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212-207-6433 |
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www.mfafinancial.com |
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MEDIA CONTACT: |
Abernathy MacGregor |
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Tom Johnson, Andrew Johnson |
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212-371-5999 |
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MFA Financial, Inc.
Announces Third Quarter 2016 Financial Results
NEW YORK - MFA Financial, Inc. (NYSE:MFA) today announced its financial results for the third quarter ended September 30, 2016.
Third Quarter 2016 and other highlights:
· Generated third quarter net income available to common shareholders of $79.3 million, or $0.21 per common share (based on 373.1 million weighted average common shares outstanding). As of September 30, 2016, book value per common share was $7.64.
· On October 31, 2016, MFA paid its third quarter 2016 dividend of $0.20 per share of common stock to shareholders of record as of September 28, 2016.
· MFA acquired $374.8 million of 3 year step-up securities and $311.6 million of credit sensitive residential whole loans during the quarter. Additionally, MFA acquired $60.4 million of Credit Risk Transfer securities and was both an opportunistic buyer and seller of Legacy Non-Agency MBS during the quarter.
William Gorin, MFAs CEO, said, In the third quarter, we continued to execute our strategy of targeted investment within the residential mortgage universe with a focus on credit sensitive assets. We acquired
$374.8 million of 3 year step-up securities, $311.6 million of credit sensitive residential whole loans and $60.4 million of Credit Risk Transfer securities during the quarter. Further, we opportunistically purchased $38.7 million of Non-Agency MBS issued prior to 2008 (Legacy Non-Agency MBS) and sold $13.2 million of Legacy Non-Agency MBS, realizing gains of $7.1 million for the quarter. This is the seventeenth consecutive quarter we have realized gains through selected sales of Legacy Non-Agency MBS based on our projections of future cash flows relative to market pricing. We did not acquire any Agency MBS in this quarter.
MFA remains well positioned to generate attractive returns despite this period of extremely low interest rates. Rates are being held down, as on a worldwide basis there appears to be insufficient growth and a bias towards low inflation. Clearly, accommodative monetary policy also continues to impact rates. Through asset selection and hedging strategy, the estimated effective duration, a gauge of MFAs interest rate sensitivity, remains below 1.0 and measured 0.55 at quarter-end. Leverage, which reflects the ratio of our financing obligations to equity, was 3.1:1 at quarter-end.
Craig Knutson, MFAs President and COO, added, MFAs portfolio asset selection process continues to emphasize residential mortgage credit exposure while seeking to minimize sensitivity to interest rates. As housing prices maintain their upward trend and borrowers repair their credit and balance sheets, MFAs Legacy Non-Agency portfolio continues to outperform our credit assumptions. In the third quarter of 2016, we reduced our credit reserve by $6.8 million. Also, our credit sensitive residential whole loans offer additional exposure to residential mortgage credit while affording us the opportunity to improve outcomes through sensible and effective servicing decisions.
MFAs Legacy Non-Agency MBS had a face amount of $3.8 billion with an amortized cost of $2.8 billion and a net purchase discount of $1.0 billion at September 30, 2016. This discount consists of a $715.0 million credit reserve and other-than-temporary impairments and a $294.0 million net accretable discount. We believe this credit reserve appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows. Our Legacy Non-Agency MBS loss adjusted yield of 8.09% for the third quarter is based on projected defaults equal to 21% of underlying loan balances. On average, these loans are approximately ten years seasoned and approximately 12.5% are currently 60 or more days delinquent.
The Agency MBS portfolio had an average amortized cost basis of 103.8% of par as of September 30, 2016, and generated a 1.83% yield in the third quarter. The Legacy Non-Agency MBS portfolio had an average amortized cost of 73.3% of par as of September 30, 2016, and generated a loss-adjusted yield of 8.09% in the third quarter. At the end of the third quarter, MFA held approximately $2.5 billion of the senior most tranches of 3 year step-up securities. These securities had an amortized cost of 99.9% of par and generated a 3.86% yield for the quarter.
In addition, at September 30, 2016, our investments in credit sensitive residential whole loans totaled $1.3 billion. Of this amount, $550.6 million is recorded at carrying value, or 86.4% of the interest-bearing unpaid principal balance and generated a loss-adjusted yield of 6.09% (5.71% net of servicing costs) during the quarter and $797.2 million is recorded at fair value on our consolidated balance sheet. On this portion of the portfolio we recorded gains for the quarter of approximately $18.7 million,
primarily reflecting changes in the fair value of the underlying loans and coupon interest payments received during the quarter.
For the three months ended September 30, 2016, MFAs costs for compensation and benefits and other general and administrative expenses were $10.8 million, or an annualized 1.42% of stockholders equity as of September 30, 2016.
The following table presents the weighted average prepayment speed on MFAs MBS portfolio.
Table 1
|
|
Third Quarter |
|
Second Quarter |
|
Agency MBS |
|
16.7 |
% |
13.9 |
% |
Legacy Non-Agency MBS |
|
15.9 |
% |
16.1 |
% |
3 Year Step-up securities (1) |
|
32.2 |
% |
25.4 |
% |
(1) All principal payments are considered to be prepayments for conditional prepayment rate (CPR) purposes. 3 year step-up securities are MBS that are backed by securitized Re-performing and Non-performing Loans. The securities are structured such that the coupon steps-up 300 basis points at 36 months or sooner.
As of September 30, 2016, under its swap agreements, MFA had a weighted average fixed-pay rate of interest of 1.82% and a floating receive rate of 0.53% on notional balances totaling $3.0 billion, with an average maturity of 37 months.
The following table presents MFAs asset allocation as of September 30, 2016, and yield on average interest earning assets, average cost of funds and net interest rate spread for the various asset types for the quarter ended September 30, 2016.
Table 2
ASSET ALLOCATION
At September 30, 2016 |
|
Agency MBS |
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Legacy |
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3 Year Step- |
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Residential |
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Residential |
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Other, |
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Total |
| |||||||
Fair Value/ Carrying Value |
|
$ |
4,021,535 |
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$ |
3,385,588 |
|
$ |
2,523,227 |
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$ |
550,623 |
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$ |
797,191 |
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$ |
862,916 |
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$ |
12,141,080 |
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Less Payable for Unsettled Purchases |
|
|
|
|
|
|
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(111,232 |
) |
(92,728 |
) |
|
|
(203,960 |
) | |||||||
Less Repurchase Agreements |
|
(3,356,803 |
) |
(2,287,178 |
) |
(1,963,760 |
) |
(213,781 |
) |
(419,628 |
) |
(241,606 |
) |
(8,482,756 |
) | |||||||
Less FHLB advances |
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(215,000 |
) |
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|
|
|
|
|
|
|
|
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(215,000 |
) | |||||||
Less Senior Notes |
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|
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|
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|
|
|
|
|
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(96,724 |
) |
(96,724 |
) | |||||||
Equity Allocated |
|
$ |
449,732 |
|
$ |
1,098,410 |
|
$ |
559,467 |
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$ |
225,610 |
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$ |
284,835 |
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$ |
524,586 |
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$ |
3,142,640 |
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Less Swaps at Market Value |
|
|
|
|
|
|
|
|
|
|
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(109,202 |
) |
(109,202 |
) | |||||||
Net Equity Allocated |
|
$ |
449,732 |
|
$ |
1,098,410 |
|
$ |
559,467 |
|
$ |
225,610 |
|
$ |
284,835 |
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$ |
415,384 |
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$ |
3,033,438 |
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Debt/Net Equity Ratio (2) |
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7.9x |
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2.1x |
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3.5x |
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1.4x |
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1.8x |
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3.1x |
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For the Quarter Ended September 30, 2016 |
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Yield on Average Interest Earning Assets (3) |
|
1.83 |
% |
8.09 |
% |
3.86 |
% |
6.09 |
% |
N/A |
|
|
% |
4.23 |
% | |||||||
Less Average Cost of Funds (4) |
|
(1.28 |
) |
(2.98 |
) |
(2.05 |
) |
(2.81 |
) |
(3.27 |
) |
|
|
(2.10 |
) | |||||||
Net Interest Rate Spread |
|
0.55 |
% |
5.11 |
% |
1.81 |
% |
3.28 |
% |
N/A |
|
|
% |
2.13 |
% |
(1) Includes cash and cash equivalents and restricted cash of $411.4 million, securities obtained and pledged as collateral, $347.6 million of CRT securities, other assets, obligation to return securities obtained as collateral and other liabilities.
(2) Represents the sum of borrowings under repurchase agreements, Federal Home Loan Bank advances and payable for unsettled purchases as a multiple of net equity allocated. The numerator of our Total Debt/Net Equity Ratio also includes the obligation to return securities obtained as collateral of $506.2 million, Senior Notes and repurchase agreements financing CRT security purchases.
(3) Yields reported on our interest earning assets are calculated based on the interest income recorded and the average amortized cost for the quarter of the respective asset. At September 30, 2016, the amortized cost of our interest earning assets were as follows: Agency MBS - $3,974,896; Legacy Non-Agency MBS - $2,766,024; 3 year step-up securities - $2,515,487; and Residential Whole Loans at carrying value - $550,623. In addition, the yield for residential whole loans at carrying value was 5.71% net of 38 basis points of servicing fee expense incurred during the quarter. For GAAP reporting purposes, such expenses are included in Loan servicing and other related operating expenses in our statement of operations. Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans held at fair value in our statement of operations. Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.
(4) Average cost of funds includes interest on repurchase agreements and other advances, the cost of swaps and Senior Notes. Agency cost of funds includes 62 basis points and Legacy Non-Agency cost of funds includes 74 basis points associated with Swaps to hedge interest rate sensitivity on these assets.
At September 30, 2016, MFAs $7.4 billion of Agency and Legacy Non-Agency MBS were backed by Hybrid, adjustable and fixed-rate mortgages. Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:
Table 3
|
|
Agency MBS |
|
Legacy Non-Agency MBS (1) |
|
Total (1) |
| |||||||||||||||
($ in Thousands) |
|
Fair |
|
Average |
|
3 Month |
|
Fair |
|
Average |
|
3 Month |
|
Fair |
|
Average |
|
3 Month |
| |||
< 2 years (5) |
|
$ |
1,826,632 |
|
7 |
|
19.3 |
% |
$ |
2,276,780 |
|
5 |
|
15.4 |
% |
$ |
4,103,412 |
|
6 |
|
17.0 |
% |
2-5 years |
|
511,385 |
|
33 |
|
21.5 |
|
|
|
|
|
|
|
511,385 |
|
33 |
|
21.5 |
| |||
> 5 years |
|
135,798 |
|
71 |
|
15.2 |
|
|
|
|
|
|
|
135,798 |
|
71 |
|
15.2 |
| |||
ARM-MBS Total |
|
$ |
2,473,815 |
|
16 |
|
19.5 |
% |
$ |
2,276,780 |
|
5 |
|
15.4 |
% |
$ |
4,750,595 |
|
11 |
|
17.4 |
% |
15-year fixed (6) |
|
$ |
1,545,954 |
|
|
|
12.2 |
% |
$ |
6,357 |
|
|
|
18.6 |
% |
$ |
1,552,311 |
|
|
|
12.2 |
% |
30-year fixed (6) |
|
|
|
|
|
|
|
1,096,328 |
|
|
|
17.1 |
|
1,096,328 |
|
|
|
17.1 |
| |||
40-year fixed (6) |
|
|
|
|
|
|
|
6,123 |
|
|
|
16.5 |
|
6,123 |
|
|
|
16.5 |
| |||
Fixed-Rate Total |
|
$ |
1,545,954 |
|
|
|
12.2 |
% |
$ |
1,108,808 |
|
|
|
17.1 |
% |
$ |
2,654,762 |
|
|
|
14.4 |
% |
MBS Total |
|
$ |
4,019,769 |
|
|
|
16.7 |
% |
$ |
3,385,588 |
|
|
|
15.9 |
% |
$ |
7,405,357 |
|
|
|
16.3 |
% |
(1) Excludes $2.5 billion of 3 year step-up securities. Refer to Table 4 for further information.
(2) Does not include principal payments receivable of $1.8 million.
(3) Months to Reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps. Months to Reset does not reflect scheduled amortization or prepayments.
(4) 3 month average CPR weighted by positions as of beginning of each month in the quarter.
(5) Includes floating rate MBS that may be collateralized by fixed-rate mortgages.
(6) Information presented based on data available at time of loan origination.
Table 4
The following table presents certain information about our 3 year step-up securities portfolio at September 30, 2016:
Underlying collateral |
|
Fair Value |
|
Net Coupon |
|
Months to |
|
Current |
|
Original |
|
3 Month |
| |
Re-Performing loans |
|
$ |
334,931 |
|
3.61 |
% |
15 |
|
41 |
% |
38 |
% |
30.0 |
% |
Non-Performing loans |
|
2,188,296 |
|
3.86 |
|
21 |
|
49 |
|
47 |
|
32.8 |
| |
Total 3 year step-up securities |
|
$ |
2,523,227 |
|
3.83 |
% |
20 |
|
48 |
% |
46 |
% |
32.2 |
% |
(1) Months to step-up is the weighted average number of months remaining before the coupon interest rate increases pursuant to the first coupon reset. We anticipate that the securities will be redeemed prior to the step-up date.
(2) Credit Support for a particular security is expressed as a percentage of all outstanding mortgage loan collateral. A particular security will not be subject to principal loss as long as credit enhancement is greater than zero.
(3) All principal payments are considered to be prepayments for CPR purposes.
Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, November 3, 2016, at 11:00 a.m. (Eastern Time) to discuss its third quarter 2016 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 MFAs 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, could, would, should, may 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. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market value of MFAs MBS; changes in the prepayment rates on the mortgage loans securing MFAs MBS, an increase of which could result in a reduction of the yield on MBS in our portfolio and could require us to reinvest the proceeds received by us as a result of such prepayments in MBS with lower coupons; credit risks underlying MFAs assets, including changes in the default rates and managements assumptions regarding default rates on the mortgage loans securing MFAs Non-Agency MBS and relating to MFAs residential whole loan portfolio; MFAs 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 MFAs business; MFAs 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 Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFAs Agency MBS, Non-Agency MBS and residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modification, foreclosure and liquidation; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFAs Board of Directors and will depend on, among other things, MFAs taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as the Board deems relevant; MFAs ability to maintain its qualification as a REIT for federal income tax purposes; MFAs 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 in engaged in the business of acquiring mortgages and mortgage-related interests; MFAs ability to successfully implement its strategy to grow its residential whole loan portfolio; expected returns on our investments in non-performing 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; and risks associated with investing in real estate assets, including changes in business conditions and general economic conditions. 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 MFAs actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements 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.
MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts) |
|
September 30, |
|
December 31, |
| ||
|
|
(Unaudited) |
|
|
| ||
Assets: |
|
|
|
|
| ||
Mortgage-backed securities (MBS) and credit risk transfer (CRT) securities: |
|
|
|
|
| ||
Agency MBS, at fair value ($3,783,913 and $4,532,094 pledged as collateral, respectively) |
|
$ |
4,021,535 |
|
$ |
4,752,244 |
|
Non-Agency MBS, at fair value ($4,882,017 and $4,874,372 pledged as collateral, respectively) |
|
5,721,796 |
|
5,822,519 |
| ||
Non-Agency MBS transferred to consolidated variable interest entities (VIEs), at fair value |
|
187,019 |
|
598,298 |
| ||
CRT securities, at fair value ($320,852 and $170,352 pledged as collateral, respectively) |
|
347,640 |
|
183,582 |
| ||
Securities obtained and pledged as collateral, at fair value |
|
506,182 |
|
507,443 |
| ||
Residential whole loans, at carrying value ($273,419 and $93,692 pledged as collateral, respectively) |
|
550,623 |
|
271,845 |
| ||
Residential whole loans, at fair value ($618,846 and $585,971 pledged as collateral, respectively) |
|
797,191 |
|
623,276 |
| ||
Cash and cash equivalents |
|
288,698 |
|
165,007 |
| ||
Restricted cash |
|
122,656 |
|
71,538 |
| ||
Other assets |
|
208,049 |
|
166,799 |
| ||
Total Assets |
|
$ |
12,751,389 |
|
$ |
13,162,551 |
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Repurchase agreements and other advances |
|
$ |
8,697,756 |
|
$ |
9,387,622 |
|
Obligation to return securities obtained as collateral, at fair value |
|
506,182 |
|
507,443 |
| ||
8% Senior Notes due 2042 (Senior Notes) |
|
96,724 |
|
96,697 |
| ||
Payable for unsettled residential whole loans purchases |
|
203,960 |
|
|
| ||
Other liabilities |
|
213,329 |
|
203,528 |
| ||
Total Liabilities |
|
$ |
9,717,951 |
|
$ |
10,195,290 |
|
|
|
|
|
|
| ||
Stockholders Equity: |
|
|
|
|
| ||
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference) |
|
$ |
80 |
|
$ |
80 |
|
Common stock, $.01 par value; 886,950 shares authorized; 371,083 and 370,584 shares issued and outstanding, respectively |
|
3,711 |
|
3,706 |
| ||
Additional paid-in capital, in excess of par |
|
3,023,033 |
|
3,019,956 |
| ||
Accumulated deficit |
|
(566,917 |
) |
(572,332 |
) | ||
Accumulated other comprehensive income |
|
573,531 |
|
515,851 |
| ||
Total Stockholders Equity |
|
$ |
3,033,438 |
|
$ |
2,967,261 |
|
Total Liabilities and Stockholders Equity |
|
$ |
12,751,389 |
|
$ |
13,162,551 |
|
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
(In Thousands, Except Per Share Amounts) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
|
|
(Unaudited) |
| ||||||||||
Interest Income: |
|
|
|
|
|
|
|
|
| ||||
Agency MBS |
|
$ |
18,957 |
|
$ |
23,618 |
|
$ |
64,546 |
|
$ |
81,030 |
|
Non-Agency MBS |
|
80,370 |
|
79,276 |
|
241,116 |
|
241,440 |
| ||||
Non-Agency MBS transferred to consolidated VIEs |
|
3,268 |
|
11,154 |
|
12,439 |
|
34,792 |
| ||||
CRT securities |
|
3,983 |
|
1,593 |
|
9,897 |
|
4,477 |
| ||||
Residential whole loans held at carrying value |
|
5,917 |
|
4,033 |
|
16,112 |
|
11,817 |
| ||||
Cash and cash equivalent investments |
|
221 |
|
32 |
|
531 |
|
88 |
| ||||
Interest Income |
|
$ |
112,716 |
|
$ |
119,706 |
|
$ |
344,641 |
|
$ |
373,644 |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Expense: |
|
|
|
|
|
|
|
|
| ||||
Repurchase agreements and other advances |
|
$ |
46,158 |
|
$ |
41,331 |
|
$ |
137,127 |
|
$ |
122,736 |
|
Senior Notes and other interest expense |
|
2,009 |
|
2,372 |
|
6,360 |
|
7,756 |
| ||||
Interest Expense |
|
$ |
48,167 |
|
$ |
43,703 |
|
$ |
143,487 |
|
$ |
130,492 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income |
|
$ |
64,549 |
|
$ |
76,003 |
|
$ |
201,154 |
|
$ |
243,152 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other-Than-Temporary Impairments: |
|
|
|
|
|
|
|
|
| ||||
Total other-than-temporary impairment losses |
|
$ |
(1,255 |
) |
$ |
|
|
$ |
(1,255 |
) |
$ |
(525 |
) |
Portion of loss recognized in/(reclassed from) other comprehensive income |
|
770 |
|
|
|
770 |
|
(180 |
) | ||||
Net Impairment Losses Recognized in Earnings |
|
$ |
(485 |
) |
$ |
|
|
$ |
(485 |
) |
$ |
(705 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Other Income, net: |
|
|
|
|
|
|
|
|
| ||||
Net gain on residential whole loans held at fair value |
|
$ |
18,701 |
|
$ |
5,565 |
|
$ |
45,052 |
|
$ |
10,823 |
|
Gain on sales of MBS |
|
7,083 |
|
11,196 |
|
26,069 |
|
25,248 |
| ||||
Other, net |
|
8,117 |
|
(259 |
) |
12,521 |
|
(626 |
) | ||||
Other Income, net |
|
$ |
33,901 |
|
$ |
16,502 |
|
$ |
83,642 |
|
$ |
35,445 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating and Other Expense: |
|
|
|
|
|
|
|
|
| ||||
Compensation and benefits |
|
$ |
7,078 |
|
$ |
6,482 |
|
$ |
21,507 |
|
$ |
19,759 |
|
Other general and administrative expense |
|
3,709 |
|
3,538 |
|
12,508 |
|
11,673 |
| ||||
Loan servicing and other related operating expenses |
|
4,167 |
|
2,975 |
|
10,265 |
|
6,706 |
| ||||
Operating and Other Expense |
|
$ |
14,954 |
|
$ |
12,995 |
|
$ |
44,280 |
|
$ |
38,138 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
|
$ |
83,011 |
|
$ |
79,510 |
|
$ |
240,031 |
|
$ |
239,754 |
|
Less Preferred Stock Dividends |
|
3,750 |
|
3,750 |
|
11,250 |
|
11,250 |
| ||||
Net Income Available to Common Stock and Participating Securities |
|
$ |
79,261 |
|
$ |
75,760 |
|
$ |
228,781 |
|
$ |
228,504 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per Common Share - Basic and Diluted |
|
$ |
0.21 |
|
$ |
0.20 |
|
$ |
0.61 |
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends Declared per Share of Common Stock |
|
$ |
0.20 |
|
$ |
0.20 |
|
$ |
0.60 |
|
$ |
0.60 |
|
Exhibit 99.2
Third Quarter 2016 Earnings Presentation
Forward looking statements When used in this presentation 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 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. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market value of MFAs MBS; changes in the prepayment rates on the mortgage loans securing MFAs MBS, an increase of which could result in a reduction of the yield on MBS in our portfolio and could require us to reinvest the proceeds received by us as a result of such prepayments in MBS with lower coupons; credit risks underlying MFAs assets, including changes in the default rates and managements assumptions regarding default rates on the mortgage loans securing MFAs Non-Agency MBS and relating to MFAs residential whole loan portfolio; MFAs 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 MFAs business; MFAs 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 Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFAs Agency MBS, Non-Agency MBS and residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modification, foreclosure and liquidation; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFAs Board of Directors and will depend on, among other things, MFAs taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as the Board deems relevant; MFAs ability to maintain its qualification as a REIT for federal income tax purposes; MFAs 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; MFAs ability to successfully implement its strategy to grow its residential whole loan portfolio; expected returns on our investments in non-performing 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; and risks associated with investing in real estate assets, including changes in business conditions and general economic conditions. 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 MFAs actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements speak only as of the date on which they are made and are based on beliefs, assumptions and expectations of MFAs future performance, taking into account information currently available. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect MFA. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. 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. 2
Executive summary In this low interest rate environment, we continue to generate attractive returns from residential credit mortgage assets. In the third quarter we generated EPS of $0.21 and dividend per share of $0.20. MFA continued to acquire credit sensitive residential mortgage assets, such as 3 year step-up securities and credit sensitive loans, in response to attractive investment opportunities. 3
Through volatile markets and both interest rate and credit cycles, MFA has generated strong long term returns to investors (1) As of 9/30/16 assuming reinvestment of dividends. 4 Time Period Annualized MFA Shareholder Return (1) Since January 1, 2000 14.9% 10 Year 12.6% 5 Year 15.9% 1 Year 22.8%
2016 MFA strategy 1)Invest in high value-added assets A.Generate returns from investment in credit sensitive residential mortgage assets: MFAs credit sensitive assets continue to perform well. Legacy Non-Agency MBS Credit Reserve has been reduced by $39.8 million over the past 12 months. B.Acquire assets with less interest rate sensitivity: 73% of MFAs MBS are adjustable, hybrid or step-up. Net portfolio duration of 0.55. 2)Maintain staying power and the ability to invest in distressed, less liquid markets Permanent equity capital. Debt to Equity Ratio of 3.1x is low enough to accommodate potential declines in asset prices. MFA is able to invest while other investors may face concerns about capital outflows and potential mark-to-market losses. 5
Third quarter investment flows Our assets run off due to amortization, paydowns or sale, allowing reinvestment opportunities in changing interest rate and credit environments. $ in Millions June 30, 2016 Runoff Acquisitions (1) other changes 2016 Change Re-performing and Non-performing Loans $1,077 $(38) $312 $(3) $1,348 $271 3 Year Step-up Securities (2) $2,639 $(503) $375 $12 $2,523 $(116) Credit Risk Transfer Securities $273 $ $60 $15 $348 $75 3rd Quarter 3rd Quarter MTM and September 30, 3rd Quarter Legacy Non-Agency MBS $3,466 $(194) $39 $75 $3,386 $(80) Agency MBS $4,308 $(270) $ $(16) $4,022 $(286) Totals $11,763 $(1,005) $786 $83 $11,627 $(136) (1) Includes $204 million of re-performing and non-performing loan acquisitions recorded on the trade date. Loan acquisition amounts recorded reflect best estimates of assets to be acquired at the closing of the transaction. Such estimates are subject to revision at the closing of the transaction pending completion of due diligence performed prior to closing. (2) 3 year step-up securities are MBS that are backed by securitized re-performing and non-performing loans. The securities are structured such that the coupon steps-up 300 basis points (bps) at 36 months or sooner. 6
MFAs yields and spreads remain attractive Earning Assets 4.23% 4.19% 4.23% Rate Spread 2.13% 2.14% 2.18% Equity Ratio 3.1x 3.3x 3.4x 7 Third Second First Quarter Quarter Quarter 2016 2016 2016 Yield on Interest Net Interest Debt to EPS $0.21 $0.20 $0.20
Third quarter 2016 yields and spreads by asset type (1) Net of 38 bps of servicing costs. (2) Residential whole loans held at fair value produce GAAP income/loss based on changes in fair value in the current period and therefore results will vary on a quarter to quarter basis. MFA expects to realize returns over time on these investments of 5-7%. 8 Debt/Net Asset Yield/Return Cost of Funds Net Spread Equity Ratio Agency MBS 1.83% (1.28)% 0.55% 7.9x Legacy Non-Agency MBS 8.09% (2.98)% 5.11% 2.1x 3 Year Step-up Securities 3.86% (2.05)% 1.81% 3.5x RPL Whole Loans 5.71% (1) (2.81)% 2.90% 1.4x NPL Whole Loans(2) (3.27)% (2) 1.8x
Undistributed REIT taxable income As of September 30, 2016, we estimate that MFA had undistributed REIT taxable income of approximately $0.16 per share. MFA has until the filing of its 2016 tax return (due not later than September 15, 2017) to declare the distribution of any 2016 REIT taxable income not previously distributed. An unwind of our remaining re-securitization transaction is expected to occur in Q1 2017 with the expected result that we will generate taxable income (but not GAAP income) of an amount estimated to exceed $0.10 per share. 9
MFAs interest rate sensitivity remains below 1.0, as measured by net duration $ in Millions 10 Assets Market Value Average Coupon Duration Non-Agency ARMs (12 months or less MTR) $2,620 3.30% 0.4 Non-Agency Hybrid (13-48 MTR) $3 3.99% 1.0 3 Year Step-up Securities $2,523 3.83% 0.3 Non-Agency Fixed Rate $1,109 5.82% 3.0 Residential Whole Loans $1,367 4.48% 2.7 Agency ARMs (12 months or less MTR) $1,610 2.95% 0.6 Agency ARMs (13-120 MTR) $863 2.96% 1.0 Agency 15 Year Fixed Rate $1,546 3.06% 2.6 Cash, Cash Equivalents & Principal Receivable $413 0.0 TOTAL ASSETS $12,056 1.22 Hedging Instruments Notional Amount Duration Swaps (Less than 3 years) $1,200 -1.3 Swaps (3-10 years) $1,800 -3.8 TOTAL HEDGES $3,000 -2.8 Net Duration 0.55
Millions ($) Q3-2013 Q4-2013 Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Low sensitivity to prepayment rates Legacy Non-Agency MBS discount accretion has exceeded Agency MBS premium amortization since 2013. MFA's Agency MBS Premium Amortization and Legacy Non-Agency MBS Discount Accretion by quarter $30 $25 $20 $15 $10 $5 $0 Agency MBS Premium Amortization Legacy Non-Agency MBS Discount Accretion 11
While economic growth rate is uncertain, there are many positive fundamentals for residential mortgage credit and home prices Fundamental and technical support for residential credit assets and home prices Distressed sales share of existing home sales is down to 4% (vs. 10% a year ago and 30% 5 years ago)* Foreclosure inventory is down 30% year over year (as of August 2016)** Median existing single-family home prices are up 5.6% year over year*** Total housing inventory is down 6.8% year over year*** * Citigroup ** CoreLogic *** Data sourced from the National Association of Realtors website 12
Continued growth in credit sensitive loan portfolio Re-Performing and Non-Performing Loan Portfolio $ in Millions At todays market prices, re-performing and non-performing residential mortgage loans generate higher yields than residential MBS. Residential whole loans are qualifying interests for purposes of REIT qualification and Investment Company Act exemption. Significant expected supply. 13 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 $1,348 $1,077 $1,024 $895 $777
Credit sensitive residential whole loans: Growing asset class for MFA Early results indicate returns to date are consistent with our expectation of 5-7%. Utilizes the same residential mortgage credit expertise we have employed in Legacy Non-Agency MBS since 2008. Ability to oversee servicing decisions (loan modifications, short sales, etc.) to produce better NPV outcomes. Actively manages its loan portfolio through in-house asset management professionals and utilizes third-party special servicers. 14
Third quarter 3 Year Step-up Securities Holdings Current market yields of mid to high 3% Well protected portfolio with current credit enhancement of 48% Very short assets with an average of 20 months remaining to step-up As of September 30, 2016 Underlying collateral Fair Value mm Net Coupon Months to Step-Up Current Credit Support Original Credit Support 3 Month Average Bond CPR 15 Re-Performing loans $335 3.61% 15 41% 38% 30.0% Non-Performing loans $2,188 3.86% 21 49% 47% 32.8% Total 3 Year Step-up Securities $2,523 3.83% 20 48% 46% 32.2%
16 $ (Millions) LTV breakdown of non-delinquent mortgage loans underlying MFAs Legacy Non-Agency MBS 1,400 1,200 1,000 800 600 400 200 0 <= 60% 61-80% 81-90% 91-100% 101-110% 111-125% > 125% LTV These loans are up to date on all required mortgage payments. Underlying loans are over ten years seasoned on average. Source: CoreLogic Data as of September 30, 2016
Summary We continue to identify and acquire attractive credit sensitive residential mortgage assets. We continued to acquire 3 year step-up securities and credit sensitive mortgage loans during the quarter. Our credit sensitive assets continue to perform well. MFA is well positioned for changes in prepayment rates, monetary policy and/or interest rates. 17
Additional Information 18
Book value increased 3% primarily due to impact of fair value changes in Legacy Non-Agency MBS 19 Book value per common share as of 6/30/16 $7.41 Net income available to common shareholders 0.21 Common dividend declared during the quarter (0.20) Net change attributable to Agency MBS (0.02) Net change attributable to Non-Agency MBS and CRT securities 0.18 Net change in value of swap hedges 0.06 Book value per common share as of 9/30/16 $7.64
Third Quarter Non-Agency MBS impact on MFA book value Impact Per Share(1) Discount Accretion: Primarily income in excess of coupon on Non-Agency MBS purchased at a discount. This income increases amortized cost and lowers unrealized gains (0.05) (1) Does not include impact of swap hedges. 20 Impact of change in market prices $0.23 Realized gains from asset sales: Reallocation from OCI to Retained Earnings (0.02) Principal Paydowns 0.06 Realized Credit Losses (0.04) Total $0.18
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