MFA Financial, Inc. (NYSE:MFA) today provided its financial results for the third quarter ended September 30, 2022.

Third Quarter 2022 financial results update:

• MFA generated a GAAP loss for the third quarter of ($63.2) million, or ($0.62) per common share. Distributable Earnings, a non-GAAP financial measure, was $28.2 million, or $0.28 per common share.
• GAAP book value at September 30, 2022 was $15.31 per common share, while Economic book value, a non-GAAP financial measure of MFA’s financial position, was $15.82 per common share at quarter-end.
• Active portfolio management limited declines in book value and included additional securitizations of loans across asset classes that reduced recourse, mark-to-market financing and generated substantial liquidity. $750 million of securitized debt was issued during the quarter, with another $160 million of securitized debt issued in October. As of September 30, 2022, recourse leverage was 1.7x and unrestricted cash was $434 million.
• Loan acquisition activity of $710.4 million included $519.6 million of funded originations (inclusive of draws on Residential Transition Loans) of Business Purpose loans and $178.7 million of Non-QM loan acquisitions.
• MFA’s seasoned $8.2 billion residential whole loan portfolio has benefited from strong home price appreciation (HPA) and loan amortization. At September 30, 2022, the portfolio has an estimated HPA adjusted loan-to-value ratio (LTV) of 57%.
• Portfolio of interest rate swaps remained unchanged during the quarter with a notional amount of $3.2 billion. As of September 30, 2022, 99% of financing was effectively fixed-rate (in the form of either fixed-rate securitized debt or debt that has been economically hedged with swaps). Sensitivity to interest rate changes remains relatively low with net duration of 0.92 at quarter end.
• Continued market volatility characterized by ongoing increases in interest rates and wider spreads resulted in losses of $291.9 million on MFA’s residential whole loans that are measured at fair value through earnings. These losses were partially offset by unrealized gains on securitized debt measured at fair value through earnings as well as gains on derivatives used for risk management purposes totaling $210.7 million.
• Net interest income for the third quarter was $52.3 million. Interest income from residential whole loans increased 12% to $114.4 million as compared to the immediately prior quarter. Interest expense increased $14.8 million as compared to the immediately prior quarter, consistent with the rising rate environment, which continues to impact both repurchase agreement and warehouse funding and securitization execution. For the third quarter, the overall net interest spread generated by all of MFA’s interest-bearing assets, including the carrying cost associated with swaps used for economic hedging purposes, increased to 1.64%, an increase of 19.7% as compared to the immediately prior quarter.
• On October 31, 2022, MFA paid a regular cash dividend for the third quarter of $0.44 per share of common stock.

Commenting on the third quarter, Craig Knutson, MFA’s CEO and President said, “The third quarter of 2022 offered no respite from the extremely difficult prior two quarters and was another extremely challenging period across all financial markets. Although the S&P 500 Index was down 5% during the third quarter, it was up 14% in the first half of the third quarter and down 17% in the second half of the quarter. Bond markets continued to sell off with 10-year Treasury yields up over 80 basis points in the third quarter, and mortgage spreads widened materially as did credit spreads. Nonetheless, our team at MFA has protected book value and preserved capital as we await more favorable market conditions. Although mortgage REIT book values are down substantially since the beginning of 2022, our book value performance has been better than most in the peer group. Our focus has been on maintaining substantial liquidity, fortifying our balance sheet by continuing to increase non-mark-to-market financing for our loan portfolio and decreasing our sensitivity to future interest rate increases. As of September 30, 99% of our asset-based financing costs were fixed, either through securitizations or interest rate swaps. In addition, 71% of our asset-based financing is non-mark-to-market. We ended the quarter with unrestricted cash of $434 million, which is over 20% of our equity, and had approximately $1.4 billion of available but unused financing capacity across all loan product types. Finally, our loan portfolio has significant embedded home price appreciation, which, when combined with loan amortization, lowers the average LTV of our mortgage loan portfolio to approximately 57%.

Mr. Knutson added, “Lima One has been able to take advantage of market disruptions that have made it difficult for competitors who rely on loan sales to third-parties. The current origination pipeline has a weighted average coupon of over 10%. We slowed our new investment activity in Non-QM loans further in the third quarter, given the uncertainty around rates and credit spreads. Overall leverage increased slightly, mainly due to declines in asset values, but remains relatively low at 3.6 times debt to equity. Excluding securitized debt, our recourse leverage is 1.7 times debt to equity.”

Q3 2022 Portfolio Activity

MFA’s residential mortgage investment portfolio remained essentially unchanged during the third quarter. Loan acquisitions of $710.4 million, including $519.6 million of funded originations (including draws on Residential transition loans) of Business Purpose loans and $178.7 million of Non-QM loan acquisitions, were offset by portfolio run-off and asset valuation declines.

At September 30, 2022, our investments in residential whole loans totaled $8.2 billion. Of this amount, $6.9 billion are Purchased Performing Loans, $457.3 million are Purchased Credit Deteriorated Loans and $847.6 million are Purchased Non-performing Loans. Overall yields on our residential whole loans increased materially over the quarter resulting in a net interest spread of 1.81%, a 15.3% increase over the immediately prior quarter. During the quarter, we recognized approximately $114.4 million of Interest Income on residential whole loans in our consolidated statements of operations, representing a yield of 5.30%. Purchased Performing Loans generated a yield of 4.75%, Purchased Credit Deteriorated Loans generated a yield of 6.49% and Purchased Non-performing Loans generated a yield of 9.84%. Interest income from our residential whole loan portfolio increased on a sequential quarter basis by almost 12% and overall delinquency rates across all loan products in the portfolio were lower than the prior quarter.

Lima One had another strong quarter, funding more than $412.5 million of new business purpose loans with a maximum loan amount of approximately $640 million. Further, $107.0 million of draws were funded on previously originated Residential transition loans. For the quarter, Lima One generated approximately $12.4 million of origination, servicing, and other fee income.

During the quarter we completed three loan securitizations, with $893.1 million UPB of loans sold. This included $336.1 million of re-performing loans, $214.5 million of Single-Family Rental loans and $342.5 million of Non-QM loans. Subsequent to the end of the quarter we completed an additional securitization, selling $234.8 million UPB of Single-Family rental loans.

During the third quarter we maintained our position in interest rate swaps at a notional amount of $3.2 billion. At September 30, 2022, these swaps had a weighted average fixed pay interest rate of 1.69% and a weighted average variable receive interest rate of 2.98%. After including the impact of these swaps that have been entered into for economic hedging purposes, as well as the effect of securitized and other fixed rate debt, we estimate that the net effective duration of our investment portfolio at September 30, 2022 was 0.92.

Our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition, with changes in the fair value and other non-interest related income from these loans recorded in Other income, net each period. For the third quarter, net losses of $291.9 million were recorded, primarily reflecting unrealized fair value changes in the underlying loans. These losses were partially offset by $111.8 million of gains on derivatives used for risk management purposes, as well as $98.9 million of mark-to-market gains on securitized debt held at fair value through earnings.

We also continued to take advantage of a strong housing market to reduce our REO portfolio, selling 74 properties in the third quarter for aggregate proceeds of $23.8 million and generating $5.3 million of gains. Our REO portfolio was $132.7 million at September 30, 2022, a 26% decrease since September 30, 2021.

At the end of the third quarter, MFA held $227.4 million of Securities, at fair value, including $148.2 million of MSR-related assets and $79.2 million of CRT securities.

General and Administrative and other expenses

For the three months ended September 30, 2022, MFA’s costs for compensation and benefits and other general and administrative expenses were $29.9 million. Expenses this quarter include $14.9 million of compensation and other general and administrative expenses recorded at Lima One.

Segment reporting

Included in this press release is information on our reportable segments, including GAAP Net Income and Distributable Earnings for each segment for the three month periods ended September 30 and June 30, 2022 and segment assets as of September 30, 2022 and December 31, 2021.

The following table presents MFA’s asset allocation as of September 30, 2022, and the third quarter 2022 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

Table 1 - Asset Allocation

The following table presents the activity for our residential mortgage asset portfolio for the three months ended September 30, 2022:

Table 2 - Investment Portfolio Activity Q3 2022

The following tables present information on our investments in residential whole loans.

Table 3 - Portfolio composition

Table 4 - Yields and average balances

Table 5 - Net Interest Spread

Table 6 - Allowance for Credit Losses

The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential Whole Loans, at Carrying Value:

Table 7 - Credit related metrics/Residential Whole Loans

Table 8 - LTV 90+ Days Delinquencies

The following table presents certain information regarding the Company’s Residential whole loans that are 90 days or more delinquent:

Table 9 - Shock Table

The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on the value of our portfolio, including the impact of Swaps and securitized debt, over the next 12 months based on the assets in our investment portfolio at September 30, 2022. Changes in portfolio value are measured as the percentage change when comparing the projected portfolio value to the base interest rate scenario at September 30, 2022.

Webcast

MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Thursday, November 3, 2022, at 10:00 a.m. (Eastern Time) to discuss its third quarter 2022 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 MFA’s 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,” “should,” “could,” “would,” “may,” the negative of these words 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. These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives. Among the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements we make are: changes in inflation and interest rates and the market (i.e., fair) value of MFA’s residential whole loans, mortgage-backed securities (“MBS”), securitized debt and other assets, as well as changes in the value of liabilities accounted for at fair value through earnings, the effectiveness of hedging transactions; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in MFA’s portfolio and could require MFA to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA’s portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows; credit risks underlying MFA’s assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans in MFA’s residential whole loan portfolio; MFA’s 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 MFA’s business; MFA’s 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 residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA’s residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFA’s Board of Directors (“Board”) and will depend on, among other things, MFA’s taxable income, its financial results and overall financial condition and liquidity, maintenance of its qualification as a real estate investment trust (“REIT”) and such other factors as MFA’s Board deems relevant; MFA’s ability to maintain its qualification as a REIT for federal income tax purposes; MFA’s 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; MFA’s ability to continue growing its residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; targeted or expected returns on MFA’s investments in recently-originated mortgage loans, the performance of which is, similar to MFA’s other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing costs associated with such investments; risks associated with the ongoing operation of Lima One Holdings, LLC (including, without limitation, unanticipated expenditures relating to or liabilities arising from its operation (including, among other things, a failure to realize management’s assumptions regarding expected growth in business purpose loan (“BPL”) origination volumes and credit risks underlying BPLs, including changes in the default rates and management’s assumptions regarding default rates on the BPLs originated by Lima One); expected returns on MFA’s investments in nonperforming 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; risks associated with MFA’s investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, risks associated with investing in real estate assets generally, including changes in business conditions and the general economy; and other risks, uncertainties and factors described in the annual, quarterly and current reports that MFA files with the SEC. All forward-looking statements are based on beliefs, assumptions and expectations of MFA’s future performance, taking into account all information currently available. Readers are cautioned not to place undue reliance on these forward-looking statements, which 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.