MFA Financial: Exceptional Dividend With A Diversified Loan Portfolio – Seeking Alpha

February 19, 2022 By admin
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cagkansayin/iStock via Getty Images

cagkansayin/iStock via Getty Images
MFA Financial, Inc. (MFA) is slightly undervalued with the highest dividend yield seen in the last 12 months. The company’s portfolio is well diversified among several asset classes such as non-performing loans, business purpose loans, and non-QM loans however as you can see most of these assets are not government-backed securities. Income-seeking investors should put MFA on a watch list because if drops below $4.25, the over 9% stable yield is far from negligible among mREITs especially because MFA is in the top 10 mREITs based on market cap.
MFA Financial is a real estate investment trust primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including residential mortgage-backed securities and residential whole loans. The company has approximately $7.5 billion worth of investments in its portfolio. The management has been actively reducing its REO in the portfolio over the last year and its portfolio is well-diversified thanks to the Lima acquisition at the beginning of 2021. MFA’s current portfolio consists of approximately 37% Non-QM loans and approximately 14.5% purchased non-performing loans. That means compared to other mREITs MFA’s portfolio is less secured (in terms of agency-backed securities) but more diverse in terms of loan types such as business loans and does not depend to a very large extent on the residential and commercial housing market except for ROE sales.

MFA Financial Investment portfolio

Quarterly Results Presentation

Quarterly Results Presentation
The company reported growing book value in Q3 2021 and I expect this trend to continue for the last quarter of 2021 as well. The company had a record quarter of asset acquisitions from the second quarter of $6.1 billion of total assets to $7.5 billion by the end of Q3. This was mainly due to the acquisition of $695 million of Non-QM and $485 million of Business Purpose loans. Their book value increased by 3.7% and the NII on their loan portfolio increased by 15%. Craig Knutson, MFA’s CEO said: “We are very pleased with our third-quarter results and activity. MFA acquired $2 billion of loans during the third quarter, the highest quarterly total in our history, and grew our loan portfolio by $1.5 billion after runoff.” The company also announced a dividend increase in mid-December from $0.1 per share to $0.11 per share.
The company will announce its 4th quarter results on February 23, 2022. I expect strong fourth-quarter results and greater actual EPS than the current estimates. This is because strong economic fundamentals support MFA’s business model. From September the unemployment figures declined to 3.9% as of December 2021, National HPA for December averaged 16.1%, up from 10.5% a year ago and interest rates have not started to rise. Based on positive external factors I expect the loan portfolio to grow between 4-6% minimum in Q4 and I estimate a moderate book value growth of 1-1.5%. The EPS consensus for Q4 is $0.11 per share but it would not be a surprise to me if the company could outperform this figure by 20-30%. In addition, MFA outperformed the EPS estimates 69% of the time over the last 4 years including the two “pandemic quarters” of 2020.
MFA is trading 16.5% below its book value thanks to the overall market price pressure since the beginning of 2022. The company also has a better than average return on equity of 13% compared to the industry average of 12%. The NII surpassed the pre-pandemic 2019 Q3 results however, this was mainly due to the acquisition of Lima One. The stock price is still far from pre-COVID levels of $7-7.5 per share but slowly and steadily gaining back its momentum. I agree with Crowd Noise Fundamentals that below $4.25 MFA would be an interesting buy and even on the current $4.34, I would consider the stock a bit undervalued.

MFA Financial Price to book value
Data by YCharts

Due to the dividend increase in June, the dividend yield jumped from 6% to the 7.5% territory overnight and remained on those levels until the December dividend increase. Since then, MFA traded above 8% and thanks to the recent price drop MFA is yielding almost 9% at the moment. This is the best yield in a year so income investors should take a closer look at MFA from the income and dividend yield point of view.

MFA Financial price and dividend yield
Data by YCharts

MFA invests in several assets that are considered to be lower credit quality. In general, these investments are less exposed to credit risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S. Government. However, higher-than-expected rates of default or higher-than-expected loss severities on the mortgages underlying these investments could adversely affect the value of these assets and in the end MFA’s income stream.
The company also heavily invests in less liquid investments such as re-performing loans and non-performing loans. Non-performing loans are approximately 15.67% of MFA’s total investment portfolio. The company’s ability to sell RPLs for a profit depends on the borrower continuing to make payments. An RPL could become an NPL, which could reduce MFA’s earnings. If loans become REO, they, through a designated servicer that they retain, will have to manage these properties and may not be able to sell them.
MFA is not immune from downward price pressure and we could see that trend since January 2022. However, the decline is less than the S&P 500 7.5% due to the strong housing market. The real estate market has been very strong since the beginning of 2021 and the low-interest-rate environment helped fuel the mortgage growth. The million-dollar question is: what will the rate hikes cause in the second half of 2022 and how many rate hikes will the FED actually announce? In addition, by what degree this will make the company’s underlying assets riskier and loan-to-value rates higher.

MFA total return 2022 YTD

Seeking Alpha

Seeking Alpha
MFA has a hectic dividend payment policy but one thing is crystal clear: the company has been paying dividends for 22 years, although, we saw massive cuts and increases in these years. Since 2014 the management tried to establish a new way of stable dividend payments of $0.2 per share quarterly and that worked well until the pandemic. Just like with a lot of other mREITs, they had to temporarily cut the dividend but the management has been progressively raising it back since. The last dividend increase happened two months ago and was paid to shareholders less than a month ago.
The company’s payout ratio will be close to 100% if the earnings results will be in line with estimates. However, based on past figures of 7 out of 10 times they outperform the estimates, so I am not too worried about this 100% payout ratio. I would say in the long term it will be rather around 70-80% even with minor dividend increases. Neither do I nor the analysts expect any more dividend increases for 2022. According to Seeking Alpha analysts, they expect a dividend of $0.44 for 2022 which is exactly the current $0.11 per share quarterly dividend.

MFA Financial Payout ratio

The chart is created by the author. All the figures are from the company’s financial statement of Q3 2021.

The chart is created by the author. All the figures are from the company’s financial statement of Q3 2021.
We saw the second full quarter with Lima One and MFA together and the company reported record numbers in Q3. I expect good fourth-quarter earnings due to positive external factors. The company is yielding 8.89% which is the highest in the last 12 months. MFA is a bit undervalued, trading 16% below its BV but it will be an interesting pick below $4.25. Its portfolio is well-diversified but huge parts of that are risky assets which are only growing until the positive impact of the housing market continues to push these asset prices higher. I am bullish on MFA (but neutral in the short term) mainly from the dividend perspective and I see a steady and slow long-term price appreciation as well.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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