MFA Financial, Inc. (MFA) - 10-Q - Quarterly Report
MFA Financial, Inc. (MFA) - 10-Q - Quarterly Report
MFA Financial, Inc. (MFA) reported its quarterly financial results for the period ended September 30, 2024. The company’s net income was $43.1 million, or $0.42 per diluted share, compared to $34.5 million, or $0.33 per diluted share, in the same period last year. MFA’s total assets increased to $14.3 billion, up from $13.4 billion in the prior year. The company’s net interest income was $123.1 million, a 10% increase from the same period last year. MFA’s non-interest income was $14.4 million, a 15% decrease from the same period last year. The company’s total expenses were $93.4 million, a 12% increase from the same period last year. MFA’s book value per share was $14.15, up from $13.45 in the prior year.
Overview of the Company’s Financial Performance
Redwood Trust, Inc. is a specialty finance company that invests in and finances residential mortgage assets. The company had total assets of approximately $11.2 billion as of September 30, 2024, with $9.0 billion or 81% invested in residential whole loans.
For the third quarter of 2024, Redwood generated GAAP earnings of $0.38 per basic common share and Distributable Earnings, a non-GAAP financial measure, of $0.37 per basic common share. The company’s GAAP book value remained flat at $13.77 per common share, while its Economic book value, another non-GAAP measure, increased by 1% to $14.46 per common share. Redwood declared dividends of $0.35 per common share during the quarter.
Revenue and Profit Trends
Redwood’s net interest income decreased by $2.9 million to $50.6 million in the third quarter of 2024, compared to $53.5 million in the prior quarter. This decrease was primarily due to lower net interest income from the residential whole loan portfolio, partially offset by higher interest income from other investments and securities.
The company’s Other Income/(Loss), net increased by $10.4 million to $40.3 million in the third quarter, compared to $29.8 million in the prior quarter. This increase was driven by higher mark-to-market gains on residential whole loans, securities, and other portfolio investments, partially offset by losses on derivatives and securitized debt.
For the nine months ended September 30, 2024, Redwood’s net interest income increased by $21.9 million, or 16.9%, to $151.9 million, compared to $130.0 million in the same period of the prior year. This increase was primarily due to higher net interest income from the residential whole loan portfolio, as well as additional interest income from cash and other earning assets.
Analysis of Strengths and Weaknesses
Strengths:
- Diversified residential mortgage asset portfolio, including Business purpose loans, Non-QM loans, and Legacy RPL/NPL loans
- Successful securitization activities, providing longer-term, non-recourse financing
- Positive trends in net interest income and Distributable Earnings
- Prudent use of leverage, with a debt-to-equity ratio of 4.8x and a recourse leverage multiple of 1.8x
Weaknesses:
- Increased delinquency in the Multifamily transitional loan portfolio, leading to heightened credit risk
- Potential volatility in GAAP earnings due to fair value accounting on certain assets and liabilities
- Reliance on short-term financing agreements, which could be impacted by changes in market conditions
Outlook and Future Prospects
Redwood’s management is closely monitoring the actions of the Federal Reserve regarding interest rate changes and their potential impact on the company’s business. The recent rate cuts by the Federal Reserve have resulted in a reversal of the yield curve inversion, which could benefit Redwood’s investment portfolio.
However, the company expects to see continued heightened levels of delinquency and potential credit losses in its Multifamily transitional loan portfolio, as it has decided to refocus Lima One’s resources away from multifamily lending due to the softening in the multifamily housing market.
Overall, Redwood’s diversified residential mortgage asset portfolio, successful securitization activities, and prudent use of leverage position the company to navigate the current market environment. The company’s focus on credit analysis, prepayment rates, interest rate sensitivity, and expected returns on its investments should continue to drive shareholder value.
Tables
Asset Allocation
| (Dollars in Millions) | Business purpose loans | Non-QM loans | Legacy RPL/NPL loans | Securities at fair value | Other net (1) | Total |
|---|---|---|---|---|---|---|
| Asset Amount | $3,682 | $4,171 | $1,118 | $1,140 | $756 | $10,867 |
| Receivable/(Payable) for Unsettled Transactions | — | — | — | (65) | — | (65) |
| Financing Agreements with Non-mark-to-market Collateral Provisions | (678) | — | — | — | — | (678) |
| Financing Agreements with Mark-to-market Collateral Provisions | (802) | (653) | (309) | (918) | (90) | (2,772) |
| Securitized Debt | (1,617) | (3,030) | (641) | — | (1) | (5,289) |
| Senior Notes | — | — | — | — | (183) | (183) |
| Net Equity Allocated | $585 | $488 | $168 | $157 | $482 | $1,880 |
| Debt/Net Equity Ratio (2) | 5.3x | 7.5x | 5.7x | 6.3x | 4.8x |
(1) Includes $305.6 million of cash and cash equivalents, $197.3 million of restricted cash, $55.9 million of Other loans and $16.8 million of capital contributions made to loan origination partners, as well as other assets and other liabilities. (2) Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements as a multiple of net equity allocated.
Residential Whole Loans Contractual Maturities
| (In Thousands) | Business purpose loans (1) | Non-QM loans (1) | Legacy RPL/NPL loans (1) | Other loans |
|---|---|---|---|---|
| Within one year | $1,735,045 | $— | $2,129 | $— |
| Over one to five years | 494,817 | $— | 7,681 | $— |
| Over five years | 1,454,179 | $4,172,797 | 1,115,471 | $55,909 |
| Total | $3,684,042 | $4,172,797 | $1,125,280 | $55,909 |
(1) Excludes allowance for credit losses.
Securities, at Fair Value
| (Dollars in Thousands) | September 30, 2024 | December 31, 2023 |
|---|---|---|
| Agency MBS | $993,471 | $559,144 |
| Term notes backed by MSR collateral | $54,519 | $79,895 |
| CRT Securities | $68,236 | $83,222 |
| Non-Agency MBS | $23,810 | $23,828 |
| Total | $1,140,036 | $746,089 |
| Weighted average yield (1) | 6.48% | 6.88% |
| Weighted average time to maturity | 29.1 years | 29.3 years |
(1) Weighted average yield is annualized interest income divided by average amortized cost for Securities, at fair value held at September 30, 2024 and December 31, 2023.
Net Interest Spread and Margin
| Quarter Ended | Net Interest Spread (1) | Net Interest Margin (2) |
|---|---|---|
| September 30, 2024 | 2.18% | 3.00% |
| June 30, 2024 | 2.16% | 3.01% |
| March 31, 2024 | 2.06% | 2.88% |
| December 31, 2023 | 2.13% | 2.96% |
| September 30, 2023 | 2.17% | 3.02% |
| June 30, 2023 | 2.14% | 2.99% |
| March 31, 2023 | 1.74% | 2.64% |
(1) Reflects the difference between the yield on average interest-earning assets and average cost of funds (including net swap expense). (2) Reflects annualized net interest income (including net swap expense) divided by average interest-earning assets.
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