Buy This 9% Yielding mREIT
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
MFA Financial (NYSE: MFA) reported its fourth quarter performance on March 6, 2013. This article will review the latest earnings by this 9% dividend yielder and compare it with its closest peers.
Incorporated in 1997, MFA Financial started operations in 1998 as a hybrid mortgage REIT. The company is classified as hybrid mortgage REIT as it is invested in both Agency and non-Agency mortgage backed securities. As a company policy, 50% of its investment portfolio consists of Agency and non-Agency MBS while the remainder is other types of MBS and residential mortgage loans, other real estate related debt and equity and other yield instruments in compliance with its qualification as a REIT.
The charts above summarize the company’s holdings as of December 31, 2012. Figure 1 shows that the company is largely invested in Agency mortgage backed securities as they form 57% of the entire MBS portfolio. Within the Agency portfolio, adjustable rate securities are 68% while the remainder is fixed rate. MFA Financial only has 15-year fixed rate mortgage backed securities in its Agency portfolio.
In comparison, Invesco Mortgage Capital (NYSE: IVR) and Two Harbors (NYSE: TWO) have similarly diverse investment portfolios. Around 69% of Invesco Mortgage Capital’s portfolio is invested in Agency MBS while 17% is non-Agency. Over 81% of Two Harbors’ portfolio is Agency MBS while the remainder is non-Agency.
Recent Quarter Performance Review
MFA Financial reported its fourth quarter performance on March 6, 2013. The core earnings per share of $0.20 per share remained in line with the expectations while the book value grew by 2.16% to $8.99 per common share over the prior quarter.
The fourth quarter of 2012 was characterized by decreasing interest rates and increasing refinancing as a result of the Fed’s efforts to revive the US housing sector. However, despite the challenging environment, MFA Financial was able to increase its interest income 79 bps year over year to $124.9 million. The appreciation in interest income was a result of higher interest income from non-Agency MBS, partially offset by lower interest income accruing from Agency MBS and non-Agency MBS transferred to consolidated VIEs.
Interest expense of $43.1 million increased 11% over the prior year. As a result, the fourth quarter net interest income came in at $81.9 million, down 4% over the same time period.
During the fourth quarter, MFA Financial earned 4.24% yield on its interest earning assets while it paid 1.71% on its interest bearing liabilities. This resulted in a net interest rate spread of 2.53%, up 9 bps from the linked quarter but down 16 bps from a year ago. Compared to the linked quarter, MFA Financial’s cost of funds dropped 11 bps.
In comparison, Two Harbors reported 20 bps declined in its fourth quarter net interest rate spread while for Invesco Mortgage, the sequential decline was only 2 bps.
During the fourth quarter, the company earned 1.17 million in unrealized net gains while it also earned 1.77 million in gain on sale of MBS which provided support to the bottom line. Operating expenses of $15.6 million were incurred, well above the levels of a year ago, causing the net income of $69.2 million to go down 2% year over year. A $7.5 million excise tax adjustment led the company to report core income of $71.95 million or $0.20 per common share.
A reduction in the prepayment speeds of the company’s Agency MBS trended down the entire portfolio’s prepayments. At the end of the most recent quarter, MFA Financial reported 17.67% as it's MBS portfolio’s CPR compared to 19% at the end of the third quarter. Besides this, a combination of mortgage amortization and home price appreciation has caused the Loan-to-Value ratio for MFA Financial’s non-Agency MBS to decrease. Going forward, this lower LTV will cause fewer losses.
MFA Financial declared a $0.50 special dividend to reflect a portion of taxable income in excess of distributions. It is currently yielding 8.7%, excluding the special dividend $0.30/share above current $0.20/share estimate.
MFA Financial is trading at a 3% discount to the recently reported January book value while Two Harbors is trading at 13% premium, and Invesco Mortgage is trading in line with its book value. Therefore, MFA Financial appears to be attractively valued compared to its peers.
I recommend investors looking for regular income buy MFA Financial. It increased its interest income during challenging times and going forward you can expect its prepayment speeds to go further down. Therefore, I believe it can produce growth in its bottom line in the coming quarters.
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