MFA Financial, Inc. (NYSE: MFA) today provided its financial results for the fourth quarter ended December 31, 2020.
Fourth Quarter 2020 financial results update:
- MFA generated fourth quarter net income of $37.6 million, or $0.08 per common share.
- MFA paid a regular cash dividend for the fourth quarter of $0.075 per share of common stock on January 29, 2021.
- GAAP book value at December 31, 2020 was $4.54 per common share, while Economic book value, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized market value changes in residential whole loans held at carrying value for GAAP reporting, was $4.92 per common share at quarter-end.
- Markets for residential mortgage assets further stabilized following the disruptions experienced earlier in 2020. Earnings and changes in book value continued to be positively impacted by improvements in the values of residential mortgage assets. Income from residential whole loans at fair value included $30.9 million of market value gains, while changes in the fair value of loans held on our balance sheet at carrying value also resulted in an increase in Economic book value during the quarter of approximately $0.07 per common share. While MFA's fourth quarter financial results had fewer unusual items than prior periods, they were impacted by certain items that will not reoccur in future periods. In particular, fourth quarter net income included expenses totaling $25.3 million (or $0.06 per common share) recognized on the repayment of the senior secured term loan from Apollo and Athene and a $3.1 million non-cash charge (or $0.01 per common share) related to the redemption of our 8% Senior Notes (both items discussed further below).
- Additionally, during the quarter, we completed two transactions with Apollo and Athene that eliminated potential future dilution from the warrants that were issued in connection with the loan. In the first transaction, the Company repurchased, for $33.7 million, approximately 48% of the warrants and in the second transaction, the remaining warrants were exercised by Apollo and Athene, resulting in MFA issuing approximately 12.3 million shares of common stock and receiving $6.5 million in cash. The combined impact of the warrant exercise and repurchase transactions decreased MFA's GAAP book value per common share by $0.18 and Economic book value per common share by $0.19, reflecting less than 4% dilution of previously reported book value.
- We continued to make significant progress on initiatives to lower the cost of financing our investments with more durable forms of borrowing. During the quarter, we completed two Non-QM securitization transactions, totaling $951.6 million, that generated $214.6 million of additional liquidity and lowered the funding rate for the associated assets by approximately 193 basis points. After the end of the fourth quarter, we completed a securitization solely consisting of $217.5 million of Business Purpose Rental Loans, generating $48.4 million of additional liquidity. As the weighted average coupon of the bonds sold was 1.06%, this transaction is expected to lower the funding rate of the underlying assets by more than 150 basis points.
- During the fourth quarter, under our previously announced stock repurchase program we repurchased 14,085,678 shares of common stock at an average price of approximately $3.61 per share. These repurchases were accretive to MFA's GAAP book value by $0.03 per common share and Economic book value by $0.04 per common share.
- On January 6, 2021, we completed the redemption of the $100 million 8% Senior Notes due 2042 (the "Senior Notes"). In connection with this redemption, we recorded in our fourth quarter interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued in 2012.
Commenting on the fourth quarter 2020 results, Craig Knutson, MFA's CEO and President said, "MFA's fourth quarter financial results were a continuation of a return to normal, as we put the capital transactions necessary to emerge from our COVID-19 pandemic-induced distress behind us. The Apollo/Athene debt was fully paid off during the fourth quarter, and the associated warrants have been extinguished through a combination of repurchases and exercise. While the warrant settlement was mildly dilutive, a strong quarter and the impact of accretive common stock repurchases mitigated this dilution, with GAAP book value down just 1.5% and Economic book value flat compared to September 30. The net impact of the warrant transactions decreased reported book value amounts by roughly 3.9%."
Mr. Knutson added, "We continued to make substantial progress on multiple initiatives by seizing market opportunities in the fourth quarter that we believe should have a significant positive impact on our results as we enter 2021. With interest rates at historic lows and robust demand for mortgage credit, particularly rated mortgage credit, we executed two new securitizations in the fourth quarter and another subsequent to year-end. This brings our aggregate securitizations to just over $1.5 billion since September. These transactions substantially reduce our interest costs and also generate significant additional liquidity. In addition to paying off expensive debt (including our 8% Senior Notes that we redeemed in early January), we also deployed capital to repurchase MFA common stock at levels well below book value."
Mr. Knutson continued, "We also took advantage of a strong housing market to materially reduce our REO portfolio in 2020, selling over 1,000 properties for aggregate proceeds of $271 million, which was nearly 2.5 times the proceeds realized in 2019. These properties sold for an average of 105.9% of carrying value, generating gains on disposal of $15.1 million."
Q4 2020 Portfolio Activity
MFA's residential mortgage investment portfolio decreased by $346.0 million during the fourth quarter, primarily due to portfolio run-off. Acquisition of new investments continued to be modest, with $83.2 million of Non-QM loans and $27.3 million of Business Purpose loans purchased during the quarter.
At December 31, 2020, the net carrying value of our investments in residential whole loans totaled $5.3 billion. Of this amount, $4.1 billion is recorded at carrying value and $1.2 billion is recorded at fair value on our consolidated balance sheet. Loans held at carrying value generated an overall yield of 4.66% during the quarter, a slight increase from the prior quarter. Yields on purchased performing loans were essentially unchanged from the prior quarter at 4.57%, while yields on purchased credit deteriorated loans increased to 5.16% from 4.89% in the prior quarter. Overall delinquency rates on loans held at carrying value were largely unchanged from the prior quarter. The amount of Non-QM loans that were 60 or more days delinquent, measured as a percentage of the unpaid principal balance, declined during the quarter and was 7.9% at December 31, 2020, compared to 8.8% at September 30, 2020. In addition, the amount of purchased credit deteriorated loans that were 90 or more days delinquent, measured as a percentage of the unpaid principal balance, marginally increased during the quarter and was 18.5% at December 31, 2020, compared to 18.2% at September 30, 2020. Delinquency levels for our Rehabilitation loans also increased from the prior quarter, with loans that were 60 or more days delinquent totaling $161.8 million, compared to $143.3 million at September 30, 2020.
For the fourth quarter, a reversal of the provision for credit losses of $19.0 million was recorded on residential whole loans held at carrying value, primarily reflecting lower estimates of future rates of unemployment and lower loan balances. The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2020 was $86.8 million. In addition, as of December 31, 2020, reserves for credit losses totaling approximately $1.2 million were recorded related to undrawn commitments on loans held at carrying value. Further, we recorded a provision for credit losses on other financial instruments of $3.3 million during the fourth quarter. The total allowance for credit losses on other financial instruments was $9.0 million as of December 31, 2020.
Net gains for the quarter on residential whole loans measured at fair value through earnings were $49.8 million, including unrealized gains in the fair value of the underlying loans of $30.9 million, and $18.9 million of coupon interest payments and other gains realized during the quarter. The percentage amount of fair value loans that were 90 or more days delinquent decreased to 47.0% at December 31, 2020 from 49.0% at September 30, 2020.
In addition, as of the end of the quarter, we held approximately $250 million of REO properties, which has decreased from $299 million as of the end of the third quarter as foreclosure activity in recent months has slowed, while asset sales continued. MFA's proactive asset management team has been able to shorten liquidation timelines and increase property sale proceeds, leading to improved outcomes and better returns.
At the end of the fourth quarter, MFA held approximately $53.9 million of RPL/NPL MBS. In addition, our investments in MSR-related assets totaled $239.0 million at December 31, 2020. Our investments in CRT securities totaled $104.2 million at December 31, 2020.
Expenses recognized on repayment of senior secured term loan
Included in Other income are expenses of approximately $25.3 million recorded on the repayment of the remaining balance of the $500 million senior secured term loan from Apollo and Athene that was obtained on June 26, 2020. These expenses are recognized as the loan was repaid at its par value and include accelerated accretion of original issue discount and the reversal of unrealized market value gains recorded in the prior quarter.
Impact of warrant transactions
During the quarter, the Company repurchased approximately 48% of the warrants that were issued to Apollo and Athene in connection with the senior secured term loan. These warrants were repurchased for $33.7 million, reflecting the market value of the warrants at the time of repurchase. The impact of this transaction is reflected directly in the Company's stockholders' equity and had no impact on current period net income. In addition, the remaining warrants were exercised by Apollo and Athene late in the quarter, resulting in the Company issuing approximately 12.3 million shares of common stock and receiving $6.5 million in cash.
General and Administrative and other expenses
For the three months ended December 31, 2020, MFA's costs for compensation and benefits and other general and administrative expenses were $8.6 million, or an annualized 1.37% of average stockholders' equity for the quarter ended December 31, 2020. Compensation related expenses for the quarter were lower than our normal expected run rate, primarily due to the finalization of incentive compensation accruals for 2020, which resulted in a reduction in accrued incentive compensation of approximately $3.1 million.
Stock Repurchase Program
On November 2, 2020, MFA's Board of Directors authorized a share repurchase program under which MFA may repurchase up to $250 million of its common stock through the end of 2022. Under this program during the fourth quarter, the Company repurchased 14,085,678 shares of common stock at an average price of approximately $3.61 per share. In addition, as previously discussed, during the year ended December 31, 2020 the Company repurchased 17,593,576 warrants for $33.7 million that were included in the stock repurchase program. As of December 31, 2020, the Company was permitted to purchase an additional $165.7 million of its common stock.
MFA expects to fund the share repurchases from current cash balances and future investment portfolio run-off. The Company currently has approximately 451.7 million shares of common stock outstanding.