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Section 1: 8-K (8-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported):  November 6, 2018

 

MFA FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

1-13991

 

13-3974868

(State or other jurisdiction

 

(Commission File Number)

 

(IRS Employer

of incorporation

 

 

 

Identification No.)

or organization)

 

 

 

 

 

350 Park Avenue, 20th Floor

 

 

New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (212) 207-6400

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a- 12)

 

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

 

 


 

Item 2.02 Results of Operations and Financial Condition and

Item 7.01 Regulation FD Disclosure

 

MFA Financial, Inc. (“MFA”) issued a press release, dated November 6, 2018, announcing its financial results for the quarter ended September 30, 2018, which is attached hereto as Exhibit 99.1 and is incorporated herein by reference.  In addition, in conjunction with the announcement of its financial results, MFA issued additional information relating to its 2018 third quarter financial results.  Such additional information is attached to this report as Exhibit 99.2 and is incorporated herein by reference.

 

The information referenced in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2) is being “furnished” and, as such, shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section.  The information set forth in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2) is and will not be incorporated by reference into any registration statement or other document filed by MFA pursuant to the Securities Act of 1933, as amended (the “Securities Act”), except as may be expressly set forth by specific reference in such filing.

 

As discussed therein, the press release contains forward-looking statements within the meaning of the Securities Act and the Exchange Act and, as such, may involve known and unknown risks, uncertainties and assumptions.  These forward-looking statements relate to MFA’s current expectations and are subject to the limitations and qualifications set forth in the press release as well as in MFA’s other documents filed with the SEC, including, without limitation, that actual events and/or results may differ materially from those projected in such forward-looking statements.

 

Exhibit

 

99.1                        Press Release, dated November 6, 2018, announcing MFA’s financial results for the quarter ended September 30, 2018.

 

99.2                        Additional information relating to the financial results of MFA for the quarter               ended September 30, 2018.

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press Release, dated November 6, 2018, announcing MFA Financial Inc.’s financial results for the quarter ended September 30, 2018.

 

 

 

99.2

 

Additional information relating to the financial results of MFA Financial, Inc. for the quarter ended September 30, 2018.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

MFA FINANCIAL, INC.

 

(REGISTRANT)

 

 

 

By:

/s/ Harold E. Schwartz

 

 

Name:

Harold E. Schwartz

 

 

Title:

Senior Vice President and General Counsel

 

Date:  November 6, 2018

 

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Section 2: EX-99.1 (EX-99.1)

Exhibit 99.1

 

 

MFA

FINANCIAL, INC.

 

350 Park Avenue

New York, New York 10022

 

PRESS RELEASE

 

 

 

FOR IMMEDIATE RELEASE

 

 

 

 

 

November 6, 2018

 

 

 

NEW YORK METRO

 

 

 

 

 

INVESTOR CONTACT:

 

InvestorRelations@mfafinancial.com

 

NYSE: MFA

 

 

212-207-6488

 

 

 

 

www.mfafinancial.com

 

 

 

 

 

 

 

MEDIA CONTACT:

 

Abernathy MacGregor

 

 

 

 

Tom Johnson

 

 

 

 

212-371-5999

 

 

 

MFA Financial, Inc.

Announces Third Quarter 2018 Financial Results

 

NEW YORK - MFA Financial, Inc. (NYSE:MFA) today announced its financial results for the third quarter ended September 30, 2018.

 

Third Quarter 2018 and other highlights:

 

·                  MFA generated third quarter GAAP net income of $83.4 million, or $0.19 per common share.  As of September 30, 2018, book value per common share was $7.46.

 

·                  Asset acquisitions exceeded run-off during the quarter.  MFA purchased in excess of $2.3 billion of residential mortgage assets in the third quarter, including $707 million of residential whole loans.

 

·                  Recent growth in MFA’s residential whole loan portfolio has been largely through purchases of newly originated whole loans, including Non-QM loans, rehabilitation or “fix and flip” loans and single family rental loans.

 

·                  We completed a common equity offering in August, selling 50.9 million common shares, for net proceeds of $389.4 million.

 

·                  Net Income was $0.02 per common share higher than the second quarter of 2018, primarily due to higher net interest income, primarily due to growth in our portfolio of newly originated residential whole loans.

 

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·                  On October 31, 2018, MFA paid its third quarter 2018 dividend of $0.20 per share of common stock to shareholders of record as of October 1, 2018.

 

Craig Knutson, MFA’s CEO and President, said, “MFA’s investment team was very active in the third quarter, acquiring over $2.3 billion of new assets.  With the additional capital from our August common equity raise, we grew our investment portfolio by over $1.3 billion. Our residential whole loan and REO portfolio increased by $543 million, largely due to purchases of newly originated whole loans.  RPL/NPL MBS increased by $253 million, and MSR-related investments increased by $184 million.  We also purchased approximately $750 million of 30 year fixed rate Agency MBS, growing this portfolio by approximately $540 million.  This incremental Agency MBS investment was hedged to minimize duration exposure and also provided an efficient means to deploy a portion of the capital raised in our August common equity raise.  These very liquid investments can easily be sold to fund future purchases of residential whole loans or other higher yielding assets.  Much of the growth in our residential whole loan portfolio has been through purchases of newly originated whole loans, including Non-QM loans, fix and flip loans and single family rental loans.  We are pleased to continue to gain traction on these new acquisition efforts, which involve relationships cultivated over the past year or more.  Through our willingness and ability to explore and enter into various arrangements, including flow agreements, strategic alliances and also minority equity investments, we have been able to partner with originators to source attractive new investments, while enabling them to grow with support from MFA as a reliable provider of capital.”

 

“MFA remains well-positioned to generate attractive returns despite higher funding costs due to Fed Funds increases and continued elevated asset prices.  Through our asset selection and hedging strategy, our estimated net effective duration, a gauge of our portfolio’s sensitivity to interest rates, remained relatively low and measured 1.14 at quarter-end.  MFA’s book value per common share decreased slightly to $7.46 from $7.54 as of June 30, 2018, due primarily to lower unrealized gains on Legacy Non-Agency MBS and higher unrealized losses on Agency MBS, which were partially offset by an increase in the fair value of Swaps.  Leverage, which reflects the ratio of our financing obligations to equity, was 2.3:1 at quarter-end.”

 

Mr. Knutson added, “MFA’s portfolio asset selection process continues to emphasize residential mortgage credit exposure while seeking to minimize sensitivity to interest rates.  As housing prices maintain their upward trend and borrowers repair their credit and balance sheets, the performance of our credit sensitive residential whole loan portfolio benefits from this fundamental strength.  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.  Additionally, MFA’s Legacy Non-Agency MBS portfolio continues to outperform our credit assumptions.  In the third quarter of 2018, we reduced our credit reserve on this portfolio by $10.2 million and these assets generated a yield of 10.76% for the quarter.”

 

At September 30, 2018, our investments in residential whole loans totaled $3.9 billion.  Of this amount, $2.5 billion is recorded at carrying value and generated a yield of 5.89% (5.73% net of servicing costs) during the quarter, and $1.4 billion is recorded at fair value on our consolidated balance sheet.  On this portion of the portfolio, we recorded gains for the quarter of approximately $34.9 million, primarily reflecting coupon interest payments and other cash received during the quarter together with changes in

 

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the fair value of the underlying loans.  In addition, as of the end of the quarter we held approximately $223 million of REO properties.

 

MFA’s Legacy Non-Agency MBS had a face amount of $2.3 billion with an amortized cost of $1.6 billion and a net purchase discount of $722.8 million at September 30, 2018.  This discount consists of a $531.8 million credit reserve and other-than-temporary impairments and a $191.0 million net accretable discount.  We believe this credit reserve appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows.  Our Legacy Non-Agency MBS have underlying mortgage loans that are on average approximately twelve years seasoned and approximately 11.2% are currently 60 or more days delinquent.

 

As of September 30, 2018, the Agency MBS portfolio totaled $2.9 billion, had an amortized cost basis of 103.9% of par and generated a 2.21% yield in the third quarter. At the end of the third quarter, MFA held approximately $1.2 billion of RPL/NPL MBS.  These securities had an amortized cost basis of 99.9% of par and generated a 5.01% yield for the quarter.  Our investments in CRT securities totaled $538.9 million at September 30, 2018, and generated a yield of 6.19% in the third quarter. During the quarter we opportunistically sold Legacy Non-Agency MBS and CRT securities for $143.2 million, realizing gains of $16.4 million ($6.8 million of which had previously been recorded as unrealized gains on CRT securities for which we had elected fair value accounting).

 

For the three months ended September 30, 2018, MFA’s costs for compensation and benefits and other general and administrative expenses were $11.0 million, or an annualized 1.24% of stockholders’ equity as of September 30, 2018.

 

The following table presents the weighted average prepayment speed on MFA’s MBS portfolio.

 

Table 1

 

 

 

Third Quarter
2018 Average CPR

 

Second Quarter
2018 Average CPR

 

Agency MBS

 

16.8

%

16.2

%

Legacy Non-Agency MBS

 

16.8

%

15.8

%

RPL/NPL MBS (1)

 

19.6

%

20.4

%

 


(1)   All principal payments are considered to be prepayments for conditional prepayment rate (“CPR”) purposes.  RPL/NPL MBS are securitized financial instruments that are primarily backed by securitized re-performing and non-performing loans.  The majority of these securities are structured such that the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner.

 

As of September 30, 2018, under its swap agreements, MFA had a weighted average fixed-pay rate of interest of 2.35% and a floating receive rate of 2.21% on notional balances totaling $2.6 billion, with an average maturity of 32 months.

 

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The following table presents MFA’s asset allocation as of September 30, 2018, and the third quarter 2018 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

 

Table 2

 

ASSET ALLOCATION

 

At September 30, 2018

 

Agency
MBS

 

Legacy
Non-Agency
MBS

 

RPL/NPL
MBS

 

Credit Risk
Transfer
Securities

 

MSR
Related
Assets

 

Residential
Whole
Loans, at
Carrying
Value (1)

 

Residential
Whole
Loans, at Fair
Value

 

Other,
net (2)

 

Total

 

($ in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value/Carrying Value

 

$

2,905

 

$

2,173

 

$

1,162

 

$

539

 

$

565

 

$

2,472

 

$

1,449

 

$

387

 

$

11,652

 

Less Payable for Unsettled Purchases

 

 

(2

)

 

 

 

(7

)

(2

)

 

(11

)

Less Repurchase Agreements

 

(2,584

)

(1,592

)

(913

)

(405

)

(436

)

(893

)

(455

)

 

(7,278

)

Less Securitized Debt

 

 

 

 

 

 

(173

)

(541

)

 

(714

)

Less Senior Notes

 

 

 

 

 

 

 

 

(97

)

(97

)

Net Equity Allocated

 

$

321

 

$

579

 

$

249

 

$

134

 

$

129

 

$

1,399

 

$

451

 

$

290

 

$

3,552

 

Debt/Net Equity Ratio (3)

 

8.0x

 

2.8x

 

3.7x

 

3.0x

 

3.4x

 

0.8x

 

2.2x

 

 

 

2.3x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended September 30, 2018

 

 

 

 

 

 

 

 

 

Yield on Average Interest Earning Assets (4)

 

2.21

%

10.76

%

5.01

%

6.19

%

5.32

%

5.89

%

N/A

 

 

 

5.54

%

Less Average Cost of Funds (5)

 

(2.22

)

(3.29

)

(3.10

)

(3.14

)

(3.08

)

(3.67

)

(4.07

)

 

 

(3.13

)

Net Interest Rate Spread

 

(0.01

)%

7.47

%

1.91

%

3.05

%

2.24

%

2.22

%

N/A

 

 

 

2.41

%

 


(1)   Includes $825.6 million of purchased credit impaired loans, $989.8 million of Non-QM loans, $329.3 million of Rehabilitation loans, $79.7 million of Single-family rental loans and $247.1 million of seasoned performing loans.  At September 30, 2018, the total fair value of these loans is estimated to be approximately $2.5 billion.

(2)   Includes cash and cash equivalents and restricted cash, other assets and other liabilities.

(3)   Represents the sum of borrowings under repurchase agreements, securitized debt and payable for unsettled purchases as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity Ratio also includes Senior Notes.

(4)   Yields reported on our interest earning assets are calculated based on the interest income recorded and the average amortized cost for the quarter of the respective asset.  At September 30, 2018, the amortized cost of our interest earning assets were as follows: Agency MBS - $3.0 billion; Legacy Non-Agency MBS - $1.6 billion; RPL/NPL MBS - $1.2 billion; Credit Risk Transfer securities - $504.8 million; and Residential Whole Loans at carrying value - $2.5 billion. In addition, the yield for residential whole loans at carrying value was 5.73%, net of 16 basis points of servicing fee expense incurred during the quarter.  For GAAP reporting purposes, such expenses are included in Loan servicing and other related operating expenses in our statement of operations.  Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans held at fair value in our statement of operations.  Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.

(5)   Average cost of funds includes interest on repurchase agreements, the cost of swaps, Senior Notes and securitized debt.  Agency MBS cost of funds includes 6 basis points and Legacy Non-Agency MBS cost of funds includes 5 basis points associated with swaps to hedge interest rate sensitivity on these assets.

 

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At September 30, 2018, MFA’s $5.1 billion of Agency and Legacy Non-Agency MBS were backed by hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:

 

Table 3

 

 

 

Agency MBS

 

Legacy Non-Agency MBS (1)

 

Total (1)

 

Time to Reset

 

Fair
Value
(2)

 

Average
Months

to Reset
(3)

 

3 Month
Average
CPR (4)

 

Fair
Value

 

Average
Months
to Reset
(3)

 

3 Month
Average
CPR (4)

 

Fair
Value
(2)

 

Average
Months

to Reset

(3)

 

3 Month
Average
CPR (4)

 

($ in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

< 2 years (5)

 

$

1,150

 

6

 

22.7

%

$

1,418

 

4

 

18.6

%

$

2,568

 

5

 

20.3

%

2-5 years

 

132

 

44

 

12.6

 

 

 

 

132

 

44

 

12.6

 

> 5 years

 

10

 

82

 

10.7

 

 

 

 

10

 

82

 

10.7

 

ARM-MBS Total

 

$

1,292

 

11

 

21.6

%

$

1,418

 

4

 

18.6

%

$

2,710

 

7

 

19.9

%

15-year fixed

 

$

866

 

 

 

11.5

%

$

2

 

 

 

17.6

%

$

868

 

 

 

11.5

%

30-year fixed

 

747

 

 

 

8.7

 

719

 

 

 

13.4

 

1,466

 

 

 

12.5

 

40-year fixed

 

 

 

 

 

34

 

 

 

16.7

 

34

 

 

 

16.7

 

Fixed-Rate Total

 

$

1,613

 

 

 

11.0

%

$

755

 

 

 

13.6

%

$

2,368

 

 

 

12.2

%

MBS Total

 

$

2,905

 

 

 

16.8

%

$

2,173

 

 

 

16.8

%

$

5,078

 

 

 

16.8

%

 


(1)   Excludes $1.2 billion of RPL/NPL MBS.

(2)   Does not include principal payments receivable of $438,000.

(3)   Months to Reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps.  Months to Reset does not reflect scheduled amortization or prepayments.

(4)   3 month average CPR weighted by positions as of beginning of each month in the quarter.

(5)   Includes floating rate MBS that may be collateralized by fixed-rate mortgages.

 

Webcast

 

MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Tuesday, November 6, 2018, at 10:00 a.m. (Eastern Time) to discuss its third quarter 2018 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” 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. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market (i.e., fair) value of MFA’s MBS, residential whole loans, CRT securities and other assets; changes in the prepayment

 

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rates on residential mortgage assets , an increase of which could result in a reduction of the yield on certain investments in our portfolio and an increase of which could require us to reinvest the proceeds received by us as a result of such prepayments in investments with lower coupons; credit risks underlying MFA’s assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing MFA’s Non-Agency MBS and relating to 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 Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA’s Agency MBS, Non-Agency MBS and 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 and will depend on, among other things, MFA’s taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as MFA’s Board of Directors 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; expected returns on our investments in non-performing 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; targeted or expected returns on MFA’s investments in recently-originated loans, the performance of which is, similar to MFA’s other mortgage loan investments, subject to, among other things, prepayment risk, credit risk and financing cost associated with such investments; risks associated with our investments in MSR related assets, including servicing, regulatory and economic risks, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the SEC, could cause MFA’s actual results to differ materially from those projected in any forward-looking statements it makes. 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.

 

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MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, Except Per Share Amounts)

 

September 30,
2018

 

December 31,
2017

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Mortgage-backed securities (“MBS”) and credit risk transfer (“CRT”) securities:

 

 

 

 

 

Agency MBS, at fair value ($2,795,273 and $2,727,510 pledged as collateral, respectively)

 

$

2,905,490

 

$

2,824,681

 

Non-Agency MBS, at fair value ($3,237,108 and $2,379,523 pledged as collateral, respectively)

 

3,334,610

 

3,533,966

 

CRT securities, at fair value ($504,931 and $595,900 pledged as collateral, respectively)

 

538,945

 

664,403

 

Mortgage servicing rights (“MSR”) related assets ($565,272 and $482,158 pledged as collateral, respectively)

 

565,272

 

492,080

 

Residential whole loans, at carrying value ($1,149,293 and $448,689 pledged as collateral, respectively) (1)

 

2,471,567

 

908,516

 

Residential whole loans, at fair value ($685,095 and $996,226 pledged as collateral, respectively) (1)

 

1,449,365

 

1,325,115

 

Cash and cash equivalents

 

104,186

 

449,757

 

Restricted cash

 

6,489

 

13,307

 

Other assets

 

406,069

 

742,909

 

Total Assets

 

$

11,781,993

 

$

10,954,734

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Repurchase agreements

 

$

7,278,270

 

$

6,614,701

 

Other liabilities

 

951,483

 

1,078,397

 

Total Liabilities

 

$

8,229,753

 

$

7,693,098

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)

 

$

80

 

$

80

 

Common stock, $.01 par value; 886,950 shares authorized; 449,472 and 397,831 shares issued and outstanding, respectively

 

4,495

 

3,978

 

Additional paid-in capital, in excess of par

 

3,620,268

 

3,227,304

 

Accumulated deficit

 

(598,971

)

(578,950

)

Accumulated other comprehensive income

 

526,368

 

609,224

 

Total Stockholders’ Equity

 

$

3,552,240

 

$

3,261,636

 

Total Liabilities and Stockholders’ Equity

 

$

11,781,993

 

$

10,954,734

 

 


(1)   Includes approximately $215.1 million and $183.2 million of Residential whole loans, at carrying value and $723.8 million and $289.3 million of Residential whole loans, at fair value transferred to consolidated VIEs at September 30, 2018 and December 31, 2017, respectively. Such assets can be used only to settle the obligations of each respective VIE.

 

7


 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In Thousands, Except Per Share Amounts)

 

2018

 

2017

 

2018

 

2017

 

 

 

(Unaudited)

 

Interest Income:

 

 

 

 

 

 

 

 

 

Agency MBS

 

$

14,332

 

$

15,533

 

$

42,795

 

$

50,014

 

Non-Agency MBS

 

58,667

 

63,252

 

169,812

 

212,728

 

CRT securities

 

7,748

 

8,676

 

25,939

 

22,898

 

MSR related assets

 

6,407

 

7,194

 

20,249

 

17,833

 

Residential whole loans held at carrying value

 

29,524

 

9,026

 

61,788

 

26,219

 

Cash and cash equivalent investments

 

754

 

1,452

 

2,348

 

2,854

 

Interest Income

 

$

117,432

 

$

105,133

 

$

322,931

 

$

332,546

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

Repurchase agreements and other advances

 

$

50,881

 

$

46,303

 

$

142,832

 

$

141,444

 

Other interest expense

 

7,997

 

2,972

 

18,410

 

7,202

 

Interest Expense

 

$

58,878

 

$

49,275

 

$

161,242

 

$

148,646

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

58,554

 

$

55,858

 

$

161,689

 

$

183,900

 

 

 

 

 

 

 

 

 

 

 

Other Income, net:

 

 

 

 

 

 

 

 

 

Net gain on residential whole loans held at fair value

 

$

34,942

 

$

18,679

 

$

105,883

 

$

48,660

 

Net gain on sales of investment securities

 

16,415

 

14,933

 

32,661

 

30,530

 

Other, net

 

(2,998

)

(4,515

)

(1,519

)

13,812

 

Other Income, net

 

$

48,359

 

$

29,097

 

$

137,025

 

$

93,002

 

 

 

 

 

 

 

 

 

 

 

Operating and Other Expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

6,868

 

$

10,892

 

$

20,654

 

$

26,258

 

Other general and administrative expense

 

4,155

 

4,081

 

13,569

 

14,060

 

Loan servicing and other related operating expenses

 

8,758

 

6,177

 

23,569

 

14,785

 

Operating and Other Expense

 

$

19,781

 

$

21,150

 

$

57,792

 

$

55,103

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

87,132

 

$

63,805

 

$

240,922

 

$

221,799

 

Less Preferred Stock Dividends

 

3,750

 

3,750

 

11,250

 

11,250

 

Net Income Available to Common Stock and Participating Securities

 

$

83,382

 

$

60,055

 

$

229,672

 

$

210,549

 

 

 

 

 

 

 

 

 

 

 

Earnings per Common Share - Basic and Diluted

 

$

0.19

 

$

0.15

 

$

0.56

 

$

0.54

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared per Share of Common Stock

 

$

0.20

 

$

0.20

 

$

0.60

 

$

0.60

 

 

8


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Section 3: EX-99.2 (EX-99.2)

Exhibit 99.2

Third Quarter 2018 Earnings Presentation

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Forward Looking Statements When used in this presentation 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 1933 Act and Section 21E of the 1934 Act and, as such, may involve known and unknown risks, uncertainties and assumptions. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market (i.e., fair) value of MFA’s MBS, residential whole loans, CRT securities and other assets; 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 our portfolio and an increase of which could require us to reinvest the proceeds received by us as a result of such prepayments in investments with lower coupons; credit risks underlying MFA’s assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing MFA’s Non-Agency MBS and relating to 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 Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA’s Agency MBS, Non-Agency MBS and 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 and will depend on, among other things, MFA’s taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as MFA’s Board of Directors 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; expected returns on our investments in non-performing 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; targeted or expected returns on MFA’s investments in recently-originated loans, the performance of which is, similar to MFA’s other mortgage loan investments, subject to, among other things, prepayment risk, credit risk and financing cost associated with such investments; risks associated with our investments in MSR related assets, including servicing, regulatory and economic risks, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the SEC, could cause MFA’s actual results to differ materially from those projected in any forward-looking statements it makes. 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. 2

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Executive summary In the third quarter of 2018, MFA generated GAAP EPS of $0.19. • • Q3 dividend to common stockholders was $0.20 per share. • Estimated REIT taxable income for the quarter was $0.21 per common share. Estimated undistributed taxable income was $0.11 per common share at September 30, 2018. • Wecompletedacommonequityofferingofnearly51millionshares,raising approximately $389 million of net proceeds. • Investment activity was very robust as we purchased over $2.3 billion of assets and increased our portfolio by more than $1.3 billion in the third quarter. • Book value per share declined approximately 1% to $7.46 from $7.54 at June 30, 2018. 3

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Executive summary (cont’d.) Over $700 million of residential whole loan purchases included approximately $400 million of Non-QM loans, $190 million of Fix and Flip loans, nearly $25 million of Single Family Rental loans and nearly $80 million of Non-Performing and Re-Performing loans. • • Our strategy of investing in newly originated loans continues to expand our portfolio and the investment performance has thus far been consistent with our expectations. • We remain willing to explore new investment structures to strengthen our originator relationships and gain access to loan flow. • MFA’s asset management team maintains oversight of servicing of our credit sensitive loans, particularly non-performing loans, to improve outcomes and expected returns. • Strong credit fundamentals continue to drive performance of our Legacy Non-Agency portfolio, which generated a yield in the third quarter of 10.76%. 4

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Investment strategy Continue to grow investment assets • Newly originated loans should provide recurring (and increasing) portfolio growth. • Optimize capital structure associated with asset growth. • Produce attractive returns that are comparable to peers, but with less risk due to lower leverage, less interest rate exposure and reduced prepayment sensitivity. • Utilize Agency MBS to invest liquidity pending more attractive investment opportunities: •Hedged to minimize duration exposure •Highly liquid MBS 5

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Market conditions and investment activity • Vigorous investment activity in the third quarter, particularly after our equity raise in early August. • Expand investment opportunities in the form of newly originated whole loans. Acquiring these assets is a unique process: • Long gestation periods • Creative approach to partnering with originators • Flow vs bulk arrangements • Opportunities still exist to purchase non-performing and re-performing credit sensitive whole loans. 6

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Q3 2018 net income per common share of $0.19 • Net income was higher on a sequential quarter basis primarily due to: $mm $mm • Higher net interest income from carrying value loans, reflecting ongoing portfolio growth, particularly in more recently originated loans. Higher net other income, reflecting a continued strong contribution from fair value loans, higher income overall on sales of securities and higher unrealized gains on CRTs. Operating and other expenses declined as the prior quarter was impacted by the timing of recognition of expenses associated with certain share-based compensation awards. • • (1) Includes interest expense on financing associated with all residential whole loans. Interest income received on residential whole loans held at fair value is reported in Other Income in Net gains on Residential Whole Loans held at fair value. (2) Net income impact of MBS and CRT securities sold is comprised of: Realized gains on MBS and CRT securities sold Reversal of previously unrealized gains on sold CRT securities held at fair value 16.4 (6.8) 7.4 (2.2) 9.6 5.2 7 Summary Income StatementQ3 2018 Q2 2018 Net Interest Income: MBS, CRT and MSR related$48.4 $48.6 Residential whole loans (1) 11.42.7 Income on cash balances less interest on Senior Notes(1.3)(1.3) Net Interest Income$58.6 $49.9 Other Income, net: Net gains on residential whole loans held at fair value (1) 34.932.4 Net income impact of MBS and CRT sales (2) 9.65.2 Unrealized gains/(loss) on CRT securities held at fair value3.7(0.2) Other0.23.5 Other Income, net:$48.4 $41.0 Operating and Other Expenses(19.8)(20.5) Preferred Dividends(3.8)(3.8) Net Income Available to Common Shareholders$83.4 $66.6 Earnings Per Common Share$0.19 $0.17

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Third quarter 2018 investment flows • • Vigorous investment activity with asset acquisition in excess of $2.3 billion. Investment portfolio grew by $1.3 billion in the third quarter and by $1.6 billion year to date as new loan initiatives add meaningfully to investment flows. We opportunistically sold $119 million of CRT securities and $24 million of Non-Agency MBS in the quarter. • 3rd Quarter 3rd Quarter September 30, 3rd Quarter $ in Millions June 30, 2018 and other $3,601 $(188) $707 $24 $4,144 $543 and REO $571 $(3) $84 $(113) $539 $(32) Securities (1) RPL/NPL are securitized financial instruments that are backed by re-performing and non-performing loans. The majority of these securities are structured such that the coupon increases up to 300-400 basis points (bps) at 36-48 months from issuance. (2) MSR Related Assets include investments in term notes whose cash flows are considered to be largely dependent on underlying MSRs that directly or indirectly act as collateral for the investment. 8 Sales, MTM RunoffAcquisitionschanges2018Change Residential Whole Loans RPL/NPL MBS (1) $909$(192)$446$(1)$1,162$253 MSR Related Assets (2) $381$(166)$350$—$565$184 Credit Risk Transfer Legacy Non-Agency MBS$2,335$(145)$2$(19)$2,173$(162) Agency MBS$2,363$(192)$758$(24)$2,905$542 Totals$10,160$(886)$2,347$(133)$11,488$1,328

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MFA’s yields and spreads remain attractive • Despite eight Fed Funds rate increases in almost three years, MFA’s interest rate spread is relatively unchanged and remains attractive. • During this period yield on interest earning assets has risen by approximately 140 bps. ◦ ◦ Yield on credit sensitive assets have benefited from continued improvements in credit fundamentals. We have successfully identified higher yielding assets in a rising rate environment. • Funding costs have risen more slowly than Fed Funds. ◦ ◦ Interest rate swaps and securitizations have mitigated increases in repo costs. Funding spreads have improved as rates rise. 6% 5% 4% 3% 2% 1% 0% Q4 '15Q1 '16Q2 '16Q3 '16Q4 '16Q1 '17 Q2 '17Q3 '17Q4 '17Q1 '18 Q2 '18 Q3 '18 9 Yield (%)

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Third quarter 2018 yields and spreads by asset type Asset Allocated Net Spread Return Funds Equity Ratio (1) (2) Net of 16 bps of servicing costs. These residential whole loans produce GAAP income/loss based on changes in fair value in the current period, and therefore results will vary on a quarter-to-quarter basis. MFA expects to realize returns over time on these investments of 5-7%. Agency MBS cost of funds includes 6 bps and Legacy Non-Agency cost of funds includes 5 bps associated with swaps to hedge interest rate sensitivity on these assets. (3) 10 Net EquityYield/Cost ofDebt/Net (million) Whole Loans at Carrying Value$1,3995.73% (1) (3.67)%2.06%0.8x Legacy Non-Agency MBS$57910.76%(3.29)% (3) 7.47%2.8x Whole Loans at Fair Value$451(2) (4.07)%2.2x RPL/NPL MBS$2495.01%(3.10)%1.91%3.7x Agency MBS$3212.21%(2.22)% (3) (0.01)%8.0x Credit Risk Transfer Securities$1346.19%(3.14)%3.05%3.0x MSR Related Assets$1295.32%(3.08)%2.24%3.4x

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MFA’s interest rate sensitivity remains low • • • • Excluding hedges, our asset duration remains relatively low at 1.68. Our assets continue to be primarily sensitive to mortgage credit fundamentals. In addition, our leverage remains low, with a debt-to-equity ratio of 2.3x. Due to the combination of low leverage and low duration, an increase in interest rates from a parallel shift in the curve of 100 bps would result in an expected decline of MFA’s equity of approximately 4%. $ in Millions 11 (1) MTR = months to reset AssetsMarket ValueAverage CouponDuration Non-Agency ARMs and CRTs (12 months or less MTR(1)) $1,9544.28%0.4 RPL/NPL MBS1,1624.62%0.6 Non-Agency Fixed Rate7585.84%3.0 Residential Whole Loans3,9995.01%2.2 MSR Related Assets5654.82%0.7 Agency ARMs (12 months or less MTR(1)) 1,1223.82%0.6 Agency ARMs (13-120 MTR(1)) 1702.98%2.8 Agency 15-Year Fixed Rate8663.06%3.1 Agency 30-Year Fixed Rate7474.50%3.8 Cash, cash equivalents and Other Assets3340.2 TOTAL ASSETS$11,6771.68 Hedging InstrumentsNotional AmountDuration Swaps (Less than 3 years)$2,130-1.7 Swaps (3-10 years)507-5.4 TOTAL HEDGES$2,637-2.4 Estimated Net Duration1.14

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MFA’s strategy continues to deliver book value stability • MFA’s investment strategy has consistently minimized book value volatility. Since 2014 MFA’s average quarterly book value change has been less than 2%. Protecting book value gives MFA the ability to take advantage of new opportunities as they arise. Quarterly change in MFA's Book Value (left axis) and MFA's Asset Duration by Quarter (right axis) 15% 2.5 10% 2.0 • 5% 1.5 0% 1.0 -5% 0.5 -10% -15% 0.0 • 12 Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018

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Continued positive fundamentals National HPA-YoY As of August 2018 for residential mortgage U-3 Unemployment Rate As of September 2018 credit 4% As of Q2-2018 Source: Zillow Source: FRB # of Units (millions) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17 Mar-18 12% 10% 8% 6% % 4% 2% 0% Source: Corelogic 12% 10% 8% 6% 7% 2% 0% Source: BLS National for Sale Inventory As of August 2018 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Deliquency Rate on Single-Family Resi Mortgages 14% 12% 10% 8% 6% 4% 2%3.25% 0% 13 1.21mm 3. 5.5

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Residential whole loan portfolio update • We sourced over $700 million of residential whole loans in the third quarter. We continue to grow our portfolio of Non-QM, Fix & Flip and Single Family Rental loans adding origination partners and developing our existing relationships. Year to date flows in legacy loans have outpaced last year with over $60 billion of supply. Volumes in the legacy loan market year-to-date exceeds last year’s pace. Returns to date on Non-Performing loans continue to be consistent with our expectation of 5-7%. 14 • • • •

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RPL portfolio delinquency characteristics as of 9/30/2018 • 88% of our RPL portfolio is less than 60 days delinquent. • On average, 28% of the 60+ days delinquent loans are making payments. • Prepay speeds have outperformed expectations maintaining a range between 6% and 14%. 15 Reflects 3 month trailing average voluntary prepayments

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Performance of Non-Performing1 loans purchased before 9/30/17 • Measured by UPB at purchase, 30% (or approximately 2,000) of loans that were non-performing at purchase are either performing or have paid in full as of September 2018. • Through diligent asset management we continue to improve outcomes for our NPL portfolio by returning loans to performing or paid-in-full status, and through other forms of resolution. • 78% of MFA modified loans are either performing today or have paid in full. • In addition, 39% of our NPL portfolio has liquidated or reverted to REO. 1Non-Performing at purchase defined as greater than or equal to 60 days delinquent 2Performing over time defined as less than 60 days delinquent or made a P&I payment 32017 only includes loans purchased prior to 9/30/2017 16 Acquisition Year 20142015201620173Total Loan Count UPB Purchase ($mm) Status 9/30/2018 Performing2/PIF Liquidation/REO Non-Performing Total 7432365106918956072 $161.30$619.90$301.30$413.50$1,496.00 33%26%30%36%30% 48%45%42%26%39% 19% 29% 28% 38% 30% 100%100%100%100%100%

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Non-QM investments • We are purchasing loans made to creditworthy borrowers who have limited conventional mortgage finance options. We have purchased over $1 billion UPB to date and are currently working with several origination partners. Able to achieve appropriate leverage through warehouse lines and potentially through capital markets transactions. Targeted yield on Non-QM assets of 5% and ROE of low double digits. • • • 17 Non-QM Portfolio Statistics as of 9/30/18 WA LTV66% WA FICO706 WA Coupon6.54% Avg Balance$410,716 Hybrid ARMs80% Fixed Rate20% Top 2 States CA54% FL15%

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Business purpose loans - Rehabilitation and Single Family Rental (SFR) Loans We continue to grow our holdings of Rehabilitation and SFR loans as we expand our existing originator relationships and develop new ones. Since inception we have acquired (including undrawn commitments) close to $600mm of Rehabilitation and SFR loans. Rehabilitation loans (“Fix and Flip”) • Fixed rate short term loans collateralized by residential property. Term is generally less than 24 months. Borrower intends to rehabilitate property and resell. Non-owner occupied business purpose loans. Target yield of 7% to 8%. • • • SFR Loans • Hybrid and fixed rate loans collateralized by residential property/properties. Term is 30 years. Borrower intends to rent out property. Non-owner occupied business purpose loans. Target yield of 6%. • • • * WA ARV-LTV: Weighted average after repair loan to value ** WA DSCR: Weighted average debt service coverage ratio 18 SFR Portfolio Statistics (9/30/18) WA LTV68% WA FICO737 WA DSCR**1.51 WA Coupon6.3% 5/1 Hybrid Loans90% UPB$80mm Rehabilitation Portfolio Statistics (9/30/18) WA ARV-LTV*65% WA FICO707 WA Term13 WA Passthrough Rate7.51% UPB$329mm Undrawn Commitments$44mm

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Summary • We remain active in the market and again grew the portfolio as we purchased more than $2.3 billion of investments in the third quarter. • We continue to expand our investment opportunity set within the residential mortgage space, utilizing the same disciplined approach to risk/reward as we have in the past. • Lengthy efforts to develop and cultivate originator relationships are expected to continue to produce growth in acquisitions of newly originated performing whole loans. • MFA’s asset management team is playing an active role in the servicing of our credit sensitive whole loans, leading to better results and improved returns. 19

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Additional Information 20

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Book value down 1% primarily due to discount accretion on Legacy Non-Agency MBS (resulting in lower unrealized gains) and price changes on Agency MBS (0.04) at a discount. Results in increased amortized cost and lower unrealized gains 21 Qtr ended 9/30/18 Book value per common share at the beginning of the period$7.54 Net income available to common shareholders0.19 Common dividends declared(0.20) Net change attributable to Agency MBS(0.02) Discount Accretion: Primarily income in excess of coupon on Non-Agency MBS purchased Net change attributable to Non-Agency MBS and CRT securities(0.02) Net change in value of swap hedges0.01 Book value per common share as of 9/30/18$7.46

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