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Section 1: 8-K (FORM 8-K)

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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, 2019

 

MFA FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   1-13991   13-3974868

(State or other jurisdiction

of incorporation or organization)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

   

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):

 

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

 

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

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class  

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share   MFA   New York Stock Exchange
         

7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share

  MFA/PB   New York Stock Exchange
         
8.00% Senior Notes due 2042   MFO   New York Stock Exchange

 

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  ¨

 

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.  ¨

 

 

 

 

 

 

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, 2019, announcing its financial results for the quarter ended September 30, 2019, 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 2019 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, 2019, announcing MFA’s financial results for the quarter ended September 30, 2019.
   
99.2 Additional information relating to the financial results of MFA for the quarter ended September 30, 2019.
   
104Cover Page Interactive Data File (formatted as Inline XBRL).

 

 

 

 

EXHIBIT INDEX

 

Exhibit No.Description
  
99.1 Press Release, dated November 6, 2019, announcing MFA Financial Inc.’s financial results for the quarter ended September 30, 2019.
   
99.2 Additional information relating to the financial results of MFA Financial, Inc. for the quarter ended September 30, 2019.
   
104Cover Page Interactive Data File (formatted as Inline XBRL).

 

 

 

 

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, 2019  

 

 

(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

 

Exhibit 99.1

 

 

 

MFA

FINANCIAL, INC.

 

350 Park Avenue

New York, New York 10022

 

PRESS RELEASEFOR IMMEDIATE RELEASE

 

November 6, 2019 NEW YORK METRO

 

INVESTOR CONTACT: [email protected] NYSE: MFA
  212-207-6488
  www.mfafinancial.com
   
MEDIA CONTACT: Abernathy MacGregor
  Tom Johnson
  212-371-5999

 

MFA Financial, Inc.

Announces Third Quarter 2019 Financial Results

 

NEW YORK - MFA Financial, Inc. (NYSE:MFA) today announced its financial results for the third quarter ended September 30, 2019.

 

Third Quarter 2019 and other highlights:

 

MFA generated third quarter GAAP net income of $91.8 million, or $0.20 per common share. Core earnings, a non-GAAP financial measure of MFA’s operating performance that is calculated by adjusting GAAP net income to exclude the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges, was also $0.20 per common share.

 

GAAP book value per common share during the quarter continued to be stable and was $7.09 at September 30, 2019.

 

Economic book value per common share, a non-GAAP financial measure of MFA’s financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on residential whole loans held at carrying value for GAAP reporting, was $7.41 at September 30, 2019.

 

MFA acquired, or committed to acquire, approximately $1.1 billion of residential mortgage assets in the third quarter, including $918 million of residential whole loans. In addition, consistent with the ongoing execution of our residential whole loan investment strategy, we provided $100 million of capital to select loan origination partners.

 

1

 

 

Interest income on MFA’s purchased performing loan portfolio increased 14.3% from the prior quarter to $53.6 million, building on the growth observed in this portfolio over the past several quarters.

 

On October 31, 2019, MFA paid its third quarter 2019 dividend of $0.20 per share of common stock to shareholders of record as of September 30, 2019.

 

Craig Knutson, MFA’s CEO and President, said, “MFA’s investment portfolio activity in the third quarter of 2019 was driven by acquisitions of $1.1 billion of new assets. Our residential whole loan and REO portfolio increased by $548 million, largely due to investments in purchased performing loans. Our growth in purchased performing loans was driven by the acquisition of Non-QM, fix and flip and single-family rental loans. We continue to gain traction on these new acquisition efforts, which involve relationships cultivated over the past two years. 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. During the quarter we made approximately $100 million of capital contributions to select loan origination partners.”

 

Mr. Knutson added, “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. Our portfolio continues to deliver GAAP book value stability. In addition, MFA’s Economic book value was $7.41 at September 30, 2019 and has increased by approximately 1% during 2019. Leverage, which reflects the ratio of our financing obligations to equity, was 2.8:1 at quarter-end, unchanged from the end of the second quarter.”

 

At September 30, 2019, our investments in residential whole loans totaled $6.4 billion. Of this amount, $5.0 billion is recorded at carrying value and generated a yield of 5.58% during the quarter, and $1.5 billion is recorded at fair value on our consolidated balance sheet. We recorded gains for the quarter on residential whole loans measured at fair value for GAAP reporting purposes of approximately $40.2 million, primarily reflecting coupon interest payments and other cash received during the quarter together with changes in the fair value of the underlying loans. In addition, as of the end of the quarter, we held approximately $376 million of REO properties. 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.

 

MFA’s Legacy Non-Agency MBS had a face amount of $1.7 billion with an amortized cost of $1.1 billion and a net purchase discount of $563.9 million at September 30, 2019. This discount consists of a $462.1 million credit reserve and other-than-temporary impairments and a $101.8 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 generated a yield of 10.32% for the quarter. The portfolio continues to outperform our credit assumptions and has underlying mortgage loans that are on average approximately thirteen years seasoned and only 10.9% are currently 60 or more days delinquent.

 

2

 

 

As of September 30, 2019, the Agency MBS portfolio totaled $1.8 billion, had an amortized cost basis of 103.9% of par and generated a yield of 2.32% for the third quarter. At the end of the third quarter, MFA held approximately $828.0 million of RPL/NPL MBS. These securities had an amortized cost basis of 99.94% of par and generated a yield of 5.18% for the quarter.  In addition, our investments in MSR-related assets at September 30, 2019 totaled $1.2 billion and generated a yield of 5.26% for the third quarter. Our investments in CRT securities totaled $377.9 million at September 30, 2019, and generated a yield of 4.36% for the third quarter. During the quarter we opportunistically sold residential mortgage securities for $334.1 million, realizing gains of $17.7 million ($2.9 million of which had been recorded in prior periods as unrealized gains on 30-Year Agency MBS and CRT securities for which we had elected fair value accounting). We realized a loss of $3.7 million on termination of swap hedges ($3.5 million of which had been recorded in prior periods as unrealized losses) in connection with managing our investment in 30-Year Agency MBS, in response to the continued rally in rates that occurred during the quarter.

 

For the three months ended September 30, 2019, MFA’s costs for compensation and benefits and other general and administrative expenses were $12.9 million, or an annualized 1.52% of stockholdersequity as of September 30, 2019.

 

3

 

 

The following table presents MFA’s asset allocation as of September 30, 2019, and the third quarter 2019 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

 

Table 1

 

ASSET ALLOCATION

 

At September 30, 2019  Agency
MBS
  

Legacy

Non-
Agency MBS

   RPL/NPL
MBS
   Credit
Risk
Transfer
Securities
  

Residential Whole

Loans, at
Carrying

Value (1)

  

Residential Whole

Loans, at

Fair

Value

   MSR-
Related
Assets
  

Other,

net (2)

   Total 
($ in Millions)                                             
Fair Value/Carrying Value  $1,814   $1,570   $828   $378   $4,969   $1,453   $1,164   $785   $12,961 
Less Payable for Unsettled Purchases                   (60)               (60)
Less Repurchase Agreements   (1,676)   (1,232)   (643)   (304)   (3,046)   (679)   (918)   (73)   (8,571)
Less Securitized Debt                   (139)   (467)           (606)
Less Convertible Senior Notes                               (224)   (224)
Less Senior Notes                               (97)   (97)
Net Equity Allocated  $138   $338   $185   $74   $1,724   $307   $246   $391   $3,403 
Debt/Net Equity Ratio (3)   12.1x   3.6x   3.5x   4.1x   1.9x   3.7x   3.7x        2.8x
                                              
For the Quarter Ended September 30, 2019                                             
Yield on Average Interest Earning Assets (4)(5)   2.32%   10.32%   5.18%   4.36%   5.58%   N/A    5.26%        5.32%

Less Average Cost of Funds (6)

   (2.47)   (3.24)   (3.18)   (3.12)   (3.90)   (3.95)   (3.23)        (3.50)
Net Interest Rate Spread   (0.15)%   7.08%   2.00%   1.24%   1.68%   N/A    2.03%        1.82%

 

(1)Includes $2.7 billion of Non-QM loans, $968.9 million of Rehabilitation loans, $366.4 million of Single-family rental loans, $189.0 million of Seasoned performing loans and $718.2 million of Purchased Credit Impaired loans. At September 30, 2019, the total fair value of these loans is estimated to be approximately $5.1 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 Convertible Senior Notes and 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, 2019, the amortized cost of our interest earning assets were as follows: Agency MBS - $1.8 billion; Legacy Non-Agency MBS - $1.1 billion; RPL/NPL MBS - $824.3 million; Credit Risk Transfer securities - $370.0 million; and Residential Whole Loans at carrying value - $5.0 billion. In addition, the yield for residential whole loans at carrying value was 5.52%, net of 6 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.
(5)Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans measured at fair value through earnings in our statement of operations. Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.
(6)Average cost of funds includes interest on repurchase agreements, the cost of swaps, Convertible Senior Notes and Senior Notes and securitized debt. Agency MBS cost of funds includes 1 basis point and Legacy Non-Agency MBS cost of funds includes 1 basis point associated with swaps to hedge interest rate sensitivity on these assets. Residential Whole Loans at Carrying Value cost of funds includes 3 basis points associated with swaps to hedge interest rate sensitivity on these assets.

 

4

 

 

At September 30, 2019, MFA’s $3.4 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 2

 

   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)  $791    6    20.8%  $948    5    16.3%  $1,739    6    18.2%
2-5 years   87    36    15.5                87    36    15.5 
> 5 years   8    68    39.6                8    68    39.6 
ARM-MBS Total  $886    10    20.4%  $948    5    16.3%  $1,834    7    18.2%
15-year fixed (6)  $614         10.5%  $1         15.0%  $615         10.6%
30-year fixed (6)   313         32.9    574         12.6    887         19.2 
40-year fixed (6)                44         15.1    44         15.1 
Fixed-Rate Total  $927         17.1%  $619         12.8%  $1,546         15.4%
MBS Total  $1,813         18.6%  $1,567         14.9%  $3,380         16.9%

 

(1)Excludes $828.0 million of RPL/NPL MBS.
(2)Does not include principal payments receivable of $965,000.
(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)Amounts presented are based on origination data. Includes floating-rate MBS that may be collateralized by fixed-rate mortgages. In addition, underlying loans may have been modified to be fixed or step rate.
(6)Information presented based on data available at time of loan origination.

 

Webcast

 

MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Wednesday, November 6, 2019, at 10:00 a.m. (Eastern Time) to discuss its third quarter 2019 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.

 

5

 

 

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 rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in its portfolio and could require MFA to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA’s portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows or, in certain circumstances, other-than-temporary impairment on certain Legacy Non-Agency MBS purchased at a discount; 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 MFA’s investments in nonperforming 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, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with MFA’s 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.

 

6

 

 

MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, Except Per Share Amounts)  September 30,
2019
   December 31,
2018
 
    (Unaudited)      
Assets:          
Residential mortgage securities:          
Agency MBS, at fair value ($1,809,380 and $2,575,331 pledged as collateral, respectively)  $1,813,873   $2,698,213 
Non-Agency MBS, at fair value ($2,389,549 and $3,248,900 pledged as collateral, respectively)   2,397,789    3,318,299 
Credit Risk Transfer (“CRT”) securities, at fair value ($377,779 and $480,315 pledged as collateral, respectively)   377,892    492,821 
Residential whole loans, at carrying value ($3,657,830 and $1,645,372 pledged as collateral, respectively) (1)   4,969,414    3,016,715 
Residential whole loans, at fair value ($835,762 and $738,638 pledged as collateral, respectively) (1)   1,453,169    1,665,978 
Mortgage servicing rights (“MSR”) related assets ($1,164,284 and $611,807 pledged as collateral, respectively)   1,164,284    611,807 
Cash and cash equivalents   154,193    51,965 
Restricted cash   38,998    36,744 
Other assets   735,209    527,785 
Total Assets  $13,104,821   $12,420,327 
           
Liabilities:          
Repurchase agreements  $8,571,422   $7,879,087 
Other liabilities   1,129,973    1,125,139 
Total Liabilities  $9,701,395   $9,004,226 
           
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; 451,692 and 449,787 shares issued
and outstanding, respectively
   4,517    4,498 
Additional paid-in capital, in excess of par   3,634,140    3,623,275 
Accumulated deficit   (637,161)   (632,040)
Accumulated other comprehensive income   401,850    420,288 
Total Stockholders’ Equity  $3,403,426   $3,416,101 
Total Liabilities and Stockholders’ Equity  $13,104,821   $12,420,327 

 

(1)Includes approximately $189.9 million and $209.4 million of Residential whole loans, at carrying value and $593.3 million and $694.7 million of Residential whole loans, at fair value transferred to consolidated VIEs at September 30, 2019 and December 31, 2018, 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)  2019   2018   2019   2018 
   (Unaudited) 
Interest Income:                    
Agency MBS  $11,806   $14,332   $45,521   $42,795 
Non-Agency MBS   44,582    58,667    150,610    169,812 
CRT securities   4,251    7,748    15,545    25,939 
Residential whole loans held at carrying value   64,226    29,524    171,725    61,788 
MSR-related assets   15,274    6,407    38,232    20,249 
Cash and cash equivalent investments   903    754    2,703    2,348 
Other interest-earning assets   1,679        4,272     
Interest Income  $142,721   $117,432   $428,608   $322,931 
                     
Interest Expense:                    
Repurchase agreements  $74,240   $50,881   $220,939   $142,832 
Other interest expense   11,583    7,997    28,954    18,410 
Interest Expense  $85,823   $58,878   $249,893   $161,242 
                     
Net Interest Income  $56,898   $58,554   $178,715   $161,689 
                     
Other Income, net:                    
Net gain on residential whole loans measured at fair value through earnings  $40,175   $34,942   $116,915   $105,883 
Net realized gain on sales of residential mortgage securities   17,708    16,415    50,027    32,661 
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings   (571)   (8,545)   8,101    (11,776)
Net (loss)/gain on Swaps not designated as hedges for accounting purposes   (929)   4,002    (17,267)   4,355 
Other, net   6,046    1,545    12,684    5,902 
Other Income, net  $62,429   $48,359   $170,460   $137,025 
                     
Operating and Other Expense:                    
Compensation and benefits  $7,920   $6,868   $24,315   $20,654 
Other general and administrative expense   5,022    4,155    15,601    13,569 
Loan servicing and other related operating expenses   10,786    8,758    31,763    23,569 
Operating and Other Expense  $23,728   $19,781   $71,679   $57,792 
                     
Net Income  $95,599   $87,132   $277,496   $240,922 
Less Preferred Stock Dividends   3,750    3,750    11,250    11,250 
Net Income Available to Common Stock and Participating Securities  $91,849   $83,382   $266,246   $229,672 
                     
Basic Earnings per Common Share  $0.20   $0.19   $0.59   $0.56 
Diluted Earnings per Common Share  $0.20   $0.19   $0.58   $0.56 
                     
Dividends Declared per Share of Common Stock  $0.20   $0.20   $0.60   $0.60 

 

8

 

 

Non-GAAP Financial Measures

 

Reconciliation of GAAP net income available to common stock and participating securities to non-GAAP Core earnings

 

“Core earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Core earnings excludes certain unrealized gains and losses on investments in residential mortgage securities and related hedges that we are required to include in GAAP Net Income each period because management believes that these items, which to date have typically resulted from short-term market volatility or other market technical factors and not due to changes in fundamental asset cash flows, are not reflective of the economic income generated by our investment portfolio. Accordingly, we believe that the adjustments to compute Core earnings specified below better allow investors and analysts to evaluate our financial results, including by analyzing changes in our Core earnings between periods. In addition to using Core earnings in the evaluation of investment portfolio performance over time, Management considers estimates of periodic Core earnings as an input to the determination of the level of quarterly dividends to common shareholders that are recommended to the Board of Directors for approval and in its forecasting and decision-making processes relating to the allocation of capital between different asset classes.

 

We believe that Core earnings provides useful supplemental information to both management and investors in evaluating our financial results. Core earnings should be used in conjunction with results presented in accordance with GAAP. Core earnings does not represent and should not be considered as a substitute for Net Income or Cash Flows from Operating Activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

 

The following table provides a reconciliation of our GAAP net income available to common stock and participating securities to our non-GAAP Core earnings for the three months ended September 30, 2019, June 30, 2019, March 31, 2019 and December 31, 2018:

 

9

 

 

   Three Months Ended 
(In Thousands, Except Per Share Amounts)  September 30, 2019   June 30, 2019   March 31, 2019   December 31, 2018 
   (Unaudited) 
GAAP Net income to common stockholders - basic  $91,569   $89,014   $84,851   $56,888 
Adjustments:                    
Unrealized (gain)/loss on CRT securities measured at fair value through earnings   (83)   2,040    (2,690)   27,246 
Unrealized net (gain)/loss on Agency MBS measured at fair value through earnings and related swaps that are not accounted for as hedging transactions   (2,074)   (918)   (4,840)   11,758 
Total adjustments  $(2,157)  $1,122   $(7,530)  $39,004 
Core earnings  $89,412   $90,136   $77,321   $95,892 
                     
GAAP earnings per common share  $0.20   $0.20   $0.19   $0.13 
Core earnings per common share  $0.20   $0.20   $0.17   $0.21 
Weighted average common shares for basic earnings per share   451,020    450,538    450,358    449,559 

 

Reconciliation of GAAP Book Value per Common Share to non-GAAP Economic Book Value per Common Share

 

“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. This adjustment is also reflected in the Company’s end of period stockholders’ equity in the table below. Management considers that Economic book value provides investors with a useful supplemental measure to evaluate the Company’s financial position as it reflects the impact of fair value changes for all of our residential mortgage assets, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

 

10

 

 

The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of September 30, 2019 and December 31, 2018:

 

(In Thousands, Except Per Share Amounts)  September 30, 2019   December 31, 2018 
GAAP Total Stockholders’ Equity  $3,403,426   $3,416,101 
Preferred Stock, liquidation preference   (200,000)   (200,000)
GAAP Stockholders’ Equity for book value per common share   3,203,426    3,216,101 
Adjustments:          
Fair value adjustment to Residential whole loans, at carrying value   145,807    87,686 
           
Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value  $3,349,233   $3,303,787 
           
GAAP book value per common share  $7.09   $7.15 
Economic book value per common share  $7.41   $7.35 
Number of shares of common stock outstanding   451,692    449,787 

 

11

(Back To Top)

Section 3: EX-99.2 (EXHIBIT 99.2)

 

Exhibit 99.2

 

Third Quarter 2019 Earnings Presentation

 

Forward Looking Statements 2 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 27 A of the 1933 Act and Section 21 E 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 its portfolio and could require MFA to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA’s portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows, or in certain circumstances, other - than - temporary impairment on certain Legacy Non - Agency MBS purchased at a discount ; 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 MFA’s 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, differences in prepayment risk, credit risk and financing cost associated with such investments ; risks associated with MFA’s 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 .

 

Executive summary • MFA’s GAAP EPS and Core earnings ( 1 ) in the third quarter of 2019 were both $ 0 . 20 , as our whole loan portfolio continued to make meaningful and growing contributions to our results . • For the third quarter of 2019 , MFA acquired, or committed to acquire, $ 1 . 1 billion of assets, including $ 918 million of whole loans . In addition, consistent with our residential whole loan investment strategy, we made approximately $ 100 million of capital contributions to select loan origination partners . • Our third quarter dividend to common stockholders of $ 0 . 20 was paid on October 31 , 2019 . • GAAP book value continued to be stable and was $ 7 . 09 per share at September 30 , 2019 . • Economic book value ( 2 ) was $ 7 . 41 at September 30 , 2019 . • Estimated undistributed taxable income was $ 0 . 04 per share at September 30 , 2019 . 3 (1) Core earnings is a Non - GAAP financial measure of MFA’s operating performance that is calculated by adjusting GAAP net income to exclude the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges. Refer to slide 24 for additional information, inc lud ing a reconciliation of GAAP net income to Core earnings. (2) Economic book value is a Non - GAAP financial measure of MFA’s financial position. To calculate Economic book value, our port folios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied t o t hese loans. Refer to slide 25 for additional information, including a reconciliation of GAAP book value to Economic book value.

 

• Third quarter investment activity was very robust as we purchased, or committed to purchase, approximately $ 1 . 1 billion of assets, including $ 918 million of Purchased Performing Loans . ( 1 ) • We continue to pursue new investment structures to strengthen our originator relationships and gain access to loan flow, making both new and additional capital contributions to selected loan origination partners . • We purchased an additional $ 133 million of RPL/NPL MBS in the third quarter . 4 (1) Purchased Performing Loans are comprised of Non - QM loans, Fix and Flip Loans, Single Family Rental Loans and Seasoned Perfor ming Loans. They are included, along with Purchased Credit Impaired Loans, in Residential whole loans held at carrying value on our consolidated balance sheet. Executive summary (cont'd.)

 

• Loan portfolio growth from Purchased Performing Loans has increased interest income in 2019 : ⦁ Loans held at carrying value ( 1 ) produced $ 64 . 2 million of interest income in the third quarter of 2019 (versus $ 57 . 9 million in Q 2 2019 and $ 100 . 9 million for all of 2018 ) . ⦁ $ 53 . 6 million of this $ 64 . 2 million of interest income was from Purchased Performing Loans, up from $ 46 . 9 million in Q 2 2019 . • 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 an unlevered yield in the third quarter of 10 . 32 % . 5 (1) As of September 30, 2019, Residential whole loans held at carrying value includes $4.3 billion of Purchased Performing Loans and $718.2 million of Purchased Credit Impaired Loans. Executive summary (cont'd.)

 

Investment strategy 6 • Continue to grow investment assets ⦁ Purchased Performing Loans are providing recurring (and increasing) portfolio growth ⦁ Opportunistic growth in other asset classes • Optimize Balance Sheet/Capital Structure ⦁ Modest increase in leverage (including securitization) to support asset growth ⦁ Produce attractive returns that are comparable to peers, but with relatively less risk due to lower leverage, less interest rate exposure and reduced prepayment sensitivity • Manage existing portfolio ⦁ Strategic sales of Legacy Non - Agency MBS and Agency MBS

 

• 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 purchases • Opportunities still exist to purchase non - performing and re - performing credit sensitive whole loans . Market conditions and investment activity 7

 

Stable earnings again provides dividend coverage Summary Income Statement Q3 2019 $ in mm Q2 2019 $ in mm Net Interest Income: MBS, CRT, MSR - related $ 36.9 $ 42.4 Residential whole loans (1) 24.1 19.2 Other interest earning assets less interest on Convertible Senior Notes and Senior Notes (4.1 ) (1.7 ) Net Interest Income $ 56.9 $ 59.9 Other Income, net: Net gains on residential whole loans measured at fair value 40.2 51.5 Net income impact of MBS and CRT sales (2) 14.8 6.6 Unrealized gain/(loss) on CRT securities measured at fair value 0.6 (0.9 ) Net gain/(loss) on Agency MBS and related swap hedges measured at fair value 0.8 (5.4 ) Other 6.0 5.1 Other Income, net: $ 62.4 $ 56.9 Operating and Other Expenses (23.7 ) (23.7 ) Preferred Dividends (3.8 ) (3.8 ) Net Income Available to Common Shareholders $ 91.8 $ 89.3 Earnings Per Common Share $ 0.20 $ 0.20 Core Earnings Per Common Share $ 0.20 $ 0.20 • Higher other income, reflecting the following: ⦁ Continued strong contribution from fair value loans; ⦁ Higher realized gains on MBS and CRT sales; and ⦁ Improved performance of 30 - Year Agency MBS and related swap hedges. • Net interest income key drivers include: ⦁ Continued growth in Purchased Performing Loans; ⦁ Lower amounts invested in residential mortgage securities. In addition, the prior quarter included approximately $3 million of income recognized on early redemption of Legacy Non - Agency MBS; and ⦁ Full quarter of interest expense on convertible debt. • Operating and other expenses were in line with our expected run rate. 8 (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 measured at fair value. (2) Net income impact of MBS and CRT securities sold is comprised of: Realized gains on MBS and CRT securities sold $17.7 $7.7 Reversal of previously unrealized gains on sold securities held at fair value $(2.9) $(1.1) $14.8 $6.6 GAAP EPS and Core Earnings again $0.20. Q3 2019 net income highlights include:

 

Third quarter 2019 investment flows • Continued robust investment activity with approximately $1.1 billion of asset acquisitions. • Acquired over $900 million of purchased performing loans, growing our holdings of whole loans for the 10th consecutive quarter. 2019 average quarterly whole loan acquisition volume of $930 million. • Elevated portfolio runoff due to early redemptions of NPL/RPL MBS and strategic sales of $257 million of higher coupon 30 Year Agency MBS, realizing gains of $2.8 million. • Sales of $77 million of Legacy Non - Agency MBS and CRT securities, realizing gains of $14.9 million. 9 $ in Millions June 30, 2019 3rd Quarter Runoff (1) 3rd Quarter Acquisitions (2) Sales (3) , MTM and Other Changes September 30, 2019 3rd Quarter Change Residential Whole Loans and REO $6,251 $(396) $918 $26 $6,799 $548 RPL/NPL MBS $1,037 $(342) $133 $ — $828 $(209) MSR - Related Assets $1,170 $(15) $7 $2 $1,164 $(6) CRT Securities $407 $ — $ — $(29) $378 $(29) Legacy Non - Agency MBS $1,691 $(91) $ — $(30) $1,570 $(121) Agency MBS $2,257 $(182) $ — $(261) $1,814 $(443) Totals $12,813 $(1,026) $1,058 $(292) $12,553 $(260) (1) Includes $305 million of early redemptions on RPL/NPL MBS. (2) Loan acquisitions include Non - QM $568.9 million, Fix and Flip $267.7 million and SFR $80.4 million. Amounts presented exclu de approximately $100 million of capital contributions made during the quarter to select loan origination partners. (3) Includes sales for the quarter of $257.3 million of Agency MBS, $29.0 million of CRT Securities, and $47.9 million of Lega cy Non - Agency MBS.

 

Strong portfolio growth since expanding investment strategy to include Non - QM, Fix and Flip and SFR Loans • Since expanding our investment universe to include Purchased Performing Loans, our investment portfolio has grown by $2.7 billion since the end of Q3 2017. • Residential whole loans and REO have grown by approximately $4.9 billion since the end of Q3 2017 and are currently our largest asset class. • Non - QM, Fix and Flip and SFR Loans have grown from $0 since the end of Q3 2017 to $4.1 billion at the end of Q3 2019 and now represent 32% of our investment portfolio. 10 (in millions) Total Investment Portfolio Residential Whole Loans and REO % of Total Investment Portfolio Non - QM, Fix and Flip and SFR Loans % of Residential Whole Loans and REO 9/30/17 $9,878 $1,881 19% $ — — % 3/31/18 $10,018 $2,838 28% $326 11% 9/30/18 $11,488 $4,144 36% $1,399 34% 3/31/19 $12,422 $5,527 44% $2,735 49% 9/30/19 $12,553 $6,799 54% $4,062 60% Change (9/30/17 to 9/30/19) $2,675 $4,918 $4,062

 

• MFA’s emphasis on credit risk over interest rate risk continues to deliver attractive portfolio yield and spread. ⦁ Yield on interest earning assets of 5.32% . ⦁ Net interest rate spread of 182bps. • MFA’s funding costs are expected to continue to benefit from falling short term rates. ⦁ At September 30, 2019, the ratio of MFA’s pay - fixed interest rate swaps to repo financings was 37%. ⦁ 1mth Libor has declined 73bps year to date. 11 Yield on interest earning assets (Left Axis ) Net interest rate spread (Left Axis) Fed Funds (Right Axis) MFA's yields and spreads remain attractive

 

Third quarter 2019 yields and spreads by asset type Amount Yield/ Cost of Debt/Net Allocated Asset (1) (2) Net of servicing expense. 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 increased by 1 bp and Legacy Non-Agency cost of funds increased by 1 bp associated with swaps to hedge interest rate sensitivity on these assets. Whole Loans at Carrying Value cost of funds increased by 3 bps associated with swaps to hedge interest rate sensitivity on these assets. (3) 12 Net Equity (millions)(millions)ReturnFundsNet SpreadEquity Ratio Whole Loans at Carrying Value$4,969$1,7245.52% (1) (3.90)% (3) 1.62%1.9x Whole Loans at Fair Value$1,453$307N/A (2) (3.95)%N/A3.7x Legacy Non-Agency MBS$1,570$338 10.32%(3.24)% (3) 7.08%3.6x RPL/NPL MBS$828$1855.18%(3.18)%2.00%3.5x Agency MBS$1,814$1382.32%(2.47)% (3) (0.15)%12.1x Credit Risk Transfer Securities$378$744.36%(3.12)%1.24%4.1x MSR-Related Assets$1,164$2465.26%(3.23)%2.03%3.7x quarter basis. MFA expects to realize returns over time on these investments of 5 - 7%. (3) Agency MBS cost of funds increased by 1 bp and Legacy Non - Agency cost of funds increased by 1 bp associated with swaps to hedge interest rate sensitivity on these assets. Whole Loans at Carrying Value cost of funds increased by 3 b ps associated with swaps to hedge interest rate sensitivity on these assets.

 

MFA’s net interest rate sensitivity remains low at 1.14 13 Assets (in millions) Market Value Average Coupon (1) Duration Non - Agency ARMs and CRTs $ 1,326 4.37% 0.4 RPL/NPL MBS $ 828 5.06% 0.3 Non - Agency Fixed Rate $ 622 5.86% 3.0 Residential Whole Loans $ 6,509 5.64% 2.2 MSR - Related Assets $ 1,164 5.03% 0.8 Agency ARMs $ 886 4.27% 0.8 Agency 15 - Year Fixed Rate $ 614 3.12% 2.4 Agency 30 - Year Fixed Rate $ 312 4.50% 1.5 Cash, cash equivalents and Other Assets $ 798 0.2 Total Assets $ 13,059 1.60 Hedging Instruments (in millions) Notional/M arket Value Duration Swaps (Less than 3 years) $ 2,930 - 1.3 Swaps (3 - 10 years) $ 222 - 3.6 Securitized and Other Fixed Rate Debt $ 939 - 1.8 Total Hedges $ 4,091 - 1.5 Estimated Net Duration 1.14 • Excluding hedges, our asset duration remains relatively low at 1.60 . • MFA’s net interest rate sensitivity remains low at 1.14 • • • Excluding hedges, our asset duration remains relatively low at 1.60. Our assets continue to be primarily sensitive to mortgage credit fundamentals. In addition, our leverage remains low, with a debt-to-equity ratio of 2.8x. Duration Risk Portfolio sensitivity to Rates interest rate Change in value(1) Change as a % Value Coupon(1) (1) Includes the impact of estimated valuation changes in residential whole loans and certain other assets that are held at carrying value. For GAAP reporting purposes, valuation changes for these assets are not included in the determination of net income or changes in shareholders’ equity for any given period. 13 (1) Amounts presented for Residential Whole Loans are net of servicing costs, including for loans acquired on a servicing released basis ParallelEstimatedEstimated shiftportfolioof Equity -100bp0.9%3.3% -50bp0.5%1.9% +50bp-0.6%-2.4% +100bp-1.4%-5.3% Assets (in millions)MarketAverageDuration Non-Agency ARMs and CRTs$1,3264.37%0.4 RPL/NPL MBS$8285.06%0.3 Non-Agency Fixed Rate$6225.86%3.0 Residential Whole Loans$6,5095.64%2.2 MSR-Related Assets$1,1645.03%0.8 Agency ARMs$8864.27%0.8 Agency 15-Year Fixed Rate$6143.12%2.4 Agency 30-Year Fixed Rate$3124.50%1.5 Cash, cash equivalents and Other Assets $7980.2 Total Assets$13,0591.60 Notional/ Hedging Instruments (in millions)MarketDuration Value Swaps (Less than 3 years)$2,930-1.3 Swaps (3-10 years)$222-3.6 Securitized and Other Fixed Rate Debt$939-1.8 Total Hedges$4,091-1.5 Estimated Net Duration1.14 ed basis

 

MFA’s strategy continues to limit quarterly book value fluctuations 14 • Through asset selection and risk management MFA has consistently limited quarterly book value fluctuations. • Since 2014 MFA’s average quarterly book value change has been less than 2%. Largest quarterly book value decline was 4%. • Protecting book value gives MFA the ability to take advantage of new opportunities as they arise. Q1 ’14 Q3 ‘14 Q1 '15 Q3 '15 Q1 '16 Q3 '16 Q1 '17 Q3 '17 Q1 '18 Q3 '18 Q1 '19 Q3’19

 

Continued positive fundamentals residential mortgage credit 15 3.6% As of August 2019 As of October 2019 3.6% 0.87% As of Q2 - 2019 As of September 2019 1.50mm Source: Zillow Source: NY FED Source: BLS Source: Corelogic

 

Residential whole loan portfolio 16 • We purchased over $900 million of residential whole loans in the third quarter of 2019. • We continue to grow our portfolio of Non - QM, Fix & Flip, and Single Family Rental loans by adding origination partners and developing our existing relationships. • Our seasoned loan portfolio continues to out - perform our initial expectations.

 

RPL portfolio delinquency characteristics as of 9/30/2019 17 • 87 % of our RPL portfolio is less than 60 days delinquent. • On average, 28% of the 60+ days delinquent loans are making payments. • Prepayment speeds have outperformed expectations, maintaining a range between 6% and 14%.

 

• Measured by UPB at purchase, 35% (or approximately 3,300) of loans that were non - performing at purchase are either performing or have paid in full as of September 2019. • 76% of MFA modified loans are either performing today or have paid in full. Performance of Non - Performing (1) loans purchased before 9/30/18 Acquisition Year 2014 2015 2016 2017 2018 (3) Total Loan Count 743 2,365 1,069 3,124 1,274 8,575 UPB Purchased (in millions) $161.3 $619.9 $301.3 $704.7 $388.6 $2,175.8 9/30/2019 Status Performing (2) /PIF 35% 27% 29% 37% 49% 35% Liquidation/REO 52% 54% 54% 35% 19% 41% Non - Performing 13% 19% 17% 28% 32% 24% Total 100% 100% 100% 100% 100% 100% 18 (1) Non - Performing at purchase defined as greater than or equal to 60 days delinquent (2) Performing as of 9/30/2019 defined as less than 60 days delinquent or made a full P&I payment in September 2019 (3) 2018 only includes acquisitions prior to 9/30/2018 • 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. • In addition, 41% of our NPL portfolio has liquidated or reverted to REO.

 

Non - QM investments • We have been purchasing loans made to creditworthy borrowers who have limited conventional mortgage finance options. • We have purchased over $3.1 billion UPB to date • Delinquencies have remained very low with less than 1.0% greater than 60 days delinquent. • 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 in the mid 4% range and ROE of low double digits. Non - QM Portfolio Statistics (9/30/19) WA LTV 66 % WA FICO 710 WA Coupon 6.42% Avg Balance $452,637 Total UPB ($mm) $2,582.7 Hybrid ARM’s 77% Fixed Rate 23% Current 99.0% 60+Days DQ 1.0% 3 - Month CPR 22.8% Top 2 States CA 57% FL 15% 19

 

Business purpose loans - Rehabilitation and Single Family Rental (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%. 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 in the mid 5% range. Rehabilitation Portfolio Statistics (9/30/19) WA ARV - LTV* 65 % WA FICO 714 WA Orig Term (months) 15 WA Passthrough Rate 7.32% UPB (in millions) $969.3 Undrawn Commitments (in millions) $126.0 Current and 30 Days DQ 94.2% 60+ Days DQ 5.8% 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) over $2.0 billion of Rehabilitation and SFR loans. SFR Portfolio Statistics (9/30/19) WA LTV 69 % WA FICO 737 WA DSCR** 1.4x WA Coupon 6.67% Hybrid Arm Loans 59% UPB (in millions) $364.4 Current and 30 Days DQ 99.1% 60+ Days DQ 0.9% 20 * WA ARV - LTV: Weighted average after repair loan to value ** WA DSCR: Weighted average debt service coverage ratio

 

Summary 21 • Continued successful execution of our investment strategy, with residential whole loan purchases exceeding $ 900 million and approximately $ 100 million of additional capital contributions to select loan originators . • Net portfolio growth of $ 500 million for the nine months ended September 30 , 2019 . • Acquisitions of P urchased Performing Loans continues to drive interest income expansion and we expect this to continue . • Our investment strategy and portfolio continue to deliver dividend and GAAP book value stability . Economic book value has increased approximately 1 % during 2019 . • Total shareholder return of 19 . 5 % for the nine months ended September 30 , 2019 . • Economic return ( 1 ) for Q 3 2019 of 2 . 5 % or 10 . 1 % annualized . (1) Economic return calculated as the change in GAAP book value plus dividends for the period, divided by start of period GAAP b ook value

 

Additional Information 22

 

23 QTR 9/30/19 YTD 9/30/19 GAAP book value per common share at the beginning of the period $7.11 $7.15 Net income available to common shareholders 0.20 0.59 Common dividends declared (0.20) (0.60) Net change attributable to Agency MBS — 0.06 Impact of Discount Accretion and realization of gains on sale of Non - Agency MBS that results in a reduction of unrealized gains (0.05) (0.17) Fair value and other net changes attributable to Non - Agency MBS 0.03 0.14 Net change in value of swap hedges — (0.08) GAAP book value per common share as of 9/30/19 $7.09 $7.09 GAAP book value continues to be stable

 

24 (In Millions, Except Per Share Amounts) Q3 2019 Q2 2019 Q1 2019 YTD Q3 2019 YTD Q3 2018 GAAP Net Income to common stock holders - basic $ 91.6 $ 89.0 $ 84.9 $ 265.4 $ 229.0 Adjustments: Unrealized (gain)/ loss on CRT securities measured at fair value through earnings (0.1 ) 2.0 (2.7 ) (0.7 ) 6.3 Unrealized net (gain)/loss on Agency MBS measured at fair value through earnings and related swaps not accounted for as hedging transactions (2.1 ) (0.9 ) (4.8 ) (7.8 ) 1.5 Total adjustments $ (2.2 ) $ 1.1 $ (7.5 ) $ (8.5 ) $ 7.8 Core earnings $ 89.4 $ 90.1 $ 77.3 $ 256.9 $ 236.7 GAAP earnings per common share $ 0.20 $ 0.20 $ 0.19 $ 0.59 $ 0.56 Core earnings per common share $ 0.20 $ 0.20 $ 0.17 $ 0.57 $ 0.58 Weighted average common shares for basic earnings per share 451.0 450.5 450.4 450.6 408.6 Reconciliation of GAAP to Core earnings “Core earnings” is a non - GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10 (e) of Regulation S - K, as promulgated by the Securities and Exchange Commission . Core earnings excludes certain unrealized gains and losses on investments in residential mortgage securities and related hedges that we are required to include in GAAP Net Income each period, because management believes that these items, which to date have typically resulted from short - term market volatility or other market technical factors and not due to changes in fundamental asset cash flows, are not reflective of the economic income generated by our investment portfolio . Accordingly, we believe that the adjustments to compute Core earnings specified below better allow investors and analysts to evaluate our financial results, including by analyzing changes in our Core earnings between periods . In addition to using Core earnings in the evaluation of investment portfolio performance over time, Management considers estimates of periodic Core earnings as an input to the determination of the level of quarterly dividends to common shareholders that are recommended to the Board of Directors for approval and in its forecasting and decision - making processes relating to the allocation of capital between different asset classes . We believe that Core earnings provides useful supplemental information to both management and investors in evaluating our financial results . Core earnings should be used in conjunction with results presented in accordance with GAAP . Core earnings does not represent and should not be considered as a substitute for Net Income or Cash Flows from Operating Activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies . The following table provides a reconciliation of GAAP net income to our non - GAAP Core earnings for each quarter from Q 1 2019 through Q 3 2019 and for year - to - date 9 / 30 / 19 and 9 / 30 / 18 .

 

25 Reconciliation of GAAP Book Value to Economic Book Value “Economic book value” is a non - GAAP financial measure of our financial position . To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans . This adjustment is also reflected in the Company’s end of period stockholders’ equity in the table below . Management considers that Economic book value provides investors with a useful supplemental measure to evaluate the Company’s financial position as it reflects the impact of fair value changes for all of our residential mortgage assets, irrespective of the accounting model applied for GAAP reporting purposes . Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies . The following table provides a reconciliation of GAAP book value per common share to our non - GAAP Economic book value per common share as of the end of each quarter during 2019 and as of December 31 , 2018 . (In Millions, Except Per Share Amounts) 9/30/19 6/30/19 3/31/19 12/31/18 GAAP Total Stockholders’ Equity $ 3,403.4 $ 3,403.4 $ 3,404.5 $ 3,416.1 Preferred Stock, liquidation preference (200.0 ) (200.0 ) (200.0 ) (200.0 ) GAAP Stockholders’ Equity for book value per common share $ 3,203.4 $ 3,203.4 $ 3,204.5 $ 3,216.1 Adjustments: Fair value adjustment to Residential whole loans, at carrying value 145.8 131.2 92.1 87.7 Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value $ 3,349.2 $ 3,334.6 $ 3,296.7 $ 3,303.8 GAAP book value per common share $ 7.09 $ 7.11 $ 7.11 $ 7.15 Economic book value per common share $ 7.41 $ 7.40 $ 7.32 $ 7.35 Number of shares of common stock outstanding 451.7 450.6 450.5 449.8

 

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