2023-11-21 21:31:16 ET
Summary
- MFA Financial, Inc. posted stronger-than-expected Q3 2023 performance, demonstrating resilience in challenging economic conditions.
- The company's business model, focused on higher-yielding assets and stable funding sources, is sustainable and effective.
- Technical analysis suggests a neutral outlook for the stock. I recommend patience before investing until technical indicators improve.
Investment Thesis
MFA Financial, Inc.(MFA) has been very volatile, something I attribute to the volatility in interest rates , which I believe have significantly affected the company’s performance. Despite the volatility and challenges posed by harsh macroeconomic factors, the company posted what I would call a stronger-than-expected Q3 2023 performance, demonstrating its tenacity in the face of challenging economic conditions. I attribute this solid performance to the company’s business model, which I find very sustainable and effective.
Further, the company’s strategy of offering its balance sheet a buffer against volatility, in my view, is very attractive and may, together with its business plan, fuel the company’s long-term share growth. Although the MRQ has inspired a lot of optimism in me, which could be backed by its pleasing business model, I recommend patience before investing here because the technical analysis indicates a neutral outlook. As a result, I recommend a hold at the moment for the technical indicators to improve, as will be guided in the technical analysis section.
Reflecting On Q3 2023: Resilience Manifested
MFA reported its third quarter 2023 financial results on November 7, 2023. Despite the tough macroeconomic environment that is affecting financial institutions, the company delivered what I may term as a stronger performance than expected. Here are some key takeaways from the performance:
To begin with, the company reported an EPS of $0.40, which beat expectations by $0.02, and revenue of $46.14 million, which beat estimates by $1.28 million. Its non-GAAP financial measure of $41.1 million, or $0.40 per common share, exceeded its dividend of $0.35 per share paid on October 31, 2023. This, in my view, reflects the company’s core operating performance and cash generation capacity despite the challenging economic climate.
The company continued to execute its business strategy of adding higher-yielding assets while keeping its cost of funds relatively stable. The company acquired or originated over $800 million of loans at an average coupon of approximately 10% and purchased $152 million of agency MBS at attractive spreads. These investments increased the company’s net interest spread to 2.17% and its net interest margin to 3.02%. It also maintained a strong credit profile and a diversified funding base. The company securitized over $600 million of loans during the quarter and an additional $225 million in October, reducing its reliance on short-term financing. It also repurchased over $10 million of its convertible senior notes that mature in June 2024 at a slight discount to their unpaid principal balance. The company’s loan delinquencies and loan-to-value ratios remained low, reflecting its prudent underwriting standards.
Further, the company also benefited from its $3.1 billion interest rate swap position, which generated a net positive carry of $29 million during the quarter and helped mitigate the impact of rising interest rates on its net interest income. It also added $133 million of longer-duration swaps and maintained a substantial cash position of $300.1 million to protect its balance sheet from further rate volatility.
Based on these highlights, I believe it’s reasonable to assert that the company’s third quarter 2023 financial results demonstrate its resilience and adaptability in a challenging market environment. For example, the company was able to generate distributable earnings that exceeded its dividend, grow its portfolio of high-yielding assets, diversify its funding sources, maintain its credit quality, and hedge its interest rate risk. Further, the fact that the management is hedging its interest rates shows that it is aware of the risks in the market and they are acting to safeguard its future, which, in my view, is a good management attribute. I believe awareness of the business environment is one of the best guidelines for sound decision-making because it forms the SWOT analysis. This can be affirmed by the management’s decision to hedge against interest rate volatility, which I think is a good and informed decision.
Given this background, I strongly believe that should this company sustain this performance in the future, it would be a strong share growth catalyst as it would lead to strong fundamentals and a bullish technical trajectory outlook. Since these results didn’t happen in isolation, I attribute them to the company’s business plan, which I will discuss in the following section.
MFA Business Plan
MFA is a specialty finance company that invests in and finances residential mortgage assets , such as business purpose loans, non-qualified mortgages, and agency mortgage-backed securities. It also owns and operates Lima One Capital, a subsidiary that originates and services loans for real estate investors. The company’s business plan is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. To achieve this plan, the company has its focus markets, which it exploits strategically, as I will cover in this section.
Before discussing the details of the company’s plan, I believe it is critical to demonstrate how it has been achievable, and it is paying off. To do this, I draw your attention to the Q3 2023 results, where the company reported distributable earnings of $41.1 million, or $0.40 per common share, which exceeded its dividend of $0.35 per share. The company also acquired or originated over $800 million of loans at an average coupon of approximately 10% and purchased $152 million of agency MBS at attractive spreads, among other achievements mentioned above in the preceding sections. In my opinion, these figures suggest that the company is keeping to the plan and executing the plan, and the plan is already paying off.
With that in mind, let us delve deeper into this strategy. To achieve and execute this plan profitably, I believe the distinctive features of how the company operates in the market enable it to capitalize on its competitive advantage. As a result, I’ll go over some of the unique features of the company’s plan. For this analysis, I will sample the business purpose loan segment to demonstrate the company’s unique attributes as a representation of the other focus market segments of this company. MFA focuses on business purpose loans , which are loans that are used for financing real estate investments, such as fix-and-flip, rental, or commercial properties. Among the unique features of this company in this target market is its acquisition of Lima One Capital , a leading nationwide originator and servicer of business purpose loans with a nationwide presence and a proprietary technology platform. It offers a variety of loan products for real estate investors, such as fix and flip loans, rental loans, multifamily loans, new construction loans, and bridge loans. It also offers flexible, and competitive rates terms. This diverse offering, coupled with flexibility and competitive rates, helps MFA easily reach a broader market. To demonstrate how important this acquisition has been to the company, the Q3 report shows that MFA had acquired over $2.1 billion in loans in 2023, with Lima One originated loans accounting for approximately 75% of that.
Another unique feature is the move to diversify its funding sources and reduce its reliance on short-term financing. MFA has access to various sources of financing, such as term loan warehouse financing, repurchase agreement financing, and securitization transactions. It also securitized over $600 million of loans during the third quarter of 2023 and an additional $225 million in October, creating long-term and non-recourse financing for its loan portfolio. By so doing, the company is enhancing its financial flexibility, stability, and risk management because through reducing the short-term financing, which is subject to market fluctuations and margin calls , the company has long-term funding, which has relatively lower costs and longer maturities.
Given these few examples and how the company’s plan has been able to pay off in Q3 of 2023, I am confident that this is a workable and sustainable plan that could be a significant growth catalyst in the long run if the management keeps executing it effectively.
Technical Analysis
In this section, I will discuss the technical analysis of MFA using various indicators. To begin with, the stock has been trading below its 50-day and 200-day moving averages, which are key indicators of the long-term and medium-term trends. This suggests the stock has been in a downward trend and faces resistance from these levels. However, the stock appears to have rebounded and is about to cross the 50-day moving average, which could signal that the bullish trajectory is gaining momentum.
The stock is currently trading at the neutral Bollinger band line, which shows that it is neither oversold nor overbought, which is a sign of a neutral outlook. Although the price appears to be rising and deviating from the lower Bollinger band, I would recommend buying the shares at the moment because the company needs to show it can sustain its impressive Q3 2023 performance in the long run.
Additionally, the stock has an RSI of 53, slightly above the neutral range. Although it is rising, I believe the stock needs to sustain it above the 50 mark before recommending a buy decision.
Lastly are the support and resistance levels. MFA has a very strong long-term support level at $5.92; since it bounced off this zone, it has appeared to retest it once in October this year, and the rebound appears weak, which could lead to another retest. However, the middle yellow line at $12.56 would confirm a strong rebound off the support zone, which would mark my entry point, and the red line at $19.69 would be my resistance zone, where I would consider taking profits before reevaluating the stock.
Conclusion
Considering the inflationary environment, which possesses a major risk of investing in financial stocks, it would be understandable why this stock has been volatile recently. However, the company’s Q3 2023 has shown it is resilient and can still deliver despite the challenges. While this inspires optimism in me, particularly when I look at it from the company’s business plan perspective, I think it can only be assuring if it’s sustainable in the coming quarters. Further, looking at the technical analysis, the stock appears to have rebounded from the bearish trajectory and is currently in the neutral outlook which calls for patience until it assumes a bullish trajectory, perhaps when the price breaks and sustains above the moving averages and when breaks above an RSI of about 55 is. For a definite entry point, I would buy if the price breaks above the $12.56 mark, which would confirm a strong reversal from the bearish trajectory.
For further details see:
MFA Financial: Not Yet A Buy, Wait For Bullish Indicators