2023-12-26 08:00:00 ET
Summary
- MFA Financial uses preferred stocks to finance operations in the mREIT industry.
- The company's preferred stocks analyzed are MFA Financial, Inc. PFD SER B and MFA Financial, Inc. 6.50 PFD SER C.
- Recent announcements from FOMC indicate the direction of interest rates might be changing, thus I changed my rating from Hold to Buy on both preferred, with a preference for MFA-B.
Introduction
This is an update to my July review of the two preferred stock offerings from MFA Financial (MFA), one of numerous mREITs that use preferred stocks (or Notes) to help finance their operations. With the recent FOMC meeting seeming to curtail the "higher for longer" fear that gripped the market back a few months, many fixed-income assets have rallied big-time, but with the cuts still to materialize, there should still be time to hop on that train.
After a brief overview of the Issuer, the two preferred stocks analyzed will be:
With the recent indication that the FOMC is done increasing rates, I have upgraded my rating on both preferred stocks from Hold to Buy, with a preference for "B" over "C".
Seeking Alpha provides this description of MFA:
MFA Financial, Inc., together with its subsidiaries, operates as a real estate investment trust in the United States. The company invests in residential mortgage assets, including non-agency mortgage-backed securities, agency MBS, and credit risk transfer securities; residential whole loans, including purchased performing loans, purchased credit deteriorated, and non-performing loans; and mortgage servicing rights related assets. MFA Financial, Inc. was incorporated in 1997 and is based in New York, New York.
Source: seekingalpha.com MFA
This is how MFA Financial defines themselves:
We are a specialty finance company that invests in and finances residential mortgage assets. Our targeted investments include principally the following:
- Residential whole loans, including Purchased Performing Loans, Purchased Credit Deteriorated and Purchased Non-performing Loans. Through certain of our subsidiaries, we also originate and service business purpose loans for real estate investors. We also own residential real estate (or REO), which is typically acquired as a result of the foreclosure or other liquidation of delinquent whole loans in connection with our loan investment activities;
- Residential mortgage securities, including CRT securities; and
- MSR-related assets, which include term notes backed directly or indirectly by MSRs.
Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity, and expected return. We are an internally-managed real estate investment trust (or REIT).
Source: mfafinancial.com/overview
Recently released 3Q results show that GAAP Total Stockholders' Equity and both Book Values continue to fall.
Since recovering from the COVID shock, MFA's quarterly EPS has been erratic. The Net Interest spread changes differ by loan type but one thing in common is the cost of funding is up over the past year; no surprise there.
While earnings have been poor, the ability to redeem both preferred stock issues is very certain unless something really bad happens.
All the recent articles on Seeking Alpha covering MFA Financials have given it a Hold rating.
Preferred Stock Reviews
Factor | PFD B | PFD C |
Issued | 7/18/13 | 2/25/20 |
Issue size | $75m | $175m |
Coupon | 7.50% | 6.50% |
Call date | 4/15/18 | 3/31/25 |
Price | $21.10 | $20.98 |
Yield | 8.86% | 7.75% |
YTC | NA | 20.9% |
Both are cumulative, which came into play for the B-series as the March'20 payment was delayed until July'20. The C-series was not effected as it was just issued. While the PFD-C has an attractive YTC, with the higher coupon, the PFD-B would be Called first. Also, since MFA didn't Call the PFD-B when rates were near zero, investors should not plan on investing based on that event happening to either issue.
My preference between these two would be the B-series despite having no official Call protection since new investors have a 111bps higher YOC. As I said earlier, being Called is not in the cards for B-series, nor C-series when it becomes eligible in 2025.
Portfolio Strategy
Talk that "higher for longer" might be wrong has caused both preferreds to rally off their end-of-October lows.
As I write this article, the DJIA dropped almost 500 points (1.27%) as the market mavens might be rethinking what the FOMC indicated recently about possible interest rate cuts in 2024. The next chart shows a pause in the downward march of the yield on BBB-rated securities.
That also occurred going into the last FOMC meeting, so a pause is not unusual. Neither MFA preferred is trading at the prices they had before the start of the rate climb in 2022, though no one is predicting all the increase since will be reversed. The FOMC Dot Plot is a favorite chart used to read the minds of the Fed. It shows rates between 2.5-3.5% by 2026.
That compares to the current upper limit on the Fed target rate of 5.5% currently. Unless the inflation takes off, the peak in rates seems to have been reached. If that is indeed the case, owning cumulative, unlikely-to-be-called preferreds and Notes makes sense as they should increase the duration of the investor's income-generating allocation of their portfolio. As I think that is where we are, even if when and by how much rates will decline, both MFA preferred to deserve a Buy rating, with a preference for the B-series.
Final Thought
There are plenty of mREIT preferreds to pick from. Here are some that the Hoya Capital Income Builder Investing Group has data on.
Many have higher yields than the two MFAs for those looking to maximize income.
For further details see:
MFA PFDs Revisited: FOMC Has Changed The Outlook (Rating Upgrade)