Scott Kennedy’s mREIT + BDC Earnings Series: MFA Financial’s And Cherry Hill Mortgage’s Performance For Q1 2024
Summary
This earnings assessment article reviews MFA’s and CHMI’s BV and core earnings/EAD performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
MFA’s BV largely matched my/our expectations (well within range) while its core earnings/EAD was a modest-notable underperformance. This related to Lima One and a larger-than-anticipated increase in MFA’s operational expenses.
While disappointing, I believe these expenses were “periodic/lumpy” in nature. Therefore, no change in MFA’s percentage recommendation ranges or risk/performance rating. MFA is currently deemed slightly undervalued (BUY).
CHMI’s BV matched my/our expectations (minor decrease) while its core earnings/EAD was a modest underperformance (modest decrease). No change in CHMI’s percentage recommendation ranges or risk/performance rating.
The decision of no downgrade is mainly due to CHMI looking at “strategic alternatives” for the company (possible merger/sale of assets/internalization of management). CHMI is currently deemed appropriately valued (HOLD).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) MFA:
Commentary
Quarterly BV Fluctuation: Very Minor - Minor Outperformance (1.1% Variance).
Core Earnings/EAD: Modest - Notable Underperformance ($0.060 Variance).
A largely “as expected” quarter regarding MFA Financial’s MFA 0.00%↑ BV in my opinion. If anything, a very minor – minor outperformance. MFA recorded a minor quarterly BV decrease which matched my expectations. As such, no “notable” surprises arose regarding the company’s quarterly valuation fluctuations. Let us briefly discuss how MFA’s sub-portfolios performed when compared to my expectations.
First, MFA completed 1 loan securitization during Q1 2024. This securitization was related to SFR/transitional loans. As such, MFA was able to continue to originate/purchase investments during the quarter and “package” said loans into a debt securitization for financing purposes. Nothing out of the ordinary.
Second, MFA’s investment portfolio slightly outperformed my expectations from a FMV perspective during Q1 2024. This was largely due to the valuation fluctuations within MFA’s residential whole loans sub-portfolio. Unlike the prior several quarters (most notably through the fairly recent Lima One Capital acquisition), MFA “took the foot off the accelerator” a bit regarding investment portfolio growth during Q1 2024. MFA grew the company’s investment portfolio by only 1% during Q1 2024. I projected mean growth of 2.5%. This resulted in a minor BV outperformance due to a slightly lower total investment portfolio size. MFA recorded a net valuation loss of ($15) million regarding the company’s entire investment portfolio (excluding Lima One operations) during Q1 2024. In comparison, I projected a net valuation loss of ($35) million.
Third, MFA’s originator and servicer, Lima One, slightly underperformed expectations regarding loan origination volumes (nothing “alarming” though). Fourth, MFA’s derivatives instruments sub-portfolio performed largely as expected. Finally, MFA refrained from repurchasing any common or preferred stock during Q1 2024. While disappointing, this was correctly anticipated on my end as MFA continued to use available capital for investments as levered returns remain attractive in the current environment.
Moving on, MFA’s core earnings/EAD experienced a notable decline during Q1 2024. While a quarterly decrease was correctly anticipated on my end, the severity of the decrease was a surprise which was disappointing. First, as mentioned above, quarterly origination volumes in Lima One were less than anticipated which led to a ($0.02) per common share core earnings/EAD underperformance. Second, and most notably, MFA reported an increase in total operational expenses of ($6) million during Q1 2024. In particular, MFA reported a proportionately large increase in quarterly compensation and benefits expense which led to a ($0.04) per common share core earnings/EAD underperformance. While disappointing, this account can be “lumpy” at times (fluctuating quarterly expenses). I anticipate this expense will “normalize”/lower next quarter. Third, a bit of a “silver lining” was MFA’s net spread income largely matched expectations (only a ($0.01) per common share core earnings/EAD underperformance). MFA’s net interest rate spread decreased from 2.13% during Q4 2023 to 2.06% during Q1 2024 (my projection was 2.10%).
A risk/performance rating of 4 for MFA remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields). MFA continues to employ modest sub-sector leverage. Credit risk remains manageable but this is something I expect to slightly – modestly increase during 2024 (which is always monitored/already factored into the modeling).