What's in the Cards for MFA Financial's (MFA) Q2 Earnings?

MFA Financial, Inc.  MFA is scheduled to report second-quarter 2020 results on Aug 6, before the opening bell. The company’s quarterly net interest income (NII) is expected to have declined year over year, while earnings per share (EPS) are anticipated to have improved.

In the last reported quarter, this mortgage real estate investment trust (mREIT), which invests in residential mortgage assets, including residential whole loans and residential mortgage-backed securities (RMBS), posted a loss per share of $2.02. The company posted earnings per share of 19 cents in first-quarter 2019. Moreover, NII witnessed a marginal year-over-year decline to $61.7 million.

Amid the decline in prices for MBSs, the company received significant margin calls in March and was forced to stop meeting these margin calls on Mar 23. Consequently, it entered forbearance negotiations with its lender counterparties.

Moreover, MFA Financial sold $2.1 billion residential mortgage assets during the quarter due to significant pricing dislocations in markets to shore up liquidity, meet margin calls and bring down leverage. The company realized $238.4 million of losses related to the sale during the first quarter.

Let’s see how things have shaped up prior to second-quarter results.

Factors at Play

During the second quarter, the company continued to improve its liquidity position and reduce exposure to mark-to-market financing on the back of asset sales. Moreover, it extended the initial forbearance period twice during the quarter.

In fact, concurrent with its first-quarter earnings release on Jun 16, the company reported the sale of an additional $3.2 billion of assets, consisting of $2.4 billion in residential mortgage securities and mortgage servicing rights (MSR) notes as well as $0.8 billion in residential whole loans.

In fact, sales of legacy non-Agency securities, credit risk transfers and MSR-related assets drove realized gains of more than $150 million in April relative to March-end marks.

This along with the stabilization of the mortgage market during the second quarter on account of the Fed’s continuous purchase of Agency mortgage-backed securities, a decline in benchmark interest rates to near zero and improvement in housing data is expected to have driven second-quarter earnings of the company. In fact, the Zacks Consensus Estimate for its second-quarter EPS of 40 cents suggests growth of 100% from the year-ago reported figure.

Moreover, the company raised $500 million in additional capital through a private senior secured loan agreement. This is anticipated to have boosted its balance sheet position and provided it with additional flexibility. Moreover, the capital procured will likely have aided MFA Financial to exit the previously extended forbearance agreement.

Notably, since entering forbearance arrangements in April, unpaid margins calls as of Jun 19, 2020, amounted to $29.1 million. As of the same date, the company reported total cash balances of $343.6 million, inclusive of cash on deposit, with repurchase agreement counterparties amounting to $103.5 million.

Although significant asset sales helped MFA Financial to de-lever, the move is expected to have reduced the size of its investment portfolio. In fact, as of May 31, 2020, the company had a $6.6-billion residential mortgage asset portfolio, consisting of $6.2 billion of residential whole loans and real estate owned (REO), around $235 million of MSR-related assets, and another $136 million of residential mortgage securities.

This is likely to have impacted the company’s NII for the June-end quarter. In fact, the Zacks Consensus Estimate for second-quarter NII of $41.2 million indicates a year-over-year decline of 31.2%.

Moreover, the decline in interest rates is anticipated to have resulted in higher prepayment activity on the company’s securities. This is expected to have resulted in higher amortization of purchase premiums, impacting asset yield and spreads. Moreover, a decline in interest rates is expected to have driven a loss on the company’s derivative hedging instruments for the second quarter.

Lastly, prior to the second-quarter earnings release, there is a lack of any solid catalyst for becoming overly optimistic about the company’s business activities and prospects. The Zacks Consensus Estimate for second-quarter EPS has been unrevised at 40 cents over the past month.

Here is what our quantitative model predicts:

MFA Financial does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for MFA Financial is 0.00%.

Zacks Rank: MFA Financial currently carries a Zacks Rank of 5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

Public Storage PSA, slated to release results on Aug 5, has an Earnings ESP of +0.41% and a Zacks Rank of 3 at present.

National Storage Affiliates Trust NSA, scheduled to announce earnings figures on Aug 6, has an Earnings ESP of +0.44% and a Zacks Rank of 3 currently.

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