MFA Financial, Inc. (MFA): A Few Reasons to Buy This 10% Yielder

Competition

Let’s look at a couple of MFA Financial, Inc. (NYSE:MFA)’s peers to explore their potential.

Invesco Mortgage Capital is another hybrid mortgage REIT that has structured its portfolio to benefit from increasing mortgage rates. However, if the Fed prolongs or accelerates its bond buying program, you can expect the company to report lower income and a possible dividend cut.

If the Fed halts its bond buying program and the mortgage rates climb 50 bps, you can expect Invesco Mortgage to report over 19% increase in its net interest income. However, a decline in the rates, coupled with higher cost of funds due to a funding base diversification, can lead to compression in its spread. While the shift to term financing decreases exposure to repos, it will also increase the cost of funds for Invesco Mortgage.

Javelin Mortgage Investment is another hybrid mortgage REIT and a sister concern of ARMOUR Residential REIT, Inc. (NYSE:ARR), a major pure-play mortgage REIT. ARMOUR and Javelin have been the worst and second-worst performers amid speculations about the Fed’s exit. Javelin has structured its portfolio in such a way that it will clearly not benefit in an increasing interest rate environment.

During an increasing interest rate environment, which is highly likely, Javelin would probably report a decline in its next quarter’s interest income. Besides, Javelin is highly leveraged (at 7.9 times), which can magnify the negative impact of adverse changes in interest rates or any disruptions in its sole funding source (the repos).

Therefore, MFA Financial, Inc. (NYSE:MFA) has a better shot than both Invesco Mortgage and Javelin Mortgage during times of rising interest rates.

Foolish takeaway

Fewer anticipated losses, the company’s non-Agency MBS’ concentration within the California region, and a relatively higher proportion of non-Agency MBS in the entire investment portfolio lead me to think that MFA Financial will report a strong second quarter.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned

The article A Few Reasons to Buy This 10% Yielder originally appeared on Fool.com.

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