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Invesco Mortgage Capital Inc (IVR), MFA Financial, Inc. (MFA): Another Hybrid mREIT, Another Disappointment?

The volatility in the rates and the prevailing rising interest rates environment have caused the mREITs to skydive during the second quarter on fears of immediate book value declines. Under the scenario, MFA Financial, Inc. (NYSE:MFA), another hybrid mortgage REIT, disappointed investors and analysts. This is despite hybrids being widely favored over their pure-play counterparts. While comparing its performance with other hybrid peers, I will see what led MFA Financial to report lower-than-expected performance for the second quarter.

Key attractions

MFA Financial, Inc.MFA Financial, Inc. (NYSE:MFA) is a largely followed hybrid mREIT that offers a dividend yield of 11.25% on a quarterly rate of $0.22 per share. The company is classified as a hybrid mREIT because it invests in Agency and non-Agency MBS that could either be fixed-rate and adjustable-rate mortgages (ARMs). At the end of the second quarter, nearly 43% of the entire asset portfolio was the high yielding non-Agency MBS.

Latest financial disclosure

At the end of the second quarter, MFA Financial, Inc. (NYSE:MFA) reported earnings per share of $0.19, missing the consensus mean estimate by $0.02 per share. The company also reported a book value decline of 7.4% over the prior quarter, while its net interest spread expanded 6 bps. However, prepayments increased 1.2% during the quarter. The company also reported one of the lowest leverage ratios of 3.1.

So, I think the three key metrics, book value, spread, and prepayments have performed relatively well, compared to some of MFA Financial, Inc. (NYSE:MFA)’s peers in the hybrid mortgage REITs sector. So, for me, the moderate earnings miss is not an actual disappointment.

Much of the decline in the earnings for the second quarter was associated with the reduction in the interest yielding assets. During the quarter, assets decreased 3.3%, which caused a decline in the interest income. This decline trickled down all the way to the bottom line, causing it to decline 3% sequentially.

Now, let’s look at some of MFA Financial, Inc. (NYSE:MFA)’s peers

Peer analysis

Since MFA Financial is a hybrid mREIT, I will take two more hybrids to compare their performances with MFA Financial. Invesco Mortgage Capital and Dynex Capital are two similar hybrid mREITs.

Invesco Mortgage Capital Inc (NYSE:IVR) reported 12.4% decline in its second-quarter book value, while its net interest spread came off 5 bps over the linked quarter due to higher cost of funds. Also, the prepayment speed for its investment portfolio remained mostly stable at 12.6%, while the company decided to increase leverage to 7.6 times. Invesco Mortgage’s performance was one of the better ones by hybrid mREITs. That’s because, it has roughly the same proportion of non-Agency MBS in its asset portfolio as did MFA Financial. Also, Invesco Mortgage Capital Inc (NYSE:IVR) owns adjustable-rate securities, which provides diversification, coupled with some support to the net interest spread and book value.

Dynex Capital Inc (NYSE:DX) is another hybrid mREIT with investments in Agency and non-Agency MBS. While the company is classified as a hybrid, it acts more like an Agency mREIT. That’s because its portfolio is more tilted towards Agency MBS. At the end of the second quarter, nearly 68% of its assets were residential Agency MBS.

Even though the company reported an EPS ahead of the consensus estimate, overall results were not as high-quality. Rising interest rates during the quarter cut 15% of the company’s book value, while net interest spread was off 14 bps compared to the prior quarter. During the quarter, the company also moderately increased its leverage, which I believe was not a smart move. That’s because more leverage will cause more fluctuations in the book value if volatility in the rates continues in the future.

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