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With Its Restored Dividend, MFA Financial Stock Is Deeply Undervalued

With Its Restored Dividend, MFA Financial Stock Is Deeply Undervalued



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MFA Financial (NYSE:MFA) is a real estate investment trust (“REIT”) that has had a rough year. To date, MFA stock is down more than 62% as of Oct. 9, but it is likely to have a significant turnaround.



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I suspect that the REIT has reached an inflection point in its finances and is likely to do much better for the rest of this year and next.

One important fact to note right at the start is that MFA stock is selling well below its book value. Most of the company’s assets are real estate securities, rather than actual real estate.

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For example, as of June 30, the company said that its “economic” book value, or a market-related assessment of its residential whole loans, is $4.46 per share. Therefore, MFA stock is trading for around 60% of its economic book value.

Moreover, this implies that the stock could rise over 55% if it were to begin trading for the true value of its residential whole loans. This is because $4.46 per share divided by $2.87 is 1.554, or 55.4% above $2.87.

Other Catalysts for MFA Stock

In the company’s Aug. 6 letter to shareholders, MFA Financial’s management indicated that it had made big changes. For one, it completely restructured its leverage and asset portfolios.

For example, instead of owning mortgage-backed securities, its portfolio now mainly consists of residential whole loans. In other words, it had gotten rid of derivative type securities, which require lots of daily “mark-to-market” collateral. That means that it collects the interest from mortgages directly, and the loans don’t

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Is MFA Financial a Buy?

Is MFA Financial a Buy?

Early spring was a brutal time for mortgage real estate investment trusts. Unlike typical REITs, which invest in property and charge rent, mortgage REITs invest in debt securities secured by real estate. This can create problems because these assets are usually leveraged with short-term loans, which are hard to refinance during turbulent times.



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Is MFA Financial a Buy?

The financial markets seized up early during the pandemic, and mortgage REITs were hit harder than most. MFA Financial (NYSE: MFA) was beset by margin calls and forced to enter forbearance with its creditors. This gave the company enough breathing room to sell some of its assets in an orderly manner. Eventually MFA was able to secure a rescue package and satisfy all outstanding margin calls. The worst is over and MFA is going forward as a smaller company. But is it a buy?



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A black keyboard with a red button that says “Margin Call.”

MFA entered 2020 with $13.6 billion in assets and finished the second quarter with $7.6 billion. Book value fell from $3.4 billion to $2.5 billion. Its portfolio consists of $5.9 billion in residential whole loans and another $750 million of mortgage servicing rights, real estate owned, and residential mortgage-backed securities.

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MFA’s portfolio of non-residential whole loans is not guaranteed by government agencies, which separates the company from agency REITs like AGNC Investment Corp. and Annaly Capital Management, which didn’t plunge as far in March. MFA’s non-agency loans consist primarily of mortgages that don’t meet the Consumer Financial Protection Bureau’s (CFPB) definition of a qualified mortgage (non-QM). In addition to non-QM loans, MFA has business-purpose loans like fix-and-flip and multifamily rental loans.

The loan portfolio has a lot of equity, which gives borrowers an incentive to

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