MFA Financial Dataset
Description
MFA Financial (“MFA”) Series C fixed-to-floating rate cumulative redeemable preferred stock is an attractive short duration fixed income instrument that I expect to generate approximately a 25% IRR and 40% total return over the next year and a half. The opportunity exists because 1.) the interest rate and mortgage spread environment over the last two years has presented a challenging backdrop for levered long fixed income investing strategies, 2.) one mortgage REIT peer took a surprising position with respect to the LIBOR transition, and 3.) preferred instruments broadly have been out of favor. I believe the go forward environment for mortgage REITs is conducive to generating positive economic returns, PMT’s position with respect to LIBOR transition is the exception rather than the rule, and there are early signs of increased investor demand for preferred instruments. MFA Series C preferred will begin paying quarterly dividends at an annual rate of 5.345% over 3-month term SOFR as of March 31, 2025. Mortgage REIT fixed-to-floating rate preferreds that have already reset to floating rate such as AGNC Series C (+5.111%), Annaly Series F (+4.993%) and Annaly Series G (+4.172%) trade at or near par (98% to 101% of par). Assuming MFA Series C preferred trades at 95% of par once the first floating rate dividend is paid in June 2025, this preferred will generate an approximate 25% IRR and 40% total return. Assuming MFA Series C preferred trades at par once the first floating rate dividend is paid, this preferred would generate a 29% IRR and 48% total return. AGNC on 10/31/2023: “Our outlook for Agency MBS is very favorable. Spreads have decoupled from treasuries and corporates due to supply and demand technical factors that we expect will ease over time…spreads and other fixed income sectors are close to post-GFC long-term averages, which spreads on Agency MBS are in the 95-plus percentile area.” MFA on 11/7/2023: “Mortgage spreads are indeed very wide today, but they were at similar levels in 1986, and ’87, in 1999 and 2000 and in 2008 before the Fed began its first round of QE.” The PMT LIBOR transition wrinkle PennyMac Mortgage Investment Trust (“PMT”) is a mortgage REIT with two series of fixed-to-floating rate preferred stock. On August 25, 2023, PMT issued a press release stating their position that the Federal Reserve’s LIBOR rule would result in PMT’s fixed-to-floating rate preferred not transitioning to a floating reference rate as a result of USD LIBOR being phased out. PMT’s press release can be found here. I believe PMT has taken an aggressive and unique position and am not aware of any other company that has or has indicated an intent to take a similar position. I believe that MFA’s Series C preferred will transition to floating, as scheduled, with the floating benchmark referring to Term SOFR rather than LIBOR for the following reasons: