MFA Financial (NYSE:AMF) is a real estate investment trust (âREITâ) which has had a difficult year. To date, MFA stock has been down more than 62% as of October 9, but it is likely to experience a significant turnaround.
I suspect the REIT has reached an inflection point in its finances and is expected to do much better for the remainder of this year and next.
An important fact to note early on is that MFA stocks sell well below their book value. Most of the company’s assets are real estate titles rather than real real estate.
For example, as of June 30, the company said its âeconomicâ book value, or a market-related valuation of its entire residential loans, was $ 4.46 per share. Therefore, the MFA share trades at around 60% of its economic book value.
Moreover, it implies that the stock could rise by more than 55% if it starts trading for the true value of its entire residential loans. In fact, $ 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 August 6 letter to shareholders, MFA Financial management said it had made big changes. On the one hand, it completely restructured its leverage and its asset portfolios.
For example, instead of holding mortgage-backed securities, its portfolio now consists primarily of entire residential loans. In other words, it got rid of derivative-type securities, which daily require numerous âmark-to-marketâ guarantees. This means that he collects the interest on mortgages directly and that the value of the loans does not change much on a daily basis.
Second, the company reinstated its dividend payments in common stock. However, instead of paying a quarterly dividend of 20 cents per share, the company now pays a quarterly dividend of 5 cents per share.
Additionally, MFA said it already has taxable undistributed REIT income of 16 cents per share. Indeed, MFA Financial can therefore afford its restored quarterly dividend of 5 cents per share.
In fact, depending on how the Q3 and Q4 quarters unfold, I suspect there is a good chance the company will need to increase its dividend. REITs are required to distribute 90% of their taxable income in order to preserve their tax-exempt structure.
Therefore, this dividend gives the MFA share a very attractive dividend yield. For example, the annualized dividend of 20 cents per share divided by the MFA stock price of $ 2.87 per share is 6.97%.
Another catalyst for MFA
Another catalyst for MFA stocks is that the company will likely release its third quarter results on or around November 6, in a few weeks.
It is likely to show that its economic book value has increased, as well as the increase in its underlying loan value assets. Indeed, the US economy continued to recover from the lows of the second quarter.
This has a leverage effect on the stock’s upside potential.
For example, suppose the economic book value increased 10% to $ 4.91 per share by the end of the year. This means that the MFA share could increase by 71% to reach book value.
This represents a potential increase of 16% from its current potential of 55% (see above). So you see the leverage effect – every 10% increase in book value could result in a 16% price increase.
What to do next with the MFA stock
Recently, Starwood Capital took an 8.39% stake in the company by buying company shares in the market. Starwood, led by Barry Sternlicht, is well known as a shrewd value investment firm in the real estate industry.
This is a major catalyst for AMF’s stock. On the one hand, the type of investment emphasizes that the stock is too cheap. Barry Sternlicht is known for his very successful long term value investing.
The company normally invests in durable assets. For them, buying a mortgage related REIT like MFA Financial is very important. He’s probably attracted to its huge discount – from 55% to 71% – to economic book value.
Second, they probably think MFA will continue to be able to pay its dividend, despite the high yield. It also underlines the value that the dividend gives to the MFA share. I have shown that there is a good possibility that the dividend will increase in the coming year.
The patient value investor will consider these catalysts and take a position ahead of the third quarter earnings release on November 6 or shortly thereafter. They are likely to achieve a good return on their investment over the next year or so.
At the time of publication, Mark R. Hake had (directly or indirectly) no positions in any of the securities mentioned in this article.
Mark Hake directs the Total Value of Return Guide that you can consult here.