Rising Funding Rates And Declining Demand Will Hurt Outlook

Key Takeaways

• Higher funding costs, demographic shifts, and increased competition threaten earnings, revenue growth, and return on equity.
  
• Greater credit risk exposure and tighter regulations could cause elevated volatility, loan losses, and persistent margin pressures.
  
• Diversified mortgage investments, disciplined risk management, and technology-driven efficiencies position MFA for stable earnings and resilience amid industry volatility.

Catalysts

Operates as a real estate investment trust in the United States.

• Persistently higher funding costs remain a threat if the Federal Reserve maintains elevated interest rates in response to fiscal deficits or inflation; since MFA relies heavily on repo and short-term financing for long-duration assets, net interest margins may be structurally compressed and recurring earnings could weaken further as asset yields lag funding costs.
  
• Demographic headwinds, including slowing U.S. population growth and lower rates of household formation, risk reducing the long-term demand for housing and corresponding mortgage origination volume; this structural decline may pressure MFA's revenue growth and the quality of collateral supporting its loan portfolio.
  
• MFA's recent strategic emphasis on credit-risk transfer and non-agency credit-sensitive loans increases its exposure to credit events; in a prolonged housing downturn or credit cycle reversal, the company may face elevated loan loss provisions and impairment charges, resulting in greater volatility and potential declines in net income over coming years.
  
• As technology-enabled mortgage originators and fintech platforms expand, competitive pressures could drive fee compression and disrupt traditional mortgage REIT models; over time this may erode MFA's revenue base and limit its ability to maintain current return on equity levels.
  
• Greater regulatory scrutiny and the prospect of tighter capital, leverage, or ESG-related requirements could increase MFA's compliance and operational costs; the resulting margin compression and constrained product flexibility would likely reduce long-term profitability.

MFA Financial Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MFA Financial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MFA Financial's revenue will decrease by 16.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 35.5% today to 45.8% in 3 years time.
• The bearish analysts expect earnings to reach $79.1 million (and earnings per share of $1.42) by about June 2028, down from $103.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

MFA Financial Future Earnings Per Share Growth

Risks

• Strong and persistent demand for housing-backed by ongoing population growth and housing formation-continues to support healthy mortgage volumes and asset origination, which can boost MFA's revenue and net margins despite short-term volatility.
  
• The company's demonstrated ability to grow its investment portfolio across non-QM, business purpose loans, and agency MBS, even during turbulent market conditions, suggests effective portfolio diversification that increases the stability of its earnings.
  
• Technology investments and prudent underwriting standards, emphasized throughout the management discussion, enable MFA to lower credit risk and control operational costs, which can improve net margins and support long-term earnings growth.
  
• Securitization markets for non-QM assets remain liquid and well-bid, with deals consistently oversubscribed, which allows MFA to manage funding costs and optimize returns, leading to potential increases in net interest income and book value over time.
  
• Regulatory discipline and risk management rigor adopted post-Global Financial Crisis-reflected in high levels of non-mark-to-market financing and conservative leveraged positions-provide MFA with resilience to market shocks, reducing the risk of forced asset sales and supporting sustainable profitability.

Valuation

• The assumed bearish price target for MFA Financial is $9.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of MFA Financial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $9.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $172.7 million, earnings will come to $79.1 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $9.49, the bearish analyst price target of $9.5 is 0.1% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.