Securitization Strategies Will Unlock Liquidity In 2025

Key Takeaways

• Unlocking liquidity through securitizations could enhance ROE and future earnings, while optimizing funding structure improves margins.
  
• Portfolio expansion and favorable tax treatment on dividends may attract investors, boosting growth and net margins.
  
• Rising interest rates and macroeconomic uncertainties pose risks to earnings, with higher delinquency rates and expired interest rate swaps impacting net margins negatively.

Catalysts

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

• MFA Financial aims to leverage its ability to call existing securitizations to unlock additional liquidity and improve return on equity (ROE), potentially enhancing future earnings.
  
• The company is actively increasing its portfolio, adding over $1.2 billion in loans and securities in the fourth quarter of 2024, indicating a strategy for growth and potential revenue increase.
  
• The favorable tax treatment of a significant portion of its dividends, often treated as a nontaxable return of capital, is seen as an undervalued benefit that could attract more investors, supporting future revenue and net margin growth.
  
• The company is optimizing its funding structure by issuing rated securitizations, which can lower the cost of funds and improve net margins.
  
• Lima One's management changes and introduction of process and technological improvements are expected to drive origination growth in 2025, potentially increasing revenue from business purpose loans.

MFA Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MFA Financial's revenue will decrease by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.7% today to 50.9% in 3 years time.
• Analysts expect earnings to reach $137.3 million (and earnings per share of $1.25) by about March 2028, up from $85.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

MFA Financial Future Earnings Per Share Growth

Risks

• Rising interest rates led to a decline in economic book value for Q4 2024, potentially impacting future earnings and returns.
  
• Higher delinquency rates in portfolios, especially among riskier loan types, could lead to increased credit losses, affecting net margins negatively.
  
• A significant portion of earnings was impacted by the expiration of $1.1 billion in interest rate swaps, which may increase cost of funds and decrease short-term earnings.
  
• Economic returns may be lower if rising market rates increase the cost of securitizations, impacting net revenue.
  
• Uncertainties in the macroeconomic environment, such as persistent inflation and fiscal policy issues, pose risks that could affect future revenues and margins.

Valuation

• The analysts have a consensus price target of $14.536 for MFA Financial based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $269.8 million, earnings will come to $137.3 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $10.88, the analyst price target of $14.54 is 25.1% higher.
  
• 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.