Analysts are buzzing about MFA Financial's solid first-quarter performance. The company's distributable earnings, strategic acquisitions of high-yielding assets, and successful bond issuances all point to a resilient company weathering the storm of a volatile market. But beneath the surface, hidden within the mundane details of securitization call dates and liability structures, lies a potential catalyst that could supercharge MFA's growth in the years to come: its cleverly constructed portfolio of callable debt.

While most are focused on MFA's immediate earnings power, the real story might be the explosive potential embedded within this carefully assembled "liability framework," as CEO Craig Knutson called it. This isn't just about refinancing at lower rates when the Fed eventually pivots. It's about unlocking vast reservoirs of non-dilutive capital right now, even in this "higher for longer" environment.

MFA currently has a staggering 30 securitizations outstanding, many of which are callable today, and more coming online every quarter (see page 19 of their earnings deck for the full list). While these securitizations served their purpose in providing stable funding during the tumultuous period of the past two years, they now represent an opportunity for MFA to play offense.

Here's where it gets interesting. Calling a securitization allows MFA to essentially "re-lever" the underlying loans in a new deal. Sure, the cost of debt in a new securitization might be slightly higher today than in the existing one. But that's a small price to pay for the massive increase in liquidity that MFA gains. This newly freed-up capital can then be immediately redeployed into those same "attractive mid-teens ROE" investments that Knutson highlighted.

Let's run a hypothetical scenario. Suppose MFA calls an unrated RTL deal issued a few years ago, as suggested by Bryan Wulfsohn, MFA's Co-Chief Investment Officer. He estimates that such a call could unlock $70-$80 million in liquidity. Even if the cost of financing in a new deal is 200-250 basis points higher, reinvesting that $70 million at a 15% ROE generates an additional $10.5 million in annual earnings.

That's nearly a 30% increase in distributable earnings from just one re-leveraging transaction. Now multiply that across even a portion of their 30 securitizations, and you begin to grasp the sheer magnitude of MFA's potential earnings power.

What's more, this strategy isn't just a one-time boost. As senior bonds in the existing securitizations mature, the weighted average coupon of the outstanding bonds naturally rises. This creates an even more compelling case for MFA to call these deals, refresh the debt, and unlock more liquidity to fuel further growth.

This liability framework offers a powerful, almost counter-intuitive advantage. While most mortgage REITs are bracing themselves for the impact of higher rates, MFA's callable debt portfolio positions them to not just survive, but thrive. It's a hidden treasure chest of growth potential, just waiting to be unlocked.

Of course, this is all contingent on MFA continuing to find attractive investment opportunities. But judging by the consistent performance of Lima One, which originated $430 million in business purpose loans in Q1 at an average coupon of 10.4%, and the company's overall track record of acquiring high-yielding assets, MFA appears to be well-positioned to capitalize on this hidden opportunity.

Portfolio Growth and Asset Yield

MFA Financial has consistently grown its portfolio and increased its asset yield, even in a challenging interest rate environment. The chart below, based on data from MFA Financial's Q4 2023 and Q1 2024 earnings calls, illustrates this trend.

MFA Financial Securitizations

Below is a table listing details about MFA Financial's outstanding securitizations. This data is publicly available through MFA Financial's investor relations website.

While the market waits for the Fed's next move, astute investors may be wise to look beyond the immediate noise and focus on the long-term potential hidden in plain sight within MFA Financial's sophisticated liability framework. It's a strategy that could propel MFA to become a dominant force in the mortgage REIT space, regardless of the direction of interest rates.

"Fun Fact: The term "REIT" stands for Real Estate Investment Trust. REITs are companies that own, operate, or finance income-generating real estate. They are required to distribute at least 90% of their taxable income to shareholders as dividends, making them an attractive investment for income-seeking investors."