5/26/2017 | By Sarah Borchersen-Keto
Published in the May/June 2017 issue of REIT magazine
MFA Financial, Inc. (NYSE: MFA) began operations nearly 19 years ago. During that time, the Mortgage REIT has generated strong long-term returns for investors through volatile markets and credit cycles. William Gorin, who has been with MFA from the start, took over as CEO in January 2014.
MFA Financial primarily invests in residential mortgage assets, including residential mortgage-backed securities and residential whole loans, on a leveraged basis. According to Gorin, MFA’s permanent capital REIT structure gives it the staying power to hold assets through fluctuations in market value.
Gorin, chairman of NAREIT’s Mortgage REIT Council, recently spoke with REIT magazine about the company’s 29 percent total shareholder return in 2016 and where the Mortgage REIT expects to find growth going forward.
REIT: What has been the most important lesson that you’ve learned so far in your tenure as CEO?
Bill Gorin: As CEO, I’ve come to increasingly appreciate the value of a corporate culture based on teamwork. As we move ahead as a company, employees need to assist and fully engage with co-workers for the betterment of the company.
REIT: Over the last 10 years, MFA has generated annualized shareholder returns of approximately 13 percent. Last year saw total shareholder returns of approximately 29 percent. What accounts for that performance, and what sort of levels do you anticipate longer term?
Gorin: Over the last 18 years or so, we’ve sought to generate returns in the range of 9 to 11 percent. As you point out in your question, we have historically outperformed this goal. Reflecting upon 2016, certain macroeconomic events and trends, such as the Brexit vote in June, the U.S. presidential election in November and insufficient growth on a worldwide basis, certainly impacted asset values and financial markets. Nevertheless, we were able to identify and take advantage of attractive investment opportunities and provide a meaningful return to our shareholders.
Our total shareholder return of 29 percent in 2016 was due to asset performance, but was also a function of the equity markets in general and, more specifically, Mortgage REITs’ performance in the equity markets.
REIT: What are the big stories that you see impacting the market dynamics in the near term for MFA and Mortgage REITs as a whole?
Education: BA in economics, Brandeis University; MBA, Stanford University.
Family: Wife, Jody; daughter, Allie; and son, Matthew.
Hobbies: Skiing, Design
Favorite Vacation spot: Turks and Caicos Islands.
Gorin: The key variables for MFA and the entire Mortgage REIT universe will probably be the pace of change in the federal funds rate, potential government-sponsored enterprises (GSE) reform and reinvestment activities within the Federal Reserve balance sheet.
REIT: How would you describe MFA’s overall interest rate risk?
Gorin: I believe that MFA’s portfolio has relatively low price sensitivity relative to the changes in interest rates. We acquire lower-duration assets such as hybrid mortgage-backed securities or three-year step-up securities. We have a substantial longer-term swap position and we maintain relatively low leverage ratios. As we saw in the fourth quarter, rising interest rates from an improving economy can have a positive impact on the value of credit-sensitive assets.
REIT: How do you plan to mix mortgage credit exposure with interest rate exposure?
Gorin: The mix between mortgage credit and interest rate exposure will continue to trend toward more credit, given that it’s easy to envision a continued normalization of interest rates in the coming years. In 2017, we’ll continue to focus on credit-sensitive residential mortgage assets.
The credit assets we’ve acquired continue to perform well. They tend to be short term and have less interest rate sensitivity. Many of our assets were purchased at a discount, so they actually benefit from increases in prepayment rates.
REIT: Why is MFA looking to invest in distressed, less-liquid assets?
Gorin: Our investment decisions are based on pricing of assets and our view of potential financial returns relative to risk. This strategy does require staying power, which gives us the ability to invest in and hold long-term, distressed, less-liquid assets.
We view the strategy as attractive because we have permanent equity capital and our debt-to-equity ratio is low enough to accommodate potential declines in marks. MFA has shown the ability to invest significant amounts at advantageous prices while other investors may be facing capital outflows.
REIT: Does the residential mortgage credit market continue to enjoy both fundamental and technical support?
Gorin: Particularly when you are talking about legacy assets, those that were issued prior to 2008, the fundamentals are that home prices have increased in recent years. From a technical standpoint, they are not making any new 2005, 2006, 2007 vintage mortgage assets, so both the fundamentals and technicals have been strong.
REIT: Will MFA’s sales of legacy non-agency MBS continue?
Gorin: We’re aware that the asset class has significantly declined in size over time, and, generally, we would not want to own a disproportionate share of this asset class. All those things being equal, probably we’ll reduce our exposure as the overall market shrinks.
REIT: As chairman of NAREIT’s Mortgage REIT Council’s executive committee, what are some of the issues on your agenda?
Gorin: The primary goal of the Mortgage REIT Council in 2017 is to interface with the new administration and its appointees relative to a wide range of topics, including tax reform and its impact on Mortgage REITs, GSE reform and the overall role of private capital in U.S. mortgage markets.
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