MFA Financial 6.50% Series C Fix/Float Cumulative Redeemable Preferred Stock ( MFA PRC )

Today we will present you a preferred stock with a stable dividend that will significantly increase soon, and with a good potential for capital gain.

MFA Financial, Inc., 6.50% Series C Fixed to Floating Cumulative Redeemable Preferred Stock, liquidation preference $25 per share, redeemable at the issuer's option on or after 31 March 2025 at $25 per share plus accrued and unpaid dividends, and with no stated maturity. Cumulative distributions of 6.50% per annum ($1.625 per annum or $0.40625 per quarter) will be paid quarterly on 31 Mar, 30 June, 30 Sept & 31 Dec.

The Company MFA Financial

Some words about the issuer MFA Financial is a real estate investment trust primarily engaged in the business of investment, on a leveraged basis, in Agency and Non-Agency residential mortgage-backed securities.

The company is positioned as a Hybrid Mortgage REIT. The last 3 years of higher interest rates were challenging for the company. Like many MREITs common stock price was hurt, mainly by higher interest expenses. Despite headwinds, MFA's Financial Book value stands stable.

Recent purchases of 400 million in agency-backed securities will deliver more stability in companies' interest income. The common stock pays a 13,2% dividend yield in exchange for a significantly higher risk than the preferred and is not fixed.

Behind the trade

MFA PRC pays a fixed dividend of $0.406 quarterly, with the next ex-dividend date projected for 4 March 2025. This is the last fixed dividend that will be paid.

MFA PRC will start floating from 21 March 2025. Dividends will be paid at a floating rate of the Three-Month CME Term SOFR plus 0.26161%  plus a spread of 5.345% per annum.

This is a great premium over the main Benchmark index (SOFR rate 4.32%).

SOFR+0.261%+4,32%= 9.925% Yield at par value of $25. 

After the floating date, the quarterly distribution will be $0.62 or  ~$2,48 per annum.

Today's price of $24,80 is a really good entry price, with the recent dividend payment stripped yield will increase to 10.1% per annum.

MFA Financial has the right to redeem shares on 31 March 2025. We consider redemption very unlikely, as the market conditions are not favorable for swapping this preferred stock with a newly issued one, at this FED funds rate. 

Our expectation, for a fair price after the floating occurs, is $25,20. 

There is a risk of change in the FED funds rate. A rate cut will have an immediate impact on the SOFR rate and the next dividend payment of MFA PRC. The Federal Reserve is expected to make 1 or 2  25bps cuts, such an event will lower the yield. In lowering the FED funds the yield still stands high, thanks to the spread of 5,345%.

Conclusion

We add MFA PRC to our portfolio from a price of $24,80. Attracted by a floating yield of 10% is something that we will enjoy collecting in times when FED’s rate policy is not certain. Expected capital appreciation of 3-5% is the cheery top of this investment. 

Good opportunity for dividend seekers, with little to medium risk tolerance.