MFA Financial's Series C Preferred: A Steady Hand in a Volatile Market?

As the Federal Reserve’s tightening cycle continues, income-focused investors face a conundrum: how to secure steady returns while navigating rising borrowing costs. MFA Financial’s 6.5% Series C Fixed-to-Floating Rate Preferred Shares (MFA.PRC) now offer an annualized yield of ~6.2% at current prices, positioning them as a potential anchor in a turbulent landscape. But is this yield sustainable, and does it outweigh the risks tied to MFA’s mortgage REIT business model?

The Dividend’s Foundation: Stable Net Interest Income or a Mirage?

MFA’s Series C Preferred dividend, recently reset to $0.61911 per share quarterly, reflects a transition from its fixed-rate period to a floating-rate mechanism tied to the SOFR benchmark. This shift, effective March 31, 2025, ensures dividends adapt to rising rates—a critical feature in a tightening environment. However, the sustainability of this income hinges on MFA’s ability to maintain its net interest margin (NIM).

Key Data Points:
- MFA’s NIM held steady at 2.05% in Q1 2025 despite $602 million in added interest rate swaps to hedge against rate volatility.
- The company’s $275 million Series C preferred dividend requirement represents just 14% of its $1.9 billion in distributable earnings (non-GAAP) over the past year, suggesting ample coverage.
- Peer comparison: Dynex Capital’s (DX) and Annaly’s (NLY) preferred shares yield ~6.5% and ~6.8%, respectively, underscoring MFA’s competitive edge.

The Capital Structure Risk: Leverage and Liquidity in a Stress Test

MFA’s 5.1x debt-to-equity ratio (as of March 2025) is a double-edged sword. While leverage amplifies returns during favorable rate environments, it exposes the company to margin pressure when borrowing costs outpace asset yields.

Critical Considerations:
- Hedging Efficacy: MFA’s use of interest rate swaps and $790 million in liquidity (as of Q1 2025) provides a buffer against sudden rate shocks.
- Asset Mix: 90% of its portfolio is Agency MBS, which are government-backed but vulnerable to spread widening between MBS and Treasury yields—a key risk in 2025.
- Preferred Share Priority: As cumulative preferred stock, holders are paid before common shareholders in liquidation. However, their claim ranks below debt, leaving them exposed if MFA’s leverage backfires.

The Case for Immediate Investment: Yield vs. Sensitivity

The 6.2% yield on MFA.PRC is compelling, especially against the 10-year Treasury’s ~4.3% and inflation-indexed bonds. But investors must weigh this against three risks:

1. Floating Rate Volatility: While the SOFR-linked dividend adjusts upward with rates, it also declines if the Fed cuts rates—a possibility by late 2025.
2. Liquidity Risk: MFA’s $24.36 share price trades at a 2.56% discount to liquidation value, offering a margin of safety but no guarantee if book value erodes.
3. Peer Competition: Annaly’s Series F preferred (NLY.PF) and Dynex’s Series A (DX.PA) offer comparable yields with similar leverage profiles, making MFA.PRC a contender but not a standout.

Final Verdict: A Prudent Bet for Income Seekers

The Series C Preferred’s high yield, cumulative status, and SOFR-linked flexibility make it a viable option for investors prioritizing income over capital appreciation. While MFA’s leverage and mortgage REIT exposure introduce risks, its robust hedging, stable NIM, and peer-competitive yields justify a buy at current prices.

Action Items:
- Buy: For investors with a 12–18 month horizon seeking a yield cushion against rising rates.
- Avoid: If you fear a sharp Fed pivot or MBS spread widening exceeding hedges.

In a market hungry for income, MFA’s Series C Preferred offers a balanced trade-off: a premium yield in exchange for tolerating the volatility inherent in mortgage REITs. For those willing to accept that risk, this could be a reliable handhold in turbulent waters.