Player Avatar fcfroic (92.43) Submitted: 3/11/2010 3:43:32 PM : Outperform Start Price: $2.97 MFA Score: +95.08

This is a mortgage REIT which has both agency MBS's and non-agency MBS's. This is a unique hybrid strategy. The agency MBS provide an opportunity to access liquidity if needed; the Treasury has purchased agency MBS's in order to maintain liquidity in the system and now Fannie and Freddie are following suit. The non-agency exposure provides higher returns but also higher risks. Since MFA bought mortgage-backed and other asset-backed securities at a significant discount, the IRS requires them to record that discount into taxable income over time as the securities season. That discount accretion income does not get recorded into GAAP earnings until the securities are actually sold, so GAAP understates (sometimes significantly) the amount that these REITs will be required to distribute as dividends. Hence, earnings are understated.
The risk here is near-term, with the purchase of agency MBS, the spreads have gone out of this market and it may take some time for MFA to replace these assets. Consequently, the dividend may be reduced temporarily form the current $1.08 to perhaps 95 cents to $1.00, still providing a very healthy yield.
Trading below book value, I expect that this will trade at a slight premium (perhaps 120% of BV) with a growing dividend stream following the potential "hiccup."

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