MCLEAN,
Va., Nov. 14, 2022 /PRNewswire/ -- Arlington
Asset Investment Corp. (NYSE: AAIC) (the "Company" or "Arlington") today reported financial results
for the quarter ended September 30,
2022.
Third Quarter 2022 Financial Highlights
- $6.45 per common share of book
value
-
- 2.4% increase from prior quarter
- 8.0% increase over last four quarters
- $0.10 per diluted common share of
GAAP net income available to common shareholders
- $0.11 per diluted common share of
non-GAAP earnings available for distribution
-
- $0.06 per diluted common share
increase from second quarter of 2022
- $0.07 per common share of book
value accretion from the repurchase of capital stock including 1.7%
of the outstanding shares of common stock
-
- Purchased an additional 1.1% of the outstanding shares of
common stock through November 11,
2022
- 10.2 million share remaining authorization, or $32 million of current market capitalization, as
of November 11, 2022
- 1.2 to 1 "at risk" leverage ratio as of September 30, 2022
-
- decrease from 1.6 to 1 as of June 30,
2022
- $42 million of net cash proceeds
from previously announced partial sale of 371 single-family
residential ("SFR") properties that resulted in a $0.47 per common share increase to book
value
-
- $29 million of expected
additional net cash proceeds from pending sale of remaining
251 SFR properties expected to close
on or about December 1, 2022
- 28% expected total annualized return from overall SFR strategy
over a five quarter investment period
"Arlington's primary focus of
preserving capital in the current economic environment once again
proved to be beneficial for shareholders during the third
quarter. Through another quarter of challenging financial
markets, Arlington was able to
generate a 2.4% economic return, its fifth consecutive quarter of a
positive economic return. The Company's diversified
investment strategy has enabled it to consistently grow book value
per share during periods of volatile market conditions while
traditional mortgage REITs have experienced losses. Over the last
twelve months, the Company delivered a positive 8.0% economic
return while its mortgage REIT peers have experienced a negative
16.6% economic return," said J. Rock Tonkel, Jr., the Company's
President and Chief Executive Officer.
"With our largest capital allocation in our mortgage servicing
rights ("MSR") strategy, the Company's financial results benefited
from another strong quarterly performance in our MSR related
investments as higher rates and corresponding low prepayments
contributed to our MSR investment portfolio generating a total
annualized return of 25.3% during the third quarter.
"In the third quarter, the Company successfully completed its
previously announced sale of 371 of its SFR rental properties at a
significant gain that contributed $0.47 per share to our book value during the
quarter. The Company has also announced today that on
November 11, 2022 it entered into an
agreement to sell its remaining SFR rental portfolio including the
assumption of its financing facility for a gross sale price of
$87.3 million that would result in
estimated net cash proceeds of $29
million with a slight positive impact to book value.
The transaction is expected to close in the fourth quarter and is
contingent upon receiving final lender consent and other closing
conditions. Assuming the second sale transaction is
ultimately consummated, it would represent a culmination of an
overall SFR investment strategy that we expect would result in a
total annualized return of 28% with expected net cash proceeds of
$71 million, including the
realization of a $15 million gain
over a five quarter investment period.
"In our credit investment strategy, the Company continued to
migrate towards higher quality AAA rated liquid securities that now
comprise 64% of its credit portfolio. The Company experienced
strong returns in its credit investments producing a 17.6%
annualized total return during the third quarter.
"During the third quarter, ongoing market volatility led to
further widening of agency MBS spreads that negatively impacted
agency mortgage investments. Although the wider spreads have
led to increased current carry returns, the Company continues to
take a cautious approach in allocating capital towards its levered
agency MBS strategy with only 14% of its invested capital allocated
to agency mortgages as of quarter-end.
"We continue to believe there is greater value in Arlington's business than the public markets
recognize. Since reinstituting our current common stock repurchase
program in 2020, the Company has aggressively returned capital to
shareholders by purchasing 26% of its outstanding shares,
delivering $0.82 per share of
accretion to shareholders.
"In the current market environment, capital preservation has
been the Company's priority with a focus on harvesting capital and
gains from successful investments, lowering leverage and increasing
liquidity. Today, with 1.2x leverage, high cash yielding
investments and ample liquidity, these actions have put the Company
in a strong position to adapt to uncertain market conditions and to
capitalize on attractive new opportunities that may arise as market
conditions evolve that should benefit shareholders over time."
Third Quarter Investment Portfolio
As of September 30, 2022, the
Company's investment portfolio capital allocation was as follows
(dollars in thousands):
|
|
September 30,
2022
|
|
|
|
Assets
|
|
|
Invested Capital
Allocation (1)
|
|
|
Invested Capital
Allocation (%)
|
|
|
Leverage
(2)
|
|
MSR financing
receivables
|
|
$
|
164,585
|
|
|
$
|
164,585
|
|
|
|
57
|
%
|
|
|
0.2
|
|
Single-family
residential properties
|
|
|
82,219
|
|
|
|
26,726
|
|
|
|
9
|
%
|
|
|
2.1
|
|
Credit investments
(3)
|
|
|
169,940
|
|
|
|
59,670
|
|
|
|
20
|
%
|
|
|
1.8
|
|
Agency MBS
(4)
|
|
|
208,124
|
|
|
|
40,814
|
|
|
|
14
|
%
|
|
|
4.2
|
|
Total invested
capital
|
|
$
|
624,868
|
|
|
|
291,795
|
|
|
|
100
|
%
|
|
|
|
Cash and other
corporate capital, net
|
|
|
|
|
|
9,694
|
|
|
|
|
|
|
|
Total investable
capital
|
|
|
|
|
$
|
301,489
|
|
|
|
|
|
1.2
|
|
(1)
|
Our investable capital
is calculated as the sum of our shareholders' equity capital plus
accumulated depreciation of our single-family residential
properties and long-term unsecured debt.
|
(2)
|
Our leverage is
measured as the ratio of the sum of our repurchase agreement
financing, long-term debt secured by single-family residential
properties, net payable or receivable for unsettled securities, net
contractual forward purchase (sale) price of our TBA commitments
and leverage within our MSR financing receivables less our cash and
cash equivalents compared to our investable capital.
|
(3)
|
Includes our net
investment of $24,782 in two variable interest entities with gross
assets and liabilities of $207,383 and $182,601, respectively, that
are consolidated for GAAP financial reporting purposes.
|
(4)
|
Agency MBS assets
include the fair value of the agency MBS which underlie the
Company's to-be-announced ("TBA") forward purchase and sale
commitments. In accordance with GAAP, the Company's TBA
forward commitments are reflected on the consolidated balance
sheets as derivative assets and liabilities at fair value in the
financial statement line items "other assets" and "other
liabilities." As of September 30, 2022, the fair value of the
agency MBS that underlie the Company's net short position in TBA
commitments had a fair value of $(236,998) and a net carrying value
of $4,023.
|
MSR Related Investments
The Company is party to agreements with a licensed, U.S.
government sponsored enterprise ("GSE") approved residential
mortgage loan servicer that enable the Company to garner the
economic return of an investment in an MSR purchased by the
mortgage servicing counterparty. The arrangement allows the
Company to participate in the economic benefits of investing in an
MSR without holding the requisite licenses to purchase or hold MSRs
directly. Under the terms of the arrangement, the Company
provides capital to the mortgage servicing counterparty to purchase
MSRs directly and the Company, in turn, receives all the economic
benefits of the MSRs less a fee payable to the counterparty. At the
Company's request, the mortgage servicing counterparty may utilize
leverage on the MSRs to which the Company's MSR financing
receivables are referenced to finance the purchase of additional
MSRs to increase potential returns to the Company. These
transactions are accounted for as financing receivables on the
Company's consolidated financial statements.
The Company's MSR financing receivable investments as of
September 30, 2022 are summarized in
the tables below (dollars in thousands):
Amortized Cost Basis
(1)
|
|
|
Unrealized
Gain
|
|
|
Fair
Value
|
|
$
|
114,899
|
|
|
$
|
49,686
|
|
|
$
|
164,585
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents capital investments plus accretion of interest income
net of cash distributions.
|
MSR Financing
Receivable Underlying Reference Amounts:
|
|
|
|
|
|
|
|
MSRs
|
|
|
Financing
|
|
|
Advances
Receivable
|
|
|
Cash and Other Net
Receivables
|
|
|
Counterparty
Incentive Fee Accrual
|
|
|
MSR Financing
Receivables
|
|
|
Implicit
Leverage
|
|
$
|
190,085
|
|
|
$
|
(27,863)
|
|
|
$
|
2,244
|
|
|
$
|
13,176
|
|
|
$
|
(13,057)
|
|
|
$
|
164,585
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Reference
MSRs:
|
|
Holder of
Loans
|
|
Unpaid
Principal
Balance
|
|
|
Weighted-
Average
Note Rate
|
|
|
Weighted-
Average
Servicing
Fee
|
|
|
Weighted-
Average
Loan Age
|
|
Price
|
|
|
Multiple
(1)
|
|
|
Fair
Value
|
|
Fannie Mae
|
|
$
|
12,764,245
|
|
|
|
3.09
|
%
|
|
|
0.25
|
%
|
|
21 months
|
|
|
1.37
|
%
|
|
|
5.48
|
|
|
$
|
175,230
|
|
Freddie Mac
|
|
|
1,045,337
|
|
|
|
3.72
|
%
|
|
|
0.25
|
%
|
|
19 months
|
|
|
1.42
|
%
|
|
|
5.68
|
|
|
|
14,855
|
|
Total/weighted-average
|
|
$
|
13,809,582
|
|
|
|
3.14
|
%
|
|
|
0.25
|
%
|
|
21 months
|
|
|
1.38
|
%
|
|
|
5.50
|
|
|
$
|
190,085
|
|
(1) Calculated as the
underlying MSR price divided by the weighted-average servicing
fee.
|
As of September 30, 2022, the
mortgage servicing counterparty had drawn $27.9 million of financing under its credit
facility collateralized by the MSRs to which the Company's MSR
financing receivables are referenced, resulting in an implicit
leverage ratio of 0.2 to 1. The weighted average yield on the
Company's MSR financing receivables was 15.95% for the third
quarter of 2022 compared to 15.28% for the second quarter of 2022,
and the actual weighted-average constant prepayment rate ("CPR")
for the MSRs underlying the Company's MSR financing receivables was
6.48% for the third quarter of 2022 compared to 8.10% for the
second quarter of 2022.
Single-family Residential Investments
As of September 30, 2022, the
Company owned 246 SFR properties for
a total cost of $82.2 million and had
commitments to acquire an additional five
SFR properties for an aggregate purchase price of
$1.5 million. The timing of the
earnings benefit to the Company from investing in SFR rental
properties is dictated by the pace of home purchases, the level of
any property level refurbishments required after purchase and the
length of the lease marketing period. The Company expects the
time period between the date of settlement of the home purchase to
the date the house is occupied by a tenant to average between 30 to
60 days. During the period prior to a lease commencement, the
Company is incurring costs to hold the property including real
estate taxes, insurance, homeowner association fees and interest
costs.
As of September 30, 2022, the
Company's SFR portfolio is summarized in the tables below (dollars
in thousands):
|
|
September 30,
2022
|
|
Investments in
single-family residential real estate:
|
|
|
|
Land
|
|
$
|
13,646
|
|
Buildings and
improvements
|
|
|
68,573
|
|
Investments in
single-family residential real estate, at cost
|
|
|
82,219
|
|
Less: accumulated
depreciation
|
|
|
(977)
|
|
Investments in
single-family residential real estate, net
|
|
$
|
81,242
|
|
Market
|
|
Number of
Properties
|
|
|
Gross Book
Value
|
|
|
Average Gross
Book Value
|
|
|
Average
Square Feet
|
|
|
Average
Year Built
|
|
Atlanta, GA
|
|
|
56
|
|
|
$
|
20,082
|
|
|
$
|
359
|
|
|
|
2,099
|
|
|
|
2006
|
|
Dallas, TX
|
|
|
49
|
|
|
|
17,894
|
|
|
|
365
|
|
|
|
1,874
|
|
|
|
2015
|
|
Huntsville,
AL
|
|
|
34
|
|
|
|
11,850
|
|
|
|
349
|
|
|
|
2,203
|
|
|
|
2016
|
|
Birmingham,
AL
|
|
|
35
|
|
|
|
9,606
|
|
|
|
274
|
|
|
|
1,653
|
|
|
|
2017
|
|
Tulsa, OK
|
|
|
29
|
|
|
|
8,548
|
|
|
|
295
|
|
|
|
1,842
|
|
|
|
2016
|
|
Charlotte,
NC
|
|
|
18
|
|
|
|
6,593
|
|
|
|
366
|
|
|
|
1,915
|
|
|
|
2009
|
|
Kansas City,
MO
|
|
|
16
|
|
|
|
5,020
|
|
|
|
314
|
|
|
|
1,969
|
|
|
|
2014
|
|
Memphis, TN
|
|
|
9
|
|
|
|
2,626
|
|
|
|
292
|
|
|
|
1,761
|
|
|
|
2005
|
|
Total/weighted
average
|
|
|
246
|
|
|
$
|
82,219
|
|
|
$
|
334
|
|
|
|
1,940
|
|
|
|
2013
|
|
Status of
Property
|
|
Number of
Properties
|
|
|
Gross Book
Value
|
|
In
rehabilitation
|
|
|
4
|
|
|
$
|
1,341
|
|
In marketing
|
|
|
25
|
|
|
|
8,706
|
|
Leased not yet
occupied
|
|
|
3
|
|
|
|
1,030
|
|
Leased and
occupied
|
|
|
214
|
|
|
|
71,142
|
|
Total
|
|
|
246
|
|
|
$
|
82,219
|
|
As of September 30, 2022, the
Company had drawn $57.0 million under
its $150 million credit
facility. Advances may be drawn up to 74% of the fair value
of eligible SFR properties with an advance period that expires in
March 2023 with outstanding principal
balance due in October 2026. Advances under the facility bear
interest at a fixed rate of 2.76%.
On August 19, 2022, the Company
closed on its previously announced sale of 371 SFR properties for $130.0 million for a net gain of $14.4 million.
The Company also announced today that it has entered into an
agreement on November 11, 2022 to
sell its remaining SFR investment portfolio including the
assumption of the secured credit facility for a gross sale price of
$87.3 million. The sale
transaction is expected to close in the fourth quarter of 2022 and
is contingent upon receiving lender consent and other closing
conditions. If consummated, the Company would expect to
receive estimated net cash proceeds of $29
million and would be expected to have a slight positive
impact to the Company's book value per share.
Credit Investments
The Company's credit investments generally include mortgage
loans secured by residential or commercial real property or MBS
collateralized by residential or commercial mortgage loans or
residential solar panel loans ("non-agency" MBS or ABS). As
of September 30, 2022, the Company's
credit investment portfolio at fair value was comprised of the
following (dollars in thousands):
|
|
Fair Value
(1)
|
|
|
Market
Price
|
|
|
Leverage
|
|
Commercial
MBS
|
|
$
|
108,330
|
|
|
$
|
99.84
|
|
|
|
4.9
|
|
Commercial mortgage
loan
|
|
|
29,375
|
|
|
|
100.00
|
|
|
|
2.3
|
|
Residential MBS -
interest-only (2)
|
|
|
18,970
|
|
|
|
8.24
|
|
|
|
—
|
|
Residential MBS
(2)
|
|
|
1,035
|
|
|
|
63.86
|
|
|
|
—
|
|
Business purpose
residential MBS (3)
|
|
|
9,882
|
|
|
|
91.16
|
|
|
|
—
|
|
Residential solar panel
loan ABS
|
|
|
2,348
|
|
|
|
46.40
|
|
|
|
—
|
|
Total/weighted-average
|
|
$
|
169,940
|
|
|
|
|
|
|
1.8
|
|
(1)
|
For credit investments
in securities, includes contractual accrued interest
receivable.
|
(2)
|
Residential MBS -
interest-only and residential MBS, in combination, reflect our net
investment at fair value of $20,005 in a
VIE that is
consolidated for GAAP financial reporting purposes.
|
(3)
|
Includes our net
investment at fair value of $4,777 in a VIE that is consolidated
for GAAP financial reporting purposes.
|
As of September 30, 2022, the
Company had $89.8 million in
repurchase agreements outstanding with a weighted average rate of
3.68% and remaining weighted average maturity of 27 days secured by
$99.8 million of non-agency MBS at
fair value. As of September 30,
2022, the Company had a $20.6
million repurchase agreement outstanding with a rate of
5.27% and remaining maturity of 327 days secured by a $29.4 million commercial mortgage loan at fair
value.
Agency MBS
The Company's agency MBS consist of residential mortgage
pass-through certificates for which the principal and interest
payments are guaranteed by a government sponsored enterprise, such
as the Federal National Mortgage Association ("Fannie Mae") or the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). As of
September 30, 2022, the Company's
agency MBS investment portfolio totaled $208.1 million at fair value comprised of
$445.1 million of specified agency
MBS and $(237.0) million of net short
to-be-announced ("TBA") agency MBS. As of September 30, 2022, the Company's specified
agency MBS investment portfolio was comprised of the following
(dollars in thousands):
|
|
Unpaid
Principal
Balance
|
|
|
Net
Unamortized
Purchase
Premiums
(Discounts)
|
|
|
Amortized
Cost Basis
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair
Value
|
|
|
Market
Price
|
|
|
Coupon
|
|
|
Weighted
Average
Expected
Remaining
Life
|
|
30-year fixed
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0 %
|
|
$
|
69,786
|
|
|
$
|
(2,528)
|
|
|
$
|
67,258
|
|
|
$
|
(6,307)
|
|
|
$
|
60,951
|
|
|
$
|
87.34
|
|
|
|
3.00
|
%
|
|
|
10.3
|
|
4.0 %
|
|
|
198,079
|
|
|
|
1,206
|
|
|
|
199,285
|
|
|
|
(15,079)
|
|
|
|
184,206
|
|
|
|
93.00
|
|
|
|
4.00
|
%
|
|
|
9.3
|
|
4.5 %
|
|
|
209,514
|
|
|
|
(4,032)
|
|
|
|
205,482
|
|
|
|
(5,525)
|
|
|
|
199,957
|
|
|
|
95.44
|
|
|
|
4.50
|
%
|
|
|
9.7
|
|
5.5 %
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
|
1
|
|
|
|
8
|
|
|
|
102.82
|
|
|
|
5.50
|
%
|
|
|
6.2
|
|
Total/weighted-average
|
|
$
|
477,386
|
|
|
$
|
(5,354)
|
|
|
$
|
472,032
|
|
|
$
|
(26,910)
|
|
|
$
|
445,122
|
|
|
$
|
93.24
|
|
|
|
4.07
|
%
|
|
|
9.6
|
|
The Company's weighted average yield on its specified agency MBS
was 3.98% for the third quarter of 2022 compared to 2.95% for the
second quarter of 2022, and the actual weighted-average CPR for the
Company's specified agency MBS was 6.36% for the third quarter of
2022 compared to 8.40% for the second quarter of 2022.
As of September 30, 2022, the
Company's net short TBA agency MBS investment portfolio was
comprised of the following (dollars in thousands):
|
|
Notional Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Long (Short)
|
|
|
Implied
|
|
|
Implied
|
|
|
Net
Carrying
|
|
|
|
Position
(1)
|
|
|
Cost Basis
(2)
|
|
|
Fair Value
(3)
|
|
|
Amount
(4)
|
|
3.5% 30-year MBS sale
commitments
|
|
$
|
(60,000)
|
|
|
$
|
(56,803)
|
|
|
$
|
(53,897)
|
|
|
$
|
2,906
|
|
4.0% 30-year MBS sale
commitments
|
|
|
(100,000)
|
|
|
|
(93,359)
|
|
|
|
(92,680)
|
|
|
|
679
|
|
4.5% 30-year MBS sale
commitments
|
|
|
(95,000)
|
|
|
|
(90,859)
|
|
|
|
(90,421)
|
|
|
|
438
|
|
Total net long (short)
agency TBA positions
|
|
$
|
(255,000)
|
|
|
$
|
(241,021)
|
|
|
$
|
(236,998)
|
|
|
$
|
4,023
|
|
|
(1)
|
Notional amount
represents the unpaid principal balance of the underlying agency
MBS.
|
(2)
|
Implied cost basis
represents the contractual forward price for the underlying agency
MBS.
|
(3)
|
Implied fair value
represents the current fair value of the underlying agency
MBS.
|
(4)
|
Net carrying amount
represents the difference between the implied cost basis and the
implied fair value of the underlying agency MBS. This amount
is reflected on the Company's consolidated balance sheets as a
component of "other assets" and "other liabilities."
|
As of September 30, 2022, the
Company had $319.5 million of
repurchase agreements outstanding with a weighted average rate of
3.02% and remaining weighted average maturity of 13 days secured by
an aggregate of $336.3 million of
agency MBS at fair value. The Company's weighted average cost
of repurchase agreement funding secured by agency MBS was 2.33%
during the third quarter of 2022 compared to 0.80% during the
second quarter of 2022.
The Company enters into various hedging transactions to mitigate
the interest rate sensitivity of its cost borrowing and the value
of its fixed-rate agency MBS. Under the terms of the
Company's interest rate swap agreements, the Company pays
semiannual interest payments based on a fixed rate and receives
variable interest payments based upon either the prevailing
three-month London Interbank Offered Rate ("LIBOR") or Secured
Overnight Financing Rate ("SOFR"). As of September 30, 2022, the Company's interest swap
agreements were comprised of the following (dollars in
thousands):
|
|
|
|
|
Weighted-average:
|
|
|
|
Notional Amount
|
|
|
Fixed
Pay Rate
|
|
|
Variable Receive
Rate
|
|
|
Net Receive (Pay)
Rate
|
|
|
Remaining
Life (Years)
|
|
Years to
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3
years
|
|
$
|
125,000
|
|
|
|
1.82
|
%
|
|
|
2.78
|
%
|
|
|
0.96
|
%
|
|
|
1.6
|
|
3 to less than 10
years
|
|
|
70,000
|
|
|
|
2.53
|
%
|
|
|
3.11
|
%
|
|
|
0.58
|
%
|
|
|
5.4
|
|
Total /
weighted-average
|
|
$
|
195,000
|
|
|
|
2.07
|
%
|
|
|
2.90
|
%
|
|
|
0.83
|
%
|
|
|
3.0
|
|
The Company's weighted average net receive rate of its interest
rate swap agreements was 0.55% during the third quarter of 2022
compared to net pay rate of (0.53)% during the second quarter of
2022. Under GAAP, the Company has not designated these
transactions as hedging instruments for financial reporting
purposes and, therefore, all gains and losses on its hedging
instruments are recorded to line item "investment and derivative
gains (losses), net" in the Company's financial
statements.
Other Third Quarter 2022 Financial Highlights
The Company's book value was $6.45
per common share as of September 30,
2022 compared to $6.30 per
common share as of June 30,
2022. Book value per common share is calculated as total
equity plus accumulated depreciation of SFR properties less the
preferred stock liquidation preference divided by common shares
outstanding plus vested restricted stock units convertible into
common stock less unvested restricted common stock.
The Company's "at risk" leverage ratio was 1.2 to 1 as of
September 30, 2022 compared to 1.6 to
1 as of June 30, 2022. The
Company's "at risk" leverage ratio is calculated as the sum of the
Company's repurchase agreement financing, long-term debt secured by
single-family properties, net payable or receivable for unsettled
securities, net contractual price of TBA purchase and sale
commitments and financing embedded in its MSR financing receivables
less cash and cash equivalents compared to the Company's investable
capital measured as the sum of the Company's shareholders' equity
and long-term unsecured debt.
During the third quarter of 2022, the Company repurchased 0.5
million shares of its common stock at an average price of
$3.14 per share for a total purchase
cost of $1.5 million, representing
1.7% of common stock outstanding as of June
30, 2022. Subsequent to September 30, 2022, the Company repurchased an
additional 0.3 million shares of its common stock at an average
price of $2.92 per share for a total
purchase cost of $0.9 million,
representing 1.1% of common stock outstanding as of September 30, 2022. Currently, the Company
has remaining authorization from its Board of Directors to
repurchase up to 10.2 million shares of its common stock. In
addition, during the third quarter of 2022, the Company repurchased
0.1 million shares of Series C Preferred Stock at an average price
of $20.54 per share for a total
purchase cost of $1.6
million.
Conference Call
The Company will hold a conference call for investors at
10:00 A.M. Eastern Time on Tuesday,
November 15, 2022 to discuss the Company's third quarter 2022
results.
Investors may listen to the earnings call via the internet at:
http://www.arlingtonasset.com/index.php?s=19.
Replays of the earnings call will be available for 60 days via
webcast at the Internet address provided above, beginning two hours
after the call ends.
Additional Information
The Company will make available additional quarterly information
for the benefit of its shareholders through a supplemental
presentation that will be available at the Company's website,
www.arlingtonasset.com. The presentation will be available on
the Webcasts and Presentations section located under the Updates
& Events tab of the Company's website.
About the Company
Arlington Asset Investment Corp. (NYSE: AAIC) currently invests
primarily in mortgage related and residential real estate and has
elected to be taxed as a REIT. The Company is headquartered
in the Washington, D.C.
metropolitan area. For more information, please visit
www.arlingtonasset.com.
Statements concerning interest rates, portfolio allocation,
financing costs, portfolio hedging, prepayments, dividends, book
value, utilization of loss carryforwards, any change in long-term
tax structures (including any REIT election), use of equity raise
proceeds and any other guidance on present or future periods
constitute forward-looking statements that are subject to a number
of factors, risks and uncertainties that might cause actual results
to differ materially from stated expectations or current
circumstances. These factors include, but are not limited to,
the uncertainty and economic impact of the ongoing coronavirus
(COVID-19) pandemic and the measures taken by the government to
address it, including the impact on our business, financial
condition, liquidity and results of operations due to a significant
decrease in economic activity and disruptions in our financing
operations, among other factors, changes in interest rates,
increased costs of borrowing, decreased interest spreads, credit
risks underlying the Company's assets, especially related to the
Company's mortgage credit investments, our ability to close on the
sale of single-family residential homes described herein, and to
realize the expected benefits from such sale, changes in political
and monetary policies, changes in default rates, changes in
prepayment rates and other assumptions underlying our estimates
related to our projections of future core earnings, changes in the
Company's returns, changes in the use of the Company's tax
benefits, the Company's ability to qualify and maintain
qualification as a REIT, changes in the agency MBS asset yield,
changes in the Company's monetization of net operating loss
carryforwards, changes in the Company's investment strategy,
changes in the Company's ability to generate cash earnings and
dividends, preservation and utilization of the Company's net
operating loss and net capital loss carryforwards, impacts of
changes to and changes by Fannie Mae and Freddie Mac, actions taken
by the U.S. Federal Reserve, the Federal Housing Finance Agency and
the U.S. Treasury, availability of opportunities that meet or
exceed the Company's risk adjusted return expectations, ability and
willingness to make future dividends, ability to generate
sufficient cash through retained earnings to satisfy capital needs,
and general economic, political, regulatory and market
conditions. These and other material risks are described in
the Company's most recent Annual Report on Form 10-K and any other
documents filed by the Company with the SEC from time to time,
which are available from the Company and from the SEC, and you
should read and understand these risks when evaluating any
forward-looking statement. All forward-looking statements speak
only as of the date on which they are made. New risks and
uncertainties arise over time, and it is not possible to predict
those events or how they may affect the Company. Except as
required by law, the Company is not obligated to, and does not
intend to, update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Financial data to
follow
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED BALANCE
SHEETS
(Dollars in thousands,
except per share amounts)
(Unaudited)
|
|
|
|
September 30,
2022
|
|
|
June 30,
2022
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents (includes $560 and $247, respectively,
from consolidated VIEs)
|
|
$
|
13,803
|
|
|
$
|
9,575
|
|
Restricted
cash
|
|
|
590
|
|
|
|
1,270
|
|
Restricted cash of
consolidated VIEs
|
|
|
1,954
|
|
|
|
4,649
|
|
Agency mortgage-backed
securities, at fair value
|
|
|
445,122
|
|
|
|
382,357
|
|
MSR financing
receivables, at fair value
|
|
|
164,585
|
|
|
|
120,260
|
|
Credit investments, at
fair value
|
|
|
145,158
|
|
|
|
142,903
|
|
Mortgage loans of
consolidated VIEs, at fair value
|
|
|
203,456
|
|
|
|
225,004
|
|
Single-family
residential real estate (net of $977 and $326, respectively, of
accumulated depreciation)
|
|
|
81,242
|
|
|
|
68,190
|
|
Single-family
residential real estate held-for-sale (net of $-0- and $1,288,
respectively, of accumulated depreciation)
|
|
|
—
|
|
|
|
112,979
|
|
Deposits
|
|
|
3,228
|
|
|
|
4,623
|
|
Other assets (includes
$1,413 and $1,401, respectively, from consolidated VIEs)
|
|
|
15,003
|
|
|
|
12,945
|
|
Total
assets
|
|
$
|
1,074,141
|
|
|
$
|
1,084,755
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
429,910
|
|
|
$
|
329,994
|
|
Purchased securities
payable
|
|
|
93,081
|
|
|
|
114,410
|
|
Secured debt of
consolidated VIEs, at fair value
|
|
|
182,336
|
|
|
|
205,497
|
|
Long-term unsecured
debt
|
|
|
86,302
|
|
|
|
86,199
|
|
Long-term debt secured
by single-family properties
|
|
|
56,801
|
|
|
|
122,770
|
|
Other liabilities
(includes $265 and $275, respectively, from consolidated
VIEs)
|
|
|
11,501
|
|
|
|
12,187
|
|
Total
liabilities
|
|
|
859,931
|
|
|
|
871,057
|
|
Equity:
|
|
|
|
|
|
|
Preferred stock
(liquidation preference of $33,612 and $35,609,
respectively)
|
|
|
32,968
|
|
|
|
34,608
|
|
Common stock
|
|
|
286
|
|
|
|
291
|
|
Additional paid-in
capital
|
|
|
2,024,746
|
|
|
|
2,025,345
|
|
Accumulated
deficit
|
|
|
(1,843,790)
|
|
|
|
(1,846,546)
|
|
Total
equity
|
|
|
214,210
|
|
|
|
213,698
|
|
Total liabilities
and equity
|
|
$
|
1,074,141
|
|
|
$
|
1,084,755
|
|
Book value per
common share (1)
|
|
$
|
6.45
|
|
|
$
|
6.30
|
|
Common shares
outstanding (in thousands) (2)
|
|
|
28,154
|
|
|
|
28,529
|
|
|
|
|
|
|
|
|
(1) Book value per
common share is calculated as total equity plus accumulated
depreciation of single-family residential real estate less
the
preferred stock
liquidation preference divided by common shares
outstanding.
|
|
(2) Represents common
shares outstanding plus vested restricted stock units convertible
into common stock less shares of unvested restricted
common stock. The
amount of unvested restricted common stock was 1,023 as of
September 30, 2022. Does not include performance-based
units
that are convertible
into common stock following both the achievement of performance
goals over applicable performance periods and continued
employment. The
number of shares of common stock issuable under outstanding
performance-based units can range from zero to 4,848 as
of
September 30,
2022.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022
|
|
|
June 30,
2022
|
|
Assets and
liabilities of consolidated VIEs:
|
|
|
|
|
|
|
Cash and restricted
cash
|
|
$
|
2,514
|
|
|
$
|
4,896
|
|
Mortgage loans, at fair
value
|
|
|
203,456
|
|
|
|
225,004
|
|
Other assets
|
|
|
1,413
|
|
|
|
1,401
|
|
Secured debt, at fair
value
|
|
|
(182,336)
|
|
|
|
(205,497)
|
|
Other
liabilities
|
|
|
(265)
|
|
|
|
(275)
|
|
Net investment in
consolidated VIEs
|
|
$
|
24,782
|
|
|
$
|
25,529
|
|
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in thousands,
except per share data)
(Unaudited)
|
|
|
|
Three Months
Ended
|
|
|
|
September 30,
2022
|
|
|
June 30,
2022
|
|
|
March 31,
2022
|
|
|
December 31,
2021
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR financing
receivables
|
|
$
|
3,608
|
|
|
$
|
3,983
|
|
|
$
|
3,382
|
|
|
$
|
2,589
|
|
Agency mortgage-backed
securities
|
|
|
3,631
|
|
|
|
2,065
|
|
|
|
1,492
|
|
|
|
2,206
|
|
Credit securities and
loans
|
|
|
2,736
|
|
|
|
991
|
|
|
|
853
|
|
|
|
772
|
|
Mortgage loans of
consolidated VIEs
|
|
|
2,303
|
|
|
|
1,611
|
|
|
|
1,354
|
|
|
|
144
|
|
Other
|
|
|
110
|
|
|
|
113
|
|
|
|
325
|
|
|
|
169
|
|
Total interest and
other income
|
|
|
12,388
|
|
|
|
8,763
|
|
|
|
7,406
|
|
|
|
5,880
|
|
Rent revenues from
single-family properties
|
|
|
2,103
|
|
|
|
2,137
|
|
|
|
1,064
|
|
|
|
259
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
|
2,863
|
|
|
|
763
|
|
|
|
276
|
|
|
|
286
|
|
Long-term debt secured
by single-family properties
|
|
|
741
|
|
|
|
718
|
|
|
|
408
|
|
|
|
151
|
|
Long-term unsecured
debt
|
|
|
1,456
|
|
|
|
1,400
|
|
|
|
1,370
|
|
|
|
1,376
|
|
Secured debt of
consolidated VIEs
|
|
|
912
|
|
|
|
1,578
|
|
|
|
1,188
|
|
|
|
20
|
|
Total interest
expense
|
|
|
5,972
|
|
|
|
4,459
|
|
|
|
3,242
|
|
|
|
1,833
|
|
Single-family
property operating expenses
|
|
|
1,872
|
|
|
|
1,915
|
|
|
|
1,531
|
|
|
|
593
|
|
Net operating
income
|
|
|
6,647
|
|
|
|
4,526
|
|
|
|
3,697
|
|
|
|
3,713
|
|
Investment and
derivative gain (loss), net
|
|
|
1,235
|
|
|
|
370
|
|
|
|
(827)
|
|
|
|
3,909
|
|
General and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
2,256
|
|
|
|
2,324
|
|
|
|
2,065
|
|
|
|
1,855
|
|
Other general and
administrative expenses
|
|
|
1,121
|
|
|
|
1,463
|
|
|
|
1,219
|
|
|
|
1,125
|
|
Total general and
administrative expenses
|
|
|
3,377
|
|
|
|
3,787
|
|
|
|
3,284
|
|
|
|
2,980
|
|
Income (loss) before
income taxes
|
|
|
4,505
|
|
|
|
1,109
|
|
|
|
(414)
|
|
|
|
4,642
|
|
Income tax
provision
|
|
|
1,074
|
|
|
|
802
|
|
|
|
2,287
|
|
|
|
808
|
|
Net income
(loss)
|
|
|
3,431
|
|
|
|
307
|
|
|
|
(2,701)
|
|
|
|
3,834
|
|
Dividend on preferred
stock
|
|
|
(675)
|
|
|
|
(707)
|
|
|
|
(742)
|
|
|
|
(739)
|
|
Net income (loss)
available (attributable) to
common stock
|
|
$
|
2,756
|
|
|
$
|
(400)
|
|
|
$
|
(3,443)
|
|
|
$
|
3,095
|
|
Basic earnings (loss)
per common share
|
|
$
|
0.10
|
|
|
$
|
(0.01)
|
|
|
$
|
(0.12)
|
|
|
$
|
0.10
|
|
Diluted earnings (loss)
per common share
|
|
$
|
0.10
|
|
|
$
|
(0.01)
|
|
|
$
|
(0.12)
|
|
|
$
|
0.10
|
|
Weighted average
common shares outstanding (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,338
|
|
|
|
28,766
|
|
|
|
29,832
|
|
|
|
31,100
|
|
Diluted
|
|
|
28,913
|
|
|
|
28,766
|
|
|
|
29,832
|
|
|
|
31,421
|
|
Non-GAAP Earnings Available for Distribution
In addition to the results of operations determined in
accordance with GAAP, we also report a non-GAAP financial measure
"earnings available for distribution" . We define earnings
available for distribution as net income available to common stock
determined in accordance with GAAP adjusted for the following
items:
- Plus (less) realized and unrealized losses (gains) on
investments and derivatives;
- Plus (less) income tax provision (benefit) for TRS realized and
unrealized gains and losses on investments and derivatives
- Plus TBA dollar roll income (expense)
- Plus (less) interest rate swap net interest income
(expense)
- Plus depreciation of single-family residential properties
- Plus stock-based compensation
Realized and unrealized gains and losses recognized with respect
to our mortgage related investments and economic hedging
instruments, which are reported in line item "investment and
derivative gain (loss), net" of our consolidated statements of
comprehensive income, other than TBA dollar roll income and
interest rate swap net interest income or expense, are excluded
from the computation of earnings available for distribution as such
gains on losses are not reflective of the economic interest income
earned or interest expense incurred from our interest-bearing
financial assets and liabilities during the indicated reporting
period. Because our long-term-focused investment strategy for
our mortgage related investment portfolio is to generate a net
spread on the leveraged assets while prudently hedging periodic
changes in the fair value of those assets attributable to changes
in benchmark interest rates, we generally expect the fluctuations
in the fair value of our mortgage related investments and economic
hedging instruments to largely offset one another over time.
In addition, certain of our investments are held by our TRS which
is subject to U.S. federal and state corporate income taxes.
In calculating earnings available for distribution, any income tax
provision or benefit associated with gains or losses on our
mortgage related investments and economic hedging instruments are
also excluded from earnings available for distribution.
TBA dollar roll income (expense) represents the economic
equivalent of net interest income (expense) generated from our
transactions in non-specified fixed-rate agency MBS, executed
through sequential series of forward-settling purchase and sale
transactions that are settled on a net basis (known as "dollar
roll" transactions). Dollar roll income (expense) is generated
(incurred) as a result of delaying, or "rolling," the settlement of
a forward-settling purchase (sale) of a TBA agency MBS by entering
into an offsetting "spot" sale (purchase) with the same
counterparty prior to the settlement date, net settling the
"paired-off" positions in cash, and contemporaneously entering
another forward-settling purchase (sale) with the same counterparty
of a TBA agency MBS of the same essential characteristics for a
later settlement date at a price discount relative to the spot sale
(purchase). The price discount of the forward-settling purchase
(sale) relative to the contemporaneously executed spot sale
(purchase) reflects compensation to the seller for the interest
income (inclusive of expected prepayments) that, at the time of
sale, is expected to be foregone as a result of relinquishing
beneficial ownership of the MBS from the settlement date of the
spot sale until the settlement date of the forward purchase, net of
implied repurchase financing costs. We calculate dollar roll income
(expense) as the excess of the spot sale (purchase) price over the
forward-settling purchase (sale) price and recognize this amount
ratably over the period beginning on the settlement date of the
sale (purchase) and ending on the settlement date of the forward
purchase (sale). In our consolidated statements of comprehensive
income prepared in accordance with GAAP, TBA agency MBS dollar roll
income (expense) is reported as a component of the overall periodic
change in the fair value of TBA forward commitments within the line
item "investment and derivative gain (loss), net."
We utilize interest rate swap agreements to economically hedge a
portion of our exposure to variability in future interest cash
flows, attributable to changes in benchmark interest rates,
associated with future roll-overs of our short-term repurchase
agreement financing arrangements. Accordingly, the net interest
income earned or expense incurred (commonly referred to as "net
interest carry") from our interest rate swap agreements in
combination with repurchase agreement interest expense recognized
in accordance with GAAP represents our effective "economic interest
expense." In our consolidated statements of comprehensive income
prepared in accordance with GAAP, the net interest income earned or
expense incurred from interest rate swap agreements is reported as
a component of the overall periodic change in the fair value of
derivative instruments within the line item "investment and
derivative gain (loss), net."
The following table provides a reconciliation of GAAP net income
(loss) available (attributable) to common stock for the last four
fiscal quarters (unaudited, dollars in thousands):
|
|
Three Months
Ended
|
|
|
|
September 30,
2022
|
|
|
June 30,
2022
|
|
|
March 31,
2022
|
|
|
December 31,
2021
|
|
Net income (loss)
available (attributable) to common stock
|
|
$
|
2,756
|
|
|
$
|
(400)
|
|
|
$
|
(3,443)
|
|
|
$
|
3,095
|
|
Add
(less):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and
derivative (gain) loss, net
|
|
|
(1,235)
|
|
|
|
(370)
|
|
|
|
827
|
|
|
|
(3,909)
|
|
Income tax provision
for TRS investment gain
|
|
|
406
|
|
|
|
496
|
|
|
|
2,058
|
|
|
|
679
|
|
Depreciation of
single-family residential properties
|
|
|
632
|
|
|
|
604
|
|
|
|
715
|
|
|
|
287
|
|
Stock-based
compensation expense
|
|
|
919
|
|
|
|
992
|
|
|
|
761
|
|
|
|
523
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll
(expense) income
|
|
|
(421)
|
|
|
|
280
|
|
|
|
823
|
|
|
|
465
|
|
Interest rate swap net
interest income (expense)
|
|
|
258
|
|
|
|
(282)
|
|
|
|
(291)
|
|
|
|
(653)
|
|
Non-GAAP earnings
available for distribution
|
|
$
|
3,315
|
|
|
$
|
1,320
|
|
|
$
|
1,450
|
|
|
$
|
487
|
|
Non-GAAP earnings
available for distribution per
diluted common share
|
|
$
|
0.11
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
Weighted average
diluted common shares outstanding
|
|
|
28,913
|
|
|
|
29,300
|
|
|
|
30,315
|
|
|
|
31,421
|
|
Earnings available for distribution is used by management to
evaluate the financial performance of our long-term-focused, net
interest spread-based investment strategy and core business
activities over periods of time as well as assist with the
determination of the appropriate level of periodic dividends to
common stockholders. In addition, we believe that earnings
available for distribution assists investors in understanding and
evaluating the financial performance of our long-term-focused, net
interest spread-based investment strategy and core business
activities over periods of time as well as its earnings
capacity.
A limitation of utilizing this non-GAAP financial measure is
that the effect of accounting for all events or transactions in
accordance with GAAP does, in fact, reflect the financial results
of our business and these effects should not be ignored when
evaluating and analyzing our financial results. In addition, our
calculation of earnings available for distribution may not be
comparable to other similarly titled measures of other
companies. Therefore, we believe that earnings available for
distribution should be considered as a supplement to, and in
conjunction with, net income and comprehensive income determined in
accordance with GAAP. Furthermore, there may be differences between
earnings available for distribution and taxable income determined
in accordance with the Internal Revenue Code. As a REIT, we
are required to distribute at least 90% of our REIT taxable income
(subject to certain adjustments) to qualify as a REIT and all of
our taxable income in order to not be subject to any U.S. federal
or state corporate income taxes. Accordingly, earnings available
for distribution may not equal our distribution requirements as a
REIT.
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SOURCE Arlington Asset Investment Corp.