EX-99.1 2 aaic-ex99_1.htm EX-99.1 EX-99.1

 

 

Exhibit 99.1

 

img153742315_0.jpg 

 

Contacts:

Media: 703.373.0200 or ir@arlingtonasset.com

Investors: Rich Konzmann at 703.373.0200 or ir@arlingtonasset.com

Arlington Asset Investment Corp. Reports Third Quarter 2022 Financial Results

McLean, VA, November 14, 2022 – 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
o
2.4% increase from prior quarter
o
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
o
$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
o
Purchased an additional 1.1% of the outstanding shares of common stock through November 11, 2022
o
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
o
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
o
$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
o
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 in 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 the 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 annual or 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.