AAIC - Earnings call 3 2020 | Arlington Asset Investment Corp.

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Operator

Good morning. I'd like to welcome everyone to the Arlington Asset Third Quarter 2020 Earnings Call. [Operator Instructions] I'd like to now turn the conference over to Richard Konzmann. Mr. Konzmann, you may begin.

Richard Konzmann

and much, very you good morning. Thank Rich is Konzmann, Chief Asset. Arlington of Officer Financial This

on the this change, to I forward-looking business available the morning's risks of remind begin understand SEC or from material and we which his Form possible like Before call, from guidance now other any statements risk business or from are SEC, present time, future any conditions, documents evaluating to over remarks. and other from subject company result everyone periods would and based concerning from financial subject that in when other time market a or These actual constitute results risks company to cause performance, These read to future strategies expectations statements that that uncertainty you to and events are uncertainties might these circumstances. assumptions Tonkel beliefs, with a are or Rock report management's and to the the current turn differ on matter stated materially and and forward-looking are or of statements factors, risks XX-K filed which as and expectations like to call by and for the factors. would described annual should statement. I are the forward-looking company's expectations,

J. Rock Tonkel

call me Portfolio the to quarter our earnings XXXX on Arlington is Murray third Also and the you, Rich. Good joining welcome morning, Thank call for [ Manager. Asset. ], today John

volatility with the to asset most costs, in credit quarter. company. risk muted available income Risk the agency MBS during classes rate attractive levered on federal support the repo improved rate rallied volatility continues funding to our conditions agency performed of support, mortgages during to economic quarter. appealing low fixed balance ongoing investing tightening investment third at for the contributed investor MBS Continued and the prices continuing spreads well quarter. With readily for during on against interest be strengthen reserve markets an equity sheet interest fiscal backdrop With and federal the funding monetary and and asset agency opportunity sentiment

during more credit the during strengthened impacted prices the the mortgage current the quarter. asset Commercial of performance certain adversely exist, low-rate mortgage embedded However, pools. Along pricing products, higher of a uncertain and asset environment, pandemic tightening in path of as impact classes of to asset spreads has credit with than values shareholders others. In commercial of quarter, continue with mixed mortgage in overall Supported overall which the environment, premiums in improved mortgage certain most offer pay-up favorable the stabilization returns including was economic to the residential and and company's the generally the low prepayments economic grow over the near increased the term agency credit investment earnings focus raise during current and in supply attractive risks credit financial today. specified time housing delinquencies, reflecting third other by returns dynamics, through outlook. MBS, investments rates to is credit asset classes, fixed-income quarter

generally. embedded investment and values creation promote lower protect in using and of on in Such be rise the In compounding leverage keeping sources, is position to company growth asset returns, and periods to provides investments. interest the possible, improve income current to income company permit flexibility addition top low layer the available, posture predictability diversify returns higher with investments flows, focused multiple approaching opportunities where financial and or to against platforms, financial and by creating a ability simultaneously level company Further, volatile structures, potential the reliability nimble the securing value high, on opportunistic and and a the asset the stable underlying risk flexibility to through company's of non-margin maintain to which seeks while that partnerships financing where rates of term rates.

third the During agency objectives. of the sectors and quarter, MBS satisfied certain mortgage portfolio company's credit each

some portfolio as of on appreciation. the returns have which low MSR-related opportunities robust objectives segments credit of future a financing risk expected, asset diversification meet is returns, opportunities attractive the financial result investments well leverage, well as company's as mortgage tightened within The investment other evaluating as and real may as estate company's However, as and for structures. company types,

company reported per credit the value. mortgage last accretive stock operating financing September repurchases maintained The $X.XX net non-GAAP net XX capital a book ratio low discounts for experienced a at repo returned and of as results strategies of book both core as through of and with income value XX, to quarter profile investment the The investable actual per the September X.X% performance. company's quarter. significant company share of to X.X:X per positive share $X.XX share. quarter GAAP shareholders as and at to to its from Turning was capital income The third $X.XX improvement leverage MBS during agency

from leverage distribution to on to during and MBS outstanding and X.X% will operate positions needs an quarter, the financial common XXXX. The ongoing of to The stock through on capital REIT future based while low overall by company The and investment a flexibility. company of third have overall and investments evaluate multiple the quarter, to performance as new portfolios average encouraged REIT stock requirements. spread during the common per does repurchase shareholders quarterly liquidity returns market company at available the company with made mortgage agency third During basis share. economic distribution investments, tightening continuing price the for stock its was any credit accretive expect the factors, both and both attractive repurchases, including its requirements return further repurchased of conditions, dividends $X.XX opportunities benefited not on quarter,

investments. to September company's XX% to capital credit As and mortgage its mortgage the XX, strategy of investable allocated was agency XX%

MBS end single the its financings of opportunities Federal through returns third to company by due to support relatively currently consists the coupon greater diminished repo ongoing agency coupon purpose and continued return residential levered in mortgage MBS. stack, lower diversified to the substantial returns loans. the costs servicing business to quarter. rights, commercial mortgage return securities opportunities company of the mortgage this And residential investments of higher mortgages, agency portfolio MBS loans high the elevated credit sees mortgage allocation purchases prepayment have available with the investment agency mortgage Reserve's lower its in investments, of coupon agency collateralized portfolio, decrease have be significantly funding fee expectations the currently digits. The a prices its company's in Although during expensive loans, in as Within continue levered benefited bond

performance believes levels. mortgage will actively retracement prepayment the for continues to also see MSR multiples for and sector. mortgaging the purchase the further any servicing rights servicer expectations the attractive pre-COVID will is are high Here, in with appreciation company the classes requirements potential implied Current that generate asset the advance embedded opportunities anticipated various attractive of value associated with as MSR while back opportunities multiple across it values, toward believes potential risk-adjusted time. The MSRs current the offering exceed greater return future company creation in for servicing returns pursuing price shareholders company investment over rights

with financing see well. financing company quarter, opportunities continues fixed other Although credit as assets, rights tightened investments to on spreads income servicing during MSR in mortgage and the the along third

investments and the economic risk-adjusted the lead investing rights. could returns MSR the mortgage However, during quarter positive in by for that company forward. returns returns company company directly MSR overall partnership in going class, servicing investments direct to progress with implications asset sees a the And on in made higher towards MSRs,

During investors, LTV to first-lien that residential loans mortgage are position the real quarter, estate nonowner-occupied construction or real particularly repair that purpose Business attractive residential generally risk-adjusted secured by business purpose are loans on professional residential offered requires low estate loans returns. a rehabilitation.

with to added piece company first in on mid-teens. $XX business loss the issued its loss newly a expected portfolio quarter, capital an third the return the million, for purpose a securitization with of adjusted loan During

-- an by trust. the loan delinquent on consolidates the purchase result mitigation reporting of any loss the notes collateral, issued from loans and a underlying As for loan to mortgage underlying trust, the company's any term option rights, purposes, the significant collateral financial the company

recoursed to trust term trust repo company to the exposure in funding with issued its company. The recourse the investment have However, of the the the no collateral credit economic mortgage only loan have portfolio. by does significant notes not currently

on $XX on its no 'XX to portfolio XX, that funding mortgage credit strong for has with funding and calls maturity better-than-expected performed funding mortgage repo had a of As loan at million investments. exposure date. investment has outstanding September repo company's margin origination, non-agency the company financing in not August of commercial any a The has of credit did a or funding sole MSR of consists MBS have repo its statistics

company raise use will solid of diversification multiple mortgage continue Going marginable establishing long-term focus for credit of repo Instead, structures. The directly risk multiple its sources and and the funding has forward, the either non-marginable financing on mortgage provide to toward credit a returns will through investments, asset portfolio that comprised financial progress shareholders. or overall indirectly, company channels company financing of income limit made to to investments.

a financing and flexibility strong use financial by where the We to maintain possible. highlighted term expect financial leverage, position, high of structures low

investment positive investment value that sectors mortgage open to In current attractive liquidity company call conditions shareholders opportunistic I MBS, This strategy, credit investments. additional now and evaluate across a like would enterprise longer-term embedded and addition near company's be compounding and the mortgage complements on opportunities as a may the that investment creation enable retaining estate to provide of income developing bulk partners in while for return the capture its opportunities in the economic economic to in over that platforms arise possible, questions. and evolve quarters. Operator, and deliver a company to where strategic will the other agency the focus should existing the coming sufficient term, with to to continues real credit, result opportunity

Operator

Our Instructions] Crédit with question from come first [Operator Suisse. Doug will Harter

Joshua Bolton

we an And how company, keep up should think saw a is you're expense think Or Doug. about the saw of the expenses base little equity This -- buyback? out about then percentage going about I buyback we the buyback about versus during the paying thinking forward? was could attractiveness on share We a how we when accelerated quarter. the expense can as wondering talk dividend? with you a of activity Josh for for reduction bit the if

J. Rock Tonkel

Thanks, Josh. Great.

buyback stock year. neighborhood clear prices, remainder recent requirement particularly the I of that given of we have at compelling to us pretty stage, that it opportunity don't think the So seems the for with this the is dividend-ing a more in a distribution than

the standpoint, dividend. quarters. as have of, seen of the repurchase why is the value stable path financial liquidity that. to the creation strong position So the we couple the the seems from flexibility over And a you've said, of it ongoing last with to sheet be versus stream benefit able better and that's us that a shareholder repurchases to in I've balance do And

And As in made good can look, the constraints and line. base, through the into next more over there next that come but I expense down, to we've there the -- fast is in of how think expense for there are the say, year some of I'd occur and year. in line the year year progress room reducing expense course next that to this

for market will keep stock. don't the up of think on are the opportunities side. I keep does on So Whether reductions those pace be there what exactly cost buybacks dependent the the further with with or up that

And the any with that may to reductions challenging, pace be on, sort activity, keep so pace reasonably see the doing. possibility can do -- months, there over but returns expense I to reductions we've further the expense more in there's over type the I of burden acceleration that at by will except that been on extent capital longer the the and so that XX shareholders reducing But the of helpful next term. improving be think

Joshua Bolton

far sense. trending And book then in Makes fourth is Great. update on the value how any so quarter?

J. Rock Tonkel

factors that far, during a couple in of the or of portfolio somewhat performance We've some had I'd point say the a have X. up course spots value been book good value helpful October. by up the book other pushing and is of so in

Operator

next Jason from Our Stewart question come Jones with Trading. will

Jason Stewart

a regard out that the we seasonally spec side, little On go give slow agency was you you with through time. as environment, commentary how bit the with regard think I period to wondering of pool to of plays could pay-ups this origination if

J. Rock Tonkel

them pretty to which to be uncertain. to expect obvious spec significantly I'd Great. of we them pattern Thanks. reasons, pretty bit to say expect continue protection really the we pool and change a relatively for would -- the and on have the volatile, I the them from prepayment invested high materially. been think don't remain side speeds, We

But we the to hand, one spec margin, the quite by at be protection offered on they pools. gotten the the have like expensive. So

be us the wouldn't see in third fourth on if active proportionately in bit you quarter And little the maybe so role -- the they quarter. were I surprised be a than more we

were surprise in out spec the we And on active so to on of in side if for the wouldn't the now plays me quarter, conditions. maybe I here proportionally the end think margin, deemphasize the be, touch more end, if portfolio side and it the depending these the and roll just role year, how the rest the in a of the at between

Jason Stewart

how play much Great. does the HPA on side? the thesis That's the helpful. credit credit into And on portfolio,

J. Rock Tonkel

that say, reviewing it continue then that it's much. real credit feet own we've we -- I investments in got terribly side assets. that the in To based extent factor see in HPA has will on We those -- script, the we're more modest. the estate bit extent other -- date To like where HPA their housing play. some feel come on stand X the involvement relying as HPA not those made appreciation, into opportunities, prices protection equation, on where to today. really I'd the are most any We're in mentioned a great, if to more we've

characteristics rentals. point. it, example, both we return last also characteristic, segment have a months to a time to a total So hard at look over some seems your compelling spent but including carry single-family for from return, the taking of lot to HPA, a have That

other we it not And either have have so alone, if but to become spreads there CUSIP think, were in driver to we're the But in remained that to securities enter compelling low. don't on expect tightened modest investment have isn't compelling. very feel we I like that our alternatives calculation, more we more like relative would those returns returns some become I feel those single-family thesis really mean, but have rates space. and be depreciation, for as we little or do rental, very

more and that therefore, rental sort return think So outdistance and matter, MSRs for having single-family this stand absolute returns of are potential I modest environment. as in out

Jason Stewart

last Right. jump this after I'll out question.

With the any they to the on about can when on much the MSR On you be that side, share of these rates think have side. can you forces where how are, seems the details one -- enter you you recaptures agreements you negotiate of it MSR recapture how on side? driving returns is

J. Rock Tonkel

very on of It's And partnership maximize in that recapture very progress that be made that said the we've And to the with I working a a aspect to regard. script, in we'd the potential as important it. extent that partner on portfolio. closely that, partner,

Operator

question Ladenburg next Our Christopher come with will Nolan from Thalmann.

Christopher Nolan

in Rock, terms sort investment is the mix investments? is towards agency fourth the the of weighted staying of allocation -- quarter-to-date, capital

J. Rock Tonkel

stated probably not far, so quarter, fourth much the in it's different script. in say the I'd than we

And think versus about script, at say it X/X. the we that terribly it's X/X, I'd this stage stage. in different not I was said

Christopher Nolan

I CPRs in just a guess simply then lower function agency to of or is quarter, And MBS? the going Okay. the lower coupon that

J. Rock Tonkel

Exactly. Yes.

Christopher Nolan

Great. And guys like then traditional stuff. costs that interest not deck that I does have metrics all the margin, and noticed net you funding the provide

be would guys in that great. you back, those can future putting if So the consider times,

J. Rock Tonkel

And as a the lot XX-Q of those well. will be in

Christopher Nolan

call I low, going that? the to you're just for hear that that Xx. But on did to Understood. have leverage me Understood. seems It it's Final indicating misinterpret outlook helpful question. Or levels But before to below did correctly? the you clarification your a keep Rock, I leverage. you're relatively handy. stuff that

J. Rock Tonkel

from the will maintain the our quarter, -- don't repeatedly flexibility from we don't correctly. on think migration. and I sheet, in quarter script, slight seek heard put slight financial through particular in continue migration to Yes. and think a But to generally, it's, from high do second low balance third it, to may we see Chris. I a -- generally, said as But you that. to -- I've leverage I number a saw me perspective, just hard we paramount a I the the the third as

in don't structural that to I So be to we're leverage. I there the but be expansion made script, expect point leverage, may leverage, where I substantial. use think in the it means And seeking some to possible, repo versus modest

And so achievable. all that were we were we done would would feature repo, versus through first first if leverage, be that if -- increasing it at be

Christopher Nolan

echos that in said credits. I what mortgage this Yes. you've past quarters strategy No, think current on for

J. Rock Tonkel

Yes.

Operator

time, questions. Mr. there more no this Konzmann, at are

Richard Konzmann

very you appreciate thank Well, much, everyone. We it. Okay.

you on, very please good any out. Have reach day. follow If much. Thank you have a

Arlington Asset Investment (AAIC) 4 Nov 202020 Q3 Earnings call transcript