AAIC - Earnings call 1 2021 | Arlington Asset Investment Corp.

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Operator

Good morning. I'd like to welcome everyone to the Arlington Asset First Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Rich 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

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

call now like to to I would for turn over remarks. Tonkel the his Rock

J. Rock Tonkel

Manager. Arlington Portfolio Also us our on joining Good Thank today XXXX earnings John you, and afternoon, Murray, welcome Asset. Rich. call the to quarter the for first is call

expectations monetary full global vaccine fiscal reopening. broader During of recovery, the stimulus first quarter, government growing to economic efforts a assets risk and a and rollout economic amid continue supported by rise progressing policies,

during inflation at quarter Treasury yield interest the rose long-term the the anchored a rates In over points long-term With remain the U.S. economic the overriding response, first outlook, low quarter, increased interest to theme historical rates risk. of significant increasing leading basis as levels. XX-year steepening for curve with XX rapidly short the rate positive was the

sharp lower rise agency in classes. strategy credit, with the with servicing portfolio risk extension end of was continued complement of to quarter the is its particularly treasury to by of -- mortgage multiple mortgage returns. rise curve agency during company's home during strong in diversify and mortgage prepayment allocation of rights mortgage expects rise an our long coupon unencumbered company Performance targeted liquidity, the to the investment short price The durations, an quarter, investment led level flat other reliability MBS. mortgage credit which including rights, expectations the first portions Over strong Residential the while of the were Agency long-term of deploying spreads speed its annual of growth. strategies, relatively MBS improve currently and appreciation other as rates. its agency investment mortgage The declined income, mortgages of into capital the MBS form sources the complement and of its asset portfolio, servicing construct and time,

financing structures keeping flexibility low non-margin available. while and We where liquid maintain strong, position stable expect leverage utilizing a and financial financial high, by term to

current to In opportunities creation creating compounding is layer of or promote growth investments. company top where that company's flows, addition, on platforms predictability for value the in the possible, of investment potential partnerships returns and focused on the embedded the the investment

capital reallocating solid made company the quarter, first progress into these MSR-related the investments. toward During goals by

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

for MBS offer upside positive Mac to Mae above exist loans mortgage Fannie Newly with MSRs attractive levered expansion, returns comparable funding hedge unlevered from and opportunities. risk duration hold potential licenses directly. exposure purchase Freddie servicing mark-to-market to rights currently specific or no is of risk. purchase At hold agency to and no matched entry as to an servicing return Xx, to in extension, Significant offer investing to just investments price required multiples mortgage rights investor financing created correlation barriers of MSR multiple base

to we and a in risk. relationship means, On oversight servicer, licensed our to as invest without established a GSE-approved that would rights the has economic strategic servicer amount MSRs of an investor the capital licensed mortgage enables residential servicing to an time return holding with requisite a acquire investment ongoing or license a prior company requires need highlighted typically directly. earnings garner operational to which through the subjects To and call, of the that in company and the traditional mortgage as well significant complete establish regulatory investor

rights terms the risk company, the this differentiates to a payable provides the the the all And purchase MSRs our of MSRs, to our company in partner. lower channel directly. less partner fee capital mortgage believe of partnership, and of servicing efficient, Under receives the to Arlington. investing economics economics We in cost-effective turn, our for

but mortgage quarter. the from thesis modestly to on direction, our rights above results the any has flows at performed To generated capacity our as significant capital portfolio leverage to Xx The utilized Xx. investment to add cash approximately company MSR-related leverage returns. not expectations potential above experienced its MSR MSR expected, servicing positive the expansion economic our portfolio to during produced partner as allocating option first increase investment date, multiple returns our has to date, for and portfolio asset has outsized and

our portfolio assets, And allocation investable grew end. The capital $XX or unpaid of in of $X.X representing XX, million balance. XX% investable invested to as $XX today, approximately investment billion we XX% quarter to principal capital additional to of March have an over subsequent MSR-related MSR increasing company's million

costs, curve. continue ongoing Returns benefit from there Turning support steepening funding federal agency to repo low to levered MBS. yield reserve and

an and with appropriate MBS of high hedging Although seeing costs returns hedge Against the available we rise backdrop, position. have in are single this increased long-term levered the in interest rates mortgage during extension in quarter. duration currently digits the agency

market Federal Reserve improvement spreads. the concerns to to if may of economy escalate, that holdings widening the its taper to lead could demonstrate agency However, mortgage continues agency continue of expectation and inflation mortgage a

significantly multiyear the allocated remains company leverage increasing capital. at about cautious its mortgage spreads on tight, currently agency mortgage With the

More complementing portfolio rise while Taken more value value in the agency from drag MBS Furthermore, $XX we million levered need extension in highest. the carry million ROEs. tend in MSRs rates hedge. agency for positive increasing capital increase when a are aggregate, of mortgage levered can hedges overall occurs as with swaps MSRs invest agency a between for mortgage in This agency decreases when MBS in and hedge positive mismatches durations risk the are approximately MSRs, the increase for carry with securities, current specifically, in we agency specifically every carry agency securities MSRs to without turns negative and into a largest extend. long-dated combination, positive. unlevered levered returns replacing MSRs MBS leveraged on resulting carry $X environment typically

fully against portfolio another a the way, principal billion, million now XXX of profile single in digits hedges at have backdrop of $XXX the Said overall we that boosting have into the hold returns, double would to $XX at improving of X.XX%, portfolio long-dated risk levered and XX, to the them our with of WACC time, of of and agency the set unpaid eliminated agency approximately million high ROE that the for $XXX XXX capital MSR added of MBS would digits combined. MBS March need balance basis points approximately portfolio invested approximately balance million which from $X.X

the in and opportunities, to returns or agency or for agency the at-risk continuing redeploy on presently term well form requiring investments other agency allocation while risk-adjusted MBS in and The mortgage expects invest capital over including to be closely excess assets may environment, real to that the offer meets those other In MBS, risk-adjusted evaluating lower asset mortgage credit and objectives into MBS, also in strong risk current leverage. nonmarginable while company as diversification estate-related particular, primarily holds its that maintain liquidity of of the unencumbered evaluating financing leverage, MSR-related company strategies opportunities structures. is focused, returns, better that time offering opportunities MBS, as in low targeted to company's which classes, in not financial the agency substantial returns in a it complement while of

investment was not For concentration yet a duration fully in asset long interest first portfolio rise lower MSR asset duration as quarter, offset to rates. portfolio first began extending to the net and prices declines quarter underperformed long-term its rise, credit and first portfolio. agency the beginning agency the underperformance company hedge was well The to at be The during securities agency quarter. at and a to offset MSR-related portfolio was MBS investments the positions its as with served of MSR volatility declined sharp MBS hedge coupon the and as the portfolio in the Arlington's during partially company increased the the while rates scaled significantly added asset MBS combined strong to in rate in year-end, that mortgage to interest hedge year response to due as able company's due agency decline. very credit performance the its mortgage assets of mitigate which company's price experienced metrics The strengthening and price their by in

from March These portfolio the book as of of quarter decline $X.XX performance company per XX, report the to value of led results combined X% share end. prior investment a

at April XX, of company's significant from decline value X% at-risk increased low since of the operate The and its with leverage per of approximately ratio XX, with overall standing company -- book As of as flexibility X a to quarter turn continue March March share year-end. end. leverage as X.X:X financial

$X.XX For share. a of the per GAAP core reported of the and quarter, loss operating share $X.XX first income net company per

despite our decline the contribution residential trust anticipated duration to earnings credit prior highlighted would that we income of core and business of quarter accelerated we operating consolidated to purpose As investment. short of loans, our a first call, paydown quarter its performance the during due strong

was for expectations. to our economic performance income Although the first this its initial this consolidated operating investment return strong credit X% quarter core particularly of a contribution in experienced as the quarter, lower trust to company's continue exceed its

return its overall The needs, dividend on including multiple continue stock common declare liquidity a factors, first Directors dividends opportunities which on results, investments will company based to REIT -- on for quarter. conditions, the its the Board and stock requirements. distribution common on earnings company's of did of market current payment The quarterly evaluate not

return tax carryforwards company shares at With regard stock. common to and of remaining also large annual continues accretive stock prices. look to repurchase flexibility taxable to its to utilize a capital have its The will from shareholders company authorization its The common have opportunistically its requirements. the income Board company to the distribution to reduce of by requirements, to continue repurchasing REIT does its its shares loss to

high-return solid the to The date goals company its by it and encouraged Overall, and its investment its flow. forward. long-term investment the provide risk, steps going the to its sources objective during offer very company MBS quarter optimistic multiple noncommodity progress agency of transition has took towards towards first portfolio ongoing diversification is to is positive complementing channels, of raise returns overall in about a made with income sustainable which prospects shareholders

addition to value attractive existing long-term other in creation. classes could mortgage MBS, the focus enterprise continues credit a and In company in MSR that strategies, developing result and strategic with opportunities financial investment its partnerships platforms asset on evaluate potentially to

time, diversified As over these which the shareholders. investments noncommodity channels, expect capital and our form MSRs to potential to the capital available we from through pathway made returns can provide company earnings expanded higher to for deploys returning power investments

to As financing its capture attractive across be that conditions structures where investment high to stock the a to as ongoing repurchase authority. utilize position, as ability strong maintain we and company arise expect occurs, possible, opportunistic opportunities well may of leverage, use that economic by enabling financial flexibility the low and process term evolve highlighted as deployment financial sizable sectors the

I open now questions. the to call like would Operator, for

Operator

[Operator JMP Trevor take Instructions] from with We'll first Cranston our question Securities.

Trevor Cranston

portfolio, the on and it of you more capital could your are much capital over a into to of how the course questions as about how relative guys the class capital year? investments. mean, benefits of I And about allocation? think of sort of the thinking an couple MSR asset allocate towards you has I target deploying that A sort agency guess, for MSRs potentially first, you

J. Rock Tonkel

existing but of $XXX along of to there, utilized that borrow available the allocation not financing of facilities that capital of with a financing $XX not quite, total leverage one-to-one half on up significantly. that to enable invested we to think almost lever neighborhood envision capital value could the our million don't lines amount, But which million in quite I have I those us are MSRs. of see the way invested we we today, facilities using us yet would us. on think And something to that would the we take not So basis.

that consider our going So our near-term million multiples, of in if now. any, rate of we in may a feels the modest, we investment, between would it. allocation probably the time, natural would change near think horizon. $XXX Depending like sort on capital primary mean but horizon, reasonable time factors, term, about our and beyond is markets, horizon and That of of near-term frame, that, somewhere sort that's but how total other here which over incremental

Trevor Cranston

that coupons big could on prior purchases curious to market of lot yields you the fixed terms in on also And that just X-plus of yield, increase buying And the relative now. Slide it. comment would be? in was from reported percent to assets is is you mortgage benefited I asset low Got Okay. the income new then today is MSRs, pretty if right in attractive MSR curious a the number to particularly expect rates? I something XX economic other on on was yield where that you

J. Rock Tonkel

Sure.

another So course or latter quarter. $XX the saw fourth the initiated in quarter, at in, had And we of the in the time, something that million part quarter. We first during last like layered that the think early or the million amount MSRs. I as quarter, of fourth you had $XX partnership, we probably significant added of

of little sort the got So a multiples, investing little above benefit maybe the of little at a below, bit in or X. A baskets. those neighborhood lower below say, those in between X-ish, of a we above, X little

And during the in benefited so script. as multiple the for said we quarter expansion, I

the Today, the script, your question, MSRs. something to paying said, lower naturally we that because yields look we an of multiples in at would they're maybe closer something little where change, at flow reasonable those a flow. be a bulk that alluded as to multiples X were there And level like -- purchase than and be an forward the that We of look expect I you're on more -- little a we to bit I a a closer higher level, on on like Maybe sort were neighborhood even X. market, X. of these would date to And have multiple and in been higher those to going the at probably involved in like to X.

or that like bulk the to depending newly assets here X in placed feel we so X from a And range today, fair is probably unlevered those portfolio flow for forward. range in on yield

Trevor Cranston

add -- Can changes the to And comment net made end overall is? curve? of quarter in to duration as continued fairly like And and of to in the it. to a portfolio, agency continue obviously in exposure in then the rate those. you of the not book. of kind second at MSRs. MSRs terms looking in maybe have have say you any the whether to book or interest you've more Got And X, addition, positioning you sheet your have relative what's yield find Okay. swap balance your swaps of it what seems to Or kind the then your changes Slide you on large long-duration amount long also the of the

J. Rock Tonkel

Trevor. time, in question, Great we closed -- placed. had to in of Well MSRs that that April. a able question. put been The Great yet Yes. block not we've on at place

to duration question, a that's shift no footprint surprise perspective. of an so your from opportunity bit sort provided And a our to

bias, closer say the of the a we a slightly bit duration And charts less time. still and between duration negative but meaningfully that but in had X negative time, I'd now. a at flat. that was see there you left that's duration to bias That's at case that negative X. So negative, than still

million charts, in mind see neighborhood those years. of of keep short $XXX you were Also X swaps, those X at time the to that

scaled of with keeping end then quarter April. mind. And worth balance so block is a in place more benefit last since that the thing up And in bit that's the we've closed the MSR in that agency actually

some of than shifts that duration book. net of So larger us quarter case with today that of X negative in agency leaves bit was and less the MSR on combination the modest all hedging the got And a net at the then. side We've to more duration footprint a we've larger we between X a got end. than did duration obviously -- effect

Richard Konzmann

And Trevor, this is Rich.

duration you our sensitivity portfolio XX, the as at we shock sensitivity, to rate calculation see have If didn't the end, rate well. the and on gap interest quarter the Slide

Trevor Cranston

I that. had missed actually Okay.

pointing for out. thanks that So

J. Rock Tonkel

Trevor, more be that clarify Does it? was would there? that helpful that So Or clear, Trevor? is there

Trevor Cranston

No, did that the answer question.

Operator

take from Thalmann. Ladenburg next with Nolan Christopher We'll question our

Christopher Nolan

your quarter, you second all credits? the allocation to in guys Rock, at capital have increased mortgage

J. Rock Tonkel

Slightly.

we have think in of first very quarter, second I late more the the quarter. opportunities, sort into quarter, mortgage second Chris, interesting begun to the see in credit in

to we added net end that at double would single have high edged we've and as looking which up a have the those digits. portfolio since been ROEs the back closely into the digits bit their types, from quarter, So of more are

opportunities. got Some given that We the above were loosened returns has into not up X. were selling now equity where to And types. that and even they far point us on those credit some and new

come As in you saw down the first our quarter. balances

move actually to to quarter, we the there that we if up incremental bit. in given we've it little able volume Second credit a predicting digits. mortgage into the me the able surprise improvement without quarter, been the will, that were to in wouldn't portfolio And double some ROEs add

Christopher Nolan

you where of look to like now? half second like the would capital the it year, thinking the at conceptually, look division you from you are as allocation is And where,

J. Rock Tonkel

opportunities. will relative risk-adjusted It question. return on good a depend it's Well,

there. couple been for number opportunities asset of said a nonmortgage-related made mortgage-related So and classes. across now quarters, as we of progress evaluating we've We've some have some a

I be about we certainly the that another were alluded that, We'd the things we close release. on our quarter by of encouraged are those guarantee we're didn't have have the progress say several think this we during I hopeful positive course quarter But process end in last quarter, -- other in we that -- making we in of initiatives but are that at that can't may on. them things. work this next out, have to one but in progress we'll solid

mix it'll make be that of byproduct a some progress -- that that allocation higher of investigating capital alternative I asset will are risk the these opportunities think we now. we in diversifying return

For as now, particular in to will our MSRs allocation move we answer that the in multiples don't some this the up lever. dial relative on likely expect to and WACCs MSRs. a are be levered incrementally really you'll question But first quarter to use most us think capital returns where portfolio to agency. substantial up enormously because earlier, that MSRs my on in I agencies would -- leverage that depend allocation would to Trevor's in see I that, versus

others extent was then the was then allocation of To the quarter it in second the capital. see that to some at develop we'd of through total to the year, the a the of these which and quarter, end of where MBS rise non-agency expect XX%, above the the quarter, that third course

today the case, that and capital in XX% leverage. from the and process, to So returns closer XX% moving agency lowering raising in probably

Christopher Nolan

MSRs, And underlying out that, the do you mortgages seek is borrower? for loan your a or so, final the what profile please? question of if particular My is

J. Rock Tonkel

the on to we're script quite We're protecting focused as escalation quite prepayment on I speed be can from can WACC the trying that the said with in keeping you and lid Well, to best focused. what WACC, against be we X.XX% process. in trying a see

we're We're And continue I a points, here And little at like primary in we'll our well our of think, to the feel probably the -- above neighborhood we reasonably lows, lows protected. sitting X.XX% nature today prepayment our in which low a to follow XX WACCs basis focus WACC, focused experience very ongoing transactions. flow historic try originator. mortgage in meantime, we're to very, on also MSR bulk on the assets, able The keeping pattern across of the through their we're agency the their of In our and investing. those rate.

purchase with prepayment recapture these the on we're -- familiar familiar originators we're we're and MSR capability these and perspective, to our intimately and the prepays. pretty originators, from we agency So can of servicers investments recapture focused with aligning the a knowledge of very them, side our with these from

success some try like So some our to entered here partnership and we've feel to begun discipline total we'll it as capital of relative mix. that's our that into size focus. We've scale keep this to critical We we've continue to begun level had the to initially.

Operator

Suisse. We'll take Josh with next our Bolton from Crédit question

Joshua Bolton

you're Rock, about of you you Curious guys share returns by mentioned assets one in trade-off repurchasing would target capital the into shares? between authorization your prepared repurchase your thinking remarks deploying versus the you the that how have. get

J. Rock Tonkel

Sure.

Josh naturally, good alternatives. focused -- we evaluate So single as question, that day, naturally, on we're one every

stock, return the ongoing is stock But we on know so reducing that's capital hand, you the generate base as repurchasing well an I magnitude have variables that the that, calculation. versus on and the one our is, does the other the hand, effects, on think which are, other think, repurchasing in from the of can substantial. know, accretion you what the I pretty opportunities it

accretively. and prices doubled the You've the members in in last well. my folks chunk other in aggressive have I company addition stock to stake a seen us as own of and as both past personally, saw doing quite buying back and it at personal healthy be corporately attractive the year management

where we're So and against the we from very in investment market a quarter. in against judging an view to positively our also it volatility stock sets evaluating as perspective for continue first dynamic process up that context returns the

part MSRs prior of the well level stock, in of nature we particular. exceptional in as as markets in as much did we the that felt facing of periods, in buy We was return for reason opportunity quite compelling the not volatility had were as the we very and

and that the perspective. time. that an to a very stock we -- from the repurchase assessing windows question could our continue on will open all very that we closely attractive view We're when as assume you basis. investment day-by-day up, And We today be evaluate

Operator

We'll take Jason next question Stewart JonesTrading. from our with

Jason Stewart

was I sort comment close we non-real more could looking bit estate it's hoping at If about to on what are a little Rock, And realm of of non-mortgage, that? how parameters you your opportunities. elaborate -- you're there?

J. Rock Tonkel

a question, good So Jason.

in our we've alluded and this past and but have other of within company, collective intellectual on a decades areas. to credit expertise in think related I in the that also many based housing to the property we range financial asset particularly classes, other

And strategic-type of the sort a through and sort so opportunistically we proprietary high-return or asset opportunity on to appreciation. not solid can there of of evaluate of of upside, flow their create but those compounding basis and value generate through creation and we partnership their and ability where value opportunities, only nature relationship also our sort a -- compounding upside

part metrics. so of are those the And

anything to the on have now at we're some to We our hopeful that next next our we progress those. about the have quarter, further But don't making good second more ability we're release it or the at and say of moment. speak say I'd during about may right sometime release. between that

Operator

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

J. Rock Tonkel

to Well, helpful. happy if appreciate your offline, much. time, a to free you. you, call. Feel Thank thank We very us that's everyone, help give and

Operator

call. your for Thank you today's participation. concludes This

You may now disconnect.

Arlington Asset Investment (AAIC) 6 May 212021 Q1 Earnings call transcript