AI - Earnings call transcript Q4 2019

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Operator

Good morning. I'd like to welcome everyone to the Arlington Asset Fourth Quarter 2019 Earnings Call. Please be aware that each of your lines is in a listen-only mode. After the company’s remarks, we will open the floor for questions [Operator Instructions].

I would now like to turn the conference over to Rich Konzmann. Mr. begin. may you Konzmann,

Rich Konzmann

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

risks to business concerning Before I we any results a constitute current cause financial other statements future present expectations, subject to forward-looking would call, might from conditions, factors, or future materially actual periods like to circumstances. guidance number strategies begin remind and everyone and this or that performance, differ stated market morning's statements uncertainties expectations or are business on that of that or

forward-looking XX-K read beliefs, other change, which These with in statements forward-looking a evaluating or and these are uncertainty from other the any and by These the Form management's based from which SEC result on the to and described statements. assumptions material should subject factors. from filed company's and and possible are are company events time-to-time, on documents you other the understand company are available Annual SEC the in as Report risks and of expectations, risk and risks

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

Rock Tonkel

Good Rich. XXXX call me welcome Arlington to morning the earnings Bowers, joining today fourth on Investment Asset. quarter Also is call Officer. and for the Brian you, Chief Thank our

at to XX global treasury points lower the During trade during points. U.S. steepened steepening in X.XX%. uncertainty economic as XX-year ending U.S. basis rate of a in yield markets, treasury outlook basis and on rate increased of curve. the the quarter improved monetary two-year an the increase curve move XX policies XX-year global the quarter, And Federal led XX-year a fourth as and which U.S. a treasury Reserve the The result risk drove to financial

spreads widened benefiting agency swap points eight swaps. portfolios hedge interest with basis rate In MBS addition,

repo funding of price mortgages Federal funding business. to Reserve's steps positive substantial markets rate the to side, X.XX this its actions were yield well and were cut rise in mortgage up interest with funding performance provide quarter, light specified backdrop, along the rates. particularly performing the of liquidity as October MBS meaningfully rates On with agency significant pay the to point between tightened the in in the our pools the benchmark in in Against fourth premiums strong spread on on

for rally the start of retracing the concerns treasury the some economic factors New and XX-year well occurred and XXXX. the U.S. early macroeconomic higher the global other a in Year, impact Since in steepening market as that relatively of performed as rate prepayment coronavirus backdrop, quarter have the led MBS surrounding the of to speed Against of yield this in the fourth well curve agency expectations agency have MBS.

share of and G&A of from the quarter per Turning lower net both to We for and and benefits reported GAAP $X.XX expenses of the our lower income leverage. Core quarter. by prior share. income as were funding core operating $X.XX operating per income costs results actual asset offset yields was unchanged the

September XX, from was declared As common the economic MBS during The total X% plus $X.XX spreads. reflecting quarter. book XX% the increase in as the company's book dividends of measured was of share, value an tightening change per year-end, value of agency return

XX. that increased estimates December today, its As since X% per of the company has value share approximately book

quarter capital average prior TBA in a XX.XX% The for and times leverage prior as weighted to from company's from the total Short-term cash moderated December XX measured X.X end. decline times recourse commitments XX.XX% the of has quarter specified agency during CPR as quarter. portfolio the investable our less as to MBS X.X the of was repo financing fourth

X.XX% MBS for compared yields the to average on lower declined to weighted speeds, from effective the shift agency a due our prepayment fourth asset to securities. asset MBS yield in benefited coupon primarily agency X.XX% lower prior agency quarter, our quarter Although, to these the

of company's fourth CPR a result To of for average which effective X.XX% XXXX, XX.XX% the increase in was the February, yield modest quarter expect weighted a begin asset the of for average weighted we yield would the average in January that fourth approximately quarter. the and period, from months

current Given we interest levels, speeds. expect continued prepayment elevated rate

strategy However, and specified increases mortgage investments going credit our to with MBS lower should reduce their MBS shift should portfolio agency coupon impact. speeds earnings prepayment securities premiums, sensitivity moderate over time. transition And in forward and value our prepayment to the agency in pool our lower in in book incorporate

securities MBS end. investment in coupon shift and premiums XX, at company's from prior X.X% coupon coupon X%, the MBS was agency X.X%, risk, at lower the With prices its of concentration lower lower carry portfolio investment MBS December quarter towards agency that total XX% its XX% increase an prepayment pay up in

of characteristics as the all MBS generic in any hold did company's agency prepayments. of that more favorable with prepayment are addition, TBA company In the sensitive as higher year-end agency specified securities MBS to not investments were

fourth funding from the the in an benefited was prior rate costs company's X.XX% During the repo from quarter rate cuts. Fed's quarter, average X.XX%, as improvement weighted the the company's

have with MBS However, rates Repo agency term X.X% at weighted approximately repo at rates rates the funding funding X.XX% company's currently. since year-end, repo of weighted company's average funding average at MBS elevated XX. as year-end agency were repo improved the with somewhat rates December

As rate and rate of repo XX% average the December funding pay prior fourth weighted with company's quarter fixed XX, was the X.XX% interest from interest swaps its company's was during of unchanged of swaps quarter. rate hedged the the

investment spectrum its quarter, on focus addition actively the Consistent mortgage its MBS. shifted of incorporate to across that, a sectors. fourth highlighted we credit strategy years the XXXX, of on During broadened during assets recent credit with increased company focus opportunities in various the agency in and mortgage evaluation company's to

or that climate but and we current expanded strategy assets their selected experience long on and constructive attractive relationships investment originated and specialty originating, Recognizing particularly the are with and leverage created Initially, and underwriting, characteristics a long-standing protective across number directly resources. financing of investment better possible with sectors, company's their tailored where are mortgage with scores fields company's mature, discipline. limited opportunities specialists the servicing focused encompasses which economic in the in partnership skills credit is in

partners many Arlington with lengthy long. cases decades had relationships in these has

Some of focus areas of these investment well. may and branding future Arlington as have partners its for opportunities

earnings Taken risks, exposures directly the together, as and returns we selected, of well for and prepayment, will volatility opportunities as enhance believe reduce repo these specially and diversify a basket financing originated and company. company's reduce the tailored leverage

industry-focused balance as like as lending real sectors non-QM specialty specialized These residential estate large CMBS commercial single originated asset, loans, commercial and as direct business purpose, residential real CMBS, such residential property-backed segments well borrower estate single and transactions, include small transition mortgages. mortgages

attractive are permanent cash coverage with risk-adjusted mortgage ROEs as financing debt such ranging characteristics significant they began diversified fourth offer credit offer targeted and cases funding from approximately in access XX% sources, potentially during returns quarter. assets liquid offer ratios opportunities also LTVs, The total They liquidity. including to These with and certain either company capital to higher to generally or the these selectively allocating XX%.

investments representing returns. small commercial investable company's to capital. capital totaled The mortgage as consisted commercial XX, and single-borrower credit mortgage MBS of million, mortgage single-asset $XX allocated investments December of of company's year-end primarily XX% attractive investments credit risk-adjusted balance the the of company's As with

the new MBS credit mortgage company returns year, the than opportunities continued the believes are add evaluate current to and start risk-adjusted it has returns. as To higher agency

transition equity During secured investment known for mortgage of the the by fourth also the a an collateralized loans the by holds loans property [ph] invested purpose company residential non-agency as quarter XXXX in homes investment securitization which residential for purposes. in business borrower

mortgage almost expands. the overall on credit as quarter of Following of two further reduction turns reductions corporate since mortgage investments, improved beginning in initial the these combined have fourth by we a credit the leverage observed with invested leverage overall the with investments in prospect returns potential capital

available from shift The on company more includes which as a the to executed opportunities optimistic is discriminate credit broader agency a strategy prudently active mortgage as focus and investments now shareholders well return a MBS. investment to about

of capital disciplined credit ROEs In characteristics. attractive summary, of in totaled and to mortgage with expected XX% XX% credit investable investments company's XX% the opportunities initial

Second, with currently premier and investments of Arlington for originations direct in or partners with a has discussions partners is initial potential co-invested these assets. sourced in additional credit number of

is investments. on have Third, and capital returns two credit increased invested nearly by turns mortgage leverage down overall observed company's initial the following

currently are spreads MBS than historical with agency spreads averages. attractive Fourth, wider

reserve landscape tailwind should to a the In strategy. costs addition, to provide markets mortgage federal credit for the actions and economic funding company's investment cut rates a lowered liquidity interest and supportive be significantly have our current repo

available the to Finally, XXXX, and to cost shareholders. capital in the returns efficiencies enhance on burden expense are company's reduce

in investing should interest net benefit which agency deliver In as summary, in shareholders. company incrementally allow from opportunistically its the well to at current relative mortgage is improvements higher company potentially MBS, to the positioned to returns credit investments as spread in selective attractive returns returns,

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

Operator

Thank you, now floor At questions. We first open to time Sir. will will for this go we Instructions] [Operator question. the our

Please comes Suisse. Our first Crédit Josh go Bolton ahead. with question from

Josh Bolton

segment capital segment? around could of morning. Thanks. have percentage have allocation are Good you credit disclosure large over incremental we the months? could then growth thoughts I you Or pace guys. thinking you in XX Thanks, grow? on of next about Curious, versus for levered agency target appreciate the a the that around how bucket And deck that the the in that how returns credit. do do any additionally, the see

Rock Tonkel

they exposures to portfolio returns to, the over investment script focus. being of obviously as agency not be as that the offer Well, investing and in Josh, that at we the than that expect would other so noted if would think are time. and the I in they the I least characteristics depend continue pace market on today first are the mortgage appealing will today, credit would that course equivalent conditions grow and the higher returns of as evolve segment Conditions ultimate

course if it a number see investable be double an they course over anyone may capital on wouldn't a process. year on surprised portfolio And prudent I the basis the high wouldn't as based in the but suggest grow where as that grow be ongoing time. over of I That's on and may of opportunities put

the the to it's know can we dynamic expansion side. side you that that to would may attractive over extent versus on of As a it materially more grow the process opportunities potential and year But of be be credit in the portfolio. a the continue see that relatively but it course agency -- prudent

Josh Bolton

great? disclosure. makes Thanks. exposed commentary just sensitivity interest around be quarter that's That on to shifted the of it. negatively be any reflective is intentional the macro the sense. positioned one higher portfolio if more agency to rates? Got then rate rates. Curious rate how your your environment view Looks like something much during of just And portfolio Or the and would

Rock Tonkel

recent first my the to guess, tended that is experience modeled a level. agency's scenarios has opposite you that historical been certain down in in see outperform -- a to to up in performance would be steepening has they to underperformed historic I in presentations environments rate that comment probably have these that versus rates actual and true. and expectations or certain extent standard The

So in say reflects these would the actual changes experience and assets today and the observed developments embedded posture this convexity shape that expectations occurred. I changes and prepayment -- the as recent rate curve difference difference market between have the

reflects sort price, -- of focus down It consequence those average the up assets. the a that's the programmatically coupon, couple pool with coupon -- X% average say a ongoing over the broader spec all broader to I'd macroeconomic commentary backdrop. the driven the it down portfolio the of and primarily pay the in of quarters on block of last coupon average observation We've also things. a is a

Josh Bolton

Great. Thanks answer. for the

Operator

you. Thank

comes from go question Trevor ahead. JMP Please next Our Securities. with Cranston

Trevor Cranston

morning. Hey. Thanks. Good

Rock Tonkel

morning. Good

Trevor Cranston

Wondering at in like if It are expect color and you credit the December up structured? could how potential provide new joint expectation around we if those will balance as to loans? the the assets but investments XX sheet some ventures mortgage of to terms show be more for show should MBS continue be strategies at things on there's that showing Or I the on looks loans, point? be up described balance you was as those up to because and like them the should as MBS some co-investments curious to sheet if

Rock Tonkel

could think suppose -- now expect of the for for you've probably time. that immediate that for seen over term now as change in financials represented probably in described what more I I I But the and that? to think potentially anyway you loans you securities Rich, securities quarter. see have different mortgage expect any do mortgage commentary the -- them saw on and fourth

Rich Konzmann

No.

the in investments so of certainly of right. opportunities. type road but our I the spoke think I direct of down in what -- of next Trevor more Literally in joint quarter that's terms latter or opportunities think venture for more you

Rock Tonkel

a you some exactly may to new But We a lines be investments potential the described those alluded with and along to discussions those Trevor. time bit would of and partners of ongoing take further of that develop.

Trevor Cranston

develop Got then expenses income you sourcing with partners expect going be these strategies as any new and associated And on Okay. out? or there the with said the you. you're play up showing to should that that additional to how we working is statement

Rich Konzmann

I think -- Rich, Yes Trevor.

going may G&A some diligence find a There's be offset certainly again be it some see I in more see in incur offset end have cost those it think we and to You into other but by we'll with opportunities. places. will that more to savings places. other that little there's savings bit as of the costs mortgage with relates types in associated costs you'll various generally expanding I think But to things other credit

Rock Tonkel

No, that's think I right.

will to at there be the XXXX around dramatic there assets to expect think opportunities I I for of other And expenses somewhat I think and over all. down personnel. it compared -- don't course to -- higher are and XXXX. higher I the think the do as of don't those around initiation run be cost potentially origination

and you'll cost expense or think basis investments XXXX the and I including through see the in required of the potential exceed incremental exceed probably these meaningfully initiate end I not over course to on a more likely and so because than will cost ventures. And joint come originate potential savings think savings undertake -- you'll net

Trevor Cranston

might then you. say the more And loss-type the first MBS you Got it on or made investments investments where been investing Okay. up? last structure? the can you've higher If question in if so structured you've towards capital far, be it's

Rock Tonkel

and sort It's loss of variable. non-first those the LTV include LTV with very of in positions higher say down stack elements it I'd in toward low It first depends. situations but it the does capital loss, bit a includes characteristics.

looking is a an of coverage then what but that cash that. for LTV, the we're we're in coverage high either we're quite investment cash expecting into other may that with and would combination higher offset And levels factors and those LTV, entering levels that be seniority,

duration - opportunities of relatively are of, credit relatively these of Some like that short also sort short. exposure. we And short the

longer and attract that LTVs are other some characteristics. have And and of the others more moderate lower

of attractive So, low of and flow leverage duration it's nice blend point attachment -- external of generally any those and low cash attached a -- external very on all cases. and in those characteristics

Trevor Cranston

Appreciate Thank Okay. comments. those you.

Operator

Thank you.

Our next ahead. go Christopher Thalmann. Please from Landenburg Nolan question with comes

Christopher Nolan

and investing you Rock. joint that credit new or talking Hey so discussing you about are you forth, partnering Can when equity? When property and with so strategy, on the ventures in you're please? me developer are for clarify

Rock Tonkel

rather sort the that's present originator, equity time. development, it top partnering type and current real probably think I probably of not real -- list. specialist with in that -- particular, thing fields the servicer of commercial the not principally With estate would at sort of than It's lines the even on folks for list lenders, along of be

in. -- co-investments to we with in or field But in joint expect specialty servicers, investments who characteristics and continue and of long are asset engage kinds track engaged things ventures to lenders records the originator, we and have have appealing their

Christopher Nolan

K-Series, And into things the which would the also, strategy on you. Freddie include tranches, of Thank would Great. require your like lower will -- consolidation new financials? the this securitization Mac require

Rock Tonkel

K-Series. It's reviewed the something that have we

say rule right focus been it's and down road, thus principal a potentially not the the to participated not out, I date, isn't have it thus at moment. I wouldn't but it far. We would far down in

Christopher Nolan

question. ROE targets... Final Great.

Rock Tonkel

Chris, we like can not comparable better other derive in but comparable, loans. feel securities not -- opportunities that We but K-Series

Christopher Nolan

Thanks. Okay.

of Finally, ago, guidance mid-single-digit, earlier of sort update high quarters low-double-digit couple to a that? ROEs, about you any for gave

Rock Tonkel

in XX%. the XX% the in we We conditions, it at representative. mid-double think to I to returns seem the current stated Well, segment by the that's under to to We available us script fact on that the digits. to the of hit low range alluding think Mortgage -- be Credit in

I are of creates returns, environment, they risks spec other improved, still on one prepayment meaningful a dollar and the think uncertainty agency the coupon XX% that probably new the is different the from be an speed head what agency hand, that while might top credit security mortgage have is on and able achieve to in end lower invested a in goal.

the same that is the feel are just we lower returns in present volatility, in credit environment higher. the and -- side or you the So,

lower characteristics. script experience they're has said with leverage our far been, that as appealing I and the in higher other So

So, nature be undertaking and evaluating beneficial originating of over the we programmatic these will think assets sort of time.

returns be today, extent over the under the that market progress we But discussions assets conditions the potential current time credit the XX% the that. the to and to the consider on to the and speak. And and max from side, now digits credit at we'll -- continue in maybe we returns with focus ventures as then evolve and agency high-single partners for have for primary ventures first would

Christopher Nolan

Great. you, Thank Rock.

Operator

Thank you.

Our question JonesTrading. Please Jason from go Stewart next ahead. comes of

Jason Stewart

it sense the those in sounds talked Just Thank might how forward profile? going you equity Great. obviously cadence you have into been to might how for time opportune played through two the investing, of in the sounds it it terms fourth commercial the it SFR? time play different sounds a an same investment we two return ventures. the out the of those to relates versus could go migration as like the out acquire joint maybe been points get assets in so you. It credit, you that and Rock, true could mentioned, have like Could at but business the like an opportune credit about quarter. it or

Rock Tonkel

direct we've investigating sort I So, the single then the borrower; on think say loans business property in potentially i.e. are tried non-QM. purpose of I asset specialty we're loans, script industry-specific So, residential small the other that's investigating transition right? we're that residential by across tailored and particular; asset; all commercial or is specialized -- to loans the what of single single sort one bucket, mortgage originated spectrums, these commercial Jason, in that hand CMBS, secured

we evaluating. looking at some appropriate list spectrum and And the at But that added right but the the mix it's isn't down it in risks is it. not moment. right the at top present are And the the our maybe returns that It's we're not of moment, be priority, at point, probably SFR if at be top things may something of the justify possible. potentially. if to themselves, road but It's

Jason Stewart

Okay.

there single any So of… that was sort asset opportunity

Rock Tonkel

Jason, that question. couldn't again understand Say I the

breaking You were up.

Jason Stewart

there thought an single this I'm a Or sorry. all opportunistic investment strategic Was process? of part fourth the investment was the in quarter?

Rock Tonkel

say and over variety discussions was process all of a in of XXXX are I'd undertaking parties with part latter time. highlighted of was for We middle -- that it way of the This right? of the a course investigating. that we were the a above we that folks period over

phase appealing opportunity. in fourth that that experienced opportunistic provided particular we quite And across situations We these partners, with focused areas. evaluation, field. the a And particular as quarter, we we that completed their are came our our in sourcing of experts -- on some

quarter second of side. the and to us we of of see were more opportunities of on the that, quarter in first surprise I'd those see realm say commercial XXXX. those if wouldn't the in the It more course were to

secured opportunities we residential at space. that fix the i.e. XXXX closely intimately look business evaluate and by has the well securitization to flip And continue then executed as included the that in and very, in properties very and those loans focus purpose

Jason Stewart

you. Okay. Thank

Operator

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

Rock Tonkel

seeking to would attention, we're won't partners. doesn't just that more Jason these our each great in help situations a of come develop returns thing we to I credit of on we overall attractive sort here a attractive be individual risk. is is of we the its are nature say what sort mean company, of one effort silos what programmatic leverage potential silos opportunities be. with improve returns opportunistic But what we're of will and reduce characteristics with and will think its and the It that across diversify programmatic seeking

have are in all we're So to that place. programmatic those focuses seeking

Thanks your post answer any them be everybody the have questions for to call. you And if further time. we'll happy

Operator

all This concludes Thank your you, now And All today's may for disconnect. participants thank sir. you conference. attention.

C3.ai (AI) 18 Feb 202019 Q4 Earnings call transcript