AI - Earnings call transcript Q1 2020

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Operator

Good morning. I like to welcome everyone to the Arlington Asset First Quarter 2020 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 question. [Operator Instructions].

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

Richard Konzmann

This Chief Good Arlington Rich is morning. Konzmann, Asset. Financial of Officer

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

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

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

Rock Tonkel

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

of impact pandemic a the sell-off During financial of price portions caused significantly on economy. to spread global strains quickly liquidity led interest markets rapidly volatility in resulting to assets, equities, assets. COVID-XX of the unprecedented less significant sharp uncertainty health in substantial the volatility, an income and the fixed shutdown market financial surrounding the of extreme the length led economic rate global most transparency large the quarter widening and dislocations by the and The in forced of crisis pandemic magnitude

MBS end to of also a improved widened tightening the the the in financial dislocations led quarter. purchases mortgage led of functioning by for during treasury market the agency agency MBS the period, declines prices spreads aggressively MBS Severe resume market March. liquidity by markets significantly substantial of in Reserve securities to of Federal agency actions to and and mortgage that of until and non-agency During the the spreads non-agency

funding as as to Repo haircuts. as assets high at quality markets more the characterized MBS credit levels, such well sensitive continued repo pricing increased for however, non-agency function strained as and agency limited MBS for availability such by assets were normal funding

mortgage decline calls fund margin apparent of in in end Repo financial company quarter. were to contributing that proactively focus the to to increasing quarter. the to In the pressure with the through it pricing the And along during February, the selling shifted investments the part redemptions led began as of delevering company conditions deteriorating, prioritizing and of liquidity be continued its approach this latter liquidity.

Reserve conditions policies, sectors. and sectors actions stimulus, as Notwithstanding be rapidly many as well aggressive Federal monetary certain in continue fiscal to and across constrained evolving record market

company's balance volatile strong in As counterparties. margin Through the relatively maintained leverage with company through protection its prioritizes liquidity. the continued all sheet meet which and a result, requirements stance, a ordinary this preservation while has of all low the maintaining company to substantial and its course of cautious the period relationships

for share last share, from share The a penny of a Core the per book quarter of as March per decline $X.XX of $X.XX XX. company income was value first reported quarter. operating per

approximately XX% agency March MBS allocated to the credit has and XX% value company's end the capital the to X%. As of investable quarter since investments. by mortgage to Book was of XX, improved

X the December loss a the quarter XXXX. quarter common on company great year and evaluate requirements Company's on tax XX upon including common preferred quarter. stock year. stock factors, will declared did prior redistribution carryforwards of ongoing conditions, future not fourth the applied liquidity, company's In deal its this investments, for market February dividend with company requirements. dividend and with common order dividend its along to declare dividends to opportunities back its be this redistribution the flexibility a on and The stock based This will of provides on company's redistribution that overall company liquidity multiple its needs paid maximize in requirements economic return during managing

Reserve through March evolving in conditions Although, in the market policies fiscal since have continued constrained a lows and selective stance, company as to sectors. taking The markets the and rapidly Federal many well approach leverage of monetary preservation protection Accordingly, to has as increasing liquidity. and and financial improved stimulus, or to low through which the continue maintain capital the its a experienced aggressive current redeploying record patient be sheet prioritizes leverage is the environment. balance in company

peak have to deterioration substantial Reserve purchases after cuts Federal up and significantly however, March. conditions specified pay-ups MBS, of funding widening support mortgage result Reserve agency elevated have agency MBS funding and lead drops markets. funding rate Prices ongoing precipitous Steadier the and agency in as lower Federal in since and for to due repo during pay-ups bases the interest costs market mid-to-late the support MBS of in of to substantial provided pool its recent that time a

relatively MBS to and agency there lower X% levered exposure. associated shortening path extension are the returns durations marginal they the dollar the and in agency With the available and below Notwithstanding the remain valuations of with material extent digits prepayments, while non-economic cautious Federal on appropriate support as Reserve effect be or liquidity expensive relatively levered creating had invested with new for subsides. agency single well of pressure we risk, elevated. the uncertainty X.X% potential coupons, generally MBS protection a same mortgage for to the as credit and continues have some further toward become leverage, in MBS expected to price as the although available agency the has Reserve with remain compressing on at This great Federal time yields buyer,

day, XX% two-thirds credit bond, dedicated to The currently balanced residential between non-agency first XX% repo and with collateral, XX% current discounted of about only and in is company's senior low reflect discounted are through what currently. returns leverage overall collateral, teens liquid deeply capital investments are XX% residential characteristics These representing CUSIP expected the or reasonably with approximately long-term commercial X.Xx we targeting.

mortgage opportunities attractive to recent The foundation with with modest laid financial in markets assets low dislocations and credit in other the work have no or returns leverage. for related

range costs, most returns For double and single residential seniority, and types to collateral most from under assets. unlevered the non-agency available range MBS And senior volatility high and depending low of for scenarios. currently a return other senior single leveragability, low loans and commercial digits stress to for the liquidity, funding liquid and credits on digits

The and company channels and new non-proprietary partners. and with various identifying is investment actively like evaluated existing proprietary both opportunities through these

are calls. currently and to and no today, long-term of these we liquidity, senior opportunities low of received has repo non-agency overall credit piece As on MBS very well-positioned only margin advantage a of repo with characteristics our substantial one mortgage take collateral strong which with zero leverage, loan

teens of that generate through our We assets historical returns high investing cycles. in also the in prior unlevered the experience economic stressed have benefit

conditions from may that time, during clearly phases but various acceptable on substantial a arise flexibility that both executing market current capital and Based not from sustain economic are shock. investments be focuses which to of conditions, capture financial provide plan we benefit situations through these ongoing on sufficient opportunities while returns on yet to may visible optionality earlier over the liquidity this retaining that

during more current quarter the we make them. make with capitalized We've of opportunities are somewhat expect these characteristics investments as the conditions stage months. While and over having course may massive attractive stimulus fiscal on we to supporting monetary of the of and financial to evaluating success benefit investing our permit, that identifying, continue challenging coming to markets the access, of second and these some flexibility in

the company assets totaling new April, investments mortgage attractive characteristics $XX with related In unlevered million. and credit and discounted made

company which reflect fully opportunities in may as period capitalizes power second on earnings reflected quarter immediately. not of earnings these be a the expect we to available company underinvestment time However, of over attractive the the selectively

investments the modest double order to by returns in substantial and sustain economic as full ongoing key capture related created the attractive as dislocations well flexibility its revealed over realization as platform investment liquidity low on to a retaining financial profile objective is impact leverage to A of upside returns COVID-XX time. potential while overall overall digit with shock

well-positioned current attractive economic liquidity take to created shareholders risk investment over environment a summary, to is In have advantage low company adjusted the profile leverage, the that flexible attractive of opportunities characterized time. should been the with enable deliver to from company that financial returns by and

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

Operator

questions. [Operator for open Thank this time, will you. we the floor At Instructions].

question with Our Suisse. first from Doug Harter comes Credit

Doug Harter

shareholders or given difficulty] returning around to versus repo process new [Technical the discount to significant assets? book Yes. buyback capital buying

Rock Tonkel

that we we is something Doug, certainly thing expect, of a Naturally, you'd we is that as spend thinking looking about mission. and first think time our at contemplate the about. larger are Well, lot

are market key exceptional type may as of as from importance the they opportunity right in advantage markets liquidity in available over platform as now. and ingredients is sheet, process we our quite uncertain take and as well become as flexibility of as in in and discussions that in to seeing in these securities that well on that an returns in provide the of time challenges I us come available think additional opportunities that own circumstances markets absorb develop may the or opportunities to time potentially one shareholders over said, to balance for I longer-term the including, are for providing about opportunities may create naturally whatever path

Doug Harter

that if are continuing us extra behind has would there the What more and just any you can give commercial be loan little great? detail loan about And then a the color details leverage? just the Great.

Rock Tonkel

to built collateral, calls function the and again, ratios there. think flows those into quality to repo, there's a that's margin I think not the that I of with financed a well combination the liquidity, as -- in the reasonably as critical critical exhibited it benefits ideal it's assets of one it's sort through this volatile -- type operation is number set very might of critical from I and say, overall, circumstances. sensitive of I would economic two, of as a And detail it's financing risk bottom itself, of expect ideal form combination as ideal credit coverage a loan or in And the things. real period long-term estate say time through Number behavior, line the well. a XX-Q a on very that of sorts the so asset. And But the type piece that's is its behavior would that specialized due no of the And all function operation. one. support it of location, ideal

Operator

Thank you.

Cranston Our next Trevor question from comes JMP with Securities.

Trevor Cranston

guess, color Can discounted capital kind of I provide securities the you're you when new you them looking buying, discussing guys so loans looking and unlevered investment I think you what there and its in are any you investments. additional at? opportunities April, were and whether deployed as the the terms guys or at collateral of in of what you types characterized

Rock Tonkel

I protection, absolute reflect collateral and would most described what spectrum to circumstances say are predominant focus been necessarily not credit see not the return adjusted I that return in a where The We're most opportunities naturally case, for continue liquidity cases there's very cases residential combination. liquidity but seeking and in in every -- terms of we and in interesting expectations. those in are we there. and has

that them pay are the cash a platform for above others cash that a that in other either or in that a other We the opportunities front digits, are digits. discounted type of mid-to-high And total double which opportunities we aspect have higher returns little them and variables see digits, in RPL then see time. in flow part we're over low-to-mid to also carry of couple assets stack. double we and have seeing carry less are the maybe to generating in returns that, some other may similar liquid seeing have return And single then carry securitizations senior that that most nature than

emphasis double break sort think in I of And evaluating identifying down, kinds of attractive primarily very it providing with on exclusively, senior illustrated pretty in but opportunities, of to from primarily, we're so credit robust to new not in perspective residential the balance and characteristics process script liquid although those the that going primarily, a low-to-mid and the again, our be are speak returns we well the that combination, digits.

Trevor Cranston

it. That's Okay. helpful. Got

Rock Tonkel

Taken together.

Trevor Cranston

done potentially partner or they existing Sure. direct far, there new so been you in some what partners. and stuff you've are And you're within some those purchases structure of new are through Is you this our guys mentioned investment buying? by the you've investments looking -- is that at were that

Rock Tonkel

more it's of Today, the former.

are latter on as illustrated opportunities of speak, can that think number up I engaged -- Although of that more we're that we that provide higher also end with look the the situations a sort of we before. returns like the in spectrum

Trevor Cranston

Got it.

Okay. agencies? the any much agency you environment, credit willing you're to and might from the sounded we side. you on to obviously Do be as thoughts when positive credit described away you opposed it quarters much into next the over the more And investment capital three investments have shift side as progress how two of your like

Rock Tonkel

shock Well, it markets that depends on this develops economic how as time. and adapt over to adjust

say suggest that reconsider those markets adjusting would each If I would change and in think always returns our sort we where associated the thoughts the then were materially, are expected to should invested a I illustrated well, with new I the agency. of dollar that side, we're of and and capital it. to agency side. on non-agency

So -- than way play be one there to more the and opportunity. agency may

involved agency to even be the resi and spaces. other So other agency in we're investigating alternatives space

MBS those be it's think or or basis the emphasize levered yielding -- basis on these agency, would a digits single the we a over time we'll to certainly agency, which long we whether as what compete view the I to high-single-digits then unlevered are be somewhere over in with adjusted profile leverage as continue what in direct an we'll to other assets, focusing appropriately characters on think comfortable time. agency exceed can And mid-to-high not opportunity -- be on returns these risk other our

emphasis mid-to-high, total cash the again unlevered digits digits, the credit in currents low-double yields collateral short maybe higher Keeping single and on strong adjusted. the credit basis the duration, in be non-agency than loss side, mind very there side, protection, solidly on returns even that would

as that allow of that unlevered space very on related agency I So as competes basis or with -- -- or opportunities be basis. said, And low pretty agency low speak the opportunities kinds here. there may we well those very leverage to an also for

well, But we're down, agency a to back For that and can in of focused a we And those or now, to book also then continue of in from and immediately us support the intermediate more near new we term. the better think to the expensive that now, in become enough the necessarily drive those cause removed. those. -- Fed returns, to reenter expect have spreads the expensive material with give types become on shift markets opportunities for the has that's returns well extent chance I on if widen to prices effects less look to that be agency and always us don't non-agency agency any dollar reduction other extent that. at we our to eye a to

Operator

you. Thank

Nolan Our Ladenburg with next question Thalmann. comes from Christopher

Christopher Nolan

you with in Excuse mentioned going leverage me strategy? you the new this are if ratio forward what targeting Rock. but earlier, Hey,

Rock Tonkel

that I directly that relates just I think answered. question the Well, to

the agency And on it I that here leverage over depend markets think extent with my script extent I I market shifts our in and non-agency described would on and the environment the continue the the sort in of a and would have over on suggest the disclosed that and time will to our in remains associate what better new leverage with that -- evolve to be I've change and and approximate well to what emphasis, conditions we've parameters low and my in time, the we then comments a that risk circumstances agency, to how given naturally in-line script, get the what disclosed would expect return be that. in the the that conditions time. reasonably that in investing answers increasing side over with then may extent adjusted dollar side

have So it's a -- say target. I wouldn't we specific

I across the generally low-to-no would -- the for think which low script board. comments our in board, be the across the credit on my and across I the objectives illustrate leverage to side, leverage in investments try

Christopher Nolan

– Okay. Great. And then

Rock Tonkel

In that space.

Christopher Nolan

liquidity, And given looking forward cash terms sheet keep in much balance of everything how you're going to going on? then the on

Rock Tonkel

return for pathway been Well, there already. more that available should yet to my divine maintaining probably shocks can as than think market the and keep economic a it are this very And is attractive from an substantial pool overall significant comments liquidity matter a XX these shareholders returns, emphasizing to attractive general six provide an you we over create turbulent we the prove has liquidity. opportunity kinds still to of months next absorbing

So more for the along markets we recovery and of that more that opportunity that we layer And we substantial against us one those take severe protection meaningful expect positive or described. take provide pool dislocations with to optionality to the time at shocks way along way in pathway would to same along as that with or can or the would making we investments would have attractive a include ongoing can say provide the kinds these of we platform occur economic the keep would decline advantage or a that hope I characteristics of liquidity liquidity in pathway. they that addition that advantage

Christopher Nolan

you for cost be sheet carried Rich. new for going Great. going or cost? on break value Are the fair to estate assets or they're Final value fair are question. property? balance it's the I at down guess these real to And each

Richard Konzmann

has investments. been all on talking fair estate mortgage-backed for sheet. of option and investments -- balance we value our We're our a loans mortgage we've a securities, elected everything any have self don't our we about have if Well, in so real

our carried at on fair value. is sheet everything balance So

Operator

Instructions]. Thank you. [Operator

from JonesTrading. Jason with comes next Our Stewart question

Jason Stewart

morning. Thank Good you. Hi.

your to, given When process tabs back portfolios, agency cause and the on comments describe that to prepays pools? just bit versus little added about are you call it, spec your spec you you On shift about a could think TBAs, mid-February. more you would what thought

Rock Tonkel

cause probably given Well, The all emerge perspective. now to that that all of of limited deteriorate understand And significant forces a of I that is a the speed that over position can I'm predictability quality lot would subject right there's lot periods time continues we has shift and it we movement fully a and short spec to out Jason. of underlying not role the experienced from we sure think to time. us pretty that pool in -- the circumstances pool have,

So -- I think perspective we pool along the sort -- spec risks emphasize to also and of in to capital continue adjustments adjustments stack, from probably to be, we it emphasize predictability the and would expensive just that and based would simply we pay-up from coupon adjust the portfolio of given how away for side to movements through but the allocation that a basis or at view it the time on size be. a pay-ups

just So back just so of to -- cause for basis and adjust just up moving might holding to excess be scale the the cheaper, capital pay-ups, overall to would or have back of us that that in the use liquidity we the the to come say potentially to agency. I'd expansiveness capital I the come other or to may side and would get expect we that, We they book down and moderate the it basis of the dedicated keep mind. and that relative

Jason Stewart

Then credit return. sense. side, makes the That you about talk on Okay. total

cash and you think accretion the and of two helpful. could to discount the Thanks. you dividend, about cost that strategy, return components If be allocation the link the capital the total way would carry just

Richard Konzmann

Could Jason, you us. we Pardon the repeat just first part missed that? that. just of

Jason Stewart

Sure.

be cash, as you accretion, two the think capital allocation credit, and of about when discount probably of think allocated the about strategy, weigh think So if you relate to helpful. I if carry you dividends, the and two could just that components those would that you

Rock Tonkel

cash spoke a some digits the in yields we're in cash on We Well, certainly the that to primarily on double start to it script, we in of digits. the see sort seeing we're of to investments with, I single way mid think high types right? in the targeting,

those over balance expected cash as appealing on that be to the I into a work non-cash in provide in to as think we're I'd the digits earnings we'll able and that So dividend the see upside with is in kinds the of total platform say potential mid-double to on then fully single manage a to from component a we're yield time put presently this certainly from shareholders returns time comfortable for maybe we and -- high of that would through potential or capital be digits utilized comfortable some over cash that low upside acceptable, investments above comfortably otherwise. be well or would that

the short maybe frame to in going accretion XX%, either time an is occurs -- are or keep that cash shorter from So of XX% adjusted most yield these I of a from par it the discount the yield, to come in the cash mind return very book loss rest that if current think compression in expected and period. cash spread of duration. toward And

it period that So to abbreviated. the exists is accretion extent

Operator

Thank you. are the questions at no additional There time.

Rock Tonkel

we'll questions Thank you like. much. be And Thank very Okay. if available you or conversation to very for much. further you'd

Operator

presentation. and concludes today's gentlemen. ladies you, This Thank

disconnect. now may You

C3.ai (AI) 11 May 202020 Q1 Earnings call transcript