AI - Earnings call transcript Q2 2020

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Operator

Good morning. I’d like to welcome everyone to the Arlington Asset Second Quarter 2020 Earnings Call. Please be aware 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 Richard Konzmann. Mr. begin. may you Konzmann,

Richard Konzmann

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

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

Rock Tonkel

unprecedented also welcome coupon federal second expectations And future, Investment me coupon quarter, Federal XXXX and conditions quarter generic current intention slight to Chief support by and the significantly market earnings Arlington rallied mortgage in the prepayment to Bowers, Good the call the asset prior generally bonds monetary the for quarter. mixed markets on with joining coupon improved adversely morning foreseeable today short-term at Asset. TBAs Financial outperforming of equity rate the by second second for Thank interest to yield higher losses Also of Elevated resulting spreads steepening specified you, quarter is recovering Reserve driven Rich. the those outperformed impacted Officer. volatility fixed increased during our MBS call counterparts. Brian classes the of fiscal recouped the an backed higher during a stimulus its as quarter. quarter. path curve quarter leading some the Arlington of policies. prior economic interest during credit losses premiums agency Most keep their asset from during as for was recovery, generic tightened their their income most the MBS, during risk quarter. performance Despite the their quarter. significantly prices second Agency rates low pay-up lower for pools, the like specified pools owns, by signaled Agency level and uncertain

repo Federal Reserve at of for available support result costs. As cuts the repo a and funding lower funding MBS rate operations, for agency ongoing readily remains

premiums embedded While in risks the path current has and interest pools. higher MBS current specified in a landscape also investment of uncertain the quarter, lower rate have pay-up last for increased, of the agency the improved investing including prepayments certain environment from pricing levered

general in improvement prior second most the recovered their losses of classes financial the the With reflecting credit from mortgage markets quarter, asset values quarter, of some a spreads. of during the credit tightening

certain credit of priced the ramifications financial Despite may and residential reopening the its in U.S. that of and resulting and across the impact continues continues both be on uncertainty varying magnitude is in credit assets. commercial company current mortgage the timing assets. there not economy, the fixed there in fiscal timing in and the any the of economic economy lack on surrounding remain positive financial the believe borrowers. and full spreads shutdowns Accordingly, degrees mortgage income of degree impact policies losses of federal clarity the appropriately condition, However, to the from monetary of current to investment market

the the leverage preservation to substantial company result, sheet company of prioritizes a through capital a balance cautious take redeploying to has in leverage current As the company’s and approach continued significantly stance, liquidity. the maintain Accordingly, a low to its is protection or and increasing environment. relatively continuing selective which

reported was last share of quarter. X% some the improvement for of to quarter. of from the $X.XX June as operating company’s income both XX, non-GAAP investment quarter per agency mortgage losses credit results $X.XX value per MBS income and Turning recovered share. actual strategies its core $X.XX company The per of their GAAP and share The a last as net from book

operate on the and X.X:X of and MBS second also to X% from profile low low its common mortgage benefited portfolios encouraged quarter to by The overall both attractive company’s company multiple its managing both common The stock. preferred quarter, on upon on dividends return repurchasing quarter. its XX. as and company its flexibility. liquidity, basis its and dividend leverage of during the maintain declare during economic flexibility accretive REIT with to quarterly not loss this including the its investments made In The its maximize positions short-term at the as did distribution liquidity of evaluate a based made REIT order opportunities requirements. was stock, combined leverage needs quarter, overall financing common continues second credit year. the and ongoing financial during ratio provides During investable on in future tightening to company agency stock will its requirements and common factors, The with continuing company the the dividend June carryforwards, spread company and the secured capital outstanding repurchases its conditions, distribution with stock paid February the investments, a market X, second common with performance company of while stock a tax

at assets credit allocation mortgage investments by During increased to opportunistically the in its company investing new the returns. second risk-adjusted quarter, capital attractive

XX% company’s to allocated XX% was the of to capital As and MBS credit agency XX, mortgage investments. June investable

financing and collateralized on collateralized Federal levered including elevated agency with by relatively a MBS, levered market, in the the pricing credit end high available loan, Although across MBS. company have portfolio, to investment lower current MBS opportunities investments fully a we initial expectations. this its MBS expensive MBS return prepayment investment of is with single with collateralized with speed digits than investment environment. mortgage consists of current agency due decreased opportunities The the investments, sees mortgage composition asset portfolio improved coupon potential the expectations mortgage single have develop greater quarter various new – with mortgage the exposure. loans, is company as actively significantly dollar through on a diminished of digits. in Within line in balanced servicing returns non-agency the opportunities leverage, residential agency agency relatively stack. credit and mortgage investments agency Notwithstanding currently become The commercial classes, bonds opportunities agency funding liquidity invested – associated the protection the higher cautious commercial they lower of repo which specialized coupon appropriate in primarily to other evaluating available as returns in substantial remain and return the securities coupon on costs platform mortgage-related this rights In its evolving Reserve the during company’s of the performing investment generally its opportunities company credit equity return support by purchases levered has second allocation high in MBS,

of by of the financing servicing borrower observed senior protection MSR led collateral with consist company default The MSR return investments quarter, the attractive surrounding values MSR of meet in forbearances, ability quarter. servicing a servicing the which servicers’ returns second that prepayment opportunities in spreads for due attractive associated and During this the financing meaningfully. elevated class the by and declined term in took new carry guarantee. making opportunities widening anticipated servicing to with also securitized to rights expectations financing mortgage rights corporate typically asset on investments and advances risk-adjusted parent mortgage rights the then of significant to company available during several MSRs as uncertainty advantage financing assets notes mortgage

company related repo or financings MSRs MSR the additional to investments. XX, evaluate investment MSRs. financing company continue have investments portfolio. And of in by credit funding to held of mortgage significant opportunities its servicing does the company in $XX direct currently million As collateralized rights attractive is June mortgage The investment through either not exposure

has that on credit not statistics, any $XX million credit company’s have had mortgage of to loan on June repo or funding commercial calls of in repo of margin repo funding MBS May company consists outstanding for investments. funding The As MSR a its XXXX maturity XX, with investment its mortgage strong portfolio no financing date. exposure sole non-agency any funding a did of with the

the the the credit the in from outlook. have financial COVID-XX-induced and While laid shutdowns effects fully in the company markets other dislocations economic investment foundation economic certain not attractive yet priced mortgage-related believes the assets for assets, certain opportunities may credit the in of have

We enable to as downturn In a is have coming to as time, and of be returns time. should the economic the opportunities investments, on of over which questions, acceptable the with approach to liquidity created will to them. attractive shareholders economic you summary, the if ensures that quarters. may while We’d capture provide current of attractive materialize ability low are will sufficient focuses retaining economic capital opportunities company’s impact investment enable the over that take the to evolve shareholders happy provide sectors executing the leverage be company selective deliver well deliver company on return liquidity attractive positive level full investment across returns company a ongoing to and over economic positioned of the to a that and company advantage arise may take plan that risk-adjusted conditions current on high

Operator

Suisse. We’ll [Operator from question Credit first with Doug take Instructions] our Harter

Doug Harter

some can the you repurchase? Rock, compares obviously, back – of just about investment repurchase kind the second to did about share you’re you Thanks. thinking you additional buy of talked opportunities how attractiveness share how about? just the quarter, during talk stock And how

Rock Tonkel

Sure. given commodity we’re to on by capital repurchasing be I’d things. something has about, the One, sheet that take is Morning, Doug. I obviously, balance securities deliberate precious two reducing scale. our very and guess a scale

equation. differently, that, as that stock Having of our that circumstances the with sit think don’t were said start versus during the the than world I’d markets we second differently I really we viewing secondly say here and quarter. we’re the much our part today, and we markets So much

I’d were quarter. executing would be with where orientation and our while line generally, was the that say, it thought second in in reasonably So our we process process

Doug Harter

you us your just you remind can on much under And for how Great. – authorization have buybacks? remaining

Rock Tonkel

probably, was or today. million shares a there So at as authorization new – take, later think, think give end the which the we’ve of I undertaken you’ll quarter, I well, today left. later And a disclosed, see or

Doug Harter

Okay. Thank you.

Operator

question Trevor And we’ll our Securities. Cranston next with JMP take from

Trevor Cranston

Thanks.

some income again? market Fed versus that the giving carry portfolio you would guys the of a you how You add little the the think of reasons sort to maybe relevering little way associated with And some in to book? about moment. of start the with sort be that for fact looking you somewhat the why at around cost talked you be But assets can talk to bit the a see overpriced space about that may up cautious just you’re color what of Thanks. adding agency bit on the

Rock Tonkel

Having both don’t thoughts equation, others. A the Sure. Well, involved things. influence to if outlined likely think see, of supply stabilizing And that our and government maybe as prices or equation, obviously, One, any indication that probably had even space of agency continue some be government that a one with know all that if that soon. very I – effect on around pull the time probably of bid a let’s of there indicated any one think given will slightest has on in could around any was to – said contemplate sides us for effect intends the net a for that hint I whether – heavily support don’t funding. terribly to conclude who’ve be that a others I hand, pulling negative couple think think well the to would that, pricing. government I back, any been were a while. this and think it the would the that’s I as are powerful is give we on have know that to while, I it’s you say is probably

the is as speed. here, aware, all factor think we’re other uncertainty The I around

take maybe an let’s at probably that. spec X.XX%-ish-type we’ve speed today, be you it’s the but as X all not, in somewhere generate low of maybe of path stack, can sit we appealing it X.XX%, that, market around all so it’s here plan, And speeds, goes – like of we’d expectation a coupon the If something can or seems which end here like according to speeds with also yield reasonable. a which observed though of a the recently. XX% off But uncertain pretty that find is

talking be that, towards it’s outside And is associated in And hedging certainly so potentially of that’s high XXs, now like or that, X%. if X% or could even that. you’re cash with doubles, probably the with teens down and to then going your it’s funding about to funding something below, not room double. possibility but the of And probably yield that closer it

in for levered you’re And half from on is XXs. If of an you adds basis, from digits. And basis. then if you’re all the be the look generate going view going the get potential we’re double on to our in non-agency in other you to carry you at from as that, on digits, it’s with to able going deliver perspective, XXs. which that is digits that an where approach case, us, category that we but alternatives, we are really a other high appropriately single-digit a that I depending every into discounts in are still cash which basis we And the perspective, an ideally basis, the upside think discount. we that to you’re something gets to an single unlevered probably a up you believe And not hedging toward would without selective digits carry that’s blended – but at double mid-single that, likewise – associated unlevered to to that ROE on in agency, can high alternatives then be from be that tells or looking duration on assets a

than likely So, be not can you’re that’s unlevered upside, on least to basis if an you more not touching going touching, at but gain carry lot the a digits. of where to generate double

net and that to the even key balance stabilizing capital with high from profitability variability we and government movements looking that influence, we’re stabilizing in a influence digits sides for as at so the And equation, powerful, around a of equation significant a asset agency amount single as potential speed agencies. volatility, across expectations related provides both therefore, the speed of

some in with in you the illustrated single result And return on So, against essentially that that securities we what saw the we against the it. sheet. own metrics size side. carry And just the think which balance doubled in portfolio profiles alternative quarter the balance is of those that exact mind, second mid-to-high non-agency associated with with balance in our the I also that digits I discount we

become the more growth that which and value level saw the at book in did. economic have assets the expensive, you return those Now, we is why

So that stands, we today bit that three favorable than are a the was two ago, it months is less about ago. months the is equation time. all it still and that equation But thinking little

sustaining to a And well. allocation play of place, meaningful agency priority take absolutely have low other of a for portfolio a as process arise but two our liquidity so also And opportunities is alternatives or has are to and in us. a role as the also amount they dislocations leverage has advantage

And in what think occur had deliberate of accompany that the along of that, a two approach we’re of or maybe profile as thinking historically we and the it the about that. to ramp profiles portfolio, investments on very line the a as well been so asset ourselves levels in the types and as relevering not quarters view making or that selective ramp is I asset how behind provide will I earnings the in that that deliberate to coming in allocation the outlined three company with back over a up That’s that’s driver So pathway. to agency it.

Trevor Cranston

And those pretty your like you what those MBS, Thanks. financing about talk the of asset the The the Okay, then added to close Thank another credit expected you par bigger resi classes being during great. you. the looks and both you yield are Can also then there, carried question the portfolio. new MSR of on is some that assets two on quarter? value. mortgage one unleveraged just new bought second

Rock Tonkel

at just carried value. Trevor. they’re Well, fair so question, on clear And I’m the

quarter-end. You’re you’re take, to assets asking what incremental about that or of added give that describing? quarter-end Is were $XX million from the,

Trevor Cranston

Yes, exactly.

Rock Tonkel

carry And return you’re on is total cash asking those? expected the or the what

Trevor Cranston

both, I your guess, yield of you’ll I what total the expected return guess, Well, be the sort amortizing be? might and,

Rock Tonkel

than going the those X%, But be assets will carry not – X%. so range X% coupon single digits Well, and going would X%, discount are and for are current double that. something maybe. to a be X.X%, in straight right? discounts, that upside those Some And bit high lower little that it’s And I’m I’d X%, digits, be and blend, to a little don’t in them that little the sorry, to it, like going be a of discounts those upside. those a are a some say to of then But – are be others have digits. are the higher the do with that. than a higher mid-to-high instruments, X%, X.X%, be teens, the single X.X%, those teens combination maybe currents, X%, And – some call going

Trevor Cranston

It looks book hedge than book. historically. have about Okay, significantly rate is right relative approach to like to hedging have great. smaller on And now talk of just you you portfolio interest and your then back kind agency question, Can your where you the at? sensitivity a agency the the guys last

Rock Tonkel

the positive we’re before, positively slightly And in mostly the that now, And Right described the X.X that’s durated. most elements it’s not at as long it the all of a is the That I hedge more see that you’ll It’s end. in is XX-year see end. can GAAP. with it of it’s didn’t in – in – you in see if Q. focus. long you’ll release, And you see the if

Trevor Cranston

you. Thank it. got Okay,

Operator

Trading. And Jason Stewart with Jones we’ll take our question next from

Jason Stewart

Good morning, gentlemen.

driving And like? financing On does the credit that investment you current of opportunities the that what evaluate? book, side impacting look is how the term or

Rock Tonkel

we’re credit side commercial financing may I Well, – mortgage of putting generally. to for on first, book, that have. on only we that piece that. the But the exceptions unlevered, really one is the not on except the There one of repo be guess essentially portfolio

them, not that don’t we sheet. like that, we’re think level If repo a in funds mid- be at X.X% are So, cost balance in were, side should that a doing be of But the little the to on you’d on financing, digits on rates this I the And really that. single that against to XXX assets we financing, liquidity would against anticipate that’s going stack And to I senior X%, the soon. carry. the depending – focused carry Those range, really are point take that. with – X%, of financing of you’d might or We closer X%-ish. don’t layering a credit RPL a of on non-structural that be down would need on external are a those And to X.X%. if to senior portfolio. they’re you’re really going where lever basis if the not we’re going maybe a levering something like be something And are I high bond, on they lot be looking think further be bit that doing them have financing stack, say, like some. XXX credit

Jason Stewart

it’s and did it. like NIM sounds I what apply just it like you the was Got attractive. I thinking down pretty more guess would on road, the if look it, leverage

Rock Tonkel

you would a matter, an it’s broad cost, be say, I if X% like a a net fair assumed against X%, As assumption. carry, something it’d X.X% X% a example be Jason, just to or fair probably that think that,

that the today, be doing that but not down possible We’re could road.

Jason Stewart

sir. you, Thank Okay.

Rock Tonkel

Thank you.

Operator

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

Rock Tonkel

Hey, Chris.

Christopher Nolan

and when unlevered? in on the Rock, clarify can was return hey, comments, detailed But single-digit new your strategy. how appreciate you’re mentioning – you are comments the doing? I high for you that gave you RMBS,

Rock Tonkel

on the credit side, mean the on non-agencies? obviously You

Christopher Nolan

Yes.

Rock Tonkel

Yes.

Christopher Nolan

Okay.

Rock Tonkel

they those discount or cases, and structural some some some may them. combination Those as leverage assets, Now, have carry carry cases upside of but not. on unlevered, be time. In in over would either realized of many raw, a

Christopher Nolan

so how just repo And I’m in to my given around a will way MBS are strategy, losses Okay. has that impacting second me you’re making prepayments your it funding materially you keep to manageable. market which and RMBS hands evolved I it recover, economy in the a the bet get reasonable to down, that the to And guess, quarter, Is costs. to going the seems enable then given will increase that trying credit this? U.S. decline the at look boiling

Rock Tonkel

asset uncertain. – And attractive is and X% an levels significant they speeds yields asset given the or which are prepay at rates, prices of hedge. be markets, let’s repo Yes. to are, A X% be possibly, I but while hedged. have use basis, require a X% probably still on the can where that pool, spec fund that’s for either today a X.X%, now, asset, to choice, these X% assets one going would meaning,

and by spread raising therefore, funding the that shrinking placing on you’re asset. cost so And the a of on significant hedge available that, net

bargain an with potential And you number was upfront. may that, to used the it will which for a XX%, spread you speeds say could I significant. quite be realize from believe get so XX% less than you And expected some if in combined you before, elevation

spread returns they than surface a and they predictable So, the wider there just at maybe there’s than are where been points have maybe less bit on the appear been opportunity.

combination allocation that doesn’t a expressing look to others and their may in liquidity, than obviously, around and capital higher non-agency side net of those an unlevered speeds agency the the an less Now, the but maybe with those that a the those from leverage have liquidity at entering view And it different Or into we provides capture the volatility that quite that returns. by in have in deal it. they’re opportunities cases, great albeit liquidity, and as at CUSIP, on allocations. uncertainties justifies or not the these of And different spreads in can that, CUSIPs. can But opportunity comparable the agency, view carry of a very on returns, a offer resulting require leverage occur some may either time, the same or upside. pure a combination side, returns low same not in some double-digit basis have carry and are discount on

same those as and we sheet balance own script. sort as on balance those focus alternatives three But – that identified on. platform of the day. I those as of well that we’re sheet of are each So, the on day sets And at opportunities that – types at securities opportunities time, looking balancing the the in of the our we’re by focusing are

Christopher Nolan

mentioned And some hoping as discount you collect assets at also, it to a the earlier. what – have are you a are discount type accretion? and just of What buying on might clarification,

Rock Tonkel

residential – assets. residential character. residential they’re principally they’re character. so exclusively common mean almost I in Well, in They’re But

now right commercial on focused We’re not side. the

that that’s year. out very And performing a has very in one well the a commentary Our we commercial exposure script almost have commercial repo I on facility that extends is and gave small. loan the

to residential-related also, residential primarily focused focus on either or is to we’re in So agencies. continue that then assets, and non-CUSIP. opportunities evaluate and platform CUSIP identified we’ve our And addition

Christopher Nolan

Great. Thank you.

Operator

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

Rock Tonkel

much. very you Thank

Operator

Thank teleconference. you, today’s This ladies concludes gentlemen. and

disconnect. You may now

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