Arlington Asset Investment Corp. Reports First Quarter 2023 Financial Results
First Quarter 2023 Financial Highlights
per common share of book value, a$6.47 1.8% decrease from prior quarter per diluted common share of GAAP net loss attributable to common shareholders$0.10 per diluted common share of non-GAAP earnings available for distribution$0.05 - 0.4 to 1 "at risk" leverage ratio as of March 31, 2023
First Quarter Investment Portfolio
As of March 31, 2023, the Company's investment portfolio capital allocation was as follows (dollars in thousands):
March 31, 2023 | ||||||||||||||||
Assets | Invested Capital | Invested Capital | Leverage (2) | |||||||||||||
MSR financing receivables | $ | 183,058 | $ | 183,058 | 62 | % | — | |||||||||
Credit investments (3) | 133,396 | 35,349 | 12 | % | 2.8 | |||||||||||
Agency MBS (4) | 88,011 | 76,358 | 26 | % | 0.3 | |||||||||||
Total invested capital | $ | 404,465 | 294,765 | 100 | % | |||||||||||
Cash and other corporate capital, net | 6,888 | |||||||||||||||
Total investable capital | $ | 301,653 | 0.4 |
(1) Our investable capital is calculated as the sum of our shareholders' equity capital and long-term unsecured debt.
(2) Our leverage is measured as the ratio of the sum of our repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward purchase or sale price of our TBA commitments and leverage within our MSR financing receivables less our cash and cash equivalents compared to our investable capital.
(3) Includes our net investment of
(4) Agency mortgage-backed securities ("MBS") assets include the fair value of the agency MBS which underlie our TBA forward purchase and sale commitments. In accordance with GAAP, our TBA forward commitments are reflected on the consolidated balance sheets as derivative assets and liabilities at fair value in the financial statement line items "other assets" and "other liabilities". As of March 31, 2023, the fair value of the underlying agency MBS that underlie our net short position in TBA commitments had a fair value of (
MSR Related Investments
The Company is party to agreements with a licensed,
The Company's MSR financing receivable investments as of March 31, 2023 are summarized in the tables below (dollars in thousands):
Amortized Cost Basis (1) | Unrealized Gain | Fair Value | ||||||||
$ | 139,153 | $ | 43,905 | $ | 183,058 | |||||
(1) Represents capital investments plus accretion of interest income net of cash distributions.
MSR Financing Receivable Underlying Reference Amounts: | ||||||||||||||||||||||||||
MSRs | Financing | Advances | Cash and Other | Counterparty | MSR Financing | Implicit | ||||||||||||||||||||
$ | 178,180 | $ | (1,010) | $ | 4,202 | $ | 12,979 | $ | (11,293) | $ | 183,058 | 0.0 | ||||||||||||||
Underlying Reference MSRs: | ||||||||||||||||||||||||||
Holder of Loans | Unpaid Principal Balance | Weighted- Average Note Rate | Weighted- Average Servicing Fee | Weighted- Average Loan Age | Price | Multiple(1) | Fair Value | |||||||||||||||||||
Fannie Mae | $ | 12,343,228 | 3.09 | % | 0.25 | % | 29 months | 1.33 | % | 5.33 | $ | 164,564 | ||||||||||||||
Freddie Mac | 1,006,719 | 3.72 | % | 0.25 | % | 25 months | 1.35 | % | 5.41 | 13,616 | ||||||||||||||||
Total/weighted-average | $ | 13,349,947 | 3.14 | % | 0.25 | % | 29 months | 1.33 | % | 5.33 | $ | 178,180 |
(1) Calculated as the underlying MSR price divided by the weighted-average servicing fee.
As of March 31, 2023, the mortgage servicing counterparty had drawn
Credit Investments
The Company's credit investments generally include mortgage loans secured by residential or commercial real property or MBS collateralized by residential or commercial mortgage loans or residential solar panel loans ("non-agency" MBS or ABS). As of March 31, 2023, the Company's credit investment portfolio at fair value was comprised of the following (dollars in thousands):
Market Price | Fair Value (1) | Financing | Invested | Leverage | ||||||||||||||||
AAA rated commercial MBS | $ | 98.93 | $ | 98,933 | $ | 79,372 | $ | 19,780 | 4.0 | |||||||||||
Commercial mortgage loan | 100.00 | 27,798 | 19,053 | 8,904 | 2.1 | |||||||||||||||
Business purpose residential MBS (3) | 79.80 | 4,780 | — | 4,780 | — | |||||||||||||||
Solar ABS | 37.25 | 1,885 | — | 1,885 | — | |||||||||||||||
Total/weighted-average | $ | 133,396 | $ | 98,425 | $ | 35,349 | 2.8 |
(1) For non-commercial credit investments in securities, includes contractual accrued interest receivable.
(2) Invested capital includes investment accrued interest receivable and financing accrued interest payable.
(3) Includes our net investment of
As of March 31, 2023, the Company had
Agency MBS
The Company's agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government sponsored enterprise, such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). As of March 31, 2023, the Company's agency MBS investment portfolio was comprised of the following (dollars in thousands):
Fair Value | ||||
Agency MBS | $ | 460,984 | ||
Net short TBA Position | (372,973) | |||
Total agency MBS investment portfolio | $ | 88,011 |
As of March 31, 2023, the Company's specified agency MBS investment portfolio was comprised of the following (dollars in thousands):
Unpaid |
| Amortized | Net | Fair Value | Market | Coupon | Weighted | |||||||||||||||||||||||||
Fannie Mae | $ | 221,765 | $ | (4,069) | $ | 217,696 | $ | (4,942) | $ | 212,754 | $ | 95.94 | 4.09 | % | 9.5 | |||||||||||||||||
Freddie Mac | 258,777 | (2,901) | 255,876 | (7,646) | 248,230 | 95.92 | 4.09 | % | 9.9 | |||||||||||||||||||||||
Total/weighted-average | $ | 480,542 | $ | (6,970) | $ | 473,572 | $ | (12,588) | $ | 460,984 | $ | 95.93 | 4.09 | % | 9.7 |
The Company's weighted average yield on its specified agency MBS was
As of March 31, 2023, the Company's net short TBA agency MBS investment portfolio was comprised of the following (dollars in thousands):
Notional Amount: | ||||||||||||||||
Net Long (Short) | Implied | Implied | Net Carrying | |||||||||||||
Position (1) | Cost Basis (2) | Fair Value (3) | Amount (4) | |||||||||||||
$ | (70,000) | $ | (61,009) | $ | (62,725) | $ | (1,716) | |||||||||
50,000 | 47,957 | 47,781 | (176) | |||||||||||||
(140,000) | (130,665) | (133,788) | (3,123) | |||||||||||||
(229,000) | (218,642) | (224,241) | (5,599) | |||||||||||||
Total net long (short) agency TBA positions | $ | (389,000) | $ | (362,359) | $ | (372,973) | $ | (10,614) |
(1) Notional amount represents the unpaid principal balance of the underlying agency MBS.
(2) Implied cost basis represents the contractual forward price for the underlying agency MBS.
(3) Implied fair value represents the current fair value of the underlying agency MBS.
(4) Net carrying amount represents the difference between the implied cost basis and the implied fair value of the underlying agency MBS. This amount is reflected on the Company's consolidated balance sheets as a component of "other assets" and "other liabilities."
As of March 31, 2023, the Company had
The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost borrowing and the value of its fixed-rate agency MBS and MSR financing receivables. Under the terms of the Company's interest rate swap agreements, the Company pays or receives interest payments based on a fixed rate and pays or receives variable interest payments based upon the Secured Overnight Financing Rate ("SOFR"). As of March 31, 2023, the Company's interest swap agreements were comprised of the following (dollars in thousands):
Weighted-average: | ||||||||||||||||||||||||
Notional | Fixed Receive | Variable (Pay) | Net (Pay) | Remaining | Fair | |||||||||||||||||||
Receive-fixed | $ | 60,000 | 3.58 | % | (4.82) | % | (1.24) | % | 5.7 | $ | 117 | |||||||||||||
Pay-fixed | 25,000 | (4.20) | % | 4.82 | % | 0.62 | % | 2.8 | (11) | |||||||||||||||
Total / weighted-average | $ | 85,000 | 1.29 | % | (1.98) | % | (0.69) | % | 4.9 | $ | 106 |
The Company's weighted average net pay rate of its interest rate swap agreements was (0.53)% during the first quarter of 2023 compared to a net receive rate of
Other First Quarter 2023 Financial Highlights
The Company's book value was
The Company's "at risk" leverage ratio was 0.4 to 1 as of March 31, 2023 compared to 0.3 to 1 as of December 31, 2022. The Company's "at risk" leverage ratio is calculated as the sum of the Company's repurchase agreement financing, net payable or receivable for unsettled securities, net contractual price of TBA purchase and sale commitments and financing embedded in its MSR financing receivables less cash and cash equivalents compared to the Company's investable capital measured as the sum of the Company's shareholders' equity and long-term unsecured debt.
Additional Information
The Company will make available additional quarterly information for the benefit of its shareholders through a supplemental presentation that will be available at the Company's website, www.arlingtonasset.com. The presentation will be available on the Webcasts and Presentations section located under the Updates & Events tab of the Company's website.
About the Company
Arlington Asset Investment Corp. (NYSE: AAIC) currently invests primarily in mortgage related assets and has elected to be taxed as a REIT. The Company is headquartered in the
Statements concerning interest rates, portfolio allocation, financing costs, portfolio hedging, prepayments, dividends, book value, utilization of loss carryforwards, any change in long-term tax structures (including any REIT election), use of equity raise proceeds and any other guidance on present or future periods, as well as the Company's estimates for certain financial information post year-end, constitute forward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These factors include, but are not limited to, inflation, changes in interest rates, increased costs of borrowing, decreased interest spreads, credit risks underlying the Company's assets, especially related to the Company's mortgage credit investments, changes in political and monetary policies, changes in default rates, changes in prepayment rates and other assumptions underlying our estimates related to our projections of future earnings available for distribution, changes in the Company's returns, changes in the use of the Company's tax benefits, the Company's ability to qualify and maintain qualification as a REIT, changes in the agency MBS asset yield, changes in the Company's monetization of net operating loss carryforwards, changes in the Company's investment strategy, changes in the Company's ability to generate cash earnings and dividends, preservation and utilization of the Company's net operating loss and net capital loss carryforwards, impacts of changes to and changes by Fannie Mae and Freddie Mac, actions taken by the
Financial data to follow
ARLINGTON ASSET INVESTMENT CORP. | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(Dollars in thousands, except per share amounts) | ||||||||
(Unaudited) | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
ASSETS | ||||||||
Cash and cash equivalents (includes | $ | 12,833 | $ | 28,021 | ||||
Restricted cash of consolidated VIEs | — | 2,191 | ||||||
Agency mortgage-backed securities, at fair value | 460,984 | 443,540 | ||||||
MSR financing receivables, at fair value | 183,058 | 180,365 | ||||||
Credit investments, at fair value | 130,362 | 133,701 | ||||||
Mortgage loans of consolidated VIEs, at fair value | 1,344 | 193,957 | ||||||
Deposits | 11,171 | 1,823 | ||||||
Other assets (includes | 8,252 | 18,720 | ||||||
Total assets | $ | 808,004 | $ | 1,002,318 | ||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Repurchase agreements | $ | 484,348 | $ | 515,510 | ||||
Secured debt of consolidated VIEs, at fair value | 160 | 169,345 | ||||||
Long-term unsecured debt | 86,508 | 86,405 | ||||||
Other liabilities (includes | 21,843 | 13,718 | ||||||
Total liabilities | 592,859 | 784,978 | ||||||
Equity: | ||||||||
Preferred stock (liquidation preference of | 32,821 | 32,821 | ||||||
Common stock | 284 | 282 | ||||||
Additional paid-in capital | 2,024,979 | 2,024,298 | ||||||
Accumulated deficit | (1,842,939) | (1,840,061) | ||||||
Total equity | 215,145 | 217,340 | ||||||
Total liabilities and equity | $ | 808,004 | $ | 1,002,318 | ||||
Book value per common share (1) | $ | 6.47 | $ | 6.59 | ||||
Common shares outstanding (in thousands) (2) | 28,081 | 27,904 | ||||||
(1) Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares | ||||||||
(2) Represents common shares outstanding plus vested restricted stock units convertible into common stock less shares of unvested restricted | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
Assets and liabilities of consolidated VIEs: | ||||||||
Cash and restricted cash | $ | — | $ | 2,487 | ||||
Mortgage loans, at fair value | 1,344 | 193,957 | ||||||
Other assets | 1,850 | 2,067 | ||||||
Secured debt, at fair value | (160) | (169,345) | ||||||
Other liabilities | — | (262) | ||||||
Net investment in consolidated VIEs | $ | 3,034 | $ | 28,904 |
ARLINGTON ASSET INVESTMENT CORP. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | ||||||||||||||||
March 31, | December 31, | September 30, | June 30, | |||||||||||||
Interest income | ||||||||||||||||
MSR financing receivables | $ | 4,685 | $ | 4,446 | $ | 3,608 | $ | 3,983 | ||||||||
Agency mortgage-backed securities | 4,976 | 4,732 | 3,631 | 2,065 | ||||||||||||
Credit securities and loans | 2,762 | 2,932 | 2,736 | 991 | ||||||||||||
Mortgage loans of consolidated VIEs | 1,398 | 2,302 | 2,303 | 1,611 | ||||||||||||
Other | 179 | 314 | 110 | 113 | ||||||||||||
Total interest and other income | 14,000 | 14,726 | 12,388 | 8,763 | ||||||||||||
Rent revenues from single-family properties | — | 869 | 2,103 | 2,137 | ||||||||||||
Interest expense | ||||||||||||||||
Repurchase agreements | 6,125 | 5,081 | 2,863 | 763 | ||||||||||||
Long-term debt secured by single-family properties | — | 335 | 741 | 718 | ||||||||||||
Long-term unsecured debt | 1,541 | 1,516 | 1,456 | 1,400 | ||||||||||||
Secured debt of consolidated VIEs | 681 | 906 | 912 | 1,578 | ||||||||||||
Total interest expense | 8,347 | 7,838 | 5,972 | 4,459 | ||||||||||||
Single-family property operating expenses | — | 755 | 1,872 | 1,915 | ||||||||||||
Net operating income | 5,653 | 7,002 | 6,647 | 4,526 | ||||||||||||
Investment and derivative (loss) gain, net | (3,851) | 1,809 | 1,235 | 370 | ||||||||||||
General and administrative expenses | ||||||||||||||||
Compensation and benefits | 2,255 | 3,200 | 2,256 | 2,324 | ||||||||||||
Other general and administrative expenses | 1,656 | 1,267 | 1,121 | 1,463 | ||||||||||||
Total general and administrative expenses | 3,911 | 4,467 | 3,377 | 3,787 | ||||||||||||
(Loss) income before income taxes | (2,109) | 4,344 | 4,505 | 1,109 | ||||||||||||
Income tax provision (benefit) | 109 | (45) | 1,074 | 802 | ||||||||||||
Net (loss) income | (2,218) | 4,389 | 3,431 | 307 | ||||||||||||
Dividend on preferred stock | (660) | (660) | (675) | (707) | ||||||||||||
Net (loss) income (attributable) available to | $ | (2,878) | $ | 3,729 | $ | 2,756 | $ | (400) | ||||||||
Basic (loss) earnings per common share | $ | (0.10) | $ | 0.13 | $ | 0.10 | $ | (0.01) | ||||||||
Diluted (loss) earnings per common share | $ | (0.10) | $ | 0.13 | $ | 0.10 | $ | (0.01) | ||||||||
Weighted average common shares outstanding (in | ||||||||||||||||
Basic | 28,004 | 27,956 | 28,338 | 28,766 | ||||||||||||
Diluted | 28,004 | 28,468 | 28,913 | 28,766 |
Non-GAAP Earnings Available for Distribution
In addition to the results of operations determined in accordance with GAAP, we also report a non-GAAP financial measure "earnings available for distribution". We define earnings available for distribution as net income available to common stock determined in accordance with GAAP adjusted for the following items:
- Plus (less) realized and unrealized losses (gains) on investments and derivatives;
- Plus (less) income tax provision (benefit) for TRS realized and unrealized gains and losses on investments and derivatives
- Plus TBA dollar roll income (expense)
- Plus (less) interest rate swap net interest income (expense)
- Plus depreciation of single-family residential properties
- Plus stock-based compensation
Realized and unrealized gains and losses recognized with respect to our mortgage related investments and economic hedging instruments, which are reported in line item "investment and derivative gain (loss), net" of our consolidated statements of comprehensive income, other than TBA dollar roll income and interest rate swap net interest income or expense, are excluded from the computation of earnings available for distribution as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our mortgage related investment portfolio is to generate a net spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our mortgage related investments and economic hedging instruments to largely offset one another over time. In addition, certain of our investments are held by our TRS which is subject to
TBA dollar roll income (expense) represents the economic equivalent of net interest income (expense) generated from our transactions in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as "dollar roll" transactions). Dollar roll income (expense) is generated (incurred) as a result of delaying, or "rolling," the settlement of a forward-settling purchase (sale) of a TBA agency MBS by entering into an offsetting "spot" sale (purchase) with the same counterparty prior to the settlement date, net settling the "paired-off" positions in cash, and contemporaneously entering another forward-settling purchase (sale) with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale (purchase). The price discount of the forward-settling purchase (sale) relative to the contemporaneously executed spot sale (purchase) reflects compensation to the seller for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income (expense) as the excess of the spot sale (purchase) price over the forward-settling purchase (sale) price and recognize this amount ratably over the period beginning on the settlement date of the sale (purchase) and ending on the settlement date of the forward purchase (sale). In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income (expense) is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item "investment and derivative gain (loss), net."
We utilize interest rate swap agreements to economically hedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated with future roll-overs of our short-term repurchase agreement financing arrangements. Accordingly, the net interest income earned or expense incurred (commonly referred to as "net interest carry") from our interest rate swap agreements in combination with repurchase agreement interest expense recognized in accordance with GAAP represents our effective "economic interest expense." In our consolidated statements of comprehensive income prepared in accordance with GAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item "investment and derivative gain (loss), net."
The following table provides a reconciliation of GAAP net income (loss) available (attributable) to common stock for the last four fiscal quarters (unaudited, dollars in thousands):
Three Months Ended | ||||||||||||||||
March 31, | December 31, | September 30, | June 30, | |||||||||||||
Net (loss) income (attributable) available to common stock | $ | (2,878) | $ | 3,729 | $ | 2,756 | $ | (400) | ||||||||
Add (less): | ||||||||||||||||
Investment and derivative loss (gain), net | 3,851 | (1,809) | (1,235) | (370) | ||||||||||||
Income tax (benefit) provision for TRS investment | (344) | (344) | 406 | 496 | ||||||||||||
Depreciation of single-family residential properties | — | 225 | 632 | 604 | ||||||||||||
Stock-based compensation expense | 757 | 865 | 919 | 992 | ||||||||||||
Add back: | ||||||||||||||||
TBA dollar roll income (expense) | 74 | (429) | (421) | 280 | ||||||||||||
Interest rate swap net interest (expense) income | (118) | 212 | 258 | (282) | ||||||||||||
Non-GAAP earnings available for distribution | $ | 1,342 | $ | 2,449 | $ | 3,315 | $ | 1,320 | ||||||||
Non-GAAP earnings available for distribution per | $ | 0.05 | $ | 0.09 | $ | 0.11 | $ | 0.05 | ||||||||
Weighted average diluted common shares outstanding | 28,478 | 28,468 | 28,913 | 29,300 |
Earnings available for distribution is used by management to evaluate the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that earnings available for distribution assists investors in understanding and evaluating the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as its earnings capacity.
A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for all events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. In addition, our calculation of earnings available for distribution may not be comparable to other similarly titled measures of other companies. Therefore, we believe that earnings available for distribution should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between earnings available for distribution and taxable income determined in accordance with the Internal Revenue Code. As a REIT, we are required to distribute at least
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SOURCE Arlington Asset Investment Corp.