Arlington Asset Investment Corp. Reports Second Quarter 2022 Financial Results
Arlington Asset Investment Corp. (NYSE: AAIC) reported its Q2 2022 results, noting a book value of $6.30 per share, representing an 1.8% increase from Q1 2022. The company reported a GAAP net loss of $0.01 per diluted common share but achieved non-GAAP earnings of $0.05. Book value accretion of $0.09 came from repurchasing 3.2% of its outstanding common shares. The economic return was 6.1% over the last year, outperforming peers by over 16.6%. Investments in mortgage servicing rights (MSRs) and single-family residential properties continued to perform strongly.
- Book value increased by 1.8% to $6.30 per share.
- Achieved economic return of 6.1%, outperforming peers' -10.5% return.
- Strong quarterly performance in MSR portfolio with a 41% annualized return.
- Repurchased 3.2% of outstanding shares, contributing $0.09 to book value accretion.
- Reported a GAAP net loss of $0.01 per diluted common share.
- Considerable leverage ratio of 1.6 to 1 may indicate heightened risk.
MCLEAN, Va., Aug. 9, 2022 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AAIC) (the "Company" or "Arlington") today reported financial results for the quarter ended June 30, 2022.
Second Quarter 2022 Financial Highlights
$6.30 per common share of book value1.8% increase from March 31, 2022$0.01 per diluted common share of GAAP net loss attributable to common shareholders$0.05 per diluted common share of non-GAAP earnings available for distribution (formerly referred to as core operating income)$0.09 per common share of book value accretion from the repurchase of3.2% of the outstanding shares of common stock- Purchased an additional
1.1% of the outstanding shares of common stock through August 8, 2022 - 10.7 million share remaining authorization as of August 8, 2022
- 1.6 to 1 "at risk" leverage ratio
"Arlington's successful transition from a primarily levered agency MBS strategy to one focused on multiple high return, non-commodity investment channels in mortgage servicing rights ("MSRs"), single-family residential ("SFR") rental properties and select credit investments continued to produce positive results during the second quarter, including a positive economic return for the fourth consecutive quarter.
"The execution of this strategy has enabled the Company to consistently grow book value per share during periods of volatile market conditions while traditional mortgage REITs experienced losses. Over the last twelve months, the Company delivered a
"The Company's differentiated investment strategy has performed well during both positive and negative market conditions and is positioned to continue to do so. With our largest investment capital allocation in our MSR strategy, the Company's financial results benefited from another strong quarterly performance in our MSR investment portfolio that generated a total annualized return of
"Within the Company's credit investment strategy, widening of credit spreads has created compelling new investment opportunities in high quality assets. Late in the second quarter, the Company made several investments in highly rated senior commercial mortgage bonds that offer double digit levered returns and is actively evaluating similar investment opportunities.
"As of today, the Company has essentially reached its stated goal of
"We continue to believe there is greater value in Arlington's business than the public markets recognize. Since reinstituting our current common stock repurchase program in 2020, the Company has aggressively returned capital to shareholders by purchasing
"Having successfully positioned Arlington to preserve capital and grow book value per share, the Company now has the opportunity to capitalize on substantially wider investment spreads with superior risk adjusted returns in the low to mid-teens in high grade residential and commercial mortgage securitized products. We expect that the redeployment of capital into these higher return investments will drive greater earnings potential which can be used to increase our equity capital, return capital to shareholders through accretive stock repurchases or reinstate a dividend to common shareholders."
Second Quarter Investment Portfolio
As of June 30, 2022, the Company's investment portfolio capital allocation was as follows (dollars in thousands):
June 30, 2022 | ||||||||||||||||
Assets | Invested Capital | Invested Capital | Leverage (2) | |||||||||||||
MSR financing receivables | $ | 120,260 | $ | 120,260 | 41 | % | 0.5 | |||||||||
Single-family residential properties | 182,783 | 64,605 | 22 | % | 1.9 | |||||||||||
Credit investments (3) | 168,432 | 63,058 | 21 | % | 1.7 | |||||||||||
Agency MBS (4) | 235,781 | 48,102 | 16 | % | 4.0 | |||||||||||
Total invested capital | $ | 707,256 | 296,025 | 100 | % | |||||||||||
Cash and other corporate capital | 5,486 | |||||||||||||||
Total investable capital | $ | 301,511 | 1.6 | |||||||||||||
(1) | Our investable capital is calculated as the sum of our shareholders' equity capital plus accumulated depreciation of our single-family residential properties and long-term unsecured debt. |
(2) | Our leverage is measured as the ratio of the sum of our repurchase agreement financing, long-term debt secured by single-family residential properties, net payable or receivable for unsettled securities, net contractual forward purchase (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 MBS assets include the fair value of the agency MBS which underlie the Company's to-be-announced ("TBA") forward purchase and sale commitments. In accordance with GAAP, the Company's 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 June 30, 2022, the fair value of the agency MBS that underlie the Company's net short position in TBA commitments had a fair value of |
MSR Related Investments
The Company is party to agreements with a licensed, U.S. government sponsored enterprise ("GSE") approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows the Company to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. Under the terms of the arrangement, the Company provides capital to the mortgage servicing counterparty to purchase MSRs directly and the Company, in turn, receives all the economic benefits of the MSRs less a fee payable to the counterparty. At the Company's request, the mortgage servicing counterparty may utilize leverage on the MSRs to which the Company's MSR financing receivables are referenced to finance the purchase of additional MSRs to increase potential returns to the Company. These transactions are accounted for as financing receivables on the Company's consolidated financial statements.
The Company's MSR financing receivable investments as of June 30, 2022 are summarized in the tables below (dollars in thousands):
Amortized Cost Basis (1) | Unrealized Gain | Fair Value | ||||||||
$ | 74,866 | $ | 45,394 | $ | 120,260 | |||||
(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 | ||||||||||||||||||||
$ | 176,408 | $ | (60,868) | $ | 2,348 | $ | 13,883 | $ | (11,511) | $ | 120,260 | 0.51 | ||||||||||||||
Underlying Reference MSRs: | ||||||||||||||||||||||||||
Holder of Loans | Unpaid | Weighted- | Weighted- | Weighted- | Price | Multiple (1) | Fair Value | |||||||||||||||||||
Fannie Mae | $ | 12,057,248 | 3.04 | % | 0.25 | % | 18 months | 1.35 | % | 5.38 | $ | 162,449 | ||||||||||||||
Freddie Mac | 1,015,899 | 3.66 | % | 0.25 | % | 17 months | 1.37 | % | 5.50 | 13,959 | ||||||||||||||||
Total/weighted-average | $ | 13,073,147 | 3.09 | % | 0.25 | % | 18 months | 1.35 | % | 5.39 | $ | 176,408 | ||||||||||||||
(1) | Calculated as the underlying MSR price divided by the weighted-average servicing fee. |
As of June 30, 2022, the mortgage servicing counterparty had drawn
Single-family Residential Investments
As of June 30, 2022, the Company had acquired 586 single family residential ("SFR") properties for a total cost of
On May 10, 2022, the Company entered into a purchase and sale agreement to sell 378 SFR properties for
As of June 30, 2022, the Company's SFR portfolio is summarized in the tables below (dollars in thousands):
Single-family Residential | Single-family Residential | Total | ||||||||||
Land | $ | 11,423 | $ | 18,913 | $ | 30,336 | ||||||
Buildings and improvements | 57,093 | 95,354 | 152,447 | |||||||||
Investments in single-family residential real estate, at cost | 68,516 | 114,267 | 182,783 | |||||||||
Less: accumulated depreciation | (326) | (1,288) | (1,614) | |||||||||
Investments in single-family residential real estate, net | $ | 68,190 | $ | 112,979 | $ | 181,169 | ||||||
Market | Number of | Gross Book | Average Gross | Average | Average | |||||||||||||||
Atlanta, GA | 102 | $ | 34,458 | $ | 338 | 2,209 | 2008 | |||||||||||||
Dallas, TX | 88 | 30,920 | 351 | 1,915 | 2014 | |||||||||||||||
Huntsville, AL | 86 | 28,510 | 332 | 2,306 | 2015 | |||||||||||||||
Tulsa, OK | 103 | 27,130 | 263 | 1,762 | 2016 | |||||||||||||||
Birmingham, AL | 69 | 18,606 | 270 | 1,690 | 2017 | |||||||||||||||
Kansas City, MO | 52 | 15,510 | 298 | 1,944 | 2008 | |||||||||||||||
Memphis, TN | 49 | 14,421 | 294 | 1,890 | 2006 | |||||||||||||||
Charlotte, NC | 37 | 13,228 | 358 | 1,920 | 2010 | |||||||||||||||
Total/weighted average | 586 | $ | 182,783 | $ | 312 | 1,971 | 2012 | |||||||||||||
Status of Property | Number of | Gross Book | ||||||
In rehabilitation | 38 | $ | 12,693 | |||||
In marketing | 97 | 31,455 | ||||||
Leased not yet occupied | 1 | 247 | ||||||
Leased and occupied | 450 | 138,388 | ||||||
Total | 586 | $ | 182,783 | |||||
As of June 30, 2022, the Company 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 June 30, 2022, the Company's credit investment portfolio at fair value was comprised of the following (dollars in thousands):
Fair Value (1) | Market Price | Leverage | |||||||||
Commercial MBS | $ | 99,901 | $ | 99.90 | 5.6 | ||||||
Commercial mortgage loan | 29,484 | 100.00 | 2.3 | ||||||||
Residential MBS - interest-only (2) | 19,255 | 8.12 | — | ||||||||
Residential MBS (2) | 1,082 | 67.11 | — | ||||||||
Business purpose residential MBS (3) | 15,683 | 93.51 | — | ||||||||
Residential solar panel loan ABS | 3,027 | 59.81 | — | ||||||||
Total/weighted-average | $ | 168,432 | 1.7 | ||||||||
(1) | For credit investments in securities, includes contractual accrued interest receivable. |
(2) | Residential MBS - interest-only and residential MBS, in combination, reflect our net investment at fair value of |
(3) | Includes our net investment at fair value of |
As of June 30, 2022, 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 GSE, such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). As of June 30, 2022, the Company's agency MBS investment portfolio totaled
Unpaid | Net | Amortized | Net | Fair Value | Market | Coupon | Weighted | |||||||||||||||||||||||||
30-year fixed rate: | ||||||||||||||||||||||||||||||||
3.5 % | $ | 68,634 | $ | (844) | $ | 67,790 | $ | (1,440) | $ | 66,350 | $ | 96.67 | 3.50 | % | 9.2 | |||||||||||||||||
4.0 % | 202,817 | 1,253 | 204,070 | (3,191) | 200,879 | 99.04 | 4.00 | % | 9.0 | |||||||||||||||||||||||
4.5 % | 114,419 | (9) | 114,410 | 710 | 115,120 | 100.61 | 4.50 | % | 8.1 | |||||||||||||||||||||||
5.5 % | 8 | — | 8 | — | 8 | 107.89 | 5.50 | % | 5.7 | |||||||||||||||||||||||
Total/weighted-average | $ | 385,878 | $ | 400 | $ | 386,278 | $ | (3,921) | $ | 382,357 | $ | 99.09 | 4.06 | % | 8.8 | |||||||||||||||||
The Company's weighted average yield on its specified agency MBS was
As of June 30, 2022, 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) | |||||||||||||
$ | (25,000) | $ | (22,649) | $ | (22,472) | $ | 177 | |||||||||
(30,000) | (27,970) | (27,932) | 38 | |||||||||||||
(100,000) | (95,486) | (96,172) | (686) | |||||||||||||
50,000 | 50,121 | 50,195 | 74 | |||||||||||||
(50,000) | (50,929) | (50,195) | 734 | |||||||||||||
Total net long (short) agency TBA positions | $ | (155,000) | $ | (146,913) | $ | (146,576) | $ | 337 | ||||||||
(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 June 30, 2022, 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. Under the terms of the Company's interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives variable interest payments based upon either the prevailing three-month London Interbank Offered Rate ("LIBOR") or Secured Overnight Financing Rate ("SOFR"). As of June 30, 2022, the Company's interest swap agreements were comprised of the following (dollars in thousands):
Weighted-average: | ||||||||||||||||||||
Notional Amount | Fixed Pay | Variable Receive | Net Receive | Remaining | ||||||||||||||||
Years to maturity: | ||||||||||||||||||||
Less than 3 years | $ | 130,000 | 1.32 | % | 1.22 | % | (0.10) | % | 1.5 | |||||||||||
3 to less than 10 years | 100,000 | 1.68 | % | 1.30 | % | (0.38) | % | 5.4 | ||||||||||||
Total / weighted-average | $ | 230,000 | 1.48 | % | 1.25 | % | (0.23) | % | 3.2 | |||||||||||
The Company's weighted average net pay rate of its interest rate swap agreements was
Other Second Quarter 2022 Financial Highlights
The Company's book value was
The Company's "at risk" leverage ratio was 1.6 to 1 as of June 30, 2022 compared to 1.3 to 1 as of March 31, 2022. The Company's "at risk" leverage ratio is calculated as the sum of the Company's repurchase agreement financing, long-term debt secured by single-family properties, 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.
During the second quarter of 2022, the Company repurchased 0.9 million shares of its common stock at an average price of
Conference Call
The Company will hold a conference call for investors at 10:00 A.M. Eastern Time on Wednesday, August 10, 2022 to discuss the Company's second quarter 2022 results.
Investors may listen to the earnings call via the internet at: http://www.arlingtonasset.com/index.php?s=19. Replays of the earnings call will be available for 60 days via webcast at the Internet address provided above, beginning two hours after the call ends.
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 and residential real estate and has elected to be taxed as a REIT. The Company is headquartered in the Washington, D.C. metropolitan area. For more information, please visit www.arlingtonasset.com.
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 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, the uncertainty and economic impact of the ongoing coronavirus (COVID-19) pandemic and the measures taken by the government to address it, including the impact on our business, financial condition, liquidity and results of operations due to a significant decrease in economic activity and disruptions in our financing operations, among other factors, 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, our ability to close on the sale of single-family residential homes described herein, and to realize the expected benefits from such sale, 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 core earnings, 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 U.S. Federal Reserve, the Federal Housing Finance Agency and the U.S. Treasury, availability of opportunities that meet or exceed the Company's risk adjusted return expectations, ability and willingness to make future dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, and general economic, political, regulatory and market conditions. These and other material risks are described in the Company's most recent Annual Report on Form 10-K and any other documents filed by the Company with the SEC from time to time, which are available from the Company and from the SEC, and you should read and understand these risks when evaluating any forward-looking statement. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Financial data to follow
ARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) | ||||||||
June 30, 2022 | March 31, 2022 | |||||||
ASSETS | ||||||||
Cash and cash equivalents (includes | $ | 9,575 | $ | 21,715 | ||||
Restricted cash | 1,270 | 851 | ||||||
Restricted cash of consolidated VIEs | 4,649 | 9,292 | ||||||
Agency mortgage-backed securities, at fair value | 382,357 | 292,318 | ||||||
MSR financing receivables, at fair value | 120,260 | 139,225 | ||||||
Credit investments, at fair value | 142,903 | 54,952 | ||||||
Mortgage loans of consolidated VIEs, at fair value | 225,004 | 261,976 | ||||||
Single-family residential real estate (net of | 68,190 | 120,952 | ||||||
Single-family residential real estate held-for-sale (net of | 112,979 | — | ||||||
Deposits | 4,623 | 4,607 | ||||||
Other assets (includes | 12,945 | 14,995 | ||||||
Total assets | $ | 1,084,755 | $ | 920,883 | ||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Repurchase agreements | $ | 329,994 | $ | 284,862 | ||||
Purchased securities payable | 114,410 | — | ||||||
Secured debt of consolidated VIEs, at fair value | 205,497 | 244,365 | ||||||
Long-term unsecured debt | 86,199 | 86,096 | ||||||
Long-term debt secured by single-family properties | 122,770 | 77,824 | ||||||
Other liabilities (includes | 12,187 | 9,639 | ||||||
Total liabilities | 871,057 | 702,786 | ||||||
Equity: | ||||||||
Preferred stock (liquidation preference of | 34,608 | 36,357 | ||||||
Common stock | 291 | 301 | ||||||
Additional paid-in capital | 2,025,345 | 2,027,585 | ||||||
Accumulated deficit | (1,846,546) | (1,846,146) | ||||||
Total equity | 213,698 | 218,097 | ||||||
Total liabilities and equity | $ | 1,084,755 | $ | 920,883 | ||||
Book value per common share (1) | $ | 6.30 | $ | 6.19 | ||||
Common shares outstanding (in thousands) (2) | 28,529 | 29,345 | ||||||
(1) Book value per common share is calculated as total equity plus accumulated depreciation of single-family residential real estate less the | ||||||||
(2) Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock. | ||||||||
June 30, 2022 | March 31, 2022 | |||||||
Assets and liabilities of consolidated VIEs: | ||||||||
Cash and restricted cash | $ | 4,896 | $ | 9,365 | ||||
Mortgage loans, at fair value | 225,004 | 261,976 | ||||||
Other assets | 1,401 | 1,461 | ||||||
Secured debt, at fair value | (205,497) | (244,365) | ||||||
Other liabilities | (275) | (293) | ||||||
Net investment in consolidated VIEs | $ | 25,529 | $ | 28,144 | ||||
ARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited) | ||||||||||||||||
Three Months Ended | ||||||||||||||||
June 30, | March 31, | December 31, | September 30, | |||||||||||||
Interest income | ||||||||||||||||
MSR financing receivables | $ | 3,983 | $ | 3,382 | $ | 2,589 | $ | 1,945 | ||||||||
Agency mortgage-backed securities | 2,065 | 1,492 | 2,206 | 2,660 | ||||||||||||
Credit securities and loans | 991 | 853 | 772 | 1,247 | ||||||||||||
Mortgage loans of consolidated VIEs | 1,611 | 1,354 | 144 | 301 | ||||||||||||
Other | 113 | 325 | 169 | 193 | ||||||||||||
Total interest and other income | 8,763 | 7,406 | 5,880 | 6,346 | ||||||||||||
Rent revenues from single-family properties | 2,137 | 1,064 | 259 | — | ||||||||||||
Interest expense | ||||||||||||||||
Repurchase agreements | 763 | 276 | 286 | 306 | ||||||||||||
Long-term debt secured by single-family properties | 718 | 408 | 151 | — | ||||||||||||
Long-term unsecured debt | 1,400 | 1,370 | 1,376 | 1,435 | ||||||||||||
Secured debt of consolidated VIEs | 1,578 | 1,188 | 20 | 173 | ||||||||||||
Total interest expense | 4,459 | 3,242 | 1,833 | 1,914 | ||||||||||||
Single-family property operating expenses | 1,915 | 1,531 | 593 | 36 | ||||||||||||
Net operating income | 4,526 | 3,697 | 3,713 | 4,396 | ||||||||||||
Investment and derivative gain (loss), net | 370 | (827) | 3,909 | (1,313) | ||||||||||||
General and administrative expenses | ||||||||||||||||
Compensation and benefits | 2,324 | 2,065 | 1,855 | 1,888 | ||||||||||||
Other general and administrative expenses | 1,463 | 1,219 | 1,125 | 1,009 | ||||||||||||
Total general and administrative expenses | 3,787 | 3,284 | 2,980 | 2,897 | ||||||||||||
Income (loss) before income taxes | 1,109 | (414) | 4,642 | 186 | ||||||||||||
Income tax provision | 802 | 2,287 | 808 | 436 | ||||||||||||
Net income (loss) | 307 | (2,701) | 3,834 | (250) | ||||||||||||
Dividend on preferred stock | (707) | (742) | (739) | (731) | ||||||||||||
Net (loss) income (attributable) available to | $ | (400) | $ | (3,443) | $ | 3,095 | $ | (981) | ||||||||
Basic (loss) earnings per common share | $ | (0.01) | $ | (0.12) | $ | 0.10 | $ | (0.03) | ||||||||
Diluted (loss) earnings per common share | $ | (0.01) | $ | (0.12) | $ | 0.10 | $ | (0.03) | ||||||||
Weighted average common shares outstanding (in | ||||||||||||||||
Basic | 28,766 | 29,832 | 31,100 | 31,927 | ||||||||||||
Diluted | 28,766 | 29,832 | 31,421 | 31,927 | ||||||||||||
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" (formerly core operating income). 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
- 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 U.S. federal and state corporate income taxes. In calculating earnings available for distribution, any income tax provision or benefit associated with gains or losses on our mortgage related investments and economic hedging instruments are also excluded from earnings available for distribution.
TBA dollar roll income represents the economic equivalent of net interest income (implied interest income net of financing costs) generated from our investments 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 is generated as a result of delaying, or "rolling," the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting "spot" sale with the same counterparty prior to the settlement date, net settling the "paired-off" positions in cash, and contemporaneously entering another forward-settling purchase 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. The price discount of the forward-settling purchase relative to the contemporaneously executed spot sale reflects compensation 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 as the excess of the spot sale price over the forward-settling purchase price and recognize this amount ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward purchase. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income 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 | ||||||||||||||||
June 30, | March 31, | December 31, | September 30, | |||||||||||||
Net (loss) income (attributable) available to common stock | $ | (400) | $ | (3,443) | $ | 3,095 | $ | (981) | ||||||||
Add (less): | ||||||||||||||||
Investment and derivative (gain) loss, net | (370) | 827 | (3,909) | 1,313 | ||||||||||||
Income tax provision for TRS investment gain | 496 | 2,058 | 679 | 351 | ||||||||||||
Depreciation of single-family residential properties | 604 | 715 | 287 | 12 | ||||||||||||
Stock-based compensation expense | 992 | 761 | 523 | 520 | ||||||||||||
Add back: | ||||||||||||||||
TBA dollar roll income | 280 | 823 | 465 | 1,064 | ||||||||||||
Interest rate swap net interest expense | (282) | (291) | (653) | (379) | ||||||||||||
Non-GAAP earnings available for distribution | $ | 1,320 | $ | 1,450 | $ | 487 | $ | 1,900 | ||||||||
Non-GAAP earnings available for distribution per | $ | 0.05 | $ | 0.05 | $ | 0.02 | $ | 0.06 | ||||||||
Weighted average diluted common shares outstanding | 29,300 | 30,315 | 31,421 | 32,243 | ||||||||||||
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.
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