Arlington Asset Investment Corp. Reports Second Quarter 2020 Financial Results
Arlington Asset Investment Corp. (NYSE: AI) reported a net income of $9.5 million ($0.26 per diluted share) and a non-GAAP core operating income of $0.4 million ($0.01 per diluted share) for Q2 2020. The company’s mortgage investment portfolio reached $651 million in fair value, with a strong performance due to spread tightening. Arlington's economic net interest income was $3.9 million, down from $9.8 million in Q1 2020. The Board decided not to declare a dividend on common stock for Q2 2020, emphasizing cash reserves. A conference call is scheduled for July 31, 2020.
- Achieved net income of $9.5 million ($0.26/share) for Q2 2020.
- Economic return of 7% attributed to improved market conditions.
- Retained financial flexibility with leverage near 1x.
- Total mortgage investment portfolio valued at $651 million.
- Decline in economic net interest income from $9.8 million in Q1 to $3.9 million in Q2.
- No dividend declared on common stock for Q2 2020.
MCLEAN, Va., July 30, 2020 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company" or "Arlington") today reported net income available to common shareholders of
Second Quarter 2020 Financial Highlights
$0.26 per diluted common share of GAAP net income$0.01 per diluted common share of non-GAAP core operating income$5.63 per common share of book value- 1.2 to 1 "at risk" short term secured financing to investable capital ratio
"The Company is encouraged by the performance of its investment portfolio and resulting
Other Second Quarter Highlights
As of June 30, 2020, the Company's mortgage investment portfolio totaled
The Company's agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a U.S. government sponsored enterprise ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. government agency, such as the Government National Mortgage Association ("Ginnie Mae"). The Company's mortgage credit investments generally include mortgage loans secured by residential or commercial real property, MBS collateralized by residential or commercial mortgage loans ("non-agency MBS"), and securities or loans collateralized by mortgage servicing rights ("MSRs").
As of June 30, 2020, the Company's
$230 million of2.5% coupon 30-year agency MBS$192 million of3.0% coupon 30-year agency MBS$23 million of3.5% coupon 30-year agency MBS$17 million of4.0% coupon 30-year agency MBS$40 million of4.5% coupon 30-year agency MBS
As of June 30, 2020, the Company's
During the second quarter of 2020, the Company purchased agency MBS totaling
As of June 30, 2020, the Company's
$64 million of financing collateralized by MSRs$45 million commercial mortgage loan$18 million of non-agency MBS collateralized by residential mortgage loans$12 million of non-agency MBS collateralized by commercial mortgage loans$10 million of non-agency MBS collateralized by business purpose residential mortgage loans
During the second quarter of 2020, the Company purchased mortgage credit investments totaling
As of June 30, 2020, the Company had a total of
The Company's "at risk" short-term secured financing to investable capital ratio was 1.2 to 1 as of June 30, 2020 compared to 1.5 to 1 as of March 31, 2020. The Company's "at risk" short-term secured financing to investable capital is measured as the ratio of the sum of the Company's repurchase agreement financing, net payable or receivable for unsettled securities and net contractual price of TBA commitments 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 2020, the Company satisfied all of its margin calls under its repurchase agreement financing arrangements in the normal course of business.
GAAP net interest income was
The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost of borrowing and the value of its agency MBS portfolio including interest rate swap agreements, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, and options on agency MBS. Under GAAP, the Company has not designated these transactions as hedging instruments for financial reporting purposes and therefore all gains and losses on its hedging instruments are recorded as net investment gains and losses in the Company's financial statements.
Under the terms of the Company's interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives quarterly variable interest payments based upon the prevailing three-month London Interbank Offered Rate ("LIBOR") on the date of reset. As of June 30, 2020, the Company had
Economic net interest income was
Excluding TBA dollar roll income, the Company had net investment gains of
During the second quarter of 2020, the Company repurchased 1.1 million shares of its common stock for a purchase cost of
Distributions to Shareholders
The Company's Board of Directors approved distributions to its Series B and Series C preferred shareholders of
The Company intends to elect to be taxed as a REIT for its taxable year ended December 31, 2019 upon the filing of its tax return for such taxable year. The Company is organized and operated in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes and currently intends to continue to be organized and operated in such a manner. As a REIT, distributions to shareholders will generally be taxable as ordinary income that are not eligible to be taxed as qualified dividends. However, a portion of such distributions may be designated as long-term capital gain dividends to the extent that such portion is attributable to the Company's sale of capital assets held for more than one year. Non-corporate taxpayers may deduct up to
Conference Call
The Company will hold a conference call for investors at 9:00 A.M. Eastern Time on Friday, July 31, 2020 to discuss the Company's second quarter 2020 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: AI) currently invests primarily in mortgage-related and other assets and intends to elect to be taxed as a REIT upon filing its tax return for its taxable year ending December 31, 2019. 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, 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. | ||||||||
June 30, 2020 | March 31, 2020 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 14,096 | $ | 89,376 | ||||
Interest receivable | 1,605 | 6,126 | ||||||
Sold securities receivable | 91,426 | 1,479,396 | ||||||
Agency mortgage-backed securities, at fair value | 501,582 | 645,001 | ||||||
Mortgage credit investments, at fair value | 149,446 | 77,237 | ||||||
Derivative assets, at fair value | 489 | 16,963 | ||||||
Deposits | 2,473 | 33,008 | ||||||
Other assets | 24,683 | 11,200 | ||||||
Total assets | $ | 785,800 | $ | 2,358,307 | ||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Repurchase agreements | $ | 426,877 | $ | 2,036,466 | ||||
Interest payable | 611 | 1,199 | ||||||
Accrued compensation and benefits | 1,469 | 832 | ||||||
Derivative liabilities, at fair value | 207 | 11,828 | ||||||
Purchased securities payable | 42,662 | — | ||||||
Other liabilities | 967 | 790 | ||||||
Long-term unsecured debt | 74,022 | 74,383 | ||||||
Total liabilities | 546,815 | 2,125,498 | ||||||
Equity: | ||||||||
Preferred stock (liquidation preference of | 36,385 | 37,198 | ||||||
Common stock | 357 | 368 | ||||||
Additional paid-in capital | 2,047,286 | 2,049,741 | ||||||
Accumulated deficit | (1,845,043) | (1,854,498) | ||||||
Total equity | 238,985 | 232,809 | ||||||
Total liabilities and equity | $ | 785,800 | $ | 2,358,307 | ||||
Book value per common share (1) | $ | 5.63 | $ | 5.28 | ||||
Common shares outstanding (in thousands) (2) | 35,752 | 36,711 | ||||||
(1) | Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. |
(2) | Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock. |
ARLINGTON ASSET INVESTMENT CORP. | ||||||||||||||||
Three Months Ended | ||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||
Interest income | ||||||||||||||||
Agency mortgage-backed securities | $ | 3,517 | $ | 23,388 | $ | 27,927 | $ | 28,455 | ||||||||
Mortgage credit investments | 2,083 | 1,442 | 173 | 4 | ||||||||||||
Interest and other income | 534 | 143 | 155 | 215 | ||||||||||||
Total interest income | 6,134 | 24,973 | 28,255 | 28,674 | ||||||||||||
Interest expense | ||||||||||||||||
Short-term secured debt | 1,154 | 14,592 | 19,970 | 22,721 | ||||||||||||
Long-term unsecured debt | 1,215 | 1,240 | 1,248 | 1,261 | ||||||||||||
Total interest expense | 2,369 | 15,832 | 21,218 | 23,982 | ||||||||||||
Net interest income | 3,765 | 9,141 | 7,037 | 4,692 | ||||||||||||
Investment advisory fee income | — | — | 82 | — | ||||||||||||
Investment gain (loss), net | ||||||||||||||||
Gain (loss) on investments, net | 7,625 | 3,094 | (268) | 16,890 | ||||||||||||
(Loss) gain from derivative instruments, net | (397) | (102,600) | 23,440 | (25,353) | ||||||||||||
Other, net | 2,569 | (562) | 136 | 232 | ||||||||||||
Total investment gain (loss), net | 9,797 | (100,068) | 23,308 | (8,231) | ||||||||||||
General and administrative expenses | ||||||||||||||||
Compensation and benefits | 1,897 | 1,858 | 2,012 | 2,833 | ||||||||||||
Other general and administrative expenses | 1,431 | 1,385 | 1,005 | 1,365 | ||||||||||||
Total general and administrative expenses | 3,328 | 3,243 | 3,017 | 4,198 | ||||||||||||
Net income (loss) | 10,234 | (94,170) | 27,410 | (7,737) | ||||||||||||
Dividend on preferred stock | (758) | (774) | (774) | (774) | ||||||||||||
Net income (loss) available (attributable) to common stock | $ | 9,476 | $ | (94,944) | $ | 26,636 | $ | (8,511) | ||||||||
Basic earnings (loss) per common share | $ | 0.26 | $ | (2.59) | $ | 0.73 | $ | (0.23) | ||||||||
Diluted earnings (loss) per common share | $ | 0.26 | $ | (2.59) | $ | 0.72 | $ | (0.23) | ||||||||
Weighted average common shares outstanding (in thousands) | ||||||||||||||||
Basic | 36,618 | 36,711 | 36,628 | 36,572 | ||||||||||||
Diluted | 36,666 | 36,711 | 36,750 | 36,572 | ||||||||||||
Non-GAAP Core Operating Income
In addition to the Company's results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States ("GAAP"), the Company also reports "non-GAAP core operating income." The Company defines core operating income as "economic net interest income" and investment advisory fee income less "core general and administrative expenses" and preferred stock dividends.
Economic Net Interest Income
Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of interest expense incurred from all of our interest-bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions. Economic net interest income is comprised of the following:
- net interest income determined in accordance with GAAP;
- TBA agency MBS dollar roll income, which is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the "spot" sale of the same security, earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settling purchase; and
- net interest income earned or expense incurred from interest rate swap agreements.
In the Company's consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the net interest income earned or expense incurred from interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item "gain (loss) from derivative instruments, net" of the "investment gain (loss), net" section. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company's long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.
Core General and Administrative Expenses
Core general and administrative expenses are non-interest expenses reported within the line item "total general and administrative expenses" of the consolidated statements of comprehensive income less stock-based compensation expense and non-recurring expense.
Non-GAAP Core Operating Income Results
The following table presents the Company's computation of economic net interest income and core operating income for the last four fiscal quarters (unaudited, amounts in thousands, except per share amounts):
Three Months Ended | ||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||
GAAP net interest income | $ | 3,765 | $ | 9,141 | $ | 7,037 | $ | 4,692 | ||||||||
TBA dollar roll income | 170 | 105 | 132 | 923 | ||||||||||||
Interest rate swap net interest (expense) income | (6) | 592 | 2,126 | 4,445 | ||||||||||||
Economic net interest income | 3,929 | 9,838 | 9,295 | 10,060 | ||||||||||||
Investment advisory fee income | — | — | 82 | — | ||||||||||||
Core general and administrative expenses | (2,734) | (2,850) | (2,140) | (2,797) | ||||||||||||
Preferred stock dividend | (758) | (774) | (774) | (774) | ||||||||||||
Non-GAAP core operating income | $ | 437 | $ | 6,214 | $ | 6,463 | $ | 6,489 | ||||||||
Non-GAAP core operating income per diluted common share | $ | 0.01 | $ | 0.17 | $ | 0.18 | $ | 0.18 | ||||||||
Weighted average diluted common shares outstanding | 36,666 | 36,817 | 36,750 | 36,751 | ||||||||||||
The following table provides a reconciliation of GAAP net income (loss) to non-GAAP core operating income for the last four fiscal quarters (unaudited, amounts in thousands):
Three Months Ended | ||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||
GAAP net income (loss) | $ | 10,234 | $ | (94,170) | $ | 27,410 | $ | (7,737) | ||||||||
Add (less): | ||||||||||||||||
Total investment (gain) loss, net | (9,797) | 100,068 | (23,308) | 8,231 | ||||||||||||
Stock-based compensation expense | 594 | 393 | 877 | 913 | ||||||||||||
Preferred stock dividend | (758) | (774) | (774) | (774) | ||||||||||||
Non-recurring expense | — | — | — | 488 | ||||||||||||
Add back: | ||||||||||||||||
TBA dollar roll income | 170 | 105 | 132 | 923 | ||||||||||||
Interest rate swap net interest (expense) income | (6) | 592 | 2,126 | 4,445 | ||||||||||||
Non-GAAP core operating income | $ | 437 | $ | 6,214 | $ | 6,463 | $ | 6,489 | ||||||||
Non-GAAP core operating income is used by management to evaluate the financial performance of the Company's long-term 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. The Company believes that non-GAAP core operating income assists investors in understanding and evaluating the financial performance of the Company's long-term 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 "non-core" 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. For example, the economic cost or benefit of hedging instruments other than interest rate swap agreements, such as U.S. Treasury note futures or options on U.S. Treasury note futures, do not affect the computation of non-GAAP core operating income. In addition, the Company's calculation of non-GAAP core operating income may not be comparable to other similarly titled measures of other companies. Therefore, the Company believes that net income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income. Furthermore, there may be differences between non-GAAP core operating income and taxable income determined in accordance with the Internal Revenue Code. As a REIT, the Company will be required to distribute at least
The following tables present information on the Company's investment and hedge portfolio as of June 30, 2020 (unaudited, dollars in thousands):
Mortgage Investments: | ||||
Fair Value | ||||
Agency MBS: | ||||
Specified agency MBS | $ | 501,582 | ||
Net long agency TBA position | — | |||
Total agency MBS | 501,582 | |||
Mortgage credit investments | 149,446 | |||
Total mortgage investments | $ | 651,028 | ||
Specified Agency MBS: | ||||||||||||||||||||||||||
Unpaid | Net | Amortized | Net | Fair Value | Market | Coupon | Weighted Average Expected Remaining Life | |||||||||||||||||||
30-year fixed rate: | ||||||||||||||||||||||||||
$ | 218,144 | $ | 10,699 | $ | 228,843 | $ | 850 | $ | 229,693 | $ | 105.29 | 2.50 | % | 4.2 | ||||||||||||
178,561 | 5,145 | 183,706 | 7,963 | 191,669 | 107.34 | 3.00 | % | 4.2 | ||||||||||||||||||
20,969 | 806 | 21,775 | 885 | 22,660 | 108.06 | 3.50 | % | 3.1 | ||||||||||||||||||
15,567 | 640 | 16,207 | 687 | 16,894 | 108.52 | 4.00 | % | 2.5 | ||||||||||||||||||
37,094 | 1,608 | 38,702 | 1,950 | 40,652 | 109.59 | 4.50 | % | 2.9 | ||||||||||||||||||
12 | — | 12 | 2 | 14 | 117.71 | 5.50 | % | 4.8 | ||||||||||||||||||
Total/weighted-average | $ | 470,347 | $ | 18,898 | $ | 489,245 | $ | 12,337 | $ | 501,582 | $ | 106.64 | 2.94 | % | 4.0 | |||||||||||
Net Long Agency TBA Positions: | |||||||||||||
Notional Amount: | |||||||||||||
Net Long (Short) | Implied Cost Basis | Implied Fair Value | Net Carrying Amount | ||||||||||
$ | 75,000 | $ | 77,777 | $ | 78,187 | $ | 410 | ||||||
(75,000) | (77,980) | (78,187) | (207) | ||||||||||
Total TBA commitments, net | $ | — | $ | (203) | $ | — | $ | 203 | |||||
Mortgage Credit Investments: | |||||||||||||||||||
Unpaid | Net | Amortized | Net | Fair Value (1) | Market | ||||||||||||||
Mortgage credit investments: | |||||||||||||||||||
Mortgage servicing rights financing | $ | 65,000 | $ | (2,559) | $ | 62,441 | $ | 2,029 | $ | 64,470 | $ | 99.09 | |||||||
Commercial mortgage loan | 45,000 | — | 45,000 | (451) | 44,549 | 99.00 | |||||||||||||
Commercial MBS | 20,690 | (1,704) | 18,986 | (6,405) | 12,581 | 60.33 | |||||||||||||
Residential MBS | 17,947 | (699) | 17,248 | 805 | 18,053 | 99.93 | |||||||||||||
Interest-only residential MBS | — | — | 16 | — | 16 | 0.16 | |||||||||||||
Business purpose residential MBS | 11,731 | 200 | 11,931 | (2,154) | 9,777 | 83.34 | |||||||||||||
Total/weighted-average | $ | 160,368 | $ | (4,762) | $ | 155,622 | $ | (6,176) | $ | 149,446 | $ | 93.01 | |||||||
(1) | For mortgage credit investments in securities, includes contractual accrued interest receivable. |
Interest Rate Swap Agreement: | ||||||||||||||||||
Notional Amount | Fixed Pay Rate | Variable Receive Rate | Net Receive (Pay) Rate | Remaining Life (Years) | ||||||||||||||
50,000 | 0.64 | % | 0.84 | % | 0.20 | % | 9.8 | |||||||||||
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SOURCE Arlington Asset Investment Corp.
