MCLEAN, Va., March 2, 2022 /PRNewswire/ — Arlington Asset Investment Corp. (NYSE: AAIC) (the “Company” or “Arlington“) today reported net income available to common shareholders of $3.1 million, or $0.10 per diluted common share, and non-GAAP core operating income of $0.5 million, or $0.02 per diluted common share, for the quarter ended December 31, 2021. A reconciliation of non-GAAP core operating income to GAAP net income appears at the end of this press release.
Fourth Quarter 2021 Financial Highlights
- $6.16 per common share of book value
- 3.2% increase from September 30, 2021
- $0.10 per diluted common share of GAAP net income
- $0.02 per diluted common share of non-GAAP core operating income
- $0.09 per common share of book value accretion from the repurchase 3.8% of the outstanding shares of common stock
- Purchased an additional 2.5% of the outstanding shares of common stock through March 1, 2022
- 12.2 million share remaining authorization as of March 1, 2022
- 1.5 to 1 “at risk” leverage ratio
Full Year 2021 Financial Highlights
- $0.38 per diluted common share of GAAP net loss
- $0.17 per diluted common share of non-GAAP core operating income
- $0.27 per common share of book value accretion from the repurchase of 9.7% of the outstanding shares of common stock
- Successfully launched two new investment silos in mortgage servicing right (“MSR”) related assets and single-family residential (“SFR”) rental property
- Initial purchases of SFR properties of $61 million with commitments to purchase an additional $20 million
- Supported by $150 million five-year financing facility at attractive fixed cost of funds of 2.76%
- 7% reduction in general and administrative expenses
- Completed a public offering of $37.8 million of 6.00% senior notes due 2026 and redeemed its outstanding 6.625% senior notes due 2023 with an outstanding principal balance of $23.8 million
“We are pleased with fourth quarter results, including an economic return of 3.2% achieved amid challenging market conditions,” said J. Rock Tonkel, Jr., the Company’s President and Chief Executive Officer. “Further, as a result of positive investment returns and accretive stock repurchases, book value per share increased by approximately 2.5% during January 2022, and we believe it is relatively unchanged from that figure through the end of February.
“As previously discussed, the Company continues to progress toward building multiple high return, non-commodity investment channels that diversify investment risk and improve reliability of returns over time. The Company’s initial efforts include platforms for investments in MSRs, SFR rental properties, and credit securities backed by real estate.
“Our MSR portfolio has generated a 34% annualized return since its initial formation in late 2020, and now represents 43% of investment capital. Our SFR portfolio, initiated during the third quarter, has reached $125 million as of today and is scaling in eight attractive U.S. markets with a better-than-expected unlevered yield of 4.9%, a highly attractive financing facility, and anticipated total returns in the double digits.
“With “at risk” leverage of just 1.5x and high liquidity, we continue to be positioned with a primary focus on protecting shareholder capital from the impact of inflation, rising rates, and Federal Reserve monetary tightening. In addition, we have reduced G&A expenses by 22% over the last two years and 7% over the past year against a strong tide of inflation.
“With the Company’s stock trading at a significant discount to book value, we have utilized our strong financial position to repurchase over $25 million of the Company’s shares as of today. This equates to 21% of the Company’s outstanding shares of common stock since the inception of our share buyback program in mid-2020. Included in that number are repurchases to date in 2022 of 0.75 million shares or 2.5% of the outstanding shares of common stock. At our current stock price, we intend to aggressively repurchase shares of our common stock under our remaining authorization of 12.2 million shares. If fully executed, our existing authorization would retire approximately 40% of currently outstanding shares.
“It has taken great effort to transition Arlington into a differentiated investment firm dedicated to developing high return programmatic investment channels, and I would like to thank my colleagues for their efforts to increase shareholder value. I would note that our portfolio is still not fully scaled, and I believe there is additional untapped earnings power in our model. I am optimistic that our strategy and our team will build on our recent successes and that the Company has a bright future.”
Fourth Quarter Investment Portfolio
As of December 31, 2021, the Company’s investment portfolio totaled $735 million at fair value consisting of the following:
- $484 million of agency mortgage-backed securities (“MBS”)
- $125 million of MSR related assets
- $65 million of credit investments
- $61 million of SFR real estate assets
The Company has allocated 32%, 43%, 16% and 9% of its invested capital to its agency MBS, MSR related, credit and SFR investment strategies, respectively, as of December 31, 2021.
The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
As of December 31, 2021, the Company’s agency MBS investment portfolio totaled $484 million at fair value consisting entirely of specified agency MBS comprised of the following:
- $344 million of 2.0% coupon 30-year agency MBS
- $140 million of 2.5% coupon 30-year agency MBS
As of December 31, 2021, the Company’s $484 million agency MBS portfolio had a weighted average amortized cost basis of $103.56 and a weighted average market price of $100.97. The Company’s agency MBS are comprised of securities backed by specified pools of mortgage loans selected for their lower propensity for prepayment. During the fourth quarter of 2021, the Company sold agency MBS for gross sale proceeds of $134 million for a net realized loss of $2.0 million. The Company did not purchase any specified agency MBS during the fourth quarter of 2021.
The Company’s weighted average yield on its agency MBS was 1.53% for the fourth quarter of 2021 compared to 1.52% for the third quarter of 2021, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 7.43% for the fourth quarter of 2021 compared to 8.62% for the third quarter of 2021.
As of December 31, 2021, the Company had $426 million of repurchase agreements outstanding with a weighted average rate of 0.14% and remaining weighted average maturity of 13 days secured by an aggregate of $448 million of agency MBS at fair value, which includes $28 million at sale price of unsettled agency MBS sale commitments which is included in the line item “sold securities receivable” in the Company’s financial statements. The Company’s weighted average cost of repurchase agreement funding secured by agency MBS was 0.12% during the fourth quarter of 2021 compared to 0.11% during the third quarter of 2021.
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 December 31, 2021, the Company had $150 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 0.84% and a remaining weighted average maturity of 5.0 years. The Company’s weighted average net pay rate of its interest rate swap agreements was 0.69% during the fourth quarter of 2021 compared to 0.51% during the third quarter of 2021. 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.
MSR Related Investments
The Company is party to agreements with a licensed, 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 option, the mortgage servicing counterparty could utilize leverage on the MSRs that are subject to the Company’s MSR financing receivable to finance the purchase of additional MSRs to increase potential returns to the Company. The transactions are accounted for as a financing receivable on the Company’s consolidated financial statements.
As of December 31, 2021, the Company had $125 million of MSR financing receivable investments at fair value. During the fourth quarter of 2021, the Company invested additional capital of $5.7 million in MSR financing receivables. As of December 31, 2021, the mortgage servicing counterparty has drawn $40 million of financing under its credit facility collateralized by the MSRs that reference the Company’s MSR financing receivable resulting in a leverage ratio of 0.3 to 1 as of December 31, 2021. The weighted average yield on the Company’s MSR financing receivables was 9.63% for the fourth quarter of 2021 compared to 8.85% for the third quarter of 2021.
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”). As of December 31, 2021, the Company’s $65 million credit investment portfolio at fair value was comprised of the following:
- $29 million commercial mortgage loan
- $21 million of non-agency MBS collateralized by business purpose residential mortgage loans
- Includes a $10 million net investment in a consolidated VIE
- $15 million of asset backed securities collateralized by loans secured by residential solar…