Arlington Asset Investment Corp.

Good morning. I'd like to welcome everyone to the Arlington Asset fourth quarter and full year 2021 earnings call. Please be aware that each of your line is in a listen only mode. After the company's remarks, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone. If you'd like to remove yourself from the questioning queue, please press star two. I would now like to turn the conference over to Richard Konsman. Mr. Konsman, you may begin.

Thank you very much. Good morning. This is Rich Konsman, Chief Financial Officer of Arlington Asset. Before we begin this morning's call, I would like to remind everyone that statements concerning future financial or business performance, market conditions, business strategies, or expectations, 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 the stated expectations or current circumstances. These forward-looking statements are based on management's beliefs, assumptions, and expectations, which are subject to change, risk, and uncertainty as a result of possible events or factors. These and other material risks are described in the company's annual report on Form 10-K and 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. I would now like to turn the call over to Rock Tonkel for his remarks.

Thank you, Rich. Good morning, and welcome to the fourth quarter 2021 earnings call for Arlington Asset. Also joining us on the call today is John Murray, our portfolio manager. The company is pleased with the progress it has made towards its goal of establishing multiple high-return, non-commodity investment channels, that should both diversify investment risk and improve reliability of returns over time. Having established new investment silos over the past year in mortgage servicing rights, single-family residential rental properties, and selective credit opportunities, the company has successfully allocated capital into new investments that complement its historical agency mortgage strategy and position the company for strong growth in shareholder value over the long term. Going into the fourth quarter, our primary goal was and continues to be to protect shareholder capital from the impact of inflation, rising rates, and Federal Reserve monetary tightening policies while maintaining low leverage and plentiful liquidity. During the fourth quarter, we traded the potential for short-term incremental core operating income from levered agency MBS in exchange for capital preservation and potential long-term capital growth by lowering the company's investment allocation to agency MBS and accompanying mortgage basis risk. At the same time, the company continued to expand its investment allocation towards MSRs, single-family rentals, and opportunistic credit investments that collectively should perform well in a rising rate and inflationary environment while being defensive versus an expected Federal Reserve tightening. The company has grown its MSR portfolio at attractive entry points over the course of the year to 43% of its capital as of December 31st. That portfolio has produced year-to-date high single-digit current cash yields along with asset appreciation through multiple expansion that has resulted in a year-to-date total return of 34% all while employing very modest leverage. As of year end, the company's MSR investments had $158 million of underlying mortgage servicing rights, valued at a multiple of 4.38 with leverage of just 0.3 times. Newly created mortgage servicing rights of Fannie Mae and Freddie Mac loans currently offer unlevered yield opportunities in the high single digits with the potential for further multiple expansion if rates continue to rise. The company continued to make significant progress in its recently announced strategy of acquiring, operating, and leasing single-family residential homes. The company believes the investment opportunity in single-family residential offers potential attractive long-term returns supported by favorable supply-demand dynamics, a healthy U.S. home financing market, and flexible financing structures with attractive terms for institutional investors. We expect the favorable dynamic in U.S. single-family residential homes to continue for some time, as we believe the limited supply of new homes will likely not meet the growing demand of housing based on expected demographic trends. And in a high inflationary environment, investments in single-family residential rental properties should benefit from home price appreciation and rental income growth. As of December 31st, the company has acquired or committed to acquire 283 homes for $83 million. As of today, we have either acquired or committed to acquire a total of 412 homes for $125 million. Overall, the company has committed to invest at least $50 million of capital to acquire approximately $200 million of properties. To finance our SFR properties, the company has a $150 million five-year secured term debt facility with an 18-month draw period at an attractive fixed cost of funds of 2.76% with limited recourse to Arlington. The company expects its investments in SFR properties to generate average current unlevered net yields of 4.5% to 5%. and levered net yields of 8% to 11.5%, plus the opportunity to realize any home price appreciation. To date, we are pleased with the progress we have made in building our SFR portfolio and its expected average unlevered net yield of 4.9%. The timing of the earnings benefit to the company from investing in SFR rental properties will be dictated by the pace of home purchases the level of any property level refurbishments we make, and the length of the lease marketing period. We expect that time period between the date of settlement of a home purchase to the date the house is occupied by a tenant to average between 30 and 60 days. Accordingly, during its initial ramp period, our SFR portfolio has not yet contributed to current earnings. We believe that is an opportunity for us going forward. Once the company's $50 million of committed capital in SFR is fully scaled, the company expects to generate double-digit returns on the capital that is not currently reflected in the company's earnings. The company is also encouraged by the potential appreciation value the company may realize in its SFR portfolio over time, none of which is reflected in its book value today, as these assets are carried at the historical depreciated cost basis of the property. The company also continues to identify and evaluate opportunities in credit investments that offer high risk-adjusted returns, including securitizations of residential solar panel loans and non-agency residential MBS. Turning to the actual results for the quarter, the company reported book value of $6.16 per share as of December 31st, a 3.2% increase from the prior quarter end. Furthermore, the company's book value per share grew an additional 2.5% in January, and we believe has remained relatively unchanged from there during the month of February. The company continued to operate with overall low leverage and significant financial flexibility, with its overall at-risk leverage ratio standing at 1.5 to 1 as of December 31st. And for the fourth quarter, the company reported gap net income of $0.10 per share and core operating net income of $0.02 per share. With the company's stock trading at a significant discount to its book value, the company continues to aggressively repurchase shares of its common stock. During the fourth quarter, the company repurchased nearly 4% of its outstanding shares of common stock and accreted $0.09 per share to book value. Subsequent to year-end, the company has already purchased 2.5% of its common stock outstanding, and it created an additional $0.07 per share to book value. Since reinstituting its current common stock repurchase program in 2020, the company has repurchased 7.7 million shares of its common stock, or nearly 21% of outstanding shares. The company has a substantial remaining authorization of over 12 million shares from its board, to repurchase shares of its common stock, and the Board is prepared to increase that authorization if necessary. At current stock price levels, the company intends to return capital to shareholders through aggressive stock repurchases. Overall, we are very encouraged by the progress the company has made to date in its transition toward its long-term goals and is optimistic about its prospects going forward. The company has taken positive steps toward its objective of complementing its core agency MBS portfolio with high-return, non-commodity investment channels in mortgage servicing rights, single-family rentals, and opportunistic credit investments while operating with balance sheet flexibility through low leverage and high liquidity. As I indicated, we believe there is untapped earnings power yet to be generated from the existing portfolio. We continue to evaluate attractive opportunities for investments that fit our criteria for programmatic platforms with non-commodity return characteristics, which can further add to shareholder value. And we believe that over time there are potential additional growth paths for our existing asset silos beyond the scope of our current capital base. As always, we will evaluate those opportunities and the use of capital to support their long-term value creation compared to the benefits of repurchasing the company stock or other potential distributions to shareholders. We are optimistic that the company's current diversified investment strategy can deliver attractive long-term returns to shareholders while the company maintains the financial flexibility to return capital to shareholders through accretive stock repurchases at today's current stock prices. Operator, I'd like to now open the call for questions.