Arlington Asset Investment Corp.

Good morning. I'd like to welcome everyone to the Arlington Asset First Quarter 2022 Earnings Call. Please be aware that each of your lines is in a listen-only mode. After the company's remarks, we will open the floor for questions. If you'd like to ask a question, please press the star key followed by the 1 key on your touch-tone phone. If you'd like to remove yourself from the questioning queue, please press star 2. I'd like to now turn the conference over to Richard Consman. Mr. Consman, you may begin.

Thank you very much and good morning. This is Rich Consman, Chief Financial Officer of Arlington Assets. 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 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 first quarter 2022 earnings call for Arlington Assets. Also joining us on the call today is John Murray, our portfolio manager. Over the last 24 months, we have thoroughly repositioned Arlington. Set a course to transition the company from a primarily levered agency MBS-oriented strategy to one focused on establishing multiple high-return, non-commodity investment channels in mortgage servicing rights, single-family rental properties, and select credit investments that would both diversify investment risk and improve the reliability of returns over time, reduce leverage, and diversify funding sources, including using structural leverage. We maintained expense discipline by lowering G&A costs. We returned over $28 million of capital to shareholders, 68 cents of accretion from which represents an equivalent dividend yield of approximately 10% over that period. Today, the company is a flexible investment platform, investing across primarily residential asset classes built to produce high returns with low volatility. In short, we have repositioned Arlington with a differentiated strategy, well-suited for various market conditions and positioned to generate strong returns for shareholders over time. Overall, we are pleased with the progress and the results we have made towards the company's objectives, including a top 10 economic return among peers with low book value volatility during turbulent markets since September 30th of last year. Double digit returns from its MSR and credit portfolios since the beginning of 2021, including a 53% annualized return from the MSR portfolio and high teens returns from our credit portfolio. Significant progress towards building our SFR portfolio, including the opportunity to capture a substantial gain and associated 7% book value pickup during the second quarter. expenses down double digits over a two-year period. In the current market environment, our primary goal continues to be to protect shareholder capital from the impact of inflation, rising rates, and Federal Reserve monetary tightening policies while maintaining low leverage. In anticipation of the effects of Federal Reserve tightening policies on mortgage basis risks, we continued down the path of lowering our investment exposure to agency MBS. 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 expected Federal Reserve tightening. The company has grown its MSR portfolio to 50% of its capital as of year-end. As interest rates rise and prepayment speeds decline, MSRs should generally outperform. With a substantial rise in interest rates, the company's low-coupon MSR portfolio produced exceptional returns during the first quarter in both current returns and through further multiple expansions. Since we acquired our first MSR investment five quarters ago, the portfolio has produced strong current cash yields along with asset appreciation through multiple expansions. That has resulted in an annualized total return of 53% all while employing very modest leverage. As of March 31st, the company's MSR investments had $180 million of underlying mortgage servicing rights valued at a multiple of 5.21 with leverage of 0.3 times. Newly created mortgage servicing rights of Fannie Mae and Freddie Mac loans currently offer Unleveraged yield opportunities in the high single digits, with the potential for further multiple expansion if rates continue to rise. Continue to make significant progress in our strategy of acquiring, operating, and leasing single-family residential homes. The company's goal is to invest up to $55 million of capital to acquire $200 million of homes, and we have made great strides toward that objective. As of March 31st, the company had acquired or committed to acquire 454 homes for $137 million. And as of today, we have acquired or committed to acquire a total of 566 homes for $177 million. To finance the acquisition of our SFR properties, the company has a $150 million five-year secured term debt facility with an 18-month draw period and an effective fixed cost of funds of 2.76% with limited recourse to Arlington. The company expects its investment in SFR properties to generate average current unlevered yields of 4.5% to 5% and unlevered net yields of 8% to 12%. What's the opportunity to realize any home price appreciation? Today, we are pleased with the progress we've made in building our SFR portfolio. currently carries an expected average unlevered 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, the length of the lease marketing period, and the timing of any future sales. We expect the time period between the date of settlement of the home purchase to the date the house is occupied by a tenant to average between 30 and 60 days. Accordingly, as we continue to ramp up our investments, our SFR portfolio has not yet contributed to current earnings. Once the company's SFR portfolio is fully scaled, the company expects to generate double-digit returns on capital that is not currently reflected in the company's earnings. The company also announced yesterday that it had signed a purchase and sale agreement on May 10th to sell 378 of its SFR properties for a sale price of $132.75 million. This opportunistic sale captures a strong bulk premium for a portfolio of leased homes we constructed from individual purchases with strong rental yields in attractive markets. The sale is expected to close around the end of the second quarter and subject to normal closing conditions, including the right of the buyer to terminate the sale transaction for any reason during the diligence period. The company is very pleased with this potentially significant return on our investment in such a short period of time. It is expected to result in a positive impact of the company's book value of approximately 45 cents per share upon closing. Following the sale pending market conditions, the company expects to continue to reinvest capital in SFR properties to reach its goal of $200 million of homes and to take full advantage of its well-below-market fixed-rate five-year funding facility. The company also continues to identify and evaluate opportunities in credit investments that offer high risk-adjusted returns. During the first quarter, the company made a new $20 million investment in a first-loss piece and excess interest-only strip in its securitization of recently originated performing non-qualified residential mortgages that is expected to generate mid-teen returns. With risk-free rates of about 200 basis points and risk spreads about 100 basis points wider this year, we believe there will be attractive new investment opportunities available in mortgage credit going forward. Turning to the actual results for the quarter, the company reported book value of $6.19 per share as of March 31st, a half percent increase from the prior period end. In addition, during the month of April, the company's book value for shares remained relatively unchanged. That does not include the potential approximate $0.45 per share gain associated with the SFR book sale, which represents an increase of 7% over first quarter book value. The company continued to operate with overall low leverage and significant financial flexibility, with its overall at-risk leverage ratio standing at 1.3 to 1 as of March 31st. For the first quarter, the company reported gap, net loss of $0.12 per share, and core operating income of $0.05 per share, a $0.03 per share increase from last quarter. We continue to believe there is far greater value in Arlington's business than the public markets recognize. Until we believe the stock price more accurately reflects the intrinsic value of Arlington's business, the company and its insiders who owns 7% of the outstanding shares, expect to continue to purchase substantial shares of the company's common stock. During the first quarter, the company returned capital to shareholders by repurchasing over 3% of outstanding shares that accreted 9 cents per share to book value and offer an equivalent annualized dividend yield of 10.4% based on the average stock price during the quarter. Subsequent to quarter end, the company has already purchased 2% of its common stock outstanding that accreted an additional $0.06 per share to book value, with an equivalent annualized dividend yield of 16%. Since reinstituting its current common stock repurchase program in 2020, the company has returned $0.68 per share to shareholders by purchasing over 23% of its outstanding shares. Notably, the company has a substantial remaining authorization of over 11 million shares from its board to repurchase shares of common stock. By positioning itself for a rising rate, inflationary environment, and Federal Reserve tightening cycle, the company has been able to produce solid economic returns during a period of quite challenging market conditions. As our investor presentation clearly demonstrates, compared to our peers in the FTSE NA REIT Mortgage Home Financing Index, the company has outperformed the index in total economic return in both recent quarters and the last 12 months, including being a top 10 performer over the last six months, while also experiencing among the lowest volatility of quarterly economic returns over the last year. Looking forward, we believe that as monetary policy tightening runs its full course, The impact on market conditions may present investors with historically high investment return opportunities. We believe our diversified portfolio structure and low leverage positions us well to capture opportunities as they become available. We have strong conviction about Arlington's differentiated strategy. We believe that the company's diversified investment platform can generate strong returns that will deliver ongoing substantial returns of capital to shareholders and growth in book value that the market will recognize and value over time. Operator, I would now like to open the call for questions. Thank you.