Arlington Asset Investment Corp.

Good morning. I'd like to welcome everyone to the Arlington Asset second 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 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 and good morning. This is Rich Konsman, 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 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 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 Tonkle for his remarks.

Thank you, Rich. Good morning, and welcome to the second quarter 2022 earnings call for Arlington Asset. Also joining us on the call today is John Murray, our portfolio manager. Over the last two years plus, we set a course and have successfully repositioned Arlington. into an investment platform built to produce attractive returns with low volatility. Through one of the most challenging quarters in the financial market since the first quarter of 2020, a quarter in which we saw broad equity markets draw down over 16% and benchmark short-term interest rates rise over 100 basis points, Arlington's diverse non-commodity investment channels of mortgage servicing rights, single-family residential rental properties, and mortgage credit investments continue to produce positive results during the quarter, its fourth consecutive quarter, of positive economic return. Arlington's differentiated investment strategy with low leverage and multiple sources of return is well suited for various market conditions and positioned to generate strong returns for shareholders over time. Overall, we are pleased with the progress and results we have made towards the company's objectives, including consistent economic returns a 10% economic return among peers for the second quarter, a 6% positive economic return in the last 12 months versus peers of negative 11, 41% annualized total return from the MSR portfolio for the second quarter, and 51% since inception. Building out our SFR portfolio to our $200 million goal, a 10% total return in our credit portfolio during the second quarter through quite challenging market conditions, and shifting the credit quality of the company's credit investment portfolio to nearly 60% senior AAA rated securities. In the current Fed versus inflation focused market, we have constructed a low levered portfolio with the primary goal of protecting shareholder capital. The company continued to maintain a significant investment allocation in MSRs, single family rentals, and opportunistic credit investments, that collectively should perform well in current volatile markets. The company's low-coupon MSR portfolio once again produced exceptional results during the second quarter in both current net interest yields of 15% and through further multiple expansion resulting in a 41% total annualized return. Since we acquired our first MSR investment a year and a half ago, strong current cash yields along with asset appreciation through multiple expansion have resulted in an annualized total return of 51% while employing modest leverage. As of quarter end, the company's MSR investments at $176 million of underlying mortgage servicing rights valued at a multiple of 5.39 with leverage of 0.5 times. Importantly, with a weighted average coupon of only 3.09% in the underlying mortgage servicing rights, The company's MSR investments are well positioned to mitigate declines in value if interest rates should fall. The significant appreciation in value of the company's MSR investments has contributed to it becoming the company's largest investment allocation at 41% of capital at quarter end. And the company may look to harvest some of those gains and reallocate the capital to other attractive return opportunities that we see available today. We continue to make significant progress in our strategy of acquiring, operating, and leasing single-family residential homes. The company's goal has been to invest up to $55 million of capital to acquire 200 million of homes, and we have essentially achieved that objective. As of June 30th, the company had acquired or committed to acquire 611 homes for $192 million, and as of today, we have acquired or committed to acquire a total of 622 homes for $197 million. The company continues to experience strong lease demand for its properties with a net unlevered yield of 4.8%. Importantly, to finance the acquisition of our SFR properties, the company has a $150 million five-year secured term debt facility with a draw period through the end of March 23, at an attractive fixed rate cost of funds of 2.76% and with limited recourse to Arlington. As we previously announced, the company entered into an agreement to sell 376 of its SFR properties for a sale price of $131.9 million. This opportunistic sale would capture 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 scheduled to close later this month, subject to standard closing conditions, and if consummated, we would expect the sale to have an additional positive impact to the company's June 30th book value of approximately 50 cents a share. Importantly, the buyer has also funded a $5.3 million earnest money deposit with an escrow agent to secure its obligations under the purchase and sale agreement. Assuming the sale closes, the company intends to continue to reinvest the company, the capital, back into SFR properties to once again reach its goal of 200 million homes and to take full advantage of its below-market five-year fixed-rate funding facility. However, we expect to take a disciplined approach in purchasing new properties in the near term. as the residential housing market evolves in the current economic environment. 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, we made several investments in floating-rate AAA-rated senior SASB securities in commercial real estate, with unlevered spreads of 250 to 300 basis points, over SOFR, and solid double-digit levered returns with final maturities of five years or less. We are continuing to evaluate similar investment opportunities in highly rated assets and may increase our capital allocation towards these opportunities in the near term. The agency mortgage market also saw wider spreads during the second quarter, increasing potential current carry returns in levered agency MVS. However, based on current conditions, the company does not expect to materially increase its investment allocation to agency MBS. As in our assessment, the potential risk to capital remains in excess of the current hedge carry return. Turning to the actual results for the quarter, the company reported book value of $6.30 per share as of June 30th, a 1.8% increase from the prior quarter end. That does not include any markup for the potential gain of approximately 50 cents per share associated with the SFR bulk sale, which would represent an increase of about 8% over second 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 1.6 to 1 at June 30th. For the second quarter, the company reported a gap net loss of $0.01 per share and earnings available for distribution, formerly referred to as core operating income, of $0.05 per share, unchanged from last quarter. We continue to believe there is far greater value in Arlington's business than the public markets recognize. During the second quarter, the company repurchased over 3% of its outstanding shares of common stock that accreted $0.09 per share to book value. Subsequent to quarter end, the company has repurchased over 1% of its common stock outstanding, and it created an additional $0.04 per share to book value in that period. Since reinstituting its current common stock repurchase program in 2020, the company has repurchased 25% of its outstanding shares, and the company has a substantial remaining authorization of 10.7 million shares from its board, to repurchase shares of its common stock. The company has been able to consistently produce solid economic returns during a period of challenging market conditions. As our investor presentation illustrates, compared to our peers in the FTSE NAREIT Mortgage Home Financing Index, the company has significantly outperformed our peers in total economic return in both recent quarters and the last 12 months, while also experiencing among the lowest volatility of quarterly economic returns over the last year. Having successfully positioned Arlington to preserve capital and grow book value per share through various market conditions, the company now has the opportunity to capitalize on substantially wider investment spreads by deploying incremental capital to new investments with superior risk-adjusted returns in the low to mid-teens in high-grade residential and commercial mortgage securitized products, among other improved return opportunities that are available. We expect that the redeployment of capital into these higher return investments can drive increased overall earnings potential, which can be used to increase equity capital, support share repurchases, or reinstate a dividend to common shareholders. We have a strong conviction about Arlington's differentiated strategy, and as significant owners of Arlington stock, we believe that the company's diversified investment platform can generate attractive returns to shareholders that the market will recognize and value over time. Thank you, and I'd like to open the call to questions.