Arlington Asset Investment Corp.

Good morning. I'd like to welcome everyone to the Arlington Asset Third Quarter 2022 Earnings Conference 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 on your touchtone 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 Mr. Richard Konsman. Mr. Konsman, you may begin.

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 from 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, 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 Tonkle for his remarks.

Thank you, Rich. Good morning and welcome to the third quarter 2022 earnings call for Arlington Asset. Also joining us on the call today is John Murray, our portfolio manager. Through yet another quarter of challenging financial markets, Arlington's primary focus of preserving capital in the current market environment once again proved to be beneficial for shareholders during the third quarter. generating a 2.4% economic return, its fifth consecutive quarter of a positive economic return. Going forward, Arlington's low leverage and diversified investment strategy continues to be well-suited for various market conditions and positioned to generate strong returns for shareholders over time. Overall, we are pleased with the results achieved during the quarter and year to date. An economic return of 2.4%, percent during the quarter, an economic return of 8 percent over the last 12 months. We completed the initial sale of a portion of the company's SFR portfolio for net cash proceeds of $42 million in the third quarter, harvesting a $14 million gain. We entered into an agreement to sell the company's remaining SFR portfolio for expected net cash proceeds of $29 million in the fourth quarter. If that is consummated, the overall strategy will generate a 28% overall annualized return over the last 15 months. 25% annualized total return on the company's MSR strategy during the third quarter while lowering the leverage to 0.2 times. Migrated credit investments upward toward high quality assets with 64% of credit investments in AAA-rated assets that achieved a total 18% annualized total return during the third quarter, and we repurchased shares of capital stock that accreted 7 cents per share during the third quarter and 27 cents per share year-to-date to book value. During 2022, Federal Reserve policy and economic developments have driven valuations and liquidity down and return opportunities on new investments higher. In general, Available return opportunities in certain asset classes have nearly doubled in expected return profile over the course of the year. While we have selectively taken advantage of these higher return opportunities over the course of the year, capital preservation and shareholder value creation have been the company's priorities. In line with that focus, this quarter we reduced leverage and harvested gains, capital, and liquidity and extended our overall patient approach to portfolio management. The company's low-coupon MSR portfolio again produced strong results during the third quarter in both current interest yields of 16% and through further multiple expansion resulting in a 25% total annualized return. Since we acquired our first MSR investment less than two years ago, strong current cash yields along with asset appreciation have resulted in an annualized total return of 47%. while employing modest leverage. As of quarter end, the company's MSR investments had $190 million of underlying mortgage servicing rights valued at a multiple of 5.5 times with a leverage of only 0.2 times. Importantly, with a weighted average coupon of 3.14 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 and value of the company's MSR investment portfolio has contributed to it becoming the company's largest investment allocation at 41% of capital at quarter end. During the third quarter, the company successfully closed on its previously announced sale of 371 of its SFR properties for a sale price of $130 million. and net cash proceeds of $42 million after pay down of the secured credit facility. Sale resulted in a net gap gain of $14 million that contributed 47 cents per share to book value during the third quarter. The company is also pleased to announce that it signed a purchase and sale agreement on November 11th to sell its remaining SFR investment portfolio of 251 properties, including the assumption of its secured credit facility. for a gross sales price of $87.3 million, which would result in net cash proceeds of approximately $29 million and a slight positive impact to book value. The sale transaction is expected to close in the fourth quarter and is contingent upon receiving lender consent and other closing conditions. Assuming the second sale transaction is ultimately consummated, it would represent the culmination of investment strategy that we expect would result in a total annualized return of approximately 28% over an investment horizon that spans just over one year. Given the uncertain near to intermediate term outlook for housing, we felt that crystallizing and locking in a 28% return from our SFR strategy was prudent for shareholders. As of September 30th, the company's investable capital allocation to its credit investment strategy increased to 20%. The company elevated the overall credit quality of its credit investments with 64% in floating rate AAA rated senior commercial mortgage securities as of quarter end with remaining maturities under five years and that have attractive double-digit levered returns. As of quarter end, 11% of the company's credit portfolio consists of a high-performing interest-only investment in low LTV non-QM residential mortgages, for which the return is principally predicated on rates instead of credit, and the average coupon of the underlying mortgages is approximately 400 basis points out of the money. Overall, the company's credit investments continue to produce strong returns, delivering an 18% annualized total return during the third quarter. Also during the third quarter, continued interest rate volatility led to significant widening of agency MBS spreads, resulting in underperformance in values of agency MBS relative to interest rate hedges. Although wider spreads led to increased potential carry returns, the company does not expect to materially increase its investment allocation toward levered agency MBS in the near term as the risk to capital remains in excess of the current hedge carry return. As of September 30th, the company's investable capital allocation to agency MBS was 14%. Turning to the results for the quarter, the company reported book value of $6.45 per share as of September, a 2.4% increase from the prior quarter end. The company continued to operate with overall low leverage and significant financial flexibility. with its overall at-risk leverage ratio standing at 1.2 to 1 as of September 30th. For the third quarter, the company reported gap net income of $0.10 per share and earnings available for distribution of $0.11 per share, an increase of $0.06 per share from last quarter. We believe there is greater value in Arlington's business than the public markets recognize, and the company continues to be an active buyer of the company's common stock. During the third quarter, the company repurchased capital stock that accreted $0.07 per share to book value, including repurchasing nearly 2% of its outstanding shares of common stock. Subsequent to quarter end, the company has repurchased an additional 1% of its common stock that accreted an additional $0.03 per share to book value. And since reinstituting its current common stock repurchase program in 2020, the company has repurchased 26% of its outstanding shares. Notably, the company has a substantial remaining authorization of 10.2 million shares or an excess of $32 million of current market capitalization from its board to repurchase shares of its common stock. The company has been able to produce solid economic returns during a period of challenging market conditions, including an 8% return over the last four quarters. 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 the lowest volatility of quarterly economic returns over the last year. During this period, the company is focused on preserving capital and creating economic shareholder value principally through a combination of low leverage, prudent high return asset selection, and a strong emphasis on share repurchases. As we approach year end, we believe that market volatility around Fed tightening and the period of elevated interest rates may be somewhat more prolonged than the most recent market actions imply. Having monetized $42 million from our third quarter SFR sale and another expected $29 million from our pending fourth quarter SFR sale for a total of $71 million, Arlington is an attractive investment platform in a strong and flexible position with low leverage, high return assets, sound overall credit quality, and substantial liquidity available from our current balance sheet configuration. We have worked hard to successfully position Arlington to both preserve capital and grow book value per share through recent market turmoil. In the current economic environment, we now intend to use Arlington's strong position to capitalize on new opportunities as they may arise and continue to create and harvest the substantial value embedded in Arlington for its shareholders. Operator, I would now like to open the call for questions.