Arlington Asset Investment Corp. (NYSE:AI) Q4 2019 Earnings Conference Call - Final Transcript

Feb 18, 2020 • 10:00 am ET

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Arlington Asset Investment Corp. (NYSE:AI) Q4 2019 Earnings Conference Call - Final Transcript

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Presentation
Executive
Richard Konzmann

agency MBS have performed relatively well in early 2020. Turning to our actual results for the quarter. We reported GAAP net income of $0.72 per share and core operating income of $0.18 per share. Core operating income was unchanged from the prior quarter as the benefits of both lower funding costs and G&A expenses were offset by lower asset yields and leverage. As of year-end, book value was $7.86 per share, an increase of 7% from September 30, reflecting the tightening of agency MBS spreads. The Company's total economic return measured as the change in book value plus common dividends declared was 10% during the quarter. As of today, the Company estimates that its book value per share has increased approximately 1% since December 31. Short-term recourse leverage measured as the Company's repo financing and TBA commitments less cash to total investable capital has moderated to 8.7 times as of December 31 from 9.9 times as of the prior quarter end. The weighted average CPR for our specified agency MBS portfolio was 12.11% during the fourth quarter, a decline from 12.85% in the prior quarter. Although, our agency MBS asset yields benefited from these lower prepayment speeds, the weighted average effective asset yield on our agency MBS for the fourth quarter declined to 2.81% compared to 2.96% in the prior quarter, due primarily to a shift to lower coupon agency securities. To begin the fourth quarter of 2020, the Company's weighted average CPR was 10.47% for the months of January and February, which we expect would result in a weighted average effective asset yield of approximately 2.84% for that period, a modest increase from the average yield in the fourth quarter. Given current interest rate levels, we expect continued elevated prepayment speeds. However, our transition in the agency MBS portfolio to lower coupon specified pool securities with lower premiums, should moderate increases in prepayment speeds going forward and their impact. And our shift in strategy to incorporate mortgage credit investments should reduce agency MBS prepayment sensitivity in our book value and earnings over time. With its shift in agency MBS investment concentration towards lower coupon securities that carry lower prices pay up premiums and prepayment risk, the Company's investment in lower coupon 2.5%, 3%, 3.5% coupon MBS was 72% of its total agency MBS portfolio at December 31, an increase from 57% as of the prior quarter end. In addition, all of the Company's agency MBS investments as of year-end were in specified agency MBS with favorable prepayment characteristics as the Company did not hold any generic TBA securities that are more sensitive to higher prepayments. During the fourth quarter, the Company's weighted average repo rate was 2.09%, an improvement from 2.46% in the prior quarter as the Company's funding costs benefited from the Fed's rate cuts. However, term repo funding rates were somewhat elevated at year-end, with the Company's weighted average agency MBS repo rates at 2.1% as of December 31. Repo funding rates have improved since year-end with