Arlington Asset Investment Corp. (NYSE:AI) Q4 2019 Earnings Conference Call - Final Transcript
Feb 18, 2020 • 10:00 am ET
[Operator Instructions] We will now go to our first question. Our first question comes from Josh Bolton with Credit Suisse. Please go ahead.
Thanks, guys. Good morning. I appreciate the disclosure in the deck around the incremental levered returns on agency versus credit. Curious, do you have a target percentage of capital allocation for the credit segment? Or how are you thinking about how large that bucket could grow? And then additionally, do you have any thoughts around the pace of growth that we could see in that segment over the next 12 months? Thanks.
J. Rock Tonkel
Well, obviously, Josh, the pace of investing and the ultimate exposures will depend on the market conditions as they evolve over the course of time. Conditions being as they are today, we would continue to expect that the mortgage credit investment portfolio would grow as returns in that segment are at least equivalent to, if not higher than agency returns and offer other appealing characteristics that I noted in the script. And so I think that would be today the first focus. And I wouldn't put a number on it, but I wouldn't suggest anyone be surprised if they see that portfolio grow in investable capital over the course of the year on a prudent basis based on where opportunities may be and may grow as high as double over the course of time. That's an ongoing process. As you know it's dynamic, but -- and it would be a prudent process of a potential expansion in that portfolio. But we can see that it may grow materially over the course of the year to the extent that opportunities continue to be relatively more attractive on the credit side versus the agency side.
Got it. That makes sense. And then just one on the interest rate sensitivity disclosure. Looks like during the quarter, the portfolio shifted to be much more negatively exposed to higher rates. Curious, if that's something intentional reflective of your macro view of rates, or just any commentary around the rate environment and how your agency portfolio is positioned would be great? Thanks.
J. Rock Tonkel
I guess, my first comment to that would be that actual performance in agency's in down rate scenarios has probably underperformed versus modeled expectations that you see in these standard presentations and the opposite is true. The recent historical experience has been that they have tended to outperform in up rates, or steepening environments to a certain extent and to a certain level. So, I would say that this posture reflects the recent experience, the convexity embedded in these assets today and the difference -- observed difference between actual prepayment developments and market expectations as rate changes and curve shape changes have occurred.
I'd say it also reflects a broader commentary -- a broader observation on the macroeconomic backdrop. It is a consequence of all those things. We've driven the coupon -- the average coupon, the average price, the average pay up in the portfolio down sort of programmatically over