Arlington Asset Investment Corp (AI)

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Arlington Asset Investment Corporation (AI)

Q1 2013 Earnings Call

April 30, 2013 9:00 am ET


Kurt Harrington - CFO

Eric Billings - CEO

Rock Tonkel - President & COO

Brian Bowers - CIO


Jason Stewart - Compass Point Research

David Walrod - Ladenburg



Good morning. I would like to welcome everyone to the Arlington Asset First Quarter 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. (Operator Instructions).

I would now like to turn the conference over to Kurt Harrington. Mr. Harrington, you may begin.

Kurt Harrington

Thank you very much. Good morning. This is Kurt Harrington, Chief Financial Officer of Arlington Asset. Before we begin this morning’s call, I would like to remind everyone that statements concerning future performance, the completion of senior notes offering, market conditions, cash returns and earnings, investment opportunities, core cash operating expenses, portfolio allocation, plans and steps to position the company to realize value, statements on tax benefits including net loss carry-forwards 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 factors include, but are not limited to, changes in interest rates, increased cost of borrowing; decreased interest spreads, changes in default rates, changes in the constant prepayment rate for the company’s MBS, changes in our operating tax benefits, maintenance of the company’s low leverage posture, changes in agency-backed MBS yields, changes in the company’s monetization of net operating loss carry-forwards, changes in the company’s ability to generate consistent cash earnings and dividends, preservation and utilization of our net operating loss and net capital loss carry-forwards, impacts of changes to Fannie Mae and Freddie Mac, actions taken by the U.S. Federal Reserve and the U.S. Treasury, the availability of opportunities that meet or exceed our risk-adjusted return to expectations, the ability and willingness to make future dividends, the ability to generate sufficient cash to retained earnings to satisfy capital needs, changes in the value growth through reflation of private-label MBS, and general economic, political, regulatory and market conditions. These and other material risks are described in the company’s annual report on Form 10-K for the year ended December 31, 2012, which is available from the company and from the SEC. You should read and understand these risks when evaluating any forward-looking statement.

I would now like to turn the call over to Eric Billings for his remarks. Eric.

Eric Billings

Thank you, Kurt. Good morning, and welcome to the first quarter earnings call for Arlington Asset. I’m Eric Billings, Chief Executive Officer of Arlington Asset. And joining me on the call today are Rock Tonkel, President and Chief Operating Officer; and Brian Bowers, our Chief Investment Officer. Thank you for joining us today.

Yesterday, we reported core operating income per share of $1.04 for the first quarter which equates to an 18% return on book value available for investment. During the early part of the year, we have reallocated capital to the company’s non-agency mortgage-backed portfolios such that after giving effect to the $87 million March equity offering, Arlington currently has approximately 60% of investable capital direct into that portfolio and approximately 40% allocated to agency mortgage-backed securities.

Naturally, as we increased capital allocated to the non-agency MBS opportunities, we executed few sales of the non-agency MBS which in turn limited the contribution to core earnings, operating income from cash gains during the quarter. Also, we expect the March offering to be accretive going forward following full deployment of the capital. As such core operating EPS for the first quarter would have been $0.05 higher absent the offering.

Other key effects to the capital raise in the portfolio reallocation include the following. Increased exposure to the U.S. housing industry recovery with approximately $450 million of face value and approximately $250 million of capital allocated to the non-agency mortgage-backed securities. Increased potential for appreciation and book value as the non-agency MBS portfolio appreciates from the quarter end mark of 61.9% to higher terminal value.

Increased use of tax benefits on spread income and realized gains as they occur. Reduced leverage as capital allocated to low leverage and non-agency MBS now meaningfully exceeds capital allocated to more leveraged agency MBS. Increased hedge proportionality on the agency MBS portfolio as total hedge positions now equate to approximately $1.125 billion compared to fair value of agency MBS of approximately $1.65 billion.

Increased cash returns on capital as the ratio of recurring cash expenses to investable capital is declined by approximately 50% over the past 15 months. We continue to see encouraging performance from both our agency and non-agency MBS portfolio. In the agency portfolio all of our assets were specifically selected for prepayment protection of some type. Approximately 60% of our portfolio was originated under HARP programs and our remaining assets consist of either low loan balance loans or loans with other prepayment protection features.

These loan characteristics significantly reduce the economic incentive to the borrower to refinance or constrain the ability to refinance. This quarter, our agency MBS portfolio demonstrated again the value of asset selection with a three month portfolio CPR of 8.64% versus CPR of 33.7% on Fannie Mae 450 Universe. The portfolio CPR including purchases for the month of April was 6.61%.

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