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PR Newswire

Arlington Asset Investment Corp. Reports Second Quarter 2022 Financial Results

Arlington Asset Investment Corp. Reports Second Quarter 2022 Financial Results

Arlington Asset Investment Corp. Reports Second Quarter 2022 Financial Results

PR Newswire

MCLEAN, Va., Aug. 9, 2022

MCLEAN, Va., Aug. 9, 2022 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AAIC) (the "Company" or "Arlington") today reported financial results for the quarter ended June 30, 2022.

Second Quarter 2022 Financial Highlights

  • $6.30 per common share of book value
    • 1.8% increase from March 31, 2022
  • $0.01 per diluted common share of GAAP net loss attributable to common shareholders
  • $0.05 per diluted common share of non-GAAP earnings available for distribution (formerly referred to as core operating income)
  • $0.09 per common share of book value accretion from the repurchase of 3.2% of the outstanding shares of common stock
    • Purchased an additional 1.1% of the outstanding shares of common stock through August 8, 2022
    • 10.7 million share remaining authorization as of August 8, 2022
  • 1.6 to 1 "at risk" leverage ratio

"Arlington's successful transition from a primarily levered agency MBS strategy to one focused on multiple high return, non-commodity investment channels in mortgage servicing rights ("MSRs"), single-family residential ("SFR") rental properties and select credit investments continued to produce positive results during the second quarter, including a positive economic return for the fourth consecutive quarter. 

"The execution of this strategy has enabled the Company to consistently grow book value per share during periods of volatile market conditions while traditional mortgage REITs experienced losses. Over the last twelve months, the Company delivered a 6.1% economic return while its mortgage REIT peers have experienced a negative 10.5% economic return," said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer.

"The Company's differentiated investment strategy has performed well during both positive and negative market conditions and is positioned to continue to do so. With our largest investment capital allocation in our MSR strategy, the Company's financial results benefited from another strong quarterly performance in our MSR investment portfolio that generated a total annualized return of 41% during the second quarter.

"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, the Company made several investments in highly rated senior commercial mortgage bonds that offer double digit levered returns and is actively evaluating similar investment opportunities.

"As of today, the Company has essentially reached its stated goal of $200 million of SFR rental properties with a total committed investment of $197 million and a strong expected net unlevered rental yield of 4.8%. The Company previously announced that it had entered into an agreement to sell a portion of its SFR portfolio with an expected closing date later this month at a significant gain that would be expected to add approximately $0.50 per share to our second quarter book value if consummated. Assuming the sale is completed, we have the ability to grow our SFR investment portfolio back to approximately $200 million, subject to market conditions, to fully realize the benefit of our below market fixed rate five-year financing facility. However, we will take a disciplined approach in purchasing new homes in the near term as the residential housing market evolves in the current environment.

"We continue to believe there is greater value in Arlington's business than the public markets recognize. Since reinstituting our current common stock repurchase program in 2020, the Company has aggressively returned capital to shareholders by purchasing 25% of its outstanding shares, delivering $0.75 per share of accretion to shareholders.

"Having successfully positioned Arlington to preserve capital and grow book value per share, the Company now has the opportunity to capitalize on substantially wider investment spreads with superior risk adjusted returns in the low to mid-teens in high grade residential and commercial mortgage securitized products. We expect that the redeployment of capital into these higher return investments will drive greater earnings potential which can be used to increase our equity capital, return capital to shareholders through accretive stock repurchases or reinstate a dividend to common shareholders."

Second Quarter Investment Portfolio

As of June 30, 2022, the Company's investment portfolio capital allocation was as follows (dollars in thousands):



June 30, 2022




Assets



Invested Capital
Allocation (1)



Invested Capital
Allocation (%)



Leverage (2)


MSR financing receivables


$

120,260



$

120,260




41

%



0.5


Single-family residential properties



182,783




64,605




22

%



1.9


Credit investments (3)



168,432




63,058




21

%



1.7


Agency MBS (4)



235,781




48,102




16

%



4.0


Total invested capital


$

707,256




296,025




100

%




Cash and other corporate capital






5,486








Total investable capital





$

301,511






1.6


(1)

Our investable capital is calculated as the sum of our shareholders' equity capital plus accumulated depreciation of our single-family residential properties and long-term unsecured debt. 

(2)

Our leverage is measured as the ratio of the sum of our repurchase agreement financing, long-term debt secured by single-family residential properties, net payable or receivable for unsettled securities, net contractual forward purchase (sale) price of our TBA commitments and leverage within our MSR financing receivables less our cash and cash equivalents compared to our investable capital.

(3)

Includes our net investment of $25,529 in two variable interest entities with gross assets and liabilities of $231,301 and $205,772, respectively, that are consolidated for GAAP financial reporting purposes.

(4)

Agency MBS assets include the fair value of the agency MBS which underlie the Company's to-be-announced ("TBA") forward purchase and sale commitments.  In accordance with GAAP, the Company's TBA forward commitments are reflected on the consolidated balance sheets as derivative assets and liabilities at fair value in the financial statement line items "other assets" and "other liabilities."  As of June 30, 2022, the fair value of the agency MBS that underlie the Company's net short position in TBA commitments had a fair value of $(146,576) and a net carrying value of $337.

 MSR Related Investments

The Company is party to agreements with a licensed, U.S. government sponsored enterprise ("GSE") approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty.  The arrangement allows the Company to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly.  Under the terms of the arrangement, the Company provides capital to the mortgage servicing counterparty to purchase MSRs directly and the Company, in turn, receives all the economic benefits of the MSRs less a fee payable to the counterparty. At the Company's request, the mortgage servicing counterparty may utilize leverage on the MSRs to which the Company's MSR financing receivables are referenced to finance the purchase of additional MSRs to increase potential returns to the Company.  These transactions are accounted for as financing receivables on the Company's consolidated financial statements. 

The Company's MSR financing receivable investments as of June 30, 2022 are summarized in the tables below (dollars in thousands):

Amortized Cost Basis (1)



Unrealized Gain



Fair Value


$

74,866



$

45,394



$

120,260













(1)

Represents capital investments plus accretion of interest income net of cash distributions.

 

MSR Financing Receivable Underlying Reference Amounts:








MSRs



Financing



Advances
Receivable



Cash and Other
Net Receivables



Counterparty
Incentive Fee
Accrual



MSR Financing
Receivables



Implicit
Leverage


$

176,408



$

(60,868)



$

2,348



$

13,883



$

(11,511)



$

120,260




0.51





























 

Underlying Reference MSRs:


Holder of Loans


Unpaid
Principal
Balance



Weighted-
Average
Note Rate



Weighted-
Average
Servicing
Fee



Weighted-
Average
Loan Age


Price



Multiple (1)



Fair Value


Fannie Mae


$

12,057,248




3.04

%



0.25

%


18 months



1.35

%



5.38



$

162,449


Freddie Mac



1,015,899




3.66

%



0.25

%


17 months



1.37

%



5.50




13,959


Total/weighted-average


$

13,073,147




3.09

%



0.25

%


18 months



1.35

%



5.39



$

176,408


(1)

Calculated as the underlying MSR price divided by the weighted-average servicing fee.

As of June 30, 2022, the mortgage servicing counterparty had drawn $60.9 million of financing under its credit facility collateralized by the MSRs to which the Company's MSR financing receivables are referenced, resulting in an implicit leverage ratio of 0.51 to 1.  The weighted average yield on the Company's MSR financing receivables was 15.28% for the second quarter of 2022 compared to 12.49% for the first quarter of 2022, and the actual weighted-average constant prepayment rate ("CPR") for the MSRs underlying the Company's MSR financing receivables was 8.10% for the second quarter of 2022 compared to 8.71% for the first quarter of 2022.

Single-family Residential Investments

As of June 30, 2022, the Company had acquired 586 single family residential ("SFR") properties for a total cost of $182.8 million and had commitments to acquire an additional 25 SFR properties for an aggregate purchase price of $9.0 million.  The timing of the earnings benefit to the Company from investing in SFR rental properties is dictated by the pace of home purchases, the level of any property level refurbishments required after purchase and the length of the lease marketing period.  The Company expects the time period between the date of settlement of the home purchase to the date the house is occupied by a tenant to average between 30 to 60 days.  During the period prior to a lease commencement, the Company is incurring costs to hold the property including real estate taxes, insurance, homeowner association fees and interest costs.

On May 10, 2022, the Company entered into a purchase and sale agreement to sell 378 SFR properties for $132.8 million with an original closing date no later than June 23, 2022.  Pursuant to the purchase and sale agreement, the buyer made a $2.655 million initial deposit with an escrow agent.  On May 27, 2022, the Company entered into an amendment to the purchase and sale agreement to remove two properties from the sale transaction reducing the total properties to be sold to 376 SFR properties for $131.9 million.  On June 20, 2022, the Company entered into an additional amendment to the purchase and sale agreement that required the buyer to fund an additional $2.655 million deposit with the escrow agent for a total deposit of $5.31 million to extend the closing date to no later than August 19, 2022.  During the second quarter of 2022, the Company classified the 376 SFR properties as held-for-sale. 

As of June 30, 2022, the Company's SFR portfolio is summarized in the tables below (dollars in thousands):



Single-family Residential
Real Estate



Single-family Residential
Real Estate Held-for-
Sale



Total


Land


$

11,423



$

18,913



$

30,336


Buildings and improvements



57,093




95,354




152,447


Investments in single-family residential real estate, at cost



68,516




114,267




182,783


Less: accumulated depreciation



(326)




(1,288)




(1,614)


Investments in single-family residential real estate, net


$

68,190



$

112,979



$

181,169


 

Market


Number of
Properties



Gross Book
Value



Average Gross
Book Value



Average
Square Feet



Average
Year Built


Atlanta, GA



102



$

34,458



$

338




2,209




2008


Dallas, TX



88




30,920




351




1,915




2014


Huntsville, AL



86




28,510




332




2,306




2015


Tulsa, OK



103




27,130




263




1,762




2016


Birmingham, AL



69




18,606




270




1,690




2017


Kansas City, MO



52




15,510




298




1,944




2008


Memphis, TN



49




14,421




294




1,890




2006


Charlotte, NC



37




13,228




358




1,920




2010


Total/weighted average



586



$

182,783



$

312




1,971




2012


 

Status of Property


Number of
Properties



Gross Book
Value


In rehabilitation



38



$

12,693


In marketing



97




31,455


Leased not yet occupied



1




247


Leased and occupied



450




138,388


Total



586



$

182,783


As of June 30, 2022, the Company had drawn $123.0 million under its $150 million credit facility.  Advances may be drawn up to 74% of the fair value of eligible SFR properties with an advance period that expires in March 2023 with outstanding principal balance due in October 2026.  Advances under the facility bear interest at a fixed rate of 2.76%.

Credit Investments

The Company's credit investments generally include mortgage loans secured by residential or commercial real property or MBS collateralized by residential or commercial mortgage loans or residential solar panel loans ("non-agency" MBS or ABS).  As of June 30, 2022, the Company's credit investment portfolio at fair value was comprised of the following (dollars in thousands):


Fair Value (1)



Market Price



Leverage


Commercial MBS

$

99,901



$

99.90




5.6


Commercial mortgage loan


29,484




100.00




2.3


Residential MBS - interest-only (2)


19,255




8.12





Residential MBS (2)


1,082




67.11





Business purpose residential MBS (3)


15,683




93.51





Residential solar panel loan ABS


3,027




59.81





Total/weighted-average

$

168,432







1.7


(1)

For credit investments in securities, includes contractual accrued interest receivable.

(2)

Residential MBS - interest-only and residential MBS, in combination, reflect our net investment at fair value of $20,337 in a VIE that is consolidated for GAAP financial reporting purposes.

(3)

Includes our net investment at fair value of $5,192 in a VIE that is consolidated for GAAP financial reporting purposes.

As of June 30, 2022, the Company had $84.8 million in repurchase agreements outstanding with a weighted average rate of 2.81% and remaining weighted average maturity of 17 days secured by $99.9 million of non-agency MBS at fair value.  As of June 30, 2022, the Company had a $20.6 million repurchase agreement outstanding with a rate of 3.77% and remaining maturity of 260 days secured by a $29.5 million commercial mortgage loan at fair value. 

Agency MBS

The Company's agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a GSE, such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac").  As of June 30, 2022, the Company's agency MBS investment portfolio totaled $235.8 million at fair value comprised of $382.4 million of specified agency MBS and $(146.6) million of net short to-be-announced ("TBA") agency MBS.  As of June 30, 2022, the Company's specified agency MBS investment portfolio was comprised of the following (dollars in thousands):



Unpaid
Principal
Balance



Net
Unamortized
Purchase
Premiums
(Discounts)



Amortized
Cost Basis



Net
Unrealized
Gain
(Loss)



Fair Value



Market
Price



Coupon



Weighted
Average
Expected
Remaining
Life


30-year fixed rate:

























3.5 %


$

68,634



$

(844)



$

67,790



$

(1,440)



$

66,350



$

96.67




3.50

%



9.2


4.0 %



202,817




1,253




204,070




(3,191)




200,879




99.04




4.00

%



9.0


4.5 %



114,419




(9)




114,410




710




115,120




100.61




4.50

%



8.1


5.5 %



8







8







8




107.89




5.50

%



5.7


Total/weighted-average


$

385,878



$

400



$

386,278



$

(3,921)



$

382,357



$

99.09




4.06

%



8.8


The Company's weighted average yield on its specified agency MBS was 2.95% for the second quarter of 2022 compared to 1.52% for the first quarter of 2022, and the actual weighted-average CPR for the Company's specified agency MBS was 8.40% for the second quarter of 2022 compared to 9.01% for the first quarter of 2022. 

As of June 30, 2022, the Company's net short TBA agency MBS investment portfolio was comprised of the following (dollars in thousands):



Notional Amount:













Net Long (Short)



Implied



Implied



Net Carrying




Position (1)



Cost Basis (2)



Fair Value (3)



Amount (4)


2.5% 30-year MBS sale commitments


$

(25,000)



$

(22,649)



$

(22,472)



$

177


3.0% 30-year MBS sale commitments



(30,000)




(27,970)




(27,932)




38


3.5% 30-year MBS sale commitments



(100,000)




(95,486)




(96,172)




(686)


4.5% 30-year MBS purchase commitments



50,000




50,121




50,195




74


4.5% 30-year MBS sale commitments



(50,000)




(50,929)




(50,195)




734


Total net long (short) agency TBA positions


$

(155,000)



$

(146,913)



$

(146,576)



$

337


(1)

Notional amount represents the unpaid principal balance of the underlying agency MBS.

(2)

Implied cost basis represents the contractual forward price for the underlying agency MBS.

(3)

Implied fair value represents the current fair value of the underlying agency MBS.

(4)

Net carrying amount represents the difference between the implied cost basis and the implied fair value of the underlying agency MBS.  This amount is reflected on the Company's consolidated balance sheets as a component of "other assets" and "other liabilities."

As of June 30, 2022, the Company had $224.6 million of repurchase agreements outstanding with a weighted average rate of 1.48% and remaining weighted average maturity of 14 days secured by an aggregate of $237.4 million of agency MBS at fair value.  The Company's weighted average cost of repurchase agreement funding secured by agency MBS was 0.80% during the second quarter of 2022 compared to 0.17% during the first quarter of 2022. 

The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost borrowing and the value of its fixed-rate agency MBS.  Under the terms of the Company's interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives variable interest payments based upon either the prevailing three-month London Interbank Offered Rate ("LIBOR") or Secured Overnight Financing Rate ("SOFR").  As of June 30, 2022, the Company's interest swap agreements were comprised of the following (dollars in thousands):






Weighted-average:




Notional Amount



Fixed Pay 
Rate



Variable Receive
Rate



Net Receive
(Pay) Rate



Remaining
Life (Years)


Years to maturity:
















Less than 3 years


$

130,000




1.32

%



1.22

%



(0.10)

%



1.5


3 to less than 10 years



100,000




1.68

%



1.30

%



(0.38)

%



5.4


Total / weighted-average


$

230,000




1.48

%



1.25

%



(0.23)

%



3.2


The Company's weighted average net pay rate of its interest rate swap agreements was 0.53% during the second quarter of 2022 compared to 0.68% during the first quarter of 2022.  Under GAAP, the Company has not designated these transactions as hedging instruments for financial reporting purposes and, therefore, all gains and losses on its hedging instruments are recorded to line item "investment and derivative gains (losses), net" in the Company's financial statements. 

Other Second Quarter 2022 Financial Highlights

The Company's book value was $6.30 per common share as of June 30, 2022 compared to $6.19 per common share as of March 31, 2022.  Book value per common share is calculated as total equity plus accumulated depreciation of SFR properties less the preferred stock liquidation preference divided by common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.

The Company's "at risk" leverage ratio was 1.6 to 1 as of June 30, 2022 compared to 1.3 to 1 as of March 31, 2022.  The Company's "at risk" leverage ratio is calculated as the sum of the Company's repurchase agreement financing, long-term debt secured by single-family properties, net payable or receivable for unsettled securities, net contractual price of TBA purchase and sale commitments and financing embedded in its MSR financing receivables less cash and cash equivalents compared to the Company's investable capital measured as the sum of the Company's shareholders' equity and long-term unsecured debt. 

During the second quarter of 2022, the Company repurchased 0.9 million shares of its common stock at an average price of $3.40 per share for a total purchase cost of $3.2 million, representing 3.2% of common stock outstanding as of March 31, 2022.  Subsequent to June 30, 2022, the Company repurchased an additional 0.3 million shares of its common stock at an average price of $3.18 per share for a total purchase cost of $1.0 million, representing 1.1% of common stock outstanding as of June 30, 2022.  Currently, the Company has remaining authorization from its Board of Directors to repurchase up to 10.7 million shares of its common stock.  In addition, during the second quarter of 2022, the Company repurchased 0.1 million shares of Series C Preferred Stock at an average price of $24.17 per share for a total purchase cost of $1.7 million. 

Conference Call

The Company will hold a conference call for investors at 10:00 A.M. Eastern Time on Wednesday, August 10, 2022 to discuss the Company's second quarter 2022 results.

Investors may listen to the earnings call via the internet at:  Replays of the earnings call will be available for 60 days via webcast at the Internet address provided above, beginning two hours after the call ends.

Additional Information

The Company will make available additional quarterly information for the benefit of its shareholders through a supplemental presentation that will be available at the Company's website, .  The presentation will be available on the Webcasts and Presentations section located under the Updates & Events tab of the Company's website.

About the Company

Arlington Asset Investment Corp. (NYSE: AAIC) currently invests primarily in mortgage related and residential real estate and has elected to be taxed as a REIT.  The Company is headquartered in the Washington, D.C. metropolitan area.  For more information, please visit .

Statements concerning interest rates, portfolio allocation, financing costs, portfolio hedging, prepayments, dividends, book value, utilization of loss carryforwards, any change in long-term tax structures (including any REIT election), use of equity raise proceeds 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, the uncertainty and economic impact of the ongoing coronavirus (COVID-19) pandemic and the measures taken by the government to address it, including the impact on our business, financial condition, liquidity and results of operations due to a significant decrease in economic activity and disruptions in our financing operations, among other factors, changes in interest rates, increased costs of borrowing, decreased interest spreads, credit risks underlying the Company's assets, especially related to the Company's mortgage credit investments, our ability to close on the sale of single-family residential homes described herein, and to realize the expected benefits from such sale, changes in political and monetary policies, changes in default rates, changes in prepayment rates and other assumptions underlying our estimates related to our projections of future core earnings, changes in the Company's returns, changes in the use of the Company's tax benefits, the Company's ability to qualify and maintain qualification as a REIT, changes in the agency MBS asset yield, changes in the Company's monetization of net operating loss carryforwards, changes in the Company's investment strategy, changes in the Company's ability to generate cash earnings and dividends, preservation and utilization of the Company's net operating loss and net capital loss carryforwards, impacts of changes to and changes by Fannie Mae and Freddie Mac, actions taken by the U.S. Federal Reserve, the Federal Housing Finance Agency and the U.S. Treasury, availability of opportunities that meet or exceed the Company's risk adjusted return expectations, ability and willingness to make future dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, and general economic, political, regulatory and market conditions.  These and other material risks are described in the Company's most recent Annual Report on Form 10-K and any 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. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect the Company.  Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Financial data to follow

 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)




June 30, 2022



March 31, 2022


ASSETS







Cash and cash equivalents (includes $247 and $73, respectively,
  from consolidated VIEs)


$

9,575



$

21,715


Restricted cash



1,270




851


Restricted cash of consolidated VIEs



4,649




9,292


Agency mortgage-backed securities, at fair value



382,357




292,318


MSR financing receivables, at fair value



120,260




139,225


Credit investments, at fair value



142,903




54,952


Mortgage loans of consolidated VIEs, at fair value



225,004




261,976


Single-family residential real estate (net of $326 and $1,010, respectively, of
  accumulated depreciation)



68,190




120,952


Single-family residential real estate held-for-sale (net of $1,288 and $-0-,
  respectively, of accumulated depreciation)



112,979





Deposits



4,623




4,607


Other assets (includes $1,401 and $1,461, respectively, from consolidated VIEs)



12,945




14,995


Total assets


$

1,084,755



$

920,883


LIABILITIES AND EQUITY







Liabilities:







Repurchase agreements


$

329,994



$

284,862


Purchased securities payable



114,410





Secured debt of consolidated VIEs, at fair value



205,497




244,365


Long-term unsecured debt



86,199




86,096


Long-term debt secured by single-family properties



122,770




77,824


Other liabilities (includes $275 and $293, respectively, from consolidated VIEs)



12,187




9,639


Total liabilities



871,057




702,786


Equity:







Preferred stock (liquidation preference of $35,609 and $37,418, respectively)



34,608




36,357


Common stock



291




301


Additional paid-in capital



2,025,345




2,027,585


Accumulated deficit



(1,846,546)




(1,846,146)


Total equity



213,698




218,097


Total liabilities and equity


$

1,084,755



$

920,883


Book value per common share (1)


$

6.30



$

6.19


Common shares outstanding (in thousands) (2)



28,529




29,345









(1) Book value per common share is calculated as total equity plus accumulated depreciation of single-family residential real estate less the
preferred stock liquidation preference divided by common shares outstanding.


(2) Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.











June 30, 2022



March 31, 2022


Assets and liabilities of consolidated VIEs:







Cash and restricted cash


$

4,896



$

9,365


Mortgage loans, at fair value



225,004




261,976


Other assets



1,401




1,461


Secured debt, at fair value



(205,497)




(244,365)


Other liabilities



(275)




(293)


Net investment in consolidated VIEs


$

25,529



$

28,144


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)




Three Months Ended




June 30,
2022



March 31,
2022



December 31,
2021



September 30,
2021


Interest income













MSR financing receivables


$

3,983



$

3,382



$

2,589



$

1,945


Agency mortgage-backed securities



2,065




1,492




2,206




2,660


Credit securities and loans



991




853




772




1,247


Mortgage loans of consolidated VIEs



1,611




1,354




144




301


Other



113




325




169




193


Total interest and other income



8,763




7,406




5,880




6,346


Rent revenues from single-family properties



2,137




1,064




259





Interest expense













Repurchase agreements



763




276




286




306


Long-term debt secured by single-family properties



718




408




151





Long-term unsecured debt



1,400




1,370




1,376




1,435


Secured debt of consolidated VIEs



1,578




1,188




20




173


Total interest expense



4,459




3,242




1,833




1,914


Single-family property operating expenses



1,915




1,531




593




36


Net operating income



4,526




3,697




3,713




4,396


Investment and derivative gain (loss), net



370




(827)




3,909




(1,313)


General and administrative expenses













Compensation and benefits



2,324




2,065




1,855




1,888


Other general and administrative expenses



1,463




1,219




1,125




1,009


Total general and administrative expenses



3,787




3,284




2,980




2,897


Income (loss) before income taxes



1,109




(414)




4,642




186


Income tax provision



802




2,287




808




436


Net income (loss)



307




(2,701)




3,834




(250)


Dividend on preferred stock



(707)




(742)




(739)




(731)


Net (loss) income (attributable) available to
   common stock


$

(400)



$

(3,443)



$

3,095



$

(981)


Basic (loss) earnings per common share


$

(0.01)



$

(0.12)



$

0.10



$

(0.03)


Diluted (loss) earnings per common share


$

(0.01)



$

(0.12)



$

0.10



$

(0.03)


Weighted average common shares outstanding (in
   thousands)













Basic



28,766




29,832




31,100




31,927


Diluted



28,766




29,832




31,421




31,927


Non-GAAP Earnings Available for Distribution

In addition to the results of operations determined in accordance with GAAP, we also report a non-GAAP financial measure "earnings available for distribution" (formerly core operating income).  We define earnings available for distribution as net income available to common stock determined in accordance with GAAP adjusted for the following items:

  • Plus (less) realized and unrealized losses (gains) on investments and derivatives;
  • Plus (less) income tax provision (benefit) for TRS realized and unrealized gains and losses on investments and derivatives
  • Plus TBA dollar roll income
  • Plus (less) interest rate swap net interest income (expense)
  • Plus depreciation of single-family residential properties
  • Plus stock-based compensation

Realized and unrealized gains and losses recognized with respect to our mortgage related investments and economic hedging instruments, which are reported in line item "investment and derivative gain (loss), net" of our consolidated statements of comprehensive income, other than TBA dollar roll income and interest rate swap net interest income or expense, are excluded from the computation of earnings available for distribution as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period.  Because our long-term-focused investment strategy for our mortgage related investment portfolio is to generate a net spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our mortgage related investments and economic hedging instruments to largely offset one another over time.  In addition, certain of our investments are held by our TRS which is subject to U.S. federal and state corporate income taxes.  In calculating earnings available for distribution, any income tax provision or benefit associated with gains or losses on our mortgage related investments and economic hedging instruments are also excluded from earnings available for distribution.

TBA dollar roll income represents the economic equivalent of net interest income (implied interest income net of financing costs) generated from our investments in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as "dollar roll" transactions). Dollar roll income is generated as a result of delaying, or "rolling," the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting "spot" sale with the same counterparty prior to the settlement date, net settling the "paired-off" positions in cash, and contemporaneously entering another forward-settling purchase with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale. The price discount of the forward-settling purchase relative to the contemporaneously executed spot sale reflects compensation for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income as the excess of the spot sale price over the forward-settling purchase price and recognize this amount ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward purchase. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item "investment and derivative gain (loss), net."

We utilize interest rate swap agreements to economically hedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated with future roll-overs of our short-term repurchase agreement financing arrangements. Accordingly, the net interest income earned or expense incurred (commonly referred to as "net interest carry") from our interest rate swap agreements in combination with repurchase agreement interest expense recognized in accordance with GAAP represents our effective "economic interest expense." In our consolidated statements of comprehensive income prepared in accordance with GAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item "investment and derivative gain (loss), net."

The following table provides a reconciliation of GAAP net income (loss) available (attributable) to common stock for the last four fiscal quarters (unaudited, dollars in thousands):



Three Months Ended




June 30,
 2022



March 31,
 2022



December 31,
 2021



September 30,
 2021


Net (loss) income (attributable) available to common stock


$

(400)



$

(3,443)



$

3,095



$

(981)


Add (less):













Investment and derivative (gain) loss, net



(370)




827




(3,909)




1,313


Income tax provision for TRS investment gain



496




2,058




679




351


Depreciation of single-family residential properties



604




715




287




12


Stock-based compensation expense



992




761




523




520


Add back:













TBA dollar roll income



280




823




465




1,064


Interest rate swap net interest expense



(282)




(291)




(653)




(379)


Non-GAAP earnings available for distribution


$

1,320



$

1,450



$

487



$

1,900


Non-GAAP earnings available for distribution per
  diluted common share


$

0.05



$

0.05



$

0.02



$

0.06


Weighted average diluted common shares outstanding



29,300




30,315




31,421




32,243


Earnings available for distribution is used by management to evaluate the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that earnings available for distribution assists investors in understanding and evaluating the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as its earnings capacity.

A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for all events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. In addition, our calculation of earnings available for distribution may not be comparable to other similarly titled measures of other companies.  Therefore, we believe that earnings available for distribution should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between earnings available for distribution and taxable income determined in accordance with the Internal Revenue Code.  As a REIT, we are required to distribute at least 90% of our REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of our taxable income in order to not be subject to any U.S. federal or state corporate income taxes. Accordingly, earnings available for distribution may not equal our distribution requirements as a REIT.

Cision View original content:https://www.prnewswire.com/news-releases/arlington-asset-investment-corp-reports-second-quarter-2022-financial-results-301602961.html

SOURCE Arlington Asset Investment Corp.