4Q19 Investor Presentation · Allocate between high quality specified pools selected for favorable...
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Investor Presentation Fourth Quarter 2019
Transcript of 4Q19 Investor Presentation · Allocate between high quality specified pools selected for favorable...
Investor Presentation
Fourth Quarter 2019
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Information Related to Forward-Looking Statements
Statements concerning interest rates, portfolio allocation, financing costs, portfolio hedging, prepayments, dividends, book value, utilization of losscarryforwards, any change in long-term tax structures (including any REIT election) and any other guidance on present or future periods constituteforward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from statedexpectations or current circumstances. These factors include, but are not limited to, changes in interest rates, increased costs of borrowing, decreasedinterest spreads, changes in political and monetary policies, changes in default rates, changes in prepayment rates and other assumptions underlyingour 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,changes in mortgage investment asset yields, changes in the Company’s monetization of net operating loss carryforwards, changes in the Company’sability 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 Agencyand the U.S. Treasury, availability of opportunities that meet or exceed the Company’s risk adjusted return expectations, ability and willingness to makefuture dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, and general economic, political, regulatory andmarket conditions. These and other material risks are described in the Company's most recent Annual Report on Form 10-K and any other documentsfiled 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 understandthese risks when evaluating any forward-looking statement. All forward-looking statements speak only as of the date on which they are made. New risksand 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, theCompany is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, futureevents or otherwise.
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Contents
SECTION SLIDE NUMBER
Company Snapshot Slide 3
Q4 2019 Financial Results and Portfolio Update Slide 7
Additional Market Data and Financial Information Slide 19
COMPANY SNAPSHOT
4
Publicly Traded Capital
Class A Common StockTicker: AI
Exchange: NYSE
Market Capitalization: $217 million (1)
Annual Dividend Yield: 15.3% (1)(2)
Senior Notes Due 2023Ticker: AIW
Exchange: NYSE
Per Annum Interest Rate: 6.625%Current Strip Yield per Annum: 7.14%(1)(3)
Maturity Date: May 1, 2023
Senior Notes Due 2025Ticker: AIC
Exchange: NYSE
Per Annum Interest Rate: 6.75%Current Strip Yield per Annum: 7.47%(1)(3)
Maturity Date: March 15, 2025
Series B Cumulative Perpetual Redeemable Preferred Stock
Ticker: AI PrBExchange: NYSE
Per Annum Dividend Rate: 7.00% Payable Quarterly
Current Strip Yield per Annum: 8.25%(1)(3)
(1) As of February 13, 2020.(2) Based on most recent quarterly dividend.(3) Source: Bloomberg
Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
Ticker: AI PrCExchange: NYSE
Per Annum Dividend Rate: 8.25% Payable Quarterly
Current Strip Yield per Annum: 9.29%(1)(3)
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Company Snapshot
� Real estate investment trust (“REIT”) focused on mortgage assets
� Internally-managed
� Selectively and opportunistically allocate investable capital among the following current investment strategies:
- Agency MBS
� Highly liquid residential MBS that carry a credit guarantee from Fannie Mae, Freddie Mac or Ginnie Mae
- Mortgage Credit Investments
� Includes MBS or mortgage loans secured by residential or commercial real property
NYSE Ticker AI
Share Price (2/13/20) $5.90
Book Value Per Common Share (12/31/19) $7.86
GAAP Net Income per Diluted Share (Q4 ‘19) $0.72
Non-GAAP Core Operating Income per Diluted Share (Q4 ‘19) (1) $0.18
Dividend per Common Share (Q4 ‘19) $0.225
Dividend Yield (2/13/20) 15.3%
Common Equity Market Cap (2/13/20) $217 million
Mortgage Investment Portfolio (12/31/19) $3.9 billion
Investable Capital (12/31/19) (2) $402 million
(1) A reconciliation of non-GAAP core operating income to GAAP net income (loss) available (attributable) to common stock is provided on slide 24.
(2) Investable capital represents shareholders’ equity plus long-term unsecured debt.
Arlington Asset Investment Corp. Summary
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� Mortgage loans secured by, or MBS ultimately secured by, residential or commercial real property
� Includes the following primary asset classes:
- Single borrower, single property commercial mortgage loans
- Pools of small balance commercial mortgage loans
- Business purpose loans consisting of mortgages on residential investment properties
- Non-qualified residential mortgage (“Non-QM”) loans
� Prudently utilize leverage to increase potential returns
- Level of leverage is based upon asset class and risk profile
� Highly liquid residential MBS that carry a credit guarantee from Fannie Mae, Freddie Mac or Ginnie Mae
� Allocate between high quality specified pools selected for favorable prepayment characteristics or generic “TBA” pools
� Prudently utilize leverage to increase potential returns
� Utilize hedging transactions to mitigate interest rate sensitivity
Current Investment Strategy Alternatives
Agency MBS Mortgage Credit Investments
� Illustrative levered returns – approximately 9% to 11% � Illustrative levered returns – approximately 11% to 16%
Q4 2019 FINANCIAL RESULTS AND PORTFOLIO UPDATE
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Q4 2019 Financial Highlights
� $0.72 GAAP net income per diluted common share
� $0.18 non-GAAP core operating income (1) per diluted common share
- 9.5% annualized core operating income return on average common equity (2)
- Unchanged from the prior quarter as a result of:
� a decrease in weighted average secured financing costs driven by Federal Reserve interest rate cuts
� lower general and administrative expenses
� a reduction in agency MBS asset yields due primarily to continued reallocation from higher to lower coupon securities
� a reduction in average leverage and investment portfolio volumes
� $0.225 per common share dividend
� $7.86 book value per common share as of December 31, 2019
- Increase of 6.9% from $7.35 as of September 30, 2019
- Economic return of 10% measured as the change in book value per common share plus dividends declared during the quarter
(1) A reconciliation of non-GAAP core operating income to GAAP net income (loss) available (attributable) to common stock is provided on slide 24.
(2) See slide 16 for further information.(3) Economic net interest income is a non-GAAP financial measure. See slide 15 for further information.
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Investment Portfolio Allocation as of 12/31/2019
(1) Investable capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt. Investable capital allocated to mortgage credit assets is calculated as Non-
Agency MBS plus Mortgage Loans less the short-term secured debt collateralized by such assets. Remaining investable capital is allocated to Agency MBS.
(2) For Agency MBS, calculated as [short-term secured financing collateralized by agency MBS +(-) net payable (receivable) for unsettled securities – cash] divided by the investable capital
allocated to agency MBS. For Mortgage Credit, calculated as short-term secured financing collateralized by Non-Agency MBS and Mortgage Loans divided by the investable capital
allocated to Mortgage Credit assets.
Asset Allocation Investable Capital Allocation
Agency MBS Mortgage Credit Total
Mortgage related assets 3,768,496$ 78,501$ 3,846,997$
Allocated investable capital (1) 344,173$ 57,403$ 401,576$
Repo leverage ratio (2)10.1 0.4 8.7
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As of December 31, 2019$3.77 Billion Fair Value
As of September 30, 2019$4.11 Billion Fair Value
Agency MBS Investment Portfolio Allocation
Specified Pool vs. TBA Allocation (1)
(1) Includes the fair value of the agency MBS underlying forward-settling “to-be-announced (“TBA”) purchase or sale commitments that are accounted for as derivative instruments in accordance with
GAAP. The difference between the contractual forward price of the Company’s TBA commitments and the fair value of the underlying MBS is reflected on the Company’s consolidated balance
sheets as a component of “derivative assets, at fair value” or “derivative liabilities, at fair value.”
By Fixed Coupon Rate (1)
As of September 30, 2019As of December 31, 2019
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Specified Agency MBS Yield Performance
Historical Quarterly Prepayments (2) and GAAP Asset Yield Performance:
Q4 2019 GAAP Prepayments and Asset Yield Performance (dollars in thousands):
1) Unpaid principal balance.2) CPR of equivalent TBA eligible calculated as the average of the outstanding population of all Fannie Mae TBA eligible MBS weighted based on the contractual maturity and coupon
composition of AI’s monthly investment portfolio.
Coupon RateAmortized Cost
Basis
Amort. Cost /
$100 UPB (1) CPR Asset Yield Interest Income
2.5% (30-Year) 98,181$ 100.75$ 1.93% 2.43% $ 596
3.0% (30-Year) 1,299,736 102.64 3.50% 2.72% 8,824
3.5% (30-Year) 1,245,044 103.02 11.30% 2.91% 9,054
4.0% (30-Year) 917,847 103.47 19.74% 2.82% 6,463
4.5% (30-Year) 416,750 104.57 21.78% 2.87% 2,990
5.5% (30-Year) 12 99.92 0.33% 5.52% -
TOTAL 3,977,570$ 103.11$ 12.11% 2.81% $ 27,927
WEIGHTED-AVERAGE:
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To-be-Announced (“TBA”) Dollar Roll Performance
(1) TBA dollar roll transactions involve delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” sale prior to the settlement date,
net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase of a TBA agency MBS of the same essential characteristics for a later
settlement date at a price discount relative to the “spot” sale.
(2) Cost basis is based upon the contractual price of the initial TBA purchase trade of each individual series of dollar roll transactions.
(3) Asset yield calculated based upon future cash flow estimates obtain from Citi’s the Yield Book, a third-party model, for an illustrative 3.0% coupon specified pool purchased on January 15, 2020.
For comparative purposes, assumes agency MBS is 100% financed with a one-month repurchase agreement.
(4) TBA dollar roll net interest spread based upon the “price drop” between the February and March settlement of a 3.0% coupon TBA as of January 15, 2020.
(5) Source: Bloomberg
Q4 2019 Dollar Roll (1) Income (dollars in thousands):
Recent Relative TBA Dollar Roll Performance and Historical Monthly Price Drop:
%
Annualized
1/32s
Monthly
On Balance Sheet
Asset Yield (3) 2.58% 6.9
One-month Repo -1.75% (4.7)
Net interest spread 0.83% 2.2
Dollar Roll
One-month Drop (4)0.94% 2.5
Dollar Roll Specialness 0.11% 0.3
Example Dollar Roll vs. On Balance Sheet Funding3.0% Coupon Agency MBS as of January 15, 2020
Coupon Rate Cost Basis (2) Net Interest
Spread
Dollar Roll
Income
2.5% (30-Year) 78,987$ 0.59% 116$
3.0% (30-Year) 11,234 0.57% 16
TOTAL 90,221$ 0.58% 132$
WEIGHTED-AVERAGE IMPLIED:
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Financing Update
� 16 counterparties with access to 19 total counterparties
� Less than 10% of equity-at-risk with any one counterparty
- 6.0% of equity-at-risk with largest counterparty
- 25.9% of equity-at-risk with five largest counterparties
Diversified Funding Sources As of December 31, 2019 (dollars in thousands):
The Company’s repo agreements generally have one-monthterms while the Company receives three-month LIBOR on itsinterest rate swaps
Increases in the spread between three- and one-month LIBORgenerally positively impact the Company’s economic fundingcosts (and vice versa)
Repo Rate vs. One-Month LIBOR One-Month vs. Three-Month LIBOR
The spread of repo financing rates over one-month LIBOR hasincreased in recent quarters
Outstanding
Borrowing
Collateral Fair
Value
Average
Interest
Rate
Average
Days to
Maturity
Agency MBS repo 3,560,139$ 3,741,399$ 2.10% 23.7
Non-agency MBS repo 21,098$ 30,747$ 3.11% 8.1
Total repo 3,581,237$ 3,772,146$ 2.11% 23.6
Counterparty Region Number of
Counterparties
Outstanding
Borrowing
Percent
of Total
North America 10 2,257,789$ 63.0%
Europe 2 542,613 15.2%
Asia 4 780,835 21.8%
Total 16 3,581,237$ 100.0%
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Hedging Update
Interest Rate Swaps as of December 31, 2019 (dollars in thousands):
(1) Duration is calculated based upon each interest rate swap’s “DV01” (a valuation metric illustrating the dollar value of a one basis point increase in interest rates) as reported by theChicago Mercantile Exchange, the clearinghouse through which those instruments were centrally cleared. Duration is a measure of how much the price of an asset or liability is expectedto change if interest rates move in a parallel manner.
Q4 2019 Interest Rate Swap Activity
Remaining Life Notional
Amount
Fixed Pay
Rate
Variable
Receive Rate
Net Receive
(Pay) Rate
Remaining
Life (Years)Duration
(1)
Less than 3 years to maturity 2,050,000$ 1.77% 1.92% 0.15% 1.6 (1.4)
3 to less than 7 years to maturity 510,000 1.61% 1.92% 0.31% 6.0 (5.6)
7 to less than 10 years to maturity 400,000 2.24% 1.91% (0.33%) 9.5 (8.9)
10 or more years to maturity 25,000 2.96% 1.90% (1.06%) 28.2 (24.5)
Total / weighted average 2,985,000$ 1.81% 1.92% 0.11% 3.6 (3.3)
WEIGHTED-AVERAGE
NotionalFixed Pay
Rate
Years to
Maturity
Early terminations (100,000)$ 3.08% 8.9
Additions 210,000 1.73% 9.8
Maturities (125,000) 1.10% -
Net impact to swap book (15,000)$ (0.02%) 0.2
WEIGHTED-AVERAGE:
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Non-GAAP Core Operating Income (1)
(1) Core operating income and economic net interest income are non-GAAP financial measures. These non-GAAP measures are used by management to evaluate the financialperformance of the Company’s long-term investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodicdividends to stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist investors in understanding and evaluating the financialperformance of the Company’s long-term investment strategy and core business activities over periods of time as well as its earnings capacity. A limitation of utilizing these non-GAAPfinancial measures is that the effect of accounting for “non-core” events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and theseeffects should not be ignored when evaluating and analyzing our financial results. The Company believes that net income and comprehensive income determined in accordance withGAAP should be considered in conjunction with non-GAAP core operating income and economic net interest income. A reconciliation of non-GAAP core operating income to GAAP netincome (loss) available (attributable) to common stock is provided on slide 24.
Non-GAAP Core Operating Income Per Diluted Share Rollforward – Q4 2019 vs. Q3 2019
(Unaudited, in thousands except per share amounts) Q4 2019 Q3 2019 Q2 2019 Q1 2019
GAAP net interest income 7,037$ 4,692$ 6,582$ 7,917$
TBA dollar roll income 132 923 1,995 1,420
Interest rate swap net interest income 2,126 4,445 3,769 4,747
Economic net interest income 9,295 10,060 12,346 14,084
Investment advisory fee income 82 — — 250
Core general and administrative expenses (2,140) (2,797) (3,207) (3,603)
Preferred stock dividend (774) (774) (774) (278)
Non-GAAP core operating income 6,463$ 6,489$ 8,365$ 10,453$
Non-GAAP core operating income per diluted common share 0.18$ 0.18$ 0.23$ 0.32$
Weighted average diluted common shares outstanding 36,750 36,751 36,644 33,139
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Core Operating Income Return on Equity
(1) Includes interest expense incurred from repurchase agreement financing and net interest income earned or expense incurred from interest rate swaps. Excludes the economic cost or
benefit of hedging instruments other than interest rate swaps.
(2) Calculated based upon the weighted average balance of repurchase agreement financing for the period multiplied by the ratio of average common equity to average total investable capital
(common equity plus preferred equity plus unsecured debt).
(3) Expressed as an annualized percentage of average common equity for the period.
(4) Expressed as an annualized percentage of average common equity for the period. For example, for the fourth quarter of 2019, calculated as $0.1 million in dollar roll income (representing an
implied net interest spread of 0.58% on a weighted average cost basis of $90 million). All else being equal, as the average balance of the Company’s TBA dollar roll portfolio increases, the
calculated annualized return on average common equity will increase (and vice versa).
(5) Calculated as [GAAP interest income less repurchase agreement interest expense plus (less) interest rate swap net interest income (expense) plus TBA dollar roll income] multiplied by the
ratio of average preferred equity and unsecured debt to average total investable capital. Expressed as an annualized percentage of average common equity for the period.
(6) Core general and administrative expenses represent non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of
comprehensive income less stock-based compensation expense. Presented net of investment advisory fee income. For the third quarter of 2019, excludes a non-recurring expense related to
a one-time out-of-period payment made in that period for a business, professional and occupation license tax from Arlington County, Virginia for the 2018 tax year. Core general and
administrative expenses and investment advisory fee income have been allocated to common equity and preferred equity and unsecured debt on a pro rata basis based upon average capital
balances for the period.
Core Operating Income Return to Common Shareholders from: Q4 2019 Q3 2019 Q2 2019 Q1 2019
Common equity:
Mortgage investment asset yield 2.82% 2.96% 3.21% 3.36%
Economic cost of funds (1) (1.87)% (1.98)% (2.24)% (2.16)%
Economic net interest spread 0.95% 0.98% 0.97% 1.20%
Repo leverage ratio (2) 8.4 7.7 8.7 9.3
Leveraged economic net interest margin 7.95% 7.55% 8.42% 11.11%
Unleveraged asset yield 2.82% 2.96% 3.21% 3.36%
MBS return on average common equity excluding TBAs 10.77% 10.51% 11.63% 14.47%
Return on equity from TBA dollar roll income (3)(4) 0.14% 0.93% 2.00% 1.47%
Core general and administrative expenses (3)(6) (2.13)% (2.83)% (3.21)% (3.48)%
Return to common shareholders 8.78% 8.61% 10.42% 12.46%
Preferred equity and unsecured debt:
MBS and TBA return on average preferred equity and unsecured debt (3)(5) 4.58% 4.64% 4.58% 4.82%
Preferred stock dividend and unsecured debt interest costs (3) (2.97)% (2.89)% (2.73)% (2.10)%
Core general and administrative expenses (3)(6) (0.89)% (1.15)% (1.08)% (1.05)%
Return to common shareholders 0.72% 0.60% 0.77% 1.67%
Core operating income return to common shareholders 9.50% 9.21% 11.19% 14.13%
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Agency MBS Portfolio Weighted Average Statistics
(1) Includes interest expense incurred from repurchase agreement financing and net interest income earned or expense incurred from interest rate swaps. Excludes the economic cost orbenefit of hedging instruments other than interest rate swaps.
(2) Calculated as the total of the following, expressed as an annualized percentage of the total agency MBS weighted average cost basis for the period: GAAP interest income from agencyMBS, plus TBA dollar roll income, less agency MBS repurchase agreement interest expense, less interest rate swap net interest expense.
(dollars in thousands, except cost basis per $100 UPB) Q4 2019 Q3 2019 Q2 2019 Q1 2019
Specified agency MBS:
Constant prepayment rate 12.11% 12.85% 10.16% 7.55%
Coupon rate 3.53% 3.86% 4.09% 4.13%
GAAP asset yield 2.81% 2.96% 3.21% 3.36%
GAAP amortized cost basis 3,997,570$ 3,844,404$ 4,025,014$ 3,998,040$
GAAP amortized cost / $100 UPB 103.11$ 103.71$ 104.34$ 104.59$
Repurchase agreements:
Financing rate (2.09)% (2.46)% (2.64)% (2.68)%
Balance 3,736,255$ 3,609,519$ 3,728,583$ 3,680,429$
Interest rate swaps:
Fixed pay rate (1.82)% (1.82)% (2.10)% (2.11)%
Variable receive rate 2.06% 2.34% 2.60% 2.70%
Net receive (pay) rate 0.24% 0.52% 0.50% 0.59%
Notional amount 2,941,538$ 2,888,011$ 2,895,663$ 3,095,411$
Interest rate swap notional to repo ratio 79% 80% 78% 84%
Economic cost of funds (1)
(1.86)% (1.98)% (2.24)% (2.16)%
TBA dollar rolls:
Implied net interest spread 0.58% 0.93% 0.84% 1.05%
Implied cost basis 90,221$ 396,857$ 947,965$ 538,885$
Total agency MBS GAAP amortized cost basis 4,087,791$ 4,241,261$ 4,972,979$ 4,536,925$
Specified agency MBS allocation 98% 91% 81% 88%
TBA dollar roll allocation 2% 9% 19% 12%
Core net interest margin / return on assets (2)
1.02% 1.07% 1.10% 1.35%
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Book Value Per Share Rollforward
(1) Calculated based upon weighted average diluted shares outstanding during the quarter.(2) Excludes TBA dollar roll income, which is included in non-GAAP core operating income.(3) Excludes net interest income or expense incurred from interest rate swap agreements, which is included in non-GAAP core operating income.
Q4 2019
At September 30, 2019 7.35$
Non-GAAP core operating income (1) 0.18
Dividend to common shareholders (0.23)
Mortgage asset loss, net (1)(2) (0.03)
Interest rate hedge gain, net (1)(3) 0.60
Other, net (0.01)
At December 31, 2019 $ 7.86
ADDITIONAL MARKET DATA AND FINANCIAL INFORMATION
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Market Data (1)(2)
(1) 30-Year FNMA fixed rate price information is provided for illustrative purposes only and represents generic FNMA TBA prices and is not meant to be reflective of securities held by
the Company.
(2) Source: Bloomberg
12/31/18 3/31/19 6/30/19 9/30/19 12/31/19
Q4 '19 ∆ to
Q3 '19
30-Year FNMA Fixed Rate MBS
2.5% 94.30$ 97.55$ 99.27$ 99.58$ 98.92$ (0.66)$
3.0% 97.36$ 99.58$ 100.80$ 101.55$ 101.39$ (0.16)$
3.5% 99.83$ 101.39$ 102.20$ 102.64$ 102.86$ 0.22$
4.0% 101.83$ 102.86$ 103.33$ 103.80$ 104.02$ 0.22$
4.5% 103.45$ 104.17$ 104.48$ 105.33$ 105.30$ (0.03)$
FNMA Current Coupon vs. 10 Yr Swap Rate 79 bps 70 bps 78 bps 105 bps 82 bps -23 bps
U.S. Treasury ("UST") Rates
2 Yr UST 2.49% 2.26% 1.75% 1.62% 1.57% -5 bps
3 Yr UST 2.46% 2.21% 1.71% 1.56% 1.61% 5 bps
5 Yr UST 2.51% 2.23% 1.77% 1.54% 1.69% 15 bps
7 Yr UST 2.59% 2.31% 1.88% 1.61% 1.83% 22 bps
10 Yr UST 2.69% 2.41% 2.01% 1.66% 1.92% 26 bps
30 Yr UST 3.02% 2.82% 2.53% 2.11% 2.39% 28 bps
2 Yr to 10 Yr UST Spread 20 bps 15 bps 26 bps 4 bps 35 bps 31 bps
Interest Rate Swap Rates
2 Yr Swap 2.66% 2.38% 1.81% 1.63% 1.70% 7 bps
3 Yr Swap 2.59% 2.31% 1.74% 1.55% 1.69% 14 bps
5 Yr Swap 2.57% 2.28% 1.77% 1.50% 1.73% 23 bps
7 Yr Swap 2.62% 2.32% 1.84% 1.51% 1.80% 29 bps
10 Yr Swap 2.71% 2.41% 1.96% 1.56% 1.90% 34 bps
30 Yr Swap 2.84% 2.58% 2.21% 1.71% 2.09% 38 bps
2 Yr Swap to 2 Yr UST Spread 17 bps 12 bps 6 bps 1 bps 13 bps 12 bps
10 Yr Swap to 10 Yr UST Spread 2 bps 0 bps -5 bps -10 bps -2 bps 8 bps
London Interbank Offered Rates ("LIBOR")
1 Month LIBOR 2.50% 2.49% 2.40% 2.02% 1.76% -26 bps
3 Month LIBOR 2.81% 2.60% 2.32% 2.09% 1.91% -18 bps
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Well Matched Hedging Can Protect Profitability Though
Various Rate Environments
Net interest margin fluctuates based on economic and U.S. Federal Reserve cycles
The Company utilizes interest rate swaps to attempt to lock into cost of funds for a defined period
Mortgage principal repayments are reinvested at then-current investment spreads
Mortgage investment spreads have historically never been negative even in periods of inverted U.S. Treasury yield curves
Historical Agency MBS Investment Spread and Related Data
150 bps
76 bps on 1/24/2019
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Balance Sheet
(1) Represents shares of common stock outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.(2) Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding.(3) Calculated as the sum of repurchase agreement financing, plus (less) any net payable (receivable) for unsettled securities, plus the net contractual forward price of TBA commitments, less
cash compared to shareholders’ equity plus long-term unsecured debt.
(Unaudited, in thousands except per share amounts) December 31, 2019 September 30, 2019
ASSETS
Cash and cash equivalents $ 19,636 $ 12,129
Interest receivable 10,663 11,684
Sold securities receivable 71,199 -
Agency MBS 3,768,496 4,013,161
Mortgage credit investments 78,501 25
Derivative assets, at fair value 1,417 675
Deposits 37,123 43,298
Other assets 13,079 18,566
Total assets $ 4,000,114 $ 4,099,538
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements $ 3,581,237 $ 3,697,906
Dividend payable 8,494 8,397
Derivative liabilities, at fair value 8 724
Other liabilities 8,799 10,062
Long-term unsecured debt 74,328 74,272
Total liabilities 3,672,866 3,791,361
Common stockholders’ equity 288,397 269,326
Preferred stock liquidation preference 38,851 38,851
Total equity 327,248 308,177
Total liabilities and stockholders’ equity $ 4,000,114 $ 4,099,538
Shares outstanding (in thousands) (1)
36,692 36,627
Book value per common share (2)
7.86$ 7.35$
Short-term secured financing to investable capital leverage ratio (3)
8.7 9.9
TBA net purchase commitment at cost -$ 99,867$
23
Statement of Comprehensive Income(Unaudited, in thousands except per share amounts) Q4 2019 Q3 2019 Q2 2019 Q1 2019
Interest income
Agency mortgage-backed securities 27,927$ 28,455$ 32,275$ 33,570$
Mortgage credit investments 173 4 14 1
Other 155 215 428 261
Total interest income 28,255 28,674 32,717 33,832
Interest expense
Short-term secured debt 19,970 22,721 24,866 24,643
Long-term unsecured debt 1,248 1,261 1,269 1,272
Total interest expense 21,218 23,982 26,135 25,915
Net interest income 7,037 4,692 6,582 7,917
Investment advisory fee income 82 — — 250
Investment gain (loss), net 23,308 (8,231) (26,683) 13,803
General and administrative expenses
Compensation and benefits 2,012 2,833 2,233 3,116
Other general and administrative expenses 1,005 1,365 1,191 1,260
Total general and administrative expenses 3,017 4,198 3,424 4,376
Net income (loss) 27,410 (7,737) (23,525) 17,594
Dividend on preferred stock (774) (774) (774) (278)
Net income (loss) available (attributable) to common stock 26,636$ (8,511)$ (24,299)$ 17,316$
Basic earnings (loss) per common share 0.73$ (0.23)$ (0.67)$ 0.52$
Diluted earnings (loss) per common share 0.72$ (0.23)$ (0.67)$ 0.52$
Weighted-average common shares outstanding (in thousands):
Basic 36,628 36,572 36,533 33,053
Diluted 36,750 36,572 36,533 33,139
24
Non-GAAP Core Operating Income Reconciliation(1)
(1) Core operating income and economic net interest income are non-GAAP financial measures. These non-GAAP measures are used by management to evaluate the financial performance ofthe Company’s long-term investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends tostockholders. The Company believes that non-GAAP core operating income and economic net interest income assist investors in understanding and evaluating the financial performance ofthe Company’s long-term investment strategy and core business activities over periods of time as well as its earnings capacity. A limitation of utilizing these non-GAAP financial measures isthat the effect of accounting for “non-core” events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignoredwhen evaluating and analyzing our financial results. The Company believes that net income and comprehensive income determined in accordance with GAAP should be considered inconjunction with non-GAAP core operating income and economic net interest income.
(2) Core operating income for the third quarter of 2019 excludes a non-recurring expense related to a one-time out-of-period payment made in that period for a business, professional andoccupation license tax from Arlington County, Virginia for the 2018 tax year.
Reconciliation of GAAP net income to non-GAAP core operating income:
(Unaudited, in thousands) Q4 2019 Q3 2019 Q2 2019 Q1 2019
Net income (loss) available (attributable) to common stock 26,636$ (8,511)$ (24,299)$ 17,316$
Add (less):
Total investment (gain) loss, net (23,308) 8,231 26,683 (13,803)
Stock-based compensation expense 877 913 217 773
Non-recurring expense (2)
— 488 — —
Add back:
TBA dollar roll income 132 923 1,995 1,420
Interest rate swap net interest income 2,126 4,445 3,769 4,747
Non-GAAP core operating income 6,463$ 6,489$ 8,365$ 10,453$
25
Specified Agency MBS Investment Portfolio
(1) Specified pools of loans with original balances of up to $150K.(2) Specified pools of loans with original balances between $150K and $175K.(3) Specified pools of loans with original balances between $175K and $200K.(4) Specified pools of loans with original balances between $200K and $225K.(5) Other specified pools primarily include pools of loans with higher loan-to-value ratios, loans for properties in certain geographical areas, and low FICO loans.(6) Unpaid principal balance.(7) WAC represents the weighted average coupon of the underlying collateral.(8) Loan age represents the weighted average age of the underlying collateral.(9) Actual 3-month constant prepayment rate (“CPR”) represents annualized 3-month CPR published in January 2020 for securities held as of December 31, 2019.(10) Remaining life represents the weighted average expected remaining life of the security based on expected future CPR as estimated by Citi’s “The Yield Book,” a third-party model.(11) Duration is derived from the Citi’s “The Yield Book,” a third-party model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent
upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions.
Fixed-Rate Agency MBS Selected for Favorable Prepayment Characteristics as of December 31, 2019
(Dollars in thousands) MBS Coupon UPB (6) Amortized Cost
/ $100 UPB Fair Value
Fair Value /
$100 UPB WAC
(7)Loan Age
(Months) (8)
Actual 3-
Month CPR (9)
Remaining
Life
(Years) (10)
Duration
(Years) (11)
30-Year Agency MBS:
Low Loan Balance <= $150K (1)
4.0% 18,174$ 102.83$ 19,095$ 105.07$ 4.90% 10 19.39% 4.2 2.2
Low Loan Balance <= $175K (2)
2.5% 27,577$ 101.39$ 27,380$ 99.29$ 3.56% 4 1.06% 7.6 5.7
3.0% 131,593 103.34 135,008 102.60 3.92% 4 1.66% 7.1 4.7
3.5% 273,248 103.04 286,271 104.77 4.36% 10 7.84% 5.8 3.2
4.0% 470,496 103.48 499,699 106.21 4.75% 15 21.28% 5.0 2.4
4.5% 81,292 104.41 87,220 107.29 4.96% 21 14.59% 5.0 2.6 984,206$ 103.36$ 1,035,578$ 105.22$ 4.51% 12 13.81% 5.6 3.0
Low Loan Balance <= $200K (3)
2.5% 46,644$ 99.77$ 46,253$ 99.16$ 3.36% 3 1.61% 8.2 5.9
3.0% 628,815 102.54 643,180 102.28 3.94% 4 2.97% 6.9 4.3
3.5% 351,513 103.61 367,101 104.43 4.34% 6 6.63% 5.8 3.1
4.0% 167,631 102.74 177,633 105.97 4.73% 17 18.65% 5.0 2.4
4.5% 159,342 104.93 170,922 107.27 4.94% 22 22.55% 4.7 2.2 1,353,945$ 103.03$ 1,405,089$ 103.78$ 4.24% 8 8.12% 6.2 3.6
Low Loan Balance <= $225K (4)
3.0% 171,240$ 102.45$ 174,652$ 101.99 3.80% 3 0.10% 7.1 4.5
3.5% 115,403 103.02 119,959 103.95 4.43% 8 14.75% 5.3 2.6
4.0% 54,551 103.50 57,498 105.40 4.43% 23 17.66% 5.1 2.6
341,194$ 102.81$ 352,109$ 103.20$ 4.11% 8 7.86% 6.2 3.5
Other Specified Pools (5)
2.5% 44,733$ 100.90$ 44,538$ 99.56$ 3.57% 3 2.40% 9.1 6.5
3.0% 445,604 102.53 455,090 102.13 3.76% 3 2.46% 7.6 4.9
3.5% 414,721 102.64 427,767 103.15 4.47% 7 17.27% 4.1 2.3
4.0% 27,880 103.67 29,216 104.79 4.67% 17 35.82% 3.8 2.0
5.5% 12 99.93 14 112.61 5.92% 144 0.34% 5.9 4.5 932,950$ 102.53$ 956,625$ 102.54$ 4.09% 5 10.04% 6.0 3.8
Total Agency MBS:
30-Year 2.5% 118,954$ 100.57$ 118,171$ 99.34$ 3.49% 3 1.78% 8.4 6.1
30-Year 3.0% 1,377,252 102.60 1,407,930 102.23 3.86% 4 2.32% 7.2 4.5
30-Year 3.5% 1,154,885 103.07 1,201,098 104.00 4.40% 8 11.55% 5.2 2.8
30-Year 4.0% 738,732 103.30 783,141 106.01 4.72% 16 20.92% 5.0 2.4
30-Year 4.5% 240,634 104.75 258,142 107.28 4.95% 22 19.86% 4.8 2.3 30-Year 5.5% 12 99.93 14 112.61 5.92% 144 0.34% 5.9 4.5
3,630,469$ 102.97$ 3,768,496$ 103.80$ 4.27% 9 10.19% 6.0 3.4
WEIGHTED-AVERAGE
26
(1) Duration is derived from the Citi’s “The Yield Book,” a third-party model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates movein a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models couldgenerate materially different estimates using similar inputs and assumptions.
(2) Total liability and hedge duration is expressed in asset units. Excludes unsecured debt.(3) Interest rate sensitivity of MBS and TBA commitments is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. Interest rate
sensitivity is based on assumptions resulting in certain limitations, including (i) an instantaneous shift in rates with no changes to the slope of the yield curve, (ii) no changes in MBSspreads, and (iii) no changes to the investment or hedge portfolio.
Agency MBS Portfolio Net Duration Gap as of December 31, 2019
Interest Rate Sensitivity as of December 31, 2019 (3)
Book Value Sensitivity to Interest Rates
-100 bps -50 bps
As of
12/31/2019 +50 bps +100 bps
Common Stockholders' Equity 278,504$ 292,825$ 288,397$ 260,819$ 214,052$
Percentage Change -3.4% 1.5% - -9.6% -25.8%
Fair Value / Notional Duration (1)
Agency MBS 3,768,496$ 3.4
Net long agency TBA position -$ -
Total agency MBS 3,768,496$ 3.4
Agency MBS repo (2) (3,560,139)$ (0.1)
Interest rate swap agreements (2) (2,975,000)$ (3.3)
Total liabilities and hedges (2.7)
Net duration gap 0.7
27
(1) Agency MBS spread sensitivity is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. The estimated change in book valuereflects an assumed spread weighted average duration of 5.2 years, which is a model-based assumption that is dependent upon the size and composition of our portfolio as well aseconomic conditions present as of December 31, 2019. The agency MBS spread sensitivity is based on assumptions resulting in certain limitations, including (i) no changes in interestrates, and (ii) no changes to the investment or hedge portfolio.
Agency MBS Spread Sensitivity as of December 31, 2019 (1)
Historical Agency MBS to U.S. Treasury Yield Spread
107 bps
134 bps
80 bps on 1/24/2020
89 bps on 1/24/2020
Book Value Sensitivity to Agency MBS Spreads
-25 bps -10 bps
As of
12/31/2019 +10 bps +25 bps
Common Stockholders' Equity 336,984$ 307,832$ 288,397$ 268,962$ 239,810$
Percentage Change 16.8% 6.7% - -6.7% -16.8%
