Investor Presentation
Third Quarter 2021
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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 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, 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.
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Contents
SECTION SLIDE NUMBER
Company Snapshot Slide 3
Q3 2021 Financial Results and Portfolio Update Slide 11
Additional Financial Information and Market Data Slide 20
COMPANY SNAPSHOT
4
Company Snapshot
Real estate investment trust (“REIT”)
Internally-managed
High return investment classes:
- A gency MBS
Highly liquid residential MBS that carry a credit guarantee from Fannie Mae or Freddie Mac - Mortgage Servicing Right (“MSR”) Related Assets
Financing receivables with a mortgage servicing counterparty for which the investment return is based upon the performance of a pool of MSRs
- Single-Family Residential (“SFR”) Rental Properties
Investment strategy focused on acquiring, leasing and operating single-family residential homes as rental properties - Mortgage Credit Investments
Includes MBS or mortgage loans secured by residential or commercial real property
NYSE Ticker AAIC
Share Price (11/8/21) $3.87
Book Value Per Common Share (9/30/21) $5.97
Investment Portfolio (9/30/21) (1) $850 million
Investable Capital (9/30/21) (2) $311 million
(1) Reflects the Company’s net investment of $12.4 million in a variable interest entity with gross assets and liabilities of $19.8 million and $7.4 million, respectively, that is consolidated for GAAP financial reporting purposes.
(2) Investable capital represents shareholders’ equity plus long-term unsecured debt.
Arlington Asset Investment Corp. Summary
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Transitioning into Diversified Investment Platforms
9.9x Leverage (2) 1.5x Leverage (2) 1.8x Leverage (2)
Transitioning into multiple investment channels that compliment historical agency MBS strategy - Mortgage servicing rights (“MSR”)
- Single-family residential (“SFR”) rental properties - Mortgage credit
Diversifies investment risk and should improve level and reliability of returns over time
Target new investment classes that:
- Are less commoditized with higher barriers of entry - Offer attractive unlevered returns
- Provide opportunity to use term financing structures where available
Capital Allocation (1)
(1) Capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt.
(2) Calculated the ratio of the sum of repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward price of TBA commitments and financing embedded in MSR financing receivables less cash and cash equivalents compared to investable capital.
6
Diversified and Complimentary Return Profile
Agency MBS
Mortgage Servicing Rights
Single-Family Residential Rental Properties
Mortgage Credit
Principal and interest guaranteed by Fannie Mae or Freddie Mac
Funded with short-term repurchase agreements
Subject to interest rate and prepayment risk
Hedged with interest rate swaps and Treasury futures
8.0% to 12.0%
7.0x to 9.0x
Asset Class Targeted Return
and Leverage (1)
Recently originated pools of Fannie Mae and Freddie Mac loans
Partnering with licensed, GSE approved servicer
Ability to prudently leverage through access to funding facility
Subject to interest rate and prepayment risk
Complimentary to agency MBS
8.0% to 11.25% (2)
0.0x to 0.5x
Current return 8.0% to 11.75%
Total return (3) 8.0% to 21.75% (2)
2.0x to 3.0x
10.0% to 16.0%
0.0x to 10.0x
Acquiring, operating and leasing SFR rental properties
Partnering with leading asset manager offers ability to leverage partner’s scale
Funded with fixed-rate long-term non-recourse financing
Attractive current yields plus ability to realize home price appreciation over time
Mortgage loans or MBS collateralized by mortgage loans
Residential business purpose mortgage loans
Commercial mortgage loans
Residential mortgage loans
Funded with non-recourse term securitization where available
(1) Targeted return and leverage are for illustrative purposes only. Any assumptions and estimates used may not be accurate and cannot be relied upon. Actual returns for any given period may differ materially from these examples.
(2) Net of direct expenses and estimated partner fees including potential incentive fees.
(3) Total return includes potential annual home price appreciation of 1% to 4% and is net of direct expenses and partner fees.
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Increasing Allocation to Complimentary MSRs with Attractive Returns
Strategic relationship with licensed, GSE approved mortgage servicer
Cost effective and lower risk channel for investing in MSRs
Do not incur direct cost and regulatory risk of holding licenses directly
Strategic Partnership
Complimentary to Agency MBS
As interest rates rise and mortgage durations extend, MSRs generally increase in value while a gency MBS generally decrease in value
Opportunity to increase combined agency MBS and MSR returns by replacing negative carry interest rate swap hedges with positive carry MSRs
Attractive Returns
Attractive unlevered returns in high single digits
Ability to prudently leverage to increase potential returns
Targeting Lower Risk MSR Pools
Pools of Fannie Mae and Freddie Mac loans
Focus on recently originated loans
Targeting lower coupon loan pools to mitigate prepayment risk
8
Launched New Initiative in Single-Family Residential Property Rentals
Partnering with leading asset manager with approximately $140B of AUM including $1.1B in 4,200 SFR properties in 18 markets
Enables AAIC to leverage partner’s scale, intellectual capital and access to investment opportunities
Strategic Relationship
Favorable Supply Demand
Dynamics
Population growth driving strong housing demand
Declining housing affordability increasing home rental demand
Limited housing supply SFR Program
Overview
Committed to invest up to $50M of capital in $200M of houses
Currently targeting seven growth markets
Focusing on high quality, newer homes
Attractive current yields plus ability to realize home price apprec.
Attractive Debt Financing Structures
Increasingly attractive and flexible financing structures for institutional investors
Arlington has a $150M fixed-rate 5-year term financing facility
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Favorable Supply Demand Dynamics in Single-Family Residential
US population growth driving housing demand Millennial generation desire more space
Largest US age cohorts entering home-formation years
Limited new housing supply
Sources: US Census Bureau, Eurostat, World Bank and National Institute of Population and Social Security Research.
Demographic Trends Support SFR
Overall housing demand fueled by strong population growth
Post pandemic demand increase for single-family homes
Leading to increased demand for single- family homes over apartments
Limited New Housing Supply
Newly constructed units do not meet budget of typical entry level buyer
Builders have focused on “move-up”
buyer at the expense of entry level buyer
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Illustrative Single-Family Residential Rental Economic Returns
This illustrative model is not intended to predict outcomes. This model is only intended to illustrate how different assumptions will impact the results. All returns and expenses are based on a fully stabilized portfolio of SFR and there are many risks that may cause Arlington to not meet these objectives. There can be no assurances that Arlington will stabilize its portfolio and achieve these illustrated returns.
(1) Net rental yield is lease revenue less property level operating expenses (excluding fixed asset depreciation) as a percentage of the home investment.
(2) Estimated annual home price appreciation ("HPA"). S&P/Case-Shiller US national Home Price Index has increased 4.24% per annum since 1987.
(3) Includes other direct G&A expenses and estimated partner fees including potential incentive fees.
Lower Range Higher Range
Net rental yield (1) 4.50% 5.00%
Cost of financing -2.76% -2.76%
Net spread 1.74% 2.24%
Leverage 2.0x 3.0x
Leverage carry before HPA and expenses 8.0% 11.7%
Long-term annual HPA (2) 1.0% 4.0%
Levered return before expenses 11.0% 27.7%
Direct expenses and partner fees (3) -3.0% -5.9%
Net return on equity 8.0% 21.8%
Q3 2021 FINANCIAL RESULTS AND PORTFOLIO UPDATE
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Q3 2021 Financial Highlights
$0.03 GAAP net loss per diluted common share
$0.06 non-GAAP core operating income (1) per diluted common share
$5.97 book value per common share as of September 30, 2021
$0.07 per common share of book value accretion from the repurchase of 1.1 million shares of common stock
o Repurchased 3.3% of outstanding common shares during Q3 2021
o Repurchased 15.5% of outstanding common shares program inception to date
1.8 to 1 “at risk” leverage ratio (2) as of September 30, 2021
Increased capital allocated to MSR related assets to 36%
o 31% total annualized return for Q3 2021
o 34% total annualized return for YTD Q3 2021
Successful launch of new investment strategy in SFR rental properties
o Obtained $150 million five-year financing facility at attractive fixed rate
Completed a public offering of $37.8 million of 6.00% senior notes due 2026 and redeemed outstanding 6.625% senior notes due 2023 with an outstanding principal balance of $23.8 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) Calculated the ratio of the sum of repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward price of TBA commitments and financing embedded in MSR financing receivables less cash and cash equivalents compared to investable capital. Investable capital is calculated as the sum of stockholders’ equity and long- term unsecured debt.
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Investment Portfolio Allocation as of September 30, 2021
Asset Allocation Investable Capital Allocation
(1) Capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt.
(2) Calculated the ratio of the sum of repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward price of TBA commitments and financing embedded in MSR financing receivables less cash and cash equivalents compared to investable capital.
(3) Leverage ratio for MSR related assets reflects $11,548 of secured financing obtained by the mortgage servicer counterparty to our MSR financing receivables at our direction.
(4) Reflects the Company’s net investment of $12,448 in a variable interest entity with gross assets and liabilities of $19,850 and $7,402, respectively, that is consolidated for GAAP financial reporting purposes.
(5) Excludes depreciation recognized pursuant to GAAP.
Capital
(1)% of Total Leverage
(2)(3)Agency MBS Investments $ 134,932 44% 4.1 MSR Related Assets
(3)$ 112,834 36% 0.1 Mortgage Credit Investments:
Commercial mortgage loan $ 8,940 3% 2.3 Business purpose residential MBS
(4)23,165 8% —
Residential MBS 6,960 2% —
Commercial MBS 4,375 1% —
Other 3,425 1% —
Total Mortgage Credit Investments $ 46,865 15% 0.4 Single-Family Residential Properties
(5)$ 15,947 5% — Total Investments $ 310,578 100% 1.8
Fair Value % of TotalAgency MBS Investments:
Agency MBS $ 637,718 75%
TBAs 22,250 3%
Agency MBS Investments $ 659,968 78%
MSR Related Assets $ 112,834 13%
Mortgage Credit Investments:
Commercial mortgage loan $ 29,800 3%
Business purpose residential MBS
(4)23,165 3%
Residential MBS 6,960 1%
Commercial MBS 4,375 1%
Other 3,425 —
Total Mortgage Credit Investments $ 67,725 8%
Single-Family Residential Properties
(5)$ 9,419 1%
Total Investments $ 849,946 100%
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Coupon Rate UPB Fair Value Allocation Balance Collateral Fair
Value Wtd. Avg.
Interest Rate Wtd. Avg. Days to Maturity 2.0% $ 456,519 $ 460,175 72% $ 533,123 $ 558,543 0.12% 14.0
2.5% 170,776 177,534 28%
5.5% 8 9 — Total $ 627,303 $ 637,718 100%
< 3 years $ 100,000 0.11% 0.04% 2.1
Coupon Rate UPB Fair Value Allocation 3 to < 10 years 115,000 1.09% 0.10% 9.3
2.0% $ 125,000 $ 125,469 55% $ 215,000 0.64% 0.07% 6.0
2.5% (100,000) (103,219) 45%
Total $ 25,000 $ 22,250 100%
Coupon Rate UPB Fair Value Allocation
2.0% $ 581,519 $ 585,644 89%
2.5% 70,776 74,315 11%
5.5% 8 9 — Total $ 652,303 $ 659,968 100%
Net Long TBAs
Total Agency MBS
Floating
Receive Rate Years to Maturity Maturity
Interest Rate Swap Hedge Repo Financing
Specified Agency MBS
Notional Fixed Pay Rate
Agency MBS Investments
Agency MBS Investment Portfolio as of September 30, 2021
(Dollars in thousands)
1) Investable capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt
2) Calculated as [short-term secured financing collateralized by MBS +(-) net payable (receivable) for unsettled securities – allocated cash] divided by the allocated investable capital.
3) Calculated as the sum of GAAP net interest income attributable to agency MBS, TBA dollar roll income, and interest rate swap net income (expense) divided by the weighted average amortized cost basis of agency MBS net of the weighted average balance of agency MBS repurchase agreement financing for the period, annualized.
Allocated Investable Capital (1) as of Quarter End $134.9 million
Investable Capital Allocation % 44%
Leverage Ratio as of Quarter End (2) 4.1x Q3 Weighted Average Constant Prepayment Rate 8.62%
Q3 Weighted Average GAAP Asset Yield 1.52%
Q3 Levered Return (Including TBAs) Based on Cost (3) 10.37%
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MSRs Financing Counterparty Incentive Fee
Accrual
Cash and Other Net
Receivables Total 120,589
$ $ (11,548) $ (1,413) $ 5,206 $ 112,834 Underlying Reference Amounts:
MSR Related Assets
Allocated Investable Capital (1) as of Quarter End $112.8 million
Investable Capital Allocation % 36%
Leverage Ratio as of Quarter End (2) 0.1x Q3 Weighted Average GAAP Asset Yield 8.85%
MSR Related Assets as of September 30, 2021
(Dollars in thousands)
AAIC has a strategic relationship with a licensed, GSE approved mortgage servicer that enables us to garner the economic return of an investment in an MSR purchased by the servicer
For an MSR purchased by our partner, AAIC:
i. purchases the excess servicing spread entitling the Company to servicing fees in excess of 12.5 basis points; and
ii. funds the balance of the MSR in exchange for an unsecured right to payment equal to the underlying base servicing fee of 12.5 basis points less the costs of servicing and any proceeds from the sale of the underlying MSR, less a monthly oversight fee and an annual incentive fee, if earned
At our option, we can direct our partner to leverage our capital
1) Investable capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt.
2) Reflects $11,548 of secured financing obtained by the mortgage servicer counterparty to our MSR financing receivables at our direction.
Holder of Loans UPB Note Rate Servicing
Fee WA Loan Age Projected
CPR Market Yield Price Multiple
(Price /
Servicing Fee) Fair Value Fannie Mae $ 11,311,790 2.92% 0.25% 8 months 10.19% 9.00% $ 1.07 4.20 $ 120,572 Freddie Mac 1,636 3.22% 0.25% 4 months 10.93% 9.00% 1.07 4.27 17 Total / Wtd. Avg. $ 11,313,426 2.92% 0.25% 8 months 10.19% 9.00% $ 1.07 4.20 $ 120,589
Underlying MSRs:
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Single-Family Residential Properties
1) Investable capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt.
Allocated Investable Capital (1) as of Quarter End $15.9 million
Investable Capital Allocation % 5%
Leverage Ratio as of Quarter End 0.0x
SFR Investment Portfolio as of September 30, 2021
(Dollars in thousands)
Committed to invest at least $50 million of capital to acquire approximately $200 million of SFR properties
Partnering with a leading, experienced asset manager that will enable us to leverage our partner’s scale, intellectual capital and access to investment opportunities
As of September 30, 2021, we had acquired 33 SFR properties for $9.4 million and had committed to acquire an additional 75 properties for $19.9 million
To finance the purchase of SFR properties, we have entered into a $150 million five-year secured term debt facility:
- 18-month draw period - 74% advance rate - 2.76% fixed cost of funds - limited recourse to AAIC
Market Number of
Properties Gross Book
Value Average Gross
Book Value Average
Square Feet Average Year
Built
Tulsa, OK 12 $ 3,024 $ 252 1,683 2005
Atlanta, GA 5 1,624 325 1,808 2012
Charlotte, NC 5 1,546 309 2,754 2011
Dallas, TX 4 1,269 317 1,968 2008
Kansas City, MO 4 1,088 272 2,384 2004
Memphis, TN 3 868 289 1,875 2004
Total / weighted-average 33 $ 9,419 $ 285 2,001 2007
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Mortgage Credit Investments
1) Investable capital is calculated as the Company’s GAAP shareholders’ equity plus long-term unsecured debt.
2) Calculated as [short-term secured financing collateralized by mortgage credit investments +(-) net payable (receivable) for unsettled securities – allocated cash] divided by the allocated investable capital. Reflects the Company’s net investment in a consolidated VIE on a net basis.
3) Reflects the Company’s net investment of $12,448 in a variable interest entity with gross assets and liabilities of $19,850 and $7,402, respectively, that is consolidated for GAAP financial reporting purposes on a net basis.
4) Calculated as the sum of GAAP net interest income attributable to mortgage credit investments divided by the weighted average amortized cost basis of mortgage credit investments net of the weighted average balance of mortgage credit investment secured financing for the period, annualized.
5) For mortgage credit investments in securities, includes contractual accrued interest receivable.
6) Calculated as an inception-to-date annualized internal rate of return based upon our initial investment, cash received from the investment, cash paid for secured financing costs (if any) and assumes liquidation at quarter-end at an amount equal to estimated fair value plus accrued interest and the payoff of any secured financing and accrued interest thereon (if any).
Allocated Investable Capital (1) as of Quarter End $46.9 million
Investable Capital Allocation % 15%
Leverage Ratio as of Quarter End (2)(3) 0.4x Q3 Weighted Average GAAP Asset Yield 6.56%
Q3 GAAP Levered Return Based on Cost (4) 8.66%
Mortgage Credit Investment Portfolio as of September 30, 2021
(Dollars in thousands)
Asset Category UPB Fair Value
(5)Market Price Asset
Allocation Repo
Financing Invested
Capital Capital
Allocation Leverage Ratio
Cumulative Total Return
(6)Commercial mortgage loan $ 29,800 $ 29,800 $ 100.00 44% $ 20,860 $ 8,940 19% 2.3 9.83%
Business purpose loan residential MBS
(3)24,649 23,165 93.71 34% — 23,165 49% — 9.84%
Residential MBS 6,934 6,960 100.04 10% — 6,960 15% — 5.29%
Small balance commercial MBS 6,000 4,375 72.38 6% — 4,375 9% — (2.01%) Other 5,061 3,425 67.70 5% — 3,425 7% — 0.20%
Total $ 72,444 $ 67,725 $ 93.32 100% $ 20,860 $ 46,865 100% 0.4 7.43%
Balance Collateral Fair
Value Interest Rate Days to Maturity 20,860
$ $ 29,800 2.59% 329
Commercial Mortgage Loan Repo Financing
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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 financial performance 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 periodic dividends to stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist investors in understanding and evaluating the financial performance 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-GAAP financial 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 these effects should not be ignored when evaluating and analyzing our financial results. The Company believes that net income and comprehensive income determined in accordance with GAAP 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 net income (loss) available (attributable) to common stock is provided on slide 24.
(2) Excludes the Company’s net investment in its consolidated VIE.
Non-GAAP Core Operating Income Per Diluted Share Rollforward – Q3 2021 vs. Q2 2021
(2)
(Unaudited, in thousands except per share amounts) Q3 2021 Q2 2021 Q1 2021 Q4 2020
GAAP net interest income $ 4,432 $ 5,087 $ 3,758 $ 6,414
TBA dollar roll income 1,064 1,778 836 1,156
Interest rate swap net interest income (expense) (379) (1,187) (710) (62)
Economic net interest income 5,117 5,678 3,884 7,508
Single-family residential property profit (loss) (24) — — —
Core general and administrative expenses (2,377) (2,653) (2,134) (2,668)
Preferred stock dividend (731) (723) (723) (733)
Income tax provision for TRS core operating income (85) (61) (11) —
Non-GAAP core operating income $ 1,900 $ 2,241 $ 1,016 $ 4,107
Non-GAAP core operating income per diluted common share $ 0.06 $ 0.07 $ 0.03 $ 0.12
Weighted average diluted common shares outstanding 32,243 33,424 33,444 33,554
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Book Value Per Share Rollforward
(1) Calculated based upon weighted average diluted common shares outstanding for the period.
(2) Calculated based upon common shares outstanding as of the end of the period.
(3) Excludes TBA dollar roll income which is included in non-GAAP core operating income.
(4) Excludes net interest income earned or expense incurred from interest rate swap agreements which is included in non-GAAP core operating income.
(5) Net of income tax provision (benefit) for TRS investment gain (loss), net.
Q3 2021
At June 30, 2021 $ 5.94
Non-GAAP core operating income (1) 0.06 Agency MBS asset loss, net (2)(3) (0.16) Hedge loss, net (2)(4) (0.06) MSR related asset gain, net (2)(5) 0.13 Mortgage credit asset gain, net (2) 0.02 Repurchases of stock 0.07
Other, net (0.03)
At September 30, 2021 $ 5.97
ADDITIONAL FINANCIAL INFORMATION AND MARKET DATA
21
Publicly Traded Capital
Class A Common Stock Ticker: AAIC Exchange: NYSE
Market Capitalization: $122 million
(1)Senior Notes Due 2026 Ticker: AAIN Exchange: NYSE Per Annum Interest Rate: 6.00%
Current Strip Yield per Annum: 6.03%
(1)(2)Maturity Date: August 1, 2026
Series B Cumulative Perpetual Redeemable Preferred Stock
Ticker: AAIC PrB Exchange: NYSE Per Annum Dividend Rate:
7.00% Payable Quarterly Current Strip Yield per Annum: 7.09%
(1)(2)(1) As of November 8, 2021.
(2) Source: Bloomberg
Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
Ticker: AAIC PrC Exchange: NYSE Per Annum Dividend Rate:
8.25% Payable Quarterly Current Strip Yield per Annum: 8.17%
(1)(2)Senior Notes Due 2025
Ticker: AIC Exchange: NYSE Per Annum Interest Rate: 6.75%
Current Strip Yield per Annum: 6.67%
(1)(2)Maturity Date: March 15, 2025
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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)
September 30, 2021 June 30, 2021 ASSETS
Cash and cash equivalents $ 21,166 $ 2,349 Restricted cash 217 — Restricted cash of consolidated VIE 3,267 4,456 Sold securities receivable — 34,456
Agency MBS 637,718 725,709
MSR financing receivables, at fair value 112,834 74,652 Mortgage credit investments 55,277 117,902 Mortgage loans of consolidated VIE, at fair value 16,516 35,778 Interest receivable of consolidated VIE 67 179 Single-family residential real estate 9,407 — Derivative assets, at fair value 2,004 881
Deposits 6,114 16,554
Other assets 15,022 17,181
Total assets $ 879,609 $ 1,030,097 LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements $ 553,983 $ 694,586 Secured debt of consolidated VIE, at fair value 7,350 28,465 Interest payable of consolidated VIE 52 99 Derivative liabilities, at fair value 3,020 2,327 Other liabilities 4,626 2,739 Long-term unsecured debt 85,901 73,129 Total liabilities 654,932 801,345 Common stockholders’ equity 187,776 192,419 Preferred stock liquidation preference 36,901 36,333 Total equity 224,677 228,752 Total liabilities and stockholders’ equity $ 879,609 $ 1,030,097 Shares outstanding (in thousands)
(1)31,464 32,411 Book value per common share
(2)$ 5.97 $ 5.94
"At risk" leverage ratio
(3)1.8 2.2 TBA net purchase commitment at cost $ 23,131 $ 607 Financing embedded in MSR financing receivables $ 11,548 — Assets and liabilities of consolidated VIE:
Restricted cash $ 3,267 $ 4,456 Mortgage loans, at fair value 16,516 35,778 Secured debt, at fair value (7,350) (28,465) Interest receivable 67 179 Interest payable (52) (99)
Net investment in consolidated VIE $ 12,448 $ 11,849
23
Statement of Comprehensive Income
(Unaudited, in thousands except per share amounts) Q3 2021 Q2 2021 Q1 2021 Q4 2020
Interest income
Agency mortgage-backed securities $ 2,660 $ 2,984 $ 2,784 $ 3,015 MSR financing receivables 1,945 1,390 358 — Mortgage credit investments 1,247 1,770 1,269 1,863 Mortgage loans of consolidated VIE 301 776 1,687 4,305 Interest and other income 193 125 161 314 Total interest income 6,346 7,045 6,259 9,497 Interest expense
Short-term secured debt 306 403 488 526 Secured debt of consolidated VIE 173 405 862 1,403 Long-term unsecured debt 1,435 1,150 1,151 1,154 Total interest expense 1,914 1,958 2,501 3,083 Net interest income 4,432 5,087 3,758 6,414 Single-family property operating expenses 36 — — — Investment gain (loss), net (1,313) (9,032) (6,763) 8,120 General and administrative expenses
Compensation and benefits 1,888 1,841 1,395 1,712 Other general and administrative expenses 1,009 1,349 1,242 1,361 Total general and administrative expenses 2,897 3,190 2,637 3,073 Net income (loss) 186 (7,135) (5,642) 11,461 Income tax provision (benefit) 436 (76) 398 — Dividend on preferred stock (731) (723) (723) (733) Net income (loss) available (attributable) to common stock $ (981) $ (7,782) $ (6,763) $ 10,728 Basic earnings (loss) per common share $ (0.03) $ (0.24) $ (0.20) $ 0.32 Diluted earnings (loss) per common share $ (0.03) $ (0.24) $ (0.20) $ 0.32 Weighted-average common shares outstanding (in thousands):
Basic 31,927 33,066 33,181 33,415
Diluted 31,927 33,066 33,181 33,554
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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 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 periodic dividends to stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist investors in understanding and evaluating the financial performance 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-GAAP financial 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 these effects should not be ignored when evaluating and analyzing our financial results. The Company believes that net income and comprehensive income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income and economic net interest income.
Reconciliation of GAAP Net Income to Non-GAAP Core Operating Income
(Unaudited, in thousands) Q3 2021 Q2 2021 Q1 2021 Q4 2020
Net income (loss) available (attributable) to common stock $ (981) $ (7,782) $ (6,763) $ 10,728 Add (less):
Total investment (gain) loss, net 1,313 9,032 6,763 (8,120) Stock-based compensation expense 520 537 503 405 Income tax provision (benefit) for TRS investment gain (loss) 351 (137) 387 — Depreciation of single-family residential properties 12 — — — Add back:
TBA dollar roll income 1,064 1,778 836 1,156
Interest rate swap net interest income (expense) (379) (1,187) (710) (62)
Non-GAAP core operating income $ 1,900 $ 2,241 $ 1,016 $ 4,107
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Fair Value / Notional Duration
(2)Agency MBS $ 637,718 5.0 Net long agency TBA position 22,250 2.0 MSR financing receivables 112,834 (17.0) Total interest rate sensitive assets $ 772,802 1.7 Agency MBS repo
(3)$ (533,123) (0.1) Interest rate swap agreements
(3)$ (215,000) (5.6)
Total liabilities and hedges (1.6)
Net duration gap 0.1
-100 bps -50 bps As of
9/30/2021 +50 bps +100 bps
Common Stockholders' Equity $ 160,003 $ 184,752 $ 187,776 $ 180,742 $ 167,400
Percentage Change -14.8% -1.6% -3.7% -10.9%
(1) Interest rate sensitivity of MBS and TBA commitments is derived from The Yield Book, a third-party model. Interest rate sensitivity of MSR financing receivables is derived from an internal 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) the effect of negative interest rates, (iii) no changes in MBS spreads, and (iv) no changes to the investment or hedge portfolio.
Excludes changes in values to mortgage credit investments and single-family residential properties.
(2) Duration for agency MBS is derived from the Citi’s “The Yield Book,” a third-party model. Duration for MSR financing receivables is derived from an internal 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.
(3) Total liability and hedge duration is expressed in asset units. Excludes unsecured debt.
(4) 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 value reflects an assumed spread weighted average duration of 6.3 years, which is a model-based assumption that is dependent upon the size and composition of our portfolio as well as economic conditions present as of September 30, 2021. The agency MBS spread sensitivity is based on assumptions resulting in certain limitations, including (i) no changes in interest rates, and (ii) no changes to the investment or hedge portfolio.
Interest Rate Sensitivity as of September 30, 2021 (1)
Book Value Sensitivity to Interest Rates and Spreads
Agency MBS Spread Sensitivity as of September 30, 2021 (4)
Agency MBS and MSR Portfolio Net Duration Gap as of September 30, 2021
-25 bps -10 bps As of
9/30/2021 +10 bps +25 bps
Common Stockholders' Equity $ 198,324 $ 191,995 $ 187,776 $ 183,557 $ 177,228
Percentage Change 5.6% 2.2% -2.2% -5.6%
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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
