UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): May 11, 2020 (May 11, 2020)

 

ARLINGTON ASSET INVESTMENT CORP.

(Exact name of Registrant as Specified in Its Charter)

 

 

Virginia

 

54-1873198

 

001-34374

(State or Other Jurisdiction

of Incorporation or Organization)

 

 

(I.R.S. Employer

Identification No.)

 

(Commission

File Number)

 

6862 Elm Street, Suite 320

McLean, VA 22101

(Address of principal executive offices) (Zip code)

(703) 373-0200

(Registrant’s telephone number including area code)

 

N/A

(Former name or former address, if changed from last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock

 

AI

 

NYSE

7.00% Series B Cumulative Perpetual Redeemable Preferred Stock

 

AI PrB

 

NYSE

8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock

 

AI PrC

 

NYSE

6.625% Senior Notes due 2023

 

AIW

 

NYSE

6.75% Senior Notes due 2025

 

AIC

 

NYSE

 


Item 2.02.

Results of Operations and Financial Condition.

Arlington Asset Investment Corp. (the “Company”) issued a press release on May 11, 2020 announcing its financial results for the quarter ended March 31, 2020. A copy of the press release is attached hereto as Exhibit 99.1.

The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 furnished pursuant to Item 9.01, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section. Furthermore, the information in this Current Report on Form 8-K, including Exhibit 99.1 hereto, shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.

Item 7.01Regulation FD Disclosure.

The Company has posted an updated investor presentation to its website, www.arlingtonasset.com.  A copy of the slide presentation is attached as Exhibit 99.2 hereto and incorporated herein by reference.  The foregoing information is not deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in filings under the Securities Act of 1933.

Forward-Looking Statements Disclaimer

This Current Report on Form 8-K contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding future results or expectations about our investments, interest rates, portfolio allocation, dividends, financing agreements, returns on invested capital, investment strategy, taxes, portfolio, earnings, book value, housing market, compensation, growth in capital, agency mortgage-backed security (“MBS”) spreads, prepayments, hedging instruments, duration, cash flow and benefit of deferred tax asset value.  Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “views,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “potential,” “prospective,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made.  Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control.  Forward-looking statements are further based on various operating and return assumptions. Caution must be exercised in relying on forward-looking statements.  Due to known and unknown risks, actual results may differ materially from expectations or projections. You should carefully consider these risks when you make a decision concerning an investment in our securities, along with the following factors, among others, that may cause our actual results to differ materially from those described in any forward-looking statements: 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, availability of, and our ability to deploy, capital; growing our business primarily through our current strategy of focusing on acquiring primarily agency MBS and mortgage credit investments; credit risks underlying the Company’s assets, especially related to the Company’s mortgage credit investments; our ability to forecast our tax attributes, which are based upon various facts and assumptions, our ability to protect and use our net operating losses and net capital losses  to offset future taxable income, including whether our shareholder rights plan will be effective in preventing an ownership change that would significantly limit our ability to utilize such losses; our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of these strategies; the effect of changes in prepayment rates, interest rates and default rates on our portfolio; the effect of governmental regulation and actions; our ability to roll our repurchase agreements on favorable terms, if at all; our liquidity; our asset valuation policies; our decisions with respect to, and ability to make, future dividends; investing in assets other than MBS or pursuing business activities other than investing in MBS; our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; our ability to qualify and maintain our qualification as a real estate investment trust under the Internal Revenue Code; competition for investment opportunities, including competition from the U.S. Department of Treasury and the U.S. Federal Reserve, for investments in agency MBS; the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government; mortgage loan prepayment activity, modification programs and future legislative action; changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval; failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; fluctuations of the value of our hedge instruments; fluctuating quarterly operating results; changes in laws and regulations and industry practices that may adversely affect our business; volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; our ability to successfully expand our business into areas other than investing in MBS; changes in, and our ability to remain in compliance with, law, regulations or governmental policies affecting our business; and the factors described in the sections entitled “Risk Factors” in our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and other documents filed by the Company with the SEC from time to time.  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 us. 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.

Item 9.01.

Financial Statements and Exhibits.

(d)

Exhibits.

 

99.1

Arlington Asset Investment Corp. Press Release dated May 11, 2020.

 

 

99.2

First Quarter 2020 Investor Presentation.

 

 

 


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

ARLINGTON ASSET INVESTMENT CORP.

 

 

 

 

Date:  May 11, 2020

 

 

 

 

By:

 

/s/ Richard E. Konzmann

 

Name:

 

Richard E. Konzmann

 

Title:

 

Executive Vice President, Chief Financial
Officer and Treasurer

 

 

ai-ex991_7.htm

Exhibit 99.1

 

 

Contacts:

Media: 703.373.0200 or ir@arlingtonasset.com 

Investors: Rich Konzmann at 703.373.0200 or ir@arlingtonasset.com

Arlington Asset Investment Corp. Reports First Quarter 2020 Financial Results

McLean, VA, May 11, 2020 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported net loss attributable to common shareholders of $94.9 million, or $2.59 per diluted common share, and non-GAAP core operating income of $6.2 million, or $0.17 per diluted common share, for the quarter ended March 31, 2020.  A reconciliation of non-GAAP core operating income to GAAP net income (loss) appears at the end of this press release.

First Quarter 2020 Financial Highlights

 

$2.59 per diluted common share of GAAP net loss

 

$0.17 per diluted common share of non-GAAP core operating income

 

$5.28 per common share of book value

 

1.5 to 1 “at risk” short term secured financing to investable capital ratio

 

“During the first quarter, the global health crisis caused by the COVID-19 pandemic rapidly led to an unprecedented forced shutdown of large portions of the global economy.  Given the health concerns, the Company continues to focus on the safety and well-being of our staff and stakeholders.  The uncertainty surrounding the magnitude and length of the economic impact associated with the pandemic quickly led to a significant risk-off move as liquidity and cash positions were prioritized leading to substantial liquidity strains in the financial markets.  The resulting extreme market volatility and dislocations led to agency mortgage spreads widening significantly until actions by the Federal Reserve to aggressively resume purchases of Treasury securities and agency mortgage-backed securities (“MBS”) improved liquidity and functioning of the financial markets.  Severe dislocations in the market for non-agency MBS along with uncertainty surrounding the size of potential credit losses led to substantial declines in the market prices of non-agency MBS during the quarter,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer.  “Having elected to substantially reduce risk throughout the first quarter by materially lowering leverage and significantly increasing liquidity, we see a spectrum of appealing investment opportunities now and arising over time as the full ramifications of the current economic shock likely follow an uncertain and inconsistent path forward.  With its current financial flexibility and liquidity position, the Company is positioned to capture the benefit of current and developing dislocations across sectors.  We are actively investing in and pursing attractive return opportunities to deploy capital through both non-proprietary and proprietary investments with existing and new partners.”

 

Other First Quarter Highlights

As of March 31, 2020, the Company’s mortgage investment portfolio totaled $722 million in fair value, consisting of $645 million of agency MBS and $77 million of mortgage credit investments.  Based on investable capital, the Company has allocated 85% and 15% of its capital to its agency MBS and mortgage credit investment strategies, respectively, as of March 31, 2020.  

The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. government agency, such as the Government National Mortgage Association (“Ginnie Mae”).  The Company’s mortgage credit investments generally include mortgage loans secured by residential or commercial real property or MBS collateralized by such mortgage loans, which are referred to as non-agency MBS.

As of March 31, 2020, the Company’s $645 million agency MBS investment portfolio was comprised entirely of specified agency MBS as follows:

 

$336 million of 3.0% coupon 30-year agency MBS

 

$67 million of 3.5% coupon 30-year agency MBS

 

$197 million of 4.0% coupon 30-year agency MBS

 

$45 million of 4.5% coupon 30-year agency MBS


 

As of March 31, 2020, the Company’s $645 million specified agency MBS portfolio had a weighted average amortized cost basis of $103.06 and a weighted average market price of $106.40.  The Company’s fixed-rate agency MBS are comprised of securities backed by specified pools of mortgage loans selected for their lower propensity for prepayment.  Weighted average pay-up premiums on the Company’s agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a generic to-be-announced (“TBA”) agency MBS, was approximately 0.56 percentage point as of March 31, 2020, compared to 1.07 percentage point as of December 31, 2019.  

During the first quarter of 2020, the Company sold agency MBS for gross sale proceeds of $3,171 million for a realized gain of $34 million.  The Company accounts for purchases and sales of agency MBS on the trade date with any amounts payable or receivable for unsettled security trades recorded as “purchased securities payable” or “sold securities receivable” in the consolidated balance sheets.  Included in the $3,171 million of gross sale proceeds is $1,479 million of agency MBS sales that settled in April 2020 and is reflected in the balance sheet line item “sold securities receivable.”

As of March 31, 2020, the Company’s $77 million mortgage credit investment portfolio was comprised of a $44 million commercial mortgage loan and $33 million of non-agency MBS collateralized by either commercial mortgage loans or business purpose residential mortgage loans.

During the first quarter of 2020, the Company purchased $49 million of mortgage credit investments and sold mortgage credit investments for gross sale proceeds of $30 million for a realized loss of $4 million.

As of March 31, 2020, the Company had a total of $2,036 million of repurchase agreements outstanding.  As of March 31, 2020, the Company had $1,977 million of repurchase agreements outstanding with a weighted average rate of 0.92% and remaining weighted average maturity of 15 days secured by an aggregate of $2,095 million of agency MBS at fair value, which includes $1,455 million at sale price of unsettled agency MBS sale commitments included in the line item “sold securities receivable” in the Company’s financial statements.  As of March 31, 2020, the Company had $28 million of repurchase agreements outstanding with a weighted average rate of 3.13% and remaining weighted average maturity of 5 days secured by an aggregate of $33 million of non-agency MBS at fair value and $8 million of agency MBS at fair value.  As of March 31, 2020, the Company also had $31 million of repurchase agreements outstanding with a weighted average rate of 3.00% and remaining average maturity of 315 days secured by a $45 million mortgage loan at fair value.  

The Company’s “at risk” short-term secured financing to investable capital ratio was 1.5 to 1 as of March 31, 2020 compared to 8.7 to 1 as of December 31, 2019.  The Company’s “at risk” short-term secured financing to investable capital is measured as the ratio of the sum of the Company’s repurchase agreement financing, net payable or receivable for unsettled securities and net contractual price of TBA commitments 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 first quarter of 2020, the Company satisfied all of its margin calls under its repurchase agreement financing arrangements in the normal course of business.

GAAP net interest income was $9.1 million for the first quarter of 2020 compared to $7.0 million for the fourth quarter of 2019, including the amortization of the Company’s net premium on its agency MBS of $4.4 million for the first quarter of 2020 compared to $6.1 million for the fourth quarter of 2019.  The Company’s weighted average yield on its agency MBS was 2.82% for the first quarter of 2020 compared to 2.81% for the fourth quarter of 2019, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 10.84% for the first quarter of 2020 compared to 12.11% for the fourth quarter of 2019.  The Company’s weighted average cost of repurchase agreement funding secured by agency MBS was 1.81% during the first quarter of 2020 compared to 2.09% during the fourth quarter of 2019. The Company’s weighted average cost of repurchase agreement funding secured by mortgage credit investments was 3.41% during the first quarter of 2020 compared to 3.19% during the fourth quarter of 2019.

The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost of borrowing and the value of its agency MBS portfolio including interest rate swap agreements, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, and options on agency MBS.  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 as net investment gains and losses in the Company’s financial statements.  

Under the terms of the Company’s interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives quarterly variable interest payments based upon the prevailing three-month London Interbank Offered Rate (“LIBOR”) on the date of reset. As of March 31, 2020, the Company had $600 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 1.73% and a remaining weighted average maturity of 1.6 years.  The Company’s weighted average

 


 

net receive rate of its interest rate swap agreements was 0.03% during the first quarter of 2020 compared to 0.24% during the fourth quarter of 2019.

As of March 31, 2020, the total notional amount of the Company’s interest rate swaps was 92% of the Company’s outstanding repurchase agreement funding and net TBA purchase commitments, adjusted for the receivable for unsettled trades that are pledged under the repurchase agreement funding, with a net duration gap of 0.8 years.  

Economic net interest income was $9.8 million for the first quarter of 2020 compared to $9.3 million for the fourth quarter of 2019.  Economic net interest income is comprised of net interest income determined in accordance with GAAP, TBA dollar roll income and net interest income or expense from interest rate swaps.  Economic net interest income is a non-GAAP financial measure that is described later in this press release.  

Excluding TBA dollar roll income, the Company had net investment gains on its investment portfolio of $7.3 million for the first quarter of 2020. On its related interest rate hedging instruments, the Company had net investment losses of $108.1 million, excluding interest rate swap net interest income. This results in a net investment loss on the Company’s hedged investment portfolio of $100.8 million, or $2.74 per diluted common share, for the first quarter of 2020.  

Distributions to Shareholders

The Company’s Board of Directors approved distributions to its Series B and Series C preferred shareholders of $0.4375 per share and $0.515625 per share, respectively, for the first quarter of 2020.  The distributions were paid on March 30, 2020 to shareholders of record as of February 28, 2020.  As previously disclosed, consistent with the Company’s intent to raise cash and strengthen its balance sheet in light of the unprecedented conditions created by the COVID-19 pandemic, the Company’s Board of Directors determined not to declare a dividend on its common stock for the first quarter of 2020.  The Company’s Board of Directors will continue to evaluate the payment of dividends as market conditions evolve, and no definitive determination has been made at this time regarding the declaration of future dividends.  The Company’s previously announced distribution to common shareholders of $0.225 per share that was paid on February 3, 2020 to shareholders of record as of December 31, 2019 will be applied to the Company’s distribution requirements as a real estate investment trust (“REIT”) for the year ending December 31, 2020.

The Company intends to elect to be taxed as a REIT for its taxable year ended December 31, 2019 upon the filing of its tax return for such taxable year. The Company is organized and operated in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes and intends to continue to be organized and operated in such a manner.  As a REIT, distributions to shareholders will generally be taxable as ordinary income that are not eligible to be taxed as qualified dividends.  However, a portion of such distributions may be designated as long-term capital gain dividends to the extent that such portion is attributable to the Company’s sale of capital assets held for more than one year.  Non-corporate taxpayers may deduct up to 20% of dividends received from a REIT that are not designated as capital gain dividends or qualified dividend income, subject to certain limitations.  Distributions in excess of the Company’s current and accumulated earnings and profits will be treated as a tax-free return of capital to the extent of each shareholder’s tax basis in the Company’s stock and as capital gain thereafter.

Conference Call

The Company will hold a conference call for investors at 10:00 A.M. Eastern Time on Monday, May 11, 2020 to discuss the Company’s first quarter 2020 results.

Investors may listen to the earnings call via the internet at:  http://www.arlingtonasset.com/index.php?s=19.  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, www.arlingtonasset.com.  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: AI) currently invests primarily in mortgage-related and other assets and intends to elect to be taxed as a REIT upon filing its tax return for its taxable year ending December 31, 2019.  The Company is headquartered in the Washington, D.C. metropolitan area.  For more information, please visit www.arlingtonasset.com.

 

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.

Financial data to follow

 


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

89,376

 

 

$

19,636

 

Interest receivable

 

 

6,126

 

 

 

10,663

 

Sold securities receivable

 

 

1,479,396

 

 

 

71,199

 

Agency mortgage-backed securities, at fair value

 

 

645,001

 

 

 

3,768,496

 

Non-agency mortgage-backed securities, at fair value

 

 

32,623

 

 

 

33,501

 

Mortgage loans, at fair value

 

 

44,614

 

 

 

45,000

 

Derivative assets, at fair value

 

 

16,963

 

 

 

1,417

 

Deposits

 

 

33,008

 

 

 

37,123

 

Other assets

 

 

11,200

 

 

 

13,079

 

Total assets

 

$

2,358,307

 

 

$

4,000,114

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

2,036,466

 

 

$

3,581,237

 

Interest payable

 

 

1,199

 

 

 

4,666

 

Accrued compensation and benefits

 

 

832

 

 

 

3,626

 

Dividend payable

 

 

37

 

 

 

8,494

 

Derivative liabilities, at fair value

 

 

11,828

 

 

 

8

 

Other liabilities

 

 

753

 

 

 

507

 

Long-term unsecured debt

 

 

74,383

 

 

 

74,328

 

Total liabilities

 

 

2,125,498

 

 

 

3,672,866

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock (liquidation preference of $38,851)

 

 

37,198

 

 

 

37,214

 

Common stock

 

 

368

 

 

 

368

 

Additional paid-in capital

 

 

2,049,741

 

 

 

2,049,292

 

Accumulated deficit

 

 

(1,854,498

)

 

 

(1,759,626

)

Total equity

 

 

232,809

 

 

 

327,248

 

Total liabilities and equity

 

$

2,358,307

 

 

$

4,000,114

 

Book value per common share (1)

 

$

5.28

 

 

$

7.86

 

Common shares outstanding (in thousands) (2)

 

 

36,711

 

 

 

36,692

 

 

 

 

 

 

 

 

 

 

(1) Book value per common share is calculated as total equity 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.

 

 

 

 

 

 

 

 

 

 

 

 

 


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

September 30,

2019

 

 

June 30,

2019

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

23,388

 

 

$

27,927

 

 

$

28,455

 

 

$

32,275

 

Non-agency mortgage-backed securities

 

 

731

 

 

 

165

 

 

 

4

 

 

 

14

 

Mortgage loans

 

 

711

 

 

 

8

 

 

 

 

 

 

 

Other

 

 

143

 

 

 

155

 

 

 

215

 

 

 

428

 

Total interest income

 

 

24,973

 

 

 

28,255

 

 

 

28,674

 

 

 

32,717

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term secured debt

 

 

14,592

 

 

 

19,970

 

 

 

22,721

 

 

 

24,866

 

Long-term unsecured debt

 

 

1,240

 

 

 

1,248

 

 

 

1,261

 

 

 

1,269

 

Total interest expense

 

 

15,832

 

 

 

21,218

 

 

 

23,982

 

 

 

26,135

 

Net interest income

 

 

9,141

 

 

 

7,037

 

 

 

4,692

 

 

 

6,582

 

Investment advisory fee income

 

 

 

 

 

82

 

 

 

 

 

 

 

Investment (loss) gain, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on trading investments, net

 

 

3,094

 

 

 

(268

)

 

 

16,890

 

 

 

42,239

 

(Loss) gain from derivative instruments, net

 

 

(102,600

)

 

 

23,440

 

 

 

(25,353

)

 

 

(69,072

)

Other, net

 

 

(562

)

 

 

136

 

 

 

232

 

 

 

150

 

Total investment (loss) gain, net

 

 

(100,068

)

 

 

23,308

 

 

 

(8,231

)

 

 

(26,683

)

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,858

 

 

 

2,012

 

 

 

2,833

 

 

 

2,233

 

Other general and administrative expenses

 

 

1,385

 

 

 

1,005

 

 

 

1,365

 

 

 

1,191

 

Total general and administrative expenses

 

 

3,243

 

 

 

3,017

 

 

 

4,198

 

 

 

3,424

 

Net (loss) income

 

 

(94,170

)

 

 

27,410

 

 

 

(7,737

)

 

 

(23,525

)

Dividend on preferred stock

 

 

(774

)

 

 

(774

)

 

 

(774

)

 

 

(774

)

Net (loss) income (attributable) available to

   common stock

 

$

(94,944

)

 

$

26,636

 

 

$

(8,511

)

 

$

(24,299

)

Basic (loss) earnings per common share

 

$

(2.59

)

 

$

0.73

 

 

$

(0.23

)

 

$

(0.67

)

Diluted (loss) earnings per common share

 

$

(2.59

)

 

$

0.72

 

 

$

(0.23

)

 

$

(0.67

)

Weighted average common shares outstanding (in

   thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,711

 

 

 

36,628

 

 

 

36,572

 

 

 

36,533

 

Diluted

 

 

36,711

 

 

 

36,750

 

 

 

36,572

 

 

 

36,533

 

 

 


 

Non-GAAP Core Operating Income

 

In addition to the Company’s results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”), the Company also reports “non-GAAP core operating income.”  The Company defines core operating income as “economic net interest income” and investment advisory fee income less “core general and administrative expenses” and preferred stock dividends.

 

Economic Net Interest Income

 

Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of interest expense incurred from all of our interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions.  Economic net interest income is comprised of the following:

 

 

net interest income determined in accordance with GAAP;

 

 

TBA agency MBS dollar roll income, which is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the “spot” sale of the same security, earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settling purchase; and

 

 

net interest income earned or expense incurred from interest rate swap agreements.

 

In the Company’s consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the net interest income earned or expense incurred from interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.  

 

Core General and Administrative Expenses

 

Core general and administrative expenses are 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 and non-recurring expense.

 

Non-GAAP Core Operating Income Results

 

The following table presents the Company’s computation of economic net interest income and core operating income for the last four fiscal quarters (unaudited, amounts in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

September 30,

2019

 

 

June 30,

2019

 

GAAP net interest income

 

$

9,141

 

 

$

7,037

 

 

$

4,692

 

 

$

6,582

 

TBA dollar roll income

 

 

105

 

 

 

132

 

 

 

923

 

 

 

1,995

 

Interest rate swap net interest income

 

 

592

 

 

 

2,126

 

 

 

4,445

 

 

 

3,769

 

Economic net interest income

 

 

9,838

 

 

 

9,295

 

 

 

10,060

 

 

 

12,346

 

Investment advisory fee income

 

 

 

 

 

82

 

 

 

 

 

 

 

Core general and administrative expenses

 

 

(2,850

)

 

 

(2,140

)

 

 

(2,797

)

 

 

(3,207

)

Preferred stock dividend

 

 

(774

)

 

 

(774

)

 

 

(774

)

 

 

(774

)

Non-GAAP core operating income

 

$

6,214

 

 

$

6,463

 

 

$

6,489

 

 

$

8,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP core operating income per

   diluted common share

 

$

0.17

 

 

$

0.18

 

 

$

0.18

 

 

$

0.23

 

Weighted average diluted common

   shares outstanding

 

 

36,817

 

 

 

36,750

 

 

 

36,751

 

 

 

36,644

 

 

 


 

The following table provides a reconciliation of GAAP net income (loss) to non-GAAP core operating income for the last four fiscal quarters (unaudited, amounts in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

September 30,

2019

 

 

June 30,

2019

 

GAAP net (loss) income

 

$

(94,170

)

 

$

27,410

 

 

$

(7,737

)

 

$

(23,525

)

Add (less):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment loss (gain), net

 

 

100,068

 

 

 

(23,308

)

 

 

8,231

 

 

 

26,683

 

Stock-based compensation expense

 

 

393

 

 

 

877

 

 

 

913

 

 

 

217

 

Preferred stock dividend

 

 

(774

)

 

 

(774

)

 

 

(774

)

 

 

(774

)

Non-recurring expense

 

 

 

 

 

 

 

 

488

 

 

 

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TBA dollar roll income

 

 

105

 

 

 

132

 

 

 

923

 

 

 

1,995

 

Interest rate swap net interest income

 

 

592

 

 

 

2,126

 

 

 

4,445

 

 

 

3,769

 

Non-GAAP core operating income

 

$

6,214

 

 

$

6,463

 

 

$

6,489

 

 

$

8,365

 

 

 

Non-GAAP core operating income is 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 common stockholders.  The Company believes that non-GAAP core operating income assists 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 this non-GAAP financial measure 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.  For example, the economic cost or benefit of hedging instruments other than interest rate swap agreements, such as U.S. Treasury note futures or options on U.S. Treasury note futures, do not affect the computation of non-GAAP core operating income.  In addition, the Company’s calculation of non-GAAP core operating income may not be comparable to other similarly titled measures of other companies.  Therefore, the Company believes that net income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income.  Furthermore, there may be differences between non-GAAP core operating income and taxable income determined in accordance with the Internal Revenue Code.  As a REIT, the Company will be required to distribute at least 90% of its REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of its taxable income in order to not be subject to any U.S. Federal or state corporate income taxes.  Accordingly, non-GAAP core operating income may not equal the Company’s distribution requirements as a REIT.

 

The following tables present information on the Company’s investment and hedge portfolio as of March 31, 2020 (unaudited, dollars in thousands):

Mortgage Investments:

 

 

 

Fair Value

 

Agency MBS:

 

 

 

 

Specified agency MBS

 

$

645,001

 

Net long agency TBA position

 

 

 

Total agency MBS

 

 

645,001

 

Mortgage credit investments:

 

 

 

 

Non-agency MBS

 

 

32,623

 

Mortgage loans

 

 

44,614

 

Total mortgage credit investments

 

 

77,237

 

Total mortgage investments

 

$

722,238

 

 

Specified Agency MBS:

 

 


 

 

 

Unpaid Principal Balance

 

 

Net Unamortized Purchase Premiums

 

 

Amortized Cost Basis

 

 

Net Unrealized Gain (Loss)

 

 

Fair Value

 

 

Market Price

 

 

Coupon

 

 

Weighted

Average

Expected

Remaining

Life

 

30-year fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.0%

 

$

318,565

 

 

$

9,447

 

 

$

328,012

 

 

$

7,615

 

 

$

335,627

 

 

$

105.36

 

 

 

3.00

%

 

 

5.7

 

3.5%

 

 

62,693

 

 

 

2,161

 

 

 

64,854

 

 

 

1,913

 

 

 

66,767

 

 

 

106.50

 

 

 

3.50

%

 

 

3.9

 

4.0%

 

 

183,338

 

 

 

5,154

 

 

 

188,492

 

 

 

8,968

 

 

 

197,460

 

 

 

107.70

 

 

 

4.00

%

 

 

3.3

 

4.5%

 

 

41,623

 

 

 

1,817

 

 

 

43,440

 

 

 

1,693

 

 

 

45,133

 

 

 

108.43

 

 

 

4.50

%

 

 

3.5

 

5.5%

 

 

12

 

 

 

 

 

 

12

 

 

 

2

 

 

 

14

 

 

 

114.20

 

 

 

5.50

%

 

 

5.6

 

Total/weighted-average

 

$

606,231

 

 

$

18,579

 

 

$

624,810

 

 

$

20,191

 

 

$

645,001

 

 

$

106.40

 

 

 

3.46

%

 

 

4.6

 

 

Net Long Agency TBA Positions:

 

 

 

Notional Amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Long (Short) Position

 

 

Implied Cost

Basis

 

 

Implied

Fair Value

 

 

Net Carrying

Amount

 

2.5% 30-year MBS purchase commitments

 

$

450,000

 

 

$

451,422

 

 

$

465,961

 

 

$

14,539

 

2.5% 30-year MBS sale commitments

 

 

(450,000

)

 

 

(455,930

)

 

 

(465,961

)

 

 

(10,031

)

3.0% 30-year MBS purchase commitments

 

 

100,000

 

 

 

102,477

 

 

 

104,875

 

 

 

2,398

 

3.0% 30-year MBS sale commitments

 

 

(100,000

)

 

 

(103,133

)

 

 

(104,875

)

 

 

(1,742

)

Total TBA commitments, net

 

$

 

 

$

(5,164

)

 

$

 

 

$

5,164

 

 

Mortgage Credit Investments:

 

 

 

Unpaid Principal Balance

 

 

Net Unamortized Original Purchase Premiums (Discounts)

 

 

Amortized Original Cost Basis

 

 

Net Unrealized Gain (Loss)

 

 

Fair Value (1)

 

 

Market Price

 

Non-agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small balance pool commercial MBS

 

$

20,690

 

 

$

(1,728

)

 

$

18,962

 

 

$

(5,216

)

 

$

13,746

 

 

$

66.11

 

Single asset commercial MBS

 

 

17,500

 

 

 

32

 

 

 

17,532

 

 

 

(7,821

)

 

 

9,711

 

 

 

55.30

 

Business purpose residential MBS

 

 

11,731

 

 

 

74

 

 

 

11,805

 

 

 

(2,655

)

 

 

9,150

 

 

 

78.00

 

Interest-only residential MBS

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

16

 

 

 

0.16

 

Total/weighted-average non-agency MBS

 

 

49,921

 

 

 

(1,622

)

 

 

48,315

 

 

 

(15,692

)

 

 

32,623

 

 

 

65.11

 

Commercial mortgage loan

 

 

45,000

 

 

 

 

 

 

45,000

 

 

 

(386

)

 

 

44,614

 

 

 

99.14

 

Total/weighted-average

 

$

94,921

 

 

$

(1,622

)

 

$

93,315

 

 

$

(16,078

)

 

$

77,237

 

 

$

81.25

 

 

 

(1)

For non-agency MBS, includes contractual accrued interest receivable.

 

Interest Rate Swap Agreements:

 

 

 

 

 

 

 

Weighted-average:

 

 

 

Notional Amount

 

 

Fixed Pay Rate

 

 

Variable Receive Rate

 

 

Net Receive (Pay) Rate

 

 

Remaining Life (Years)

 

Years to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 3 years

 

$

500,000

 

 

 

1.78

%

 

 

1.65

%

 

 

(0.13

)%

 

 

1.0

 

3 to less than 5 years

 

 

100,000

 

 

 

1.52

%

 

 

0.77

%

 

 

(0.75

)%

 

 

4.7

 

Total / weighted-average

 

$

600,000

 

 

 

1.73

%

 

 

1.50

%

 

 

(0.23

)%

 

 

1.6

 

 


 

 

 

ai-ex992_760.pptx.htm

Slide 0

Investor Presentation First Quarter 2020 Exhibit 99.2

Slide 1

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.

Slide 2

Contents SECTION SLIDE NUMBER Company Snapshot Slide 3 Q1 2020 Financial Results and Portfolio Update Slide 6 Additional Market Data and Financial Information Slide 18

Slide 3

COMPANY SNAPSHOT

Slide 4

Publicly Traded Capital Class A Common Stock Ticker: AI Exchange: NYSE Market Capitalization: $95 million (1) Senior Notes Due 2023 Ticker: AIW Exchange: NYSE Per Annum Interest Rate: 6.625% Current Strip Yield per Annum: 10.39%(1)(2) Maturity Date: May 1, 2023 Senior Notes Due 2025 Ticker: AIC Exchange: NYSE Per Annum Interest Rate: 6.75% Current Strip Yield per Annum: 10.87%(1)(2) Maturity Date: March 15, 2025 Series B Cumulative Perpetual Redeemable Preferred Stock Ticker: AI PrB Exchange: NYSE Per Annum Dividend Rate: 7.00% Payable Quarterly Current Strip Yield per Annum: 10.51%(1)(2) As of May 7, 2020. Source: Bloomberg Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock Ticker: AI PrC Exchange: NYSE Per Annum Dividend Rate: 8.25% Payable Quarterly Current Strip Yield per Annum: 12.20%(1)(2)

Slide 5

Company Snapshot Real estate investment trust (“REIT”) focused primarily 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 or other mortgage related investments NYSE Ticker AI Share Price (5/7/20) $2.58 Book Value Per Common Share (3/31/20) $5.28 GAAP Net Loss per Diluted Share (Q1 ‘20) $(2.59) Non-GAAP Core Operating Income per Diluted Share (Q1 ‘20) (1) $0.17 Common Equity Market Cap (5/7/20) $95 million Mortgage Investment Portfolio (3/31/20) $722 million Investable Capital (3/31/20) (2) $307 million A reconciliation of non-GAAP core operating income to GAAP net income (loss) available (attributable) to common stock is provided on slide 23. Investable capital represents shareholders’ equity plus long-term unsecured debt. Arlington Asset Investment Corp. Summary

Slide 6

Q1 2020 FINANCIAL RESULTS AND PORTFOLIO UPDATE

Slide 7

Q1 2020 Financial Highlights $2.59 GAAP net loss per common share $0.17 non-GAAP core operating income (1) per diluted common share 9.2% annualized core operating income return on average common equity (2) $5.28 book value per common share as of March 31, 2020 Decrease of 32.8% from $7.86 as of December 31, 2019 1.5 to 1 “at risk” short-term secured financing to investable capital ratio (3) as of March 31, 2020 Decrease from an 8.7 to 1 ratio as of December 31, 2019 The Company did not declare a common stock dividend Enabled the Company to preserve liquidity during volatile market conditions related to the COVID-19 pandemic A reconciliation of non-GAAP core operating income to GAAP net income (loss) available (attributable) to common stock is provided on slide 23. See slide 15 for further information. Calculated the ratio of the sum of repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward price of TBA commitments less cash and cash equivalents compared to investable capital. Investable capital is calculated as the sum of stockholders’ equity and long-term unsecured debt.

Slide 8

Investment Portfolio Allocation as of March 31, 2020 Investable capital allocated to mortgage credit assets is calculated as non-agency MBS plus mortgage loans less the short-term secured debt collateralized buy such assets less cash available to satisfy repurchase agreements collateralized by non-agency MBS. Remaining investable capital is allocated to agency MBS Calculated as [short-term secured financing collateralized by MBS +(-) net payable (receivable) for unsettled securities – allocated cash] divided by the allocated investable capital. Asset Allocation Investable Capital Allocation

Slide 9

As of March 31, 2020 $0.65 Billion Fair Value As of December 31, 2019 $3.77 Billion Fair Value Agency MBS Investment Portfolio Allocation Specified Pool vs. TBA Allocation (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 December 31, 2019 As of March 31, 2020

Slide 10

Specified Agency MBS Yield Performance Historical Quarterly Prepayments (2) and GAAP Asset Yield Performance: Q1 2020 GAAP Prepayments and Asset Yield Performance (dollars in thousands): Unpaid principal balance. 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.

Slide 11

Hedging Update Interest Rate Swaps as of March 31, 2020 (dollars in thousands): 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 the Chicago 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 expected to change if interest rates move in a parallel manner. Q1 2020 Interest Rate Swap Activity

Slide 12

Mortgage Credit Investments Update Mortgage Credit Investments as of March 31, 2020 (dollars in thousands): For non-agency MBS, includes contractual accrued interest receivable.

Slide 13

Financing Update 13 counterparties with access to 19 total counterparties Less than 10% of equity-at-risk with any one counterparty 9.8% of equity-at-risk with largest counterparty 36.8% of equity-at-risk with five largest counterparties Diversified Funding Sources As of March 31, 2020 (dollars in thousands): The Company’s MBS repo agreements generally have one-month terms while the Company receives three-month LIBOR on its interest rate swaps Increases in the spread between three- and one-month LIBOR generally positively impact the Company’s economic funding costs (and vice versa) Agency MBS Repo Rate vs. One-Month LIBOR One-Month vs. Three-Month LIBOR The spread of repo financing rates over one-month LIBOR has increased in recent quarters Includes $1,376,603 in repo collateralized by agency MBS sold as of March 31, 2020 for settlement in April 2020. Includes $32,607 and $8,623 at fair value of non-agency and agency MBS collateral, respectively.

Slide 14

Non-GAAP Core Operating Income (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 23. Non-GAAP Core Operating Income Per Diluted Share Rollforward – Q1 2020 vs. Q4 2020

Slide 15

Core Operating Income Return on Equity For agency MBS, based on GAAP interest income and weighted average GAAP amortized cost basis for the period. For mortgage credit investments, based on GAAP interest income and weighted average fair value for the period. 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. 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). Average total investable capital allocated to mortgage credit investments is calculated as the weighted average fair value of mortgage credit investments less the weighted average repurchase agreements collateralized by mortgage credit investments for the period. Remaining investable capital is allocated to agency MBS. Expressed as an annualized percentage of average common equity for the period. Expressed as an annualized percentage of average common equity for the period. For example, for the first quarter of 2020, calculated as $0.1 million in dollar roll income (representing an implied net interest spread of 0.96% on a weighted average cost basis of $43.8 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). 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. 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.

Slide 16

Agency MBS Portfolio Weighted Average Statistics 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. 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 agency MBS, plus TBA dollar roll income, less agency MBS repurchase agreement interest expense, less interest rate swap net interest expense.

Slide 17

Book Value Per Share Rollforward Calculated based upon weighted average diluted shares outstanding during the quarter. Excludes TBA dollar roll income, which is included in non-GAAP core operating income. Excludes net interest income or expense incurred from interest rate swap agreements, which is included in non-GAAP core operating income.

Slide 18

ADDITIONAL MARKET DATA AND FINANCIAL INFORMATION

Slide 19

Market Data (1)(2) 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. Source: Bloomberg

Slide 20

Well Matched Hedging Can Protect Profitability in Agency MBS 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 Agency mortgage principal repayments are reinvested at then-current investment spreads Agency 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 149 bps

Slide 21

Balance Sheet Represents shares of common stock outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock. Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. 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.

Slide 22

Statement of Comprehensive Income

Slide 23

Non-GAAP Core Operating Income Reconciliation (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. 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 and occupation license tax from Arlington County, Virginia for the 2018 tax year. Reconciliation of GAAP net income to non-GAAP core operating income:

Slide 24

Specified Agency MBS Investment Portfolio Unpaid principal balance. WAC represents the weighted average coupon of the underlying collateral. Loan age represents the weighted average age of the underlying collateral. Actual 3-month constant prepayment rate (“CPR”) represents annualized 3-month CPR published in April 2020 for securities held as of March 31, 2020. Remaining life represents the weighted average expected remaining life of the securities based on expected future cash flows as estimated by Citi’s “The Yield Book,” a third-party model. 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. Specified pools of loans with original balances between $150K and $175K. Specified pools of loans with original balances between $175K and $200K. Other specified pools primarily include pools of loans secured by properties in certain geographical areas. Fixed-Rate Agency MBS Selected for Favorable Prepayment Characteristics as of March 31, 2020

Slide 25

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. Total liability and hedge duration is expressed in asset units. Excludes unsecured debt. Excludes repurchase agreements collateralized by agency MBS sold as of March 31, 2020 that settled after quarter-end. 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 MBS spreads, and (iii) no changes to the investment or hedge portfolio. Excludes mortgage credit investments. Agency MBS Portfolio Net Duration Gap as of March 31, 2020 Interest Rate Sensitivity as of March 31, 2020 (3) Book Value Sensitivity to Interest Rates

Slide 26

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 4.4 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 March 31, 2020. 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. Agency MBS Spread Sensitivity as of March 31, 2020 (1) Historical Agency MBS to U.S. Treasury Yield Spread 107 bps 134 bps Book Value Sensitivity to Agency MBS Spreads 3/19 – 158 bps 3/31 – 113 bps 3/19 – 180 bps 3/31 – 127 bps