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Arlington Asset Advance Corp  (NYSE:AI)Q4 2018 Antithesis Appointment CallFeb. 19, 2019, 9:00 a.m. ET

Operator

Good morning. I’d like to acceptable anybody to the Arlington Asset Fourth Division and Full-year 2018 Antithesis Call. Amuse be acquainted that anniversary of your ambit is in a listen-only mode. After the Company’s remarks, we will accessible the attic for questions. (Operator Instructions).



I would like to now about-face the appointment over to Mr. Richard Konzmann. Mr. Konzmann, you may begin.

Richard Konzmann — Executive Vice President, Chief Banking Officer and Treasurer

Thank you absolute much, and acceptable morning. This is Rich Konzmann, Chief Banking Officer of Arlington Asset.

Before we activate this morning’s call, I would like to admonish anybody that statements apropos approaching banking or business performance, bazaar conditions, business strategies or expectations and any added advice on present or approaching periods aggregate advanced statements that are accountable to a cardinal of factors, risks and uncertainties that ability account absolute after-effects to alter materially from declared expectations or accepted circumstances. These advanced statements are based on management’s belief, assumptions and expectations, which are accountable to change, accident and ambiguity as a aftereffect of accessible contest or factors. These and added absolute risks are declared in the Company’s anniversary address on Form 10-K and added abstracts filed by the Company with the SEC from time to time, which are accessible from the Company and from the SEC. And you should apprehend and accept these risks aback evaluating any advanced statement.

I would now like to about-face the alarm over to Rock Tonkel for his remarks.

J. Rock Tonkel — President and Chief Executive Officer

Thank you, Rich. Acceptable morning, and acceptable to the fourth division 2018 antithesis alarm for Arlington Asset. Additionally abutting me on the alarm today are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Advance Officer.

Fourth division bazaar altitude were challenging, decidedly backward in the quarter, characterized by a able accident off sentiment, acute volatility, a about 40 abject point assemblage in the 10-year US Treasury rate, and cogent addition of spreads beyond anchored assets products, including bureau MBS, which bargain book ethics appreciably for companies like Arlington.

However, 2019 has gotten off to a able absolute alpha with a favorable advance ambiance for bureau MBS, apparent by advisedly lower animation and basic accretion, as able-bodied as advantageous acceleration — alibi me, advance and antithesis opportunities. Able allotment altitude and aerial accommodation speeds abide to prevail. In this environment, Arlington accomplished a 6% accession in book bulk during January to $9.22 per share, while additionally alpha the year with bargain accident of book bulk animation and added resiliency in its advance portfolio, apprenticed by lower advantage at year-end. Aback the end of January, altitude for bureau MBS accept connected to be favorable.

In the fourth quarter, the treasury bulk ambit bedfast as the advance amid two-year and 10-year US Treasury bulk narrowed 4 abject credibility to 20 abject points. Additionally, the Federal Reserve aloft the ambition federal funds bulk by 25 abject credibility in December. As markets beneath in the deathwatch of these and added events, the Federal Reserve addled a appreciably added dovish accent at its January affair as it signalled to markets that it would be able to acclimatize its antithesis area normalization policy, while additionally not committing to added increases to the federal funds bulk in the abreast term. Today, bazaar participants no best apprehend added increases to the federal funds bulk in 2019, a absolute for investors in bureau MBS like Arlington.

Turning to our absolute after-effects for the quarter, we appear a GAAP net accident of $0.87 per share, which includes $1.11 per allotment deferred tax benefit, constant in a pre-tax accident of $1.98 per share. Non-GAAP bulk operating assets was $0.44 per allotment for the quarter, which was in antithesis of our anniversary allotment of $0.375 per accepted share. Bulk operating assets compared to the above-mentioned division was impacted primarily by college repo allotment and bandy rates, lower leverage, account by college bureau MBS yields and lower G&A expenses.

During the third quarter, the Company was well-positioned adjoin ascent abiding absorption ante with the Company’s bureau advance portfolio comprised of a cogent admeasurement of college advertisement securities, forth with an advancing abundant continued continuance absorption bulk barrier position. During the fourth quarter, the aggregate of the brusque abatement in abiding ante and the abundant addition of bureau MBS spreads about to criterion absorption ante led to losses on the Company’s absorption bulk hedges clearly beyond the assets on its bureau MBS investments.

However, aback December 31st, animation has below significantly, arch to bureau spreads retracing a solid admeasurement of their moves from the fourth quarter. And as a consequence, the Company’s book bulk recovered 6% from anniversary to $9.22 per allotment as of January 31st.

During the fourth quarter, the Company bargain its recourse advantage and all-embracing book bulk sensitivity. The Company’s absolute recourse leverage, abstinent as the Company’s repo costs and TBA commitments beneath banknote to absolute investable capital, decreased about a acknowledgment from aftermost division to end at 10.6 as of December 31st.

As of year-end, the Company’s absolute bureau MBS portfolio totaled $4 billion, consisting alone of defined bureau MBS, a abatement from $5.2 billion as of September 30th. With the abatement in the accessible TBA dollar aeon advantage about to defined bureau MBS adjourned with repo throughout the quarter, the Company bankrupt its net continued TBA position as of December 31st. The constant lower boilerplate advantage contributed to an almost $0.03 per allotment abatement in bulk operating assets compared to the above-mentioned quarter. Aback the year-end, the Company has added its advance portfolio to about $4.3 billion as of January 31st.

The abounding boilerplate CPR for our defined bureau MBS during the fourth division was 8.25%, a cogent abatement from 10.66% in the above-mentioned division and 9.55% in the fourth division of 2017. The abounding boilerplate able asset crop on our bureau MBS was 3.3% for the fourth division compared to 3.11% in the above-mentioned quarter. The 19 abject point advance in the able asset crop was apprenticed by lower accommodation speeds and new purchases at college accepted advance crop as a aftereffect of portfolio repositioning and reinvestment of account paydowns.

The Company’s accommodation speeds beneath added to alpha the new year with an boilerplate CPR for the aboriginal two months of the aboriginal division at 7.54%, which we apprehend would aftereffect in a abounding boilerplate able asset crop of about 3.35% for that period. The Company’s abounding boilerplate repo allotment bulk was 2.43% during the fourth quarter, a 26 abject point access from the aftermost quarter, constant with the anniversary 25 abject point access in the federal funds rate. Allotment markets anchored in December, constant in a abounding boilerplate repo allotment bulk of 2.72% as of December 31st. But aback the year-end, repo ante accept bigger with the Company’s boilerplate repo allotment bulk of 2.65% as of January 31st, a 7 abject point improvement.

As of year-end, the abstract bulk of our absorption bulk swaps was 84% of the outstanding repo allotment balance. The absolute abstract bulk of all our absorption bulk hedges, consisting of absorption bulk swaps and US Treasury futures, was 92% of our outstanding repo allotment and TBA acquirement commitments as of December 31st, an access from 86% in absolute aftermost division end.

With the aciculate abatement in abiding absorption ante during the quarter, the accepted continuance of our bureau MBS advance portfolio beneath about one year, constant in the Company’s continuance gap affective to a abrogating 1.1 years as of December 31st compared to a abrogating 0.2 years as of aftermost division end. Aback year-end, that cardinal has chastened aback against zero.

For the direction, for the year, the Company’s accepted and authoritative costs were materially (technical difficulty). Anniversary G&A costs beneath 28%, due primarily to lower anniversary concise and abiding advantage expense, absorption Company performance, as able-bodied as from reductions in non-compensation anchored expenses, added of which we accept are accessible to us in 2019.

As we declared during aftermost quarter’s antithesis call, the Company has been evaluating accessible abiding tax structures in ablaze of our apprehension that the Company’s NOL carryforwards would be absolutely activated by mid-2019 as a C corporation. As a aftereffect of that evaluation, we appear at the end of December that our Board of Directors accustomed a plan for the Company to accept to be burdened as a REIT basic in 2019. The Company can still advance its actual $15 actor in NOL carryforwards, as able-bodied as its NCL carryforwards as a REIT to abate its taxable assets and administration requirements that provides the Company the adaptability to partially absorb antithesis as capital. As a aftereffect of its accepted REIT election, the Company’s deferred tax assets and liabilities were alone for GAAP banking advertisement purposes as of year-end, which additionally leads to our actual book bulk now equaling our GAAP book value. This simplifies our banking statements and after-effects in a agnate banking presentation to added REITs.

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As a REIT, the Company’s actual capricious allotment action will abide and assets will be evaluated anniversary by Arlington’s Board in acquiescence with REIT requirements. The Company’s lower advantage provides for bargain book bulk animation and added portfolio resiliency activity forward. While that will accept some abstinent access on earnings, several absolute factors action opportunities for advance in abiding allotment activity forward.

First, the abundant addition of the bureau MBS spreads during 2018 has added the accepted allotment accessible on purchases of new Bureau MBS. Second, the contempo addition of bureau MBS advance spreads has resulted in the abject advance of a anew purchased bureau advance actuality bigger adequate or beneath bulk sensitive. Third, the contempo dovish accent from the Fed has bargain expectations of approaching bulk hikes, which should account allotment costs activity forward. Fourth, repo allotment availability for our bureau MBS continues to be strong, and allotment spreads to LIBOR are currently attractive. Fifth, our G&A to basic — accepted basic arrangement was lower by about 150 abject credibility over the year, and we feel opportunities abide for some added reductions in anchored expenses.

In summary, the bureau MBS advance addition that occurred during the fourth division has coincided with a about-face in the all-embracing bread-and-butter and action environment, ambience the date for acute advance turns (ph) in the mid-teens on bureau MBS today. This dynamic, accumulated with our shareholder-aligned centralized administration structure, makes us optimistic about approaching opportunities as we activate Arlington’s abutting affiliate as a REIT.

Operator, I’d like to now accessible the alarm for questions.

Operator

Thank you. (Operator Instructions)

Our aboriginal catechism comes from Trevor Cranston with JMP Securities.

Trevor Cranston — JMP Antithesis — Analyst

Hi, thanks. You mentioned that the advantage cardinal came bottomward a little bit in the fourth quarter. And you additionally mentioned, I guess, that book bulk is acutely up somewhat aback the end of the year, and you mentioned that you had added some MBS as well. Can you allocution about, about speaking, how you’re cerebration about the advantage cardinal activity advanced compared to area you accomplished up the year at? Thanks.

J. Rock Tonkel — President and Chief Executive Officer

Thanks, Trevor. So as you know, Trevor, we’ve articulate the affair over time that association shouldn’t be afraid to see if, over time, we were steadily (ph) abbreviation leverage. And I anticipate the move in the fourth division is constant with that. I anticipate the — we were alert of the ascent animation during the fourth quarter, and so we anticipation it was appropriate to booty accomplishments that were constant with that longer-term theme. I think, accustomed the basic accession in the aboriginal division and potentially some bashful access in the year — the advantage from year-end, that sustains the balances today. And I would apprehend that the — after advertence a ambition or annihilation like that, that the all-embracing trend that I’ve declared afore would continue, but specifically, that advantage apparently would abide in that ambit amid area we were at anniversary and area we were at the end of the third quarter. And I anticipate that’s admiring of balances that are in the adjacency of the balances on the books as of the end of January.

Trevor Cranston — JMP Antithesis — Analyst

Got it, OK. Afresh you additionally fabricated a animadversion aback you were talking about the net continuance position of the portfolio that it confused aback to about aught aback the end of the year. Is that alone through the MBS positions you added? Or can you maybe add some blush on it, any added changes you ability accept fabricated to the barrier book aback the end of the year to get the continuance aback to zero? Thanks.

J. Rock Tonkel — President and Chief Executive Officer

What I said was that had trended aback against zero, meaning, at the end of the year, it was abrogating 1.1 years, admitting at the end of the above-mentioned quarter, it had been I anticipate abrogating 0.2 years. And I anticipate it’s trended aback about in the administration of area it had been. That’s a aggregate of a array of factors, but it’s a aggregate of some fine-tuning in the portfolio, some bashful fine-tuning in the hedge, annihilation absolutely significant, and bulk changes that accept occurred in the amid aeon of time, which accept been favorable.

Trevor Cranston — JMP Antithesis — Analyst

Okay. Got it.

J. Rock Tonkel — President and Chief Executive Officer

(multiple speakers)

Trevor Cranston — JMP Antithesis — Analyst

Right. Yeah, got it. And afresh the aftermost thing, you fabricated a abrupt animadversion at the end about the bulk arrangement and accepting some abeyant to abatement your anchored bulk abject added this year. I was apprehensive if you could maybe busy on that animadversion a little bit and how abundant allowance you anticipate you accept to drive that bottomward this year. Thanks.

J. Rock Tonkel — President and Chief Executive Officer

Sure. I anticipate of it array of the afterward way. Non-compensation anchored costs were bottomward some in 2018 as we appropriate in the script. And while those we’re not array of awe-inspiring in size, every dollar transmits beeline through to the shareholders. And in a about analytic able bread-and-butter environment, decidedly backward in the cycle, it’s not necessarily accepted that one would acquisition opportunities to abate anchored costs aback there’s unemployment at the ranges of that and added factors. But — so every dollar that you can accumulate in that attention is absolute for your G&A-to-capital arrangement and for manual anon of those dollars to distributable income.

So it’s relevant. It’s not a huge amount, but it’s relevant. And we anticipate that there is some incremental bulk accessible abutting year’s — in 2019 as well. I anticipate the bulk maybe in 2018 was $0.5 million, maybe a little added than that. And I doubtable there ability be commodity of that consequence or a little added than that potentially accessible to us in 2019. There’s no guarantees, but every incremental bulk of that contributes to distributable assets for the shareholders.

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Trevor Cranston — JMP Antithesis — Analyst

All right. Okay. Acknowledge the comments. Thank you.

Operator

Thank you. Our abutting catechism comes from Christopher Nolan with Ladenburg and Thalmann.

Christopher Nolan — Ladenburg Thalmann — Analyst

Hi, guys. On the tax accouterment issue, accustomed that the DTL is gone but you’re not electing to become a REIT until year end 2019, should we apprehend added assets tax accoutrement for at atomic in the aboriginal bisected of 2019 or so?

Richard Konzmann — Executive Vice President, Chief Banking Officer and Treasurer

Hey, Chris, this is Rich. No, we will not — for the banking account purposes, we no best accept any assets tax accoutrement in our assets statement, no deferred tax assets or liabilities. So we finer are acting as a REIT for the absolute budgetary year of 2019 starting in the aboriginal quarter. So no, you’ll no best see tax accoutrement or deferred tax assets or deferred tax liabilities in our banking statements.

Christopher Nolan — Ladenburg Thalmann — Analyst

Great. Thanks, Rich. And my aftereffect would be on the CPRs declining. Is that aloof absorption a change in the bulk environment, is it change in the portfolio, is it seasonal? Aloof aggravating to get a little blush on that please?

Richard Konzmann — Executive Vice President, Chief Banking Officer and Treasurer

Hey, Chris, it’s Rich again. I’d say it’s a aggregate of all those factors, absolutely a seasonality component. Typically, the fourth division and the aboriginal division are usually your everyman abode in agreement of acceleration aloof because of seasonality of aback bodies move and things of that nature. And it’s additionally an aspect of aloof area ante are. There’s still — it’s still aloft the actual amounts we had several years ago, so a lot of bodies are priced out of refinancing. And also, it’s a bureau of this home bulk acknowledgment starting to moderate. People’s homes aren’t (ph) affectionate as fast as they were a year or two or three ago, so again, abbreviation people’s opportunities to refinance on their loans.

J. Rock Tonkel — President and Chief Executive Officer

I’d say in our case accurately — in our case specifically, Chris, we additionally account from a appealing concentrated position in defined pools with accommodation restrictions that are appealing robust. So that has benefited us as able-bodied as the beyond — as able-bodied as the beyond trend items that Rich alluded to.

Christopher Nolan — Ladenburg Thalmann — Analyst

Great. And aloof a housekeeping item, the amount abject of the portfolio — bureau portfolio added quarter-over-quarter. Is that aloof absolutely allocating basic from the TBAs into antithesis area portfolio?

Richard Konzmann — Executive Vice President, Chief Banking Officer and Treasurer

That’s correct, Chris. So it’s — our absolute portfolio was down, but best of that was in the TBA book. So if you’re attractive at aloof our defined bureau MBS, the balances didn’t change as much, but best of the change in our all-embracing advance contour was in the abridgement in our TBA book.

Christopher Nolan — Ladenburg Thalmann — Analyst

Great. Okay. Thank you for demography my questions.

J. Rock Tonkel — President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Our abutting catechism comes from Doug Harter of Credit Suisse.

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Joshua Bolton — Credit Suisse — Analyst

Hey, this is absolutely Josh on for Doug. How are you doing, Rock?

J. Rock Tonkel — President and Chief Executive Officer

Good, Josh.

Joshua Bolton — Credit Suisse — Analyst

Just accustomed the Fed backpack — Fed bulk backpack expectations this year, what are you guys seeing from repo lenders, both in agreement of appeal for your repo? And also, can you allocution about any opportunities to maybe lower allotment costs throughout the blow of the year? Thanks.

J. Rock Tonkel — President and Chief Executive Officer

So a brace of thoughts. The trend over time continues area allotment opportunities are readily available. And in fact, appeal absolutely exceeds our need. I doubtable that may be accurate for others in the industry as well, apparently is. Area appeal exceeds, our charge for that allotment — there are several counterparties today that we aloof don’t accept abundant appeal to accommodated their supply, acceptation — so we’ve got underutilized allotment books that are accessible to us activity forward. And I anticipate that’s a arresting about the robustness of the allotment markets.

Funding costs anchored up a little bit at anniversary as they about do as markets were tight. And they’ve aback down, as I said in the script, by 6 abject points, 7 abject points, 8 abject points, commodity like that. The ambit is appealing flat, right? So your bandy ante today on new dollars invested absolutely aren’t that abundant altered from your banknote repo allotment cost. So I’m not abiding I’d brainstorm on area that all trends over the — trends over the year, but it seems to us that the all-embracing accumulation appeal for repo is absolutely positive. Repo spreads to LIBOR are in band to favorable. And the all-embracing action and bulk ambiance seems to be adequately benign, all of which are absolute for Arlington and companies like it in this amplitude in agreement of acknowledgment opportunities activity advanced at a time aback mortgages accept widened and actualize added advance befalling than they did before. So I’d say, all that is — all that we see is about favorable. And after authoritative a anticipation about what the Fed will or won’t do and what ante increases may or may not happen, as it looks today, the ambiance is, again, amiable and favorable.

Joshua Bolton — Credit Suisse — Analyst

Great. Acknowledgment for the comments, Rock.

Operator

Thank you. There are no added questions at this time.

J. Rock Tonkel — President and Chief Executive Officer

Thank you absolute much. We acknowledge your time and attending advanced to talking in the future. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.

Duration: 24 minutes

Richard Konzmann — Executive Vice President, Chief Banking Officer and Treasurer

J. Rock Tonkel — President and Chief Executive Officer

Trevor Cranston — JMP Antithesis — Analyst

Christopher Nolan — Ladenburg Thalmann — Analyst

Joshua Bolton — Credit Suisse — Analyst

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