Investment Strategy and Portfolio - As of September 30, 2019, nearly all of the company's investment capital was allocated to agency mortgage-backed securities (MBS) [112]. - The company plans to evaluate the economics of exchanging existing Freddie Mac MBS for mirror MBS, which may not materially impact its financial performance [125]. - The total agency investment portfolio at fair value as of September 30, 2019, was $4,112,754, an increase from $3,982,106 as of December 31, 2018 [140]. - The specified agency MBS amounted to $4,013,161 as of September 30, 2019, compared to $3,982,106 as of December 31, 2018 [140]. - The company had a notional amount of $3,000 million in interest rate swaps outstanding as of September 30, 2019, including $1,225 million that expire after 2021 [133]. - The company had unencumbered agency MBS valued at $121.9 million at fair value as of September 30, 2019 [188]. - The company diversifies its repurchase agreement funding across 15 counterparties, with no more than 7.3% of stockholders' equity at risk with any one counterparty [198]. Financial Performance - The company declared a dividend of $0.225 per common share, resulting in an economic loss of 2.9% when measured as the change in book value per common share plus dividends declared during the quarter [138]. - The GAAP net loss was $0.23 per diluted common share, while the non-GAAP core operating income was $0.18 per diluted common share [138]. - Net interest income for the quarter was $4.7 million, down from $6.6 million in the second quarter of 2019, driven by lower weighted average agency MBS asset yields of 2.96% compared to 3.21% [138]. - Economic net interest income, including TBA dollar roll income and net interest income from interest rate swaps, was $10.1 million, compared to $12.3 million in the second quarter of 2019 [138]. - The company reported a net loss attributable to common stock of $8,511,000 for the three months ended September 30, 2019, compared to a net loss of $5,652,000 in the same period of 2018 [151]. - Interest expense increased to $23,982,000 for the three months ended September 30, 2019, from $22,526,000 in the same period of 2018 [151]. - Economic net interest income for the three months ended September 30, 2019, was $10,060, down from $17,237 in the same period of 2018 [178]. - Non-GAAP core operating income for the three months ended September 30, 2019, was $6,489, compared to $13,884 for the same period in 2018 [178]. Market Conditions and Economic Factors - The 10-year U.S. Treasury rate decreased by 35 basis points from the prior quarter to 1.66% as of September 30, 2019, and decreased by 103 basis points from the prior year end [117]. - During the third quarter of 2019, the Federal Open Market Committee (FOMC) lowered its target federal funds rate by 25 basis points twice, bringing it to a current range of 1.50% to 1.75% [119]. - Prepayment speeds in the fixed-rate 30-year residential mortgage market increased significantly during the third quarter of 2019, driven by declining mortgage rates [122]. - The spread between the 10-year U.S. Treasury rates and interest rate swaps widened by five basis points during the third quarter of 2019, with the 10-year swap rate ending at 1.56% [118]. - The S&P CoreLogic Case-Shiller U.S. National Home Price NSA index reported a 3.2% annual gain in July 2019, indicating that housing prices continue to increase at a pace exceeding inflation [122]. Company Structure and Management - The company is internally managed and does not have an external investment advisor [115]. - The company intends to elect to be taxed as a REIT starting with the taxable year ending December 31, 2019, requiring it to distribute 90% of its REIT taxable income [114]. - The company plans to qualify as a REIT for U.S. federal income tax purposes starting with the taxable year ending December 31, 2019 [168]. Risks and Challenges - The company is exposed to interest rate risk in its MBS portfolio, which is financed with short-term borrowing facilities sensitive to interest rate changes [217]. - The company faces spread risk, which is the risk of an increase in the spread between required rates of return on MBS and benchmark interest rates [224]. - The company acknowledges various risks that could cause actual results to differ materially from forward-looking statements, including changes in interest rates and market conditions [234]. Capital and Debt Management - As of September 30, 2019, the company had a debt-to-equity leverage ratio of 12.2 to 1, indicating a high level of leverage [185]. - The "at risk" short-term financing to investable capital ratio was 9.9 to 1 as of September 30, 2019, reflecting significant reliance on short-term financing [185]. - The company had total long-term unsecured debt of $74.3 million as of September 30, 2019, with various maturities and interest rates [189]. - Outstanding repurchase agreements as of September 30, 2019, amounted to $3.698 billion, with a weighted-average rate of 2.35% [197]. - The maximum amount outstanding in repurchase agreements during the period was $3.964 billion [197]. Shareholder Information - As of September 30, 2019, the company had 1,200,000 shares of 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock outstanding with a liquidation preference of $30.0 million [135]. - The Series B Preferred Stock has a liquidation preference of $8.9 million and pays a cumulative cash dividend of 7.00% per annum, equivalent to $1.75 per annum per share [208]. - The Series C Preferred Stock has a liquidation preference of $30.0 million and pays a fixed dividend rate of 8.250% per annum until March 30, 2024, after which it will be at a floating rate [209]. - As of September 30, 2019, the company had 11,302,160 shares of Class A common stock available for sale under the Amended Equity Distribution Agreements [208].
Arlington Asset Investment(AAIC) - 2019 Q3 - Quarterly Report