Economic Indicators - As of September 30, 2023, the 10-year U.S. Treasury rate increased to 4.57%, a rise of 73 basis points from the previous quarter[194]. - The Freddie Mac average primary mortgage rate rose by 60 basis points to 7.31% as of September 30, 2023[196]. - The Consumer Price Index (CPI) reached 3.7% for the twelve-month period ending September 30, 2023[196]. - Housing prices increased by 2.6% year-over-year as reported by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA index in August 2023[196]. Company Financials - The company's MSR financing receivables amounted to $191.8 million at fair value, with an unrealized gain of $49.9 million[202]. - Total invested capital as of September 30, 2023, was $434.9 million, with 64% allocated to MSR financing receivables[200]. - The company's leverage ratio was 0.4 as of September 30, 2023[200]. - The total fair value of credit investments as of September 30, 2023 is $128,488, with an invested capital of $49,290 and leverage of 1.6[206]. - The company reported net operating income primarily from interest and other income recognized from investments, net of interest expenses[212]. - Net operating income for Q3 2023 was $4.8 million, down from $6.6 million in Q3 2022[217]. - The net loss attributable to common stock was $7.3 million in Q3 2023, compared to a net income of $2.8 million in Q3 2022[217]. - Diluted loss earnings per common share were $(0.26) in Q3 2023, compared to earnings of $0.10 in Q3 2022[217]. - Interest and other income increased by $1.2 million, or 9.7%, from $12.4 million in Q3 2022 to $13.6 million in Q3 2023[218]. - For the nine months ended September 30, 2023, interest and other income rose by $11.7 million, or 40.9%, from $28.6 million in 2022 to $40.3 million in 2023[218]. - Interest expense increased by $2.8 million, or 46.7%, from $6.0 million in Q3 2022 to $8.8 million in Q3 2023[223]. - For the nine months ended September 30, 2023, interest expense rose by $11.6 million, or 84.7%, from $13.7 million in 2022 to $25.3 million in 2023[223]. Investment Portfolio - The agency MBS investment portfolio has a fair value of $520,851, with a net short TBA position of $(406,204), resulting in a total agency MBS investment portfolio of $114,647[209]. - The annualized prepayment rate for agency MBS was 5.31% for the three months ended September 30, 2023, with 61% of the portfolio in specified pools of loans[210]. - The commercial mortgage loan investment is a $25.6 million participation in a $75.8 million syndicated mortgage loan, secured by 42 health care facilities, with a variable note rate of SOFR plus 5.61%[207]. - The total fair value of commercial MBS investments is $99.4 million, with an unpaid principal balance of $100 million and 30.9% in subordinated credit support[207]. - The average balance of agency MBS increased to $498.9 million in Q3 2023, with an interest yield of 4.34%[219]. Debt and Financing - The company reported a total of $14.6 billion in long-term unsecured debt as of September 30, 2023, a decrease of $2.9 billion from the previous year[226]. - The company sold all its SFR rental properties in two separate transactions in August 2022 and December 2022[227]. - Total long-term unsecured debt as of September 30, 2023, was $86.7 million, including $34.9 million in Senior Notes due 2025 and $37.8 million in Senior Notes due 2026[247]. - The company may seek debt or equity financings for strategic business opportunities, including possible acquisitions[240]. - As of September 30, 2023, outstanding repurchase agreements for agency MBS financing were $475,109 million, with a weighted-average rate of 5.48%[245]. - The average balance of repurchase agreements was $504.5 million in Q3 2023, with an interest expense of $7.2 million[224]. Risk Management - The primary market risks the company is exposed to include interest rate risk, liquidity risk, and credit risk[262]. - The company manages interest rate risk through investment allocation and hedging instruments, including interest rate swaps and U.S. Treasury note futures[263]. - The company is exposed to spread risk, with the fair value of Agency MBS potentially decreasing to $517,715,000 and increasing to $523,987,000 with basis point changes in spreads[269]. - The company accepts credit risk at levels deemed prudent, with credit losses allocated on a "reverse sequential" basis for non-agency MBS investments[270]. - The company utilizes interest rate hedging instruments to mitigate exposure to changes in benchmark interest rates, but these do not address spread risk[267]. Corporate Strategy and Operations - The company no longer anticipates allocating capital to a single-family residential investment strategy after selling its SFR portfolio in 2022[192]. - The company is exploring business expansion beyond investing in MBS, with uncertain returns expected from such ventures[275]. - The company is dependent on short-term borrowings and repurchase agreements to finance its mortgage-related holdings, which poses liquidity risks[275]. - The company acknowledges potential adverse developments in the residential mortgage market and the overall economy, which could impact performance[273]. - The proposed merger with EFC is subject to shareholder approval and other conditions, with potential risks including significant transaction costs and management distraction[273]. Tax and Compliance - The company is required to distribute annually 90% of its REIT taxable income to shareholders to maintain its REIT status[259]. - The company has estimated NOL carryforwards of $163,800,000 to offset future taxable income[259]. - The company has not guaranteed any obligations of unconsolidated entities as of September 30, 2023[260]. - The company must maintain its qualification as a REIT for federal income tax purposes, which is critical for its financial strategy[275]. Miscellaneous - The company is monitoring the economic impact of the COVID-19 pandemic and other public health emergencies on its operations[275]. - The company has identified various risk factors in its Annual Report that could lead to actual results differing materially from forward-looking statements[273].
Arlington Asset Investment(AAIC) - 2023 Q3 - Quarterly Report