Financing Strategies - The company utilizes TBA dollar roll transactions for financing agency MBS acquisitions, which involves selling a TBA contract for current month settlement and purchasing a similar contract for a forward settlement date, resulting in a "price drop" that is economically equivalent to net interest carry income[42]. - The company seeks non-recourse term securitization debt financing for targeted investments in residential or commercial mortgage loans, with implicit financing leverage through securitized debt issued by underlying trusts[43]. - The company may issue long-term unsecured notes as an additional source of financing for its investments in MSR related assets[44]. Market Risks - The company is exposed to various market risks, including interest rate, prepayment, extension, spread, credit, liquidity, and regulatory risks, and employs strategies to manage these risks[45]. - Interest rate hedging instruments, including swaps and U.S. Treasury note futures, are used to hedge exposure to interest rate, prepayment, and extension risks[55]. - The company actively monitors its overall leverage levels to manage exposure to market risks, which may lower earnings and dividends in the short term[59]. - The company competes with various financial entities for mortgage investments, which may impact its ability to secure financing on favorable terms[60]. - The company is exposed to various market risks, including interest rate risk, which affects the fair value of its agency MBS and MSR financing receivables[319]. Taxation and Compliance - The company has elected to be taxed as a REIT, requiring it to distribute annually 90% of its REIT taxable income to avoid corporate taxes[61]. - The company must satisfy two gross income requirements annually: at least 75% of gross income must come from real property investments, and at least 95% must come from qualifying income sources[62][63]. - The company intends to operate to be excluded from regulation under the 1940 Act, requiring at least 55% of its assets to consist of qualified assets[74]. Financial Performance and Metrics - As of December 31, 2020, the company's agency MBS portfolio primarily consists of securities backed by specified pools selected for their lower prepayment characteristics[57]. - The company's agency MBS portfolio had a fair value of $970.88 million as of December 31, 2020, with a projected value of $948.24 million under a 50 basis point increase in interest rates[322]. - The book value per common share was $6.31 as of December 31, 2020, reflecting a 3.13% increase under a 50 basis point decrease in interest rates[322]. - Equity available to common stock increased to $209,937, with a potential decrease to $195,391 under a 25 basis point spread increase scenario[327]. - Book value per common share rose to $6.31, with a potential decrease to $5.87 under a 25 basis point spread increase scenario, reflecting a 6.93% change[327]. - Book value per common share experienced a percent change of -17.30% in one scenario, indicating volatility in the company's financial metrics[326]. Risk Management - The company faces spread risk, which may lead to fluctuations in the fair value of agency MBS independent of interest rate changes[324]. - Credit risk is present in mortgage credit investments, which do not carry a credit guarantee, exposing the company to potential credit losses[328]. - The company employs interest rate hedging instruments to mitigate net book value sensitivity to benchmark interest rate changes, but these do not address spread risk[325]. - The estimated change in fair value for agency MBS and TBA commitments is sensitive to movements in MBS spreads, with a spread duration assumption of 6.0 years[325]. - The company manages credit risk through prudent asset selection and ongoing performance monitoring, but there are no guarantees against substantial losses[328]. - Inflation risk is less impactful compared to interest rate sensitivity, as the company's performance is more influenced by interest rates than inflation rates[329]. Workforce and Diversity - The company had 12 employees as of December 31, 2020, and aims to maintain a workplace free from discrimination[76].
Arlington Asset Investment(AAIC) - 2020 Q4 - Annual Report