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Good morning. I’d like to welcome everyone to the Arlington Asset First Quarter 2022 Earnings Call. [Operator Instructions] Id now like to turn the conference over to Richard Konzmann. Mr. Konzmann, you may begin.
Thank you very much, and good morning. Rich Konzmann, Chief Financial Officer of Arlington Asset.
Before we begin this morning’s call, I would like to remind everyone that statements concerning future, financial or business performance, market conditions, business strategies or expectations, 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 forward-looking statements are based on management’s beliefs, assumptions and expectations, which are subject to change, risk and uncertainty as a result of possible events or factors. These and other material risks are described in the company’s annual report on Form 10-K and 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 statements.
I would now like to turn the call over to Rock Tonkel for his remarks.
Thank you, Rich. Good morning. And welcome to the first quarter 2022 earnings call for Arlington Asset. Also joining us on the call today is John Murray, our Portfolio Manager.
Over the last 24 months, we have thoroughly repositioned Arlington. Set a course to transition the company from a primarily levered agency MBS-oriented strategy to one focused on establishing multiple, high return, non-commodity investment channels in mortgage servicing rights, single-family rental properties and select credit investments that would both diversify investment risk and improve the reliability of returns over time, to reduce leverage and diversified funding sources, including using structural leverage.
We maintained expense discipline by lowering G&A costs. We returned over $28 million of capital to shareholders, $0.68 of accretion from which represents an equivalent dividend yield of approximately 10% over that period. Today, the company is a flexible investment platform investing across primarily residential asset classes built to produce high returns with low volatility.
In short, we have repositioned Arlington with a differentiated strategy, well suited for various market conditions and positioned to generate strong returns for shareholders over time.
Overall, we are pleased with the progress and the results we have made towards the company's objectives, including the top 10 economic return among peers with low book value volatility during turbulent markets since September 30 of last year. Double digit returns from its MSR and credit portfolio since the beginning of 2021, including a 53% annualized return from the MSR portfolio and high teens returns from our credit portfolio, significant progress towards building our SFR portfolio, including the opportunity to capture a substantial gain and associated 7% book value pickup during the second quarter. Expenses down double digits over a two-year period.
In the current market environment, our primary goal continues to be to protect shareholder capital from the impact of inflation, rising rates and Federal Reserve monetary tightening policies, while maintaining low leverage. In anticipation of the effects of Federal Reserve tightening policies on mortgage basis risks, we continued down the path of lowering our investment exposure to agency MBS. At the same time, the company continued to expand its investment allocation towards MSRs, single-family rentals and opportunistic credit investments that collectively should perform well in a rising rate and inflationary environment, while being defensive versus expected Federal Reserve tightening.
Company has grown its MSR portfolio to 50% of its capital as of year-end. As interest rates rise and prepayment speeds decline, MSRs should generally outperform. With the substantial rise in interest rates the company's low coupon MSR portfolio produced exceptional returns during the first quarter in both current returns and through further multiple expansion.
Since we acquired our first MSR investment five quarters ago, the portfolio has produced strong current cash yields along with asset appreciation through multiple expansion that has resulted in an annualized total return of 53%, all while employing very modest leverage.
As of March 31, the company's MSR investments had $180 million of underlying mortgage servicing rights valued at a multiple of 5.21 with leverage of 0.3 times. Newly created mortgage servicing rights of Fannie Mae and Freddie Mac loans currently offer unlevered yield opportunities in the high single digits, with the potential for further multiple expansion if rates continue to rise.
We continue to make significant progress in our strategy of acquiring, operating and leasing single-family residential homes. Company's goal is to invest up to $55 million of capital to acquire $200 million of homes. And we have made great strides towards that objective. As of March 31, the company had acquired or committed to acquire 454 homes for $437 million. And as of today we have acquired or committed acquire a total of 566 homes for $177 million.
To finance the acquisition of our SFR properties, the company has $150 million five-year secured term death facility with an 18-month draw period at an effective fixed cost of funds of 2.76% with limited recourse to Arlington.
Company expects its investment in SFR properties to generate average current unlevered yields of 4.5% to 5% and unlevered net yields of 8% to 11% – 8% to 12%, pardon me. Once the opportunity to realize any home price appreciation. To date, we are pleased with the progress we've made in building our SFR portfolio, currently carries an expected average unlevered yield of 4.9%.
The timing of the earnings benefit to the company from investing in SFR rental properties will be dictated by the pace of home purchases, the level of any property level refurbishments, the length of the lease marketing period and the timing of any future sale. We expect the time period between the date of settlement of the home purchase to the date the house is occupied by a tenant to average between 30 and 60 days. Accordingly as we continue to ramp-up our investments, our SFR portfolios [indiscernible] not yet contributed current earning.
Portfolio was fully scaled; the company expects to generate double-digit returns on capital that is not currently reflected in the company's earnings. The company also announced yesterday that it signed a purchase and sale agreement on May 10th to sell 378 of its SFR properties for the sale price of $132.75 million. This opportunistic sale captures a strong bulk premium for a portfolio of leased homes we constructed from individual purchases with strong rental yields in attractive markets.
The sale is expected to close around the end of the second quarter in subject to normal closing conditions, including the right of the buyer to terminate the sale transaction for a reason during the diligence period. Company is very pleased with this potentially significant return on our investment in such a short period of time. We expected the result in a positive impact of the company's book value of approximately $0.45 per share on closing.
Following the sales, pending market conditions, the company expects to continue to reinvest capital in SFR properties to reach its goal of $200 million of homes, and to take full advantage of its well below market fixed rate five-year funding facility. Company also continued to identify and evaluate opportunities in credit investments that offer high-risk adjuster returns. During the first quarter, the company made a new $20 million investment in a first loss piece and excess interest only strip. And in securitization of recently originated performing non-qualified residential mortgages that is expected to generate mid-teen returns. With risk-free rates of about 200 basis points and risk spreads about 100 basis points wider this year. We believe there will be attractive new investment opportunities available in mortgage credit going forward.
Turning to the actual results for the quarter, the company reported book value of $6.19 per share as of March 31st, 0.5% increase from the prior period end. In addition, during the month of April the company's book value per shares remained relatively unchanged that does not include the potential approximate $0.45 per share gain associated with the SFR buck sale, which represents an increase of 7% over first quarter book value. Company continued to operate with overall low-leverage and significant financial flexibility with its overall at risk leverage ratio standing at 1.3-to-1 as of March 31st.
For the first quarter, the company reported GAAP net loss of $0.12 per share, and core income of $0.05 per share, $0.03 per share from last quarter. We continue to believe there is far greater value in Arlington's business than the public markets recognize. Until we believe the stock price more accurately reflects the intrinsic value of Arlington's business, the company and its insiders who own 7% of the outstanding shares expect to continue to purchase substantial shares of the company's common stock.
During the first quarter, the company returned capital to shareholders by repurchasing over 3% of outstanding shares that accreted $0.09 per share to book value an equivalent – and offer an equivalent annualized given and yield of 10.4% based on the average stock price during the quarter. Subsequent to quarter end, the company has already purchased 2% of its common stock outstanding that accredited an additional $0.06 per share to book value with an equivalent annualized dividend yield of 16%.
Since reinstituting its current common stock repurchase program in 2020, the company has returned $0.68 per share to shareholders by purchasing over 23% of its outstanding shares. Notably, the company has a substantial remaining authorization of over 11 million shares from its board to repurchase shares of common stock. By positioning itself for a rising rate inflationary environment and Federal Reserve tightening cycle, the company has been able to produce solid economic return during a period of quite challenging market conditions. As our investor presentation clearly demonstrates, compared to our peers and – then let's see, and they read mortgage home financing index. The company has outperformed the index in total economic return in both recent quarters and the last 12 months, including being a Top 10 performer over the last six months, while also experiencing among the lowest volatility of quarterly economic returns over the last year.
Looking forward, we believe that as monetary policy tightening runs its full course, the impact on market conditions may present investors with historically high investment return opportunities. We believe our diversified portfolio structure and low leverage positions us well to capture opportunities as they become available. We have strong conviction about Arlington's differentiated strategy, and we believe that the company's diversified investment platform can generate strong returns that will deliver ongoing substantial returns of capital shareholders and growth in book value that the market will recognize and value over time.
Operator, I would now like to open the call for questions. Thank you.
Thank you. [Operator Instructions] We will take our first question from Doug Harter with Credit Suisse.
Hi, this is John Kilichowski on for Doug. I guess first question, I would just kind of like to get a little color around sort of capital allocation so far in the quarter and particularly the MSR mix, and how that's trending?
Thanks for the question, John. As I think I said last quarter when the MSR capital allocation was approaching 50%, we sort of felt like that was a level that we were comfortable. But we didn't really feel like we would be inclined to move considerably above that number. So I think we feel like we're in the right zip code for overall capital allocation to MSRs and I think it's fair to say would we'd expect it to remain sort of in that neighborhood of 40% to 50%, maybe a little higher based on valuation movements in the asset. But I think that's probably about the limit that we would expect on allocating the MSR.
Got it. Thank you. And my next question just looking at the SFR – excuse me, SFR portfolio; we're talking about sort of $200 million being that right size for you. At what point do, once we reach that mark should we start to expect to not see these opportunistic sales or do you kind of see them at a certain phase going forward where you try to keep yourself around that $200 million mark, just trying to understand how to think about that?
Well we expect as we said in the script, and as you see in the presentation we sort of expect returns comfortably in the double-digits. Current cash returns on the SFR portfolio on a fully levered stabilized basis in the sort of high single digits plus appreciation gets you comfortably to the dividend, to the double-digits even assuming very modest appreciation if any. So we feel like that, given that return profile in this particular circumstance we had a unique opportunity on a portfolio of assets built one-by-one-by-one to receive a significant bulk premium that essentially had the effect of front loading to us several years of those returns. And so we expect to reinvest that capital into the SFR portfolio with consistent returns to what we've described and we would expect those returns to be delivered once that portfolio is reaches that $200 million mark plus a little bit of time after that for stabilization of the properties. But at that point we would expect to be receiving ongoing returns, currents in the high-single-digits and total returns in the double-digits from that point forward.
Okay. Thank you very much.
We'll take our next question from Trevor Cranston with JMP Securities.
Good morning.
Hi, thanks. Good morning. Can you talk about how much remaining upside you could potentially see in the lower coupon MSRs in particular given how much mortgage rates have increased? And if you guys have looked at or considered potentially realizing some of the gains on low coupon MSRs and either reallocating into more current coupon or even into different strategies on the credit side? Thanks.
Great question, Trevor. Two things: One, I think I said last quarter in response to a similar question about valuation multiples that we felt like probably somewhere in the high five six was probably sort of a rough cap on valuations. And I still think we feel like that's true. We're five two, so we feel like there's some more movement there, but not a great deal of movement. Not the movement that there has been historically number one. But we do think there is still some available.
Number two, I would say that we, as you would expect us to be doing we're constantly evaluating, competing risk return opportunities versus where our capital is invested. So naturally the question, do I ask this one, we ask ourselves every day and I think it's fair to say with risk free rates up a couple of hundred basis points this year and risk spread out 100, and our general view that we see the possibility of sort of historic opportunities coming down the pike as the fed completes its mission – typing mission, then I wouldn't be surprised. People shouldn't be surprised if they see some potential reduction in that allocation of the MSR and relocation to assets that may have higher current or higher overall return expectations versus those MSRs today.
So I think it's an insightful question. It's one, we try to focus on every single day, and we're actively reviewing alternative allocations to the MSRs as we are with all of our other assets in the portfolio, in our capital allocations. We'll continue to do that in pursuit of what we view as high return assets that are less commoditized, and can deliver us attractive returns with low leverage.
Okay, got it. And then on the proceeds you're going to be receiving on the sale of the SFR portfolio. Do you have a sense sort of roughly how long it will take you guys to redeploy that capital back into the strategy?
Well, if you look at the calendar, right, there are periods in the year when that process moves a little more quickly and a little less quickly. But I think we feel like we should be able to re-ramp that portfolio by late in the year. I think we feel like we should have that. We should have the ability to ramp that back to our full scale in the next couple of quarters.
Okay, great. Thank you.
[Operator Instructions] We'll take our next question from Christopher Nolan with Ladenburg Thalmann.
Hey guys. Hey Rock, given the sale on the SFR, should we expect a bump in profitability in the third quarter, given the SFR portfolio was unprofitable?
Well we'll recognize, so a couple of responses to that, Chris. Number one, we will receive from the sale our basis back plus the gain from the premium on the sale. We would expect, as I've sort of just described, that we would reinvest our basis into fully ramping the – into a fully ramp scale on the SFR portfolio. On the other hand, the gain is growth in capital. And that growth in capital and those proceeds, we would expect to be able to deploy to current returns that today are considerably more attractive than they would have been just four months ago.
And so we feel like we should be able to deploy that capital prudently. I would think during this quarter and realize the earnings benefit of that going forward. But I'm not sure it would have much of an impact in the second quarter, but I think it would be expected to have an impact in the forward quarters, the reinvestment of that gain in solid double digit returns.
As a follow-up on the buybacks would you take any of this gain and just ramp up the buybacks from the already strong levels that have already gone?
We've been pretty clear in the script and historically about our view and the buyback. On behalf of shareholders today, with the ability to buy $1 of book value for $0.50, that that's an opportunity that we will continue to pursue on behalf of shareholders. And as I've said in the past, our focus every day is the allocation of capital between the buyback, given the stock, the price the stock trades at, and our return opportunities, which are higher today than they were when we have spoken in prior quarters.
So I would say we've been clear on what our expectation is, we've been clear on the execution of that. I don't think people should be surprised in what we've said in this script and what we have executed this quarter and we'll expect to execute in future quarters. And very clear, we expect to continue that buyback at a substantial level, given that return opportunity.
And on the other hand, we do expect the ability to reinvest that gain capital and other redeployed capital that's being freed up through – from different parts of the portfolio over time to be reinvested in solid mid-teens double digits, even mid-teens return, which would provide for some earnings growth going forward, in addition to simply to the redeployment of the SFR portfolio.
Great. Thank you,
Mr. Tonkel. There are no more questions at this time.
Okay.
Well, thank you very much. We are happy to speak to you afterward if that's what you would like to do as well. Thank you very much. Appreciate it.
That concludes today's teleconference. Thank you for your participation. You may now disconnect.