Stonegate Capital Partners Initiates Coverage on Arlington Asset Investment Corp. (NYSE: AI)
DALLAS, TX / ACCESSWIRE / January 25, 2018 / Arlington Asset Investment Corp. (AI)
COMPANY DESCRIPTION
Arlington Asset Investment Corp. is an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (RMBS), consisting of agency MBS and private-label MBS. The Company acquires residential mortgage backed securities from U.S. government agency or government sponsored enterprises (GSE), such as Federal National Mortgage Association and Federal Home Loan Mortgage. Importantly, agency MBS are guaranteed as to principal and interest by the U.S. government agency or U.S. government sponsored enterprise; whereas, private label MBS or non-agency MBS and are not backed by a GSE or U.S. government. Currently, the Company's investment capital is allocated to agency MBS. Arlington Asset Investment Corp. is a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. Additionally, it is an internally managed company and does not have an external investment advisor. The Company is headquartered in Arlington, VA.
SUMMARY
Arlington Asset Investment Corp. (''Arlington'') is an internally managed investment firm focused on acquiring and holding a levered portfolio of RMBS. Using its long-term investment strategy, coupled with its hedging strategy, the Company is focused on maintaining its net interest income spread return and its consistency over an extended period of time. The Company believes this focus should drive a high return on capital and support a consistent dividend. We note the following for Arlington:
It has a flexible investment approach to seek highest risk-adjusted returns
The Company invests in highly liquid assets with substantial interest rate hedges
AI has diversified repo funding sources to enable its RMBS investment strategy
Arlington also has access to longer-term funding sources from its equity and preferred ATMs
At Q317, its portfolio was substantially hedge at 78%, helping mitigate impacts from rising interest rates
The Company is not a REIT but is structured as a C-corp to provide tax benefits to shareholders
Dividends from C-corp are classified as qualified dividends and taxed at a maximum 23.8% federal income tax rate vs. REIT dividends that are subject to the higher 33.4% maximum effective ordinary income tax rate, starting in 2018
Reported for Q317, the Company had $70M net operating losses, $310M net capital losses, and a $9M ATM carry forwards that should help mitigate taxable impacts
Its internally managed investment structure provides operating leverage to the Company
Arlington's internally managed structure also better aligns management's interests as compensation is based on the Company and stock performance rather than capital raising and portfolio growth
We employ a comparison analysis using a P/B framework. Using current comps, along with historical valuation ranges, we believe using a P/B multiple range of 0.80x to 1.20x is reasonable. Using this P/B range, we arrive at a valuation range of ~$11.00 to ~$16.50 with a mid-point of ~$13.75.
We also note that the FY18 $2.20 per share annual dividend appears well supported by our core EPS forecast of $2.40 per share. See full report for details.
The full report can be accessed by clicking on the link below:
http://stonegateinc.com/reports/AI_Initiation_JAN_2018_Final.pdf
About Stonegate Capital Partners
Stonegate Capital Partners is a Dallas-based corporate advisory firm dedicated to serving the specialized needs of small-cap public companies. Since our inception, our mission has been to find innovative, undervalued public companies for our network of leading institutional investors who seek high-quality investment opportunities.
SOURCE: Stonegate Capital Partners
