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Stonegate Capital Partners Updates Coverage on Arlington Asset Investment Corp. (NYSE: AI)

DALLAS, TX / ACCESSWIRE / December 17, 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 Q318, its portfolio was substantially hedged at 88%, helping mitigate impacts from rising interest rates
  • The Company is structured as a C-corp to provide tax benefits to shareholders; as NOL carryforwards become fully utilized in 2019, Arlington will evaluate
  • longer-term tax structures such as electing to be taxed as a REIT
  • Dividends from a 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 Q318, the Company had $28.0M net operating losses, $390.9M net capital losses, and $9.1M 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
  • If AI were to elect REIT status, its book value would be equivalent to its tangible book value, which was $11.06 per share as of 9/30/18

We employ a comparison analysis using a P/TBV framework. Using current comps, along with historical valuation ranges, we believe using a P/TBV multiple range of 0.80x to 1.20x is reasonable. Using this range, we arrive at a valuation range of ~$8.85 to ~$13.27 with a mid-point of ~$11.06.

We also note that the Q218 and Q318 dividends of $0.375 (vs. $0.55 for Q118) resulting in our FY18 estimate of $1.68 per share for the annual dividend, still appears well supported by our core EPS forecast of $2.07 per share. See full report for details.

The full report can be accessed by clicking on the link below:

http://stonegateinc.com/reports/AI%20NOV%202018.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