Good morning. I'd like to welcome everyone to the Arlington Asset Fourth Quarter 2019 Earnings Call. Please be aware that each of your lines is in a listen-only mode. After the company’s remarks, we will open the floor for questions [Operator Instructions].I would now like to turn the conference over to Rich Konzmann. Mr. Konzmann, you may begin.

Thank you very much, Olivia. Good morning. This is 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 other 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 in 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 fourth quarter 2019 earnings call for Arlington Asset. Also joining me on the call today is Brian Bowers, our Chief Investment Officer.During the fourth quarter, as improved economic outlook as a result of Federal Reserve monetary policies and lower global trade uncertainty led to a risk on move in the global financial markets, which drove an increase in the 10-year U.S. treasury rate and a steepening of the yield curve. The 10-year U.S. treasury rate increased 26 basis points during the quarter ending at 1.92%. And the two-year to 10-year U.S. treasury curve steepened 31 basis points.In addition, swap spreads widened eight basis points benefiting agency MBS portfolios hedge with interest rate swaps. On the funding side, the Federal Reserve's 0.25 point rate cut in October along with its actions to provide substantial liquidity to the repo funding markets were significant positive steps to funding in our business. Against this backdrop, price performance of mortgages were strong in the fourth quarter, as the spread between the yield on agency MBS and benchmark interest rates tightened meaningfully with pay up premiums on specified pools performing particularly well in light of the rise in mortgage rates.Since the start of the New Year, global economic concerns surrounding the impact of the coronavirus and other macroeconomic factors have led to a rally in the 10-year U.S. treasury rate and some retracing of the steepening of the yield curve that occurred in the fourth quarter as well as higher market prepayment speed expectations for agency MBS. Against this backdrop, agency MBS have performed relatively well in early 2020.Turning to our actual results for the quarter. We reported GAAP net income of $0.72 per share and core operating income of $0.18 per share. Core operating income was…

Thank you, Sir. At this time we will open the floor for questions. [Operator Instructions] We will now go to our first question. Our first question comes from Josh Bolton with Crédit Suisse. Please go ahead.

Thanks, guys. Good morning. I appreciate the disclosure in the deck around the incremental levered returns on agency versus credit. Curious, do you have a target percentage of capital allocation for the credit segment? Or how are you thinking about how large that bucket could grow? And then additionally, do you have any thoughts around the pace of growth that we could see in that segment over the next 12 months? Thanks.

Well, obviously Josh, the pace of investing and the ultimate exposures will depend on the market conditions as they evolve over the course of time. Conditions being as they are today, we would continue to expect that the mortgage credit investment portfolio would grow as returns in that segment are at least equivalent to, if not higher than agency returns and offer other appealing characteristics that I noted in the script and so I think that would be today the first focus.And I wouldn't put a number on it but I wouldn't suggest anyone be surprised if they see that portfolio grow in investable capital over the course of the year on a prudent basis based on where opportunities may be and may grow as high as double over the course of time. That's an ongoing process. As you know it's dynamic but -- and it would be a prudent process of a potential expansion in that portfolio. But we can see that it may grow materially over the course of the year to the extent that opportunities continue to be relatively more attractive on the credit side versus the agency side.

Got it. That makes sense. And then just one on the interest rate sensitivity disclosure. Looks like during the quarter the portfolio shifted to be much more negatively exposed to higher rates. Curious if that's something intentional reflective of your macro view of rates? Or just any commentary around the rate environment and how your agency portfolio is positioned would be great? Thanks.

I guess, my first comment to that would be that actual performance in agency's in down rate scenarios has probably underperformed versus modeled expectations that you see in these standard presentations and the opposite is true. The historic -- recent historical experience has been that they have tended to outperform in up rates or steepening environments to a certain extent and to a certain level. So I would say that this posture reflects the recent experience the convexity embedded in these assets today and the difference -- the observed difference between actual prepayment developments and market expectations as rate changes and curve shape changes have occurred.I'd say it also reflects a broader commentary a -- broader observation on the macroeconomic backdrop. It is a consequence of all those things. We've driven the coupon -- the average coupon, the average price, the average pay up in the portfolio down sort of programmatically over the last couple of quarters and that's ongoing with a focus down primarily to the 3% coupon spec pool block of assets.

Great. Thanks for the answer.

Thank you. Our next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Hey. Thanks. Good morning.

Good morning.

Wondering if you could provide some more color around the new credit strategies in terms of how we should expect those investments to be structured? It looks like at December 31 the assets are to show up on the balance sheet as MBS and mortgage loans, but I was curious because you described them as co-investments if the expectation should be that those will continue to show up as MBS and loans? Or if there's potential for things like joint ventures to be showing up on the balance sheet at some point?

I think for now probably expect more of what you've seen -- described in the financials that -- I suppose that could potentially change over time. But for now for the immediate term anyway I think probably expect to see securities and mortgage securities and mortgage loans represented as you saw them in the fourth quarter. Rich, do you have any different commentary on that?

No. I think I think that's right. Literally -- in our next quarter or so but down the road certainly opportunities for more of the latter what you spoke of Trevor in terms of more direct investments in joint venture type of opportunities.

We alluded to a discussions ongoing with new potential investments and partners and some of those would be exactly along the lines of that you described Trevor. But those may take a bit of time to further develop.

Okay. Got you. And then as these develop and you said that you're working with sourcing partners should we expect there to be any additional expenses showing up on the income statement associated with the new strategies or how is that going to play out?

Yes I think -- Rich, Trevor. You may see a little bit more G&A cost associated with it but I think there's going to be offset with some savings you'll find in other places. There's certainly some more diligence costs and other types of things that we have to incur as it relates to expanding into various mortgage credit opportunities. But again I think those costs will generally be offset in the end by savings that we'll see in other places.

No, I think that's right. I think there will be higher -- somewhat higher cost around the initiation and the origination of those assets and potentially around personnel. I don't think -- I don't expect it to be dramatic at all. And I do think there are opportunities for other expenses to run down over the course of 2020 as compared to 2019.And so I think in the end you'll probably -- more likely than not you'll see cost savings come through on a net basis over the course of 2020 because I think the potential cost savings will exceed or meaningfully exceed and incremental expense required to initiate and originate and undertake these investments including potential joint ventures.

Okay. Got you. And then the last question on the MBS structured investments you've made so far, can you say where you've been investing in the capital structure? If it's more towards first loss-type investments or if it might be higher up?

It depends. It's variable. I'd say it does include sort of elements of the capital stack down toward the first loss, but in very low LTV situations and it includes non-first loss positions in those with a bit higher LTV characteristics.And in either what we're looking for is the combination of LTV, seniority, and cash coverage levels that we're entering into an investment with a higher LTV, but then we're expecting that those cash coverage levels would be quite high and other factors that may offset that.Some of these opportunities are also relatively short. And we like the short - sort of, relatively short duration of that credit exposure. And some of the others that are longer have more moderate and attract lower LTVs and other characteristics. So, it's a nice blend of duration and attachment point and generally low external -- very low external leverage on those and attractive cash flow characteristics attached in any of -- all of those cases.

Okay. Appreciate those comments. Thank you.

Thank you. Our next question comes from Christopher Nolan with Landenburg Thalmann. Please go ahead.

Hey Rock. When you are on the new credit strategy, when you're discussing joint ventures and so forth, are you talking about partnering with property developer or so and investing in equity? Can you clarify that for me please?

With -- I think it would be along the lines of partnering with originator, servicer type folks principally for lenders, in particular, specialist fields that sort of thing rather than sort of equity and real -- commercial real estate development, that's probably not top of the list. It's probably not even present on the list at the current time.But investments -- co-investments or joint ventures with originator, servicers, and specialty lenders in their field who have long track records and appealing asset characteristics are the kinds of things we have engaged in and we expect to continue to engage in.

Great. Thank you. And also, will this new strategy include things like the Freddie Mac K-Series, which would require -- into the lower tranches, would require consolidation of the securitization on your financials?

It's something that we have reviewed the K-Series. We have not participated in it down thus far. I wouldn't rule it out, potentially down the road, but thus far it's not been a principal focus to date, and I would say isn't right at the moment.

Great. Final question. ROE targets...

We feel like Chris, that we can derive better opportunities in other comparable, but not -- comparable but not K-Series securities loans.

Okay. Thanks. Finally, earlier about a couple of quarters ago, you gave sort of guidance for high mid-single-digit, low-double-digit ROEs, any update to that?

Well, I think we hit on it in the script by alluding to the fact that the returns available in the Mortgage Credit segment at -- under current conditions, seem to us to be in the range of the low to mid-double digits. We stated 11% to 16%. We think that's representative. I think agency returns, on the other hand, while they have improved, the prepayment speed uncertainty is still meaningful and that creates risks that are different from the mortgage credit environment, and probably an 11% is the top end of what one might be able to achieve on a new dollar invested in agency in a lower coupon head security spec goal.So, you just -- that volatility, we feel in the present environment is lower in the credit side and the returns are the same or higher. So far our experience has been, as I said in the script that they're higher with lower leverage and other appealing characteristics. So, we think sort of the programmatic nature of evaluating and undertaking originating these assets will be beneficial over time.And to the extent that the agency returns evolve over time from high-single digits to maybe 11% at the max today, then we'll continue to consider that. But for now the primary focus under current market conditions and returns for credit assets would be first on the credit side, and the ventures -- and the discussions and ventures we have in progress with the potential partners as we speak.

Great. Thank you, Rock.

Thank you. Our next question comes from Jason Stewart of JonesTrading. Please go ahead.

Great. Thank you. Rock, you talked about obviously the joint ventures. It sounds like the true business migration into credit, but at the same time you mentioned, it might have been an opportune or it sounds like it could have been an opportune time to acquire credit assets in the fourth quarter. Could you go through maybe those two different points as it relates to the commercial versus the equity investment and it sounds like SFR? Just how those two played out in terms of the cadence of investing, so we could get a sense for how that might play out going forward in the return profile?

So, we've -- I think what I tried to say in the script Jason, is that we're investigating across all these spectrums, right? So, we're investigating the single asset the specialty CMBS, single asset; single borrower; small commercial in particular; direct originated tailored or sort of specialized industry-specific commercial mortgage loans that's sort of one bucket, and then on the other hand loans that are secured by residential property i.e. business purpose residential transition loans, potentially non-QM.And right at the moment, SFR is not the top priority, but it's possible. It's in the spectrum of things we're evaluating. It's probably something that isn't top of our list right at the moment. But we are looking at it. And at some point, it may be appropriate if the returns and risks justify themselves, if that be added to the mix but not at present maybe down the road potentially.

Okay. So was there any single asset opportunity that sort of…

Say that again Jason, I couldn't understand the question. You were breaking up.

I'm sorry. Was there a single investment an opportunistic investment in the fourth quarter? Or was this all part of the strategic thought process?

I'd say it was -- in a way all of the above right? This was a process that we highlighted for folks over the course of the middle and latter part of 2019 that we are investigating. We were undertaking discussions with a variety of parties over that period of time.We as we completed our -- that phase of our evaluation, we focused on these particular areas. And in the fourth quarter, we came across some opportunistic situations that are quite appealing with experienced sourcing partners, experts in their field. And that provided a particular opportunity.It wouldn't surprise us to see that, if we were to see more of those opportunities in the course of the first quarter and second quarter of 2020. I'd say those were more in the realm of on the commercial side.And then in 2020 the focus has included the those loans secured by residential properties as well i.e. the fix and flip business purpose securitization that we executed and continue to look at very, very closely and evaluate opportunities intimately in that space.

Okay. Thank you.

And Mr. Tonkel, there are no more questions at this time.

I would just say Jason one more thing in each of these silos what we're seeking is sort of programmatic nature of opportunities with potential partners. It doesn't mean we won't be opportunistic on individual situations that come to our attention, we will be. But what we're seeking to develop is a sort of a programmatic effort here across what we think are attractive credit silos with great characteristics and attractive returns and that will help overall reduce the leverage of the company, improve its returns and diversify its risk. So those are all programmatic focuses that we're seeking to have in place.Thanks everybody for your time. And if you have any further questions we'll be happy to answer them post the call.

Thank you, sir. And thank you all for your attention. This concludes today's conference. All participants may now disconnect.