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Why Has Arlington Asset Investments (AI) Done So Much Better Than Other MREITs?

|Includes:Arlington Asset Investment Corporation (AI)

Arlington Asset Investments (NYSE:AI) is misunderstood, under followed and under priced. People don't understand the differences between it and your typically mREIT.

First Arlington is a C corporation, so in taxable accounts it's yield is taxed at the lower qualified tax rates, not higher mREIT marginal rates. Arlington can do this because they have a lot of tax loss carry-forwards from the financial crises. Thus for someone in the 33% tax bracket, the 13.4% forward yield for AI is comparable to an mREIT paying 16%.

Second Arlington is a C corporation so the yield doesn't have to represent 90%+ of taxable income like mREITs; Arlington's payout ratio is much lower than other mREITs and thus it's dividend much better protected.

Third, AI's agency MBS is almost fully hedged so increases in rates don't hurt them much.

Fourth, it's legacy non-agency assets are adjustable with short durations so increases in rates don't hurt them much either.

Fifth those asset are currently held at 70% of par value. As home prices improve so to have the value of these discounted non-agency assets.

Sixth, HARP 3.0 should be a net positive for these guys, as people in that legacy MBS refinance, the 70¢ on the dollar counted in book becomes $1 cash.

This is why AI has done so much better this year than other mREITs (AI +36% YTD vs. -16% for NLY).

Disclosure: I am long AI.

Additional disclosure: AI is the single largest position in the 50+ portfolio which I manage as well as in my personal holdings

Stocks: AI