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Arlington Asset Investment: A Constructive View On Preferreds


  • The mortgage REIT preferreds space went through a roller coaster ride in 2020 which has opened up attractive opportunities in the sector.
  • Arlington Asset Investment preferreds, particularly the 8.25% Series C - AAIC.PC - continue to trade very cheap relative to its credit metrics.
  • Very likely this divergence is caused by investors worried about the common dividend suspension and a relatively large book value drop over Q1 last year.
  • One thing to watch out for is whether the economic leverage starts creeping up back to double-digit levels.
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This article was originally published on 17-Feb.

The mortgage REIT preferreds sector went through quite a round trip in the past year but managed to finish in the green, in aggregate. In this article we take a look at the Arlington Asset Investment (NYSE:AAIC) preferreds. Our main takeaway is that the preferreds continue to trade at attractive levels relative to the underlying portfolio, particularly, the 8.25% Fix/Float Series C (AAIC.PC), trading at a 9.3% stripped yield with a 2024 call date.

In our view, the suspension of the common dividend and the larger than average drop in book value over the first quarter relative to other agency-focused mREITs (the portfolio was 98% in agencies at the end of 2019 and is less so now) have caused many investors to avoid the company's securities. This appears to have created an opportunity as the preferreds yields are very attractive relative to the company's portfolio based on economic leverage, the allocation to agencies and equity / preferreds coverage. One thing to watch out for is whether the portfolio leverage starts creeping up to double-digit levels as this caused much of the book value drop in the first place.

A Look At AAIC Preferreds

Arlington Asset Investment has not had the smoothest 2020. Unusually, given its agency-focused portfolio at the end of 2019, the company suspended its common dividend in March and said it would evaluate its preferreds dividends (though this latter comment came to nothing as preferreds dividends continued to be paid). This was despite the company's book value change in the first quarter being not a million miles away from other agency-focused mREITs at -33% vs. -26%. Other mREITs that suspended their dividends had book value changes over the quarter of over 50% on average.

While worrying on the face of it, this

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Learn more.

Analyst’s Disclosure: I am/we are long AAIC.PC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Keep it Country profile picture
Does the fiasco of the CDR preferreds make anyone gun shy buying AAIC preferreds?
mReit preferreds really sucked last spring. I won't touch any of them again but good luck to those who do. I can get 9% elsewhere and not have to see the position drop 75% while suspending dividends. even if restarted later. that's more adrenaline than I like.
CincinnatiRick profile picture
@Fero. "mReit preferreds really sucked last spring."

Yes, that's when the real money was made. It turns out that you could have blindly grabbed most anything and emerged a hero. Let me tell you about those Hersha preferreds with their suspended dividends, But these days, $22 for AAIC prC looks to be a solid deal. I bought today.
ADS Analytics profile picture
Yes, the drawdowns were pretty uncomfortable (for those who were long). The other thing to consider is 1) few fund options "earn" their 8-9% yields and 2) few 9% payers are up 10% year-on-year. It's hard to escape heavy drawdowns owning yields at high single-digits. Best one can do in my view is to find securities that can remain resilient i.e. bend, not break.
garkster profile picture
@Fero. Yes, please do share, in retrospect, those 9% payers that did not take a major, albeit temporary, haircut to principal a year ago.
I'm long AAIC.PC and finally back in the green (way up when considering dividends over the past few years) but really the main issue here is the management team, as @Colorado Wealth Management Fund routinely points out. I'll admit they've done pretty well lately but CEO "Rock" is a bit arrogant that has made a series of dumb moves over the past few years and I'm concerned that his hubris could lead to additional risky & ill fated decisions. For now I'm holding but I'm holding my breathe as well.
ADS Analytics profile picture
Typically, the beta of dumb management decisions is much higher on the common than the preferred. So long as agency allocation remains high, leverage remains low-ish and common/pref coverage is high while pref yields are high it looks attractive in my view.
Colorado Wealth Management Fund profile picture
@ibid6677 Agree. Looking at AAIC, the coverage remains very thin. Looking at common equity to preferred equity or total core earnings projections to the amount needed to pay out preferred dividends, the coverage just isn't very strong. It certainly wouldn't be considered "high" since it is near the lowest in the sector.

If we consider the baby bonds as additional leverage that ranks senior to the preferred shares, it further weakens the coverage ratios.
ADS Analytics profile picture
Common / pref coverage is among the highest in the space at 6.8x - what number do you see? The baby bonds are already in the equity calculation (via liabilities) so there is nothing more to subtract. Interest coverage is a nearly useless metric for mREIT preferreds, unlike for "widget manufacturers" that hold a large amount of marketable assets that can readily be sold in the market.
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