ARMOUR Residential REIT Q1 2025 Earnings Call Transcript

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April 24, 2025
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Operator

Good day, and welcome to the ARMOUR Residential REIT's First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Good morning and welcome to Armour Residential REIT's first quarter twenty twenty five conference call. This morning, I'm joined by our CFO, Gordon Harper as well as our co CIOs, Sergey Lesyev and Desmond McCauley. I'll now turn the call over to Gordon to run through the financial results. Gordon?

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

Thank you, Scott. By now everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armoreit.com. This conference call includes forward looking statements, which are intended to be subject to the Safe Harbor protection provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission describe certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in or implied by these forward looking statements. Those periodic filings can be found on the SEC's website at www.sec.gov.

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

All of today's forward looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law. Also, today's discussion refers to certain non GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for one year.

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

ARMOUR's Q1 GAAP net income available to common stockholders was $24,300,000 or $0.32 per common share. Net interest income was $36,300,000 Distributable earnings available to common stockholders was $64,600,000 or $0.86 per common share. This non GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps or futures contracts minus net operating expenses. Farmer Capital Management waived a portion of their management fees, 1,650,000.00 for Q1, which offsets operating expenses. During Q1, ARMOUR raised approximately $371,000,000 of capital by issuing approximately 20,000,000 shares of common stock through an at the market offering program and $300,000 of capital by issuing approximately 17,000 shares of preferred C shares.

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

These issuances were mildly diluted to book value. Since March 31, we have repurchased 666,000 common shares. ARMOUR paid monthly common stock dividends of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On April 29, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15.

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

We have also declared a cash dividend of $0.24 per outstanding common stock payable May 29 to holders of record on 05/15/2025. Quarter end book value was $18.59 per common share. Our most current available estimate of book value is as of April 23 and was $16.56 per common share. This is after the accrual of April dividends to be paid next week. Now, I will turn the call over to back to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Thank you, Gordon. Substantial policy changes in trade, immigration, fiscal policy and regulation have ushered in pronounced macroeconomic uncertainty along with upward pressure on longer interest rates, volatile markets and dislocations in asset swap spreads. Armed with strong liquidity of over $750,000,000 we believe that Armed is positioned to withstand short term headline volatility as well. The recent steepening performance in the rates curve along with MBS SOFR spreads hovering close to 200 basis points levels comparable only to extreme and short lived disruptions in the past offer significant value to mortgage investors. On a duration hedged and levered basis, the ROEs on production and premium coupon MBS look very compelling with estimates ranging from 18% to 21 among the highest seen in our history.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

We're also paying attention to developments in GSE reform under this administration. Comments and actions by Bill Pulte of the FHFA and Scott Bessett at the Treasury suggest that this administration may seek to accelerate the framework for eventual GSE exit. Yet we still view structural changes as a long term process and believe that the complexity and systemic importance of the GSEs make near term action unlikely. Given that the mortgage and housing market make up as much as 28% to 30% of the economy, any reform efforts must be approached with caution as they carry broad implications for economic stability and growth. As we move further into 2025, we expect the macro backdrop to remain dynamic.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

The rates market is pricing in over three Fed rate cuts this year, a reflection of the Fed's anticipated dovish reaction function to support a weakening economy, a positive for MBS. Renewed discussions around modifications to the Supplementary Leverage Ratio or SLR coupled with sooner than expected tapering of the quantitative tightening program layer on a structural tailwind to bank demand for Agency MBS. With increasingly supportive technicals, strong carry and historically wide valuations, Agency MBS remains a core opportunity within the fixed income landscape. ARMOUR continues to seek value during bounds of spread weakness with confidence in the sector's resilience and the long term strength of The U. S.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Housing finance system. Let me turn it over to Sergey for more detail on our portfolio. Thank you, Scott.

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

In Q1, our agency portfolio experienced a modest two basis points of tightening. Amidst the global market volatility in April, our portfolio's agency assets have widened approximately 15 basis points in ZV spreads quarter to date. Our estimated net portfolio duration and implied leverage at zero point five years and 8.1x, respectively, while total liquidity is approximately 50% of the total capital. The hedge book is composed of nearly 30% treasury based hedges and remainder is in oil and sulfur based swaps. This allocation benefits us if swap spreads were begin normalizing, while also help diversify some of the risk as concerns around the term funding premiums persist.

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

ARMOUR's investment portfolio is in 95% of most liquid agency MBS, which includes TBA deliverable specified pools and TBA contracts. The portfolio is diversified across the thirty year coupon stack ranging from 2.5 to 6.5 coupons, with overweight in 5.56% coupons, where spread and carry are most attractive. The remaining 5% market value is allocated to five year Agency CMBS pools whose positive convexity and short duration attributes offer much more value and upside versus comparable fifteen year MBS pools. Portfolio MBS prepayment rates have averaged 6.1% CPR in Q1 and are trending at around 7.8% CPR so far in Q2. We expect the prepayment environment to remain uneventful for our portfolio mix of modest price premiums and discount MBS, while mortgage rates remain elevated above 6%, keeping the refinance activity and net supply at bay.

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

Despite the slow prepayment environment, we continue to favor credit and investor specified pools, which help improve overall portfolio convexity and will benefit from a potential increase in loan level pricing adjustments, or LLPATs, under Bill Paltz's FHFA leadership. We also maintain some exposure to TBA roles, which, while not a core long term position, help enhance market liquidity and flexibility of our portfolio. We fund 40% to 60% of our MBS portfolio with our affiliate, Butler Securities, while spreading out the remaining repo balances across 15 to 20 other counterparties to provide ARMOUR with the best financing opportunities at an average gross haircut of 2.75%. Overall, MBS repo funding remains ample and competitively priced, reflective of the broader backdrop of abundant banking system liquidity, a point that's consistently emphasized by FOMC members. And now back to you, Scott.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Thank you, Sergey. As you know, we determine our dividend based on a medium term outlook. We view our current dividend as appropriate for this environment and the returns that are available. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions.

Operator

We will now begin the question and answer session. Our first question comes from Doug Harter with UBS. Please go ahead.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

You. Hoping you could talk about how you're approaching risk management in this type of environment, thoughts of how you're thinking about leverage levels, kind of the cost of kind of selling assets and potentially missing on a recovery of spreads versus kind of taking risk off in an incredibly unpredictable environment?

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Well, is the question, Doug. And that's what we focus on. It seems like every day, every hour in the last few weeks. Look, liquidity is king. And we are intensely focused on liquidity.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

We have the advantage of being an agency portfolio. So we don't have some of the exogenous stuff that can happen elsewhere in the markets. On the other hand, agencies are highly liquid and when people need to raise cash, I suspect they're number two on the list of places to raise cash. We look closely at leverage. We've been running in the seven to 8% level.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

As I think we've said in the past, that's sort of more of an output than an actual input, but it's an important metric to look at. And all of that is against the temptation of very attractive investment opportunities that are out there. And further, the opportunity that you have when you think about buying back stock, which we did a little bit of. But again, liquidity is king and we are very jealous of our liquidity in volatile times. And I don't see that changing.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

But that striking that balance is important among all of the factors that are there, both in terms of opportunities and maintaining an appropriate level of defensiveness.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Appreciate it. Thank you.

Operator

The next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston
Director, Mortgage Finance Equity Research at Citizens JMP

Hey, thanks. Good morning. Looking at the portfolio data, it looks like during the first quarter, the allocation to sixes went up a little bit. Can you guys talk a little bit about where you're seeing the best opportunities within the coupon stack? And post quarter end, it looks like the portfolio size is down a little.

Trevor Cranston
Director, Mortgage Finance Equity Research at Citizens JMP

If you could just comment on what you might have sold post quarter end? Thanks.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

Yes. Hi, Trevor. So we seek to maintain a diversified portfolio. Our bias right now is to continue to buy production coupons. We see very attractive ROEs there.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

We are probably biased to slightly below par, so 55.5% coupon, expecting that a weakening economy could cause lower treasury yields. And yes, we want to stay diversified. We may also buy five year DOS securities just based on their positive convexity, which we like to balance in our portfolio. It's a good diversifier to our Resume MBS and it benefits in a curve steepener as well. And their spreads are looking attractive.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

You mentioned, I guess, your second question was post quarter end. So we still like the agency MBS landscape. There are many factors, many tailwinds here. The levels are very attractive. The curve has steepened significantly.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

We also see prepayments as muted as we said in our prepared remarks, given mortgage rates over 6.5% and the funding markets are very stable. With that said, April 2 was a very significant risk event and we saw the shocks that went through the markets. We decided to sell some assets there, understanding that even post sales, our leverage was still significant enough where we felt we had enough spread risk to participate in any further spread tightening.

Trevor Cranston
Director, Mortgage Finance Equity Research at Citizens JMP

Got it. Okay. That's helpful. And you were talking about maintaining adequate levels of liquidity, obviously, in a volatile market. And you did buy back some shares in April.

Trevor Cranston
Director, Mortgage Finance Equity Research at Citizens JMP

Could you just comment on like how much capacity you think you have to continue potentially buying back shares while still maintaining levels of liquidity Thanks.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

There's some capacity there. And how we view that capacity depends on our outlook over short term and a bit of a medium term. But we maintain very substantial liquidity. But obviously, when you buy back shares, you're talking about an adjustment that has knock on effects through the portfolio as well. So, we and we like the returns available in that portfolio.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

So we're not looking to cut the size of the portfolio per se. But we have capacity and we look at it and I think the point is that we're willing to be on both sides of the market here.

Trevor Cranston
Director, Mortgage Finance Equity Research at Citizens JMP

Okay. Appreciate the comments. Thank you.

Operator

The next question comes from Randy Binner with B. Riley. Please go ahead.

Randy Binner
Managing Director at B.Riley Securities

Hey, good morning. Thank you. I appreciate your comments on GSE reform and Pulte's comments, that it seems like something is going to move forward and there's been staff changes at Fannie Mae in particular. I think it would be interesting to hear your perspective on the key things that we should look for as we learn more about the potential reform. I mean, I understand from your comments that it's a big change and it's longer term.

Randy Binner
Managing Director at B.Riley Securities

But would be helpful to think of how the details of it could manifest themselves early on. And I mean if there's any scenario where it doesn't need to be necessarily a headwind, but could be a tailwind for the market. Just interested in a little bit of kind of like what we should look for as observers of this and as it relates to armor?

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Well, as it relates to armor, like it really relates to all of us in a lot of ways, right? Nothing specific to us. But to my mind, the big one is the sovereign backstop, which obviously we have explicitly with Ginnie and we've got in structural format with Fannie and Freddie. But that is to my mind hugely important impacts potentially on risk weights and things like that. So and it also is a touchstone for the conversation, which is what makes the GSEs different kind of competitor in the mortgage market than private entities.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

So that to me is the big one to look for. The and then you get to the whole mosaic of guarantee fees and capital that will be put in and what sort of rating might exist on a standalone basis, which is important as well. All of those things go into the mix. I just hope that as this rolls out that the communication carefully modulated and presented rather than sort of bits and pieces coming out. We always worry about headline risk that even if it gets resolved can make life interesting for everybody for more than a few days.

Randy Binner
Managing Director at B.Riley Securities

Right. That's helpful. And I guess the follow-up question would be, have you I think there were some commentary in the last call in the Q and A about someone had asked you all if you thought it was priced in. I think Jenny and Fannie swaps were kind of a data point. But do you just being in the market every day, do you there's been more comments from Pulte since our last call.

Randy Binner
Managing Director at B.Riley Securities

Do you get a sense that there's more priced in to the market at all with just kind of observing what you see every day?

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

We see kind of stability in junior penny swaps mostly reacting to interest rate volatility that we've seen as of late. So in our regards, I think the mortgage market is just looking for more concrete ideas. We're seeing a lot of ideas floating out there. But until we see a road map or some sort of a blueprint from either Bill Pulte or Treasury or any part of administration, it's really hard to try to price things. And as we mentioned in our prepared remarks, I think the easiest step, the first step for any kind of GSE reform will be streamlining the profitability of the enterprises.

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

And I think Bill Paltzey has been very clear about adjusting some of the risk fees on the loans and based on the creditworthiness of the borrowers. So I think we're going to see some signs of that first before we see any kind of longer term exit plans. And I think that's kind of the plan we're following here as well.

Randy Binner
Managing Director at B.Riley Securities

Okay. Understood. That's very helpful. Thanks for the comments.

Operator

Our next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen
Managing Director at BTIG

Hey, thanks. Good to hear from you guys. Just given the dislocation in swap spreads, how do you feel like that drives the way in which you rebalance your hedges around volatility on a go forward basis, like the hedges in the back of the existing portfolio? Thank you, guys.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

Yes. Hi, Eric. So in regards to swap spreads, we want to maintain a diversified portfolio of our hedges. So in Q1, we increased the share of our treasury based hedges slightly from 25% to 30%. That benefited our portfolio when we saw a very significant tightening of swap spreads.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

So now we have about roughly 70 of our portfolio hedges in swaps. We are actually comfortable with that larger share. We feel it's been a very significant dislocation in swaps spread so far, and we expect that at some point, we would see normalization. Now it can occur in different ways. It could be through the supplementary leverage ratio, which may allow banks to intermediate better and buy more treasuries in case we see potentially higher term premium.

Desmond Macauley
Desmond Macauley
Co-Chief Investment Officer & Head of Risk Management at ARMOUR Residential REIT

So yes, so we are happy and content with our current share. With that said, if we do get any more dislocation, 30% of treasury based hedges would be there to help protect our portfolio.

Eric Hagen
Managing Director at BTIG

Yes. Okay. That's helpful. I appreciate that. Can you guys share how you think relief on the supplementary leverage ratio could drive both supply and demand for repo funding specifically at FICC, the venue where you guys have direct access into repo dealer?

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

The primary driver is so you're talking about banks here and supplementary leverage has always worked to make low high quality, low ROE assets less attractive on the balance sheet. And that's kind of precisely what Agency MBS is and even more precisely what repo is. So to the degree that assets which have extremely high quality, both lower ROE, but occupy balance sheet become more attractive or even possible to hold, not crowding out more profitable assets, it should work to the favor of repo overall, meaning improving ability of tradition, what have always been traditional holders to have more of it.

Eric Hagen
Managing Director at BTIG

Got you. All right. That's helpful. Thank you, guys.

Operator

Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan
Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc

Hi. Thanks for taking my questions. Gord, did you mention that the book value is currently roughly $16.5

Gordon Harper
Gordon Harper
CFO, Secretary & Controller at ARMOUR Residential REIT

It's $16.56 as of last night. Great. And that is after the accrual of our dividends that we're paying out next week.

Christopher Nolan
Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc

Okay. Thank you. And then turning on the dividend, what impact does declines in book value have on the sustainability of the dividend?

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

At a certain point, yes, could because that certainly is the capital that you have available to invest in and it ultimately rebounds into liquidity and leverage. On the other hand, this has been a volatile period where there's a whole lot of stuff going on. And as we say, we look to the medium term here and in particular look to the returns available. So, as I said, we're comfortable with the level we're at.

Christopher Nolan
Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc

Okay. And then I guess, can you characterize the bank's appetites for mortgage backed securities in recent quarters? It seems to be they're on the sidelines. Has that changed in the quarter?

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

Yes. Hi, Christopher. Yes, I think Q1, we saw probably largest CMO creation volumes both in February and January, kind of indicating that banks were back in the market. Now a lot of their focus is still on the floating rate aspect nature of MBS, and this is why the majority of CMO creation has been in agency MBS floaters. March has been a much more quieter month.

Sergey Losyev
Sergey Losyev
Co-Chief Investment Officer at ARMOUR Residential REIT

We also saw spreads on a tighter side during that time, so it's not surprising that some of the demand has backed up. Obviously, in times of volatility, like right now, a lot of investors are on the sidelines waiting out these bouts of volatility. But as Desmond mentioned, such widespread versus swaps, steeper curve, a lot of these things are pointing to the fact that the demand side of the equation is in a good spot. And as soon as volatility and peak uncertainty is behind us, I think we'll see bank demand return to the levels we saw in Q1 and maybe even greater.

Christopher Nolan
Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc

Great. Final question. Do you think the second quarter distributable EPS would be in excess of the dividend?

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

We traditionally have not commented on that, so I'm hesitant to provide a forward looking statement on that. But I think you can probably get to your own conclusion pretty quickly by looking the returns available.

Christopher Nolan
Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc

Okay. Thanks guys. Thanks for taking my questions.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Scott Ulm
Scott Ulm
CEO & Vice Chairman at ARMOUR Residential REIT

Well, thank you for joining us for our conference call today. We appreciate your interest in ARMOUR REIT and we are always available for follow ups. Don't be strangers. Thanks so much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Scott Ulm
      Scott Ulm
      CEO & Vice Chairman
    • Gordon Harper
      Gordon Harper
      CFO, Secretary & Controller
    • Sergey Losyev
      Sergey Losyev
      Co-Chief Investment Officer
    • Desmond Macauley
      Desmond Macauley
      Co-Chief Investment Officer & Head of Risk Management
Analysts
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Key Takeaways

  • Q1 Earnings and Dividends: ARMOUR reported GAAP net income of $24.3 M ($0.32/share) and distributable earnings of $64.6 M ($0.86/share), paying common dividends of $0.72 per share for the quarter.
  • Capital Transactions: In Q1 ARMOUR issued ~$371 M of common stock via an ATM program and $300 K of Preferred C shares, and since quarter-end has repurchased 666 000 common shares, mildly dilutive to book value.
  • Portfolio Positioning: With $750 M+ in liquidity, the REIT’s ~$8 B agency MBS portfolio (95% liquid TBA/specified pools, 5% 5-year CMBS) is duration-hedged (~0.5 yrs) and levered (~8.1×) to target 18–21% ROE in production and premium coupons.
  • Market and Technical Outlook: ARMOUR sees significant value in MBS given steepening rates curves and ~200 bp SOFR spreads, with three Fed cuts priced in and potential SLR relief and QT tapering expected to boost bank demand for agency MBS.
  • GSE Reform Perspective: Management views FHFA and Treasury proposals on sovereign backstop, guarantee fees and capital as a long-term process, expecting near-term structural change unlikely but advising cautious monitoring of policy developments.
AI Generated. May Contain Errors.
Earnings Conference Call
ARMOUR Residential REIT Q1 2025
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