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Armour Residential Reit Inc (ARR) Q2 2021 Earnings Call Transcript

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Armour Residential Reit Inc (NYSE:ARR)
Q2 2021 Earnings Call
Jul 23, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the ARMOUR Residential REIT Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Mountain, CFO. Please go ahead.

James Robert MountainChief Financial Officer and Treasurer and Secretary

Thank you, Sara, and thank you all for joining our call to discuss ARMOUR’s second quarter 2021 results. This morning, I’m joined by ARMOUR’s co-CEOs, Scott Ulm and Jeff Zimmer; Mark Gruber, our CIO, is also with us this morning. By now, everyone has access to ARMOUR’s earnings release, which can be found on ARMOUR’s website, www.armourreit.com.

This conference call may contain statements that are not recitations of historical fact and therefore constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protections provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements due to the impact of many factors beyond the control of ARMOUR. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of ARMOUR’s periodic reports filed with the Securities and Exchange Commission. Copies are available at the SEC’s website www.sec.gov. All forward-looking statements included in this conference call are made only as of today’s date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless we are required to do so by law. Also our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included in our earnings release, which can also be found on ARMOUR’s website. An online replay of this conference call will be available on ARMOUR’s website shortly and will continue for one year.

ARMOUR continues to concentrate its portfolio activity in Agency MBS for the foreseeable future. Quarter end book value was $11.28 per common share. The quarter-over-quarter decrease reflects spread widening across our MBS portfolio likely as a result of taper discussions and the markets synthesis of this Fed talk about future reductions in Agency mortgage purchases. That trend has continued through the close of business this past Wednesday when we estimated book value to be approximately $10.77 per common share.

While spread widening negatively impacts the current market values of our existing MBS portfolio, it also reflects increasing current asset yields and improving opportunities for new MBS investments. ARMOUR continues to enjoy widespread access to repurchase financing, funding our MBS portfolio under attractive terms and pricing, both through its affiliate BUCKLER Securities and through our numerous other active lending counterparties.

ARMOUR’s portfolio consists exclusively of Agency MBS valued at approximately $4.4 billion plus to be announced positions representing another $3.8 billion of securities. ARMOUR’s Q2 comprehensive loss was $61.3 million dollars, which includes $69.2 million of GAAP net losses. Core income, which excludes gains and losses from securities sales and early termination of derivatives, as well as market value adjustments, but it does include TBA drop income, was $18.9 million or $0.21 per common share.

During Q2, we issued 13,290,759 shares of common stock through our add-the-money programs raising $159.3 million of capital after fees and expenses. That represents an average price of $11.99 per share, which was accretive to book value and exceeded the volume weighted average price of our share trading for Q2. ARMOUR Capital Management, the company’s external manager continued to waive a portion of its contractual management fees, which waiver was initiated in the second quarter of 2020.

In Q2, the waiver offset $2.1 million of operating expenses. The waiver will remain at that level until further notice by ACM. ARMOUR paid dividends of $0.10 per common share for each month in the second quarter for a total of $26.2 million. We’ve also declared the July and August common dividends at the rate of $0.10 per share, as well as the stated Series C Preferred Stock dividends through Q3 2021. The Company’s remote work environment protocol has allowed us to keep operations fully functional while we worked remotely. All of ACM’s eligible employees are fully vaccinated and we’ve begun a phased plan to return to working from the Company’s offices. We expect that to be completed in September of 2021.

Now let me turn the call over to Co-Chief Executive Officer, Scott Ulm to discuss ARMOUR’s portfolio position and current strategy. Scott.

Scott J. UlmCo-Chief Executive Officer, Co-Vice Chairman and Chief Risk Officer

Thanks, Jim. [Indecipherable] financial markets in July, while COVID seem to be in retreat in the second quarter, rapidly increasing infections driven by the spread of the delta variant in July brought concerns about renewed business restrictions. In the opposite direction, the pace of the global economic reopening kept on an upswing with an abundance of liquidity from fiscally monitored policies. A strong rebound in growth created outsized imbalances between demand and supply of labor and materials pushing producer and consumer prices above historic averages.

Dismissive increases in prices is largely transitory. The Fed has pointed to the low level of labor participation and the existing slack in labor markets is the main reasons to keep its monetary policy accommodative for the foreseeable future. Despite these assurances to the market, the U.S. treasury yield curve flattened significantly, signaling greater uncertainty around the strength of the economic growth once monetary accommodation is removed. The outright [Phonetic] yields on the 10-year treasury decreased from 1.74% to 1.47% during the second quarter and dropped as low as 1.19% in July and even lower inter-day.

Similarly, the yield spreads between the twos 10s and fives 30s on the treasury curve flattened considerably by approximately 36 basis points and 28 basis points respectively in the second quarter. In the mortgage market, the option adjusted spreads on Fannie 2s widened significantly from their historic types observed in the first quarter.

As of June 30, the OASs on 30 year Fannie 2s and Fannie 2.5s widened by 14 basis points and 17 basis points respectively since the end of the first quarter. For the month of July, we’ve seen a widening of an additional 3 and 4 basis points in those coupons respectively. While this widening has impacted book value, it has significantly improved reinvestment opportunities. Spreads are no longer deeply negative and we foresee a slow but steady normalization in spreads toward historical averages prior to the end of this latest round of QE.

Continuing improvement in reinvestment opportunities is an extremely positive development for our business model after year plus of continued tight. Nominal outright pay-ups on specified pools rebounded from their lows in the second quarter. The TBA dollar roll specialness is still quite high as deliverable bonds remain locked away in the Fed’s portfolio. We continue to allocate nearly 50% of our assets to dollar rolls in 15 and 30-year TBA markets. The other half of our assets have favorable prepayment protection characteristics, composed primarily of prepayment penalties and thus — and lower loan balances in MBS pools.

Second quarter prepayment is slow relative to the prior two quarters, providing a tailwind earnings. ARRs portfolio averaged 15.3 CPR in the second quarter below the 17.4 CPR from the previous quarter. We expect spreads to remain — speeds to remain at similar levels in the third quarter. We used the past quarter to position this portfolio ahead of the potential changes in monetary policies, with all eyes on the Jackson Hole Symposium in August and the FOMC meeting later in September.

Our…

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