ARR - Earnings call transcript Q4 2017 | ARMOUR Residential REIT, Inc.

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ARMOUR Residential REIT Fiscal Fourth Quarter 2017 Conference Call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 15, 2018. like Financial the Officer. now Jim over just Chief Mountain, would to conference turn to I Please ahead, go sir.

Jim Mountain

and All expressed subject that Reform fourth XXXX Thank fact, Harbor you, by and the our ARMOUR's factors our for for to statements results the Web and ARMOUR's joining access We and Julie, the we any our cause from and and discussions Updates, only update forward-looking www.sec.gov. obligation Commission. and the the are site and ARMOUR's Form XX-K, All to Officer, found at thank by statements Securities call disclaim without of materially differ in measures in of with measures conference ARMOUR's to you reconciliation co-CEOs, our are to outcomes Risk online of XXXX Scott unless forward-looking actual today Chief SEC's Securities to do which to Company protections constitute reports included are Jeff provided I'm certain results made in the control release, measures. all outcomes the conference site. ARMOUR's these Operating This Gruber. morning, may results. $X.XX which that release, all on earnings call This Ulm us Actual included results change the quarter meaning within $XX available contain is included joined statements annual the on By subject GAAP be beyond as Zimmer; discuss Also, are call forward-looking replay most statements share. and were Web intended references impact available to forward-looking are by the or factors the such non-GAAP $X.XX law. Copies include the on will statements may of common of of GAAP Safe A those www.armourreit.com. ARMOUR. one Web Core be section for to in to earnings Exchange Litigation and ARMOUR's this Factor therefore, of now, XXXX. was filed conference to or call not found $XX.X to An ARMOUR's million, everyone could our historical net that QX implied continue contained comparable be be of has be per can forward-looking shortly, periodic site will from this on statements income Act. January and Mark today's per million, Web earnings site required available can Certain could Private due Reform share. year. by common statements of Act are to of differ materially date, are forward-looking or many notice. ARMOUR's recitations

use tax of remaining hedges, common due shield the XX.X% dividends We approximately beginning continue For XXX.X the equity stockholders' GAAP dominant the at and ordinary to income the share, dividends a or non-dividend based per the income, net were swaps share, to income on $X.XX common core earnings from in which $X.XX factor related XXXX previously return our the represents directly per $XX XXX.X for GAAP between million securities million the of was common agency while or full-year, on equity and per closed contracts. that XXXX inversely mostly in fair ARMOUR equity. treatment are on taxable market of fluctuations $X.XX pay and GAAP reporting interest represented open distributions. share shareholders' XX% February closed on our while is a Primarily gains rate January income and and of Differences year. XXXX, dividend in the of million does TBA interest of core XXXX. throughout rate due dropped to ARMOUR XX% the unrealized not in value of GAAP accounting mark income rate were for hedge our and

combined raised market preferred common continue favorable billion. shield year. book $XX.XX of common equity, per about XXXX, substantial rate of reform. $X.X close, XXXX as ARMOUR the a and a million of to all result expect and dividends common of Year-end recent for value capitalization the over up treatment $XXX.X total In We a benefiting to to was we from addition enjoy dividends as yesterday's the in the of share, tax X% tax tax had REIT

risk side and through those grow at to Securities over channel on borrowings the affiliate sheet. brokerage our of up reminder, seen our $X.X We website, fourth financing at BUCKLER year-end. fully borrowing common ramped on per our in billion quarter continues we securities another book million company most credit the last ways through XXXX. estimated repo in value line balance on the January was that ARMOUR's recent estimates we brought update the February of been portfolio company portfolio book has estimated the fund in per available able other We've to $XX.XX been far transfer value XX, since our our and XX a include our and the per of XXXX updates are book to interesting borrowing but passthrough for BUCKLER securities updated level and likely management of $XX.XX approaching since in a of with value rates. share and As outstanding. we've part spoke recent competitive market, agency effort future at into repo many ARMOUR's at highly as $XXX BUCKLER emphasize portfolio share as most share so foreseeable plateau

and to turn me Jeff let our Officers, Ulm Co-Chief Zimmer, Now the gentlemen. Scott call over Executive

Scott Ulm

good Jim, Thanks morning.

management SEC added value of creation furnished strategy ARMOUR's its by pointing in update statement website something The value the seems society, on directors for long-term. last Let statement ARMOUR. are system. risk and most our our using and ARMOUR contribution through yield monthly create superior the ARMOUR risk thoughtful long-term adjusted to oversight shareholder board the and of and management company investment We've guide statement posted over and returns which to reads our begin current new on our recent operation of this me produces out to we that EDGAR daily night and a to

Our focus private estate home supports for markets. broad ownership bringing Americans on mortgage by diverse spectrum residential into real of the finance and capital a

to value and of ARMOUR in return realized $X.XX turn results quarter book negative the fourth plus let's economic recent in change Now of net. of dividends total developments. quarter fourth $X.XX $X.XX

return income decline from price $XX.XX returns shareholder negative paid reduced $XX.XX the our for in quarter, of declared For exceeded based annualized, on and not $X.XX share dividends the price to fourth of Core and to of X.X% $X.XX. quarter. X.X% dividends total market

and Our by X.X% during book increases. was quarter value rate spread declined driven the fourth

and month returns X.X% economic the of in stock a XX, XX.X%, was $XX.XX down return in last our a by shareholders, increased products, produced Xs, December MBS XXXX X.X%, producing unlevered XX.X% increased was XXXX price and in significant return returns asset ARMOUR respectively. with strong spreads low was volatility paid across few XX fixed and of X.X% was or $X.XX target classes book share $X.XX X.X%, As weeks. rates dividend by our caused of successful in value year our each and value returns XXXX ARR year XXXX or the total XXXX. for shareholder per our was February strong total in our our REIT since a increases MBS XX Xs agency XX.X%, year $X.XX every income X.X% over X.Xs, and total book

growing floating housing securities rate future. housing Our unlevered second the continue portfolio floating XX% a difficult highly largest insulate last remain and book by We Fannie more builds enhancement segment double-digit from upgrade markets or Freddie as our our XX% These seize well that bonds year CRT delivered returns of in yield potential between a as of continuing U.S. strong securities our encouraged the CRT Credit credit and fundamentals. the Risk portfolio Transfer to Securities potentially and given as segment total have X.XX%. and

relatively contributed with total non-agency average X.XX% portfolio an to also Our return. legacy small results of

-- dry provides conservative as this of As opportunities compelling the leverage appear, of implied advantage leverage as of X.X results further leverage of of in XX. ratio of position relatively investment XX, they was with take adding ratio our funded to implied leverage the unfunded February times dollar us powder X.X times, TBA February

implied rolls not opportunities still dollar can of TBA have worth of advantage few do attractive made in extreme great predating While often present. QE is has funding that dollar years market the also rolls noting to strategy and rules specified dollar we expect to value exhibited the they for pool they TBA years, TBV specialists the the compared of over times represent the last levels

shrinks the XXXX. As footprint Fed's in MBS

be performance expect of muted more than to We XXXX. exemplary the MBS agency

Federal also funds level expect years. steps to in its sites. hikes and to position in highest We We to limit both increase duration Reserve the sensitivity the and rate recent federal announce hedge more our to XXXX in we've three quantum our taken

at end of the Our notional swap the billion quarter $X.X to from increased currently. position $X.X billion third

Our agency fixed rate hedged. XXX.X% is asset repo

Even the negative duration quarter to our decreased anticipate during the X.X Our repurchase from the we agency rate of cover not associated quarter duration with XXXX include during first which core from CPR assets with a protection in XXXX. XXXX. CPR does prepayment level earnings third quarter of liabilities. of this dividends The X.X our will X.XX rate is fourth currently our the expense of

with a with of paid is good of our $X.X the Most assets financed CPR the portfolio of paper. requirements. and with approximately TBAs for outs of XXXX. those as lower yields at contributes of is has attractive Prepayment our became Lower our stated agency a currently financing us of through quarter. at funds provides or counter protection our clearly excluding MRAs attractive composed business reasonably terms from priced X.X with the balances quarter part reduce and portfolio plan. of a X.X parties fourth of in during is across ARMOUR XX the BUCKLER DUS contractual quality Our to risk BUCKLER our remains note haircuts of February Financing BUCKLER and in billion security potential Securities cost with with is operational active end the financing and terms. prepayment affiliate maintains billion through lock recent backup years. loan Repo that and lower importantly as portfolio of $X with a financing treasury consistent financing CPR variety fourth portion important to also total in and early greater XX XX prepayment well January

part core of the as and up in swaps our of activity of supplemented coupon fourth portfolio pools TBAs see feature pay we were securities, liquidity, remain breakevens. to a in in returns attractive that security agency superior quarter consist parts rapid coupon carry of shift Our selection higher important investment specified by XXXX. and

and assets and in attractive particularly provide lower Our returns credit forward leverage investments risks the stable associated swaps. and going us to related enable with operate will multiple at credit a CRT's reduce

equity the of is total at assets fourth amount our end of allocation equity XX% tied with the the in at quarter repo. of Our haircuts credit approximately up

on haircuts allocations While will we show available larger agencies financing liquidity to of financing about equity is up purest sheet our balance the gross is think much support portfolio. not in each in to any the liquidity portfolio that a haircuts to part sector. capital is think Equity and allocation part way committed is tied of

at credit The the in $XXX.X our end XX.X% in valued sector at risk of performance ARMOUR were has began portfolio. the investment investing this of non-agency and been of quarter since transfer first exceptional Our represented million quarter securities XXXX. fourth of the

the by tightening the the in occurred has spread both carry. rewarded been have by attractive sector that and We

underwriting the a return quality strong Our bonds. to credit was The credit an the weighted for standards increasing provided we robust coupon. and of CRT the average fourth recent risk housing the of transactions has CRT in weighted the coupon of the end average X.X%. the of Fannie In of as within Freddie floating X.XX% at and combination untapped underwriting rate CRT underpinning at prices mortgage margin quarter take GSEs

grade increasing for securities financing. upgrades over fill can investment benefit in will securities upgrades. enhancement better from we and be credit to results price securities have which and in our credit that portfolio addition, to candidates other appreciation lead been rating Five future several these of In time upgraded

CRT moment million in $XX.X and in book ARMOUR value will a over asset than the At be amortize above the non-agency class. the next At that higher we for our legacy prepayments end rate is investment by our the environment. MBS. owned see X% less time effects likely very of of further fourth MBS modest relatively opportunities over to While reduced prior And years. XXXX at of the non-agency gains quarter few par value lower two

well many off. existing However, hope a from perform to to market revival that they for run jumbo we assets the participants, period in as continue continue And securitization like market.

Our treasury bond rate principle the Year has spread yet value, sell-off affected book has opportunities. The and negatively New is for the concern recent reinvestment environment. improved it

by, of curve. close our across rate portfolio to appear fundamental appears spread DVLX stay the by and dividend. control risks not volatility our actually and while now reflect fundamentals, the that warranted path The is remain though We'll we keep leverage. they strong. remain risk mindful our to market duration, not of increases We hedging that we heightened are any of strong untroubled appears although it way. still better. us to constrained, make do inflation to a exceptionally metrics our remarks. positioned U.S. welcome concludes obviously investment it can and Unbalanced, economy pieces prepared take We and allowing that even when earn to We've the our expect measured be questions. Operator, And consequently

Operator

question Thank from the Suisse. of comes Instructions] Our Harter with you. Douglas line first [Operator Credit

question. your with proceed may You

Douglas Harter

Thanks.

here. to to as we question, talk -- to book continue First is have first taken might from the been about rates rise if portfolio mitigate value rates if any try against further declines you quarter wondering help book you to protect rising in could further value are have see actions

Jeff Zimmer

which in Sure. update, done January The as February. company may XXst, encompass that have the trades first of does week been of not monthly

And look billion of have $XXX TBA XX-year anymore. four-and-a-halves three-and-a-halves of you if the now roll. monthly on any dramatically. three-and-a-halves So of the at We have not page the the update six do roll, has XX-year the company $X.X portfolio million on changed we of and

things one that's we've So of of We've swaps. also added done. the $XXX million

we and lower tenure million XX-years of are period the in And low of time. this XX% of and seven-year the XXXs maintained approximately the is are think those during I XX% the other that swaps. $XXX leverage

between are ability also risks. this with appear Doug, and other as variety comfortable is leverage give risks. appropriate us As our volatile we between returns balance a ratio some we opportunities now perspective leverages producing know take all an and And, our market. advantage right earnings, of power, in They to the that may tradeoff are containing of that

of giving implementing by maybe leverage on exposure risk general a in the us participate certainly opportunities. to are ability some for So up margin increase today the outweighed to and future and the volatility the

we backup XX-years, some buy can on dollar now perhaps XX-years produce example, here; For and we returns get mid right sell another big double-digit which rolls.

Douglas Harter

February leverage, in you you're talking And asset or hold are I through on guess when about increasing given guess not size just seen X% to able decline value you've constant it, XXth? the I book

Jeff Zimmer

amount comments, going to alone be of -- the as believe are paid. return that or Well, the lower said that the the his such with dividend what's we're we we're opportunities happened to quarter first assets still in to increased is Scott some is earnings going have dollar of exceed even able roll equal still

we Now, April, mean and toward reduced have in bit. March, fund may a a as that increase feds adjust that slightly, having little to and may that look we be

And value last book year-over-year. vast was over the X% widening. in come report, report on that, that appreciate weeks, note X.X with night. year; in of the three The writing noted book change value, the the you I up would us look last I last particularly the I a has at However, X% you OAS majority

had other I what you values at OAS' of know than research, down noted that our our I a OAS. peers as when of some is done. was updated that particularly, some You last change read And book you said, value book but don't did And I least year. this little had different that double-digit firms' XX%

Douglas Harter

broker-dealer, internal the a thoughts about shifting having your kind I guess high then right. broker-dealer. do And as of percentage you you All just talk to of can the in

of percentage there understand your in high Just risks us repo kind of help any having a are if there?

Jeff Zimmer

the feel our we and through bit counterparty, of quite our safer the quite any at day controlling broker-dealer So, other own FICC with own end we do than frankly. dealing destiny, the with a

I as business of FICC, extremely funded, we right do the where are aren't in the percentage we also through see can I course firms. more that's can wouldn't diversified So than normal would note And as things broker-dealer future with expect our but we be the are anything now. that we they exceeding with today own other I well. a total have repo under that to broker-dealer. with of said

we save able to we'll example, on considerable amount yes, be a basis. overnight can term might financing. which do on money But For overnights, do of

Scott Ulm

has broadly target reduced been And about our our outstandings. kind guess elsewhere. of of the I there, that of Doug, half half it's flipside the footprint by is

So if overall advantages anything, well sort important is master of an own of part capacity, increased destiny we chunk from for big of term feel. being portfolio the and as your it. says, Jeff And as we've a information that advantages as come our

Jeff Zimmer

perfect little case look this us financing bit for period of like available, can of they yours, and I are now all ARMOUR, course, provide wanted you talking say, more financing a doesn't world financing. the to started where our XXXX." broker-dealers, to that let's Nobody of as the time today, get go, to available. destiny going of including "Hey, "Well, there's lot during we in financing?" it when does and is of time, And a where pretty there's lot to a Well, remember control a as

Douglas Harter

Thank you. helpful. That's

Jeff Zimmer

Thank you. welcome. You're

Operator

of Securities. Our Trevor with the JMP next line question Cranston comes from

with proceed question. may your You

Trevor Cranston

mentioned book of to value some has driven lot of that of you Hi, what CRT OAS which occurred seeing the thanks. particularly in also I change, Jeff, about you spreads largely questions, with if could one, in Doug's and the follow-ups I widening. so was you're February, was a first year, think by Couple out this wondering specifically break and sort talk February? components, far of

Jeff Zimmer

deal to the first, that and little XX last I'd go CRT XX price. So worth to priced a trading inside weak, now that's

the day, price, head Trevor. CRT next the my trading So look where have the I me, don't at in But with XX. can in it strong traded is of you and room

OAS own slightly The in three-and-a-halves in, that did on marks did dollar or XX-year which of, and any widening, CRTs not which level year-end we So we CRTs. threes, XX-year are predominantly that's on roll. the at mostly

own The loan other low we that three-and-a-halves more would like balance or stuff. be seasoned

as hedging went more result up rates that extending, So had the a out. and implied models those needed you as

So, decline and includes as rates we OAS a effective XX% And book of included. OAS widening, exactly this widening the to year, Tuesday that's night, the wall almost our value of are XX% you. helpful

Trevor Cranston

commented Got shifts little And a the helpful. it. you've very February. second on Yes, that's the made you portfolio so far bit question, to then in the

Just around it's much Would made in coupon changed today? guys we curious, little that the the duration see and you you've of years it gap, up at that roughly hedges, I estimate kind moves bit of January. has the after same the X.X guess, of was end or adding a where

Scott Ulm

of said actually Tuesday I think X.X Scott it's as night.

Trevor Cranston

Perfect. Okay, got you.

Jeff Zimmer

into okay, pickup too sell point, case higher. better as you to because and you to And I world extend much, feels with where, think XX-years make weeks it very quickly six there ago. So, changes your some to may mean be okay. amount is been some don't XX-years it right, a with would a considerable yield -- maintain so at than little subtle XX-years. be what But on the different changes then markets said happens, some want extend the move that I you duration Doug, the a a when would've the might of little

$XXX,XXX You in while outright can yield double that that a guy leverage max stuff, ago. X% was so digits, like a like a

$X to than maybe That do the worth provided assets losses. what not though So buy of we're higher is billion book sell has going assets backup to just some opportunities.

portfolio. done maybe things subtle changes in So the prepayment, through will reinvestment, some or

Trevor Cranston

it. Got

comments. Okay, you. appreciate the Thank

Jeff Zimmer

you. Thank

Operator

Christopher [Operator Instructions] Please with Co. comes from next question. proceed Thalmann Ladenburg of Nolan question with the Our & your line

Christopher Nolan

get the Hi. quantify Could you BUCKLER? savings financing you with by

Jeff Zimmer

and came approvals estimates So, to over things. if the savings there I it they estimated I Five expect that to to the call, X money, the be as and money -- new have future, exceeded or firms so post points. two was in have to FICC basis X said to quarters, is because X in online ARMOUR would make have that losing expect we the are these normalize already going Federal approvals in to a far. to I are that basis back-up loan, to seven the thus last those as going they put X to to credit points, and last sub-prime be close earnings back firms collateral

Christopher Nolan

Got what I'm please. upper is you. limit -- the And sorry,

Scott Ulm

-- you potential achieved we know, little also Yes, has… add we but also a value, notoriously a puts as us you liquidity little better demand have it just on definitely to in well. hard is to less Liquidity know that haircut, which

Jeff Zimmer

Yes.

liquidity So our are with haircuts our increase counterparties. of we lower BUCKLER any of they our other with would than are because

Christopher Nolan

leverage is limit And then, Okay. the your ratios? for what upper

Jeff Zimmer

not did would exceeding to than the that we on range. near are are Harder with no a future now. turn, I stated leverage leverage one we could by lower, We seeing the right cause don't any it limit. you have Duck make us more a that, not and there leverage be comfortable have have of stated in when numbers the we but -- I mentioned anticipate

Christopher Nolan

the into And at prices, positions mean, capital assets, higher-yielding stock mean, buying I where buybacks then, or we this how should management actually look I point? and at selling given

Jeff Zimmer

watch positions, said to I said, we the selling assets, some a happens. see might stabilize lower-yielding years, about to Trevor; and we'd sell, if let bit, build, what some maybe I a buy some our market XX for longer also little -- we three-and-halves stuff while rather or as So, me but talk assets

do definitely to if numbers and road. particularly the our because we to look to the ability leverage opportunity, the And on lower down got So, we that surprise there. earnings are forward the create yes, the side capacity with

again, Now, of course in address let benefits the detriments Board This team management the equity or or the in is of both responsibility me Director's secondary regularly of issuing customer. equity stewardship, marketplace. repurchasing of stewardships ARMOUR's stewardship of and that; the of capital primary equity the group or the accesses buybacks, our

Okay? in as want earnings So, I and under about when typically, 'XX I we the calls things issue talk said before, trading remember early book generally, it. three place to late in value, were 'XX well of I sides to equity, both so

of are clear, issue, is it little The I should a the the back, and be very not promised the you I diluted agree current -- company's opportunity are up, repeat try to preferred, be other outweigh stuff shareholders that investment ARMOUR please know, I if clearly feel the always writing beneficial we about. but So, can say. to must call or portfolio, of say. you we and more give proceeds, use me what offerings let's there Accretive you to meaning this of benefits to extent had -- was issuance talked the detail let's could free dilution, improve the

absorb disturbed. market issued secondary is shares to any new also without The expected

or after secondary get to a and short-term you but involved stabilize you so. our you've before So, wanted Okay? a week format, in been you disturbance

that's the issue. So,

your So, let's get to point.

five or negatively see, the the not of company of such affect repurchase studies continuing our Board considerations would that current for repurchases four the things, are is of there're let's -- operations. the Some typically liquidity that equity the

bonds good to unwind So you about your have time the rather a your reduce up, not swap equity, that's Well, moment Is worried goes are be sell because to if markets number have bond a in you one. swaps. than seller and leverage you buyer, a we or that in to and remember, that.

probably up are We the little more. back better a buyers We bonds. of

don't time that we think a to good now. So, right do it's

use our effect shareholders be accruals bonds Best smaller potentially and company stock buybacks the less off Our that we can buying talk that available that former permanently something have and with And permanent of prices. alternatives a better the operationally vision; of better better the are makes stocks. on about.

share. to just we'd for about two of If would by It stock, is $X.XX the me Board increase things. of work one our the or did $X.X get get this Let a meeting expenses we and million repurchased we repurchase, $X.X accretion to we if other or today day, $XX book were value. the annualized

Our book a change value XXXX day. daily in $X.X was average

period it the for right us, circumstances. in liquidity to is we see In it do but don't 'XX, at we planning really XXXX this not of we $XXX reinvesting at will week, repurchase Board -- the this regularly, right that reassess. look completely as is it to and the shows stock, something and ARMOUR the amounts we stock volatile we stock. and time, repurchased agrees significant million to we're really and for at would with our like get good, we're it able now, of through of record to able a So, willing that and But

for but that's the So, question you. I answer, that a long I know address appropriately hope

Christopher Nolan

statements the CEO? the the appreciate detail. to response the I read, and borrowed Blackrock I strategic Yes, -- the Final just things by question; as

Jeff Zimmer

really a is That question. good

Scott Ulm

a do. a that of of that I part we should bit certainly guess, is that it. clearly was Yes, nudge

just an the statement overall little about think. thinking a a are we think was perspective And here. We much was chances our I Nothing inappropriate I to bit longer, that it's more already guess, nudge. -- had

Jeff Zimmer

Right. XX.X% They our of happen to own stock. a

about care as a hope long-term them really we and have we continue shareholder. to So, to them,

Christopher Nolan

or Blackrock their when standard meet do? -- I statement somewhat was just statement that boiler expects to sounded in article and like that, much mean, you it strategic they reading terms pretty I Okay. a plate, about your the wanted sounded it certain strategic of anything was will is there

Jeff Zimmer

not in strategic our putting did all talk at We to statement. Blackrock

we it we Board sure company, on are if note released are you and down a they positive a we do make on should having the what strategic to the impact received one-year-old somewhat in and look and of ours, is If letter of there like statement that, when of XX-K a let there, trying that, at society. that as and understood I with that we

So, as we public private And we result think what that's we and capital business into a encompasses to everything we is statement, directly, strategic that the exactly put it what address which our company the society. do this and markets does. is mean I that finance. people do help

Christopher Nolan

appreciate I the details. Great,

Jeff Zimmer

are You Thank welcome. you.

Operator

at there back you. Mountain, this further now to questions time. turn call no are I'll the Mr.

Jim Mountain

for Well, are available joining always thank Operator, all we conversations these with in investors and calls, regularly open say and our for We you our thank shareholders. you and us.

anything pick you trying need for you next if in and to order. will will up more, Thanks to So, short we get us much, call office, talk you and back at quarter. the we to

Operator

gentlemen, that We you conference disconnect your does the Ladies that call participation, please for line. ask your and thank conclude for you and today.

Jim Mountain	Chief Financial Officer
Jeff Zimmer	Co-Chief Executive Officer
Scott Ulm	Co-Chief Executive Officer
Mark Gruber	Chief Operating Officer
Douglas Harter	Credit Suisse
Trevor Cranston	JMP Securities
Christopher Nolan	Ladenburg Thalmann & Co.

ARMOUR Residential REIT (ARR) 15 Feb 182017 Q4 Earnings call transcript