ARR - Earnings call transcript Q2 2019 | ARMOUR Residential REIT, Inc.

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Operator

Greetings, and welcome to the ARMOUR Residential REIT second-quarter 2019 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 25, 2019.

I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead.

Jim Mountain

Thank you, Edison, and thank you, all, for joining our call to discuss ARMOUR's second-quarter 2019 results. by CIO Scott Mark and joined Zimmer; and Gruber. I'm our and Chief morning, ARMOUR's Ulm co-CEOs, Jeff This Operating Officer, XX-Q, By release on accessed has website, which Form ARMOUR's now, found can ARMOUR's www.armourreit.com. be everyone and earnings are Litigation may fact of XXXX. Reform constitute statements Act that therefore, of meaning mere within recitations of This conference the statements the not call forward-looking contain historical and, Private Securities

be Actual subject those by All and to due Risk safe are the these in the and many such intended the contained of of forward-looking are materially at provided Act. included ARMOUR. statements forward-looking the factors section impact filed harbor of and or Factors control differ statements those the in reports could available to results Reform outcomes factors results outcomes are Certain could results protection from statements cause the implied forward-looking the the that beyond ARMOUR's Commission. the Copies from Securities actual to www.sec.gov. with on expressed by periodic of Exchange report website materially to SEC's differ

can to which law. measures release, comparable most the included may A references without statements include All our We discussion to so forward-looking this conference measure change of earnings reconciliation Also, GAAP today's any call on disclaim today in by unless our forward-looking date of required and statements to update found subject to to certain made these ARMOUR's in our measure. is only be obligation are are non-GAAP included website. as notice. do

year. and website be will available will conference ARMOUR's online An this replay continue one for of shortly call on

net of million changes net movements GAAP interest Turning and per share. rate to aggregate primarily by $XXX.X ARMOUR's driven common was our was the or mark-to-market loss levels results. $XX.XX swap. in the loss QX The

per common includes $XX.X rate and share. securities losses $X.XX income, income, million credit TBA was drop such interest as in contract, items changes risk, or Core which mark-to-market on non-agency

which $X.XX ROE For the end. June earnings quarter, annualized beginning represents common XX.X%. about represents share that core exceeded of last equity on Based $XX.X outstanding the quarter excess at dividends. have XX consistently income per core quarters, our the of an Through million, stockholders' XX, totaled at

is During repurchased a added XX, of called all we book share little XXXX. shares, Insiders the $X.XX XX, redemption additional July Series during A the XXX,XXX redemption outstanding June That common cumulative purchased quarter, shares shares ARMOUR tomorrow, which redeemable QX. X,XXX,XXX X.XX% issued and to effective preferred over an of XX,XXX shares value. On for our per stock.

series. an A this at in cumulative XX, we've be $XX million. paid stock It of will preferred share program. B the XXXX, full It'll shares regular course monthly sales B XX, preferred our be Series issued business the -- with on Through of ATM XX, July of of per on preferred July XXXX, the the X or for dividend final redeemed will under Holders July, X/X to our entitled stock Series redeemable XXX,XXX XXXX. receive be their be aggregate record dividend for will of which $XX.X July

of including Series invest DRIP The shareholders dividend. also reinvestment plan new plan, Series dividend stock, allows we and B We investments a XXXX or direct call in and DRIP established stock preferred to as it. and preferred B our current purchase stock directly reinvestments

B over quarter-end ARMOUR's our in of please DRIP, For consisted mortgage-backed agency security. website. or visit to the more billion portfolio of Series information $XX.X enroll

dividends paid. our by reflects of net agency our position, and partially loss U.S. over TBA quarter. securities interest-only hedging securities we our rate all and gains $XX.XX the excess X.X% Quarter-end contracts, for value of our book interest the Treasury. common offset share, sold was of on per In QX, core down on income That

update the of the each a we previously As July common following million month value be outstanding. of of total paid share XXXX value paid for on be around the same of Yesterday, the the month. that next per in announced second our XXXX We common that $XX.X per recent EDGAR July share. during $X.XX $XX.XX middle our dividends common $X.XX website $X.XX usually per book XX, dividends book available share of we at at per will which dividend, XXth. quarter estimates August or estimate announced include share rate for XXXX, Remember presentations of Monday, we of monthly to and common our GAAP or rate

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

Scott Ulm

in Good Jim. second the throughout mode treasury quarter reverberated declines of manufacturing global in the economic recession May data of dimmed the Fears for trade stocks sharp as Thanks, volumes world sharp morning. XXXX further a XXXX rally and the produced accompanied spread bills. in risk-off by global products a outlook. and

of plunging fed's similar quarter year to and global the risk to shaky A of abandon is fourth verbal in expectations on-hold monetary flexible commitment inflation growth. last fed to meltdown market policy the real the combat potential more its to markets. favor position forced a The

However, follow XX-basis-points and actions treasury a firmly Reserve borrowing at costs than Federal curve. Therefore, overnight up in by the louder yield the the normalize the end will decrease we with spread Bank least in remains three-month that negative to LIBOR help speak the territory, anticipate year's XX-year yield between words. signifying

quarter The CPR has new mortgage quarter on agency second to rate rates lows of the X.X% since refinancing not the CPR in XXXX XXXX. XXXX. our home assets responded increased from seen in Mortgage to average X.X% prepayment first activity of in

most the at are risk subsides. our those another prepayments, characteristics interest prepay-protected agency us asset from behind approximately should bonds, September generic of the increased as factors through XX% new is to that we impact in of be mortgage by TBA expect superior production of portfolio and peak to note refinancing rates seasonal refinance. While quarter or activity We which

driver CPR the By just in X.X% and July. For pool, in option-adjusted decline in Wider average paid were quarter July. for quarter. in the OAS asset value second primary the CPR XX.X% holdings Mortgage in rose XXXX across spreads on example, points bucket, ARMOUR's originated pools book and ARR's X% quarter largest all XX-year basis XX-year the the XX.X% X.X% second contrast, class. ARR's CPR averaged X% seven by CPR second in

more holdings Our points seasonal of basis holdings, the weighted less moved remaining and yields average was Offsetting CRTs broader Meanwhile, XX U.S. vintage not widened on duration higher seven higher longer The XX-year than X% affected investors [indiscernible]. XX-year years, curve plan. by were a five of as as the basis out positive life the our older X% and DUS spread expectations much with some out in DUS pools. market repriced as point pools XX by as or points as XX-year prepayment than X.X% contribution widening

in to rally. averaged met. yield the maturities duration faster Treasury face points reinvestment the the amortization mid prepayments, ARR's rates -- the The collapse hedges well-known and and as rallied environment inverted at two positive XX XX-year that near-term by of rate. to from now duration rate across in contracted second management asset dollar assets basis of in opportunities quarter due slightly and limited headwinds mortgage XX resulting to rolls premium include our TBA an expense active higher curve investors

However, the net our our dividend for make policy interest near-term stability the and of expectation for optimistic lower funding us market. rates

ARMOUR's volatility OIS are XX% which of our repo the approximately priced agency rate book. eliminating book, position have fixed funding XX% is instrument entire and daily, of balance our Securities, is consistent most XX% rate reset Repo our portfolio of swaps liabilities. hedge our hedge financing attractively OIS and remained from of our spread Overnight BUCKLER and repo counterparties. LIBOR appropriate interest for covered affiliate, XX% agency our by historically financing index been swaps. short-maturity unwanted

challenges their concludes to monetary mortgages priced questions. the XXXX, Operator, the volatility, in now half two first policy should Given prepared happy for positive take the that rate mortgage of interest our convincing we helping in be remarks. outlook multiyear provide lower quarters. more at lives. faced next basis appropriately a are the We'll believe A

Operator

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

Douglas Harter

in being think core I earnings. you talk hoping dividend relative -- decision above stability prior heard the commentary the in about Thanks. you quarter you say light in was still well your I dividend the reduce I so of to of and of earnings expect kind rate could the kind that

Jeff Zimmer

Hey, Jeff. it's Doug, morning. Good

Douglas Harter

morning. Good

Jeff Zimmer

the dividends. I on at $X.XX remained dividends and the the QX, clear read. would much So couple of larger came cutting let and are about reports than capital certainly cut of board firms some the me in research a that's talk QX. the things. reports number that research we us, ARMOUR A out not which throughout the We all and of other note, peers, about of some talking

paying So noted, rate versus a we we coverage, as maintained a higher well out $X.XX. as as dividend just higher $X.XX

And funding rates, amortization fact However, feeling -- as amount the despite the Fund's increased, certain certain lower bit. Federal rate expense is for the that cut, almost a prepayments quite there not did a themselves. of increased a

funds you as prepayment eight basis LIBOR, you above fed have So have still a are seven to today result, that a and points rates high.

the portfolio we a reflects we our earning. we're point dividend So the that saw that want that to amount to believe with we characteristics cut coming and

earning. So what believe in to about what we're QX. we're of like analysts QX about out let's is think terms paying We would think we

think go down, prepayments the we $X.XX, dividend if to fed that that." will where then the in rate that, say at future So that's and come increase earn world we think keep the "Hey, in, rates quarters we to funding If we're earning. going -- we the we're dividend

I of, your power you management. now. capital And that's talk which right of about the with wrote overnight, noticed where that, appreciative of very I'm are So on we some let's comments

Series of We A as have redeemed tomorrow. the

A sheet, as tomorrow Series those our X.X. will balance actual take leverage of be you if So off our

our as So capital bit. of little of we've management power then thinking is reduced leverage the actually just And a follows.

the redeem and kind to reinvestment times acutely leverage, choose. you that able so we're difficult, $XXX-plus million, you you finding environment longer nice in an As, pick assets nine not And it's got you've of no where need. and to about had opportunities $XX kind of be million If that's of

of assets sold don't where some but didn't have reinvestment so that a opportunities period good. stuff we a actually just couple on sheet we've our reinvest some in months that we to retained want So look low-yielding for balance don't

redeeming with happy really we're So those.

release some we X reduces press to under Jim's sold also may believe, buying you've as $XX-plus the X/X need shares ATM $XX amount of and well reinvest. have which well, which has comments in coupon. noted maybe as have back modest that Series B, our million, I noted we program the our spent, that a And You a million,

there, a you that perhaps answers So I little your anticipated. hope question than lengthy more

Douglas Harter

down dividend that that to expect you earn. on what drill just comment of guess the I kind reflects to

of kind margin more mean, relative at sequential So just seem to look do what compression you speed to understand kind highlighted, the from also XQ, the guess, kind XQ guess expect given I we trying which I is of -- I of pressures kind earnings pressures? on capital else more do guess, if were to actions the that you I increases, positive. funding of

Jeff Zimmer

Yes, precisely of amortization on the expense. amount

prepayments to for be slightly month will We go in expect first the again we for week the up revealed that again up them August, to and September. be at expect

cycle However, see you've of from to going gone a there on. burnout to and refinance recycle bit that little we a through to that it expect a the reasonings recede seasonal due -- fact you're

put we the there. So $X.XX

I the height next and which be on where to see for we amortization going we January can't couple of going that see November from cycle. just with the the prepayment and should toward in based did December stable expense Why months? rates we're the September, see of up in that

Douglas Harter

Thank Great. you.

Jeff Zimmer

Thank you.

Operator

JMP from of with comes Cranston line the question proceed. next Securities. Trevor The Please

Trevor Cranston

rate the Hey, prepayments XQ. quick follow-up and thanks. for morning. Good One of the amortization on question of

can we in for obviously, July. where see So come rebates

likely you're they're can you September come August the for and in to around reports? some where give But numbers thinking what

Jeff Zimmer

estimates that Good discuss had? you It's morning, for months -- we've do relative next to where Trevor. Hey, the of want Jeff. Mark, just to our couple

Mark Gruber

Sure.

from or using to flat estimates the in up we're here think in XX% or next maybe portfolio things September, in XX% we and will And moderate. And like our expect in on said, that's our characteristics. what so, what -- we maybe So so. up based from we Jeff there, month see then

and looks it fed what depend again, on is the what to the curve like all But does. going

Jeff Zimmer

to Trevor, de exposure our minimis. one adjustable note would rate-ons thing is is I

you on, a of these as longer-term you result, see -- going people So heavily very see want lock recycle when because to cycles in ARMs lot a low refinance prepay rates.

not applicable that's us. So to

XX%, not through that's our So taking there. is for what and is refinance protected, you'd cycle like be which portfolio seeing you're seeing just as some part us well of just

Trevor Cranston

thoughts funding repo that guys pace the Okay. think haven't you comment And of decline bit? we've relationship three-month you the for that quite around guys so be your made a little you when particularly repo any sort a instigator at LIBOR rates finally seen, far. declined and on normalize to have rates the in that would what'll expect side, start to Do coming I

Jeff Zimmer

that start suspect I that meets fed is down. the seeing you'll after still

So at two as this ways. a result -- look let's

we're currently receiver book all, all beneficiary that OIS. a of of because our is First substantially

So funds actually that now. with above on LIBOR, we're fed more money earning right

your as much. to funding However, point, dropped haven't our rates

we've do lot -- relationship because of we're able with have short-term BUCKLER, that stuff. we what done overnight to is unique So we have the a of

dollars few have we a so billion of paper. overnight And

little we fed extending a on then can fund's as to XXst So July, get we start the potential of out of cut farther. that the closer the

positioned, the most in to rates. to we we we're expected we're from really we where benefit think the So be exactly that can where want cut

Trevor Cranston

so to quarter? earn, new guys fed to also that this that is does rates And dividend that so just incorporate be you when mentioned basically, clear, going that going you're the to you the think expectation lower what level,

Jeff Zimmer

based we is expect meet the we XX-basis-point for It $X.XX July. quarter our month in that cut a will believe We the correct. that a fact third completely on

end no have month earn at cut of the challenging this quarter. it will you be $X.XX If single every July, to

Trevor Cranston

Got you.

Okay, appreciate Thank you. the that helps. comments. I

Jeff Zimmer

You're welcome.

Operator

proceed. the The next Thalmann. from comes Christopher Ladenburg of question Nolan line Please with

Christopher Nolan

quarter? the share please? you that, repurchased was you What guys in price that out Can Hi. shares per-share the

Jeff Zimmer

Jim, did that? we announce

Jim Mountain

have We average bit solve algebra it. the to exercise, haven't do little barely to to -- from something down you announced for you that But effect backwards be rounds of backwards share the but that. we if math on the repurchase announced a just able It's the But ought price. X.XX an a not outstanding.

Christopher Nolan

are I guys sounds you at it mortgage repurchases are sounds like. how looking going fairly then it listening like And the assets Great. and to forward? was comments priced,

your leverage ratios fairly high this you for large at price to are have seems stock and authorization Your moment, the but be attractive repurchases. repurchase

the do how earnings between everything value? and you What So balance there, book thinking please? supporting out was

Jeff Zimmer

leverage. nine under more leverage least peers we particularly, So be thoughts. full term today, a couple -- times of group well, two peer The that larger the or one are our that actually would at of have

So an outlier there. I don't think that's

the of things and to we down the the and been the mortgage reporting -- We and have meeting Series subsequent word then buying -- the back use go the meeting. Series as result to going ahead to of As, $XX see the pay rates tomorrow because look we'll gets some their the funding million and cash Reserve Federal have to spreads As, see how closer

look we to at little shareholders. we'd And a rather to structure some based because like them -- Do we'll look buy opportunities opportunities? to on Or shares of like capital lever and today. so investment now, those up then all you take components, don't a want benefit some use hey, assets cash back the investment some buy better

So things we board weekly two And a basis. out on happens, do if pencil which, okay, a all with as or out, these we month look happen this our it do we'll and this. you

this If we'll happens, do that.

back some if be can remains or shares. look under good investments so anticipate par, stock X% XX% buying don't you the And and mortgage we'll opportunity then our

Jim Mountain

we've X.XXX last say quarter, Yes. We share that like is that to years One the board Jeff, done remains. that went time last and to and this other several was but thing million about the I'd that, -- increased the ago. authorization

adapt period some to for long they the authorization extended to an over share time circumstances able to market evolve give is as be powder term. this of us dry intended to So

I This is of -- own personal board us immediately. to from go not office, something corner intended my that the that the think spend

Jeff Zimmer

I the few amount in note the note, also of way, of buying modestly quarter, stock has would spent take after-tax last over I million the group Chris, spent peers at larger same a millions in press management two And the dollars, about Hey, you money the a our a release. dollars well. look underappreciated if ARMOUR I as believe, team

So Series reduction taking if in buying management that back millions with and you dollars is the of buying each A company very the team the the capital you comfortable and that means you the stock, after-tax stock people see see see structure. are

Christopher Nolan

half Great. comments, And final say question. of Based your on fair that in expect is the in to year? we second should it increase ratios leverage an the

Jeff Zimmer

reduced just true recently. not that's We all. at No, actually

Christopher Nolan

Okay.

Okay, Thank you. great.

Jeff Zimmer

Thank you.

Operator

Please [Operator next comes Howlett Instructions] Instinet. The the line Matthew question from of proceed. with

Matthew Howlett

of have taking question. think and end you'd helping July. lot been and feel the Hey, helped, value here obviously a gap guys. expect -- you my book sheet said do Jeff, that seen balance you -- by you cycles increase year. bps in Where for have the XX I through Thanks the duration here of

I And think gap do go you the from XXX is duration as think where I going? as may more. could bps fed where bit year to is high little you take now. market the market's pricing mean it in even the a a fact, right if the

Jeff Zimmer

Well, learned a the to we've keep few that need positive what actually over we last is duration. years

would guess duration XX from maintain been has intermediately over using X.X -- the rate. I our X.XX that We balance want balance sheet sheet duration there. keep ranged we've So duration. be would that to to actual a days our I treasuries duration good think last

duration a repo Now actually that. include don't gap, for liabilities true on we our

it's the So repo of if exceed average well Is helpful? life that always look life the assets, you liabilities. our at our of average to to want going

Matthew Howlett

Yes, that's helpful.

to -- it? you're than to go the to in you're I -- expecting, mean that this fed extent So from position going you're a the be if does benefit more,

Jeff Zimmer

overnights. the And we're to able very want okay? so, quickly. We're that's of own amounts, we again, keeping if move greatly why see to we do do on broker-dealer, overnights world of not having in BUCKLER, power change, once lot other amount honestly, believe that's the And because a and our a can the guys We large large do that.

Matthew Howlett

And then Got a Right. at job managing it. good done and guys always have you convexity looking opportunities.

of I pay there coupons of lot maybe I think finding you out in are opportunities a they're that said and not -- up. saying certain guys mean, sort

that? you just of Or now prepayment to your amount in incredible an I the seeing -- mean landscape of see just that the of advantage are waiting comments opportunity I year to stack. you're it's not back there's the the tell can of from coupon sort across take right

Jeff Zimmer

your started a you of But and been cycles of we these through cycles. in a comments saying XX number years. been through I've by the business for we've lot have these been

So through we And themselves. are always, -- present become do waiting. cycles opportunities these

We don't think they're there today.

your So We little to leverage some meets, denominator think up and effect, and bit trying our reason up. The value go the only is on right? not that we're leverage anticipate go But cyclically, little a trying if to going all after up here. off we'd a because you're book that's right bit came have provide increase purpose that opportunities. going we they're loosen mortgages fed see do to where the don't

XX the trading because pay seconds at not XX maintain look day, you sell dividends over appreciate They're who we going meeting investors very quarter. value are the there. no And fact we lot TBAs them now. in to XX, every that assets But there's XX, rich. for have seconds we're would we're a board looking our XX at of pay-ups, and If other

see We basis, classes, So a favorite tight. that's we're right levered one Don't asset is now. ARMs the stuff. at of are of really our disaster there. DUS, a think opportunities way is lot looking a on which

lower class. because that look ARMs, that asset a went something see the prepay the And of bit. market's value little That's a to -- expect we heavily. I values at. one reappraising would those the the book in quite can of value want lot peers go owns there's They're of their down that a to got before going book to value very I

and always things just they change change it. oftentimes But expect you don't when these

to So powder. we're some dry going keep

there fit asset, some don't As buy that if I back will we'll be stock. opportunity. But we an said, more

going patient. to be not We're We're it. to force just going

Matthew Howlett

lot a for Thanks Makes conservatism. I sense. Yes. appreciate my of the taking questions.

Jeff Zimmer

Thank you.

Operator

are call I'll any remarks. there for closing questions. turn the no back now further And

Jeff Zimmer

thank everybody. you Well, very much,

Jim Mountain

Thank you, everyone for…

Jeff Zimmer

Oops.

Please go Sorry, ahead. Jim.

Jim Mountain

for No. their I to everybody going participation was this just thank morning.

We are the around office.

questions call. has anybody if give the a So throughout always quarter, us

of and end instantly back to to try the with day. enjoy that we an And get having you have opportunity people stock. following are by or always We'll dialogue the our

you see We'll then. time. next until So

Operator

thank That disconnect ask does the call your we lines. please for for and your conference and that conclude participation you today you

ARMOUR Residential REIT (ARR) 25 Jul 192019 Q2 Earnings call transcript