ARR - Earnings call transcript Q3 2019 | ARMOUR Residential REIT, Inc.

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Operator

Greetings, and welcome to the ARMOUR Residential REIT, Inc.

Third Quarter 2019 Earnings Conference Call.

During this presentation are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, October 24, 2019.

turn over to Chief Jim pleasure Officer. Financial my the to conference Mountain, It's sir. ahead, go Please

James Mountain

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

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

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

$X.XX rate our per available mark loss other common by $XX favorable of of million million the driven for GAAP while primarily million loss net or $XX.X securities interest was net swaps, income. share. are sales comprehensive movements flows through QX ARMOUR's was on $XX.X The mark-to-market adverse

income core dropped was includes or $X.XX income share. million $XX.X items, mark-to-market common TBA those but per which Our excludes

For our earnings consistently the exceeded have last XX quarters, quarter dividends.

we at forward, that consecutive XXXX, XX excess full for also income quarters. exceed per expected which $X.XX quarter Looking dividends. million, those for represents the $XX core end XX September shares year outstanding about totals common will Through of

of income equity Based annualized on ROE core of an quarter, stockholders' XX.X%. at the represents the beginning

the we That stock book share shares repurchased common value. our per ARMOUR XXX,XXX During quarter, of for added million. to $X.X $X.XX

issued completed preferred redeemable our During of B B shares also X.XXX% the announced stock, X.XXX% Series $XX.X in the XXX,XXX previously QX. redemption Series quarter, ATM We've which stock our sales million of we redeemable cumulative A preferred preferred have our we of cumulative under agreement.

Quarter the agency quarter end of X.X% quarter. over securities. consists per $XX.XX ARMOUR share, common billion mortgage book end backed value of for $XX was portfolio

of impact dividends value the hedging, the Net was contracts our core on rate fully securities. downs, losses As and the excess by for on offset over income interest on also of the partially by and spreads impact rates book gains positive pay contributed. our agency offset reflecting and paid

in on available we $XX.XX value was following estimates outstanding. per our at presentations update the month. around our common usually at estimated the that XX, value include recent middle XXXX, of or EDGAR, website book book GAAP shares October Remember

November announced rate common for each the common share per at $X.XX $X.XX share. October for dividends monthly common of third per the a of or quarter during dividends and paid month $XX.X of for We've total We in million share. $X.XX common

strategy current further to to the call position turn outlook. Co-Chief discuss Executive Officer, Ulm I'll Scott our over and Now portfolio

Scott Ulm

X.X% delivering third morning. concerns and XXXX still basis from into today. global expects lower on first quarter fed. global manifested it Good the Despite trade and Treasury October mid U.S. using as yields. on today's concerns of low note volatility. but XX-year yielded cuts citing fed markets prices the the remained then heightened data yields, of stagnating quarter, as that and days market stable long strong got XX more September Treasury from the higher have consumer economic X.XX% in the around the GDP, December The before housing the one manufacturing exists to policy third X.XX%, of year, to last X.X% non-committal low in type cycle, XX more weakening been and uncertainty XX, of unemployment, continued on the around for a half settling Federal XX point bond war The Note deeper jumped clearly in X, Reserve on within the

from stands three-month yields between XX-year for in financial tumbled underscoring Additionally, common on LIBOR the X, basis of average markets Note spread the and borrowing own the at negative on rate September points. points the by cut basis basis Today, year's futures funds preceding XX the the decrease XX the circa basis was the months We negative negative XX October. anticipate XX outlook. spread a end. follow-up in committee between at also the point chance system Treasury, pricing overnight health of one diversion XX% the the more Reserve a XX basis least Federal for measure feds that with point in to cost indicated XX Federal points. the

reach in CPR average in CPR speed increased third the the from XXXX is August quarter second assets on X.X last rate The XX.X to by mortgage refinancing quarter. agency our by index in The the of refinancing machine measured prepayment seen MBA levels full XXXX. touching

rates TBA risk refinance. those and next generic level production year fastest note We are start current most to is we agency portfolio mortgage bonds, of XX% over loans, new assets of of originate early speeds. or to new that the speeds superior Given through borrower to which available protected factors capacity the characteristics and receding mute burnout our seasonal as by of to project prepaid the

agency any positive faster in spreads convexity A the of significant the income durations widening and precipitous significant points XX more meaningfully drastic coming adjusted agency an offset during drop contributes DUS prepayments, mortgage saw MBS basis spreads. by of ARR's convexity where losses a negative ARR and in spread. quarter, X.X throughout modest portfolio worsening expectations volatility from wider convexity. MBS to points, new plus MBS of positive mortgage and a holdings X the basis resulting duration third portfolio. average of third third the have raised widened of stock to quarter gap a in increased MBS, option Despite rates The for reduction diversification In maintain and supply the quarter

by basis Similarly, points just our during quarter. holdings and third widened the non-agency CRT X also

inter own spreads fears Although projections. prepayment and market exceeded with volatility us several presented opportunities quarter the our when season at advantages CRT

via States operation. Of XX% banking high quickly drop in technical reports and United averaged liquidity Concerns a real the big XX, X% year reverse around repo funding injecting and September by in broader and in available financial and on reserves funding their over a fed saw challenge A mid-September, the liquidity sizable corporation’s and MBS for responded decade. day. quarter emerged the experience markets first

is able BUCKLER during raise for this financing volatile it broker created saw to well alternative. of a This the very affiliated served our which volatility, exactly stable heightened circumstances. we Securities period provide dealer we us in our counterparts situation Although was these and rates BUCKLER

attractive reward negative well winding spreads X has In last the as rates MBS net points owning gross clearly basis with beginning around quarter, OAS those quarter volatility, current jumping Mortgage reached lag as risk credit, mortgage basis towards and moved years securities swap third further supply to backed securitized The the and territory. At in by have OAS complexity and ago. seen saw fourth the continued sector. concerns widening the of XX wise is points. highlighting three valuations, embedded

we in look to volatility curve for Overall, signals XXXX. sector rate in normalization is and the decline in yield outperformance the necessary

environment, XXXX remain will shareholders dividends core volatility create that pay. our constructive and our the earnings our expect prospects exceed we current our of Despite and year value to for the declared on

short the and Some repo of the to the issues and steps The substantial realizes have deal we a coming in abate prepayments factors suggesting rates see concrete if we particularly market. with And funding, more in should more in term taking with the months, investments our rates the fed wide. is stabilize will is the repo is burnout, normally. down for historically to positive trend environment yield behave curve spread

factors the our these for improving suggesting overall a as environment whole, business. Taken

Operator that concludes prepared remarks. our

We will questions. take now

Operator

sir. Absolutely

[Operator your question our begin And Douglas the question. Credit Suisse. will from Instructions] question-and-answer with We line now comes the of Please proceed with session. Harter first

Douglas Harter

fourth the your expectations for your Thanks. pay Could increase you how talk speeds pre might in more much about quarter?

Jeffrey Zimmer

that's which Jeff. part call get question a NIM, know, you the Sure. they of probably broader when And – Doug, investors it's from probably we office. regarding and analysts It's

talk we'll that. So about

We expect prepayments October prepayments the to and by on XX%. that we're in the range. And zeroing of X% November middle between exceed

that depending And element you It's at. for a way constraints burnout We expect XXX between a third on capacity say around other rate, and source it's ago XXX talked prepayments his the a the to in which from about those that I levels minutes of Scott know, to quite today burnout, drop due think couple is in hovered then XXX mortgage while. that. look thereafter words, to better comments investor refinance you

see normalize we as first into will prepayments quarter. move you So the

a course, more, get go you course down can a of slower, bit them rates the see way go could and faster Now more. of up you little see them rates bit little get

you The in perspective rates discussed. want help Prepayments will over question, turn couple they'll on repo fed will funds next I which So and fed help NIM higher to to know, the normalization. looking than I out cuts to deepen, you a more looking curve on components And positive rates move just are trading is repo historical. a if rate based NIM, be normalizing, at think quarters. four on holistic the

zero out XXX were So widened the And is was big points depending were two XX on OAS is X X.X should date, June okay. on They're which yesterday, depending closer fourth basis fed or that widener. lot, tenor. be funds the a XX on about XX the and current to areas the coupon, OAS thing trading like target a repo than has your then XXX

some provide they So opportunities.

your end in change there value despite report noticed of the the current I've this the OAS since was, that the book X.X widens X in fact the fourth coupon morning, quarter, quarter. So the

of suggest ARMOUR in increase is X widen rates. in would XX% of I the the OAS. change value portfolio quarter be so book the spread that that However, fourth And would far that XX% and the

update, see assets is XXX can a XX net the our rate. you at X%, look you see XXX, monthly a coupon like If company average the that if gross

over underperformed last know, those you couple weeks. the So assets the are that performed,

looking So it. a at has look coupon a analysis, you're when treasury it handle XX broker that's on doing what don't to says trade the current like going the is at for doing the because a while

So a answer that's question. your anyway, you. long to Thank short

Douglas Harter

Great. And within, just question. of still then know, sort the you spread

know, kind bit and you about, funding about street just talked today? mentioned differentials BUCKLER you You little between BUCKLER how see you securities. Can a know, of repo

Scott Ulm

Yeah, we sometimes Doug, better, BUCKLER, little with consistent wider, are I'd wouldn't you whole open broadly we something the having you a a confident on the us granting turned we with have is, say overnight third BUCKLER's on by know, as difference out wouldn't a party opportunity the market, funding though ability funding live which with market. taken depends them know, a where we is, us at The do in depends of a on appear balance BUCKLER's principal the ability little have comfortable time. really the having gives to day, street, know, you the if sheet. to opportunities fund execute to grace that open, We're say were, and days XX we the sometimes

of option advantage it quotes, you So funding funding true to markets, normal while know, too. in times been inversion open, sort And, offers a there's pretty with a substantial that. very hasn't in interesting the often

Douglas Harter

Great, thank you.

Operator

on, of Cranston next JMP our Securities. from comes Please sir. you, Continuing proceed. with line the question Thank Trevor

Trevor Cranston

September. know, of differently maybe to, that Specifically, the Thanks. guess wanting to preemptively any I know, that higher And your ticked I was repo was, I you kind spike and related can of are repo end market. thinking repo impact measurable into if repo that part then you're, at roll of, first the know, you across not the market, over any, about had extending I'm part is, than on normal, know, in results? think know, is possibly leverage the heading you you mid-September approaching guys down and second you adverse if of kind thinking you looking questions you look end? the rates? couple if quarter was question wondering A guess year you Hi. like And on how say third at

Jeffrey Zimmer

affiliated Scott's the echo on having power of So I'll broker comments our dealer. own

a always confident And right XX% a well two already book that have We've of, We XXXX, we're it you of broker overnight scale. about BUCKLER. of of into with because thirds know, our funding. thirds of dealer, have shorter maintained I our we now two third January think on own getting

we the As we don't have. just access move fed will moves that at the We're the over entire do other the to what look get out, having not always and we but very there year, REITs of book. slowly most comfortable into kind FICC things

has XX, trade should trade year end past. it anticipate in tighter we're is comfortable fit of normalizing we tighter the with bringing the first the effect in in dislocation. way, some not over then way September was to should tighter less it's situation the like it we than funds, and And structure repo dislocation, repo, September penny. a XX negligible, your XX because of Now do situation, so terms XX trade being a earnings very up the now The that have – question that be worth on even problems to any but solve half with able to

Trevor Cranston

Okay, gotcha.

the level in So, portfolio quarter? sort running half kind turn anticipating say just would the is you of normal at guys or for you that fourth is sort that are drop of management of leverage,

Jeffrey Zimmer

about on the repeat last talked earnings and call it I'll I it again.

we Preferred ARMOUR stock we Series only quarter, even X.X though like the in XX.X A. million it back bought looks of So million of third bought the back

We so the kind we bit, as does put little run So let not fed off. in now if widen, money times, did you leverage felt have the have nine what and we to going we we've times dry maybe mortgages make. curve $XXX We powder, mortgage last securities. to the of were that a reinvestment mortgages that quarterly and portfolio our see in said may some that agency of have we opportunistically here million work to take call, worth backed deepens widened,

they're the years. LOS said, zero spreads three I been As widest they've in

So certainly turn. are you of we a go the where may right not more we bit where don't find than finish just a now, might we but if right little right leverage entry from end see the up And we are now the point. quarter

Trevor Cranston

Gotcha.

helpful. in are to expect think versus that's comment interest generally, you balance extension the how the management, scenario risks scenario kind of upgrade Okay, you risk you those portfolio? then two would portfolio Thanks. downgrade how And you within of guys an terms approaching rate and and the on of a the know, how you can about risk perform,

Jeffrey Zimmer

up XX We points up value even performs down. have it's basis how many what know, charts markets. And points you book pretty in that between our XX and portfolio our and show does, and basis down

do the rates on book things charts, just movement account the that like they right XXXX there's fourth kind the which know, you is mortgage the in in what put heightened now. you though, generally, is have three would. because the go mortgage X.X of they wax still awareness reason fact pressure when And that them, that new on, to didn't book the we they gross a is didn't have TBA The tighten first quarter. don't heavy do of XXX for says when prepayments, weeks they origination is coupons those which nominal up, of But value. So supposed but written

Trevor Cranston

the you. appreciate Okay, comments. gotcha. I Thank

Jeffrey Zimmer

Thank you.

Operator

on. Continuing you. Thank

proceed. Ladenburg Thalmann. Please line next the question and comes Christopher Nolan Our with from

Christopher Nolan

Hi. process repurchases taking Thank the my share right additional What's you now thought in the for fourth questions. quarter? for

Jeffrey Zimmer

buy a quite shares. we million quarter, we'll trading money We're third book bit we'll selectively which the will $XX bit buy back back quite is but spent Remember, selected shares. under and a and in we be of just

it's not ridiculously – up. so go accretive, to to been as think. much you to And ratio has think starts make funny, I know, cost accretive it's your you much like you got as and spend

back. do of will for It's this buy we'll And so for discuss. book good So kind accretive value. we to continue to It's shareholders.

Christopher Nolan

on leverage, leverage. see much Okay, correctly question an change mean, not the Is Trevor's fair you quarters? attractive you're it all you're two entry maximize and portfolio to the just in a Am really expecting the in just I following or way at looking if sometime a that on of I on next that your up to way point, interpreting in but depends trying it options sounds position three like the it? to

Jeffrey Zimmer

to to the widen reiterate, widening. didn't to a so in further the point, be reinvest mortgages bought proclivity expected to A months Series out, that a have to four we last preferred, toward essentially just had to we And we for period we Yes. back where three

So That's in this versus expectations believe what so performance value were. now we that why risk avoided. quarter is been good was our book

We not we some opportunities leverage OAS, where has funding as And hedging OAS, just as LOAS see remember, the opportunities. between good it it's just increase well is where are be rates if are. will only our not the to

go you So some ahead spend holistic opportunity, get go we'll if we see money now. that and up could leverage and

We months. last couple for have of as said, reinvested I the not

December thing to paid be do at first reinvest for looking is we before up leverage. we'd be out would even the November So want we or taking

I hope that's So helpful.

Christopher Nolan

Great, thank you.

Operator

next line proceed with comes Howlet Our Instructions] Matthew of the Please Instinet. [Operator from question. your you. Thank question with

Matthew Howlet

morning. Thanks for question. Good my taking

in year think here of sort beginning trend of in talked bottom had proving follow-on or of next margin? guidance, the know the about of and Jeff, sort the I to second I but that you margins improving. outlook sort terms margin don't year to some improving guidance get could in just are want that. margin year about the you positive the next Just of possibly half

Jeffrey Zimmer

This we is is see the future. what

You that doesn't that the If XX-year, very realize thinking some elements I we positive thought bottoming we in fourth all sudden quarter. should Those see be discussed realistic don't the XX-years are here are fed XXX reason expect things quarter. that though some should is first which if NIM are in we expect sort fourth was happen, don't of gets curve the inverted. out you of happen. have to the very the cut, a our perhaps to propositions would have quarter, But things bottom that that for

Matthew Howlet

Got it.

Okay. And are that up market. about about more we outlook? pools, wondering, your on pay value on other areas in the just areas, value see was in then like there talking the you specified then I in backed I mortgage talked are that certain and curious certain other areas than you

Jeffrey Zimmer

be I few some We a versus market. want everything. in look million did reinvesting to dollars of hundred look specified respects good good because now. of days roles, may not kind versus right it downs which are careful are people, pools. we few here the pay Dollar doing to in the one some some last specified area at We spend in

pools you that trading more features. at a certain bought we pools undervalued investments that convexity good TBAs Those up know, would believe year cost Some do anymore. as ago modestly nice TBA. that points are But XX, have look are are there two we not than we over buy we much with don't are specified so X and those areas

Matthew Howlet

to we TBA And that be noticed expect then out? looking something of you part it. portfolio, decisions, short a I know, Got the ongoing is

Jeffrey Zimmer

coupon some that position if market rallied assets, represents higher the TBA Yes, against the us. short

well curve. could an assets have so – we otherwise that We that aren't into it's inverted deliver role that performing

know, and and they're are mortgage and October okay in and at your you're you're Normally, threes in So selling think this. XXX.X. XXX.XX, about selling banker a XXX in they out you're them November September you two future, the and

the are If you expect inverted high in look particular, fours and at because people prepayments fours performance. poor

you sell do. out X, market big of different know things do everybody gives typical. be the can knows we clear put it's of to at see in an trade We type been kind just the a And than enrolls. theory X you could But you months, So X, a has that prices, higher get opportunity of now else on when to thing that that. us

Matthew Howlet

it. Got Great.

Thank think I that's it. you.

Operator

Thank you. concluding your presentation back Mr. presentation I'll the Thank your to turn remarks. for continue now you. to Mountain

James Mountain

and Thank you, thank joining operator, you, us. for everybody

a appreciate if to back As please feel office, give and your call always, talk to Residential promptly. try We'll interest get the questions, And at you've free ARMOUR we'll REIT. any you ever next in we got time. to us

Operator

thank please you you, sir. great conference Have you does participation. day. call a Thank all again. you And We Thank for your your conclude the that lines. for disconnect And once today.

ARMOUR Residential REIT (ARR) 24 Oct 192019 Q3 Earnings call transcript