ARR - Earnings call transcript Q1 2021 | ARMOUR Residential REIT, Inc.

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Operator

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

First Quarter 2021 Earnings Conference Call.

During the presentation all participants will be in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded Thursday April 22, 2021. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. ahead. go Please

Jim Mountain

implied statements Zimmer; meaning And to Kelly. morning, has all joining ARMOUR’s and Securities in fact for joined forward-looking not are results could Act subject www.sec.gov. forward-looking ARMOUR. to Agency of Gruber. law. shortly the include Private materially conference CIO, of discussion are Thank to which control made the will and online in may change the earnings Risk outcomes concentrate differ ARMOUR’s now, forward-looking By ARMOUR’s reports thank first results Actual at to available website future. by our any call subject to to without XXXX. of Jeff be from be the statements we year. Ulm these up reconciliation forward-looking statements statements Copies factors Harbor new to per Scott of discuss ARMOUR’s only book This references notice. Safe to required Securities All are historical of Act. earnings be differ this everyone and could website forward-looking measures included protections by actual for Factors quarter disclaim Exchange ARMOUR’s GAAP of therefore, QX by our obligation statements provided today of Also is section which are and periodic continues so from our by Mark you, Quarter-end the included measures Co-CEOs, ARMOUR’s many included most the you and to call the release, XXXX as MBS can of replay such are ARMOUR’s constitute Litigation on within We Reform Commission. the update share, cause I’m on the that the found do website. access contain the the This to conference www.armourreit.com. XXXX. in statements our to for these All by will call date, today’s the and and results are A reports unless materially and filed forward-looking in continue expressed statements website intended $XX.XX with conference An on contained or release, be this our Reform are of one our of ARMOUR outcomes comparable in foreseeable common was call measures. impact may recitations beyond Certain from that results. $X.XX can certain to non-GAAP factors found available on due activities portfolio its SEC’s those value

annualized Monday, be this as $X.X mortgage-backed specified close was return includes approximately of in TBA As book representing of GAAP $XX.XX plus million, portfolio of an and common income $XX.X share. billion agency another ARMOUR’s value net approximately past million underlying on $XX.X QX $X.X agency ARMOUR’s billion business securities at to GAAP of income comprehensive which the per estimate we represents consisted securities. exclusively valued equity XX%. positions

as core brief a recognize and amortization make on prepayment they income. of expense accounting We comment the me prepayments Let occur.

about C have ARMOUR’s common million. recent about total capital. common C the common of first quarter, per effect that declared of stock share, for been were $XX.X method April we and dividends per for preferred and each dividends of common We $XXX.X the on stockholders per in the preferred core share. and quarter, ATM We paid QX active stock or a share. to for dilution they approximately in in share the month rate May prepayments, the stock contractual and Friday, per negligible. also this of third. share We’ve month and X, April Given the QX at Series total up prices $X.XX dividend $X.XX forecast Common lower is through ramp that Series of continuing using each that discernible the $X.XXXXX preferred XX% for $X.XX in programs estimate million in income. $X.XX would to represented of two-thirds total and common no represented saw was raised stock remaining rate amortization

a entire program. over over occur shade share that share Let’s to per XX common on per basis expense That $X.XX the will about for equates savings months.

provided external the ARMOUR further will income to fee current $X.X mail. when than stock shareholders. their of at broker. of Shareholders previously the quarter dividends likely all offset of external and shareholders tax distributed access or both ARMOUR following QX notice the notice. for also they shield it initiated REIT Full Meeting Annual Thursday, record notified be XX, cards ARMOUR Report This for projections that in intended X:XX of on which show tax should and common contact million waive The access for the at the May If notice XXX% XXXX, million By adjustments, AM of Stockholders SEC by That’s management of waiver is rate are received card. it as electronically to Annual for second for their available Time. to gets website. rate and proxyvote.com the with $XXX,XXX due statement instructions month request proxy on the may not, continue The XXXX XXXX. that consistent of paper in scheduled On is $X.X purposes. and expenses company’s the per this access the copies record all and That treated preferred Eastern by common thereafter, into log notice their basis their register should rather adjust have of quarter now ARR of hedging their shares and Our Residential in the process was a Annual of that the to and were is XXXX the who encourage Annual also my XX, portion This costs We is operating will vote common painless. www.cstproxy.com/armourreit/XXXX. the virtual-only will stockholders until shares taxable in Meeting cards. current need be April company’s webcast it advance be for advance. will on manager ARMOUR proxy our votes legal the second to of this deferred and on already XXXX. however. And I’ve fee, to manager amortization again proxyvote.com waiver with a during of results tax year. XXXX. the wish its obtain continued to Meeting to link ACM, voted

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

Scott Ulm

Thanks, Jim.

of quarter [Technical first The Difficulty] XXXX

Operator

remain your stand much ask please Please the by Mr. call have I and to call. that back the the I stay you proceed. on sir, thank of will may conference you call resumed connected. Please to for Mountain patience begin line get try very we line. will momentarily. on you We the the

Scott Ulm

with ARMOUR Thank Scott continuing Co-CEO my of Ulm, you. we disconnected. Apologies, remarks. were REIT

pandemic and the was distribution rapid and as stimulus reopen vaccines. and XXXX economy sentiment by effective projections quarter year-long XX as against this The the fueled Positive its of issuance The optimism on of quickly timelines. largest nearly X.XX%. $X.X expected high saw reinflate for a as markets raise of the potent touch U.S. fix fiscal in a deliver inflation to the first the ahead first have the fight trillion points economy. history treasury the impact and to repriced on the basis by and financial XX-year Higher treasury yield of higher

twos yield unwavering repeat XXXX, purchase due Federal to quicker program points. spreads the pace While in that in the Despite the recovery has cycle. to commitment into going mortgage large XXXX the of tantrum, avoided XXs spread economic yields taper rise keep in at part well treasury basis and treasury expanded a XX Reserve’s between mortgage by a a

ARR adjusted XX course points, for basis eight Despite have the OAS duration coupons around TBAs illustrating risk return managing exposure delivered was in treasury the an active tightened lower XX.X% cohort. X.X% strong X%, in the very points dynamic volatility a tightened portfolio’s book in ARMOUR zero controls first as economic a this production the prices, Fannie and on Over XX-year, option convexity. spreads as much bond or by annualized of hedge basis while positive the sharply and its quarter, first quarter, market.

XXXX it sits less and implied the of X.X leverage sales course This valuations ARMOUR’s the declined our raises Over either rich through took the program, of as through at times of favorable assets capital quarter profiles. place X.X with or fourth prepayment end ATM today. times to from

to take opportunities provides leverage market lower with us Our ahead. advantage dry powder of ample

as to part duration with half this exposure a we the the prices in plus the like XXXX. X.XX for yield curve. very current on We year-end rates of second the duration which will for ARMOUR’s market. in of higher buys our matches to continue negative interest long-term the profile, We be of XX-year accept is and duration risks currently in the X.XX offer selective was will

their of elevated prepayments to that from second ARR’s generic below XX.X subside And as increase to potential CPR we above slightly the more quarter still market both Note MBS cohorts. quarter. First earnings. mortgage speeds CPR the the were pressures averaged on remained portfolio prepayment tailwind share. XX.X in originators quarter, slow first in order rates are quarter protect significantly to previous expect in

including While and supply in we’re declined rates first TBA adjusted is relative dollar performing to higher protection with a the and characteristics, quarter. Nominal remaining portfolio XX% in still on XX-year investor supply portfolio observing Fed lower but to loan in seasoning. favorable well the XX% prepayment weaker was XX-year specified be specialness while roll delivered quarter-over-quarter, we’ve balances again TBAs, of remained also as the specialness duration basis. rolls approximately portfolio. pay-ups nearly mortgage robust, fourth XX% Today, penalties, assets have quarter notably origination into allocated cooled an the demand by the available to our increase prepayment reduce of roll

markets Feds balance challenging are that continuously performance year. exit eventual QE see MBS a from we of current supply near to the MBS as book are this timing Although the the driver purchases value clearly something to favorable demand key term,

our we on we’ve medium based before, dividend business. our outlook policy As on noted the set term

our continue is dividend to see We appropriate. level

Fed. our a money. into This would securities. need But shareholders comfortable market on a we’re lot Delighted bit summary, return, book a the threatens extensively we we the but we not this delighted putting business very questions. that, With be distortion of there, take to in and cautious. they’re Long degrades term, price high increases have value. So risk be from clearly to just makes

Operator

question And Harter Credit from first comes Thank Instructions] our Doug with you. [Operator Suisse.

You may question. your with proceed

Doug Harter

comment expense amortization hoping could gave. Thanks. you you more little was context the a I give to

kind quarter, I was think versus $X.XX of the that compared model kind the quarter? prepay you said drag it would this a of prior to How around speeds.

Jeff Zimmer

is this actually don’t XX% we you that up as up ago. update Doug difference the those Jeff. amortization much yet. from year a company as I see could monthly last Prepayment…hi, Prepayments in exact as we numbers The night, were put believe released over

releasing So, I careful be to public about that need information.

So, we’ll drag Jim haven’t, the higher amortization. we check on and up we’ll are I’ll which prepayments, you. would that biggest on is indeed, things, release get And two that. that’s back – are have everybody and that. But we’ll double greater go could to prepayments see ahead where earnings And XX% if

do modeling they some comments, to higher or current a non-GAAP I knows, As through do cases, the it are. don’t earnings, in catch-up occurs. amortization make take as And catch-ups, said perhaps to actually, value. be than, his Jim then in think and forecasting run core We appear and everybody book measure we

was and ramped here, the kind getting though earnings, comprehensive prepayments So honorable. income to you the of have look the substantial as hit quarter, returns up larger if core at a we’re even over quite

get our have The further other be then that, here, to course, stay late firms rates the down into rallied street, catch to and you bit on XX% and the be May expectations. think I and XX%. do around which aware that, need in If be increase they’ll and expect chart, down here interest that a seven up Most of maybe little we expect summer. see corner to a another by prepayments to prepayments we June what’s the addition have as little thing you’ll of of

target Scott Ulm high element our comments his now, is leverage other we in is the is, said the Now, in Xs X.X.

So you’re tell quarter had I right almost full have of TBA Xs can two turns, two turns going now. to full income. we you, $X.XX to And a

XX, Scott’s to on lot at negative to it’s a going of we’re kinds right, said, a and add can OAS X.Xs, and income. also is So, bit That heavy Xs levels. looking chart being OASs these are do a reinvestment I’m not point, little here reinvestment of some of a at to left negative

We’re going to be patient.

also However, prepayments. we highly month-to-month dividend term it out way we look basis maintain indicated, in just dividends as structure at on and that our not as on based is Scott of our medium perspective a occurrences on likely the reinvestment now

Doug Harter

down first first the in were your fourth the to sequential quarter? of pieces drill the higher you industry-wide kind kind the relative talked about have prepays down to in on what Just you to I prepay, drove quarter, what of quarter can just of portfolio and guess prepays

Jeff Zimmer

our under prepayments. well are prepayments Our group peer

least peer at groups the XX XX Our higher. high are to level, was compare mid to the that CPR going you prepayment rate month be to that for CPR the in last

higher individual at levels, QX prices. represented very note be positions to portfolio. that XX.X Our was our those own higher continue and our maintain exact, in those prepaid But positions to low going have CPR in prepayment XX. would to securities not also but coupons, We we’re Xs our the I securities in some, they X.X’s.

Doug Harter

you. thank Right,

Jeff Zimmer

Thank you very much.

Operator

from with comes Securities. Trevor JMP question next Our Cranston

your with proceed may question. You

Trevor Cranston

thanks. lower play of target leverage think were you see to the – way know was of on wondering But leverage, well? view. I level, there on near elaborate it’s sort I the at of things to said risk, a are based you if term sort is as could sort dividend that the guys thought other at behind earnings in running where lower there process Hi, you or if that’s maybe about medium strategy your opposed as your your level. term, you the

Jeff Zimmer

were to And matter on that XX than for a assets just of term more correct. this with you be expect, lots there very we our could I I as some indicated. negative that at OAS exactly for have long great have fully rate, That’s if to core dividend reenter we probably opportunities invested, little be fact, we income to powder. bit have a point, – dilution, Investing to is lead as core incomes of book And quarter, of value we’re going some going remainder and dry cautious. will know, the earn

Trevor Cranston

positive guys comment of negative some the have well into go you I then protect in large rate adding as got on it. Okay, how curve. the value see that, how Can That of terms as that’s the have remarks duration, mentioned, makes changed the but positioning, moves duration XX in any out against sort rates optional any protection up? your you And And prepared sense. additional in portfolio think that you further if some you and year? to overall

Jeff Zimmer

DVXXs. of has We negative the the and will whole the steepening DVXX, is another short and Fed said, don’t potentially two overnight rates. us a see as expect to But the the low, steepening. keep provide slightly in as And end a see, duration that much opportunities our And funding that for banks many tenure in occurred. as higher a of the credit have curve, as increase see other as economy don’t you’ll So, more XX we will firm as rates areas, that as an defend X.XX feel expands. release morning duration was year, we Scott against pattern this years

not Mark be maintain leverage our paydowns saw the the I will will mortgages. period three that, of so positioned know, in full going the underinvested, is at team paydowns, they’re next. target. that, round think and only the can in that the we that yesterday some some purchases And By I at course, amount and his Canada announced full do underinvested point, to of comments know their months, people’s of point on the hopeful many you buying reduce we’re Fed have reinvestment. to as so for that they’re make, way, to some that more one, a last And only starting of you where reduce reinvested also

maintain level expectation think reduce treasuries. purchases, Fed same the in and into that they is put of to I mortgages the wants it the if the would

Trevor Cranston

negative about leverage lower of Okay. with guys or to are valuations comment on let it OAS follow to and up tight end you you potentially those the reinvesting drift is To tighter, level that here. quarter? like guess, I at continue get Would a at you’d the or paydowns, remain keep leverage was even where where

Jeff Zimmer

lower. we much it’ll money you X.Xs are XX Xs May, into think at now, TBA do X.Xs leverage XX.X%. all equity TBA if Even TBAs, a year, XX.X%. could lower, I see don’t more right bit June get you debt little change. rolls put get Maybe can XX% to are

areas associated potential investment and we’re the money But there’s negative OAS So with at XX risks the there. cautious. we today, put widening to of spread that, when being look opportunities just

do will come was some note their over in over, bit that from we ticks this interestingly per have highs, off in. now. would a enough But like enough, specified, the some – ticks quite interestingly I pay-ups specified, OASs So, a XX the reinvestment and XX come have XX, stuff

Mark, the down, investment more So are the in TBAs we element, come have because pay-ups but our of negative. to to talked that you speak about over And that maybe meetings. dynamics that, want OASs

Mark Gruber

is, Sure. has out hedge declined, is that mean the the I cost mean, up. it’s fact portfolio just mortgage the gone rates option to I

decline. though nominal spread is So, little the bit a continuing you spread just some adjusted maybe to even widening, see, option of

have mid risk some yields, they in specialness Jeff And reinvest pools, our seeing so like lot said, TBAs, back to kind seeing, interesting, are lot a and OASs, have but convexity in we of spec different we’re of and because that’s paydowns a in product, single-digit mortgage negative of yields the on continue the reason not single-digit spots. why we’re

the all look So, when the outlook out opportunities, reinvest not are to of our attractive investment on we paydowns. super

Jeff Zimmer

the very XX, quickly. and opportunities These These opportunities six between things were come on difference like May XXXX, at XXXX come XX, out you. points of investment The July difference.

set We’re trying up. ourselves to

marketplace So, provides do and we a reinvest. if power quickly to ramp up earnings. the to the dividend will we continue can to reinvestment, have maintain want leverage create Otherwise, opportunity larger We for an our we times. very two

Trevor Cranston

the comments. you. Okay, appreciate Thank

Jeff Zimmer

Thank you.

Operator

[Operator comes with Christopher from Thalmann. question Nolan Instructions] Our next Ladenburg

You with your may proceed question.

Christopher Nolan

in for confidence outlook waiver of Hey, lower momentum earnings guys. does The more indicative that the XXXX?

Jeff Zimmer

actually It’s capital X.X% of our capital the the raises. groups to with peer versus raise preferred and underwriting that total the between fee X.XX%. raise and changes that of reflective point By to entire probably way paying was X.XX% more and that fee way the Jim’s the on fees combined X% $X.XX paid diluted underwriting a equity for

you capital the raise So, shareholders level. so at cheap at needed you raise very benefits but sometimes moment, necessarily to it greatly because not capital a that

that. And the we at so way that’s look

Mark Gruber

also to see did you market here. Jeff, didn’t and the overhang trading zero whereas, we not absolute in program we’ve that have offerings, ATM mention on from underwriting some Well, market negative you on price discount, block often which can seen, trading effect through addition

Jeff Zimmer

sorry, you’re to about follow-up Christopher, I’m second also question. ask a set

Christopher Nolan

that Jeff, $X.XX No, is value? book to

Jeff Zimmer

in. Yes. All

So what X.XX%? that is

Mark Gruber

fairly a through back larger capital rapidly base. on Paying Yes. savings expense

Christopher Nolan

quarter. XX% some type I you forward, momentum core improve we is given your guys in should comments. Going is say it mean, we – that or of that see, generated should the ROE

Mark Gruber

economic return. was That

value. change dividends paid So, and combination the in of that’s book a

I probably change a more you can I confidence predicting in the that, give have So, little on. book the dividend, value, trouble

Jeff Zimmer

– that can today’s XX combine that those X.X, and securities can have years market, you you hedge and, dollar rolls XX X.X, I earn OAS as and XX%, years It’s XX said, earn and negative out Xs do do it. just right and So now got we just and risk. but and that yes,

balance TBA the is, as think prior on that levels, of TBAs sheet. in and might securities see So, purchases Fed funding OAS and less future get market would might be you see on I our as in profile the or you our their have the the own some more is, reduces balance sheet, to back less repo mortgages, investment

future. I and will difference still still that be produce you might the of But those Now, model that the returns. business see the think kind in should

Christopher Nolan

the Jeff. Great. color Thanks for

Jeff Zimmer

You’re welcome.

Operator

Mr. Mountain.

We the at I time. have now over no your Please presentation back turn remarks. you. further call this to of continue your will closing with phone questions

Jim Mountain

the Kelly. up quarter. in look We And everyone us comments, time, you you, anything next give and thank the at us. a joining And have safe. keep comes meantime, Thank call questions the forward Until enjoy conversation. you, speaking next for if if office to or again we’d

Operator

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

ARMOUR Residential REIT (ARR) 22 Apr 212021 Q1 Earnings call transcript