ARR - Earnings call transcript Q2 2024 | ARMOUR Residential REIT, Inc.

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Operator

Good morning, and welcome to the ARMOUR Residential REIT Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm. Please go ahead.

Scott Ulm

Thank you, and good morning, and welcome to the ARMOUR Residential REIT Second Quarter 2024 Conference Call. by Sergey Gordon Losyev joined as as I'm co-CIOs, our and morning, our Harper, CFO, well This Desmond Macauley. the results. turn through now call Gordon to I'll to the financial over run Gordon?

Gordon Harper

access the Thank ARMOUR's By harbor to that periodic can found are includes ARMOUR's you, on the The intended and Private protection differ XXXX. Act actual in of by call forward-looking expressed earnings www.armourreit.com. the certain Factors conference statements Reform now or results those has safe filed Risk be Securities these reports This Scott. section statements. Exchange website, Securities factors forward-looking release, of with beyond could Litigation to to describe everyone Commission, to from implied which by ARMOUR's ARMOUR's provided which subject materially control cause be

can www.sec.gov. at filings SEC's periodic be found the on website Those

Also, to certain for earnings reconciled any of GAAP our unless release. required statements website We call All forward-looking measures this will replay ARMOUR's with today's An year. continue law. conference disclaim discussion shortly subject to available notice. X measures be of update in are them measures. without These on today's change and refers obligation comparable are online by non-GAAP to

contracts, million. interest million loss operating earnings results. ARMOUR's plus $XX.X $X.XX $X interest QX or share. our This minus drop interest available expense to Turning per was or to common is futures for as expenses. stockholders to swaps stockholders interest or measure income GAAP and available net rate TBA $X.XX Distributable defined $XX.X Net stock net income adjusted was non-GAAP income income on million net common was common per share. common

quarter. continues of million $X.XX management month portion per further for total continued of to $X.XX dividends share a the until expenses. for waiver notice. per management This waiving $X.XX per common capital a of monthly ARMOUR stock for which offsets operating common QX, ARMOUR's its waive fees, share

Taken made over with stock stockholders the ARMOUR has $X.X together the history. billion on its to preferred distributions approximately cumulative contractual dividends of

Quarter was per end share. common book $XX.XX value

value dismissal filed July Our In which plaintiffs of book $XX.XX of most recent by was available as common estimate the Mortgage litigation, processed portfolio the ARMOUR's the per XX, notice share. and of of now by Investment JAVELIN Scott July strategy. appealing discuss voluntary previously to with is current XXXX, shareholder's turn courts. Monday, was I'll back call Corp. the the Ulm to position

Scott Ulm

Thanks, Gordon.

ago. the toward meeting. initiated second at become the goal. point disinflationary X over trend the what years June XX quarter of mixed X% consumer commence and economic May data, just could turnaround a Overcoming with rate for of an Cooling spite a the Fed easing market finally marked of prices, months cycle rising inflation Fed's The to in affirm prices expectations annual for inflation unemployment start the the along FOMC set September and

The market is end in the this by another cuts X.X cuts year pricing XXXX. and currently of X.X

pricing in year. last we month's to against of deep a We the on and acknowledge activity too the we can trajectory path all shifted economic rate While continue remain bit of cycle. evaluate of recall has of cuts cutting each data a notably, overenthusiasm cautious that

after first roughly between just is reaching on quarter XX, above at yield U.S. remain the bound a range July XXX April of the basis XXX in and nominal securities quarter closed and spread Mortgage-backed XX-year closing The second in level. Treasury X.X% as reported. X.X% just points early X.X%,

economic of rate second and return remained driving wider, quarter, basis intra-quarter the points nominal longer intermediate quarter. the in These the contributors overall end finished negative second second an the trading range-bound choppy. of environment the part the factors spreads the while MBS at their points shifted swap curve in above to quarter X.X% XX marks quarter. Despite were the in basis XX SOFR first XX to the respective our

was ARMOUR's $XX.XX after XX, book for accounting July of per As $X.XX. July's share value dividend of

Looking the U.S. reverse REIT to curve facility rates and to exceptionally in market, sector ahead, tailwinds MBS assets in point like out the high-quality strong cut will REIT official mortgage overnight eventual a short cash MBS. we the yield XX the and provide normalization into and expect specifically, repo of flesh lower ARMOUR basis rate sitting funds full the overnight

momentum multiply. this It won't subsequent with rate happen but and interest overnight, every will cut, build

short-term bank mortgages now expect a follow many to negative rates. portfolios is, from right borrowing versus similar Only We strategy. a carry in cases,

positive is implemented, flip and bank XXXX. turn basis momentum Yet carry decisively to will since MBS the Once time demand cutting greater provide the mutual we've even similar them XX strong accelerate. already an MBS into for the from first and to this funds the MBS fixed inflows cut ETFs and demand seen point We're into noting cycle flows income banks. positive year expect in as persist

Feds to but we to on market. points be not a will tighter profound believe a there the all the basis taking mortgage together, path see the XX the move actions factors impact spreads have into in XX these could So straight very We us line. expect we year-end,

work. to we continue the So leverage approach way and in disciplined putting to we stay cash

our it some Now on ask has Desmond? give I'd Desmond evolved to like this strategy quarter. more detail mortgage how Macauley and to

Desmond Macauley

Scott. Thanks,

exposures X% wide a target value X% X.X% XX% and carry. coupon market to well-diversified while the from overweight to continues up our option-adjusted portfolio spread the strategy maintaining for with each of across coupons and approximately and ZV mortgage MBS Our discount

very offer a pickup average prepayment in thaw QX. low, historically low eventual CPR value improving in from CPR, yield via market, compelling X.X ARMOUR's keeping MBS returns. existing second quarter on in XXXX prepayment an for housing increasing was and While assets sales consequently, spreads the discount in are thus turnover speeds, home of X.X rate the a in speeds their coupons

expected prices mortgage turn the signaling in effect should dissipate part mortgage expensive. see we more of It gradually and starting by This is prepayment loan rise and to environment loss in index, A speeds speed prepayment as portion tailwind was even a are the that benign is for the near large to an increase continue into worth there year-end. less refi provide uptick and continue rates home coupons MBS. to to noting rate that the driven discount season

However, by greater middle coupon prepayment more the in towards would require mitigated a the X% concerns our significant below higher easily drop MBS are exposure of and stack. rates coupon mortgage in moving

premium MBS Additionally, which higher the versus lower will see scenario tied the lower specified geos, mortgage to risk loan prepayment rates and lower value of characteristics we LTV in continue pools FICO to in cohorts. more generic mitigate

around coupon portfolio in contracts and in for market carry TBA of coupon specified the forward dollar attractive for better premium continues the maintain pools average under with versus We fund lower XX% also other in we'll MBS haircut MBS of Ginnie conventional Securities, just a to its MBS. is with XX% XX% of BUCKLER counterparties portfolio and weighted the to X%. ARMOUR among XX diversified remainder liquidity

The repo markets remain liquid and well bid.

in end repo June. However, towards observing of SOFR the rate and some we began pressures spreads funding

balance running While to July, used the of X ability costs into and events above see some pressure record to into to that it's weigh intermediate quickly which normal points basis and efficiently. is treasury a to this the bonds dealer year-end, sheets upward beginning turn X quarter issuance on averages remained primary indicating in on funding and

to the easing X an dealer end the pressures some tailwinds spreads and funding quantitative tightening for the to of rising start an We cycle community. as program major see of of alleviate in the expectations

steepness drive spreads forward, an the Looking over longer easing on to historical constructive to of we the start as cycle curve medium to yield horizon of remain the back we await norms. the

that of year's the tights we spreads mindful to data needed macroeconomic bonds support its in fresh an A this term, into near are aggressive of back a is for trading major Fed and trajectory the rebound near easy current positively pricing REITs. sloping mortgage Yet tailwind inflow the in MBS would much market, the roll curve of from mortgage the expectations. fact are

disinflation priced health coming to labor the we economic indicate the months toward story of data With the the already in, growth. in market turn

our turns years risk leverage have exposure MBS as duration we now, July X.X X.X to of our For at implied and XX. increased of trimmed to

and banking have X of to deploy risk/reward demand leverage We we from X levels as better at increased the community. tons to see

distribution for appropriate, and believe rate expect cover current we earnings the is to We available QX. dividend Our dividend for our dividend earnings our covered into sufficiently the year-end.

our primary on remains generating return now portfolio to Our deliver our turn total Scott. shareholders. I'll to to economic focus on call back the

Scott Ulm

to that was like comment an capital low. capital I'd too Desmond. active just Thanks, this valuation been We've because not year raising equity on of raising.

thinking on as raising Our it been. has equity remains

there minimize per impact and investment look good price, achieve share considered, negative including will can are raise and factors to stock a equity we our on price. We the fair whether with lower if all expenses opportunities,

market. in shareholders. our for to sense make we that prices less involved this for look preferred are be likely always we'll But At point, the

you pleased with, the our today's once very they call given a remained we're preferred would where know, floating be. As levels fixed enter feature period,

look We focusing the dividend market than rather our fluctuations. intermediate on at short-term term over

believe to continue is dividend that for We appropriate today's our environment.

we expect in place. continue rebate the to also have fee had can You us

up prepared remarks for Thank you Operator? to for our XXXX. second of quarter call. questions. today's happy We'd joining That any wraps answer the be

Operator

first question comes Our Doug Harter UBS. from from [Operator Instructions]

Douglas Harter

go market just have It's kind MBS. bullish a is more priced the potentially to into outlook of in going the hoping of bit that Desmond, little for some obviously cuts. about

carry MBS? you do the already Or much in kind think actual, current investors. of that cause more of incremental how Just kind is of, does reflected

So of a cuts. thinking sense just to how MBS about are already those trying get markets

Sergey Losyev

mentioned, question medium see easing Losyev. to horizon. follow-up. But and Desmond as priced Desmond This very kind we a have our Near is yes, on markets term, the your of of try and constructive like in currently, view is answer any lot I'll if already. Sergey do have see long-term

been has the feel like inflation we market. the So by slowdown digested

Right very now, in Fed sign, But a on of play. a we're like aggressive cuts interest horizon us should watching we feel be well to in. markets if priced more rate give terms markets, that's in the the labor

strong like going start the of -- that's really impact tighter. tight. as start terms very also In the term, But feel year-to-date easing spreads, cycle, we are we spread as have we mortgage to the that Fed on near we we to journey conviction trading

one reserves to lot start sooner feel Additionally, that program. pricing yet is it could bank about like thing in markets down. a quantitative end being tightening wind other the We later, talked not potential continue could than is to the the

terms these It's of in factors what a long boost. giving we're journey. for going couple to looking is be really a of So the

of it, the the market year their this turning carry force, will seen full in we've positive. turn banks finally But In already the actually net positive. cut demand terms entering first

I to the be a will that think big spreads. So really boost

sitting well. income as ton ready to enter, money there's markets As on the sidelines. We're funds you know, a market of fix

of signs first for too. cut really additionally to looking equation we're that So the change

Douglas Harter

that. appreciate just other one question. I And then

duration the those hedges? is On the of what treasury hedges you have,

Sergey Losyev

Yes.

we the on specific, part curve So we the the those X are use and of between the the curve. of XX-year part shorts the and treasury in have XX-year and of barbell the kind futures, treasury treasury

As swap spreads really in you know, here. tightening are

So we're as favorable. starting see swaps owning more to

rate know, book we you big As a hedge swaps in well. as have really interest

Operator

Jason from comes Weaver Jones question from next Trading. The

Jason Weaver

briefly just in you nearing at end? intra-quarter Can that your was leverage whether the XQ and beginning or discuss greater how the trended

Sergey Losyev

quarter Yes, later has towards the cutting Fed economic data on potentially begin this the saw rates as we confirmation is our leverage the that route increased to and year. end of

end we're we come express we and saw increase fact saw begin that closer we currently to leverage X.X as So running to economic quarter Fed, for the as target FOMC are the the as in, mentioned. into data Desmond meetings the getting

Jason Weaver

asking alongside vintage where inflection mortgages. is on you this is benchmark post-XXXX And see XX-year to And the the is bit then but for paper. difficult ask, about Desmond's real range little point really prepays a the I'm with comments,

Sergey Losyev

Yes.

would So as basis XX and production Xs, you XX points X, X.X of to on begin the know. coupons, to incentive it take usually refinancing

there. way So still good a we're quite

towards So positioning. rally those We'll coupon the I think when reevaluate we levels. see rates

the As we more are doing pools And we're to few is prepay would specified versus mentioned, of generic right kind then migrate step other lower -- in a that cohorts. protection things coupons. be have adding now convexity better

diversified. Now our book well very is

discount X% to the XX% coupons across have We stack.

and tactical coupon liquid very remain across we So side. the

Operator

comes Stewart Janney. from next The Jason from question

Jason Stewart

investment of back go to where wanted turns capital mean, trading, X if And and how raising and is at leverage X your outlook I I likely for stock we to the more question. the mortgages look raising like the to now of on leverage environment where take are before you the the to sort you you drift capitalize stock your capital, view? Or are looks higher? likely to is given in up

Scott Ulm

we got could to mentioned, some we think flexibility. opportunities powder that to dry come and the not And go. -- know, we've we've as I got fortunately, there take raising We some don't we're portfolio capital tied feel raising things. we as advantage manage Desmond of capital all

but bit of not the think bit leverage. bit a more ultimately fortunately a I X turner So of a concept disconnected, little disconnected, or disconnected are a the within little

Jason Stewart

obviously, there notable? July any And is. on then presale where XQ that But so hedge far or is a we to data $XX.XX light. in Is XQ, project book from meaningful be portfolio use the little would moves the in value side

Gordon Harper

ahead. go Yes,

Sergey Losyev

report to nothing Yes, as yet. of

dynamic Our hedge very is now. right tactic book

hedge X. very know, you to As our ratio is close

assume you the If repo pools our as the that path and TBAs well. followed of

So but to right report. But day. there's continue changes we -- evaluating every no now,

Jason Stewart

Is increase any Last that on discounted would out. on coupons, call and there my going coupon guess I'm -- quarter-to-quarter jump to impactful. The spreads increase below interest be I'll one CPRs the earnings? real me, net for quantify Xs in way or and likely increase most to is it in

Sergey Losyev

CPRs. probably on. X to But right in And specific to we've analysis terms just we're roughly you come This in and had ready, a contributed see of don't now. starting close quarter-over-quarter well. pick number is coupons income speaking, I to you that increase up the impact, we'll think X.X, accounting kind X/X back But of of have just there have other just to as

Jason Stewart

again it's that migration in I okay. wouldn't expectation that Is X.Xs conceptually, in get XQ. and discounted increase move No, has of sequential expect CPRs some think and Xs in be but have would think that that in Yes. your most to coupon coupon, you maybe fair? happened And I you that up

Sergey Losyev

question. right? a keeping record the fact housing lows, we're market also are the is prepayments that It's fair mind near record But the at as in And well. lows

picks housing there's And upside discount of the like where just lot the Desmond nothing thaw and of feel for. turnover begins it's we're timing. a when mentioned, as to That's these but up. It's activity a we to So looking prepays. matter

Operator

And Ladenburg Thalmann. from our next Christopher Nolan question comes from

Christopher Nolan

earnings in there any were nonrecurring Gordon, items this quarter?

Gordon Harper

No.

the You Special back quarter. had we recall of the QX No, this costs. nothing in discussion Committee

Christopher Nolan

on topic, Committee of Okay. as indicates the that follow-up expect current result reconfirm restatements just any the weakness the And then continuing also to Special a as material activity Q into don't quarter. you since that a the

Gordon Harper

Correct.

Christopher Nolan

in the the on final book the the the is, early second the for guess the your what I half market? and are Scott I guess then given And comments, earnings on is the given of it's expectations for value year, to of cover thoughts outlook dividend direction

Scott Ulm

look, from comes cash returning, Well, a curve our other to is That's We forward here. in we spread seeing if to motivate I and reflected And see the some actually than like through spread nothing outlook could one got you, demand get tightening particularly really the bank buyers. different. the getting rather there's little sector. it tell

we was year, not have 'XX that. might XX how at are the last XX just look while tights at last the any and charts the You the certainly, let's a years bit all was. for levels. remember over years, of It's elevated we wide with know normal But We say to way. in flirted

spread, risk spreads for So are spread the spread business us book would element very in strong a we here. and a very, look, We're living in we for be take for tightening value. the

Operator

remarks. are any Scott conference question-and-answer There session. like queue. to to Ulm the I over more closing our no concludes the back questions turn for in would This

Scott Ulm

joining us for all Thanks Great. this morning.

available, we know, As will you the us be much joining. day, we're if not and within so you for Thanks in always to ring the back faster. usually office

Operator

for The attending Thank today's you conference has now presentation. concluded.

disconnect. now may You

ARMOUR Residential REIT (ARR) 25 Jul 242024 Q2 Earnings call transcript