Armour Residential REIT, Inc. Q3 FY2024 earnings call

• ARMOUR's portfolio experienced ~5 basis points of nominal spread tightening in Q3, with portfolio size and leverage increased. Duration as of October 21 was 0.91 years, implied leverage 8.6x.
• Terminated $1.75 billion of notional swaps and $1.8 billion of treasury futures, reducing hedge to repo funding ratio to ~62%.
• Investment portfolio is 100% Agency MBS, diversified across coupons (2.5% to 6.5%), with 30% gift discounts and 22% premium coupons by market value.
• Prepayment rates averaged 7.5 CPR in Q3, with premium MBS offering compelling value and low net supply of MBS as a favorable driver.
• Repo market remains liquid, with ARMOUR funding 40%-60% of MBS portfolio with affiliate BUCKLER.

ARMOUR's Q3 GAAP net income available to common stockholders was $62.9 million or $1.21 per common share. Net interest income was $1.8 million. Distributable earnings available to common stockholders were $52 million or $1 per common share. Quarter-end book value was $20.76 per common share, up from $20.30 at June 30. ARMOUR issued 6,413,735 shares of common stock in Q3, raising $129.4 million, and since the end of the quarter, an additional 567,720 shares were issued, raising $11.1 million. ARMOUR Capital Management waived $1.65 million of management fees in Q3.

• Expect book value and earnings to benefit from positive carry in production MBS, declining volatility, and wide mortgage spreads.
• Anticipate Fed easing to be the primary driver for mortgage spreads post-political uncertainty.
• Leverage seen as an output with ample liquidity, and comfortable with current levels given Fed easing cycle.
• Plan to raise capital close to or over book value, focusing on investment opportunities and returns.

• Factors beyond ARMOUR's control could cause actual results to differ from forward-looking statements, as detailed in periodic filings.
• Volatility from U.S. elections and other market factors.
• Persistent funding pressures in the repo market.

Q: With the sell-off in rates we've seen here in October, could you give us an update on what your current duration exposure is? And if you've made any significant changes to either the assets or hedge composition compared to what you disclosed as of September 30?

A: Desmond Macauley said duration was 0.91 as of October 21, mostly in front end, and they positioned for steepness, moved hedges, and have a program to keep back end duration close to zero.

Q: Given the rate volatility this week, is there any chance we get another update on how book has fared so far this week?

A: Scott Ulm said they don't plan to update book value more frequently than they do.

Q: Can you just update us on how you're thinking about raising capital going forward?

A: Scott Ulm said they look at price to raise capital, aim to raise close to or over book value, and consider investment opportunities and returns.

Q: Could you talk a little bit more in detail about where you see current returns in terms of carry? How that relates to the cost of capital, maybe including the cost to operate?

A: Desmond Macauley discussed production coupon ROE, 6% for production, high teens for 6.5% coupons, mid-to-high teens for belly coupons, and dividend yield considerations.

Q: Could you talk a little bit about how you guys are thinking about tail risk outlook? If the tenure were to run a little bit higher, than where it is now or if it were to contract significantly and how the recent changes to the hedge portfolio kind of reflect the way that you guys are thinking about it?

A: Desmond Macauley said they are positioned for steepener, dynamically hedge portfolio, especially back end, and expect Fed easing to lower back end rates.

Q: Given the improved environment that you guys are sort of anticipating, where should we expect equity returns to go?

A: Desmond Macauley mentioned higher coupons have 18%-19% ROE, and Scott Ulm talked about total return scenarios and Fed easing impact on spreads.

Q: When you say negative investment spreads, cost of funds relative to investment yields, any handicapping in terms of ideas or in terms of when that could turn positive or is that sort of dependent on who wins the presidential election and so forth?

A: Scott Ulm said timing depends on Fed, forward curve, and direction is clear, with some coupons already positive carry.