ARMOUR Residential REIT - Earnings Call - Q1 2025

Executive Summary

• Distributable EPS of $0.86 was slightly below Wall Street consensus of $0.873, while GAAP EPS printed $0.32; net interest income rose to $36.3M as economic net interest spread widened to 1.88% from 1.53% QoQ.*
• Book value per share fell to $18.59 from $19.07 QoQ, and management disclosed a post-quarter estimate of $16.56 as of April 23 after the April dividend accrual, a key stock narrative catalyst.
• Liquidity strengthened to $848.0M; ARR raised $371.4M via ATM issuance in Q1 and maintained the $0.24 monthly common dividend for April and May.
• Management highlighted compelling levered ROEs of 18%–21% on production/premium coupon MBS and reiterated a strong focus on liquidity (“liquidity is king”), amid swap-spread dislocations and GSE reform headlines.

What Went Well and What Went Wrong

What Went Well

• Economic net interest spread improved to 1.88% (vs. 1.53% in Q4) and net yield rose to 2.24%, supporting distributable earnings stability.
• Liquidity increased to $848.0M; management emphasized defensive positioning: “liquidity is king,” strengthening resilience against market volatility.
• Attractive carry and ROEs: “On a duration hedged and levered basis, the ROEs on production and premium coupon MBS look very compelling with estimates ranging from 18% to 21%”.

What Went Wrong

• Book value per share declined QoQ to $18.59 and then further to $16.56 post-quarter (after April dividend accrual), elevating investor concern about capital and dividend headroom.
• Against S&P Global consensus, distributable EPS modestly missed and “Revenue” missed more notably, implying top-line underperformance vs. expectations.*
• April market volatility: management noted agency asset spread widening of ~15 bps quarter-to-date and maintained cautious hedging amid swap-spread dislocations.

Transcript

Operator (participant)

Good day and welcome to ARMOUR Residential REIT's first quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Scott Ulm (CEO)

Good morning and welcome to ARMOUR Residential REIT's first quarter 2025 conference call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley. I'll now turn the call over to Gordon to run through the financial results. Gordon.

Gordon Harper (CFO)

Thank you, Scott. I know everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armourreit.com. This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission describes certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements. Those periodic filings can be found on the SEC's website at www.sec.gov. All of today's forward-looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law. Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.

An online replay of this conference call will be available on ARMOUR's website shortly and will continue for one year. ARMOUR's Q1 GAAP net income available to common stockholders was $24.3 million or $0.32 per common share. Net interest income was $36.3 million. Distributable earnings available to common stockholders was $64.6 million or $0.86 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense under interest rate swaps or futures contracts minus net operating expenses. ARMOUR Capital Management waived a portion of their management fees, waiving $1.65 million for Q1, which offsets operating expenses. During Q1, ARMOUR raised approximately $371 million of capital by issuing approximately 20 million shares of common stock through an at-the-market offering program and $300,000 of capital by issuing approximately 17,000 shares of preferred C shares. These issuances were mildly dilutive to book value.

Since March 31st, we have repurchased 666,000 common shares. ARMOUR paid monthly common stock dividends of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On April 29th, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15th. We have also declared a cash dividend of $0.24 per outstanding common share payable May 29th to holders of record on May 15th, 2025. Quarter-end book value was $18.59 per common share. Our most current available estimate of book value is as of April 23rd and was $16.56 per common share. This is after the accrual of April dividends to be paid next week.

Now we'll turn the call back to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Scott Ulm (CEO)

Thank you, Gordon. Substantial policy changes in trade, immigration, fiscal policy, and regulations have ushered in pronounced macroeconomic uncertainty, along with upward pressure on longer interest rates, volatile markets, and dislocations in asset swap spreads. ARMOUR, with strong liquidity of over $750 million, we believe that ARMOUR is positioned to withstand short-term headline volatility as well. The recent steepening performance in the rates curve, along with MBS SOFR spreads hovering close to 200 basis points, levels comparable only to extreme and short-lived disruptions in the past, offer significant value to mortgage investors. On a duration hedged and levered basis, the ROEs on production and premium coupon MBS look very compelling, with estimates ranging from 18%-21% among the highest seen in our history. We're also paying attention to developments in GSE reform under this administration.

Comments and actions by Bill Pulte at the FHFA and Scott Bessent at the Treasury suggest that this administration may seek to accelerate the framework for eventual GSE exit. Yet we still view structural changes as a long-term process and believe that the complexity and systemic importance of the GSEs make near-term action unlikely. Given that the mortgage and housing market make up as much as 28%-30% of the economy, any reform efforts must be approached with caution as they carry broad implications for economic stability and growth. As we move further into 2025, we expect the macro backdrop to remain dynamic. The rates market is pricing in over three Fed rate cuts this year, a reflection of the Fed's anticipated dovish reaction function to support a weakening economy, a positive for MBS.

Renewed discussions around modifications to the supplementary leverage ratio, or SLR, coupled with sooner-than-expected tapering of the quantitative tightening program, layer on a structural tailwind to bank demand for agency MBS. With increasingly supportive technicals, strong carry, and historically wide valuations, agency MBS remains a core opportunity within the fixed income landscape. ARMOUR continues to seek value during bouts of spread weakness with confidence in the sector's resilience and the long-term strength of the U.S. housing finance system. Let me turn it over to Sergey for more detail on our portfolio.

Sergey Losyev (Head of Portfolio Management and Non-Independent Director)

Thank you, Scott. In Q1, our agency portfolio experienced a modest two basis points of tightening. Amidst the global market volatility in April, our portfolio's agency assets have widened approximately 15 basis points in ZV spreads quarter to date. Our estimated net portfolio duration and implied leverage are at 0.5 years and 8.1 times, respectively, while total liquidity is approximately 50% of the total capital. The hedge book is composed of nearly 30% Treasury-based hedges, and the remainder is in OIS and SOFR-based swaps. This allocation benefits us if swap spreads were to begin normalizing, while also help diversify some of the risk if concerns around the term funding premiums persist. ARMOUR's investment portfolio is in 95% of most liquid agency MBS, which includes TBA deliverable specified pools and TBA contracts.

The portfolio is diversified across the 30-year coupon stack, ranging from 2.5-6.5% coupons, with overweight in 5.5% and 6% coupons, where spread and carry are most attractive. The remaining 5% market value is allocated to five-year agency CMBS pools, whose positive convexity and short duration attributes offer much more value and upside versus comparable 15-year MBS pools. Portfolio MBS prepayment rates have averaged 6.1% CPR in Q1 and are trending at around 7.8% CPR so far in Q2. We expect the prepayment environment to remain uneventful for our portfolio mix of modest price premiums and discount MBS, while mortgage rates remain elevated above 6%, keeping the refinance activity and net supply at bay.

Despite the slow prepayment environment, we continue to favor credit and investor-specified pools, which help improve overall portfolio convexity and would benefit from a potential increase in loan-level pricing adjustments, or LLPAs, under Bill Pulte's FHFA leadership. We also maintain some exposure to TBA rolls, which, while not a core long-term position, help enhance market liquidity and flexibility of our portfolio. We fund 40%-60% of our MBS portfolio with our affiliate Buckler Securities, while spreading out the remaining repo balances across 15-20 other counterparties to provide ARMOUR with the best financing opportunities at an average gross haircut of 2.75%. Overall, MBS repo funding remains ample and competitively priced, reflective of the broader backdrop of abundant banking system liquidity, a point that's consistently emphasized by FOMC members. Now back to you, Scott.

Scott Ulm (CEO)

Thank you, Sergey. As you know, we determine our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns that are available. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Doug Harter with UBS. Please go ahead.

Douglas Harter (Equity Research)

Thank you. Hoping you could talk about how you're approaching risk management in this type of environment, you know, thoughts of, you know, how you're thinking about leverage levels, the, you know, kind of the cost of kind of selling assets, you know, and potentially missing on a recovery of spreads versus, you know, kind of taking risk off in an incredibly unpredictable environment.

Scott Ulm (CEO)

That is the question, Doug. You know, and that's what we focus on, you know, it seems like every day, every hour in the last few weeks. Look, liquidity is king. You know, we are intensely focused on liquidity. We have the advantage of being an agency portfolio, so, you know, we don't have some of the, you know, exogenous stuff that can happen elsewhere in the markets. On the other hand, agencies are highly liquid, and when people need to raise cash, I suspect they're number two on the list of places to raise cash. You know, we look closely at leverage. You know, we've been, you know, running in the seven to eight level, though, as I think we've said in the past, that's sort of more of an output than an actual input, but it's an important metric to look at.

All of that is against the temptation of very attractive investment opportunities that are out there. Further, the, you know, the opportunity that, you know, you think about buying back stock, which we did a little bit of. Again, liquidity is king, and we are very jealous of our liquidity in volatile times. I do not see that changing. Striking that balance is, you know, is important among all of the factors that are there, you know, both in terms of opportunities and maintaining an appropriate level of defensiveness.

Douglas Harter (Equity Research)

Great. Appreciate it. Thank you.

Operator (participant)

The next question comes from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston (Managing Director)

Hey, thanks. Good morning. You know, looking at the portfolio data, you know, it looks like during the first quarter, the allocation to sixes went up a little bit. Can you guys talk a little bit about where you're seeing the best opportunities within the coupon stack? You know, post-quarter-end, it looks like the portfolio size is down a little. If you could just, you know, comment on what you might have sold post-quarter-end. Thanks.

Desmond Macauley (Asset Liability Management)

Yes. Hi, Trevor. We seek to maintain a diversified portfolio. Our bias right now is to continue to buy production coupons. We see very attractive ROEs there. We are probably biased to slightly below par, so 5% and 5.5% coupon, expecting that a weakening economy could cause lower Treasury yields. Yeah, we want to stay diversified. We may also buy five-year DUS securities just based on their positive convexity, which we like to balance in our portfolio. It's a good diversifier to all resi MBS, and it benefits in a curve steepener as well. Their spreads are looking attractive. You mentioned, I guess your second question was post-quarter-end. We still like the agency MBS landscape. There are many factors, many tailwinds here. The levels are very attractive. The curve has steepened significantly.

We also see prepayments as muted, as we said in our prepared remarks, given mortgage rates over 6.5%, and the funding markets are very stable. With that said, April 2nd was a very significant risk event, and, you know, we saw the shocks that went through the markets. We decided to sell some assets there, understanding that even post-sales, our leverage was still significant enough where we felt we had enough spread risk to participate in any further spread tightening.

Trevor Cranston (Managing Director)

Got it. Okay, that's helpful. You were talking about maintaining adequate levels of liquidity, obviously, in a volatile market. You did buy back some shares in April. Can you just comment on how much capacity you think you have to continue potentially buying back shares while still maintaining levels of liquidity that you're happy with? Thanks.

Scott Ulm (CEO)

You know, there's some capacity there. You know, and how we view that capacity depends on our outlook over, you know, a short term and a bit of a medium term. But, you know, we maintain very substantial liquidity. Obviously, when you buy back shares, you know, you're talking about an adjustment that has knock-on effects through the portfolio as well. You know, we, you know, and we like the returns available in that portfolio. We're not looking to cut the size of the portfolio per se. Certainly, we have capacity, and we look at it. I think the point is that we're willing to be on both sides of the market here.

Trevor Cranston (Managing Director)

Okay. Appreciate the comments. Thank you.

Operator (participant)

The next question comes from Randy Binner with B. Riley. Please go ahead.

Randy Binner (Managing Director and Equity Research Analyst)

Hey, good morning. Thank you. I appreciate your comments on the GSE reform and Pulte's comments. It seems like something's going to move forward, and there's been staff changes at Fannie Mae in particular. I think, you know, it would be interesting to hear your perspective on, you know, on the key things that we should look for as we learn more about the potential reform. I mean, I understand from your comments that it's a big change and it's longer term, but, you know, it'd be helpful to think of how, you know, the details of it could manifest themselves early on.

I mean, if there's any scenario where it doesn't need to be necessarily a headwind, but could be a tailwind for the market, just interested in a little bit of kind of like what we should look for as observers of this as it relates to ARMOUR.

Scott Ulm (CEO)

As it relates to ARMOUR, you know, it really relates to all of us in a lot of ways, right? Nothing specific to us. To my mind, the big one is the, you know, the sovereign backstop, which, you know, obviously we have explicitly with Ginnie and we've got in structural format with Fannie and Freddie. That is, to my mind, you know, hugely important, you know, impacts potentially on risk weights and things like that. It also is a touchstone for the conversation, which is what makes, you know, what makes the GSEs a different kind of competitor in the mortgage market than, you know, than private entities. That to me is, you know, is the big one to look for.

You know, and then you get to the whole mosaic of, you know, guarantee fees and capital that would be put in and what sort of rating might exist on a standalone basis, which, you know, which is important as well. You know, all of those things go into the mix. You know, I just hope that as this rolls out, that the communication is, you know, is carefully modulated and presented rather than, you know, sort of bits and pieces coming out. You know, we always worry about headline risk that even if it gets resolved, can, you know, make life interesting for everybody for more than a few days.

Randy Binner (Managing Director and Equity Research Analyst)

Right. That's helpful. I guess the follow-up question would be, have you, I think there was some commentary in the last call in the Q&A about, you know, someone had asked y'all if you thought it was priced in. I think Ginnie and Fannie swaps were kind of a data point. Do you, you know, just being in the market every day, do you, I mean, you know, there's been more comments from Pulte since our last call. Do you get a sense that this is more priced into the market at all with, you know, just, you know, kind of observing what you see every day?

Desmond Macauley (Asset Liability Management)

You know, we see kind of stability and genuine Fannie swaps mostly reacting to interest rate volatility that we've seen as of late. In our regards, I think the mortgage market is just looking for more concrete ideas. We're seeing a lot of ideas floating out there. Until we see, you know, roadmap or some sort of a blueprint from either Bill Pulte or Treasury or any part of an administration, it's really hard to try to price things in. As we mentioned in our prepared remarks, I think the easiest step, the first step for any kind of GSE reform will be streamlining the profitability of the enterprises. I think Bill Pulte has been very clear about, you know, adjusting some of the risk fees on the loans and based on the creditworthiness of the borrowers.

I think we're going to see some signs of that first before we see any kind of longer-term exit plans. I think that's kind of the plan we're following here as well.

Randy Binner (Managing Director and Equity Research Analyst)

Okay. Understood. That's very helpful. Thanks for the comments.

Operator (participant)

Our next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, thanks. Good to hear from you guys. Just given this dislocation in swap spreads, how do you feel like that drives the way in which you rebalance your hedges around volatility on a go-forward basis, like the hedges in the back, like the existing portfolio? Thank you, guys.

Desmond Macauley (Asset Liability Management)

Yes. Hi, Eric. In regards to swap spreads, we want to maintain a diversified portfolio of our hedges. In Q1, we increased the share of our Treasury-based hedges slightly from 25% to 30%. That benefited our portfolio when we saw a very significant tightening of swap spreads. Now we have about roughly 70% of our portfolio hedges in swaps. We are actually comfortable with that larger share. We feel it's been a very significant dislocation in swap spreads so far, and we expect that at some point we would see normalization. It can occur in different ways. It could be, you know, through the supplementary leverage ratio, which may allow banks to intermediate better and buy more Treasuries in case we see potentially higher term premium. Yeah, we are happy and content with our current share.

With that said, if we do get any more dislocation, the 30% of Treasury-based hedges would be there to help protect our portfolio.

Eric Hagen (Managing Director)

Yeah. Okay. That's helpful. I appreciate that. Can you guys share how you think relief on the supplementary leverage ratio could drive both supply and demand for repo funding, specifically at FICC, you know, the venue where you guys have direct access as a repo dealer?

Scott Ulm (CEO)

You know, the primary driver is, you know, so you're talking about banks here, and supplementary leverage has always worked to make high-quality, low ROE assets less attractive on the balance sheet. You know, and that's kind of precisely, you know, what agency MBS is and even more precisely what repo is. You know, to the degree that, to the degree that assets which have extremely high quality, but lower ROE, but occupy balance sheet become more attractive or even possible to hold, you know, not crowding out, you know, more profitable assets, it should work to the favor of repo overall, meaning improving ability of tradition, what have always been traditional holders to have more of it.

Eric Hagen (Managing Director)

Got that. All right. That's helpful. Thank you, guys.

Operator (participant)

Again, if you have a question, please press star then one. Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Sr VP)

Hi. Thanks for taking my questions. Gordon, did you mention that the book value is currently roughly $16.50?

Gordon Harper (CFO)

It's $16.56 as of last night.

Christopher Nolan (Sr VP)

Great.

Gordon Harper (CFO)

That is after the accrual of our dividends that we're paying out next week.

Christopher Nolan (Sr VP)

Okay. Thank you. Turning on the dividend, what impact does declines in book value have on the sustainability of the dividend?

Scott Ulm (CEO)

You know, at a certain point, yeah, you know, it could, you know, because, you know, that certainly is the capital that you have available to invest in, and it ultimately, you know, rebounds into liquidity and leverage. On the other hand, this has been a volatile period where there's a whole lot of stuff going on. As we say, we, you know, we look to the medium term here and in particular look to the, you know, look to the returns available. You know, as I said, you know, we're comfortable with the level we're at.

Christopher Nolan (Sr VP)

Okay. I guess, can you characterize the bank's appetites for mortgage-backed securities in recent quarters? You know, it seems to be they're on the sidelines. Has that changed in the quarter?

Desmond Macauley (Asset Liability Management)

Yes. Hi, Christopher. Yeah, I think Q1 we saw probably largest CMO creation volumes both in February and January, kind of indicating that banks were back in the market. Now, a lot of their focus is still on the floating rate aspect nature of MBS. This is why the majority of CMO creation has been in agency MBS floaters. March has been a much more quieter month. We also saw spreads on the tighter side during that time. It is not surprising that some demand has backed up. Obviously, in times of volatility, like right now, you know, a lot of investors are on the sidelines waiting out these bouts of volatility. As Desmond mentioned, such widespreads versus swaps, you know, steeper curve, a lot of these things are pointing to the fact that the demand side of the equation is in a good spot.

You know, as soon as volatility and peak uncertainty is behind us, I think we'll see bank demand return to the levels we saw in Q1 and maybe even greater.

Christopher Nolan (Sr VP)

Great. Final question. Do you think the second quarter distributable EPS would be in excess of the dividend?

Scott Ulm (CEO)

We traditionally have not commented on that. I am hesitant to provide a forward-looking statement on that, but I think you can probably get to your own conclusion pretty quickly by looking at the, you know, looking at the returns available.

Christopher Nolan (Sr VP)

Okay. Thanks, guys. Thanks for taking my questions.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Scott Ulm (CEO)

Thank you for joining us for our conference call today. We appreciate your interest in ARMOUR Residential REIT and we are always available for follow-ups. Don't be strangers. Thanks so much.

Operator (participant)

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