ARMOUR Residential REIT - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered mixed results: Distributable EPS was $0.77 versus Wall Street consensus of $0.83*, a slight miss, while GAAP EPS was a loss of $(0.94) driven by derivative marks; book value per share fell 9.1% q/q to $16.90.
• Core earnings power remained resilient: net interest income was $33.1M (down modestly q/q) and the economic net interest spread held at 1.82% (vs. 1.88% in Q1), reflecting stable asset yields and funding costs.
• Dividend maintained at $0.24 per month, with July paid and August declared; management reiterated that the dividend is set with a medium‑term lens and is “appropriate for this environment”.
• Key narrative drivers: management signaled comfort “modestly increasing” leverage as spreads remain historically attractive, and highlighted potential bank demand recovery as a catalyst; liquidity stayed strong at $772.9M to support portfolio flexibility.

Values marked with * are from S&P Global consensus/actuals.

What Went Well and What Went Wrong

• What Went Well

  • Core run‑rate earnings remained solid: Distributable Earnings to common were $64.9M ($0.77 per share), alongside $33.1M of net interest income, supporting continued dividend coverage.
  • Risk positioning is disciplined with ample liquidity ($772.9M) and diversified hedging (swaps and Treasuries/futures) as economic net yield remained 2.16% despite market volatility.
  • Management tone constructive: “grow and deploy capital thoughtfully during spread dislocations… maintain robust liquidity… dynamically adjust hedges,” and “current dividend [is] appropriate” — reinforcing a stable capital allocation framework.

• What Went Wrong

  • Book value per share declined to $16.90 from $18.59 (total economic return of (5.22)% in Q2), driven by losses on swaps and futures amid rate/spread moves.
  • Non‑GAAP DEPS missed Street by ~6% (0.77 vs 0.83*), and GAAP results showed a $(78.6)M loss to common due to derivative marks (items excluded totaled $143.5M).
  • Operating expense uptick: “Total expenses after fees waived” rose to $14.3M; CFO cited higher professional fees this quarter and does not expect that run‑rate to persist.

Values marked with * are from S&P Global consensus/actuals.

Transcript

Operator (participant)

Good morning and welcome to ARMOUR Residential REIT's Second 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. Please go ahead.

Scott Ulm (CEO)

Good morning and welcome to ARMOUR Residential REIT's Second 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)

Thanks, Scott. By now, 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 that 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, which is to 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 and will continue for one year. ARMOUR's Q2 GAAP net loss related to common stockholders was $78.6 million or $0.94 per common share. Net interest income was $33.1 million. Distributable earnings available to common stockholders were $64.9 million or $0.77 per common share. These non-GAAP measures are defined as net interest income plus TBA drop income, adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. ARMOUR Capital Management waived a portion of their management fees, waiving $1.65 million for Q2, which offsets operating expenses. During Q2, ARMOUR raised approximately $104.6 million of capital by issuing approximately 6.3 million shares of common stock through an at-the-market offering program.

Since June 30, we have raised approximately $58.8 million of capital by issuing approximately 3.5 million shares of common stock through an at-the-market offering program. We currently have outstanding 91.5 million common shares. ARMOUR paid monthly common stock dividends per share 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 July 30th, 2025, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on July 15th, 2025. We have also declared a cash dividend of $0.24 per outstanding common share payable August 29th to the holders of record on August 15th, 2025. Quarter-ending book value was $16.90 per common share.

Our estimated book value as of Monday, July 21, was $16.81 per common share, reflective of the accrual of the July common dividend. I will now turn the call over to Chief Executive Officer Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Scott Ulm (CEO)

Thanks, Gordon. Hey, just a note to the team, I had a connectivity problem a second ago, so if I disappear, just continue with what we have to say here, but we should be just fine. Thanks all. As we enter the second half of 2025, the debate around U.S. fiscal sustainability, Fed independence, and trade dynamics continues to weigh on the macro landscape. While we don't expect these issues to be resolved quickly, markets appear to have digested much of the initial shock as rates and spreads have settled into stable ranges and volatility has drifted lower. On the monetary policy front, incoming U.S. economic data indicates solid economic growth that's supportive of the Fed's wait-and-see approach. While Fed policy rates remain on hold, elevated short-term yields are absorbing investor liquidity.

However, we believe that a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into agency MBS. Current coupon MBS spreads have retraced from April's historically distressed levels, supported by declining volatility. The MBS sofa spreads have consolidated back towards an average of the spread levels observed in 2025. They widened by approximately 10 basis points quarter over quarter and remain historically cheap. The 30-year fixed mortgage rate was near 6.75% through late June and early July, effectively dampening refinancing activity and keeping net mortgage supply muted. This tightening backdrop, while a challenge for borrowers, continues to create compelling opportunities for investors in high-carry production agency MBS. At the policy level, the U.S. housing finance system remains a central topic in DC.

The FHFA Director, Bill Pulte, has begun to implement reforms aimed at streamlining the GSEs, Fannie Mae, and Freddie Mac, with administration officials signaling support for retaining an implicit government guarantee for the GSEs. While public rhetoric hints at an eventual need to end conservatorship, we view these developments as constructive yet not imminent. I'll now turn it over to Desmond for more detail on our portfolio. Desmond?

Desmond Macauley (Co-CIO)

Thank you, Scott. ARMOUR's estimated net portfolio duration and implied leverage are closely managed at 0.46 years and eight turns, respectively. Our total liquidity is strong at approximately 52% of the total capital as of July 21st. Our hedge book reflects a balanced view of duration with a bias for further Fed easing. Hedges are composed of about 33% in Treasury shorts and futures, with the remainder in OIS and SOFR swaps, as measured on a DV01 basis. While SOFR swaps are cheaper hedges, Treasuries have proven to be a more effective hedge instrument for mortgages as of late. ARMOUR is invested 100% in agency mortgage-backed securities, agency commercial MBS, and U.S. Treasuries. Our MBS portfolio remains concentrated in production MBS, with ROEs in the 18%-20% range.

The portfolio remains well diversified across the 30-year coupon stack, Ginnie Maes, and Indas, whose positive convexity and short duration attributes offer better value over comparable 15-year MBS pools. Portfolio MBS repayment rates have averaged 7.7% CPR in Q2 and are trending at around 8.3% CPR so far in Q3. We see no signs of material acceleration unless mortgage rates drop significantly. We continue to favor higher cut loan balance and credit-specified pools with favorable convexity and prepayment profiles to TBA and generic collateral. Our TBA exposure is light at $300 million and remains a tactical tool to manage MBS coupon positioning. ARMOUR funds 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, ranging at around SOFR +15 to 17 basis points. We are increasingly optimistic that structural demand for MBS may improve later this year. Evolving regulatory clarity around banking reform and a resumption of the Fed easing policy could act as meaningful catalysts for increasing banking demand. This, combined with constrained mortgage supply, sets up a highly constructive technical backdrop for agency MBS, while historically wide spreads signal strong risk to reward incentive to own mortgage assets. I'll turn it over back to you, Scott.

Scott Ulm (CEO)

Thanks, Desmond. ARMOUR's approach remains unchanged: grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity, and dynamically adjust hedges for disciplined risk management. We're confident in our positioning, strategy, and ability to deliver value for shareholders. 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 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. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Doug Harter with UBS. Please go ahead.

Doug Harter (Equity Research Analyst)

Thanks and good morning. I was hoping you could just talk about your philosophy for managing spread duration risk as you go through a volatile period like you did in April and the second quarter in total, and just give us a little more on the thought process.

Desmond Macauley (Co-CIO)

Yes, hi Doug. On spread risk, I can start with just our leverage, which we are very comfortable with at this point. We think that spreads remain historically attractive, and for that reason, we could potentially look to even modestly increase our leverage here. Currently, we are around just a little bit below the average over the last 6 to 12 months, our own average over the last 6-12 months. In terms of duration, we manage it dynamically. We've recently increased our hedges in longer duration assets, longer duration beyond the 10-year point to adjust for what we saw in Q2, where there was steepness of the curve in 10-year maturities and beyond.

Operator (participant)

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

Trevor Cranston (Managing Director)

Hi, thanks. Looking at the portfolio data, it looks like the allocation to higher coupons, like sixes and above, declined during the second quarter. Can you guys just comment on where you're seeing the best value in the coupon stack and kind of where you guys are deploying marginal dollars as you raise capital? Thanks.

Sergey Losyev (Co-CIO)

Good morning, Trevor. This is Sergey. I think we might have talked about it on last earnings call. There was volatility during the first half of April. That's probably where the sizes might have been reduced, but overall, we remain favorable at 5.5% and a half in fixed coupons. These are the highest ROE coupons that we are currently modeling. With the prepayment environment, it remains very benign. This remains our focal point for the portfolio. We don't really expect large changes near term.

Trevor Cranston (Managing Director)

Got it. Okay. I guess the other notable thing there was the, you know, there's the new line item for the long Treasury position. Can you just comment on kind of what the role of that is within the portfolio?

Sergey Losyev (Co-CIO)

Yeah, as you know, we view the five-year point on the yield curve as a very important pivotal point for managing overall portfolio duration risk and just responding to monetary policy and all across the yield curve. The five-year Treasury serves as part of that hedging strategy, but it also is used as a proxy for our agency commercial MBS position. As we know, we hold slightly just below maybe 5% of our portfolio, and we are very tactical about that market. We tend to go in when spreads widen and reduce our allocations when we see spreads on a more richer side, and five-year Treasuries help us kind of hedge that position and be able to rotate among those asset classes.

Trevor Cranston (Managing Director)

Got it. Okay. Appreciate the comments. Thank you.

Operator (participant)

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

Randy Binner (Managing Director)

Hey, good morning. I just have one on the model and total expenses after fees waived reported in the quarter was $14.3 million. That was just a little bit higher than what the trend was and what we were looking for. Was there anything unusual in that line item this quarter or seasonal, or is that a level we would expect going forward?

Gordon Harper (CFO)

I wouldn't say it's a level we'd expect going forward. We had a bit more professional fees than we had probably in the first quarter, just on things that we were working on. As we explained in the 10-Q, some of that can just vary quarter to quarter, but not expecting sort of the same run rate on expenses.

Randy Binner (Managing Director)

That's helpful. Just to be, I guess, 100% clear, that line item, if you had higher hedge costs or volatility there because of interest rates moving around in April, that would be netted. That would not be in that line item. That would be elsewhere, correct?

Gordon Harper (CFO)

Yes, that's up in the derivatives.

Randy Binner (Managing Director)

Yep, got it. Okay. Thank you.

Operator (participant)

The next question comes from the line of Jason Stewart with Janney. Please go ahead.

Jason Stewart (Director and Equity Research Analyst)

Hey, good morning. Thanks. Just big picture, as you think about constructing the hedge portfolio and the coupon stack, how do you balance total return versus carry as we start to see some of these dislocations in swaps versus U.S. Treasuries?

Desmond Macauley (Co-CIO)

Hi Jason. In terms of our portfolio on the hedge side, we mentioned our duration. We are positioned for a bullish steepener, and we adjust our hedges appropriately, and it's pretty dynamic. It's our view of the macroeconomic environment. We like to stay diversified across the coupon stack. The lower coupons would benefit if we do see rate rally. We expect that a rally could take place when the Fed resumes normalization, which we are expecting later on this year in the fall or later. The higher coupons could benefit in a steepener, where in any steepener scenario, the projected CPRs could be slower, and those could benefit the higher coupons. We're looking to reinvest mostly in production coupon 5.5 and 6s. These are specified pools.

They have the prepayment characteristics that we talked about in our prepared remarks, and that is supposed to improve the overall convexity of our portfolio. Last, of course, we also have those securities with even positive convexity. It's best to stay diversified across the coupon stack and looking to add more in production coupons in terms of reinvesting paydowns and also reinvesting any equity capital raises.

Sergey Losyev (Co-CIO)

Yeah, and just to add on the hedge book side, you know, Desmond mentioned on a DV01 basis, we're about 33% in Treasuries. On a notional basis, it's closer to 20-80. You know, we still like to use interest rate swaps as the main hedge instrument. It's a cheaper hedge, obviously, from a total return. Treasuries have been a more effective hedge as of late. We're keeping these, you know, the balance of the hedge book right where we feel like it provides both the carry and the total return opportunity from both sides.

Jason Stewart (Director and Equity Research Analyst)

Okay. Does the 18-20 range keep the hedge book with the same composition that you have right now in $20.80 billion notional?

Desmond Macauley (Co-CIO)

Eighteen to 20% would be for like our production coupon five and a half and sixes. In terms of, you know, that would, if you look at it from a total return perspective, then the hedge, like if we use swap hedges and we run swap hedges to forwards, the total return would be roughly zero in that case. A 20% return on production coupons, it pretty much doesn't matter whether we use swaps or Treasury futures. In that framework, 18 to 20%, I should also point out that that's in the base case, right? We think spreads are really attractive at this point. If we take, for example, we see a 10 basis points tightening in OIS, that can add another 4% to that number. Also keep in mind as well that the repo rate has been stable throughout the entire year.

The Fed has not cut this year. If we do see resumption in normalization, we can expect even in the base case for those returns to look even more attractive. As it is right now, they are more attractive. They either meet or exceed our hurdle rate, and that's one of the reasons that we are very optimistic about our current, you know, environment.

Jason Stewart (Director and Equity Research Analyst)

Okay. That's a helpful caller. Thank you for that. Just on the at-the-market offering program quarter to date in 3Q, could you give us an idea of how that was raised relative to book and where book was today?

Gordon Harper (CFO)

I don't have the book value for you as of today, but book is, as we said, was $16.81 as of Monday, and the issuances were just mildly dilutive, just a couple of cents per share.

Jason Stewart (Director and Equity Research Analyst)

Okay, thank you.

Operator (participant)

The next question comes from the line of Matthew Erdner with JonesTrading. Please go ahead.

Matthew Erdner (Director, Specialty Finance, and Real Estate Equity Research)

Hey guys, good morning. Thanks for taking the question. Just a quick one for me. You guys talked on leverage a little bit, with it running back up quarter to date, still below those historical levels. What exactly are you looking for to take leverage up? Is it more clarity from the Fed? Is it kind of a little more stability on the long end of the curve? We'd just like your thoughts there. Thanks.

Desmond Macauley (Co-CIO)

I think.

Gordon Harper (CFO)

Go ahead, Desmond.

Desmond Macauley (Co-CIO)

Okay. Yeah. First, I should just say our leverage strategy is, you know, it's very flexible, and it's designed to reflect our view on the attractiveness of spreads, our view on market volatility, and just where we want our liquidity to be. We took our leverage down tactically quarter to date. Our spreads are tightening locally, and we saw volatility also come up significantly since early April. In addition, there were swirling headlines around Fed independence, and those headlines have now subsided. Given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage from where we are. Does that answer your question?

Matthew Erdner (Director, Specialty Finance, and Real Estate Equity Research)

Yeah, a little bit, but you know, I guess going forward over the next three months, you know, when you guys are expecting the Fed cut, you know, are you going to put leverage on in front of that, you know, as you go into that event kind of thing?

Desmond Macauley (Co-CIO)

You know, look, we.

Sergey Losyev (Co-CIO)

Yeah, I'd just say we think about all this. We think about all this stuff, but are generally not in the business of putting big bets on. What's behind your question is exactly right. It's a view that there's more stability across all the axes that we look at. To the degree that, and of course, that's a reflection of how stable we feel liquidity is going to be, which is really the driver behind what leverage you're comfortable with. We'll react accordingly. I think you could probably expect us not to take a big bet, but as you see elements of greater stability come into the market across those axes, there may well be a pretty good case for going up a little bit. I remember historically leveraging this sort of business model, if you go back decades, was a lot higher.

Generally, people have been keeping their head down, which has served everybody pretty well, frankly. Less volatility, more stability means that the model can take a little more leverage.

Matthew Erdner (Director, Specialty Finance, and Real Estate Equity Research)

Yeah, that's helpful. Thanks for the comments. Sorry, go ahead.

Sergey Losyev (Co-CIO)

Just to, you know, as a catalyst, of course, the big elephant in the room is bank demand so far year to date. It has, you know, probably disappointed most industry investors. We're closely watching developments on the deregulation front. Just yesterday, there was the first Fed Capital Framework conference that a lot of color came out of. Industry-wide participants are looking to speed up and agree that currently the capital framework is too confusing, too stringent. Banks are sitting on record excess capital. We feel like it's just a question of if not when we start to see greater participation from the banks, and this will be the tailwind that we outlined in our script as well.

Matthew Erdner (Director, Specialty Finance, and Real Estate Equity Research)

Yeah, I definitely agree there. Thank you.

Operator (participant)

The next question comes from a line of Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, thanks. Good morning. Sticking on this conversation around hedging, do you think there's any value at this point in hedging the short end of the yield curve? How attractive do you think it is to buy swaptions at this point, just considering volatility has come down a little bit? Thank you, guys.

Sergey Losyev (Co-CIO)

Hi Eric. Yeah, so I mean, look, the two-year yield has been extremely stable over the last year. Obviously, the talk of hikes is not on the table at this point. We express that in our bull steepener bias of our yield curve hedging. Whatever front-end hedges we have on, they're there for kind of the risk management to express that exposure. We currently don't play in the swaptions market. We always evaluate it. From where mortgages are trading and how wide the spreads are, we feel like the better trade-off is to express the view on volatility through the current coupon basis, for example.

Eric Hagen (Managing Director)

Yeah, that's helpful. Maybe continuing on that theme, you guys offer good information and color on your duration gap. Just looking at these current coupons specifically, do you maybe have an estimate for what your duration gap would extend to if mortgage rates backed up, let's call it like 50 basis points? In that extension scenario, would you be more likely at this point to let your leverage run a little higher, or would you look to sell assets in that scenario?

Sergey Losyev (Co-CIO)

Yeah, that's a good question. We obviously run risk stress test scenarios. We can get some numbers for you. Do you mean sell off on the long end or the front end, since that was the initial question?

Eric Hagen (Managing Director)

Yeah, maybe more on the long end, right? Like that curve steepener you guys are positioned for.

Sergey Losyev (Co-CIO)

I think we hedge our curve exposure on a dynamic basis. We don't, we're not going to let duration extend over certain levels where we feel like it would require a rebalancing of duration. From that standpoint, we stay very disciplined, and our risk metrics in the shock scenarios don't pose any large extension beyond which liquidity would be compromised.

Eric Hagen (Managing Director)

Yep, thank you guys so much.

Operator (participant)

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks. Thank you.

Scott Ulm (CEO)

Thanks for joining us this morning. Please feel free to give us a ring at the office. Happy to catch up if other things occur as you're thinking about what's going on in mortgage land. Thank you for joining us this morning, and good morning to you.

Operator (participant)

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