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Armour Residential REIT, Inc. (ARR)·Q2 2025 Earnings Summary

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.

Financial Results

EPS and Revenue vs. Estimates

MetricQ2 2024Q1 2025Q2 2025
Distributable EPS ($) – Actual$1.08 $0.86 $0.77
Distributable EPS ($) – Consensus$0.967*$0.873*$0.825*
GAAP Net Income (Loss) per share ($)$(1.05) $0.32 $(0.94)
Revenue (GAAP, $M) – Actual$(37.1)*$40.5*$(61.3)*
Revenue (GAAP, $M) – Consensus$42.9*$52.8*$59.5*

Values marked with * are from S&P Global.

Margins and Core Earnings Power

MetricQ2 2024Q4 2024Q1 2025Q2 2025
Economic Net Interest Spread (%)2.05% 1.53% 1.88% 1.82%
Economic Net Yield on Interest Earning Assets (%)2.42% 1.91% 2.24% 2.16%
Net Interest Income ($M)$7.0 $12.7 $36.3 $33.1

KPIs and Balance Sheet

KPIQ2 2024Q4 2024Q1 2025Q2 2025
Book Value per Common Share ($)$20.30 $19.07 $18.59 $16.90
Liquidity ($M)$630.2 $608.0 $848.0 $772.9
Debt-to-Equity (x)6.09 7.87 7.33 7.72
Implied Leverage (x)7.44 7.95 7.87 8.29
Portfolio (Agency MBS, $B)$8.9 $12.4 $14.4 $15.4 (incl. 94.1% Agency)
% Repo with BUCKLER56.5% 45.7% 45.7% 49.3%
Interest Rate Swaps Notional ($B)$8.3 $7.2 $8.4 $10.3
Avg CPR (Portfolio)——6.1% 7.7%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Common dividend per share (monthly)July 2025$0.24 (guided 6/24/25) $0.24 confirmed (7/1/25) Maintained
Common dividend per share (monthly)August 2025—$0.24 declared (8/29/25 pay date announced 7/23/25) Maintained
Series C Preferred dividend (monthly)Q3 2025—$0.14583 for Jul/Aug/Sep 2025 Maintained
Dividend policy commentaryOngoing—“Dividend … appropriate for this environment” Qualitative reaffirmation

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’24 and Q1’25)Current Period (Q2’25)Trend
Macro/Fed outlookQ1: Market pricing 3 Fed cuts; supportive technicals for MBS Expect resumption of cutting cycle this year; volatility lower, spreads still historically cheap Slightly more constructive
Bank demand / regulationQ1: SLR relief could aid repo and MBS demand Capital framework/deregulation talk could unleash bank demand; potential catalyst later this year Improving prospects
Leverage stanceQ4: 7.87x implied; cautious backdrop Comfortable “modestly increasing” leverage as volatility subsides, spreads attractive Gradual increase
Hedge mixQ1: ~30% Treasuries, 70% swaps; diversified ~33% Treasuries/futures by DV01; swaps remain main/cheaper hedge; positioned for bullish steepener Balanced, diversified
Coupon allocationQ1: Bias to 5.0–5.5% production coupons Favor 5.5s and 6s; diversified across 30‑yr stack; TBA exposure light (~$300M) Stable, tactical
PrepaymentsQ1 CPR ~6.1%; muted Q2 CPR ~7.7%; still benign; ~8.3% trending in early Q3 Slightly rising but benign
Dividend stanceQ1: Aim for stable dividend; coverage implied Dividend affirmed as appropriate; July paid, Aug declared Maintained
GSE reformQ1: Monitoring FHFA/Treasury; long‑term process Still constructive yet not imminent; retain gov’t backstop Unchanged

Management Commentary

  • Strategy and dividend: “Grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity, and dynamically adjust hedges… We view our current dividend as appropriate for this environment and the returns available.” — CEO Scott Ulm .
  • Macro and spreads: “Current coupon MBS spreads… widened by ~10 bps q/q and remain historically cheap… We believe a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into agency MBS.” — CEO Scott Ulm .
  • Portfolio/hedging: “Our hedge book reflects a balanced view… about 33% in Treasury shorts and futures, remainder in OIS and SOFR swaps… invested 100% in agency MBS/CMBS and U.S. Treasuries.” — Co‑CIO Desmond Macauley .
  • Liquidity/leverage: “Given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage.” — Co‑CIO Desmond Macauley .
  • Book value update: “Quarter‑ending book value was $16.90… estimated book value as of Monday, July 21, was $16.81 per common share.” — CFO Gordon Harper .

Q&A Highlights

  • Leverage direction: Management is “comfortable modestly increasing” leverage as volatility abates and spreads tighten from distressed levels; historically wide spreads and stable liquidity underpin this stance .
  • Coupon positioning: Focus remains on production 5.5s and 6s with favorable convexity/prepayment; higher coupons trimmed during April volatility but remain attractive for ROE; 5‑year Treasuries used tactically in hedge mix .
  • Hedge composition: Diversified across swaps (primary, cheaper) and Treasuries/futures (~33% DV01); positioned for a bullish steepener while maintaining carry/total return balance .
  • Expenses: “Total expenses after fees waived” were elevated due to professional fees; CFO does not expect that higher run‑rate to persist .
  • ATM issuance and book: Q3‑to‑date ATM issuance was “mildly dilutive, a couple of cents per share” around $16.81 estimated BV as of July 21 .

Estimates Context

  • Distributable EPS: $0.77 vs $0.825 consensus* (miss). Prior quarter: $0.86 vs $0.873 consensus* (slight miss). Prior year: $1.08 vs $0.967 consensus* (beat). Results suggest modest negative surprise in Q2 after stability in Q1; Street likely revisits expense and spread assumptions .
  • Revenue (GAAP): $(61.3)M actual vs $59.5M consensus* (large “miss” on GAAP), reflecting the accounting treatment for mREITs (derivative marks and net interest presentation) — investors typically anchor on Distributable EPS rather than GAAP revenue.

Values marked with * are from S&P Global.

Key Takeaways for Investors

  • DEPS supported the dividend but missed Street by ~6%; watch for expense normalization and incremental leverage to close the gap to consensus .
  • Book value drawdown was the principal negative; improving rate volatility/spreads and a constructive bank‑demand backdrop are key to stabilizing BV in 2H25 .
  • Management is prepared to add leverage tactically as liquidity remains ample and spreads are still historically attractive — a positive for earnings power if volatility stays contained .
  • Hedge mix remains balanced (swaps + Treasuries/futures) and positioned for a bullish steepener; sustained curve dynamics could provide incremental ROE tailwinds .
  • Dividend path: July paid and August declared at $0.24; management signals durability based on medium‑term returns — a support for income‑oriented holders, but BV sensitivity remains the swing factor .
  • Watch regulatory headlines: capital framework/SLR clarity could unlock bank demand and tighten MBS spreads, a key upside catalyst for both earnings and BV .
  • Equity issuance remains a tool; modest dilution near book can fund growth into attractive spreads — monitor pace and accretion/dilution relative to book .

Supporting source documents and data:

  • Q2 2025 8‑K/Press Release: GAAP loss $(78.6)M; DEPS $0.77; NII $33.1M; Economic spread 1.82%; BVPS $16.90; liquidity $772.9M; leverage 7.72x; swaps notional $10.3B; dividends and August declaration .
  • Q2 2025 Earnings Call: Commentary on macro, hedging mix, leverage, coupon mix, expenses, ATM issuance, BV estimate ($16.81 as of 7/21) .
  • Q1 2025 8‑K/Press Release and Call: DEPS $0.86; NII $36.3M; Economic spread 1.88%; BVPS $18.59; liquidity $848.0M; leverage 7.33x; portfolio/hedge details .
  • Q4 2024 8‑K/Press Release: GAAP loss to common $(49.4)M; DEPS $0.78; NII $12.7M; Economic spread 1.53%; BVPS $19.07; leverage 7.87x .
  • Q2 2024 Press Release: DEPS $1.08; NII $7.0M; Economic spread 2.05%; BVPS $20.30 .

Values marked with * are from S&P Global.