Q4 2019 Earnings Call

Yes.

[laughter] greetings and welcome to the armor residential read fourth quarter and year end 2019 earnings conference call during.

During the presentation, all participants will be they listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.

If at any time during the conference you need to reach an operator, you May press the star followed by the zero.

As a reminder, this conference is being recorded Thursday February 22020.

I would now like to turn the conference over to Jim Shelton Chief Financial Officer. Please go ahead.

Thank you Milton and thank you all for joining our call to discuss Armours fourth quarter 2019 result, I.

I'm joined by Armours co Ceos, Scott own Jeffs, Zimmer, Chief operating officer, Mark Gruber and today, we're welcoming co Chief investment Officer, David sales.

By now everyone has access to Armours earnings release, and form 10-K, which can be found on Armours website Www armory dot com.

This conference call may contain statements that are not mere recitations of historical fact, and therefore constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

All such forward looking statements are intended to be subject to the safe Harbor protections provided by the Reform Act.

Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward looking statements due to the impact of many factors beyond the control of armor.

Certain factors that could cause actual results to differ materially from those contained in the forward. Looking statements are included in the risk factor section of Armours periodic reports filed with the Securities and Exchange Commission.

Copies of these reports are available on the Fccs website at Www Dot FCC Dot Gov.

All forward looking statements included in this conference call are made only as of today's date.

There are subject to change without notice.

We disclaim any obligation to update our forward looking statements unless we are required to do so by law.

Also our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included in earnings release, which can be found on Armours website.

An online replay of this conference call will be available on Armours website, shortly and will continue for one year.

Farmers Q4, 2019 comprehensive income was $58.5 million that includes a $108.7 million of GAAP net income.

The GAAP net income was driven primarily by in 80.4 million dollar increase in the Mark to market movements were interest rate swaps, while $42.2 million of unrealized loss on agency securities flowed through other comprehensive income.

Core income, which include which excludes those mark to market items, but includes PVA drop income was $36.5 million or 55 cents per common share.

Based on stockholders' equity at the beginning of the quarter core income for the quarter represents an annualized our Roe of 10.5%.

Quarter end book value was $20.84 per common share up 2% for the quarter.

Farmers year end mortgage backed securities portfolio consisted of over $12.8 billion of securities, including 11.9 billion of agency Securities and $900 million were credit risk and non agency securities.

In our update presentation as of January 31, 2020 available on our website or Edgar we said that estimated armor book value was $21.04 per common share.

We plan to update Armours estimated book value as of February 29, when we released the next company update in mid March.

After that we plan to provide book value estimates in the updates for months caused coinciding with our quarterly reporting cycle, which our March June September and December.

On January 28, 2020, we issued 3.450 million shares of our 7% series C preferred stock and through February 14, 2020, we have issued another 1.2 million shares of the series C preferred stock through our App the market offering.

Program, which we established on January 29.

This results in total total current series C. Net proceeds of $113.4 million after allowing for commissions and offering expenses.

We also announced the redemption of all 8 million 383344 shares of the outstanding series B preferred stock effective on February 27th 2020.

That will be redeemed at $25 per share for a total of $209.6 million of redemption proceeds.

The final full monthly series B preferred stock dividends will also be paid on that date due to holders of record as of February 15th 2020.

During the fourth quarter. We also purchased 45000 common shares at a discount to book value.

We pay dividends of 17 cents per common share during the month for each of the month in the fourth quarter of 2019, Thats a total of $30.2 million were 51 cents per common share.

We've also announced monthly common dividends for February and March of 2020 at the rate of 17 cents per share and the series C preferred stock dividends for February and March 2020 at the contractual rate of.

0.14 $583 per share.

Now, let me turn our call over to David Jeff, Mark and Scott, who will discuss armours portfolio positions current strategy and other matters David.

Good morning, everyone.

In the fourth quarter of 2019, the fed federal reserves, well coordinated Atkins delivered a sharp boost for risk markets with a lower and consistent overnight great policy, new purchases and short term treasury debt aimed at replenishing bank reserves.

As well as its commitment to support repo liquidity far into 2020.

Major U.S. equity indices climbed to record highs corporate credit spreads tightened to pre crisis levels and interest rate volatility declined below its recent trends.

The yield on a 10 year U.S treasury maintained to trading range between 1.5 and 2% throughout the quarter.

Pushing the spread between two year in 10 year treasuries to 34 basis points, it's widest in 2019.

The prevailing 30 year home mortgage rates stayed between 3.5 and 4% supporting the MBS MB a refi index at somewhat elevated levels.

The average prepayment rate on our mortgage securities portfolio was 17.1 CPR in the fourth quarter up from 13.3 CPR is Q3 average.

Headlines around declining borrowing rates and anything federal reserve policy generated a strong media stacked responsible for healthy refinancing activity.

While technological advances in the mortgage origination industry expanded its operational capacity to process applications more efficiently.

We expect seasonably seasonally muted prepayments in the first quarter to ramp up in Q2 reflective of these trends along with the recent decline in mortgage rates.

With that in mind. It is important to note that over 92% of Armours January 31st 2020 agency portfolio, excluding TV, a dollar rolls have characteristics that mute prepayments.

These include prepayment penalties loan balances less than or equal to $225000 mix seasons collateral low FICO scores and favorable loan to value ratios.

2019 was an extremely favorable year for specified pools and supply convexity and the introduction of the you MBS market have had inherently adverse impact on TV, a role carry which serves as an alternative to owning specified pools.

Although we view specified premiums is fully valued we don't foresee this dynamic changing at current levels at expected supply and refinance ability.

As of January 31st our portfolio consist of a well diversified asset mix.

19% market value in multifamily DUS pools.

17% market value in 15 year, MBS with a very low negative convexity.

And nearly 30% in 30 year MBS with gross coupons of 100 basis points above current new origination rates.

Our analysis suggest a high level of prepaid burn out in these latter securities.

Our focus on greatly improving our portfolios aggregate negative convexity through a more defensive asset mix and collateral selection has served us well so far in Q1 2020, when lower coupon mortgages underperformed treasury hedges.

During the fourth quarter Armours balance sheet averaged a positive duration gap of approximately 0.7 years and saw approximate seven basis points of last tightening across its holdings on average.

Benefiting from the decline in interest rate volatility 30 year pass throughs were the primary drivers of book value performance with the spread tightening ranging between 12 to 21 basis points across the coupon stack.

15 year pass throughs benefited from the steeper curve and produced 22 basis points of OAS tightening, while our desk portfolio record at minimal changes to spread as gains on lower priced bonds were offset by somewhat weaker performance in bonds with extremely high premiums.

In the fourth quarter, our seasons credit risk transfer holdings tightened approximately 22 basis points.

In addition, the intra quarter volatility in spreads presented us with opportunities to add seasoned CRT vintages, when the markets prepayment fears exceeded our own projections.

Additionally, during the fourth quarter.

Armor purchased bonds in the first of its kind commercial mortgage backed CRT deal.

And Fannie Mae's first ever season Harp CRT deal.

Given the continued flattening of the credit curve in mortgage backed product we saw great value in the M. Two tranches.

There has also been considerable tightening in these asset classes in 2020.

We continue to hold the majority of our seasoned crts as they offer excellent credit protection deriving from home price appreciation and deleveraging.

Our legacy non agency portfolio is small relative to the size of our portfolio, but continues to perform well and is additive to overall income.

The feds actions to alleviate year end funding pressures and remove questions around the sufficiency and availability of banking reserves were effective enough to avoid a repeat of the funding crisis in September and make the year end irrelative non event.

Our affiliated broker dealer Buckler Securities allows us to capture low cost overnight funding during the year end turn.

This was an excellent alternative to the considerably higher priced longer term repo available elsewhere in the funding markets.

The positives of having our affiliate Buckler for funding activities become stronger every quarter.

During Q1 of 2020, we called all $210 million, our series B preferred with a seven and seven eighths coupon.

Queen January 20 Eightth.