Q1 2020 Earnings Call
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[noise] greetings and welcome to the Arbor residential read first quarter 2020 earnings conference call during.
During the presentation, all participants will be they listen only mode.
Afterwards, we will conduct a question answer session at that time, if you ever question. Please press the one fall, but a foreigner telephone.
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As a reminder, this conference is being recorded Friday may 1st 2020.
I would now like turn the conference over to Jim Mountain Chief Financial Officer. Please go ahead.
Thank you know Sun and thank you all for joining Armours first quarter 2020 conference call.
We hope that all of you have been able to remain safe and healthy.
This morning, I'm joined by Armours Co Ceos got Allman, Jeff Simmer, and our Chief investment Officer, Mark Gruber.
By now everyone has access to farmers earnings release, which can be found on our website www armor read dot com.
This conference call may contain statements that are not recitations of historical fact, and therefore constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1990, but.
All such forward looking statements are intended to be subject to the safe Harbor protection 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 those reports are available on the Fccs website at Www FCC Dot Gov.
All forward looking statements included in this conference call are made only as of today's date and are subject to change without notice.
We disclaim any obligation to update our forward looking statements unless required by law to do so.
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 our earnings release, which can be found on Armours website.
An online replay of this conference call will be available on our website shortly and it will continue to be there for one year.
Other firms in our sector and across the economy.
Armor was impacted negatively by the sudden and historic levels of market volatility in March resulting from the cobot 19 pandemic.
On March 30, Onest 2020.
Farmers total assets stood at approximately $5.1 billion down nearly 62% from 13.3 billion dollar level at the beginning of the quarter.
This reflects armored successful results and actions to aggressively prune the investment portfolio reduce risk and preserve liquidity.
By comparison Armours total comprehensive loss for the quarter of $567 million represents only 37% of stockholders' equity at the beginning of the quarter.
Total equity was also reduced by $113.5 million by the Companys January decision to replace its outstanding 7.875% preferred stock with the new 7% series as well as the payment of previously declared dividends.
Having weathered what we expect to be the worst weeks of this emergency armor ended Q1 with book value per common share of $11.10 corresponding to total stockholders' equity of 786 million.
That included cash in Unpledged liquid securities of 316.
So the arm, which stands at approximately $470 million.
Since March 30, Onest Armours done a number of things Armours issued approximately 5.7 million shares of common stock through its aftermarket offering program.
Approximately $8.4 million of additional capital.
We continue to enjoy sufficient access to repurchase funding and interest rate swaps with a diversified group of Counterparties farmers affiliate Buckler Securities continues to play a major role in the company's funding strategy.
Farmers also taken advantage of relatively attractive opportunities to sell certain of its credit risk transfer and other non agency positions.
The company has also selectively rebuilding its agency pass through portfolio and is refreshing it swap book.
We expect to continue on this course for the rest of Q2.
As of yesterday evening beyond our portfolio stood at $5.6 billion, which includes $1.3 billion of TV A's and $308 million market value of CRT positions. They have a weighted average mark above 76, and 37% for those positions have investment grade.
Good ratings.
The $4 billion of agency Securities in portfolio is a nice mix of legacy higher coupon 30 year and dust positions combined with newer 15 year end 30 year products.
When the last few legacy swaps runoff in July our hedge book will stand at $3.7 billion with the average pay rate of 22 basis points based on our current positioning.
In addition to anticipated improvements in portfolio composition, and lower hedging costs. We expect future net interest margin will also be positively affected by favorable repo financing rates as term transactions roll off and are replaced at substantially lower current rates.
For example, three months.
Term repos for agency collateral, we're pricing just under 180 basis points in early March today, we're seeing one month repro repo prices inside a 30 basis points and less for overnight.
Contractual management fee expense for Q2 will be reduced by 40% as a further described in the company's form 10-Q, which will be filed with the FCC shortly.
Earlier this week armor paid the April cash dividend on the series C preferred stock and declared the may cash dividend at the rate of 1.14 $583 per share to holders of record on the 15th of May 2020 that dividends will be payable on may.
27th 2020.
As previously announced armor is moving to a quarterly dividend on its common stock for the second quarter expect to further announcement on the amount and timing of Q2 common dividends in the latter part of June.
Now, let me turn the call over to Scott, Jeff and Mark to discuss further armours portfolio position strategy and skewed towards the future Scott.
Thanks, Joe Good morning.
The World has changed significantly from our last earnings call in February our team has been working remotely since early March and our business continuity plan has worked well for us well be talking today about the pandemics financial impact to us we're mindful of personal cost to so many of our present costs, we hope everyone joining us today stays healthy.
Mark.
The bad for the mortgage assessment industry as a senior management team, where these professional having 35 years or so of average experienced in the capital markets March was the worst environment, we have had to deal with them in our careers the market movement more sudden and violent than 2008.
Our results were driven by several phenomena that occurred simultaneously.
Interest rates on 10 year Treasury bonds whipsawed from 1.16% at the beginning of March down to the new historic lows of 0.54% and back up to 1.2% at a matter of days, despite the historic risk off rally in treasuries.
Mortgage backed security PVA private prices decline. This resulted in the widest MBS spreads since the financial crisis armor as well as many others in our investment sector experienced the double shoppable interest rate hedges and asset prices moving against us.
Premiums on best criteria specified pools evaporated as for selling by Levered investors mutual funds and reach quickly drowned out all available balance sheet effects. The lack of which was further exacerbated by quarter end pressures.
In the Fannie Mae DUS 10, 9.5 market spreads exploded from approximately.
Plus seven just 50.
Yes.
This translated through an awesome.
For team.
All right.
Many Chris transfer buttons fell from par or 100 price levels to as high as 110 price levels to as low as 60 to 88.
Points on the dollar price levels, if a base can be found at all.
Repo terms in the agency asset class were very stable and in particular Armours. All always found very sound funding through his broker dealer affiliate Buckler Securities.
However outside of the agency business funding propositions degraded dramatically as haircuts and financing rates and doubled or tripled on crts.
Amidst the non agency funding cash one large money center bank abruptly ended its financing of crts altogether, causing further turmoil as many investors were forced to sell at the same time into as tumultuous market further lowering prices.
Liquidity in many respects simply disappeared off the run treasuries sharply underperformed on the runs indicated bid offer spreads current production TB A's widened by multiples 30 day commercial paper oscillated between five and 1.81% even as fed funds went to 0.05%.
FX FX swap funding all the dried up in the middle of March.
To reduce risk leverage and free up available cash we acted early by selling $1.7 billion of agency securities in the first two weeks of March in the last two weeks in March we sold another 7.4 billion primarily agency securities.
If we have not acted properly and decisively Theres Little question. Then we might have found ourselves in the midst of forbearance discussions with creditors like many others in our sector face today and with the most uncertain future.
The feds announcement of unlimited support for agency mortgages on March 23rd caused prices to stabilize an increase in order to increase liquidity for an uncertain future. We've sold many agency mortgage assets and we're not able to fully participate in the subsequent agency mortgage price by recovery.
Standing here today, we see a change landscape from prior years, we believe the substantial uncertainties will sohrab mortgage credit for the remainder of the year and perhaps longer.
Agency Securities are again, a bright investment spot require careful selection.
The fed buying program has given definitive support to the market, but is also cost substantial increases in prices that are exacerbated by the low rate environment.
We believe close attention to credit characteristics in agency securities will be rewarded with superior performance.
We believe element elevated prepayments will return as we're concerned a later in the year not any immediate future and focused portfolio selection now can mitigate that medium term risk.
Currently 85% our agency specified pools have some kind of prepay protection.
We are methodically investing and expect our leveraged increase over the coming few weeks with our emphasis on liquid agency securities that offer attractive risk return profiles.
We previously announced that we will declare a dividend for the second quarter in late June.
We believe our ongoing dividend policy should be stable as possible and reflect our medium term view of our net profitability.
We believe our dividends should not chase period to period net profitability at this point in the investment cycle.
We're very constructive on our business for the following Reais.
As we move through the pandemic and the economy revise we expect to see the yield curve modestly steepen, providing improved opportunities for investment at the same time, we believe the fed we'll keep short term rates low in order to nurture a nascent recovery, which we'll keep our funding rate slow.
The fed has already begun to taper its MBS purchases and we expect will continue to do so as the agency market normalizes.
Some spreads feel and naturally take today and fed pay for tapering should allow more conventional pricing relationships.
Prepayments will likely remain subdued until staffing and financial conditions are much closer to normal theres, a great tailwind for new investments.
Financing for agencies is abundant and as most attractive levels in years, we're highly confident our access to financing an excellent terms through our affiliate Buckler securities as well as the almost three dozen other relationships, we maintained with other repo counterparties.
Theres, clearly uncertainty and the timing and realization of all these factors that said.
We believe the medium term net yield expectation should be in the high single digit to low double digit range.
We're delighted to be through the month of March and standing here with great liquidity solid financing and dry powder to continue to design our portfolio for the present environment.
We'll now be happy to take any questions.
Nelson can you now open up the line for questions.
Thank you.
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Our first question.
Comes from the line Us Douglas Harter with credit Suisse. Please proceed.
Hey, guys. This is actually Josh on for Doug Good morning.
We saw the large drop in leverage in the quarter and you mentioned on the call that we should expect that to tick up going forward.
Curious if you could talk a little bit about how you're thinking about target target leverage at this point and if we should expect it to get back to where it was.
29, Tina thanks.
Our target leverage at this point is around eight give or take a half a turn depending on the opportunities in.
How fast we can deploy our capital based on those opportunities.
Got it that makes sense and then one on funding can you update us on how much of the agency repo is currently funded through Buck Flair.
And the average maturities.
The average maturity that funding.
So approximately three quarters of the agency book is with Buckler.
And I suspect as we re grow our agency portfolio that number will come down a little bit, but we want to make sure that the capital at bottlers completely utilized and quite frankly, the rates that we get from Buckler in the terms, we got from Buckler are fantastic, particularly better haircuts in the street.
Got it are you able to quantify how much better those those terms are versus street repo.
Well, sometimes it's a couple of basis points better sometimes it's a it's a couple of bases points worse, but if you add that with the factor that we have surety on overnight funding I'm not going to do overnight funding with X Y Z bank, because you're not sure if they're going to be there. The next day, we know that block was going to be there. The next day and as you heard from some of the other participants in the sector the book.
Overnight funding can be half the rate to some of the term funding is so we have a trust and an ability to know that they're going to be there every day and sometimes you can't actually quantify that.
Got it thanks for taking my questions guys.
Thank you.
Thank you.
Our next question.
Comes from lineup Trevor Cranston with JMP Securities. Please proceed with your question.
Hey, thanks.
Hi, guys. If I missed this in my prepared remarks, but.
With the credit portfolio can you talk about sort of how you're thinking about that going forward.
If your intention is to hang onto that portfolio or as prices have started to recover some in April.
Or you're going to be looked into to sell down that book.
And as the second part of that question can you give some additional detail around.
Where the financing market is for credit Securities now in terms of haircuts and the cost of repo. Thank you.
Sure good morning.
So the credit book Crts, let's say.
Add up approximately in early March 900 million dollar market value the value of the remaining securities on our balance sheet today.
Non agencies are only crts everything is not a CRT has been sold and the CRT valuation is 308 million. So we've reduced that by two thirds. It is our intention over the next two to three months to sell the rest of that and we're doing what we're doing it surgically as opportunities and buyers come into the market and.
People have a better perspective on recoveries were selling into strength and not selling into weakness on there are some companies and mutual funds, particularly who had withdrawals that were forced sellers during March and the first two or three weeks of April and there are opportunities for us to a move out of that product, we're not as profound and.
Yesterday actually we made an up number very nice sales that were above marks and we'll continue to look and do that you should look at us by the time, we get into the third quarter to be almost if not all agency assets and that will be our portfolio platform in the future now funding for the non agencies is and seems to be very secure.
Today, but did not feel that way even as of two weeks ago as Scott said in his comments Trevor one major central Bank one of the top five banks in the country all of sudden in third week of March decides to pull out of all of their CRT funding, which meant that everybody that was funding with them had to sell bonds because very.
Few other lenders were taking on new crts at the time and created a real world Whirlwind down pricing for awhile. So we refrain from selling there for a period, but today haircuts or as low as 17.5% our average haircut on our CRT portfolio is right around 25% today.
Okay, Great that's very helpful.
Then as your as you are deploying.
Capital back into the agency trade.
Can you talk about specifically kind of what sector of the market you like and kind of what coupons the portfolios in today and what coupons. Your I mean, they look into by maybe and maybe specifically some color on whether or not.
You find rolls attractive enough to be buying Tvs or if you're if you're really going to be focused mostly on buying a spec pools. Thanks.
Hey, Trevor its mark so.
We've been looking at both a 15 year sector and in writing coupons there.
Also the 30 year sector more of the higher coupons, so three and as.
Jim its earlier most of our book is still foreign formats. The high coupon stuff. We had bought earlier last few years.
So we're sticking to those sectors were looking for a more stable bonds.
They have good convexity profile.
We do like TV roles in certain coupon certain sectors and we're watching those carefully.
Okay have investing some of that.
So you continue to see us do a variety of different sectors are still like to us.
We like those profiles.
So in the same sectors, we've always been an agency.
But probably on the 30 year sector more higher coupons and lower coupons and one of the reasons. There is the fed has now changed if you look at the Fed report over the last few days they change what theyre buying for a long time, they were buying a lot of three and as far as a Ford has well they're going to refrain from buying those now and they're going to start buying a lower coupons, which means those are going to.
Continued to be rich may not get richer, but they're going to continue to be rich, whereas there could be some ongoing buying opportunities and above threes in areas, particularly ones that have some specialty.
125 kind of loan balances those kind of things.
That's helpful.
Yeah very helpful. Thank you for that.
And last question.
It looks like there was some issuance through the ATM plan in April.
Can you just provide some additional color around.
Sort of the rationale for that issuance, given where the stock was trading and kind of where you're at today in terms of.
The likelihood of any continued issuance of common thanks.
Sure. So as you know our traditional approach to capital raising.
It was kind of threefold.
Basically how can shareholders benefit based on a variety of factors. So is it a creative visit accretive to earnings can be a good deal. However, as we entered April there was not clarity on how the world is going to turn out liquidity was at a premium and we bought a modest amount of dilution was a very deal for our shareholders to go ahead and raised.
Up to $50 million, we raised $48 million.
The actual dilution was just around 20 cents all in to be clear. So we felt that was a very modest amount to increase the assurity and survival factor of the firm during a period of time, where some of our brother and we're doing for forbearance issues. We feel very good about what we did for our shareholders I don't anticipate.
Right now turning that program back on we'll see how the future develops.
Okay, great. Thank you for that.
Welcome.
Thank you.
As a reminder, if you'd like to register a question. Please press the one follow up at the four on your telephone.
Our next question.
Comes from line of Christopher Nolan with Ladenburg Thalmann and company. Please proceed with your question.
Hey, guys.
Scott in your comments, you mentioned that net yields could be high single low double digits.
What do you mean by net yields that core income relative to.
Equity to fund I love It please.
Yes, currently that Thats correct current income relative to equity.
Of course, so boring.
Got it as Gerald and that's correct.
Okay, Great and then.
I mean from what I can gather from the press release, it looks like the investment spreads widened quite a bit this quarter.
What's sort of your anticipation for investment spreads going forward.
Just sort of an anomaly for one Q or.
Are we in a new world.
Yes, just define investment spreads are you talking investment opportunities as we said you know low double digits or are you talking NIM or is there some other criteria.
NIM would be great.
No NIM is going to be and Uh huh.
An asset basis.
I guess I'd have to think about high would define it's going to be higher than it was in Q1.
Because spreads you're going to be a little wider than we're investing I don't have a I can give you a good.
Concrete number for NIM, but I can say, it's going to be higher than it was in the past, yes general sometimes there are couple other factors, we've got term financing that's rolling off.
And we've got a high higher higher.
Rate swaps at a rolling off to will both what you're going to give a little tailwind here the to NIM, yeah, but look at it this way Christopher Jim said that our.
Swat looks going to be a 22 basis points going forward.
By July 1st because all the old stuff rolling off repo is in high single digits for.
Let's say overnights or anywhere from 10 to 20, and let's say terminal is anywhere from 25 to 30.
So take your 22 and add 20, the that there's 42 you can earn assets here in the mid to high ones. So you can kind of do the math and figure out where you could be and frankly as Mark said earlier, we think prepaid we're going to be kind of slower for the next few months. So NIM should be pretty good and I've heard a other people that we deal with on the broker.
Side or kind of looking at the same way we are I hope that's helpful.
Yeah no. It is great and then I guess final question is when should we expect acute to be released.
Oh, we should be getting that out shortly ideally that the.
Oh on Edgar before closes.
Tonight, but.
In any event.
Yeah, we ought to be able to see it Monday morning.
Great final question is given the changes in interest rates. How does do you guys. Some change your thinking about preferred stock at all.
I mean, it's a consideration to pay that down further and go with more repo funding, we havent houses.
Yes. Please go ahead, Chris So we have 132 million of our 7% out there okay based on investment opportunities today that is accretive to the overall proposition of investing however.
You don't ever want to have preferred to larger portion of your total capital structure and currently the firm's very comfortable with the capital structure amount of our regular equity versus our preferred also.
As a very large biomar preferred yesterday, apparently over 200000 shares in the market at the close but that's still only trading at $22 a share and we would not be interested that it at least any consideration that we've been approach with no selling that under $25 a share yeah, just want to amplify a little bit in retrospect January decision to swap out.
200, and I don't know 40 or $50 million whatever it was of.
Seven and seven 8% therapies be with.
Slightly.
On a pretty should be personable smaller amount of lower coupon, 7% series C.
In retrospect in my mind that looks like a really smart decision.
The way things have worked out.
All right that's it for me could show guys. Thanks.
Thank you.
Hi, Nelson I haven't worked questions.
I'm showing no further questions at this time.
Well, thank you all for joining us.
We continue to a work largely remotely but are completely connected so if anybody has additional questions.
You've got our emails call the office and we will get a reconnected and until next time stay thanks.
That does include the conference call. We thank you for your participation and ask would you. Please disconnect your lines.
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