Q3 2021 ARMOUR Residential REIT Inc Earnings Call

Hello, and welcome to the armour residential REIT third quarter 2021 earnings conference call.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

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Thank you Keith and thanks to all of you for joining US this morning to discuss <unk> third quarter 2021 results today.

Today, I'm joined by Armours Co Ceos, Scott, Ulm, and Jeff Zimmer and our CIO Mark Gruber.

By now everyone has access to Armours earnings release, which can be found on Armours website, www armour REIT dot com.

This conference call may contain statements that are not recitations of historical fact, and therefore constitute.

Looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

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 these forward looking statements due to the impact of many factors beyond the control of armour.

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

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

They are subject to change without notice.

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

Also our discussion today may include references to certain non-GAAP measures.

A reconciliation of these measures to our most comparable GAAP measures are included in our earnings release, which can be found on Armours website.

An online replay of today's conference call will be available on <unk> website, shortly and will continue for one year.

Armour continues to concentrated portfolio activity in agency MBS for the foreseeable future.

Quarter end book value was $11 nine per common share down 19% from the end of Q2 2021.

This quarter over quarter decrease reflects spread widening across our MBS portfolio, which is likely the result of concerns over the increasingly imminent fed taper and the ultimate direction of several stimulus and debt ceiling bill, but continue to consume most of the congressional calendar.

While spread widening negatively impacts the current market value of our existing MBS portfolio. It also often represent improving opportunities for new MBS investments.

September 30th.

Armours portfolio consisted of $4 3 billion of agency Securities plus TBA positions, representing another $4 $2 billion.

At the close of business. This past Tuesday, we estimated book value to be approximately $10 97 per common share.

Liquidity, including cash and unencumbered securities was nearly $900 million, representing almost 78% of our total equity.

Armours Q3 comprehensive income was $13 $3 million, which includes $34 million of GAAP net income.

Distributable earnings, which excludes gains or losses from security sales and early termination of derivatives as well as market value adjustments, but includes TBA drop income.

It was $24 $7 million or 25 per common share you may have noticed that we changed the name of this non-GAAP measure from the prior name we used the core income we think this better reflects the way we think about this statistic.

During the quarter.

<unk> issued $4 million and 550825 shares of common stock through our ATM program, raising $49 $1 million of capital after fees and expenses.

For the first three quarters, our capital raising efforts have added about <unk> <unk> to book value per common share.

In addition to considering whether these offerings are accretive or dilutive on the margin. We also look at their potential for per share cost savings from spreading administrative costs over a larger share base.

ACM and the company's external manager continued to waive a portion of its management fee that waiver was initiated in the second quarter of 2020.

This waiver offset $2 $1 million of operating expenses for the third quarter of 2021 for.

For Q4, 2021, we expect the management fee waiver to total $2 million.

Armour paid dividends of <unk> 10 per common share for each month in the third quarter for a total of $28 $5 million. We've also declared October and November common dividends at that 10% rate per share as well as the preferred C stock dividends for Q4 2021 at the rate of 14.

<unk> five eight <unk> per share.

Now, let me turn the call over to co Chief Executive Scott Ulm to further discuss armours portfolio position and current strategy Scott.

Thanks, Jim.

Interest rates remained at a stalemate in the third quarter between underwhelming monthly increases in unemployment and elevated inflation driven by supply chain disruptions and an upswing in pent up demand.

Cognizant of risks that rising prices may prove to be longer than transitory. The epilepsy is finally signaled its intention to taper asset purchase amounts down to zero by mid 2022 with the start date as soon as November 2021.

Unfazed by the increasing eminence of the long anticipated announcement on tapering bond markets instead focused on the timing and pace of official interest rate hikes likely to follow.

As of mid October the short term OIS rates or pricing and approximately two rate hikes in 2022, followed by perhaps another three rate hikes in 2023.

Despite higher expectations for shorter term borrowing rates the yield on 10 year treasuries remains below the year to date high print of 175% muddying the longer outlook for an economic growth recovery.

The market seems to be pricing and the looming taper as seen by the spread widening that happened earlier this year.

However, since the second quarter of 2020, one option adjusted spreads on production 30 year mortgages tightened modestly the wall of cash from the banking community continues to provide a backstop bid to any measurable cheapening from current levels.

We see a potential shift in bank demand in 2020 to continue.

Continuing strong economic recovery could mean opportunity for bank lending portfolios to expand at the expense of their securities portfolios.

[noise] nominal premiums on production specified pools were nearly unchanged in the third quarter.

While OAS spreads improved by three to five basis points spread.

Specified pools have underperformed T b as in 2021, and we continue to view. This sector is rich supported by demand from outright yield buyers without access to the TBA dollar roll market.

A special niche and production dollar rolls.

He is still extraordinarily high in some instances ppas are trading over the implied funding rate of negative 90 basis points continuing to provide a strong tailwind for earnings we do expect some of the specialists and funding to start fading slowly it's fed monthly net purchases.

Are set to decline next year however.

However, the vast majority of worst to deliver bonds remain locked away and the feds portfolio and we foresee strong roll returns persisting beyond them.

Yes.

For now we continue to allocate approximately 50% of our assets. The TBA rolls weighted 60, 40 to 15 year and 30 year T Bas.

We plan to stay with these proportions until more attractive opportunities in specified pools present themselves. The other half of our assets have favorable prepayment protection characteristics composed primarily of prepayment penalties and dust and lower loan balances with MBS pools. These assets contribute to aggregate prepayment rates that are among the lowest in our peer group.

And what do we believe that as a foundation for stable and predictable earnings ahead.

Third quarter prepayments slowed relative to the speeds observed in the past year, providing a tailwind to earnings <unk>.

Portfolio averaged $12 eight CPR in the third quarter below the $15 two CPR from the previous quarter, we expect speeds to remain at similar levels in the fourth quarter, our implied leverage of six seven times at the third quarter end, which includes TBA is is one five to two turns below our historical leverage levels.

Our lower leverage apprise us with dry powder to take advantage of future market up days.

Despite the feds five basis point hike to their overnight reverse repurchase rate in the second quarter funding markets have remained at historic lows to Armours benefit.

Overnight repo rates range between 13, and 18 basis points throughout the third quarter with an average of 16 basis points.

To remove any potential risks around year end funding and the debt ceiling increase we've placed over 90% of our repo maturities out past the year end.

<unk> is active with 18 different repo counterparties and approximately 48% of our principal borrowed is with our broker dealer affiliate Buckler Securities.

As I've noted before we set our dividend policy based on the medium term outlook on our business. We continue to see our dividend level is appropriate well.

That would be delighted to take questions.

Yes. Thank you at this time, we will begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

Your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Christopher Nolan with Ladenburg Thalmann.

Hey, guys a couple of quick questions Jim was there any nonrecurring expenses.

Expenses or revenue items in the.

Earnings.

I think that the.

From an expense perspective, the answer is no from a revenue perspective.

Did have one.

Bond that prepaid had some interest make whole in that and I'm looking at Mark and I think that was $2 million.

Gotcha.

And then in your comments did you indicate that the ATM issuance was accretive to book value in the quarter.

I'm not in the quarter, if you look at the reconciliation in the.

A press release I think it was one.

<unk> <unk> dilutive.

For the quarter and the comment that I made was year to date.

It's <unk> <unk> accretive.

Great and then I guess as you know just a general question in terms of the overall market outlook I mean I. Appreciate the color that you guys provided in terms of your macro view.

Where do you see long rates going I mean, they've sort of been.

Moving up and down a bit and do you have a particular.

Perspective as to.

What youre expecting for the fourth quarter and into the first quarter on that.

Hi, good morning, it's Jeffrey.

The rise in oil prices recently.

Has caused the curve to flatten a little bit and that's taken some people by surprise.

Internally our year end target for the 10 year note was $1 75, and we've touched that recently for a cup of coffee.

If you have persistent inflation and a lot of it's exhibited itself in energy prices and commodity prices. It was flatter may stay around for a while.

Before you have economic upward increase again.

Wood inflation slowing down a little bit.

That being said if the economy continues to perform well you would expect the 10 year rates to be modestly higher.

And with the fed will give us guidance on November 3rd in terms of when Theyre going to do lift off which we think would not start until well after they stopped paper. So we wouldn't expect lift up until at least the fourth quarter of 2022 that being said the way we're hedged our performance is going to be driven.

In the medium term certainly by what mortgage spreads do.

And.

Although everybody in the world expect mortgage spreads to widen a little bit and we do as well.

When the fed winds down there'll be doing constant reinvestment of their pay downs and when the fed gets out of the market. It brings in other participants who have decided not to participate into the market and generally as Scott said in his comments the fed's absorbing the worst of the worst.

The mortgage deliverable product, Okay, and best stuffs out there for us to buy.

And we talked earlier, obviously about the fact that we're at least one five turns underneath our leverage which provides a lot of clean air to.

Exceed our dividend rate. So anyway short answer is we did expect the tenure to get up to 170 510 year, we have achieved that the bull flattened due to the energy and the concerns around commodity prices.

It was a surprise to some but.

It doesn't affect what we do long term and hope that's helpful. Great. Thank you Jeff. Thank you.

Thank you and once again. Please press Star then one if you would like to ask a question.

And the next question comes from Macau government with JMP Securities.

Hi, good morning, gentlemen, thanks for taking my questions.

Wondering how much spread widening.

Need to see to be able to increase leverage.

From this point, where it is now and also just a quick question on your outlook for prepay speeds going forward. Thank you.

Mark why don't you address our prepay all that because we have those in our models here for the rest of the quarter.

For the rest of the quarter, we don't really see really any increase in prepay speeds, we would assume they would be maybe flat to down just slightly.

So for the rest of the threat basically for the rest of the year.

And so what we're waiting for and maybe everybody is waiting for this so you might not have spreads widened so much less.

Let's see what the fed says on November 3rd is widely anticipated that they would start to taper if not it's toward the end of November starting in December.

If everybody is expecting that it would be hard to believe you're just going to get a big five or 10 basis point wider but you'll get five OAS widening here, we'll start putting a little bit of money to work and.

Not here to pick the wides or what the perfect opportunity is going to be we do get Paydowns every month that gives us the ability to take advantage of wider spreads tightened we will still have to go ahead and reinvest our pay downs does that does that answer what you're looking for.

Yes, that's helpful. Thank you very much.

Youre welcome.

Alright, thank you.

This concludes our question session as well as conference call. Thank you so much for attending today's presentation.

Not your fault lines.