Q1 2023 ARMOUR Residential REIT Inc. Earnings Call
Speaker 1: And I.
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Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead. Jim Foundation cover brand news news
Speaker 3: Thank you, Andrew, and thank you all for joining our call to discuss ARMA's first quarter 2023 results. This morning I'm joined by ARMA's Co CEOs, Scott Ulm and Jeff Zimmer. And by Mark Gruber, our CIO.
Speaker 3: By now everyone has access to Armour's earnings release which can be found on Armour's website, www.armourreet.com.
Speaker 3: This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995.
Speaker 3: The risk factor section of ARMA's public reports filed with the Securities and Exchange Commission describe certain factors beyond ARMA's control that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements.
Speaker 3: Those periodic filings can be found on the SEC's website at www.SEC.gov.
Speaker 3: All of today's forward-looking statements are subject to change without notice.
Speaker 3: do so by law. Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings relief.
Speaker 3: Armers website shortly and will continue for one year.
Speaker 3: loss related to common stockholders was $22.8 million, which includes $31.4 million of that loss.
Speaker 3: Net interest income was $12 million and net interest margin for the quarter was 1.97%.
Speaker 3: Distributable earnings available to common stockholders was $49.3 million or 27 cents per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for the net coupon effective interest rate swaps and then minus our net operating expenses.
Speaker 3: Farmer capital management is continuing to waive a portion of their management fees.
Speaker 3: They waived $1.65 million for Q1, which offsets operating expenses.
Speaker 3: $1.65 million for Q1, which offsets operating expenses. The waiver will continue until further notice.
Speaker 3: Farmer paid monthly common dividends of 10 cents per share for January , 10 cents for February , and 8 cents for March for a total of 28 cents for the quarter.
Speaker 3: We have maintained the 8th cent per share common dividend rate for April and May. As we've discussed in our previous calls, our aim is to pay an attractive dividend that is appropriate in context and stable over the medium term.
Speaker 3: We keep an eye on economic conditions and the Armor Board believes that this dividend rate achieves those objectives. Taken together with contractual dividends on the preferred stock, Armor has made cumulative distributions to stockholders of more than $2 billion over our history.
Speaker 3: During the 1st quarter, we issued 29,862,647 shares of our common stock through our ATM program. Raising 181.2M dollars of capital after fees and expenses.
Speaker 3: That represents average net proceeds of $6.07 per share.
Speaker 3: During the first quarter, we also repurchased 842,927 shares of Comments Talk at an average net cost of $5.11 per share. That was under our album.
Speaker 3: standing, uh, repurchase authorizations.
Speaker 3: By accretably managing our common share count, we were able to add six cents per share of value for common shareholders.
In addition to providing capital to take advantage of appealing current investment opportunities, share our influences, build a larger base over which to spread our mostly fixed running costs.
So far in Q2 2023, we've issued 3,509,700 shares. That brings our common share count to 192,512,577 as of today.
Quarter end book value was $5.44 per common share. Our most current available estimate of book value is as of Monday night, April 24. We estimate that book value was $5.30 for common share.
We increase the regulatory capital at our broker dealer of billion buffer securities to $203 million.
Butler continues to represent a strategic advantage for Armour by providing repo funding, APM placement, and other capital market access.
Finally, I'd like to remind all of our shareholders of the annual meeting for Armored Residential Realt. It will be held at 8 a.m. Eastern time next Thursday, May 4.
We received proxies representing a quorum of shares eligible to vote, and all matters have strong support. However, a number of shares eligible to vote have not yet provided the proxies.
We encourage all shareholders to return their proxies and to participate in your annual meeting next week. Shareholder contact their brokers if they need another copy of their proxying materials. Now let me turn the call over to the chief executive officer Scott O'Neill. Scott. Thanks, Jim. In January 2023, the agency MBS Index delivered the third best monthly total return since 1989, reflecting the value proposition and mortgage spreads after their worst one year performance on record in 2022. Despite positive fund inflows back into MBS and the broader.
It was a partnership of Congress plan, quotes gradual and orderly.
However, Tuesday's headline that the First Republic may sell up to $100 billion in assets to raise liquidity, stoked additional fear of a lingering banking contagion.
While most of these assets are presumed to be non-agency mortgage loans, the headlines caused MVS spreads to widen approximately 5 to 10 basis points.
This has left investors demanding an additional discount to absorb the unanticipated supply.
Despite all these challenges, the spreads on MBS have remained tighter versus the wide scene last fall.
implying that there is a significant appetite for mortgage assets near their current valuations. We are confident that highly liquid US government sponsored mortgage backed securities, trading in multi-decade wide spreads with muted refinance activity, will grow increasingly attractive to the investor base in 2023. Harvard continues to pursue favorable investment opportunities while growing the portfolio, adding $3 billion in mortgage backed securities since year end.
sold the remainder of our Fannie 2 and 2.5 coupon positions early in the first quarter.
Proceeds were reinvested in the new R-Yielding Curred coupon mortgages.
Sales proved to be well timed as lower coupon MBS accounted for most of the securities transferred into FDIC receivership from the two failed banks. Armor continued to hedge our exposure to FDIC held assets by decreasing our 30-year 3% MBS bucket.
from 7.1% down to just about 1% of total portfolio value.
We're closely monitoring the ongoing FDIC liquidation for the opportunity to buy back lower coupons once spreads offer a discount versus that in the higher coupon production MBS. We're also monitoring the ongoing FDIC liquidation for the opportunity to buy back lower coupons
Our leverage flows the quarter at 8.7 times and currently sits at 9 times, a number that reflect the valuations, but yet is prudent enough to withstand still elevated and highly unpredictable levels of daily market volatility. Additionally, Arbor maintains healthy levels of available liquidity at $590 million.
which includes cash, unlevered securities, and principal and interest as of the 24th of April .
Our purchased MBS are concentrated in the most liquid low premium bank service production coupon pools between more favorable geographic, LTVs, FICO scores, and loan balance characteristics versus generic production cohorts.
We continue to favor these lower payoff premium specified stories, which we believe will perform best when volatility reverses to its historical norms. These investments also reflect historically low prepayment risks as the MBA finance index has remained at suppressed levels.
Armors average prepayment rate for all MBS assets in the first quarter of 2023 was 4.7 CPR and still a very low 6.7 CPR for April . Although mortgage rates have already declined from the highs of 7.2% in early November last year to 6.5% in mid-April 2023
A substantial refinancing wave would require mortgage rates to fall below 5%.
Armor continues to fund just over 50% of our borrowers through our broker-dealer affiliate, Buckler Securities.
Despite March's precipitous drop in liquidity within the Interback lending community itself, agency repo funding remained on a strong footing throughout the quarter, with spreads ranging from 10 to 20 basis points above the so-for benchmark.
The enormous supply of cash from money market funds combined with the growing shortage of available 2-bills have created incredibly liquid conditions for overnight agency repo and term agency repo funding that benefits online.
The weighted average haircut on our repo book remained exceptionally low at 2.6% as of the 24th April .
As we've always noted, we set our dividend to be appropriate for the medium term. We will, as always, continue to evaluate the level of dividend.
We're also mindful that this environment can deliver upside surprises as well that could move our metrics.
So thanks for that and over to you, Joe.
Let's take some questions, Andrew.
Yes, sir. We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star than two.
At this time, we will pause momentarily to assemble our roster. The first question comes from Trevor Cranston with JMP Securities.
pause momentarily to assemble our roster. The first question comes from Trevor Cranston with JMP Securities. Please go ahead.
Thanks.
You guys talked a little bit about the, you know, the pending sales of the failed bank portfolios. You briefly mentioned, you know, the prospect of another bank selling assets.
Can you comment in general on how you guys are thinking about the potential risk of maybe some other banks needing to sell MBS as a risk on top of the sales that we already know about happening? Thanks
Good morning, it's Jeff Zim Thanks for dialing in.
As long as volatility stays where it is and the Federal Reserve continues to tighten, which we do expect another 25 basis points at the next meeting, there is risk of a bank having to sell more assets. And we are distinctly aware of that. And that's why we continue to keep large amounts of liquidity on hand, as Scott mentioned in his comments. To be continued....
and we will continue to approach the mortgage market as a long-term investor and we will take advantage of some of these wider spreads and we also have a dry powder if we want to use it, but we are very aware that there are risks out there.
Okay, got it. And then let's say you guys added some swaps during the quarter. Can you just give the details on kind of what the maturity of the newly added swaps was?
Sure, and this is Jeff. It's interesting because we were talking about this in our board meeting the other day. So two things going, the average weighted maturity of our OTC swaps is 75 months right now. But we have been managing off of OTC swaps over to exchange trade swaps and they're a little shorter.
that we've been putting on, partly because they're much lower haircuts. And Mark, you could perhaps provide some detail on the recent exchange-shaded swaps that we put on the books.
Sure, so the cleared swaps are one to three year swaps we put on, really to protect the front end of the curve. The bilateral swaps, the existing book is mainly longer term.
Sure, so the cleared swaps are one to three year swaps we put on, really to protect the front end of the curve. The bilateral swaps, the existing book is mainly longer term. Okay, got it. Thank you.
Like you. The next question comes from: Doug harder with credit suweees. Please go ahead.
Thanks. You just mentioned keeping dry powder. How would you size the amount of dry powder in terms of leverage that you think you could add and what would be the conditions that would cause you to want to deploy some of that dry powder?
Thank you and thanks for continuing to write about Armor. We appreciate that and we wish you the best of luck with the credit switch merger. A couple things. You're very welcome. A couple things here. We've seen how the real estate grey believed that when we talk Madam Renee, she had seen
have probably another full turn.
capabilities to invest in mortgage backed securities. I think our team would rather see it slightly tighter.
And that would indicate that the market in general is now willing to or has accepted the fact that many of the securities that are for sale have been absorbed into the pricing structure of the MBS market. So if it widens a little bit more.
We'll be there to watch and perhaps invest at that point, but we want to see others invest. It is our belief that we're not going to see large bank investing, Doug, that the investing is going to come from a privately managed fund or hedge funds, but not banks. So we're going to be aware. We talk to our counterparties on the street. We get a general feeling of.
who's now involved in the market, where things are, and then we'll deploy some money. I suspect that that's not this month. It is a longer term perspective and it will be over the next couple of quarters. I hope that answers your question.
Yeah, absolutely. And then just on the funding market, you know, kind of...
What are you seeing around debt ceiling debate, anything around those maturities and how does Buckler help in that context?
Buckler helps a lot and that's why we went ahead and started in 2016 of putting together the Buckler structure. We are very fortunate to have direct access into that whole system. We also get very, very good color from Buckler. I'll hand it over to Mark to talk about specific rates and where they are on the curve.
Generally, we feel very comfortable doing a lot of overnight with Buckler. We wouldn't feel comfortable doing it with our other 20-some other counter parties in the repo market because the will and changes of how they may approach the markets could happen at any single day. So we have great security in the fact that we can go through the banking system with Buckler. And then Mark perhaps just talk a little bit about different maternity than where we are there and the cost of those maternity. And the access to it.
Sure, so we don't see any issue with repo, both overnight or term. Obviously, we do a lot more overnight with fuckers than we would with anybody else just because of our relationship, but that funding has been great. There, I haven't heard really any talk on from from our repo kind of parties about the debt ceiling and its impact.
I think because of the debt ceiling, because of the banks, a lot of people want to be in repo.
So it's actually helped us and like Scott said in his remarks You know SOFR plus 10 to 15 is kind of what we're seeing, you know across the maturities
It widened a little bit at one point when we were kind of in the middle of the SBB and signature banking crisis But it came back with no issue. So we see plenty of liquidity in the repo and financing markets.
Great, appreciate that. Thank you. Thank you, Doug. The next question comes from Christopher Nolan with Lenberg-Pahlman. Please go ahead. The next question comes from
Appreciate that. Thank you. Thank you, Doug. The next question comes from Christopher Nolan with Lenberg-Pahlman. Please go ahead. Hey guys, what is
If you guys can give an update in terms of where you see in investment spreads particularly funding costs in the second quarter to date Here mark, you want to detail that? There you should funding funding costs funding costs. So you
Low fives is where we're seeing repo. So somewhere, you know, 5, 15, 5, 10 somewhere, just depends on maturity and the counterparty.
So, somewhere, you know, 5, 15, 5, 10, somewhere, it just depends on maturity and the counterparty for about a 30-day term.
Okay, anything? Given that, I mean, how should we think about the earnings power for the company in terms of sustaining the current $0.28 dividend, excuse me, $0.24 dividend.
As Jim said in his comments, and quite frankly, as we've said, we're on the last 10-12 earnings calls, we set the dividend based on the medium term. And right now, we think that the 8th cent dividend on a monthly basis suits the investment opportunities on the medium term. Now, is actually Doug Harder reflected in a earlier report on armor?
Some of the earnings and quite a bit of it actually comes from our well managed swap position that we put on in April and May of 2020 when rates were very low. As a matter of fact, it was noted in the board meeting on Tuesday that we actually had a swap where they had paid us on both sides that just rolled off. So we're starting to see that go.
But you know, Fannie Sixes are trading around par, so they're yielding 6%. Funding's at 5, so that gives you 100 basis points times 8. There's only 8% right there, and then you have some overhead costs as well, correct? So where does that funding power come from? That large swap position. But 75 months left on that swap position, as I noted earlier, on the over-the-counter swaps. So it does provide earnings power.
And the reason you set up those swap positions is exactly for situations like this. If we sense that rates for some reason we're going to go dramatically lower both on the short end or even on the tenure, we might actually unwind some of those swaps. But right now, we put on those positions three plus years ago exactly where we want to be and we're getting the benefit of it today. So I hope that answers your question.
It does. Thank you for the detail. You bet. Again, if you have a question, please press star then 1. The next question comes from Matthew Howlett with B Riley. Please go ahead.
Thanks for taking my question. On the prepayments outlook, things already ticked up. Obviously, off a very, very low rate in the winter. Is it seasonal in nature? What's the outlook?
for speeds. It just seems like the housing market is much stronger than I think people would have imagined that this would point this out. And any sort of update on where speeds could go for the 5 or 6 coupon.
The financial circle has been deployed.
Sure, so we expect prepayments to increase. Over the next two months, probably up to 20%. That's for our portfolio. That's what we're expecting based on where rates are today. The pull through of rates versus overtime. So again, we plan for that. It won't be a surprise.
But, you know, rates are more and greater lower than they were when it peaked. So... Is there any sense, I mean, I feel like this is going to be dependent on the Fed, but there were some changes recently at the FHFA GP and...
Just curious what you think of those, first of all, in terms of investment selection. Are you still focused on the specified pool or credit impaired nature? How do you approach investing higher up in the coupon today, given it could be cutting rates here at the back half of the year?
and the mortgage rates could be a lot lower at some point. So we have structure portfolio in higher coupons because of the wider spreads. But the other reason why our duration is higher than we probably would have been in a normal environment where the rate the Fed has been continuing to raise rates.
And that's to balance that effect of if rates do rally and we do get prepayments to increase more than we expect, we have duration on to protect us against that.
balance that effect of if rates do rally and we do get prepayments to increase more than we expect, we have duration on to protect us against that. It is a balance we try to maintain.
And you can get that duration on your balance sheet by also using treasuries and futures. So you have your mortgage core position, you have your hedge core position, then you can manage it with very liquid other products. And I believe your duration today, Mark, is 0.82 to 0.88 area.
So that's the benefit that he's talking about now. Right, you guys have been very active with that. And then just any comments on the changes with the GC? We're taking into account when we look at asset selection.
But, you know, we are for the most part looking at bonds that have low pay ups, because that's what we like to play because we don't want that additional risk of having big pay ups that could evaporate in different scenarios. And again, it's part of our liquidity management. If you remember back to 2020,
Payups on a liquid MBS basically evaporated. They went to zero or negative in some cases. So that's one of our risk management techniques is to keep in lower payups and to find bonds that have characteristics that we like, what we're not paying up a lot for. That's it. Great, thank you for taking my question. Thank you.
liquid MBS basically evaporated. They went to zero or negative in some cases. So that's one of our risk management techniques is to keep in lower payups and to find bonds that have characteristics that we like but we're not paying up a lot for. Gotcha. Great, thank you for taking my question. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Jim Mountain for any closing remarks. Thank you, Andrew, and thanks to everyone who's joined us this morning and one final shout out to all the shareholders that have
on the Internet or here this shortly on Replay. We look forward to having you join us this time next week for our annual meeting. Until then, stay safe.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
concluded. Thank you for attending today's presentation. You may now disconnect.
and wearing glasses