Q1 2024 ARMOUR Residential REIT Inc Earnings Call

Operator: Good day, and welcome to the ARMOUR Residential REIT First Quarter 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 that today's event is being recorded. I would now like to turn the conference over to Mr. Scott Ulm, CEO, ARMOUR Residential REIT. Please go ahead, sir.

Good day and welcome to the armour residential REIT first quarter 2024 earnings conference call today, all participants will be in a listen only mode should you need assistance during todays call. Please signal for a conference specialist by pressing the Star T followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Ask a question you May press Star then one on your telephone keypad. She was draw. Your question. Please press Star then two.

Please note that today's is being recorded.

I would now like to turn the conference over to Mr. Scott <unk>.

CEO armour residential REIT. Please go ahead Sir.

Yeah.

Scott Jeffrey Ulm: Good morning. I'd like to welcome you to the ARMOUR Residential REIT first quarter 2024 conference call. This morning, I'm pleased to welcome our new CFO, Gordon Harper, as well as our new co-CIOs, Sergei Lezov and Desmond McCauley, to the call. All are experienced members of the ARMOUR team whom we promoted to their new roles in March. And I have tremendous confidence in them all.

Scott: Good morning.

Scott: Welcome to the armour residential REIT first quarter 2024 conference call.

Scott: This morning, I am pleased to welcome our new CFO Gordon Harbor, as well as our new co CIO surrogate lots up and Desmond Mcauley to recall all are experienced members of the armor team, whom we promoted to their new roles in March and I have tremendous confidence in.

Scott: In them all Gordon has been with us since 2015, and Sergey and Desmond had been on our portfolio management team since 2016 and 2013, respectively.

Scott Jeffrey Ulm: Gordon has been with us since 2015, and Sergei and Desmond have been on our portfolio management team since 2016 and 2013, respectively. We're all excited to lead the business into this next chapter. Our priorities are unchanged, and we are all united in our focus on delivering value to shareholders. I'll now turn the call over to Gordon to run through the financial results. Gordon?

Scott: We're all excited to lead the business into this next chapter our priorities are unchanged and we are all United on our focus on delivering value to shareholders I'll now turn the call over to Gordon to run through the financial results Gordon.

Scott: Yeah.

Gordon Harper: Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armoureit.com. This conference call includes forward-looking statements that are intended to be subject to the Safe Harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factors section of ARMOUR's periodic reports filed with the Securities Exchange Commission describes certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements. Those periodic filings can be found on the SEC's website at www.sec.gov. All of today's forward-looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law.

Gordon Harbor: Thank you Scott by now everyone has access to Armours earnings release, which can which can be found on armours website, Ww armor REIT dot com.

Gordon Harbor: 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 95.

Gordon Harbor: The risk factors section of Armours periodic reports filed with the Securities Exchange Commission describe certain factors beyond our control that could cause actual results to differ materially from those expressed or implied by these forward looking statements. It's periodic filings can be found on the Sec's website.

UW FTC dot Gov.

Gordon Harbor: All of today's forward looking statements are subject to change without notice, we disclaim any obligation to update them unless required by law.

Gordon Harper: Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for one year. Now, we turn to results for the quarter.

Gordon Harbor: Also today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.

Gordon Harbor: And online replay of this conference call will be available on <unk> website, shortly and will continue for one year.

Gordon Harbor: Now turning to results for the quarter.

Gordon Harper: ARMOUR's Q1 gap net income available to common shareholders was $11.5 million, or $0.24 per common share. Net interest income was $5.3 million, and expenses included $9 million of non-recurring professional fees related to the special committee internal investigation. Distributor Earnings available to common stockholders was $40 million, 0.4, or $0.82 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income, adjusted for interest income or expense, and honor interest rate swaps, minus net operating expenses. ARMOUR Capital Management continues to waive a portion of their management fees, waiving $1.65 million for Q1, which offsets operating expenses. The waiver continues until further notice.

Gordon Harbor: Armours Q1, GAAP net income available to common shareholders was $11 $5 million or 24 cents per common share net.

Gordon Harbor: Net interest income was $5 $3 million expenses included $9 million of nonrecurring professional fees related to the special Committee internal investigation.

Gordon Harbor: Distributable earnings available to common stockholders was $40 million.

Gordon Harbor: 0.4.

Gordon Harbor: Or 82 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps minus net operating expenses.

Gordon Harbor: Our capital management continues to waive a portion of their management fees waiting $165 million for Q1, which offset operating expenses waiver continues until further notice.

Gordon Harper: ARMOUR paid monthly common stock dividends of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. Taken together with the contractual dividends on the preferred stock, ARMOUR has made cumulative distributions to stockholders of $2.3 billion over its history. Quarter-end book value was $22.07 per common share. Our most recent available estimate of book value is as of Tuesday, April 23rd and was $20.48 per common share. I will now turn the call over to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Gordon Harbor: Armour paid monthly common stock dividends of 24 per common share per month for a total of 72 cents for the quarter.

Gordon Harbor: We have to pay an attractive dividend that is appropriate and contacts and stable over the medium term.

Gordon Harbor: Taken together with a contractual dividend on the preferred stock armor has made cumulative distributions to stockholders of $2 3 billion over its history.

Gordon Harbor: What are our book value was $22.07 per common share.

Gordon Harbor: Our most recent current available estimate of book value is as of Tuesday April 23rd and was $20.48 per common share.

Gordon Harbor: I will now turn the call over to Scott to discuss Armours portfolio position and current strategy.

Scott: Thanks Jordan.

Scott: I know you've all seen our disclosure in the K and Q about the events of the spring and I'd like to address this upfront with some highlights in detail.

Scott: Oh of course refer you to the K in queue for the Companys definitive disclosure.

Scott: Further detail.

Scott: These issues were raised just prior to our scheduled 10-K filing related to non-GAAP disclosures. The board's internal review processes potential conflicts of interest and the external manager.

Scott: The board followed best practices and formed a special committee of independent Directors. The Special Committee engaged outside counsel at a national accounting firm to review all of these issues.

Scott: The investigation, which was comprehensive extended through our customary filing schedule and the <unk> 25 extension, but did conclude in time for the special Committee brought aboard and our auditors to review the results and filed our 10-K by the March 15th deadline.

Scott Jeffrey Ulm: Thank you, Jordan. I know you've all seen our disclosure in the K&Q about the events of the spring, and I'd like to address this up front with some highlights and detail. I of course refer you to the KNQ for the company's definitive disclosure and further details. A variety of issues were raised just prior to our Schedule 10-K filing related to non-GAAP disclosures, the Board's internal review processes, potential conflicts of interest, and the external environment. The board followed best practices and formed a special committee of independent directors.

Scott: The special Committee found that our use of earnings available for distribution and NIM, where appropriate you'll find in our press release, a revised presentation of economic interest income, which makes clear that includes swap payments as a non-GAAP measure.

Scott: As to the other matters. It matters raised the investigation found no substantiation of any of the matters raised and found that the independent directors of the board complied with their fiduciary duties.

Scott: There was a finding that in the course of the investigation. There was an issue with tone at the top the constituted a material weakness the tone set by certain individuals during the investigation was insufficient to create the proper environment for effective internal control over financial.

Scott Jeffrey Ulm: The Special Committee engaged outside counsel and a national accounting firm to review all of these. The investigation, which was comprehensive, extended through our customary filing schedule and the 12B25 extension but did conclude in time for the special committee, the broader board, and our auditors to review the results and file our 10-K by the March 15th deadline. The special committee found that our use of earnings available for distribution and NIM was appropriate.

Scott: As you've seen the result of all this we're streamlining our management structure to a single CEO and a number of remedial measures, including training an appropriate tone at the top internal controls reviewing tone at the top and enhanced whistleblower reported.

Scott: As you know we had a number of personnel changes, including the removal of our CFO for matters unrelated to the investigation and the resignation of our CIO. We're fortunate to have a deep bench and as I said at the beginning of the meeting our CFO Gordon Harper, who has been with US a long time and spent 25 years prior to joining us a deloitte or.

Scott Jeffrey Ulm: You'll find in our press release a revised presentation of economic interest income, which makes it clear that it includes swap payments as a non-GAAP measure. As to the other matters raised, the investigation found no substantiation of any of the matters raised and found that the independent directors of the board complied with their fiduciary duties. There was a finding that in the course of the investigation, there was an issue with tone at the top that constituted material weakness. The tone set by certain individuals during the investigation was insufficient to create the proper environment for effective internal control over financial reporting.

Scott: <unk>, both bring extensive experience with our portfolio and deep backgrounds in MBS investment.

Scott: Now, let's talk a bit about the mortgage business.

Scott: Following the sharp decline in the fourth quarter of 2023 treasury yields reverse their path and climbed higher in 2024.

<unk> retains dovish outlook on inflation to start the year with seven or eight cuts penciled in for 2024 and 2025 recent economic data has signaled otherwise enforced bond investors to once again abandon overly optimistic expectation of fed rates.

Scott: Following a trend of hotter than expected inflation and labor data data releases the yield on the 10 year Treasury climbed above $4 six 5% by mid April totally removed more than 75 basis points from its low of $3 eight 8% reported on the last trading day of 2023.

Scott Jeffrey Ulm: As you've seen, the result of all this was streamlining our management structure to a single CEO and a number of remedial measures, including training on appropriate tone at the top, internal controls, reviewing tone at the top, and an enhanced whistleblower report. As you know, we had a number of personnel changes, including the removal of our CFO for matters unrelated to the investigation and the resignation of our CIO. We're fortunate to have a deep bench, and as I said at the beginning of the meeting, our CFO Gordon Harper has been with us for a long time and spent 25 years prior to joining us at Deloitte.

Scott: The yield spread between two year and 10 year treasuries remained inverted at an average level of negative 34 basis points in the first quarter posing a challenge for MBS investors and particularly mortgage reach in batch.

Scott: We expect a wide ranging spread environment with elevated volatility to persist until the yield curve reverts to its upward sloping shape.

Scott: In the first quarter newly originated MBS traded within roughly 20 basis points abdominal spread range closing the quarter roughly flat versus the fourth quarter.

Scott: Zero volatility OAS on Armours portfolio tightened by approximately seven basis points on the heels of a strong performance in March should contribute to a one 1% total economic return for 4% annualized for the first quarter.

Scott Jeffrey Ulm: Our co-CIOs both bring extensive experience with our portfolio and deep backgrounds in MBS. Now, let's talk a bit about the mortgage business. Following the sharp decline in the fourth quarter of 2023, Treasury yields reversed their path and climbed higher in 2020. Despite the Fed's dovish outlook on inflation to start the year, with seven rate cuts penciled in for 2024 and 2025, recent economic data has signaled otherwise and forced bond investors to once again abandon overly optimistic expectations of the Fed's rates.

Scott: April's strong inflation ended the expectations for lower fed rates in the first half of 2020 for causing a sharp widening in mortgage spreads by 10 to 15 basis points and a rise in 10 year treasury yields by 30 basis points.

Scott: Reflecting the broad sentiment shift on fed policy staying higher for longer armour executing series of trades aimed at repositioning the portfolio with a view of higher yields and volatility to dominate the second quarter.

Scott: First we sold approximately 50% of our tenured dusk tools and in turn purchased higher premium coupon conventional MBS with a shorter duration profile. While does spreads continue to exhibit favorable positive convexity lower spread volatility and diversification benefits compared to MBS assets their outperformance in recent quarters as allows us.

Scott Jeffrey Ulm: Following a trend of higher-than-expected inflation and labor data releases, the yield on the 10-year Treasury climbed about 4.65% by mid-April, totaling more than 75 basis points from its low of 3.88% recorded on the last trading day of 2023. The yield spread between 2-year and 10-year Treasuries remained inverted at an average level of negative 34 basis points in the first quarter, posing a challenge for MBS investors and, particularly, mortgage REITs and BATs.

Scott: Captured 10 to 15 basis points of spread return and reinvest proceeds into cheaper mortgage assets.

Scott: Second army sold over 40% of our deep discount MBS pools with coupons of three 5% lower.

Scott: We're faster prepayment speeds have never materialized, we reinvested a portion of these proceeds into higher premium Ginnie Mae TBA hedges, which stood the benefit from the backup and mortgage rates, while still trading at discount.

Scott: The conventional equivalents.

Scott: Lastly, carbon sold over 10% of par coupon MBS versus treasury hedges closing the basis trade that benefit most from the spread rally in March.

Scott: As the market close on April 23rd the portfolio is implied leverage duration 769 times and five times, a respectable five years respectively.

Scott Jeffrey Ulm: We expect a wide-ranging spread environment with elevated volatility to persist until the yield curve reverts to its upward-sloping shape. In the first quarter, newly originated MBS traded within roughly 20 basis points of the nominal spread range, closing the quarter roughly flat versus the fourth quarter. The zero volatility OAS on ARMOUR's portfolio tightened by approximately seven basis points on the heels of a strong performance in March to contribute to a 1.1% total economic return, 4.4% annualized, for the first quarter.

Scott: While maintaining healthy levels of available liquidity, our book value since the start of the quarter was down 7%. We believe the recent spread widening is proceeding more hawkish fed path and as a result mortgages now offer a compelling upside in a scenario where inflation and growth begin to moderate.

Scott: Our mortgage strategy continues to target a well diversified portfolio.

Scott: Half of <unk> mortgage assets are higher coupon MBS, which are experiencing slow prepayments due to historically elevated mortgage rates around 40% of our current holdings are in coupons are 5% lower with specified characteristics favoring faster turnover speeds, while priced at a discount.

Scott: Farmers average prepayment rate for all MBS assets in the first quarter of 2024 was $4 five CPR and its still low six six CPR for April.

Scott Jeffrey Ulm: April's strong inflation trend ended expectations for lower Fed rates in the first half of 2024, causing a sharp widening in mortgage spreads by 10 to 15 basis points and a rise in 10-year Treasury yields by 30 basis points. Reflecting the broad sentiment shift on Fed policy staying higher for longer, ARMOUR executed a series of trades aimed at repositioning the portfolio with a view to higher yields and volatility dominating the second quarter.

Scott: The benign prepayment environment continues to favor mortgages that are supported by attractive fundamentals and relative valuations.

Armour has increased its allocation to funding with Buckler securities to approximately 60% of its borrowings as order at this reflects bottlers' growth as a broker dealer and armored benefit of finance it through its affiliate and.

Scott: In the first quarter Greenville markets generally priced around sofa, plus mid to high teens in basis points with a weighted average haircut at under 3%.

Scott Jeffrey Ulm: First, we sold approximately 50% of our 10-year dust tools and, in turn, purchased higher-premium coupon conventional NBS with a shorter duration profile. While dust spreads continue to exhibit favorable positive convexity, lower spread volatility, and diversification benefits compared to MBS assets, their outperformance in recent quarters has allowed us to capture 10 to 15 basis points of spread return and reinvest proceeds into cheaper mortgage assets. Second, ARMOUR sold over 40% of our deep discount MBS pools with coupons of 3.5% and lower, where faster prepayment fees never materialized.

Scott: As our trading activity indicates.

Scott: We've heard more cautious on mortgage spreads for the remainder of the second quarter, we will continue to dynamically adjust our risk profile as we continue to analyze the interest rate.

Scott: New macroeconomic data geopolitical risks and reaction to the evolving environment, but market participants and the fed.

Scott: Looking further out we remain constructive on spreads over the longer horizon.

We expect that the fed will eventually start as much anticipated easing cycle later this year, leading banks to increase their share of the net MBS purchases an improved net interest margin. We also expect rate volatility declined as the date of our first fed cut becomes more certain attracting more MBS investors, including crossover buyers who may want to increase.

Scott Jeffrey Ulm: We reinvested a portion of these proceeds into higher-premium Ginnie Mae TBAs, which stood to benefit from the backup in mortgage rates while still trading at a discount to their conventional equivalent. Lastly, ARMOUR sold over 10% of PAR coupon MBS versus Treasury hedges, closing the basis trade that benefited most from the spread rally in March. As of market close on April 23rd, the portfolio's implied leverage and duration sit at 6.9 times and 0.5 times, respectively, 0.5 years respectively. Transcribed by Transcription Outsourcing, LLC.

Scott: Their allocation of MBS at the expense of tighter corporate spreads.

Scott: We continue to believe that our dividend level is appropriate for this environment.

Speaker Change: Thank you for joining today's call that rubs or that wraps up our prepared remarks for the first quarter of 2024, and we'd be happy to take any questions.

Speaker Change: Yeah.

Speaker Change: Thank you we will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your Touchtone phone out if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: Today's first question comes from Jason Weaver with Janney Montgomery Scott. Please go ahead.

Jason Weaver: Hi, good morning, actually I'm with Jones trading.

Scott Jeffrey Ulm: Our mortgage strategy continues to target a well-diversified portfolio. About half of ARR's mortgage assets are higher-coupon MBS, which are experiencing slow prepayments due to historically elevated mortgage rates. Around 40% of our current holdings are in coupons of 5% and lower, with specified characteristics favoring faster turnover speeds while priced at a discount. ARMOUR's average prepayment rate for all NDS assets in the first quarter of 2024 was 4.5 CPR, and it's still low, 6.6 CPR for April.

Jason Weaver: I wanted to ask it's Scott regarding your prepared remarks on Butler, if you're detecting any change in the availability of a general repo credit out there given the volatility over the last month.

Speaker Change: Repo has been just fine.

Speaker Change: It's <unk>.

Speaker Change: Obviously, we monitor that extremely carefully and where we are active.

Speaker Change: With with a whole bunch of Counterparties.

Speaker Change: As well as being sort of on the inside with Buckler.

Speaker Change: But repo has been well behaved.

Speaker Change: Okay Fair enough and then on the expense side I was curious how long you plan to continue waiving the management fee as well as if there's any lingering sort.

Speaker Change: Enhanced compliance off coming from the results of the internal investigation.

Scott Jeffrey Ulm: The benign prepayment environment continues to favor mortgages that are supported by attractive fundamental and relative valuations. ARMOUR has increased its allocation to funding with Buckler Securities to approximately 60% of its borrowings as of quarter end. This reflects Buckler's growth as a broker-dealer and ARMOUR's benefit of financing through its affiliates. In the first quarter, greebo markets generally priced around SOFR plus mid to high teens in basis points with a weighted average haircut at under 3%.

Speaker Change: First of all on the waiver, we expect to continue that.

So it's a function of.

Speaker Change: The portfolio dynamics here, but we've added we've added since COVID-19 and expect to continue.

Speaker Change: As to as to enhance compliance.

Speaker Change: I mentioned.

Speaker Change: The focus on tone at the top is very real and it's part of our internal controls now.

Speaker Change: So that is a that is certainly an area of focus.

Speaker Change: But other than that.

Speaker Change: Right.

Speaker Change: And some of it some of the some of the other things I mentioned with regard to.

Scott Jeffrey Ulm: As our screening activity indicates... We have turned more cautious on mortgage spreads for the remainder of the second quarter. We'll continue to dynamically adjust our risk profile as we continue to analyze the interest rate, new macroeconomic data, geopolitical risks, and reactions to the evolving environment by market participants and the Fed. Looking further out, we remain constructive on spreads over the longer horizon. We expect that the Fed will eventually start its much-anticipated easing cycle later this year, leading banks to increase their share of net NBS purchases on improved net interest.

Speaker Change: Two.

Speaker Change: To NIM.

Speaker Change: New formulation.

Speaker Change: And economic interest income.

Speaker Change: Yeah.

Speaker Change: We remain the same place will always be and wishes.

Speaker Change: We take great care of the stuff.

Speaker Change: Alright, thanks for that I appreciate you taking the question.

Speaker Change: The next question comes from Doug Harter with UBS. Please proceed.

Douglas Michael Harter: Thanks, and good morning.

Douglas Michael Harter: Hoping you could talk through a little bit more of the decision to reduce the portfolio size.

Douglas Michael Harter: In April as you're kind of balancing kind of the near term volatility that you might said with kind of a longer term optimism on current spread levels.

Scott Jeffrey Ulm: We also expect rate volatility to decline as the date of the first Fed cut becomes more certain, attracting more MBS investors, including crossover buyers, that may want to increase their allocation to MBS at the expense of tighter corporate spreads. We continue to believe that our dividend level is appropriate for this environment. Thank you for joining today's call. That wraps up our prepared remarks for the first quarter of 2024, and we'd be happy to take any questions.

Douglas Michael Harter: Thanks, Doug I'm going to turn that one over to Sergey <unk>.

Sergey: Yes, good morning, Doug and thank you for your question, Yes. So we took a series of trades that we discussed in our earnings script. The early Q2.

Sergey: We felt like mortgage markets where pricing in.

Speaker Change: Are you well and dovish fed Bath and.

Sergey: The high inflation trends that we saw early April really kind of triggered.

Sergey: Our wide portfolio rebalancing.

Sergey: To reflect kind of a pushback on the future path of the fed right. Now we are looking at this is only a Q2 event really quarter quarter by quarter, we do still see.

Operator: Thank you. We will now begin the question-and-answer session. As a reminder, to ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jason Weaver with Jannie Montgomery Scott. Please go ahead.

Sergey: Using cycle beginning sometime later this year so.

Sergey: Just kind of seeing this as a grand theme of second quarter as elevated volatility we have geopolitical risks as.

As well as the strong economic data really kind of moving the markets get a little bit. So we felt it was prudent to reduce our leverage to below seven target duration of about a half a year and then be able to go and deploy that dry powder. When we feel the time is right.

Sergey: I guess just on the leverage how are you thinking about the right <unk>.

Jason Weaver: Hi, good morning. Actually, I'm with Jones Trading. I wanted to ask, Scott, regarding your prepared remarks on Butler, if you were detecting any change in the availability of general repo credit out there given the volatility over the last month.

Sergey: Level of leverage over time, and what's kind of the the ability appetite to kind of allow our leverage to move higher when you have these pockets of volatility.

Speaker Change: Yes so.

Speaker Change: Just kind of goes.

Speaker Change: In line with the previous answer we have about a at least a turn of leverage to deploy.

Speaker Change: Currently Budd.

Speaker Change: But we do still see.

Scott Jeffrey Ulm: You know, Repo's been just fine. We're, you know, obviously, we monitor that extremely carefully. And we're, you know, active with, with, a whole bunch of counterparties, as well as being sort of on the inside with Buckler. But Repo's been well behaved.

Speaker Change: Some residual uncertainty in the market until we confirm with a few more data points on inflation in labor markets to determine whether this is just a blip or a change and a change in the team. So.

Speaker Change: I think you can see is being aggressively.

Speaker Change: Buying into the market.

Scott Jeffrey Ulm: Okay, fair enough. And then on the expense side, I was curious how long you plan to continue waiving the management fee as well as if there's any lingering sort of enhanced compliance costs coming from the results of the internal investment.

Speaker Change: Once we figure out.

Speaker Change: Horizon past the second quarter.

Speaker Change: Alright, thank you.

Speaker Change: Okay.

Speaker Change: As a reminder, if you do have a question. Please press the Star then one on your telephone keypad.

Scott Jeffrey Ulm: First of all, on the waiver, we expect to continue that. Obviously, it's a function of, you know, portfolio dynamics here.

Speaker Change: The next question comes from Trevor Cranston with JMP Securities. Please proceed.

Trevor John Cranston: Alright. Thanks.

Trevor John Cranston: A follow up on a question about the expenses just just to clarify are there well there would you expect to see any more of the.

Scott Jeffrey Ulm: But we've had it since COVID and expect to continue to continue, you know, as to enhance compliance. You know, as I mentioned, The focus on TOTA at the top is very real and is part of our internal controls now. So, you know, that is certainly an area of focus. But other than that, you know, and some of the other things I mentioned with regard to NIM and its new formulation in economic interest income, you know, we remain in the same place we've always been, which is to take great care of this. All right, thanks.

Trevor John Cranston: Sort of one time expenses.

Trevor John Cranston: <unk> coming through in April or was that exclusively.

Trevor John Cranston: In the first quarter.

Speaker Change: I think we've accrued pretty pretty well for it but you know you know how these things go.

Speaker Change: There's always something to dribbles in but I don't think it will have anything.

Speaker Change: If there is some some drilling later on I don't expect it to be significant.

Speaker Change: Okay got it.

Speaker Change: And then given the.

Speaker Change: The reduction in the MBS portfolio here in April.

Jason Weaver: All right, thanks for that. I appreciate you taking the time to answer the question.

Speaker Change: Can you also maybe comment on any changes you've made to the hedge book, either either with swaps or treasuries and the early part of April.

Operator: The next question comes from Doug Harter with UBS. Please proceed.

Douglas Michael Harter: Thanks, good morning. Hoping you could talk through a little bit more of the decision to reduce the portfolio size in April as you're kind of balancing kind of the near-term volatility that you might say with kind of the longer-term optimism, you know, on the current spread level.

Speaker Change: That's been monitored on Ireland.

Speaker Change: Yes, Hi, Trevor.

Speaker Change: In line with some of our.

Speaker Change: Asset sales, we've also adjusted our hedge book as well.

Speaker Change: We've been trying to.

Speaker Change: Aim for five duration about half the duration so.

Sergei Lezov: Doug, I'm going to turn that one over to Sergei. Yeah, so we took a series of trades that we discussed in our earnings script for early Q2. We felt like mortgage markets were pricing in very well for the velvet Fed path, and the high inflation trend that we saw in early April really kind of triggered a wide portfolio rebalancing to reflect kind of a pushback on the future path of Fed rates. Now, we're looking at this as only a Q2 event, really quarter by quarter.

Speaker Change: Uh huh.

Speaker Change: Okay.

Speaker Change: We dynamically allocate.

Speaker Change: Treasuries and swap hedges along those lines.

Speaker Change: Yes, we've been making adjustments as we do our asset sales.

Speaker Change: Adjusting out.

Speaker Change: Our hedges as well to keep our duration within a framework that we feel comfortable with given the environment that we aim.

Speaker Change: Okay got it that's helpful. Thank you.

Speaker Change: The next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed.

Christopher Whitbread Patrick Nolan: Alright, thanks relate to the special.

Sergei Lezov: We do still see an easing cycle beginning at some time later this year, so we're just kind of seeing this as a grand theme of the second quarter as elevated volatility. We have geopolitical risks as well as strong economic data really kind of moving the market for a little bit. So we felt it was prudent to reduce our leverage below seven times the target duration of about a half a year and then be able to go and deploy the dry powder when we feel the time is right.

Christopher Whitbread Patrick Nolan: Committee investigation.

You mentioned that you hired.

Christopher Whitbread Patrick Nolan: <unk> Council and accounting firms its the same accounting from does your audit.

Christopher Whitbread Patrick Nolan: Joe.

Christopher Whitbread Patrick Nolan:

Christopher Whitbread Patrick Nolan: We're a.

Christopher Whitbread Patrick Nolan: National accounting firm and not Deloitte.

Christopher Whitbread Patrick Nolan: Alright, so is that any reflection on your confidence and Deloitte.

Speaker Change: Not at all these things you always you always hire somebody somebody independent.

Speaker Change: And that's.

Sergei Lezov: I guess just on leverage. How are you thinking about the right level of leverage over time, and what's the ability appetite to kind of allow leverage to move higher when you have these pockets of volatility? Yeah, so

Speaker Change: Thats best practices.

You just wouldn't use your regular irregular count for this sort of way.

Speaker Change: Okay, and you repeatedly mentioned tone at the top and then you also mentioned conflict of interest.

Sergei Lezov: Yeah, so, it kind of goes in line with the previous answer, we have about at least a turn of leverage to deploy currently. But we do still see some residual uncertainty in the market until we confirm with a few more data prints on inflation and labor markets to determine whether this is just a blip or a change in the direction of the changes in the seas. So I think you can see us aggressively buying into the market once we figure out, you know, the horizon past the second quarter.

Speaker Change: Is the tone of the top financial related to conflicts of interest.

Speaker Change: Or other.

Speaker Change: It's other than you know this is this was all wound up at the.

Speaker Change: Cultural framework.

Speaker Change: Sure.

Speaker Change: Troll.

Speaker Change: Framework that we use.

Speaker Change: And.

Speaker Change: The way it works is that true.

And at the top which is a.

Which is a broad measure but.

Speaker Change: But recognized as a critical part of effective effective controls.

Operator: As a reminder, if you do have a question, please press the star and then 1 on your telephone keypad. The next question comes from Trevor Cranston with JMP Securities. Please proceed.

Speaker Change: Leads into a whole network of financial controls, it's part of that.

Speaker Change: So that's that's where that goes it's pretty clearly laid out in may.

Speaker Change: In the K and the Q.

Trevor John Cranston: Hey, thanks. A follow up on a question about the expenses. Just to clarify, will you expect to see any more of the sort of one-time expenses coming through in April, or was that exclusively in the first quarter?

Speaker Change: You'll see the broader cuso framework and then how this fits in as part of it.

Speaker Change: But but it is unrelated to the conflict of interest.

Speaker Change: Gotcha.

Speaker Change: In which there were no findings.

Speaker Change: There were no findings on the conflict of interest.

Speaker Change: Correct.

Scott Jeffrey Ulm: I think we've paid pretty well for it, but you know how these things go, there's always something that dribbles in, but I don't think it will have any effect. Even if there is some dribbling later on, I don't expect it to be significant.

Speaker Change: And then final question given that the Q mentioned, apparently gave all material.

Speaker Change: Yeah clean.

Speaker Change: Clean Bill of health for the financials is it fair to say that we're not we should not expect a restatement of past results.

Trevor John Cranston: Got it. Then, you know, given the, you know, the reduction in the MBS portfolio here in April, can you also maybe comment on any changes you've made to the hedge book, either with swaps or treasuries, in the early part of April? Thanks.

Speaker Change: That's correct.

Speaker Change: Okay. That's it for me thank you.

Speaker Change: At this time, we're showing no further questioners in the queue and this does conclude our question and answer session I would now like to turn the conference back over to Scott for any closing remarks.

Sergei Lezov: Yes, hi, Trevor. In line with some of our... Asset Sales, we've also adjusted our handbook as well. We've been trying to... Aim for 0.5 duration, about half the duration, so our hedge book is, We dynamically allocate. Treasuries and swap hedges along those lines. So yes, we've been making adjustments as we do our asset sales. Adjusting our hedges as well to keep our duration within a framework that we feel comfortable with given the environment that we're in. Okay, I get it. That's helpful.

Scott: Thanks Al appreciate your participating in the call and as always if you something Christian later on give us a range here.

Scott: Thank you.

Scott: The conference.

Speaker Change: She has now concluded. Thank you for attending today's presentation and you may now disconnect.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: [music].

Trevor John Cranston: Okay, I got it. That's helpful. Thank you.

Operator: The next question comes from Christopher Nolan with Leidenberg, Salomon. Please proceed.

Christopher Whitbread Patrick Nolan: All right, thanks. Related to the special............... You mentioned that you hired outside counsel and an accounting firm. Is this the same accounting firm that does your audit?

Scott Jeffrey Ulm: No. We're a national accounting firm and not Deloitte.

Scott Jeffrey Ulm: All right, so is that any reflection on your confidence in Deloitte?

Scott Jeffrey Ulm: Not at all. These things, you always hire somebody independent to help, and that's best practice. But you just wouldn't use your regular account for this sort of work.

Scott Jeffrey Ulm: Okay, and you repeatedly mentioned tone at the top, and then you also mentioned conflict of interest. Is the tone of the top financial related to conflicts of interest?

Scott Jeffrey Ulm: It's either, and you know, this is all bound up in the COSO framework, which is a control framework that we use, and the way it works is that Tone at the Top, which is a broad measure but recognizes a critical part of effective controls, leads into the whole network of financial controls. It's part of that. So that's where that goes. It's pretty clearly laid out in the K and the Q. You see the broader COSO framework and then how this fits in as part of it. But it's unrelated to conflict of interest stuff, on which there were no findings.

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Christopher Whitbread Patrick Nolan: There were no findings on the conflict of interest. Correct. Okay. And then, a final question, given that the queue mentioned apparently gave all the material, a Clean Bill of Health for the financials, is it fair to say that we should not expect a restatement of past results? That is correct. Okay, that's it for me. Thank you.

Speaker Change: Yeah.

Speaker Change: [music].

Operator: At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Scott Ulm for any closing remarks. Thank you all.

Scott Jeffrey Ulm: Thanks, all; I appreciate your participation in the call, and, as always, if something occurs to you later on, give us a ring. We're all here. Thank you.

Operator: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.

Speaker Change: Yeah.

Operator: © BF-WATCH TV 2021 ??? ??? ??? ??? ??? ??? ??? ??? ??? ???

Speaker Change: [music].