Q4 2024 ARMOUR Residential REIT Inc Earnings Call
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Good morning and welcome to
Armor Residential REIT 4th Quarter 2024 Earnings Conference Call
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Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO. Please go ahead.
Speaker Change: 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 Change: The risk factors section of Armour's periodic reports filed with the Security and 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.
Speaker Change: Home periodic filings can be found on the FCC's website at www.fcc.gov.
Speaker Change: All of today's forward-looking statements are subject to change without notice.
Speaker Change: We disclaim any obligation to update them unless required by law.
Speaker Change: Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.
Speaker Change: An online replay of this conference call will be available on our website shortly and will continue for one year.
Thank you for your time.
Thank you very much.
That interest income was $12.7 million.
Speaker Change: Distributed earnings available to common stockholders was $46.5 million or 78 cents per common share. This non-GAAP measure is defined as net interest income.
Speaker Change: plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses.
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Speaker Change: Arma Capital Management continues to waive a portion of their management fees, waiving $1.65 million for Q4, which offsets operating expenses.
The waiver continues until further notice.
Speaker Change: During Q4, Armour raised approximately $136.2 million of capital by issuing approximately 7.2 million shares of common stock to an at-the-market offering program.
Speaker Change: These issuances were mildly diluted to both values at two cents per share.
and 17,000.
364 preferred city shares through.
February 4th.
Speaker Change: 2025, raising approximately $259 million of total net capital, which again, we're mildly deluded.
Thank you.
Speaker Change: As we stated previously, we aim to pay an attractive dividend that is appropriate in context and stable over the medium term.
Thank you very much.
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Quarter-end book value was $19.07 per common share.
Speaker Change: Our most current available estimate of book value as of Monday, February the 10th, was $19.18 per common share.
Speaker Change: Now I will turn the call over to our Chief Executive Officer, Scott Ulm, to discuss ARMA's portfolio position and current strategy.
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Thank you, Gordon.
Speaker Change: 2024 was a year of transition for Fed policy as the FOMC reduced the Fed funds rate by 50 basis points in September after keeping it unchanged at five and a quarter percent since July 2023.
Speaker Change: The Fed stated that weakness in the labor markets prompted the larger-than-typical 25 basis point rate cut. Yet the U.S. economy remained resilient in the fourth quarter, and as economic data continued to improve, investors reduced the number of expected rate cuts and extended their timing, leading to increased bond yields and wider spreads.
Speaker Change: The outcome of the U.S. presidential elections with a supportive pro-growth agenda and a potentially larger fiscal spending program added another layer of concern for the Treasury.
Speaker Change: Lastly, the hawkish weight cut at the December FOMC meeting injected another round of volatility in a month that has been historically favorable for bond investors.
Speaker Change: Despite the fourth quarter's swings in NBS valuations, Armour maintains a constructive view on agency NBS trends.
Speaker Change: Our positively sloped steeper yield curve and historically attractive MBS spreads are currently generating approximately 150 basis points positive versus cash.
Speaker Change: Moreover, a duration-edged, levered ROE measure produces some of the most attractive yields in armor's history, at 18-19% on the production and premium coupon MBS.
Speaker Change: Although macroeconomic and geopolitical themes continue to prevail, such an attractive carry profile leads us as buyers of MBS during episodes of spread weakness or volatility.
Speaker Change: Our view is supported by less volatile spreads in 2025, as well as the growing diversification of the mortgage investor base, which has steadily grown from money managers to continued overseas buying and bank demand turning net positive in 2024.
Speaker Change: With monetary policy on hold, we expect rates to trade in a range-bound environment over the earlier part of the year, a tailwind for consistent MBS returns.
Thank you.
Speaker Change: Of course, it is just as important to recognize potential headwinds facing NBS investors this year.
Speaker Change: The recent re-emergence of headlines around GSE reform adds to the already busy list of macro drivers that could keep investors in cash for longer than expected.
Speaker Change: could begin to introduce details and steps needed for their eventual exit.
Speaker Change: Our exposure to ginning MBS helps mitigate some of the reformers to conventional MBS for now. But until we see more concrete proposals, the current situation leaves us looking to fade headline-driven volatility.
Speaker Change: Secondly, we believe the bank's seemingly slower than expected deployment in HTC MBS assets could be driven by lack of clarity in the proposed regulatory changes, which though appearing to turn more favorable in recent months, lacks certainty of details and timing.
Speaker Change: So this is a win, not an issue, which we will see more transaction of Michelle Bowman, a strong proponent of banking regulations, gets nominated and confirmed as new Vice Chair for Banking Supervision.
Speaker Change: Similarly, we've been encouraged by Treasury Secretary Best's plans to keep future coupon treasuries sort of steady and tackle the budget deficit, steps that strengthen investors' confidence and incentivize banks to allocate their reserves into Treasury and NBS markets.
Speaker Change: Let me turn it over to Desmond for more detail on our portfolio. Desmond? Thank you, Scott.
Desmond: In Q4, our agency portfolio experienced approximately 4 basis points of widening in nominal spreads versus approximately 5 basis points of widening in production MBR treasury basis.
Desmond: Year-to-date, portfolio assets have tightened approximately three basis points, and our book value stands at approximately $19.18 per share as of market close on February 10.
Desmond: Net portfolio duration and implied leverage, we are at 0.36 years and 7.9 terms respectively, while cash and box liquidity is at approximately 50% of the total capital.
Desmond: The hedge book is composed of approximately 25% treasury-based hedges and the remainder in OIS and SOFRO P swaps.
Desmond: This allocation benefits us if swap spreads continue to appreciate and help diversify some of the risk if concerns around term funding premium resurface.
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Desmond: We maintain healthy levels of available capital liquidity with room to grow leverage in the appropriate market conditions.
Desmond: We are successful in bolstering our capital base through issuance of common and preferred equity in late 2024 and in the first quarter of this year.
Thank you.
Desmond: Given our favorable outlook for MBS CARI, we deployed newly raised capital to purchase approximately $2 billion of mortgage assets and PBAs year-to-date, which earn at or above our hurdle rate after accounting for costs and expenses.
Desmond: We expect earnings available for distribution to exceed our Q1 dividend rate.
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Desmond: The overall investment portfolio remains liquid with 100% agency MBS and well diversified across the 30-year coupon stack, ranging from 2.5% to 6.5%, with particular overweights to 5.5% and 6% coupons, where spreads and carry are most attractive.
Desmond: Portfolio MBH repayment rates have averaged 8.7 CPR in Q4 and trending at around 6.4 average CPR so far in Q1.
Desmond: We expect the prepayment environment to remain uneventful for our portfolio mix of modest price premiums and discount MBS, and while mortgage rates remain above 6.5%.
Desmond: Despite the slow prepayment environment, we continue to favor specified pools which exhibit better convexity over TBA and are less exposed to refinancings.
Should mortgage rates rally to 2024 lows of 6%?
Desmond: Having said that, we have increased our exposure to TBA role in coupons where we see some return in role specialness since the start of the year.
Desmond: While these are not core long-term positions, they help enhance market liquidity and flexibility of the portfolio.
Desmond: The repo market experienced some rising pressures at the year-end, as expected, but has since returned to a more typical surplus 15 basis points repo spread.
Thank you.
Desmond: We fund 40 to 60 percent of our MBS portfolio with our affiliate Buckler Securities while spreading out the remaining repo balances across 15 to 20 other counterparties to provide Armour with the best financing opportunities.
Desmond: Overall, repo funding for agency MBS remains plentiful and competitively priced across the board, and Fed Chairman Powell continues to reiterate that banking reserves remain abundant.
Back to you, Scott.
Thank you very much.
Desmond: At this point, I think we'd like to open up for any questions.
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Speaker Change: Yes, sir. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
The first question comes from Doug Harter with UBS.
Please go ahead.
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Speaker Change: Thanks. First, just a clarification on the book value update. How does that factor in February's dividend?
Speaker Change: It does not, as we know, ex-dividend by the end of this week.
Okay.
Speaker Change: And then, you know, just I guess, how are you thinking about the outlook for volatility, you know, and the potential costs of volatility on your returns?
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Speaker Change: Yes, good morning Doug. This is Sergey. How are you? Thank you for your question. You know we've seen volatility decline here both in rates and spread and I think this has been the kind of really the tailwind for the MBS market to
Speaker Change: Her consistent ROE without the volatility that we've seen over the last two years.
Speaker Change: We expect this volatility to continue to grind lower, you know, with the Fed on hold.
Speaker Change: We feel like this will be a more range-bound environment than we've seen in prior years. At the same time, we do feel like there's more cuts on the table. The question is going to be their timing, but...
Overall, the volatility aspect of the market looks very favorable.
Great, I appreciate that, Sergey.
The next question comes from Jason Weaver with Jones Trading.
Please go ahead.
Jason Weaver: Hey, good morning. Thanks for taking my question. Scott, I think in your initial comments you mentioned you expect something like 18-19% ROE on generics concurrently.
Jason Weaver: How does that compare with the 2 billion of actual deployments here today, what are you expecting there?
Bye.
We've been able to deploy at those expected numbers.
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That's fair, I just wanted to verify.
Jason Weaver: I can't tell you what tomorrow brings, but we've been pretty encouraged by what we've been able to achieve at New Capital.
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Speaker Change: Got it. Thank you for that. And, you know, what we're seeing on the screen, at least year-to-date, is mirroring your expectation of somewhat higher spreads, even in the face of some of these hotter inflationary prints. I was curious, you know, internally, what are the biggest sort of risk factors you're concerned about for spread widening going forward?
Speaker Change: There's always stuff to worry about, as you know, right? You know, it starts with geopolitical stuff that's out there. It, you know, follows through. We've got, yeah, GSE reforms have been a little wild card. You know, as we said, you know, look, I think that's going to be a heavy lift. It's been on the agenda for, you know, for past Trump administrations and, you know, didn't quite get there.
Speaker Change: you know, comments on what could happen, but there's a lot of wood to chop on that one.
Speaker Change: but that could introduce some headline stuff there. We've got ongoing fiscal issues, Treasury supply that might be there, and obviously we've got this inflation story which continues to evolve. But probably another couple pages of things that we could come up with. There's always a lot to worry about something going bump in the night.
Got it. Thanks for that, Culler.
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Speaker Change: The next question comes from Jason Stewart with Channing Montgomery Scott. Please go ahead.
Jason Stewart: Hey, good morning. Thank you. I wanted to follow up on the GSE reform topic. Thanks for the color and the comments there. Maybe if you could put a finer point on how much you think is priced into the mortgage basis right now and, you know, as we go through that process and at least see headlines, you know, what kind of widening you would expect to see in terms of basis points and how you would position the portfolio and risk for that environment.
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Jason Stewart: That's a tough one. You know, look, I saw some research that said if the agencies were stood on their own, they'd be single-A rated. And, you know, cuff that at, you know, 70 basis points or a point of additional spread required. You know, that's a big number. On the other hand, I think
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It's a
Jason Stewart: It's a little beyond the pale to think that after, you know, after the better part of a century of enjoying a implicit government guarantee, you know, now we've got, you know, and obviously there issues making it explicit in law, but we've got, you know, preferred and purchased stuff and, you know, five Treasury secretaries that say they back the agencies, that we're going to walk away from, you know, from the implicit support that we've got.
Jason Stewart: by that is that we'll see efforts to exit conservancy and probably tie that with substantial private capital tied to the front bumper to protect the taxpayer but still leaving some version of what's been in place for a long time.
Jason Stewart: How much is priced in today? I don't know, a lot.
Cecil Brandeberg helped GOCCI with its interview.
Speaker Change: I wouldn't say none because it's hard to say none, but I don't think there's a whole lot priced in right now.
Speaker Change: Yeah, a good measuring tool for that are teeny-tiny swaps, which haven't really reacted to many of the headlines that you see in the equity markets.
Speaker Change: So that kind of underlines what, you know, Scott just mentioned, you know, the steady growth of retained earnings could put them on the path to eventual exit. So the new FHFA director could look to increase their profitability through certain ways, like increasing the risk premiums on loans.
Speaker Change: and things like that. So this could reshape the footprint of GSEs going forward, but we don't see an abrupt exit as the base case scenario.
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Speaker Change: Okay, that's helpful. So the net takeaway for ARR would be, you know, debt-to-equity probably doesn't change much unless we get a material shift in terms of the path forward.
Thank you. It was fun.
Okay. Okay. That was it for me. Thank you. Thanks.
[inaudible]
Speaker Change: The next question comes from Mikhail Goberman with Citizens KMP. Please go ahead.
Speaker Change: Hey, good morning guys. Thanks for taking the questions sitting in for Trevor today.
Speaker Change: Just curious, what would you guys need to see to either increase or decrease leverage from this point on?
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Speaker Change: Yes. Hi, Mikhail. So we are very comfortable with current leverage.
Speaker Change: The last time we checked, we were somewhat above the average of our peers.
Speaker Change: So we like to leverage where it is today given the compelling returns profile of assets that we purchased.
Speaker Change: Yet as we mentioned in our prepared remarks, there are some questions that you know we're looking to have answered in order for us to increase our leverage. That is the GSE reforms, QT, the timing of any potential tapering of QT. These are the things that we're kind of looking for more clarity on in order to increase leverage from here.
Speaker Change: Secretary bathrooms commentary and commitment to bringing term premiums lower AR as well as some of the baking deregulation proposals by.
Speaker Change: By the fed and.
Speaker Change: So the new lives chair Michelle Bowman. So a lot has it been pricing are behind those comments already I think the next our next pricing point is gonna be what actions are actually going to be taking so we use our swap position of 75% versus 25 in treasuries, that's kind of you know very.
Speaker Change: The base case, a comfortable position, where we are well positioned for the further widening of appreciation and swap spreads.
Speaker Change: You know if things.
Speaker Change: Turnaround.
Speaker Change: We do have a treasury position to diversify some of that risk.
Great. Thank you. Thank you for that color and just to confirm on current book value That's 1918.
Speaker Change: One eight.
Speaker Change: Correct.
Speaker Change: 18 sets.
Speaker Change: Great. Thanks, a lot best of luck going forward guys. Thank you.
Speaker Change: The next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Christopher Nolan: Hey, guys well first on the ATM $136, two was that gross or net.
Net.
Christopher Nolan: Okay, and then as memory serves last quarter.
Christopher Nolan: So basically we're increase your portfolio weighting into lower coupon shorter term M. B S on the.
Christopher Nolan: Patients of further fed rate cuts.
Christopher Nolan: No.
Christopher Nolan: Fast forward to the fourth quarter.
Christopher Nolan: Has your expectations of rate cuts.
Christopher Nolan: Changed with the outcome of the presidential election, and are you positioned the portfolio more for a higher long end or if you will.
Christopher Nolan: Little color in terms of how your portfolio position has changed.
Christopher Nolan: Oh, yes. Thank you so much followed the motto don't find deferred.
Speaker Change: In December meeting yesterday indicated that our rates are still.
Christopher Nolan: While restricted territory.
Christopher Nolan: That are well above the neutral right now you know since then we did have a new economic data releases, including unemployment and CPI. So a lot of these things will continue to move.
Christopher Nolan: The timing of further cuts.
Christopher Nolan: But we still firmly believe that theres more cuts in the table.
Christopher Nolan: And we're positioned for it.
Christopher Nolan: On duration and coupon stack positioning now.
Christopher Nolan: What the Guy said in terms of ROE.
Christopher Nolan: You know the most attractive part.
Christopher Nolan: And the coupon stack is in five and a half and six higher coupon positioning so we've been particularly active there.
Christopher Nolan: Great. Okay. Thank you.
Speaker Change: Hey, Ken if you have a question. Please press Star then one.
Speaker Change: The next question comes from Eric Hagen with B G I G.
Speaker Change: Please go ahead.
Eric Hagen: Hey, Thanks, good morning.
Speaker Change: Another follow up on the asset selection I mean, I think he mentioned liking higher coupons specified pools.
Eric Hagen: Or are the pay ups right now relative to pay ups in the <unk>.
Eric Hagen: Current coupon you know historically and do you feel like payoffs maybe have as much value as they have historically just given how aggressive the originators are in.
Eric Hagen: Targeting borrowers for refi.
Eric Hagen: Yes, that's a good question Eric.
Eric Hagen: Lot of its payout spec pay ups have appreciated over the last few months.
Eric Hagen: Seeing the theoretical breakeven on the past versus the model approaching close to 100%. So this is why we've increased our positioning in the TBA dollar rolls as well to kind of diversify away from full payout pre.
Eric Hagen: Premiums, but.
Eric Hagen: So.
Eric Hagen: That's been the strategy too.
Eric Hagen: You laid out in some of the TBA positions to be able to swap back and expect we'll do when we see them more attractive.
Eric Hagen: Okay interesting.
Eric Hagen: Going over to repo market conditions, I mean, do you feel like the steeper yield curve is supportive for spreads and liquidity in the repo market.
Eric Hagen: And how much demand do you guys see to extend repo you know.
Eric Hagen: Pick up term repo.
Eric Hagen: Right now thank you.
Eric Hagen: Yeah. So.
Eric Hagen: The repo curves and particularly if you look at one to two months is relatively flat. So it's really more depends on kind of.
Eric Hagen: What the what the initiatives out of the Treasury Department are coming in terms of their funding and their financings and how that affects the calendar there are rates.
Eric Hagen: But overall repo market has been extremely well behaved.
Eric Hagen: Since the year end I think we're seeing any kind of sulfur plus mid teens type of spread then.
Eric Hagen: You know that part of the market is very.
Eric Hagen: Very beneficial to the agency MBS.
Eric Hagen: Okay. Thank you guys so much.
Eric Hagen: Yeah.
Scott Ulm: This concludes our question and answer session I would like to turn the conference back over to Scott <unk> for any closing remarks.
Scott Ulm: Thank you so much for joining us this morning.
Scott Ulm: And we look forward to speaking with you feel free to call us with any follow ups yeah. Thank you.
Scott Ulm: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Scott Ulm: Okay.
Scott Ulm: [music].
Scott Ulm: Yeah.
Scott Ulm: Yeah.
Scott Ulm: [music].