Q1 2025 ARMOUR Residential REIT Inc Earnings Call
Good day and welcome to the armour residential REIT first quarter 2025 earnings conference call.
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Scott: Please note. This event is being recorded I would now like to turn the conference over to Scott <unk> Chief Executive Officer. Please go ahead.
Scott: Good morning, and welcome to armour residential REIT first quarter 2025 conference call. This morning, I'm joined by our CFO Gordon Harbor as well as our co CIO as Sergey luxury up and Desmond Mccauley.
Scott: I'll now turn the call over to Gordon to run through the financial results Gordon.
Gordon: Thank you Scott I know everyone has access to our earnings release, which can be found on Armours website Ww Armory Dot Com. This conference call includes forward looking statements, which are intended to be subject to safe Harbor protection provided by the private Securities Litigation Reform Act of 1995.
Gordon: The risk factors section of Armours periodic reports filed with the Securities and 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.
Gordon: Periodic filings can be found on the Sec's website at Ww SEC Doc up well.
Gordon: 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: So today's discussion refers to certain non-GAAP measures.
Gordon: These measures are reconciled with comparable GAAP measures in our earnings release.
Gordon: An online replay of this conference call will be available on Armours website, shortly and will continue for one year.
Gordon: Q1, GAAP net income available to common stockholders was $24 3 million or 32 cents per common share.
Gordon: Net interest income was $36 3 million.
Gordon: Distributable earnings available to common stockholders was $64 6 million or <unk> 86 cents per common share.
Gordon: 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 or futures contracts minus net operating expenses.
Gordon: On a capital benefit.
Gordon: Management fees were 165 million for Q1, which offset operating expenses.
Gordon: During tier one armour raised approximately $371 billion of capital by issuing approximately $20 million.
Gordon: There is a common stock through an aftermarket offering program and 300000 of capital by issuing approximately 17000 shares of preferred C shares.
Gordon: These issuances were modeling.
Gordon: Okay.
Gordon: Since March 31st we've repurchased 666000 common shares.
Gordon: Armour paid monthly common stock dividends of 24.
Gordon: Common share per month for a total of 72 cents for the quarter.
Gordon: We aim to pay an attractive dividend that is appropriate and contacts and stable over the medium term.
Gordon: On April 29, the cash dividend of 24 cents per cow per outstanding common share will be paid to holders of record on April 15th.
Gordon: We've also declared a cash dividend <unk> 24 per outstanding common stock payable may 29 to holders of record of a 15th 2025.
Gordon: Quarter end book value was $18 59 per common share.
Gordon: Our most current available estimate of book value is as of April 23rd and was $16.56 per common share. This is after the accrual of April dividends to be paid next week.
Gordon: Now I will turn the call over to back.
Scott: Back to Scott to discuss.
Scott: Armours portfolio position and current strategy.
Gordon: Thank you Gordon.
Gordon: Substantial policy changes in trade and immigration fiscal policy and regulations have ushered in pronounced macroeconomic uncertainty along with upward pressure on longer interest rates volatile markets and dislocations in the asset swap spreads.
Gordon: Armed with strong liquidity of over $750 million, we believe that armor is positioned to withstand short term headline volatility as well.
Gordon: The recent strengthening performance in the rates curve, along with MBS sofer spreads hovering close to 200 basis points levels comparable only to extreme and short lived it does there are disruptions in the past offer significant value to mortgage investors.
Gordon: On a duration hedged and levered basis.
Gordon: <unk> on production and premium coupon MBS looked very compelling with estimates ranging from 18% to 21% among the highest seen in our history.
Gordon: We're also paying attention to developments in GSE reform under this administration com.
Speaker Change: Comments and actions by Bill Pulte at the FHFA and Scott vested at the Treasury suggests that this administration may seek to accelerate the framework for eventual GSE exit yes.
Speaker Change: Yeah, we still view the structural changes as a long term process and believe that the complexity of systemic importance of the GSE is make near term action unlikely.
Speaker Change: Given that the mortgage and housing market make up as much as 28% to 30% of the economy.
Speaker Change: Any reform efforts must be approached with caution as we carry broad implications for economic stability and growth.
Speaker Change: As we move further into 2025, we expect the macro backdrop dropped to remain dynamic.
Speaker Change: The rates market is pricing in over three fed rate cuts. This year, a reflection of the fed's anticipated dovish reaction function to support a weakening economy are positive for MBS.
Speaker Change: Renewed discussions around modifications to the supplementary leverage ratio or S. L. R. Coupled with sooner than expected tapering of quantitative tightening program later on a structural tailwind to bank demand for agency MBS.
Speaker Change: With increasingly supportive technicals strong theory, and historically wide valuations agency MBS remains a core opportunity within the fixed income landscape.
Armour continues to seek value during bouts of spread weakness with confidence in the sectors resilience and the long term strength of the U S housing finance system.
Speaker Change: Let me turn it over to Sergey for more detail on our portfolio. Thank you Scott.
Sergey: In Q1, our agency portfolio experienced a modest two basis points of tightening amidst the global market volatility in April our portfolio of agency assets. It widened approximately 15 basis points in dv spreads quarter to date.
Sergey: Our estimated net portfolio duration and implied leverage at 0.5 years and $8 one times, respectively. While total liquidity of approximately 50% of the total capital.
Sergey: The hedge book is composed of nearly 30% Treasury based hedges and remainder is in Oems and sulfur based swaps.
Sergey: This allegation benefits if.
Sergey: As swap spreads were begin normalizing well also helped diversify some of the risks if concerns around the term funding premiums persist.
Sergey: Armours investment portfolio is at 95% of most liquid agency MBS, which includes ebay and deliverable specified pools and TBA contracts.
Sergey: Portfolio is diversified across the 30 year coupons stack ranging from two and a half to six and a half coupons with overweight in finding a happened 6% coupons were spread and Gary are most attractive.
Sergey: The remaining 5% market value is allocated to five year agency MBS pools, whose positive convexity in short duration attributes over a much more value and upside versus comparable 15 year MBS pools.
Sergey: Portfolio MBS prepayment rates have averaged $6 one CPR in Q1 and are trading at around 7.8, CPR. So far in Q2, we.
Sergey: We expect that prepayment environment to remain uneventful or a portfolio mix of modest price premiums and discount MBS, while mortgage rates remained elevated at about 6% keeping the refinance activity and that supply at Bay.
Sergey: Despite the slow prepayment environment, we continued to favor credit and investors specified pools, which help improve overall portfolio convexity and will benefit from a potential increase in loan level pricing adjustments or LLP a piece on their bill policies FHFA leadership.
Sergey: We also maintain some exposure to TBA rolls, which while not a core long term position help enhanced market liquidity and flexibility of our portfolio.
Sergey: We found that 40% to 60% of our MBS portfolio with our affiliate Buckler securities while spreading out the remaining repo balances across 15 to 20 other counterparties.
Sergey: Provide armor was the best financing opportunities at an average growth of 2.75%.
Sergey: Overall, MBS repo funding remains ample and competitively priced reflective of the broader backdrop of abundant banking system liquidity appoint has consistently emphasized by Apple and team members.
Scott: And now back to you Scott.
Scott: Thank you Sir.
Speaker Change: As you know we determine our dividend based on a medium term outlook. We view our current dividend is appropriate for this environment.
Scott: And the returns that are available.
Scott: Thank you for joining today's call and your interest in armour, we're happy to now answer your questions.
Scott: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Scott: You are using a speakerphone. Please pick up your handset before pressing the keys is that any time. Your question has been addressed and we would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Scott: Our first question comes from Doug Harter with UBS. Please go ahead.
Doug Harter: Thank you I was hoping you could talk about how you're approaching.
Speaker Change: Risk management in this type of environment.
Doug Harter: Thoughts of you know.
Doug Harter: How youre thinking about leverage levels.
Doug Harter: The kind of the cost of kind of.
Doug Harter: Selling assets.
Doug Harter: You know and potentially missing on a recovery of <unk>.
Doug Harter: Spreads versus kind of taking risk off an incredibly unpredictable environment.
Doug Harter: Well that is the question Doug.
Doug Harter: And that's what we focus on.
Doug Harter: It seems like it seems like every every day every hour of the last few weeks.
Doug Harter: Liquidity is king.
Doug Harter: And we are intensely focused on liquidity we have.
Doug Harter: The advantage of being of being an agency portfolio. So we don't have some some of the exogenous stuff that can happen elsewhere in the market.
Doug Harter: On the other hand agencies are highly liquid and when people need to raise cash I suspect there number two on the list of places places to raise cash we look closely at.
Doug Harter: Leverage you know we have been running in the seven to eight level, though because I think we've said in the past that's that's sort of more of an output than an actual input, but it's an important metric to us to.
Doug Harter: To look at and all of that is against the temptation of very attractive.
Doug Harter: Investment opportunities that are out there.
Doug Harter: And further the.
Doug Harter: The you know the opportunity that you think about buying back stock, which we did a little bit off but again liquidity is king and we are very jealous of our liquidity in volatile times.
Doug Harter: I don't see I don't see that see that changing but that you know striking that balance is.
Doug Harter: As important among all of the factors.
Doug Harter: That are there.
Doug Harter: Both in terms of opportunities and maintaining that maintaining an appropriate level of defensiveness.
Doug Harter: Great I appreciate it thank you.
Speaker Change: The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston: Hey, Thanks, good morning.
Trevor Cranston: Looking at the portfolio data.
Trevor Cranston: Well it looks like during the first quarter the allocation to sixes went up a little bit.
Trevor Cranston: Can you just talk a little bit about where you're seeing the best opportunities are within the coupon stack.
Trevor Cranston: Post quarter end it looks like the portfolio size was down a little if you could just you know.
Trevor Cranston: Comment on whats your button.
Trevor Cranston: Correct.
Trevor Cranston: Yes, hi, Trevor so we seek to maintain a diversified portfolio.
Trevor Cranston: Our bias right now is two <unk>.
Trevor Cranston: Turning to our bio production coupons, we see a very attractive Roe easier.
Trevor Cranston: We are probably biased to slightly.
Trevor Cranston: Below par, so five and five 5% coupon expecting that the weakening economy.
Trevor Cranston: Could cause lower treasury yields.
Trevor Cranston: And.
Trevor Cranston: Yeah, I mean, when do we want to.
Trevor Cranston: Stay diversified.
Trevor Cranston: We may also buy five via does securities does.
Trevor Cranston: Based on the positive convexity, which we like to balance in our portfolio is a good diversified to MBS and it benefits in a curve steepened as well and there are spreads are looking attractive.
Speaker Change: You mentioned I guess your second question was.
Trevor Cranston: <unk>.
Trevor Cranston: Post quarter end, so we still like the agency MBS lines landscape. It's many factors many tailwind here.
Trevor Cranston: The levels are very attractive the curve has steepened significantly.
Trevor Cranston: We also see prepayments as muted as we said in our prepared remarks even.
Trevor Cranston: Mortgage rates over $6, 5% and the funding markets are very stable with that said April was a very significant risk event.
Trevor Cranston: <unk>.
Trevor Cranston: We sold the shops that linked to the market.
Trevor Cranston: We decided to sell some assets there.
Trevor Cranston: Understanding that even post sales our leverage was steel.
Trevor Cranston: Significant enough, where we felt we had enough spread ways to participate.
Trevor Cranston: In in any further spread tightening.
Trevor Cranston: Okay.
Trevor Cranston: Got it okay. That's helpful.
Trevor Cranston:
Trevor Cranston: And you were talking about maintaining adequate levels of liquidity, obviously in a volatile market.
Trevor Cranston: And you did buy back some shares in April can you just comment on how much capacity. You think you have to continue potentially buying back shares.
Trevor Cranston: I'll start maybe trading.
Trevor Cranston: What was the liquidity that you're happy with.
Trevor Cranston: There's some capacity there.
Trevor Cranston: And how we view that capacity depends on our outlook over.
Trevor Cranston: Oh over short term and a bit of a medium term.
Trevor Cranston: We maintain very substantial liquidity, but obviously.
Trevor Cranston: When you buy back shares Youre talking about an adjustment that has knock on effects through the portfolio as well.
Trevor Cranston: So.
Trevor Cranston: We get on it and we.
Trevor Cranston: We like we like the.
Trevor Cranston: The returns available in that portfolio. So we're not looking to cut the size of the portfolio per se, but certainly we have capacity and we look at it and I think the point is that we're willing to willing to be on both sides of the market here.
Trevor Cranston: Okay I appreciate the comments thank you.
Speaker Change: The next question comes from Randy Binner with B Riley. Please go ahead.
Randy Binner: Hey, good morning, Thank you.
Trevor Cranston: I appreciate your comments on the.
Trevor Cranston: GSE reform in <unk> comments.
Trevor Cranston: It seems like something is going to move forward and Theres been staff changes at Fannie Mae in particular, I think it would be interesting.
Speaker Change: To hear your perspective.
Speaker Change: On the key things that we should look for.
Speaker Change: Learn more about the potential reform any I understand from your comments that it's a big change and it's longer term, but.
Speaker Change: Helpful.
Speaker Change: To think of how.
Speaker Change: The details of it could manifest themselves early on and if theres any scenario, where it doesn't need to be necessarily a headwind that could be a tailwind for the market just interested in a little bit of a kind of like what we should look for as observers of this and as it relates to armor.
Speaker Change: Well you know as it relates to arm or leg of it really relates to all of us and a lot of ways right.
Speaker Change: Nothing nothing specific to us, but to my mind the the big one is the sovereign backstop.
Speaker Change: Which obviously we have explicitly.
Speaker Change: With Ginnie and we've got in structural format with Fannie and Freddie.
Speaker Change: But that is that is that is to.
Speaker Change: To my mind hugely important impacts potentially on risk weights and things like that.
Speaker Change: So and also as a touchstone for the conversation, which is what makes what makes the <unk> different kind of competitor in the mortgage market then.
Speaker Change: They're private entities.
Speaker Change: So that to me is you know is the big one to look for.
Speaker Change: And then here and then you get to the whole mosaic of.
Speaker Change: Guarantee fees.
Speaker Change: And capital that we put in and what sort of rating might exist on a standalone basis.
Speaker Change: Which which is which is important as well.
Speaker Change: All of those things go into the mix.
Speaker Change: I just hope that as this rolls out that the communication is.
Speaker Change: As carefully carefully modulate it and presented in.
Speaker Change: Rather than rather than sort of sort of bits and pieces coming out.
Speaker Change: We always we always worry about headline risk that even if it gets resolved can.
Speaker Change: It makes life interesting for everybody for more than a few days.
Speaker Change: Right that's helpful and I.
Speaker Change: I guess the follow up question would be have you I think there was some comment commentary in our last call in the Q&A about.
Speaker Change: Someone had asked.
Jenny: If you thought it was priced and I think Jenny.
Speaker Change: Fannie swaps for kind of a data point that to you.
Jenny: Just being in the market everyday.
Speaker Change: Theres been more comments from <unk> since our last call.
Jenny: Do you get a sense that theres more priced into the market at all.
Speaker Change: Kind of observing what you see.
Speaker Change: We've seen as of late.
Speaker Change: So in our regards I think the mortgage market is just looking for more concrete ideas, we're seeing a lot of ideas floating out there, but until we see roadmap or some sort of a blueprint from either bill pulte or treasury or any part of it administration, it's really hard to.
Speaker Change: Try to price things and as we mentioned in our prepared remarks, I think the easiest step the first step for any kind of GSE reform will be streamlining the profitability of the enterprises and I think bill bulk has been very clear about.
Speaker Change: Adjusting some of the risk fees on the loans and based on the credit worthiness of the borrowers. So I think we're going to see some some signs of that first before we.
Speaker Change: Before we see any kind of longer term exit plans and anything that's kind of the plan. We are following here as well.
Speaker Change: Okay understood. That's very helpful. Thanks for the comments.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Our next question comes from Eric Hagen with <unk>. Please go ahead.
Speaker Change: Okay. Thanks, good to hear from you guys.
Speaker Change: Just given that does.
Speaker Change: This dislocation in our swap spreads how do you feel like that drives the way in which you rebalance your hedges around volatility on a go forward basis like the hedges in the back the back book like the existing portfolio. Thank you guys.
Eric: Yes, Hi, Eric.
Eric: So in regards to swap spreads.
Eric: We want to maintain a diversified portfolio of our hedges.
Eric: So in Q1, we increased the.
Eric: The share of our treasury based hedges slightly from 25% to 30%.
Eric: That benefited our portfolio when we so a very significant tightening of swap spreads. So now we have about roughly 70% of our portfolio.
Eric: Hedges and swaps, we are absolutely comfortable with.
Eric: With that largest share we feel it's been a very significant dislocation.
Eric: In swap spreads so far and we expect that at some point, we would see normalization.
Eric: How many different ways it could be.
Eric: Who the supplementary leverage ratio.
Eric: Which may allow banks too.
Eric: Intermediate.
Eric: Better and more treasuries and caisson.
Eric: We see potentially.
Eric: Yeah, Tom premium so yes.
Eric: We are happy and content to meet our current share with that said, if we do get any more.
Speaker Change: Dislocation the 30% of <unk>.
Eric: Treasury based hedges would that would be there to help protect our portfolio.
Speaker Change: Okay. That's helpful. I appreciate that.
Speaker Change: Can you guys share how you think for a lease on the supplementary leverage ratio and drive both supply and demand for repo funding specifically at the venue, where you guys have direct access of the repo dealer.
Speaker Change:
Speaker Change: Okay.
Speaker Change: The primary drivers.
Speaker Change: Talking about banks here in supplementary leverage has always worked too.
Speaker Change: Low high quality low our OE assets less attractive on the balance sheet.
Speaker Change: And.
Speaker Change: That's kind of precisely what what agency MBS is an even more precisely what repo is.
Speaker Change: So to the degree that to the degree that.
Speaker Change: Assets, which are extremely high quality, both lower Roe, but occupy balance sheet become more attractive or even possible to hold.
Speaker Change: Not not crowding out more profitable assets it should work to the favor of of repo overall, meaning meaning improving improving ability of tradition, where they've always been traditional holders.
Speaker Change: To have more of it.
Speaker Change: Gotcha Alright, that's helpful. Thank you guys.
Speaker Change: Again, if you have a question. Please press Star then one on.
Christopher Nolan: Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Court: Alright, Thanks for taking my questions I'm Court did you mentioned that the book value is.
Christopher Nolan: It is currently roughly $60 55.
Speaker Change: At $16.56 as of last night.
Court: Great.
Court: Not exactly equal over dividends that were paying out next week.
Court: Thank you.
Court: And then turning on the dividend.
Court: What impact does declines in book value have on the sustainability of the dividend.
Court: You know at a certain point, yes.
Court: It could it could.
Court: Because then that certainly is the capital that you have available to invest in and it ultimately <unk>.
Court: Bounds into into.
Court: Liquidity and leverage and this has been a volatile period, and where theres a whole lot of stuff going on.
Court: As we said we look to the medium term here.
Court: And in particular look to look to the returns available. So as I said, we're comfortable with the level we're at.
Court: Okay.
Court: And then I guess can you characterize the bank's appetite for mortgage backed securities.
Speaker Change: In recent quarters, it seems to be there on the sidelines, but how's that changed in the quarter.
Speaker Change: Yes, Hi, Christopher Yes, I think Q1, we saw.
Speaker Change: Probably largest CMO creation volumes, both in February and January kind of indicating that banks were back in the market now a lot of their focus is still on the floating rate aspect nature of MBS and this is why the majority of the CMO creation has been in the agency MBS floaters.
Speaker Change: March has been a much more quieter months, we also saw our spreads.
Speaker Change: Spreads on the tighter side during that time, so it's not surprising that some of the man has backed up obviously in times of volatility right now.
Speaker Change: Investors are on the sidelines waiting out the.
Speaker Change: These bouts of volatility, but as Desmond mentioned, such widespread versus swaps steeper curve a lot of these things are pointing to the fact that the demand side of the equation isn't a good spot.
Speaker Change: As soon as volatility and peak uncertainty is behind US I think we will see bank demand returned to the levels. We saw in Q1 and maybe even greater.
Speaker Change: Great final question.
Speaker Change: Do you think the second quarter distributable EPS would be in excess of the dividend.
Speaker Change: And we traditionally have not commented on that.
Speaker Change: But so I am hesitant to provide a forward looking statement on that but I think you could probably get to your own conclusion pretty quickly by looking at the looking at the returns available.
Speaker Change: Okay. Thanks, guys. Thanks for taking my questions.
Speaker Change: This concludes our question and answer session.
Speaker Change: I'd like to turn the conference back over to Scott for any closing remarks.
Speaker Change: Well, thank you for joining us for our conference call today. We appreciate your interest in arm, a REIT and we are always available for follow ups.
Speaker Change: Don't be strangers. Thanks, so much.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.