Q2 2025 ARMOUR Residential REIT Inc Earnings Call
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Scott: I would now like to turn the conference over to Scott. Please.
Speaker Change: Please go ahead.
Scott: Good morning, and welcome to armour residential REIT second quarter 2020 conference call.
Speaker Change: This morning, I'm joined by our CFO Gordon Harbor, as well as our co Cio's, sorry, guys, Elisa and Desmond Mcauley.
Scott: I will turn the call over to Gordon to run through the financial results Gordon.
Gordon: Thanks Scott.
Gordon: Everyone has access to Armours earnings release, which can be found on <unk> website, www dot <unk> dot com.
Gordon: This conference call includes forward looking statements were intended to be subject to the safe Harbor protection provided by the private Securities Litigation Reform Act of 1095.
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 in or implied by these forward looking statements.
Gordon: Those periodic filings can be found on the Sec's website at Ww.
Gordon: Dod SEC dot Gov.
Gordon: Today's forward looking statements are subject to change without notice.
Gordon: We disclaim any obligation to update them unless required by law.
Gordon: Also today's discussion refer to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.
Gordon: An online replay of this conference call will be available on <unk> website, shortly and will continue for one year.
Speaker Change: Armours Q2, GAAP net loss related to common stockholders was $78 6 million or <unk> 94 per common share.
Gordon: Net interest income was $33 1 million.
Gordon: Distributable earnings available to common stockholders was $64 9 million or <unk> 77 per common share.
Gordon: These non-GAAP measures defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses.
Speaker Change: Armour capital management waived a portion of their management fees waiving 165 million for Q2, which offsets offering operating expenses.
Speaker Change: During Q2 armour raised approximately $104 6 million of capital by issuing approximately $6 3 million shares of common stock through an at the market offering program.
Speaker Change: Since June 30, we have raised approximately $58 8 million of capital by issuing approximately $3 5 million shares of common stock.
Speaker Change: Through the App through an at the market offering program.
Speaker Change: We currently have outstanding 91, 5 million common shares.
Speaker Change: Armour paid monthly common stock dividends per share of <unk> 24 per common share per month for a total of 72 for the quarter.
Speaker Change: We aim to pay an attractive dividend that is appropriate and context and stable over the medium term.
Speaker Change: On July 32025, our cash dividend dividend of <unk> 24 per outstanding common share will be paid.
Speaker Change: Holders of record on July 15th 2025.
Speaker Change: We've also declared a cash dividend of 24 per outstanding common share payable August 29th to the holders of record on August 15th 2025.
Speaker Change: Quarter, ending book value was $16 90 per common share.
Speaker Change: Our estimate of book value.
Speaker Change: As of Monday July 21 was $16 81 per common share reflective of the accrual of the July common dividend.
Speaker Change: I will now turn the call over to Chief Executive officers, Scott Ulm to discuss Armours portfolio position and current strategy.
Scott Ulm: Thanks Gordon.
Speaker Change: Hey, just a note to the team out of connectivity problem, a second ago. So if I disappear just continue.
Speaker Change: With with what we have to say here, but we should be just fine.
Speaker Change: Thanks Al as we entered the second half of 2025, the debate around U S fiscal sustainability said independents and trade dynamics continues to weigh on the macro landscape.
Speaker Change: While we don't expect these issues to be resolved quickly markets appear to have digested much of the initial shock as rates and spreads have settled into stable ranges and volatility has drifted lower.
Speaker Change: On the monetary policy front incoming U S. Economic data indicates solid economic growth that's supportive of the fed's wait and see approach.
Well fed policy rates remain on hold elevated short term meals are observing investor liquidity.
Speaker Change: We believe that a resumption of the fed cutting cycle. This year should reignite the flow of liquidity in the agency MBS.
Speaker Change: Current coupon MBS spreads have retraced from april's historically distress levels supported by declining volatility.
Speaker Change: The MBS two sofas spreads at the consolidated back towards the average of the spread levels observed in 2025 they.
Speaker Change: They widened by approximately 10 basis points quarter over quarter and remain historically cheap.
Speaker Change: The 30 year fixed mortgage rate was near 675% through late June and early July effectively dampening refinancing activity and keeping net mortgage supply muted.
Speaker Change: This tightening backdrop, while a challenge for borrowers continues to create compelling opportunities for investors in high carry production agency MBS.
Speaker Change: At the policy level.
Speaker Change: U S housing finance system remains a central topic in D C.
Speaker Change: The Asia FFA director Bill Pulte has begun to implement performs aimed at streamlining the gse's Fannie Mae Freddie Mac with administration officials signaling support for retaining an implicit government guarantee for the <unk>.
Speaker Change: Well public rhetoric, instead of an eventual need to end conservatorship, we view.
Speaker Change: These developments as constructive yet not eminent.
Speaker Change: I'll now turn it over to Desmond for more detail on our portfolio Desmond.
Desmond: Thank you Scott.
Desmond: <unk> estimated net portfolio duration and implied leverage are closely managed at zero point for six years and.
Desmond: In eighth turns respect respectively.
Desmond: Our total liquidity is strong at approximately 52% of the total capital as of July 21st.
Desmond: Our hedge book reflects a balanced view of duration with a bias for further fed easing.
Desmond: Hedges are composed of about 33% in treasury shorts and features with the remainder in OIS and software swaps as measured on a <unk> basis.
Desmond: While software swaps are cheaper hedges treasuries have proven to be a more effective hedge instrument for mortgages as of late.
Desmond: Our MRO is invested 100% in agency MBS agency, MBS and U S treasuries.
Desmond: Our MBS portfolio remains concentrated in production MBS with our Oes in the 18% to 20% range.
Desmond: The portfolio remains well diversified across the 30 year coupon stack Ginnie Mae's and endorse.
Desmond: Positive convexity and short duration attributes offered better value over comparable 15 year MBS pools.
Desmond: Portfolio of MBS prepayment rates have averaged seven seven CPR in Q2 and are trending at around eight three CPR or so far in Q3.
Desmond: We see no signs of material acceleration on less mortgage rates dropped significantly.
Desmond: We continue to favor higher loan balance and credit specified pools with favorable convexity in prepayment profiles to TBA and generic collateral.
Desmond: Our TBA exposure is light at $300 million and remains a tactical tool to manage MBS coupon positioning.
Desmond: Our more funds, 40% to 60% of our MBS portfolio.
Speaker Change: Our affiliate Buckler Securities Law.
Speaker Change: <unk> spreading out the remaining repo balances.
Speaker Change: Across 15 to 20 or the Counterparties.
Speaker Change: To provide our mall with the best financing opportunities at an average gross haircut of 275%.
Speaker Change: Overall, MBS repo funding remains ample and competitively priced ranging at around software plus 15% to 17 basis points.
Speaker Change: We are increasingly optimistic that structural demand for MBS may improve later this year.
Speaker Change: Evolving regulatory clarity around banking reform and a resumption of the fed easing policy.
Speaker Change: Would act as meaningful catalysts for increasing banking demand.
Speaker Change: This combined with constrained mortgage supply.
Speaker Change: Sets up a highly constructive technical backdrop for agency MBS.
Speaker Change: While historically widespread signals strong risk to reward incentive.
Speaker Change: <unk> mortgage assets.
Scott Ulm: I'll turn it over back to you Scott.
Scott Ulm: Thanks, Susan.
Scott Ulm: Almost approach remains unchanged ROE and deploy capital thoughtfully for inspired dislocations maintain robust liquidity and dynamically adjust hedges for disciplined risk management, we are confident in our positioning strategy and ability to deliver value for shareholders.
Scott Ulm: We determine our dividend based on our medium term outlook, we view, our current dividend as appropriate for this environment and the returns available.
Scott Ulm: Thank you for joining today's call and your interest in armour, we're happy to now answer your questions.
Scott Ulm: Sure.
Scott Ulm: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Scott Ulm: If youre using a speakerphone please pick up your handset before pressing the keys.
Scott Ulm: To withdraw your question. Please press Star then two.
Scott Ulm: This time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from the line of Doug Harter with UBS. Please go ahead.
Doug Harter: Thanks. Good morning, I was hoping you could just talk about your philosophy for me.
Doug Harter: Managing spread duration risk as you go through a volatile period.
Doug Harter: You did.
Doug Harter: And in April in the second quarter in total and kind of just give us a little more on the thought process.
Doug Harter: Yes, Hi, Doug.
Speaker Change: So on on spread risk.
Doug Harter: I can start with.
Doug Harter: Adjust our leverage which we are very comfortable with.
Doug Harter: At this point.
Doug Harter: We think that spreads remain.
Doug Harter: Historically attractive.
Doug Harter: And.
Doug Harter: For that reason, we could potentially.
Doug Harter: Look to even modestly increase our leverage here.
Doug Harter: Currently we have around just a little bit below the average.
Doug Harter: Over the last six to 12 months, our own average over the last six months to 12 months.
In terms of duration, we manage it dynamically.
Doug Harter: We've recently.
Doug Harter: Increased our hedges in longer duration assets.
Doug Harter: Longer duration beyond the 10 year point.
Doug Harter: <unk>.
Doug Harter: I adjust for what we saw in Q2 were.
Doug Harter: The steepness of the curve in 10 year maturities and beyond.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from the line of Trevor Cranston with JMP Securities. Please go ahead.
Speaker Change: Alright. Thanks.
Speaker Change: Hum.
Speaker Change: Okay.
Speaker Change: Hollywood data.
Speaker Change: It looks like the allocation to higher coupon so six isn't above the.
Speaker Change: Claims during the second quarter.
Speaker Change: Can you guys just comment on.
Speaker Change: What are you seeing the best value in the coupon stack and kind of where you guys are deploying <unk>.
Speaker Change: Marginal dollars as you as you've raised capital thanks.
Sergey: Good morning Sergey.
Sergey: Yes, so I think we might have talked about it last.
Sergey: Last earnings call.
Sergey: <unk> during the first half of April.
Sergey: This is probably aware.
Sergey: The size is might've been reduced but overall, we remained favorable a five 5% fixed coupons.
Sergey: Highest roe equal bonds.
Sergey: No.
Sergey: We are currently modeling so.
Sergey: The prepayment environment remains very benign.
Sergey: It remains our focal point for the portfolio.
Sergey: We don't really expect a lot of changes.
I just for what we saw in Q2 were.
Sergey: Near term.
The steepness of the curve in 10 year maturities and beyond.
Sergey: Got it okay.
Sergey: And I guess the other notable thing there was the there is the.
Sergey: The new line item for the long treasury position.
Sergey: Can you just comment on kind of the what the role of that is within the portfolio.
Great. Thank you.
Sergey: Yes.
Speaker Change: The next question comes from the line of Trevor Cranston with JMP Securities. Please go ahead.
Sergey: We use five year point on the yield curve.
Sergey: Very important pivotal points for managing overall portfolio duration risk and just responding to the monetary policy.
Thanks.
Speaker Change:
Speaker Change: Okay.
Speaker Change: Folio data.
Speaker Change: You know what it looks like the allocation to higher coupons like sixes and above declined during the second quarter.
Sergey: All across the yield curve. So five year Treasury serves as part of that hedging strategy, but it also is used.
Sergey: As a proxy for our.
Speaker Change: Can you guys just comment on.
Sergey: Our agency MBS position as we know the whole slightly just below 85% of our portfolio.
Speaker Change: Where youre, where youre seeing the best value in the coupon stack and kind of where you guys are are deploying <unk>.
Sergey: And we are very tactical about that market we tend to.
Speaker Change: Marginal dollars as you as you raise capital thanks.
Sergey: Go go in when spreads widen and reduce our locations when we see spreads on the more Richard side in five year treasuries help us.
Speaker Change: Good morning, Trevor as Sergey.
Speaker Change: Yes, so I think we might have talked about it on in our last earnings call. There was little volatility during the first half of April.
Sergey: Kind of hedge that position and be able to rotate.
Speaker Change: That's probably where the.
Speaker Change: The sizes might've been reduced but overall you know we remain favorable of five and having fixed coupons.
Sergey: Among those asset classes.
Sergey: Got it okay I appreciate the comments thank you.
Speaker Change: They are highest ROE equal bonds.
Speaker Change: Bill.
Speaker Change: We are currently modeling so.
Ron <unk>: The next question comes from the line of Ron <unk> with B Riley. Please go ahead.
Speaker Change: The prepayment environment remains very benign. This as you know remains our focal point for the portfolio.
Speaker Change: Hey, good morning, I just had one on the model.
Speaker Change: We don't really expect large changes.
Speaker Change: Total expenses after fees waived reported in the quarter was $14 3 million.
The near term.
Speaker Change: Got it okay.
Speaker Change: A little bit higher than what.
Speaker Change: And I guess the other notable thing there was the there is the new line item for the long treasury position.
Speaker Change: Trend was and what we were looking for was there anything unusual.
Speaker Change: In that line item. This quarter are seasonal or is that is that a level you would expect going forward.
Speaker Change: Can you just comment on kind of the.
Speaker Change: What the role of that is within the portfolio.
Speaker Change: I wouldn't say, it's at a level, we would expect going forward, we had a bit or.
Speaker Change: Yeah. So as you know we view five year point on the yield curve.
Speaker Change: Professional fees and we.
Speaker Change: A very important pivotal point for managing overall portfolio duration risk and just responding to the monetary policy in.
Speaker Change: Probably in the first quarter.
Speaker Change: Just on things that we are working also.
Speaker Change: But as we explained in the 10-Q some of that.
Speaker Change: All across the yield curve. So a five year treasury serves as part of that hedging strategy, but it also is used.
Ken: Ken just vary quarter to quarter, but not expecting.
Ken: So the same run rate on expenses.
Speaker Change: As a proxy for our.
Ken: And that.
Ken: That's helpful. And then just I mean, I guess, the 100% clear.
Speaker Change: Our agency MBS position as we know the whole slightly just below 95% of our portfolio.
Ken: That line item.
Ken: If you had higher hedge costs or volatility there because of interest rates moving around in April that would be that would be netted that would not be in that line item that would be elsewhere correct.
Speaker Change: And we are you know very tactical about that market we tend to.
Speaker Change: Go go in when spreads widen and reduce our locations when we see spreads on a on a more richer side in the five year treasuries help us.
Ken: Yes, that's up on the derivatives.
Ken: Yeah got it okay. Thank you.
Speaker Change: Kind of hedge that position and be able to rotate.
Speaker Change: The next question comes from the line of Jason Stewart with Janney. Please go ahead.
Speaker Change: Among those are asset classes.
Jason Stewart: Hey, good morning. Thanks.
Speaker Change: Got it okay I appreciate the comments thank you.
Speaker Change: Just big picture as you think about constructing the hedge portfolio and on the coupon stack. How do you balance total return versus carry as we start to see some of these dislocations and swaps versus treasuries.
Speaker Change: The next question comes from the line of Randy Binner with B Riley. Please go ahead.
Randy Binner: Hey, good morning, I just had one on the model.
Speaker Change: And in total expenses after fees waived reported in the quarter was $14 3 million that was just a little bit higher than what.
Jason Stewart: And so hi, Jason.
Jason Stewart: So in terms of our portfolio.
Speaker Change: Trend was and what we were looking for was there anything unusual.
Jason Stewart: On the on the AG side, we mentioned our duration we are positioned for.
Speaker Change: And that line item. This quarter are seasonal or is that is that a level, we would expect going forward.
Jason Stewart: Bullish steepness.
Jason Stewart: And we adjust our hedges appropriately.
Speaker Change: I wouldn't say, it's at a level, we would expect going forward, we had a bit more.
Jason Stewart: <unk>.
Jason Stewart: It's really dynamic it's our view of the macroeconomic environment.
Speaker Change: Professional fees and we.
Speaker Change: And probably in the first quarter.
Jason Stewart: We like to stay diversified across the coupon stack.
Speaker Change: To sum things up we are working also.
Speaker Change: But as we explained in the 10-Q some of that.
Jason Stewart: The lower coupons would benefit if we do see rate rally, we expect that to a rally could take place when the fed resumes normalization.
Speaker Change: Ken just vary quarter to quarter, but not expecting.
Speaker Change: So the sand run rate on expenses.
Speaker Change: And that did ask.
Speaker Change: That's helpful. And then just I mean, I guess, the 100% clear that that line item.
Jason Stewart: Hi.
Jason Stewart: Which we are expecting later on this year to the fall in the fall or later.
Speaker Change: If you had higher hedge costs or volatility there because of interest rates moving around in April that would be that would be netted that would not be in that line item that would be elsewhere correct.
Jason Stewart: The higher coupons could benefit in a steep now where.
Jason Stewart: In any steepness scenario.
Jason Stewart: The CPI was projected CPI, which could be slower and those could benefit.
Speaker Change: Yes, that's up on the derivatives.
Speaker Change: Yes got it okay. Thank you.
Jason Stewart:
Jason Stewart: The higher coupons, we were looking to reinvest.
Speaker Change: The next question comes from the line of Jason Stewart with Janney. Please go ahead.
Jason Stewart: Muscle in production coupon of five and a half in <unk>.
Jason Stewart: These are specified pools.
Jason Stewart: Hi, good morning. Thanks.
Jason Stewart: Have the prepayment characteristics that Tom.
Speaker Change: Just big picture as you think about constructing the hedged portfolio and on the coupon stack. How do you balance total return versus carry as we start to see some of these.
Jason Stewart: We talked about in our prepared remarks.
Jason Stewart: And that is supposed to.
Jason Stewart: Improved overall convexity of our portfolio.
Jason Stewart: Dislocations in swaps versus treasuries.
Jason Stewart: And last of course, we also have on dose securities with even positive convexity, so to stay embed best to stay diversified across the coupon stack.
Jason Stewart: And so hi, Jason.
Jason Stewart: So in terms of our portfolio.
And looking to add more.
Speaker Change: On the on the Hag side, we mentioned our duration.
Jason Stewart: Production coupons in terms of reinvesting Paydowns and.
Jason Stewart: We are positioned for.
Jason Stewart: Bullish steepness.
Jason Stewart: Also reinvesting any.
Jason Stewart: And we adjust our hedges appropriately and.
Jason Stewart: Equity equity capital raises.
Jason Stewart: H is freely dynamic, it's our view of the macroeconomic environment.
Jason Stewart: Yeah, and just to add on the hedge book side.
Jason Stewart: We like to stay diversified across the coupon stack.
Jason Stewart: You had mentioned on <unk> basis, we were about 33% in treasuries on a notional basis.
Jason Stewart: The lower coupons would benefit if we do see rate rise, we expect that to a rally could take place when the fed resumes a normalization.
Jason Stewart: Closer to 2080 <unk>.
Jason Stewart: We'd still like to use interest rate swaps.
Jason Stewart: As the main hedge instruments.
Jason Stewart: Cheaper hedge obviously from a total return of treasuries have been a more effective hedge as of late so we're keeping these.
Jason Stewart: Which we are expecting later on this year to the fall in the fall or later.
Jason Stewart: The higher coupons could benefit in a steep now where in any steepness scenarios.
Jason Stewart: The balance of the hedge book right, where we feel like it provides both both carry and the total return opportunity from both sides.
Jason Stewart: The CPI was projected CPR could be slower and those could benefit.
Speaker Change: Okay. So does the 18 to 20 range keep their hedge book and it puts the same composition that you have right now in 2018 national.
Jason Stewart:
Jason Stewart: Beyond the higher coupons, we were looking to reinvest.
Jason Stewart: Muscle in production coupon of five and a half in <unk>.
Speaker Change: So it into the 20% would it be for Leitao production coupon five five and six ish.
Jason Stewart: These are specified pools, we have the prepayment characteristics that.
Speaker Change: In terms of.
Speaker Change: That would if you look at it from a total return perspective.
Jason Stewart: We talked about in our prepared remarks.
Jason Stewart: And that is opposed to our you know improved.
Speaker Change: And then.
Speaker Change: Yeah.
Jason Stewart: Improved overwhelmed convexity of our portfolio.
Speaker Change: The hedge.
Speaker Change: If we use swap hedges and we ran swap hedges to forwards.
Jason Stewart: And last of course, we also have on dose securities, we'd even positive convexity, so to stay embed best to stay diversified across the coupon stack.
Speaker Change: The total return would be roughly zero in that case so.
Speaker Change: 20%.
Speaker Change: Return on production coupons, it's pretty much on.
Jason Stewart: And looking to add more in production coupons in terms of reinvesting Paydowns and.
Speaker Change: It doesn't matter, whether we use.
Speaker Change: In swaps or Treasury futures so in the in that framework it into 20% I should also point that that's in the base case right. We think spreads are really attractive at this point. So if we take for example, we see a 10 basis point tightening in OAS that can.
Jason Stewart: Also reinvesting any.
Jason Stewart: Equity equity capital raises.
Jason Stewart: Yeah, and just to add on that on the hedge book side and as we mentioned on <unk> basis, we were about 33% in treasuries on a notional basis, it's closer to 2080.
Speaker Change: Add another 4% so that number and also keeping in mind as well that.
Jason Stewart: We still like to use interest rate swaps.
Jason Stewart: As the main hedge instruments, it's a cheaper hedge obviously from a total return treasuries have been a more effective hedge as of late.
Speaker Change: The the repo rate has been stable throughout the entire year. The fed is not to cut this year, if we do see resumption in normalization.
Jason Stewart: So we're keeping these are the balance of the hedge book right, where we feel like it provides both both the carry and the total return opportunity from both sides.
Speaker Change: Can expect even in the base case.
Speaker Change: For those.
Speaker Change: Loans to Luke.
Speaker Change: In a more attractive but as it is right now they are more attractive.
Jason Stewart: Okay. So does the 18 to 20 range keep their hedge book and it puts the same composition that you have right now in 2018 national.
Speaker Change: Either meet or exceed our hurdle rate.
Speaker Change: And that's.
Speaker Change: That's one of the.
Speaker Change: The leasing that we are very optimistic about our current home environment.
Jason Stewart: So it into the 20% would it be for Leitao production coupon five and a half and six ish.
Speaker Change: Okay. That's helpful color. Thank you for that and then just on the ATM program quarter to date in <unk>.
Jason Stewart: In terms of you know that would if you look at it from a total return perspective.
Speaker Change: Could you give us an idea of how that it was raised relative to book an order book was today.
Jason Stewart: Then.
Jason Stewart: The hedge.
Jason Stewart: Like if we use swap hedges and we ran swap hedges to forwards.
Book value for you guys today.
Jason Stewart: It would be total return would be roughly zero in that case so.
Speaker Change: Today, but book as well as we said was $16 81.
Jason Stewart: 20%.
Speaker Change: Monday.
Jason Stewart: Return on production coupons, it's pretty much doesn't matter, whether we use.
Speaker Change: The issuances were just mildly dilutive.
Speaker Change: Just a couple of cents per share.
Speaker Change: Okay.
Jason Stewart: Our swaps or treasury futures so in the in that framework it into 20% I should also point that that's in the base case right. We think spreads are really attractive at this point so.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from a line of Matthew <unk> with Jones trading. Please go ahead.
Speaker Change: Hey, guys. Good morning, Thanks for taking the question just a quick one for me you guys talked on leverage a little bit.
Jason Stewart: If we take for example, we see a 10 basis point tightening in OAS that can add another 4% so that number is.
Speaker Change: With it running back up quarter to date is still below historical levels.
Jason Stewart: Also keep in mind as well that.
Speaker Change: What exactly are you looking for to take leverage up or is it more clarity from the fed is it kind of a little more stability on the long end of the curve.
Jason Stewart: Yeah.
Jason Stewart: The repo rate has been stable throughout the entire year. The fed has not caught this year, if we do see resumption in normalization.
Speaker Change: Just like your thoughts there thanks.
Jason Stewart: We can expect even in the base case.
Speaker Change: Yes.
Jason Stewart: For those.
Speaker Change: Go ahead doesn't.
Jason Stewart: Returns to look even more attractive but as it is right now they are more attractive.
Speaker Change: Okay. So first I should say our leverage strategy is.
They either meet or exceed our hurdle rate.
Speaker Change: It's very flexible and <unk>.
Jason Stewart: And that's that's one of the.
Speaker Change: It's designed to.
Speaker Change: To reflect our view on the attractiveness of spreads.
Jason Stewart: The reason that we are we are very optimistic about our current Tom and Rob.
Speaker Change: Our view on market volatility.
Jason Stewart: <unk>.
Jason Stewart: Okay. That's helpful color. Thank you for that and then just on the ATM program quarter to date in <unk>.
Speaker Change: And just where we wanted to our liquidity to be.
Speaker Change: So.
Speaker Change: We took our leverage down tactically are quarter to date.
Jason Stewart: Could you give us an idea of how that was raised relative to book an order book was today.
Speaker Change: Spreads are tightening locally and we saw volatility also come off significantly seen some since early April.
Jason Stewart: Why don't I have booked before he is today, but book is where as we said was $16 81.
Speaker Change: In addition, the area swelling headlines around fed independence, and those headlines have now subsided.
Jason Stewart: Monday.
Jason Stewart: The issuance since we're just mildly dilutive.
Jason Stewart: Just a couple of cents per share.
Speaker Change: So given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage from where we are so.
Jason Stewart: Yes.
Jason Stewart: Okay. Thank you.
Speaker Change: The next question comes from a line of Matthew <unk> with Jones trading. Please go ahead.
Speaker Change: Does that answer your question.
Speaker Change: Hey, guys. Good morning, Thanks for taking the question just a quick one for me you guys talked on leverage a little bit with.
Speaker Change: Yes, a little bit, but I guess going forward over the next three months. When you guys are expecting the fed cut are you going to put leverage on in front of that.
Speaker Change: With it running back up quarter to date is still below its historical levels.
Speaker Change: What are you what exactly are you looking for to take leverage or is it more clarity from the fed is it kind of a little more stability on the long end of the curve.
Speaker Change: As you go into that event kind of thing.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yes, I'll just say you can.
Speaker Change: Just like your thoughts there thanks.
Speaker Change: Think about all of those we think about all of this stuff and but are generally not in the.
Speaker Change: Yeah.
Speaker Change: Try not to be in the business of putting big bets on.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Go ahead doesn't.
Speaker Change: What's behind your question is exactly right it's in our.
Speaker Change: Okay.
Speaker Change: Firstly I should just start our leverage strategy is.
Speaker Change: View that there's more stability across all the axes that we look at.
Speaker Change: It's very flexible and you know eight some.
Speaker Change: And to the degree that and of course, that's a that's a reflection of how stable. We feel liquidity is going to be which is really the driver behind what leverage you're comfortable with.
Speaker Change: It's designed to you know to.
Speaker Change: Our view on the attractiveness of spreads.
Speaker Change: Our view on market volatility.
Speaker Change: And.
Speaker Change: Just wherever you want to our liquidity to be so.
Speaker Change: And we'll react accordingly.
Speaker Change: I think you can probably expect us not to not to take a big bet, but as you see elements of greater stability come into the market across those axes.
Speaker Change: We took our leverage down tactically are quarter to date as spreads have tightened locally and we saw volatility also come off significantly seen some since early April.
Speaker Change: There may well be a pretty good case for going up a little bit you know I remember historically, you know leverage in this sort of business model. If we go back back decades was a lot higher.
Speaker Change: In addition, the area of swelling headlines around your fed independence and those headlines have now subsided.
Speaker Change: Generally people are people and keeping their head down which has served everybody pretty well frankly.
Speaker Change: So given that spreads are still near historically wide levels and liquidity conditions are now stable. We are comfortable are modestly increasing our leverage from where we are so.
Speaker Change: But but.
Speaker Change: Less volatility more stability means that the model can model can take a little more leverage.
Speaker Change: Does that answer your question.
Speaker Change: Okay. That's helpful. Thanks for the comments.
Speaker Change: Yes, a little bit, but you know I guess going forward over the next three months you know when you guys are expecting the fed cut or are you going to put leverage on in front of that.
Speaker Change: Sorry go ahead.
Speaker Change: Just as a catalyst to of course, the big elephant in the room is bank demand so far year to date.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: I'd, probably disappointed most industry.
Speaker Change: As you go into that event kind of thing.
Speaker Change: Okay.
Speaker Change: <unk> and we are closely watching developments on the regulation front just yesterday there was the first fed.
Speaker Change: Yes.
Speaker Change: Yeah, I'll, just say we were going to think.
Speaker Change: About all of those we think about all this stuff and but are generally not in the I'm trying not to be in the business of putting big bets on.
Speaker Change: Capital framework comprehends that a lot of color came out of that industry wide participants are looking to speed up and agree that currently capital framework is too confusing too stringent banks are sitting on a record accessories.
Speaker Change: What's behind your question is exactly right and so you know our view that there's more stability across all the axes that we look at.
Speaker Change: And to the degree that and of course, that's a that's a reflection of how stable. We feel you know liquidity is going to be which is really the driver behind what leverage you're comfortable with.
Speaker Change: Excess capital so we feel like it's just the.
Speaker Change: That's a question of if not when we start to see greater participation from the banks and this will be the the tailwind that we outlined in our script as well.
Speaker Change:
Speaker Change: And and we'll react accordingly.
Speaker Change: You know I think you can probably expect us not to not to take a big bet, but you know as you see elements of greater stability come into the market across those axes.
Speaker Change: Yeah, I definitely agree there. Thank you.
Speaker Change: Yes.
Speaker Change: The next question comes from the line of Eric Hagen with BTG. Please go ahead.
Speaker Change: It may well be a pretty good case for going up a little bit you know I remember historically, you know leverage in this sort of business model. If you go back back decades was was a lot higher.
Eric Hagen: Hey, Thanks, good morning sticking on this.
Speaker Change: Conversation around Hey, Jay I mean, do you think there's any value. Despite the short end of the yield curve.
Speaker Change: And generally people are people, who are keeping their head down which is serve everybody pretty well frankly.
Eric Hagen: And how attractive do you think it is Tobias swaption at this project.
Speaker Change: Volatility has come down a little bit.
Speaker Change: But but a less volatility more stability means that the model can model can take a little more leverage.
Eric Hagen: Thank you guys.
Eric Hagen: Hi, Eric Yes.
Eric Hagen: I mean look the two year yield has been extremely stable over the last year, obviously the talk of hikes.
Speaker Change: Okay. That's helpful. Thanks for the comments.
Eric Hagen: On the table at this point, but.
Speaker Change: Go ahead.
Speaker Change: Just.
Speaker Change: As a catalyst.
Eric Hagen: We express that in our book.
Speaker Change: Of course, the big Elephant in the room is bank demand so far year to date and it has.
Eric Hagen: <unk> deepened our bias or yield curve hedging.
Eric Hagen: Whatever front end hedges, we have on there.
Speaker Change: Really disappointed most industry investors and we are closely watching developments on the regulation front just yesterday there was the first fed cut.
Eric Hagen: They are there for kind of the risk management to express that exposure.
Eric Hagen: We currently don't play in the swaps market, we always evaluate it.
Speaker Change: Capital framework comprehends that a lot of color came out of that industry wide participants are looking to speed up.
Eric Hagen: But.
Eric Hagen: From where mortgages are trading and how why the spreads are we feel like.
Speaker Change: And I agree that currently capital framework is too confusing too stringent banks are sitting on a record accessories access capital. So we feel like it's just a.
Eric Hagen: The better trade off is.
Eric Hagen: Is to express the view on volatility through the current coupon basis for example.
Eric Hagen: Okay.
Speaker Change: A question of if not when we start to see greater participation from the banks and this will be the the tailwind that we outlined in our script as well.
Speaker Change: Yeah. That's helpful. I mean, maybe continuing on that theme I mean, you guys offer good.
Speaker Change: Promotion and color on your duration gap Thats looking at these current coupon specifically deal.
Speaker Change: Yeah, I definitely agree there. Thank you.
Speaker Change: Do you have an estimate for what your duration gap would extend to if mortgage rates backed up let Scott.
Speaker Change: Okay.
Speaker Change: Oh like 50 basis points, and then that extension scenario would you be more likely that the spud to lesser leveraged.
Speaker Change: The next question comes from the line of Eric Hagen with <unk>. Please go ahead.
Speaker Change: We're in a little higher or would you look to.
Eric Hagen: Hey, Thanks, good morning sticking on this.
Speaker Change: Yes sell assets.
Eric Hagen: Conversation around hedging I mean do you think there is any value at this point the short end of the yield curve.
Speaker Change: Sure.
Speaker Change: Yes, that's a good question, we obviously run.
Eric Hagen: How attractive do you think it is to buy a swaption at this part of it.
Speaker Change: Risks stress test scenarios.
Eric Hagen: Considering the volatility has come down a little bit.
Speaker Change: We can get some numbers for you.
Eric Hagen: Thank you guys.
Eric Hagen: Hi, Eric Yeah. So I mean look the two year yield has been extremely stable over the last year, obviously, the talk of hikes or not.
Speaker Change: <unk>.
Speaker Change: You mean sell off on the long end or at the front end since that was the initial question.
Speaker Change: Yeah, maybe more on the long end alright.
Eric Hagen: Not on the table at this point, but.
Speaker Change: That curve Steepening and you guys are.
Speaker Change: Right positioning for.
Eric Hagen: We express that in our bull's deepener bias or yield curve hedging.
Speaker Change: Yes.
Speaker Change:
Speaker Change: Yes, I think look I think we hedge our currency exposure on dynamic basis, we don't we're not going to let.
Eric Hagen: Whatever front end hedges, we have on there.
Eric Hagen: They are there for kind of the risk management to express that exposure.
Speaker Change: Duration extend over certain.
Eric Hagen: We currently don't play in the swaps market, we are always evaluated.
Speaker Change: Certain levels, where we feel like with require rebalancing of duration. So from that standpoint, we stay very disciplined in our risk metrics in the shock scenarios don't pose.
Eric Hagen: But.
Eric Hagen: From where mortgages are trading and how wide the spreads are we feel like.
Eric Hagen: The better trade off is.
Speaker Change: Any.
Eric Hagen: Is to express the view on volatility through the current coupon basis for example.
Speaker Change: Any large extension beyond which liquidity would be compromised.
Eric Hagen: Yeah.
Speaker Change: Yep.
Speaker Change: Thank you guys so much.
Eric Hagen: Yeah. That's helpful. I mean, maybe continuing on that theme I mean, you guys offer good.
Scott Ulm: Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Scott <unk> for any closing remarks. Thank you.
Eric Hagen: Information and color on your duration gap I mentioned Thats looking at these current coupon specifically do you.
Eric Hagen: Have you have an estimate for what your duration gap would extend to if mortgage rates backed up.
Speaker Change: Thanks for joining us this morning.
Eric Hagen: Call. It like 50 basis points, and then that extension scenario would you be more likely that the spud to let your leveraged.
Speaker Change: Please feel free to give us a ring at the office happy to happy to catch up with other things occur as Youre thinking about.
Eric Hagen: Or a little higher or would you look to.
Speaker Change: What's going on in mortgage land.
Eric Hagen: Sell assets.
Speaker Change: For joining us this morning and monitoring them.
Eric Hagen: I'm not sure.
Eric Hagen: Yeah. That's a good question, we obviously run.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Eric Hagen: Risks stress test scenarios.
Eric Hagen: We can get some numbers for you.
Eric Hagen: In our gaming sell off on the on the long end or on the front end since that was the initial question.
Eric Hagen: Yeah, maybe more on the long end right like that current steeper than you guys are.
Eric Hagen: Right positioning for that.
Eric Hagen: Yeah.
Eric Hagen:
Eric Hagen: Yeah, I think look I think we hedge our currency exposure on dynamic basis, we don't we're not going to let.
Eric Hagen: Duration.
Eric Hagen: Then over certain.
Eric Hagen: Sure levels, where we feel like with require rebalancing of duration. So from that standpoint, we stay very disciplined.
Eric Hagen: Our risk metrics are in the shock scenarios don't pose.
Eric Hagen: Any.
Eric Hagen: Any large extension beyond which liquidity would be compromised.
Eric Hagen: Yep.
Eric Hagen: Thank you guys so much.
Speaker Change: Ladies and gentlemen, this concludes our question and answer session.
Speaker Change: I'd like to turn the conference back over to Scott Holmes for any closing remarks. Thank you.
Scott Holmes: Thanks for joining us this morning.
Speaker Change: Please feel free to give us a ring at the office are happy to happy to catch up with all of the things occur as you're thinking about.
Scott Holmes: What's going on in mortgage land.
Scott Holmes: Thank you for joining us this morning, and good morning to you.
Scott Holmes: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Scott Holmes: Oklahoma.
Speaker Change: Hey Analyst Conference call.
Scott Holmes: And thank you for asking questions now.
Scott Holmes: [music].
Scott Holmes: Yeah.
Scott Holmes:
Scott Holmes: [music].
Operator: Participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded.
Operator: I would now like to turn the conference over to Scott Ulm. Please go ahead.
Scott Ulm: Good morning, and welcome to ARMOUR Residential REIT's second quarter 2025 conference call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley.
Gordon Harper: I'll now turn the call over to Gordon to run through the financial results. Gordon?
Gordon Harper: Thanks, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armoureit.com.
Gordon Harper: This conference call includes forward-looking statements were 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 and Exchange Commission describe 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.
Gordon Harper: 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.
Operator: An online replay of this conference call will be available on ARMOUR's website, Charlie, and will continue for one year.
Gordon Harper: ARMOUR's Q2 gap net loss related to common stockholders was $78.6 million, or $0.94 per common share. Net interest income was $33.1 million. Distributed earnings available to common stockholders was $64.9 million, or $0.77 per common share.
Gordon Harper: This non-gap measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses.
Gordon Harper: ARMOUR Capital Management waived a portion of their management fees, waiving $1.65 million for the Q2, which offsets operating expenses.
Gordon Harper: During Q2, ARMOUR raised approximately $104.6 million of capital by issuing approximately 6.3 million shares of common stock through an at-the-market offering program. Since June 30, we have raised approximately $58.8 million of capital by issuing approximately 3.5 million shares of common stock.
Gordon Harper: through the through and at the market offering program. We currently have outstanding 91.5 million common shares. ARMOUR paid monthly common stock dividends per share 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.
Gordon Harper: On July 30, 2025, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on July 15, 2025. We have also declared a cash dividend of $0.24 per outstanding common share payable August 29 to the holders of record on August 15, 2025.
Gordon Harper: Quarter ending book value was $16.90 per common share. Our estimate of book value as of Monday, July 21 was $16.81 per common share, reflective of the accrual of the July common dividend.
Scott Ulm: I will now turn the call over to Chief Executive Officer Scott Ulm to discuss ARMOUR's portfolio position and current strategy. Thanks, Gordon. Hey, just a note to the team. I had a connectivity problem a second ago. So if I disappear, just continue with what we have to say here, but we should be just fine. Well, thanks all.
Scott Ulm: As we entered the second half of 2025, the debate around US fiscal sustainability, Fed independence and trade dynamics continues to weigh on the macro landscape. While we don't expect these issues to be resolved quickly, markets appear to have digested much of the initial shock as rates and spreads have settled into stable ranges and volatility has drifted lower.
Scott Ulm: On the monetary policy front, incoming U.S. economic data indicates solid economic growth that's supportive of the Fed's wait-and-see approach. While Fed policy rates remain on hold, elevated short-term yields are absorbing investor liquidity.
Scott Ulm: However, we believe that a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into agency MBS. Current coupon MBS spreads have retraced from April's historically distressed levels, supported by declining volatility. The MBS to SOFR spreads have consolidated back towards an average of the spread levels observed in 2025. They widened by approximately 10 basis points over quarter and remain historically cheap. The 30-year fixed mortgage rate was near 6.75% through late June and early July, effectively dampening refinancing activity and keeping net mortgage supply muted. This tightening backdrop, while a challenge for borrowers, continues to create compelling opportunities for investors in high-carry production agency MBS.
Scott Ulm: At the policy level, the U.S. housing finance system remains a central topic in D.C. The HFFA Director, Bill Pulte, has begun to implement reforms aimed at streamlining the GSEs, Fannie Mae and Freddie Mac, with administration officials signaling support for retaining an implicit government guarantee for the GSEs. While public rhetoric hints at an eventual need to end conservatorship, we view these developments as constructive, yet not imminent.
Desmond Macauley: I'll now turn it over to Desmond for more detail on our portfolio. Desmond? Thank you, Scott. ARMOUR's estimated net portfolio duration and implied leverage are closely managed at 0.46 years. and each terms respectively. Our total liquidity is strong at approximately 52% of the total capital as of July 21st. Our hedge book reflects a balanced view of duration with a bias for further Fed easing. Hedges are composed of about 33% in Treasury Shorts and Futures, with the remainder in OIS and SOFR swaps, as measured on a DV01 basis. While software swaps are cheaper hedges, treasuries have proven to be a more effective hedge instrument for mortgages as of late.
Desmond Macauley: ARMOUR is invested 100% in agency MBS, agency CMBS, and U.S. treasuries. Our MBS portfolio remains concentrated in production MBS with ROEs in the 18-20% range. The portfolio remains well diversified across the 30-year coupon stack, Ginnie Maze, and in DOS, whose positive convexity and short-duration attributes offer better value over comparable 15-year MBS pools. Portfolio MBS repayment rates have averaged 7.7 CPR in Q2 and are trending at around 8.3 CPR so far in Q3. We see no signs of material acceleration unless mortgage rates drop significantly. We continue to favor higher-cut loan balance and credit-specified pools with favorable convexity and prepayment profiles to TBA and generic collateral.
Desmond Macauley: Our TBA exposure is light at 300 million and remains a tactical tool to manage MBS coupon positioning. ARMOUR funds 40-60% 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 at an average gross haircut of 2.75%. Overall, MBS repo funding remains ample and competitively priced, ranging at around software plus 15 to 17 basis points. We are increasingly optimistic that structural demand for MBS may improve later this year. Evolving regulatory clarity around banking reform and a resumption of the Fed easing policy could act as meaningful catalysts for increasing banking demand.
Desmond Macauley: This, combined with constrained mortgage supply, sets up a highly constructive technical backdrop for agency MBS. While historically widespread signals strong risk to reward incentive to own mortgage assets.
Scott Ulm: I'll turn it over back to you, Scott. Thanks, Desmond. ARMOUR's approach remains unchanged. Grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity, and dynamically adjust hedges for discipline risk management. We're confident in our positioning, strategy, and ability to deliver value for shareholders. As you know, we determine our dividend based on a medium-term outlook. Review our current dividend as appropriate for this environment and the returns available.
Scott Ulm: Thank you for joining today's call and your interest in ARMOUR.
Operator: We're happy to now answer your question. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
Operator: At this time, we will pause momentarily to assemble our roaster.
Douglas Harter: The first question comes from the line of Doug Harter with UBS. Please go ahead. Thanks and good morning.
Desmond Macauley: I was hoping you could just talk about your philosophy for, you know, managing spread duration risk, you know, as you go through a volatile period like you did in April and the second quarter in total and, you know, kind of just give us a little more on the thought process. Yes, hi, Doug. So on on spread risk I can start with... Just our leverage, which we are very comfortable with at this point. We think that spreads remain historically attractive. For that reason, we could potentially... We are currently around just a little bit below the average over the last 6-12 months.
Desmond Macauley: In terms of duration, we manage it dynamically. We have increased our hedges in longer duration assets, longer duration beyond the 10-year point. Adjust for what we saw in Q2, where there was steepness of the curve in 10-year maturities and beyond.
Trevor Cranston: The next question comes from the line of Trevor Cranston with JMP Securities. Please go ahead. Um, looking at the portfolio data, um... It looks like the allocation to higher coupons, like sixes and above, declined during the second quarter.
Trevor Cranston: Can you guys just comment on where you're seeing the best value in the coupon stack and kind of where you guys are deploying marginal dollars as you raise capital? Thanks.
Sergey Losyev: Good morning, Trevor, this is Sergey. Yeah, I think we might have talked about it on you know, last earnings call, there was a volatility during the first half of April. That's probably where the sizes might have been reduced. But overall, you know, we remain favorable of five and a half and six coupons. These are the highest ROE coupons. We are currently modeling. So, you know, with the prepayment environment remains very benign. This is, you know, remains our focal point for the portfolio. We don't really expect, you know, large changes near term.
Trevor Cranston: Got it. Okay.
Trevor Cranston: And I guess the other notable thing there was the, you know, there's the new line item for the long treasury position.
Sergey Losyev: Can you just comment on kind of the, what the role of that is within the portfolio? Yeah, so, as you know, we view five-year, you know, point on the yield curve as a, you know, very important pivotal point for managing overall portfolio duration risk and just responding to the monetary policy and all across the yield curve. So, five-year Treasury serves as part of that hedging strategy, but it also is used as a proxy for our agency CNBS position. As we know, slightly just below maybe 5% of our portfolio. And we are, you know, very tactical about that market.
Sergey Losyev: We tend to go in when spreads widen and reduce our allocations when we see spreads on a more richer side. And five-year Treasuries help us, you know, kind of hedge that position and be able to rotate among those asset classes.
Trevor Cranston: Got it. Okay. Appreciate the comments.
Operator: Thank you.
Randolph Binner: The next question comes from a line of Randolph Binner with Bea Riley. Please go ahead. Hey, good morning. I just have one on the model and total expenses after fees waived report in the quarter was $14.3 million. That was just a little bit higher than what What was the trend and what we were looking for? Was there anything unusual in that line item this quarter or seasonal or is that a level we would expect going forward? I wouldn't say it's at the level we'd expect going forward. We had a bit more professional fees than we had probably in the first quarter, just on things that we were working on.
Gordon Harper: But as we explained in the 10-Q, some of that can just vary quarter to quarter, but not expecting sort of the same run rate on expenses. And that's helpful. And then just to be, I guess, 100% clear, that line item, if you had higher hedge costs or volatility there because of interest rates moving around in April, that would be netted, that would not be in that line item, that would be elsewhere, correct? Yes, that's up in the derivatives. Yep, got it. Okay. Thank you.
Jason Stewart: The next question comes from the line of Jason Stewart with Johnny. Please go ahead. Hey, good morning. Thanks.
Jason Stewart: Just big picture as you think about constructing the hedge portfolio and the coupon stack, you know, how do you balance total return versus carry, you know, as we start to see some of these, you know, dislocations and swaps versus treasuries? So, um, hi, Jason. So in terms of our portfolio... On the hedge side, we mentioned our duration. We are positioned for a bullish steepener and we adjust our hedges appropriately and it's pretty dynamic. It's our view of the macroeconomic environment. We like to stay diversified across the coupon stack. The lower coupons would benefit if we do see REIT rally.
Desmond Macauley: We expect that a rally could take place when the Fed resumes normalization, which we are expecting later on this year to the fall, in the fall or later. The higher coupons could benefit in a steepener, where in any steepener scenario, the CPRs, expected CPRs, could be slower, and those could benefit the higher coupons. We're looking to reinvest muscle in production coupon 5.5 and 6s. These are specified pools. They have the prepayment characteristics that we talked about in our prepared remarks, and that is supposed to improve the overall convexity of our portfolio. Last, of course, we also have those securities with even positive convexity.
Desmond Macauley: Best to stay diversified across the coupon stack and looking to add more in production coupons in terms of reinvesting paydowns. also reinvesting any equity capital raises. Yeah, and just to add on the Hedgebook side, you know, as Desmond mentioned, on a DV01 basis, we're about 33% in Treasuries. On a notional basis, it's closer to 2080. You know, we still like to use interest rate swaps as the main hedge instrument. It's a cheaper hedge. Obviously, from a total return, Treasuries have been a more effective hedge as of late. So we're keeping you know, the balance of the Hedgebook right where we feel like it provides both both the carry and the total return opportunity from both sides.
Desmond Macauley: Okay, so does the 18 to 20 range keep the hedge book with the same composition that you have right now in 2080 Notional? So 18 to 20% would be for like a production coupon, five and a half and sixes. In terms of, you know, that would, if you look at it from a total return perspective, then, The hedge, like if we use swap hedges and we run swap hedges to forwards, the total return would be roughly zero in that case. So, you know, 20% return on production coupons, it pretty much doesn't matter whether we use swaps or treasury futures.
Desmond Macauley: So, in that framework, 18 to 20%, I should also point that that's in the base case, right? We think spreads are really attractive at this point. So, if we take, for example, we see a 10 basis points tightening in OES, that can add another 4% to that number. And also keep in mind as well that The repo rate has been stable throughout the entire year. The Fed has not cut this year. If we do see resumption in normalization, we can expect, even in the base case, for those returns to look even more attractive. But as it is right now, they are more attractive.
Desmond Macauley: They either meet or exceed our hurdle rate. And that's one of the... The reason that we are very optimistic about our current, you know, environment.
Jason Stewart: Okay, that's helpful, caller.
Jason Stewart: Thank you for that.
Matthew Erdner: And then just on the ATM program, quarter to date and 3Q, could you give us an idea of how that was raised relative to book and where book was today? I don't have a book for you today, but the book is, as we said, was $16.81 as of Monday and the issuances were just mildly dilutive, just a couple cents per share. Okay, thank you.
Matthew Erdner: The next question comes from the line of Matthew Erdner with Jones Trading.
Matthew Erdner: Please go ahead. Hey, guys, good morning. Thanks for taking the question. Just a quick one for me. You guys talked on leverage a little bit, you know, with it running back up quarter today, it's still below those historical levels. You know, what do you what exactly are you looking for to take leverage up? Is it more clarity from the Fed? Is it kind of a little more stability on the long end of the curve? We'll just like your thoughts there.
Desmond Macauley: Thanks. Go ahead, Desmond. Okay, so first, I should just say our leverage strategy is, you know, it's very flexible. And, you know, it's, it's designed to, you know, to reflect our view on the attractiveness of spreads. Our view on market volatility, and just where we want our liquidity to be. So you know, we took our leverage down tactically quarter to date, as spreads are tightening locally and we saw volatility also come up significantly since early April. So, in addition, there were swirling headlines around your Fed independence, and those headlines have now subsided. So given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage from where we are.
Desmond Macauley: So does that answer your question?
Desmond Macauley: Yeah, a little bit, but, you know, I guess going forward over the next three months, you know, when you guys are expecting the Fed cut, you know, are you going to put leverage on in front of that, you know, as you go into that event kind of thing? Yeah, I'll submit. We think about all this stuff, but generally try not to be in the business of putting big bets on. What's behind your question is exactly right. It's a view that there's more stability across all the axes that we look at. And of course, that's a reflection of how stable we feel liquidity is going to be, which is really the driver behind what leverage you're comfortable with, and we'll react accordingly.
Scott Ulm: I think you probably expect us not to take a big bet, but as you see elements of greater stability come into the market across those axes, there may well be a pretty good case for going up a little bit. Remember, historically, leverage in this sort of business model, if you go back decades, was a lot higher. Generally, people have been keeping their head down, which has served everybody pretty well, frankly. But less volatility, more stability means that the model can take a little more leverage.
Matthew Erdner: Yeah, that's helpful. Thanks for the comments. Sorry. Go ahead.
Desmond Macauley: Just to, you know, end as a catalyst, of course, the big elephant in the room is bank demand so far, year to date. And it has, you know, probably disappointed most industry investors. And we are closely watching developments on the regulation front. Just yesterday, there was the first Fed capital framework conference that a lot of color came out of that industry-wide participants are looking to speed up and agree that currently capital framework is too confusing, too stringent. Banks are sitting on record access capital. So we feel like it's just a question of if not when we start to see greater participation from the banks.
Matthew Erdner: And this will be the detail when we outline our script as well. Yeah, I definitely agree there.
Eric Hagen: The next question comes from a line of Eric Hagen with BTIG. Please go ahead. Hey, thanks. Good morning. Speaking on this conversation around hedging, I mean, do you think there's any value at this point in hedging the short end of the yield curve? How attractive do you think it is to buy swaps at this point, just considering volatility has come down a little bit? Thank you, guys.
Desmond Macauley: Hi, Eric. Yeah, so I mean, look, the two-year yield has been extremely stable over the last year. Obviously, the talk of hikes are not on the table at this point. But, you know, we express that in our, you know, bull steepener bias of our yield curve hedging. Whatever front-end hedges we have on, you know, they're there for kind of the risk management to express that exposure. We currently don't play in the swaps market. We always evaluate it. But, you know, from where mortgages are trading and how wide the spreads are, we feel like, you know, that the better tradeoff is to, you know, express the view on volatility through the current coupon basis, for example.
Eric Hagen: Yeah, that's helpful.
Eric Hagen: I mean, maybe continuing on that theme, I mean, you guys offer good information and color on your duration gap. I mean, just looking at these current coupons specifically, do you maybe have an estimate for what your duration gap would extend to if mortgage rates backed up, let's call it like 50 basis points? And in that extension scenario, would you be more likely at this point to let your leverage run a little higher? Or would you look to you know, sell assets in that scenario. Yeah, that's a good question. We obviously run, you know, risk-stress test scenarios, we can get some numbers for you, you know, and do you mean sell off on the long end or on the front end, since that was the initial question?
Desmond Macauley: Uh, yeah, maybe more on the long end, right, like that curve steepener you guys are... Right. ...positioned for. Yep. Um... Yeah, I think, look, I think we hedge our curve exposure on a dynamic basis. We don't, we're not going to let duration extend over, you know, certain, certain levels where we feel like would require rebalancing of duration. So from that standpoint, we stay very disciplined and our risk metrics in the shock scenarios don't pose any, any large extension beyond, you know, which liquidity would be compromised. Yep. Thank you guys so much.
Operator: Ladies and gentlemen, this concludes our question and answer session.
Scott Ulm: I would like to turn the conference back over to Scott Ulm for any closing remarks. Thank you. Thanks for joining us this morning. You know, please feel free to give us a ring at the office. Happy to catch up if other things occur as you're thinking about what's going on in mortgage land. But thank you for joining us this morning, and good morning to you.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Operator: You may now disconnect.