Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ARMOUR Residential REIT Inc (ARR, Financial) reported distributable earnings available to common stockholders of $52.5 million or $1.08 per common share.
- ARMOUR Capital Management waived $1.65 million in management fees for Q2, offsetting operating expenses.
- The company paid monthly common stock dividends of $0.24 per share, totaling $0.72 for the quarter.
- ARMOUR's portfolio strategy includes a well-diversified mix of mortgage-backed securities (MBS) with a focus on higher coupon MBS for better returns.
- The company expects lower rates and normalization of the yield curve to provide strong tailwinds to the MBS market, benefiting ARMOUR Residential REIT Inc (ARR).
Negative Points
- ARMOUR Residential REIT Inc (ARR) reported a GAAP net loss available to common stockholders of $51.3 million or $1.05 per common share.
- The company's economic return for the second quarter was negative 4.8%, driven by wider MBS nominal spreads and higher SOFR swap rates.
- ARMOUR's book value per common share decreased slightly from $20.30 at quarter-end to $20.37 as of July 22.
- The repo markets showed some funding pressures towards the end of June, with rates remaining slightly above running averages into July.
- The company remains cautious about the potential for aggressive Fed rate cuts and the impact on mortgage spreads, indicating a non-linear path to tighter spreads.
Q & A Highlights
ARMOUR Residential REIT Inc (ARR) Q2 2024 Earnings Call Highlights
Q: Can you elaborate on the bullish outlook for MBS and how much of the market's expected rate cuts are already priced in?
A: Sergey Losyev, Co-Chief Investment Officer: The market has priced in a lot of easing already, digesting the inflation slowdown. We're watching labor markets for signs of more aggressive Fed cuts. Mortgage spreads are trading near year-to-date tights, but we expect them to tighten further as the Fed starts its easing cycle. Additionally, the potential end to the quantitative tightening program could boost spreads.
Q: What is the duration of your treasury hedges?
A: Sergey Losyev, Co-Chief Investment Officer: We have Treasury shorts in the 10-year part of the curve, using futures barbelled between the two and 10-year parts. Swap spreads are tightening, making owning swaps more favorable. We have a significant hedge book in interest rate swaps.
Q: How did your leverage trend intra-quarter in Q2, and was it greater at the beginning or end?
A: Sergey Losyev, Co-Chief Investment Officer: Our leverage increased towards the end of the quarter as economic data confirmed the Fed's potential rate cuts. We are currently running at 7.7 turns of leverage.
Q: What is the inflection point for prepayments on benchmark 30-year mortgages, particularly post-2022 vintage paper?
A: Sergey Losyev, Co-Chief Investment Officer: For production coupons (5.5s and 6s), it usually takes a 25-50 basis points incentive to begin refinancing. We are adding specified pools with better convexity and prepay protection. Our book is well-diversified across the coupon stack.
Q: Given your outlook on the market, what are your thoughts on the direction of book value?
A: Gordon Harper, Chief Financial Officer: If demand returns, particularly from the bank sector, we could see spread tightening. We take spread risk for a living, and tightening spreads would be very beneficial for our book value.
Q: Were there any nonrecurring items in earnings this quarter?
A: Gordon Harper, Chief Financial Officer: No, there were no nonrecurring items this quarter.
Q: Do you expect any restatements as a result of the Special Committee activities?
A: Gordon Harper, Chief Financial Officer: No, we do not expect any restatements.
Q: How likely are you to increase leverage before raising capital, given your stock's trading position and investment environment?
A: Scott Ulm, Co-Chief Executive Officer: We have flexibility and are not tied to capital raising to manage the portfolio. We have some dry powder to take advantage of opportunities, and capital raising opportunities come and go.
Q: Any meaningful moves in July on the portfolio or hedge side?
A: Sergey Losyev, Co-Chief Investment Officer: No significant changes to report. Our hedge book is very dynamic, and we continue to evaluate daily.
Q: Can you quantify the increase in CPRs on discount coupons and its impact on net interest spreads or earnings?
A: Sergey Losyev, Co-Chief Investment Officer: Roughly, 4.5s and 4s contributed close to a third of the increase in CPRs quarter over quarter. We are seeing other coupons pick up as well, but specific accounting income impact analysis is not available at the moment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
