Release Date: October 24, 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 a Q3 GAAP net income of $62.9 million, translating to $1.21 per common share.
- The company raised $129.4 million of equity capital through its at-the-market offering program, with minimal dilution to book value.
- ARMOUR's book value per common share increased by 2.3% during the quarter, from $20.30 to $20.76.
- ARMOUR Capital Management continues to waive a portion of their management fees, which helps offset operating expenses.
- The company maintains a diversified and liquid investment portfolio, with a focus on specified pools to mitigate prepayment risk.
Negative Points
- ARMOUR's net interest income was relatively low at $1.8 million for the quarter.
- The estimated book value per common share decreased to $19.58 as of October 18, after accounting for dividends.
- The repo market is experiencing funding pressures, which are expected to persist through the end of the year.
- ARMOUR's leverage has increased, with a current implied leverage of 8.6 times, which may pose risks amid market volatility.
- The company faces potential volatility due to upcoming US elections, which could impact mortgage spreads and market conditions.
Q & A Highlights
Q: With the sell-off in rates we've seen here in October, can you give us an update on what your current duration exposure is? And if you've made any significant changes to either the assets or hedge composition compared to what you disclosed as of September 30?
A: Desmond Macauley, Co-Chief Investment Officer, responded that the duration was 0.91 as of October 21, with most of it in the front end of the curve. They have a program to keep the back-end duration close to zero and have moved their hedges accordingly.
Q: In terms of leverage, it looks like it's gone up a little bit since September 30. With the volatility priced into the market coming up on the election, is the 8.6% level kind of what you guys are comfortable running with near term?
A: Desmond Macauley stated that leverage is seen more as an output, and they are comfortable with the current environment. They believe the Fed easing cycle will be the key driver, and while there may be short-term volatility, they are comfortable with their current leverage level.
Q: Given the rate volatility this week, is there any chance we get another update on how book has fared so far this week?
A: Scott Ulm, Co-Chief Executive Officer, mentioned that they do not plan to update the book value more frequently despite the volatile week.
Q: Can you update us on how you're thinking about raising capital going forward?
A: Scott Ulm explained that they consider several factors, primarily the price at which they can raise capital. They aim to raise capital close to or ideally over book value and evaluate investment opportunities and the environment for deploying capital.
Q: Could you talk a little bit more in detail about where you see current returns in terms of carry, how that relates to the cost of capital, maybe including the cost to operate?
A: Desmond Macauley noted that production coupon ROEs for 6% to 6.5% coupons are in the high teens, while belly coupons like 4% and 4.5% are in the mid- to high teens. They are comfortable with the current returns to maintain their dividend and expect spread tightening to contribute to overall economic returns.
Q: What's your view on the servicing capacity in the industry, especially for current production coupons, given the capacity in the servicing industry?
A: Desmond Macauley and Sergey Losyev discussed that while there was an uptick in refi activity over the summer, mortgage rates have backed up to 6.5%, leading to an expectation of declining prepayments. They maintain a diversified portfolio to mitigate prepayment concerns.
Q: How are you thinking about tail risk outlook if the 10-year were to run higher or contract significantly, and how do recent changes to the hedge portfolio reflect this?
A: Desmond Macauley stated they are positioned for a steepener and dynamically hedge their portfolio, particularly the back end. They expect back-end rates to come down as the Fed easing cycle deepens.
Q: On the return on equity, given the improved environment you anticipate, where should we expect equity returns to go?
A: Desmond Macauley indicated that higher coupons are in the high teens, and they maintain a diversified portfolio. They expect returns to improve with spread tightening and believe returns could reach the low 20s for certain coupons.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
