ARMOUR Residential REIT, Inc.
Q1 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Greetings and welcome to the ARMOUR Residential REIT, Inc. First Quarter 2019 Earnings Conference Call. As a reminder, this conference is being recorded on Thursday, April 25, 2019. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead.

[Jim Mountain:]

Thank you, Kelly. And thank you all for joining our call today to discuss ARMOUR’s first quarter 2019 results. This morning I'm also joined by ARMOUR’s co-CEOs, Scott Ulm, Jeff Zimmer; and Mark Gruber, our Chief Operating and Chief Investment Officer. By now everyone has access to ARMOUR’s earnings release and Form 10-Q which can be found on ARMOUR’s website, www.armourreit.com.

[Scott Ulm:]

Thanks Jim. Good morning. December's market events did not follow the script for a soft landing that the Fed officials had in mind. In an attempt to reverse some of this rapid tightening of financial conditions, Fed Chair, Jerome Powell, said in a contrastingly dovish tone early in 2019. It was a sea change moment for the rates market and we believe for our business as well. A significantly more dovish Fed and oversold risk indicators left mortgages at some of the cheapest valuation since early 2016. ARMOUR sees this opportunity by raising equity is the outlook for volatility and bond markets improved drastically. Responding to the sharp turnaround in officials’ appetite for further rate increases in 2019, yields on tenure treasuries continued their decline from 2018 highs of 3.24% down to 2.37% by the end of March. The significance of such a large move was reflected not just at lower absolute yields, but also in an inversion of yields on longer tenure treasuries versus the rate on overnight and three-month funding tenors, historically, recessionary signal in predicting the shifts in economic cycles.

[Operator:]

Thank you. Our first question comes from Douglas Harter with Credit Suisse. You may proceed with your question.

[Douglas Harter:]

Thanks. I was hoping you could talk about kind of where your average leverage was during the quarter, kind of given the amount of capital you raised during the quarter, kind of just how to think about the, the average leverage versus kind of your ending period leverage as we think about earnings power going into the second quarter?

[Jim Mountain:]

I would use low-8 as a number. Remember we raised capital, but we put the money to work oftentimes within two to three business days. Unfortunately some of our bonds don't settle for a couple of weeks and some of them settle T plus two, T plus three.

[Douglas Harter:]

Got it. And just on that settlement question, when you're putting out your monthly portfolio update, I guess at what point do you kind of include it in the portfolio, just so that we can kind of try to figure out what that average balance was?

[Jim Mountain:]

So, if we have done a transaction or a sale, it is out of the portfolio. If we have bought bonds, but they haven't settled yet it is in the portfolio. So if we sell something for May delivery, it's out of our portfolio. If we buy something from May delivery, it is in our portfolio.

[Douglas Harter:]

Alright. And then, just thinking about the net interest spread that you're earning and kind of where that would sit today versus kind of the average you had for the quarter?

[Jim Mountain:]

So the funding rates were up in the quarter. And quite frankly, we think funding rates may improve over a little bit. So we don't expect a big change in the NIM over the immediate period except for May and June, are going to experience some higher prepays and that's going to put a little bit pressure on NIM. As we said earlier, however, our estimates at this point is that we will earn dividends payable as we had been sustainable over the last 11 quarters.

[Douglas Harter:]

Thank you for that color.

[Jim Mountain:]

You're very welcome. I want to make one note here before we move on. One of your peer analysts David Walrod from JonesTrading, did passed away a month ago. He was well respected and well liked. I just want to make a note to everybody while we're on…

[Jeff Zimmer:]

We miss him.

[Jim Mountain:]

And we miss him. So, here's to you David and the next question please.

[Operator:]

Certainly. Our next question comes from Christopher Nolan with Landenburg Thalmann & Company. You may proceed with your question.

[Christopher Nolan:]

I echo your sentiments on Dave Walrod, he's a good guy. Scott, on your comments on leverage, should we read into that where you guys are sort of the higher at your leverage limit or you can possibly go up to nine turns, what was the thought there?

[Jeff Zimmer:]

Yes. Hi, this is Jeffery. We possibly could come up to nine, while we haven't talked about so far and Scott mentioned it in his prepared remarks is that zero OA spreads are very tighter over the quarter, even though nominal spreads are not and when spreads are tighter we normally wouldn't want to use that opportunity to increase our leverage. If we see a little widening and we see some buying opportunities, you might see us go from this 8.2, 8.5 level up to 9.

[Christopher Nolan:]

Great. And then I noticed on the haircuts for your repos, the rate went down slightly, should we read anything into that or what’s the driver for that?

[Jeff Zimmer:]

Well, BUCKLER securities, provides ARMOUR with generally better haircuts than the rest of the firms that we deal with and we have a larger amount with BUCKLER now. And also we have taken CRTs, you may know in our monthly updates and hopefully noticed it in our Q1 materials that we have a large amount of liquidity and we've taken some of that cash down, we’re maintaining around a 100 million out and we brought in a lot of our CRTs, so they used to be 20% kind of haircuts, even 25%. So if you take off 500 million or 600 million of CRTs and put them in the box, that's really going to bring the average down a little bit. So use the increase in BUTLER and the CRTs in the box to get to the number you want to be.

[Christopher Nolan:]

Great. Jeff, final question on your comments on the CRT being fully priced or whatever, should we anticipate more CRT sales from the portfolio or none?

[Jeff Zimmer:]

In the immediate future, I don't think we're selling. We did sell some before because we wanted to just see what their liquidity was like in the marketplace and takes 13 points of profit on some assets. In the immediate future, we don't anticipate selling any CRTs, if we add it to the portfolio it would most likely have to be seasoned paper because the new paper that is the reference pool has some of the characteristics that we think could be problematic down the road and affect those potential spreads negatively in the future.

[Christopher Nolan:]

Great. Okay, great, thank you for taking my questions.

[Jeff Zimmer:]

Good luck Christopher, take care.

[Operator:]

We have no further phone questions at this time, sir.

[Jim Mountain:]

Well, Kelly, thank you very much for moderating. Thank you all for joining our earnings call. And as always, if you have sidebar questions call us in the office and we'll pickup or get back to you promptly that offers stance throughout the quarter and until next time. Take care.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.