Armour Residential REIT, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. ARMOUR is an externally managed mortgage REIT focused primarily on agency mortgage-backed securities (MBS), financed largely through short-term repurchase agreements. Unless stated otherwise, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $48.1 | $18.2 | $81.4 | $36.8 |
| Net interest income | $35.0 | $16.7 | $66.0 | $32.7 |
| Other income (loss) | $(84.2) | $(77.2) | $(172.4) | $(13.9) |
| Net income (loss) | $(58.6) | $(69.2) | $(125.0) | $2.2 |
| Net loss per common share | $(0.58) | $(0.95) | $(1.29) | $(0.05) |
| Common dividend declared per share | $0.30 | $0.30 | $0.60 | $0.60 |
- Q2 comprehensive loss was $93.2 million, including a $34.7 million other comprehensive loss; six-month comprehensive loss was $238.2 million.
- At June 30, total assets were $8.86 billion, repurchase-agreement borrowings were $6.69 billion, and stockholders’ equity was $972.7 million, down from $1.14 billion at December 31, 2021. Cash was $209.1 million.
- Liquidity was reported as $573.7 million, comprising cash and $364.5 million of unencumbered agency and U.S. government securities. Debt-to-equity leverage was 6.88:1, versus 3.45:1 at year-end; leverage including TBA notional was 7.57:1 versus 7.39:1.
- For the June quarter, asset yield was 2.88%, cost of funds 0.66%, and net interest margin 2.22%; the filing says net interest spread increased 0.77 percentage points quarter over quarter. Repurchase-agreement interest expense was 0.83%.
- Six-month operating cash flow, including cash collateral posted to counterparties, was a use of $73.8 million. Investing activities used $2.86 billion, while financing activities provided $2.81 billion.
Material changes versus comparable periods
- Net interest income increased from the prior-year periods, reflecting a larger average securities portfolio and higher portfolio yield. Management reported the average portfolio at $8.16 billion for the six-month period, up from $7.24 billion.
- Higher interest rates and market movements drove substantial securities valuation losses. Six-month losses included $503.4 million on trading agency securities and $112.4 million on U.S. Treasury securities, partly offset by $450.9 million of net derivative gains. The resulting six-month net loss contrasts with $2.2 million of net income in the prior-year period.
- Repurchase borrowings rose from $3.95 billion at December 31, 2021. ARMOUR increased its agency and Treasury holdings and repositioned its TBA exposure: TBA notional declined to $675 million from $4.50 billion at year-end.
- Common shares outstanding increased to 110.6 million from 94.2 million at year-end. ARMOUR sold 16.6 million shares through its ATM program for net proceeds of $134.1 million during the first half.
Outlook, risks and unusual items
- The Federal Reserve raised its target range to 1.50%–1.75% on June 15, 2022 and began reducing securities holdings. Management emphasized uncertainty around future rate decisions and agency MBS market conditions; it expects to manage risk and liquidity but gave no earnings or dividend guidance.
- Management stated it believes available liquidity and capital resources are sufficient for near-term investment, financing, operating and dividend needs. It also noted that future financing depends on market conditions and cannot be assured.
- Key exposures include short-term funding costs rising faster than MBS yields, mortgage-spread widening, asset-value declines and related margin calls, prepayment variability, refinancing and counterparty concentration. Repurchase agreements had an average haircut of 3.01%; BUCKLER accounted for 51.3% of borrowings, and its amount at risk was 10.3% of stockholders’ equity.
- Interest-rate sensitivity estimates at June 30 showed that a parallel 100-basis-point increase was projected to increase net interest income 6.64% but reduce portfolio value including derivatives 0.69% and stockholders’ equity 6.20%. A 25-basis-point mortgage-spread widening was estimated to reduce equity 11.94%. These are model-based estimates, not forecasts.
- ACM waived $1.95 million of management fees in Q2 and $3.9 million in the first half. The management agreement’s fees are based on gross equity raised, not asset performance.
- ARMOUR disclosed ongoing putative class-action litigation relating to the 2016 JAVELIN tender offer and merger. The court deferred dismissal until September 1, 2022; the company said it could not estimate the outcome. No credit-loss expense was recorded on available-for-sale securities.
- After quarter-end, the Board authorized repurchases of up to 2.0 million Series C preferred shares. Through July 26, ARMOUR issued another 4.0 million common shares for net proceeds of $28.5 million and increased authorized common shares from 200 million to 300 million.
- The filing reported no material changes to the risk factors in the 2021 Form 10-K. It also stated that disclosure controls were effective and that no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether MBS valuations, mortgage spreads and Federal Reserve actions materially change book value, earnings and collateral requirements after June 30.
- How the increase in leverage and short-term repurchase funding affects liquidity, refinancing exposure and capacity to withstand margin calls.
- The extent of dependence on BUCKLER and other concentrated financing counterparties, including related-party terms and potential conflicts of interest.
- Whether common-stock ATM issuance, outstanding share growth and the stated dividend level remain sustainable given taxable income, market prices and capital needs.
- Developments in the JAVELIN litigation and the status of the court’s deferred dismissal timetable.