Armour Residential REIT, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. ARMOUR is an externally managed mortgage REIT focused primarily on agency mortgage-backed securities (MBS), financed largely through short-term repurchase agreements and managed with interest-rate derivatives. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Interest income | $33.3 | $18.6 |
| Net interest income | $30.9 | $16.1 |
| Net income (loss) | $(66.4) | $71.3 |
| Net income (loss) per common share | $(0.72) | $1.04 |
| Comprehensive income (loss) | $(145.0) | $29.1 |
| Common dividend declared per share | $0.30 | $0.30 |
- Portfolio yield was 2.20%, cost of funds 0.42%, and net interest margin 1.78%, compared with 1.84%, 0.35%, and 1.49%, respectively, in Q1 2021. Average securities portfolio size, including TBA positions, rose 25.5% to $8.66 billion.
- The quarterly loss reflected substantial fair-value losses on trading agency securities ($254.4 million) and U.S. Treasuries ($78.4 million), partly offset by $346.7 million of unrealized derivative gains. Total other loss was $88.1 million. The filing says no credit-loss expense was recorded on available-for-sale securities.
- Cash provided by (used in) operating activities was $(83.7) million, versus $21.2 million in Q1 2021. Investing activities used $2.45 billion and financing activities provided $2.51 billion. Cash and cash collateral posted to counterparties decreased by $30.1 million during the quarter.
- At March 31, total assets were $8.71 billion, repurchase-agreement borrowings $6.44 billion, and stockholders’ equity $1.02 billion. Repurchase debt was $3.95 billion and equity $1.14 billion at year-end. Debt-to-equity leverage increased to 6.30:1 from 3.45:1; including TBA notional, leverage was 7.04:1 versus 7.39:1.
- Reported liquidity was $628.3 million: $316.9 million of cash plus $311.5 million of unencumbered agency and U.S. government securities, including securities received as collateral. Average repo haircuts were 2.75%, down from 3.45% at year-end.
Material changes and capital actions
- ARMOUR repositioned its portfolio, increasing holdings of agency securities and U.S. Treasuries while reducing TBA positions. Agency securities at fair value rose to $6.40 billion from $4.41 billion; Treasury securities rose to $1.26 billion from $198.8 million. TBA notional declined to $750 million from $4.50 billion.
- Common shares outstanding increased to 100.36 million from 94.15 million. The company issued 6.16 million shares through its at-the-market program for net proceeds of $54.4 million. Stockholders’ equity fell during the quarter despite the issuance, reflecting the comprehensive loss and dividends.
- ACM waived $1.95 million of management fees in Q1, compared with $2.40 million a year earlier. Net management-fee expense was $6.18 million.
Outlook, risks and other notable items
- Outlook: No earnings or portfolio-return guidance was provided. Management said it believes available liquidity, operating cash flow, and portfolio-adjustment capacity should be sufficient for anticipated short-term needs, including financing obligations and distributions. This is subject to market conditions and continued access to funding.
- The Federal Reserve raised its target federal funds range to 0.25%–0.50% on March 16, 2022 and indicated further increases and balance-sheet reduction were expected. Management noted sensitivity of agency MBS markets to Fed policy and funding costs.
- Management’s modeled rate sensitivity at March 31 estimated that a parallel +100 basis-point shift would increase net interest income 8.31% but reduce shareholder equity 7.94%; a +25 basis-point mortgage-spread widening was estimated to reduce equity 10.73%. These are model estimates, not forecasts, and actual results may differ materially.
- Key risks include rising short-term funding costs, MBS price and mortgage-spread volatility, repo margin calls and refinancing, prepayment uncertainty, derivative and counterparty risk, and reliance on GSE guarantees. Repo financing was concentrated: BUCKLER represented 52.4% of borrowings, and five other counterparties each represented more than 5% of borrowings. BUCKLER is related to ARMOUR’s manager and certain executives.
- Management projected that amortization of previously terminated swaps would exceed other taxable income in 2022 and that 2022 dividends might be treated as basis adjustments rather than currently taxable income; this is a projection, not a tax determination. The company reported an estimated REIT taxable loss of $23.6 million for Q1.
- Nine putative class-action suits concerning the 2016 JAVELIN transaction remain unresolved. The court deferred entry of a dismissal order until September 1, 2022; ARMOUR said it cannot estimate the outcome or potential loss.
- After quarter-end, the company declared common dividends of $0.10 per share for April and May 2022 and Series C preferred dividends of $0.14583 per share for April, May, and June. It also issued 2.81 million common shares through the ATM from April 1–14 for net proceeds of $23.0 million.
Investor verification priorities
- Review the drivers and persistence of the large Q1 MBS and Treasury fair-value losses, derivative gains, and the reported net interest margin improvement.
- Assess the higher repo leverage, short financing maturities, collateral and margin-call exposure, liquidity buffer, and BUCKLER/counterparty concentration.
- Check subsequent portfolio performance against the filing’s modeled interest-rate and mortgage-spread sensitivities, including assumptions and hedging effectiveness.
- Monitor common-share issuance and dilution, dividend sustainability, and the final tax treatment of 2022 distributions.
- Track the JAVELIN litigation and any developments in GSE support, Federal Reserve policy, or market access to repo financing.