ARMOUR Residential REIT, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it is not a standalone fourth-quarter report. ARMOUR is an externally managed mortgage REIT investing primarily in agency mortgage-backed securities (MBS), financed largely through short-term repurchase agreements and hedged with derivatives. Unless noted otherwise, dollar amounts below are in millions.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $80.8 | $169.8 |
| Net interest income | $73.7 | $106.8 |
| Net income (loss) | $15.4 | $(215.1) |
| Net income (loss) available to common stockholders | $3.9 | $(224.9) |
| Basic and diluted earnings (loss) per common share | $0.05 | $(3.57) |
| Comprehensive income (loss) | $(56.7) | $(391.6) |
| Comprehensive loss per common share | $(0.86) | $(6.36) |
| Common dividend per share | $1.20 | $1.20 |
- Margins: Full-year net interest rate spread increased 5 basis points year over year. At December 31, 2021, reported quarterly asset yield was 2.15%, cost of funds 0.40%, and net interest margin 1.75%.
- Cash flow: Operating activities provided $11.7; investing activities provided $503.6; financing activities used $330.8. These reported cash-flow amounts include cash collateral posted to or received from counterparties.
- Liquidity and debt: Year-end liquidity was $848.4, comprising $337.7 cash and $510.7 unencumbered agency and U.S. government securities. Repurchase borrowings were $3,948.0, down from $4,536.1. Total stockholders’ equity was $1,143.6. Debt-to-equity was 3.45x, or 7.39x including TBA notional exposure.
- Portfolio: Balance-sheet agency securities were $4,406.5 at fair value; U.S. Treasury securities were $198.8. Gross TBA agency securities exposure was $4,575.1 at fair value, compared with $2,712.0 a year earlier. Credit-risk and non-agency securities were absent at year-end.
- Dividends and taxes: ARMOUR paid $96.6 in common dividends and $11.5 in preferred dividends in 2021. The company reported an estimated REIT taxable loss of $148.5; approximately 100% of 2021 common and preferred distributions were classified as non-dividend distributions/return of capital for tax purposes.
Material changes versus 2020
- Net income improved to $15.4 from a $215.1 loss, while comprehensive loss narrowed to $56.7 from $391.6. Results include a $150.3 unrealized derivative gain, partly offset by $77.1 of losses on trading agency securities and $61.1 of unrealized losses on available-for-sale agency securities.
- Net interest income declined by $33.1. Average securities portfolio size was down 2.0% to $7,677.7; average asset yield fell 0.55 percentage points, while average funding cost fell 0.60 points, improving the spread by 0.05 points.
- Repurchase borrowings declined by $588.0, and reported debt-to-equity fell from 4.83x to 3.45x. Including TBA notional, leverage decreased from 7.61x to 7.39x.
- Common shares outstanding increased to 94.2 million from 65.3 million, with $328.8 of net common equity proceeds raised during 2021. Series C preferred shares outstanding increased to 6.8 million from 5.3 million.
- BUCKLER’s share of aggregate borrowings fell to 49.7% from 66.1%, but it remained the largest financing counterparty.
Outlook, risks, contingencies, and unusual items
- Management reported that the Federal Reserve began tapering in the fourth quarter of 2021 and anticipated accelerated reductions in bond purchases and likely rate increases in 2022. It emphasized that portfolio values and funding costs remain sensitive to Fed actions, mortgage spreads, prepayments, and market liquidity.
- Management said it believed available liquidity and capital resources were sufficient for anticipated short-term needs. After year-end and through February 15, 2022, ARMOUR reduced MBS, including TBA securities, by approximately $2.9 billion and increased Treasury holdings by approximately $1.6 billion.
- Rate and spread sensitivity is material: the filing estimates a 100-basis-point rate increase would reduce shareholders’ equity by 4.60%, assuming stated model conditions; a 25-basis-point widening in MBS spreads would reduce it by 10.81%. These are estimates, not forecasts.
- Funding relies on short-term repos with daily collateral requirements. BUCKLER represented 49.7% of year-end borrowings, and its inability to obtain funding could raise ARMOUR’s financing costs or pressure liquidity. The company also disclosed a $105.0 million subordinated loan to BUCKLER and related-party conflicts.
- ARMOUR is externally managed under an agreement running through June 18, 2027. Management fees are based on gross equity raised rather than performance; ACM waived $8.6 million of fees in 2021, and the waiver may be reduced or ended. Termination without cause can entail a fee equal to four times the preceding 12 months’ contractual management fee.
- The company disclosed putative class-action litigation related to the 2016 JAVELIN tender offer and merger. ARMOUR said it could not estimate the outcome; the filing reports the court deferred dismissal entry through February 1, 2022, with no further action taken as of the report.
- Other key risks include premium amortization and prepayments, imperfect hedges and GAAP earnings volatility, REIT and Investment Company Act qualification, counterparty exposure, cybersecurity, and the possibility that dividends may be reduced. The 2021 common dividend exceeded current-year REIT taxable income and was reported entirely as return of capital for tax purposes.
- The financial statements received an unqualified audit opinion; the auditor reported no critical audit matters and an unqualified opinion on internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the improvement in GAAP net income with the comprehensive loss, derivative gains, securities valuation changes, and the company’s non-GAAP Distributable Earnings measure.
- Assess whether the $1.20 annual common dividend is sustainable given the reported taxable loss, return-of-capital treatment, and management’s dividend discretion.
- Monitor the extent of repo-counterparty concentration, particularly BUCKLER, and available unencumbered collateral under changing rate and spread conditions.
- Review the effect of the post-year-end portfolio repositioning and subsequent equity issuance on leverage, book value, and per-share results.
- Check subsequent filings for developments in the JAVELIN litigation, ACM fee waivers, and the continuation of monthly common and preferred dividends.