ARMOUR Residential REIT, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ARMOUR is an externally managed mortgage REIT investing mainly in agency mortgage-backed securities (MBS), financed largely through short-term repurchase agreements. Unless stated otherwise, dollar amounts below are in millions; the filing reports financial statements in thousands.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Interest income | $92.9 | $94.8 |
| Net interest income | $41.3 | $33.8 |
| Net loss | $(406.7) | $(114.4) |
| Net loss attributable to common stockholders | $(409.5), or $(6.95) per share | $(118.6), or $(2.21) per share |
| Comprehensive loss | $(537.1) | Comprehensive income of $72.8 |
| Common dividend declared per share | $0.51 | $0.57 |
| Operating cash flow | $(184.4) | $(11.3) |
Net interest income increased despite slightly lower interest income, but the net interest margin fell to 1.23% from 1.62% a year earlier. The quarter’s large loss reflected $369.0 million of net derivative losses, $183.1 million of losses on credit-risk and non-agency securities, and other security gains and losses. Total expenses were $9.9 million, including $7.5 million in management fees.
Financial position, liquidity and capital
- Total assets fell to $5.07 billion from $13.27 billion at year-end 2019; stockholders’ equity declined to $786.3 million from $1.44 billion.
- Investment securities at fair value were $3.55 billion, versus $12.83 billion at year-end. Agency securities were $2.79 billion and credit-risk/non-agency securities were $765.6 million. Including TBA agency positions, the reported portfolio exposure was $4.08 billion.
- Repurchase-agreement borrowings declined to $3.47 billion from $11.35 billion. Period-end leverage was 4.41:1, compared with 7.90:1 at year-end.
- Reported liquidity was $360.1 million: $333.9 million cash and $26.2 million of unpledged MBS. Cash and cash collateral posted to counterparties totaled $684.2 million at quarter-end; this is not the same as available liquidity.
- Average securities portfolio size was $12.06 billion, up 10.5% from Q1 2019, reflecting the larger portfolio during the first two months despite substantial quarter-end reductions.
- Average repo haircut was 7.34%, up from 5.16% at year-end, primarily reflecting increased collateral requirements on credit-risk and non-agency securities.
Material changes and notable events
- In response to COVID-19 market disruption, ARMOUR reduced its agency securities portfolio, including TBA positions, by 68% from December 31, 2019, and terminated $3.975 billion of swap notional. It reported selling $10.40 billion of agency securities during the quarter.
- Interest-rate swap notional declined to $4.00 billion from $7.98 billion. Derivative liabilities were $200.3 million, against derivative assets of $24.1 million.
- ARMOUR redeemed all 8.383 million shares of its 7.875% Series B preferred stock for $209.6 million and issued 5.303 million shares of 7.00% Series C preferred stock, raising $129.2 million net.
- After quarter-end, the company reported purchasing agency securities and reducing credit-risk transfer securities; its securities portfolio was approximately $5.6 billion at April 30, including approximately $1.3 billion of TBA agency securities.
Outlook, risks and contingencies
- Management said Federal Reserve intervention helped stabilize agency MBS markets after March spread widening. It reported meeting repo obligations and maintaining operations remotely, while prioritizing liquidity and risk reduction.
- COVID-19’s duration and financial impact remained uncertain. The filing warns of possible material adverse effects on operations, financial condition, access to capital and share price. Mortgage forbearance could affect prepayments and credit-risk transfer securities; certain securities may trigger credit events based on payment delays, including forbearance.
- Management stated it believed liquidity and capital resources were sufficient for anticipated short-term needs. This outlook depends on market access, collateral values, financing availability and portfolio adjustments; repo counterparties can demand additional collateral or terminate agreements. Certain ISDA counterparties granted waivers for equity-reduction termination events.
- Repurchase funding is short-term and concentrated: BUCKLER accounted for 56.2% of repo borrowings at quarter-end. One other counterparty represented 11.8% of borrowings; a counterparty amount at risk was 5.62% of stockholders’ equity.
- ACM began waiving 40% of its base management fee from the second quarter of 2020, until further notice. Management fees are generally based on equity raised rather than asset performance.
- On April 2, ARMOUR announced a move to quarterly common dividends for Q2 2020. It expected to announce the amount and whether it would return to monthly dividends later in June; no common dividend guidance beyond that was provided.
- Nine putative class-action suits relating to the 2016 JAVELIN merger remained unresolved. The company could not estimate the outcome or potential loss.
Investor facts to verify
- Whether reported liquidity remains adequate after collateral calls, unsettled trades and further market volatility, and whether repo funding terms or haircuts change.
- Subsequent portfolio composition, leverage, swap positions and credit-risk transfer exposure, including the effect of mortgage forbearance and any credit-event determinations.
- The amount and frequency of common dividends, and the effects of post-quarter ATM share issuance and any further capital raising.
- Whether derivative and securities valuations, realized losses and margin requirements remain consistent with the company’s quarter-end estimates.
- Developments in the JAVELIN litigation and any resulting financial exposure.