ARMOUR Residential REIT, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in millions of dollars unless stated otherwise. ARMOUR is an externally managed mortgage REIT focused primarily on agency mortgage-backed securities (MBS), financed largely through repurchase agreements and managed with derivatives. The financial statements are unaudited.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $22.0 | $25.7 | $58.8 | $147.1 |
| Net interest income | $20.4 | $22.8 | $53.2 | $87.2 |
| Other income (loss) | $22.5 | $42.7 | $8.6 | $(358.9) |
| Net income (loss) | $34.0 | $58.4 | $36.1 | $(296.5) |
| Net income (loss) per common share, diluted | $0.36 | $0.86 | $0.36 | $(4.87) |
| Common dividends per share declared | $0.30 | $0.30 | $0.90 | $0.90 |
Q3 net interest margin was 1.70%, compared with 1.95% in Q3 2020; asset yield was 2.15% and cost of funds was 0.45%. For the nine-month comparison, average securities portfolio size, including TBAs, fell 8.0% to $7.44 billion. Management attributed lower net interest income to the smaller portfolio and a 0.25 percentage-point year-over-year decline in Q3 spread.
Balance sheet, funding and liquidity
- At September 30, total assets were $4.99 billion, total liabilities $3.84 billion and stockholders’ equity $1.14 billion. Agency securities were $4.26 billion; the company also held $194.9 million of U.S. Treasuries and reported derivatives as assets of $178.6 million and liabilities of $23.0 million.
- Repurchase agreement borrowings were $3.45 billion, down from $4.54 billion at December 31, 2020. Average repo haircut rose to 3.44% from 3.13%. Repo borrowings had a 0.11% weighted-average contractual rate and 43-day weighted-average maturity.
- Debt-to-equity was 3.02:1, down from 4.83:1; leverage including TBA notional was 6.69:1, down from 7.61:1.
- Management reported liquidity of $790.5 million: $126.1 million cash and $664.4 million of unpledged MBS, including securities received as collateral. Cash and cash collateral at period-end totaled $156.2 million.
- Operating cash flow was $24.4 million for the nine months. Investing activities provided $825.1 million and financing activities used $864.9 million; cash and cash collateral declined by $15.5 million.
Material changes and notable items
- Nine-month 2021 net income of $36.1 million contrasted with a $296.5 million loss in 2020, when results included substantial derivative losses and losses on credit-risk transfer securities. However, Q3 net income declined year over year, and nine-month comprehensive loss was $18.9 million, reflecting $55.1 million of other comprehensive loss.
- Q3 2021 other income included $59.8 million of unrealized derivative gains, partly offset by $29.5 million of realized derivative losses and $9.2 million of losses on Treasuries. For the nine months, derivative gains were $52.5 million overall, while trading agency securities and Treasuries recorded losses. Such fair-value movements materially affect GAAP earnings.
- The company held no credit-risk or non-agency securities at September 30 and reported no credit-loss expense on available-for-sale agency securities during the nine-month period. The portfolio included $4.30 billion of TBA agency securities at fair value, with $4.20 billion notional, versus $2.71 billion fair value and $2.60 billion notional at year-end 2020.
- Equity issuance supported capital: 22.2 million common shares and 1.5 million Series C preferred shares were issued during the nine months, raising net proceeds of $261.3 million and $36.6 million, respectively. Common shares outstanding were 87.7 million at quarter-end; the cover reports 89.7 million as of October 26.
- The monthly common dividend remained $0.10 per share during the quarter. Series C preferred dividends were $0.14583 per share monthly. The company estimated a nine-month REIT taxable loss of $112.3 million and said it currently projected 2021 dividends would be treated as basis adjustments rather than currently taxable income; this is a projection, not a final tax determination.
Outlook, risks and contingencies
- Management said the agency MBS market remained highly dependent on the Federal Reserve’s interest-rate and asset-purchase decisions. Fed tapering was viewed as increasingly imminent, but timing and approach had not been announced; management noted markets could be highly sensitive to Fed communications. No numerical earnings or book-value guidance was provided.
- Management believed available liquidity and capital resources were sufficient for near-term investments, financing obligations, dividends and expenses. It cautioned that longer-term financing through credit facilities or securities offerings depends on market conditions and is not assured.
- Key exposures include rising short-term funding costs, interest-rate and mortgage-spread movements, prepayment speeds, repo margin calls, counterparty concentration and short-term funding of longer-duration assets. A decline in collateral values could require additional collateral or forced sales. Derivatives may not fully offset asset movements, and GAAP mark-to-market results can be volatile because hedge accounting is not used.
- Management identified COVID-19 variants and uncertainty around GSE conservatorship and potential reform as additional risks. The filing reported no material changes to previously disclosed risk factors.
- Nine putative class-action suits concerning the 2016 JAVELIN tender offer and merger remained unresolved. ARMOUR said it could not estimate the outcome; an unfavorable resolution could result in damages, and defense costs could be substantial. The court deferred dismissal proceedings until February 1, 2022.
- After quarter-end, ACM reduced its monthly management-fee waiver from $700,000 to $650,000 effective November 1, 2021. ARMOUR also issued 1.98 million common shares under its ATM program between October 1 and October 13 for net proceeds of $21.5 million.
Important facts for investors to verify
- How portfolio income, funding costs and net interest spread respond to changes in short-term rates, Fed policy and prepayment speeds.
- Whether the reported $790.5 million of liquidity remains available under changing collateral values, repo haircuts and counterparty terms, including the concentration of financing through BUCKLER.
- The effect of derivative and securities fair-value changes on earnings and book value; nine-month earnings included sizable unrealized derivative gains while comprehensive income remained negative.
- Share-count dilution and per-share results following ATM issuance, including the increase from 87.7 million shares at September 30 to 89.7 million reported at October 26.
- Developments in the JAVELIN litigation, the continuation of ACM’s fee waiver, and the final tax characterization of 2021 dividends.