Armour Residential REIT, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless noted otherwise, dollar amounts are in millions; the filing presents financial statements in thousands. Armour is an externally managed mortgage REIT that invests primarily in agency mortgage-backed securities (MBS), finances them mainly through short-term repurchase agreements, and uses derivatives to manage interest-rate risk.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Interest income | $18.6 | $92.9 |
| Net interest income | $16.1 | $41.3 |
| Net income (loss) | $71.3 | $(406.7) |
| Net income (loss) attributable to common stockholders | $68.8; $1.04 basic EPS | $(409.5); $(6.95) basic EPS |
| Comprehensive income (loss) | $29.1 | $(537.1) |
| Net interest margin | 1.49% | 1.23% |
| Operating cash flow | $21.2 | $(184.4) |
Q1 2021 net income included $146.0 million of unrealized derivative gains and $62.6 million of losses on trading Agency Securities. Other comprehensive loss was $42.2 million. Results therefore reflect significant fair-value movements, not solely recurring interest earnings.
At March 31, total assets were $5.35 billion, repurchase-agreement borrowings were $3.81 billion, and stockholders’ equity was $1.03 billion. Agency Securities on the balance sheet were $4.32 billion; including TBA Agency Securities, the reported total investment portfolio fair value was $7.88 billion. Cash was $277.6 million. Management-defined liquidity was $687.3 million, comprising cash and $409.8 million of unpledged MBS. Repo debt-to-equity leverage was 4.21:1; including TBA notional, leverage was 7.12:1. The common dividend was $0.10 per share monthly, or $0.30 for the quarter; the Series C preferred stock pays a 7.00% annual rate.
Changes versus the prior comparable period
- Net income improved substantially from the pandemic-affected Q1 2020 loss, when market turmoil drove large losses on derivatives and Credit Risk and Non-Agency Securities. Armour held no Credit Risk and Non-Agency Securities at March 31, 2021 and reported that its portfolio was exclusively Agency Securities.
- Net interest income fell 61% year over year. The average securities portfolio, including TBAs, declined 42.7% to $6.90 billion. Asset yield fell 1.34 percentage points, but cost of funds fell 1.60 points, lifting net interest margin by 0.26 points to 1.49%.
- Repo borrowings declined from $4.54 billion at year-end to $3.81 billion, and reported debt-to-equity leverage fell from 7.90:1 to 4.21:1. TBA-inclusive leverage decreased to 7.12:1 from 7.61:1.
- During Q1, Armour issued 4.4 million common shares for net proceeds of $53.0 million and 1.154 million Series C preferred shares for $28.2 million, increasing the share count and equity capital.
Outlook, commentary, risks and unusual items
- Management reported that COVID-19 continued to affect business sectors and that Agency MBS prices remained dependent on Federal Reserve actions. It described its approach as maintaining moderate leverage and maximizing liquidity, while selecting investments amid historically high target-asset prices. The filing provides no earnings or dividend guidance.
- Management stated it believed available liquidity and capital resources were sufficient for investment activity, debt repayments, and cash dividends. This is a forward-looking assessment, not a guarantee. ACM’s management-fee waiver was $2.4 million for Q1; ACM subsequently indicated waivers of $2.1 million for Q2 and $0.7 million monthly thereafter until further notice.
- Key exposures include rising short-term funding costs, interest-rate and mortgage-spread movements, prepayment speeds, repo margin calls, counterparty concentration, and potential disruptions in funding markets. At March 31, BUCKLER accounted for 61.9% of repo borrowings. The company’s sensitivity model estimated that an immediate 100-basis-point rate increase would reduce shareholder equity by 11.10%; a 25-basis-point mortgage-spread widening would reduce it by 11.01%. These are model estimates, not forecasts.
- Derivative fair-value accounting can cause material GAAP earnings volatility; Armour does not use cash-flow hedge accounting. Its $5.76 billion of interest-rate swaps and $3.50 billion of TBA notional positions also create collateral and basis risks. LIBOR’s expected discontinuation was identified as a transition risk, though management did not expect a material impact at that time.
- Nine putative class-action suits concerning the 2016 JAVELIN tender offer and merger remained unresolved. Armour said it could not estimate the outcome or potential loss; an unfavorable resolution could result in damages and defense costs. The filing reported no material changes to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- Separate recurring net interest performance from the large derivative and trading-security fair-value effects behind Q1 net income.
- Confirm the basis of portfolio and leverage comparisons, particularly the inclusion of TBA positions in some measures but not balance-sheet Agency Securities.
- Monitor repo funding concentration, collateral haircuts, margin-call capacity, and whether management-defined liquidity remains available under stressed markets.
- Track common and preferred share issuance, dividend declarations, and the effect of further capital raising on per-share results.
- Review subsequent market conditions, Federal Reserve policy, ACM fee-waiver terms, and developments in the JAVELIN litigation.