ARMOUR Residential REIT, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of U.S. dollars unless stated otherwise. ARMOUR is an externally managed mortgage REIT investing primarily in Agency residential mortgage-backed securities, financed largely through short-term repurchase agreements.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $115.9 | $72.6 | $339.1 | $206.6 |
| Net interest income | $35.6 | $32.3 | $110.3 | $98.5 |
| Net income (loss) | $(61.0) | $47.7 | $(358.6) | $106.0 |
| Net income (loss) available to common | $(64.4) | $43.4 | $(370.5) | $93.2 |
| Common earnings (loss) per share | $(1.09) | $1.03 | $(6.45) | $2.22 |
| Common dividends per share | $0.51 | $0.57 | $1.65 | $1.71 |
At September 30, 2019, total assets were $13.22 billion, including $12.01 billion of Agency securities; repurchase-agreement borrowings were $11.68 billion and stockholders’ equity was $1.38 billion. Leverage was 8.45:1, compared with 6.25:1 at December 31, 2018. Reported net interest spread was 1.31% at September 30, 2019 versus 1.64% at September 30, 2018.
Liquidity was $607.7 million, comprising $160.5 million of cash and $447.2 million of unpledged Agency securities. For the nine months, operating cash and cash collateral flows were negative $112.3 million; cash and cash collateral increased by $54.7 million overall. Net unrealized gains on available-for-sale Agency securities were $449.6 million for the nine months, recorded in other comprehensive income rather than earnings.
Material changes and management commentary
- Net interest income increased year over year as the average securities portfolio grew 30.9% to $12.79 billion for the nine-month period. Higher funding expense partly offset the increase.
- Derivatives drove the reported losses: net derivative losses were $81.2 million in Q3 and $416.7 million for the nine months, compared with gains of $57.9 million and $147.2 million in the respective 2018 periods. The nine-month 2019 results included $237.7 million of realized swap termination losses.
- Mortgage prepayments accelerated as mortgage rates fell. Average portfolio CPR rose from 3.50% in Q1 2019 to 11.80% in Q3; management noted that faster prepayments increase premium amortization and can reduce asset yields.
- Management said the company financed its portfolio throughout Q3 despite significant repo-market volatility, including overnight rates briefly reaching 10% in mid-September. Average repo financing cost was 2.55% in Q3, versus 2.69% in Q2. Management expected repo-market volatility could remain elevated, while noting Federal Reserve liquidity measures might help.
- Capital actions included $321.9 million of net common-stock issuance, redemption of $54.5 million of Series A preferred stock, additional Series B preferred issuance, and $17.0 million of common-stock repurchases during the nine months. The common dividend declined from $0.19 monthly to $0.17 beginning in July.
Outlook, risks and contingencies
Management stated it believed available liquidity, operating cash flow and borrowing arrangements would cover anticipated short-term needs, including investment activity, financing obligations and distributions. The filing provides no earnings or dividend guidance beyond declared near-term dividends. It reported that common dividends of $0.17 per share and Series B preferred dividends of $0.16 per share had been declared for specified subsequent payment dates.
Key exposures include short-term funding of longer-duration mortgage assets, margin calls, changing repo rates and haircuts, mortgage-spread movements, prepayment speeds, credit losses on non-Agency securities, and interest-rate mismatch. At September 30, the modeled impact of an immediate 100-basis-point rate increase included a 24.64% decline in projected net interest income and a 13.38% decline in shareholder equity including derivatives; these are estimates based on stated assumptions, not forecasts. Repo agreements had a weighted-average maturity of nine days, and BUCKLER accounted for 36.9% of borrowings. Management also identified potential GSE reform and cybersecurity risks.
Nine putative class actions relating to the JAVELIN tender offer and merger remained pending in Maryland; the court deferred the matter for six months in September 2019. The company said it could not estimate the outcome or potential loss. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the increase in prepayments and related premium amortization further pressures asset yields and dividend capacity.
- How derivative performance, hedging costs and non-cash fair-value changes affect GAAP earnings and book value.
- Whether liquidity remains adequate if repo haircuts rise, collateral values fall, or financing counterparties reduce capacity; review the short repo maturities and BUCKLER concentration.
- How leverage, equity issuance, share repurchases and the lower common dividend affect per-share book value and returns.
- Developments and any eventual financial exposure from the JAVELIN litigation, for which the filing provides no clear loss estimate.