ARMOUR Residential REIT, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. ARMOUR is an externally managed mortgage REIT investing primarily in agency mortgage-backed securities (MBS), funded mainly with short-term repurchase agreements. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Interest income | $141.5 | $118.5 |
| Interest expense | $136.1 | $106.2 |
| Net interest income | $5.3 | $12.2 |
| Net interest spread / net yield on interest-earning assets | (0.47)% / 0.18% | (0.23)% / 0.46% |
| Net income (loss) | $14.5 | $(31.4) |
| Net income (loss) available to common shareholders | $11.5; $0.24 per diluted share | $(34.4); $(0.95) per diluted share |
| Net cash and cash collateral provided by operating activities | $96.8 | $54.2 |
| Total assets / stockholders’ equity | $12,208.3 / $1,247.1 | $12,344.4 / $1,271.2 at Dec. 31, 2023 |
| Agency securities at fair value | $10,905.9 | $11,159.8 at Dec. 31, 2023 |
| Repurchase agreements, net | $8,654.1 | $9,648.0 at Dec. 31, 2023 |
| Liquidity | $659.3, including $221.3 cash and $438.0 unencumbered securities | Not stated on a comparable basis |
Q1 other income was $29.6, including $156.4 of net derivative gains and $137.7 of losses on trading agency securities. GAAP results therefore benefited from hedge and fair-value movements even as net interest income weakened. The filing reports a 6.94:1 debt-to-equity ratio, down from 7.59:1 at year-end; implied leverage including TBA positions and unsettled trades was 7.07:1.
Changes and notable items
- Net income turned positive year over year, but net interest income fell 56%, as higher funding costs outpaced the increase in interest income. The net interest spread and net yield on interest-earning assets also declined.
- Total expenses after management-fee waivers rose to $20.4 from $10.2. Other operating expenses included $9.0 related to a Special Committee internal investigation.
- Agency securities’ fair value declined by $253.9 from December 31, 2023. Gross unrealized losses increased to $258.7 from $123.6.
- Common dividends were $0.24 per share monthly in Q1, or $0.72 for the quarter, versus $1.40 for Q1 2023. The company also declared common dividends of $0.24 per share for April and May 2024 and preferred dividends of $0.14583 per share monthly.
- BUCKLER, an affiliate-controlled broker-dealer in which ARMOUR owns 10.8%, represented 56.2% of repurchase borrowings at quarter-end, up from 48.4% at year-end. ARMOUR’s repurchase-agreement haircut averaged 2.90%, versus 2.74%.
Outlook, risks and contingencies
- Management said it believes available liquidity and capital resources are sufficient for anticipated short-term needs, including financing obligations and distributions. It forecast positive ordinary REIT taxable income for 2024; no specific earnings or net-interest-income guidance was provided.
- The Federal Reserve held its target range at 5.25%–5.50% in March 2024 and said rate cuts would depend on greater confidence that inflation was moving sustainably toward 2%. ARMOUR highlighted sensitivity to short-term funding costs, MBS spreads, prepayments, margin calls and access to repo financing.
- Interest-rate sensitivity estimates indicate that a 100-basis-point rate increase could reduce projected shareholder equity by 8.14%; a 25-basis-point widening in MBS spreads could reduce it by 10.34%. These are model estimates, not forecasts, and assume specified market conditions.
- Disclosure controls and procedures were deemed ineffective at March 31, 2024 because of material weaknesses in the control environment, risk assessment, and information and communication. The filing links weaknesses in part to inappropriate conduct by certain senior management and Board members during the internal investigation. Management is pursuing remediation but cannot estimate its timing or cost; it nevertheless concluded the financial statements fairly present the reported periods.
- In the JAVELIN shareholder litigation, the court dismissed all claims with prejudice on February 14, 2024; plaintiffs appealed on March 11. ARMOUR says the outcome cannot currently be estimated.
- The management agreement with ACM runs through December 31, 2029. The filing reports $225.6 of contractual management-fee commitments through 2029, before applicable waivers, and describes a potential termination fee in specified circumstances.
Important facts for investors to verify
- Progress and independent oversight of remediation for the disclosed material weaknesses, including whether controls become effective.
- Funding concentration and renewal terms: BUCKLER’s share of repo borrowings, short maturities, collateral haircuts, and potential margin calls.
- Whether net interest income and dividend capacity improve, given the negative net interest spread and the lower common dividend than a year earlier.
- How much reported earnings continue to depend on derivative and securities fair-value changes, rather than recurring net interest income.
- Developments in the JAVELIN appeal, the internal-investigation-related costs, and the tax treatment of 2024 distributions.