ARMOUR Residential REIT, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions unless stated otherwise.
Business context
ARMOUR is an externally managed mortgage REIT focused on agency mortgage-backed securities (MBS), financed primarily with short-term repurchase agreements and managed with interest-rate derivatives. At June 30, 2021, its portfolio consisted exclusively of agency securities, including forward TBA positions. The company reported as a REIT and said it believed it remained qualified.
Key financial metrics
| Metric | Q2 or June 30, 2021 | Comparable period or prior date |
|---|---|---|
| Interest income | $18.2 million in Q2; $36.8 million for six months | Q2 2020: $28.6 million; six months 2020: $121.4 million |
| Net interest income | $16.7 million in Q2; $32.7 million for six months | Q2 2020: $23.1 million; six months 2020: $64.5 million |
| Net income (loss) | Q2: loss of $69.2 million; six months: income of $2.2 million | Q2 2020: income of $51.7 million; six months 2020: loss of $354.9 million |
| Net income (loss) available to common shareholders | Q2: loss of $72.2 million, or $(0.95) per diluted share; six months: loss of $3.3 million, or $(0.05) per diluted share | Q2 2020: income of $49.4 million, or $0.77 per diluted share; six months 2020: loss of $360.1 million, or $(5.87) per diluted share |
| Cash and liquidity | Cash: $500.3 million; reported liquidity: $832.3 million, including $332.0 million of unpledged MBS | Cash at Dec. 31, 2020: $167.7 million |
| Assets and equity | Total assets: $5.14 billion; stockholders’ equity: $1.11 billion | At Dec. 31, 2020: $5.52 billion and $938.3 million, respectively |
| Repurchase borrowings | $3.66 billion; debt-to-equity ratio 3.63:1 and leverage including TBA notional 6.73:1 | At Dec. 31, 2020: $4.54 billion; ratios 4.83:1 and 7.61:1 |
| Quarterly portfolio yield / funding cost / net interest margin | 1.95% / 0.50% / 1.45% | Q2 2020: 2.53% / 0.90% / 1.63% |
| Cash flows, six months | Operating activities, including cash collateral movements: $36.9 million provided; cash and collateral increased $358.6 million | 2020 operating activities used $347.9 million; cash and collateral decreased $92.4 million |
Material changes and notable items
- Q2’s $77.2 million of total other losses was driven primarily by a $96.4 million derivative loss, including $92.7 million of unrealized losses. This outweighed $19.2 million of gains on trading agency securities and contributed to the quarterly net loss.
- For the first half, derivative results were a $22.2 million gain, but trading agency securities generated a $43.4 million loss. The much larger 2020 first-half loss reflected pandemic-era portfolio reductions, terminated swaps and losses on credit-risk-transfer securities; the company now reported an agency-only portfolio.
- Average securities portfolio size, including TBAs, was down 17.8% for the first half year over year. Management attributed lower net interest income to the smaller portfolio; it also reported a 0.18 percentage-point year-over-year decline in Q2 net interest rate spread.
- Common shares outstanding increased from 65.3 million at year-end to 83.1 million at June 30. First-half equity issuance raised $212.2 million through common stock and $36.6 million through Series C preferred stock. Preferred liquidation preference was $171.2 million at quarter-end.
- Common dividends were $0.10 per share monthly during the first half, or $0.60 per share in total. The filing declared subsequent common dividends of $0.10 per share and Series C preferred dividends of $0.14583 per share.
Outlook, risks and contingencies
- Management said it believed available liquidity and capital resources were sufficient for near-term investment, financing, operating and dividend needs. It did not provide quantified earnings or portfolio guidance.
- Management noted that Federal Reserve purchases had supported agency MBS prices and that markets could be sensitive to the timing and communication of any tapering. It said it was pursuing moderate leverage and liquidity amid historically high target-asset prices.
- Key exposures include changes in short-term funding rates, mortgage spreads, prepayments and MBS valuations. Falling collateral values can prompt repo or derivative margin calls, and short-term financing creates refinancing and liquidity risk.
- At June 30, BUCKLER accounted for 57.5% of aggregate repo borrowings. The filing also describes counterparty concentration, cross-default provisions and potential termination or collateral demands.
- Management’s modeled +25 basis-point mortgage-spread scenario projected a 1.45% portfolio-value decline and a 10.81% decline in shareholders’ equity. Interest-rate sensitivity estimates are model-based and assume specified market conditions; actual results could differ materially.
- Management reported no material changes to the risk factors in the 2020 Form 10-K. It continued to disclose pending JAVELIN transaction-related shareholder litigation, whose outcome and potential cost could not be estimated.
- ACM, the external manager, waived $2.1 million of Q2 management fees, but the fee is based on equity raised rather than investment performance. The company also disclosed related-party financing through BUCKLER.
Important facts for investors to verify
- Whether the agency MBS portfolio’s yield and net interest margin can withstand changes in funding rates, prepayments and Federal Reserve policy.
- Repo leverage, margin-call capacity, collateral availability and the concentration of financing with BUCKLER and other counterparties.
- The scale and volatility of derivative mark-to-market results, and how effectively hedges offset changes in MBS values and funding costs.
- The effects of common and preferred equity issuance on per-share book value, earnings and future dividend capacity; confirm the tax treatment of distributions, which management projected could be basis adjustments for 2021.
- Developments in the JAVELIN litigation and any material changes in related-party arrangements or management-fee waivers.