Armour Residential REIT, Inc. annual report, FY2020

ARMOUR Residential REIT, Inc. — 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020; filed February 17, 2021. The filing is an annual report, not a standalone fourth-quarter report. Unless noted, amounts below are in USD millions; share amounts are per share.

Business context

ARMOUR is an externally managed mortgage REIT. At year-end it held Agency mortgage-backed securities (MBS), primarily fixed-rate, financed mainly with short-term repurchase agreements and managed with derivatives. It had exited its Credit Risk and Non-Agency securities by the third quarter. ACM manages the company; ARMOUR has no employees and owns 10% of BUCKLER, a financing counterparty controlled by ACM and certain ARMOUR executives.

Financial and operating metrics

Metric	2020	2019
Total interest income	$169.8	$439.6
Net interest income	$106.8	$151.3
Net loss	$(215.1)	$(249.9)
Net loss attributable to common stockholders	$(224.9)	$(265.5)
Net loss per common share	$(3.57)	$(4.59)
Comprehensive income (loss)	$(391.6)	$149.4
Common dividends declared per share	$1.20	$2.16

Average portfolio yield was 2.59% versus 3.63%; average funding cost fell to 1.03% from 2.19%. The average net interest spread increased to 1.56% from 1.44%, but lower portfolio size drove lower net interest income.
At December 31, total assets were $5,524.5, stockholders’ equity $938.3, and repurchase borrowings $4,536.1. Debt-to-equity was 4.83:1; leverage including TBA notional was 7.61:1.
Reported liquidity was $619.4, comprising $167.7 cash and $451.7 unencumbered Agency and U.S. government securities. Repurchase agreements had a 0.23% weighted-average rate, 21-day weighted-average maturity, and 3.13% average haircut.
Operating cash flow, including cash collateral movements, was $(257.8); investing activities provided $7,085.7 and financing activities used $6,929.4. Cash and cash collateral declined $101.5 during the year.
BUCKLER accounted for 66.1% of year-end repurchase borrowings, up from 45.0% in 2019. Its reported amount at risk was 8.3% of equity.

Material changes and unusual items

COVID-19-related market disruption prompted ARMOUR to prioritize liquidity, reduce leverage and substantially shrink its Agency portfolio. Agency holdings, including TBA positions, were reduced 39.1% from year-end 2019; repurchase debt fell from $11,354.5 to $4,536.1.
The company sold its Credit Risk and Non-Agency securities, recognizing a $189.6 loss on those securities. Gains on Agency sales and TBA positions partly offset substantial derivative losses: realized derivative losses were $378.2, partly offset by $94.1 of unrealized derivative gains. Total other loss was $289.9.
Comprehensive results turned from income of $149.4 in 2019 to a loss of $391.6 in 2020, reflecting a $176.4 loss in other comprehensive income as well as the net loss.
Beginning in the second quarter, newly acquired Agency MBS were designated as trading securities, so fair-value changes flow through net income; legacy available-for-sale securities continue to record fair-value changes in other comprehensive income.
ACM waived $8.9 of management fees in 2020. For 2021, ACM notified ARMOUR it intended to waive $2.4 for the first quarter and $0.8 monthly thereafter, subject to change.
ARMOUR issued 6.287 million common shares for net proceeds of $54.6 and 5.347 million Series C preferred shares for net proceeds of $130.1. It redeemed all Series B preferred stock, with $209.6 aggregate liquidation preference.

Outlook, risks and contingencies

Management stated it believed available liquidity, operations and portfolio-adjustment capacity were sufficient for anticipated near-term needs, including financing obligations and distributions. It did not provide numerical earnings or portfolio guidance and said the future effects of COVID-19 remained uncertain.
Key risks include short-term funding against longer-duration MBS, interest-rate and mortgage-spread changes, prepayments and premium amortization, margin calls, counterparty concentration, and reduced repo availability in stressed markets. At year-end, MBS premiums were approximately $559.9, about 70% of equity attributable to common stockholders.
BUCKLER concentration and related-party conflicts merit attention: ARMOUR has a 10% equity interest and a $105.0 subordinated loan to BUCKLER, while BUCKLER provided most of its repo financing. The loan maturity was extended to May 2025.
Interest-rate and spread sensitivity estimates are model-based, not forecasts. At year-end, a parallel 100-basis-point rate increase was estimated to reduce shareholder equity 12.20%; a 25-basis-point widening in MBS spreads was estimated to reduce equity 9.88%.
Common dividends are discretionary. All 2020 common distributions were characterized as non-taxable return of capital for tax reporting, and estimated REIT taxable loss was $92.1. The company reported an unresolved putative class-action matter related to the 2016 JAVELIN transaction; it could not estimate the outcome.
The company reported unqualified auditor opinions on its financial statements and internal control over financial reporting, and management concluded controls were effective at year-end.

Most important facts for investors to verify

Whether the reduced portfolio, interest-rate hedge position and higher prepayment environment can sustain net interest income and book value.
How liquidity and repo access would hold up under renewed market stress, especially given BUCKLER’s 66.1% share of borrowings and short repo maturities.
Whether common dividends are supported by recurring earnings and cash economics, rather than return of capital; reconcile the dividend level with taxable income and comprehensive losses.
How much derivative volatility reflects hedge economics versus GAAP fair-value timing, and how the switch to trading classification affects reported earnings.
Developments in COVID-19 impacts, the JAVELIN-related litigation, management-fee waivers, and the company’s ability to maintain REIT and Investment Company Act exclusions.