ARMOUR Residential REIT, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts below are in millions unless stated otherwise. ARMOUR is an externally managed mortgage REIT investing primarily in fixed-rate agency mortgage-backed securities (MBS), financed largely through short-term repurchase agreements and managed with derivatives.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $153.6 | $74.0 | $406.7 | $155.8 |
| Interest expense | $150.0 | $44.3 | $385.4 | $59.8 |
| Net interest income | $3.6 | $29.6 | $21.3 | $96.0 |
| Net loss | $(179.2) | $(144.3) | $(167.6) | $(269.3) |
| Net loss per common share | $(3.92) | $(5.98) | $(4.30) | $(12.80) |
| Common dividends declared per share | $1.20 | $1.50 | $3.80 | $4.50 |
- Portfolio and balance sheet: Agency securities at fair value were $12,384.1 at September 30, up from $8,198.6 at December 31, 2022. Total assets were $13,914.2; stockholders’ equity was $1,236.0, compared with $1,112.4 at year-end 2022.
- Debt and leverage: Repurchase-agreement borrowings were $11,504.2, up from $6,463.1. Reported debt-to-equity was 9.31:1, versus 5.81:1 at year-end; leverage including TBA securities was 8.97:1, versus 6.51:1.
- Liquidity: Management reported liquidity of $499.0, comprising $133.5 of cash and $365.6 of unencumbered agency and U.S. government securities, including securities received as collateral. Average repo haircut was 2.73%, down from 3.85% at year-end.
- Cash flows, nine months: Operating activities provided $72.5; investing activities used $4,657.9; financing activities provided $4,614.5. Cash interest paid was $448.7, versus $68.0 in 2022.
- Margins and hedges: At September 30, asset yield was 4.65%, net cost of funds 2.92%, and net interest margin 1.73%; margin was 1.75% at June 30. Interest-rate swaps had $8,336.0 notional value and a 1.84% weighted-average fixed rate.
Changes versus comparable periods
- Interest income rose with a larger portfolio, but borrowing costs grew faster, sharply reducing net interest income. Management attributed pressure to higher short-term rates and the larger portfolio; the nine-month average securities portfolio increased 36.5% year over year.
- Q3 net loss widened year over year, while the nine-month net loss narrowed. Q3 included a $468.3 loss on trading agency securities, partly offset by $291.1 of derivative gains. Nine-month derivative gains were $350.9, down from $820.8 in 2022.
- The company sold its remaining available-for-sale securities in Q1 2023, recognizing a $7.5 realized loss. At September 30, the portfolio was classified as trading, so securities fair-value movements flow through earnings.
- Common shares outstanding increased to 49.0 million from 32.6 million at December 31, 2022, including issuance of 16.6 million shares through ATM offerings and the dividend reinvestment program. A one-for-five reverse split became effective September 29; presented historical per-share amounts reflect the split.
Outlook, risks and notable items
- Management said it believed available liquidity, operating cash flow and portfolio adjustment capacity were sufficient for anticipated short-term needs, including financing obligations and distributions. This is a management assessment, not earnings guidance; the filing gives no specific forward earnings forecast.
- The Federal Reserve held its target range at 5.25%–5.50% in September 2023 and continued balance-sheet runoff. Management noted sensitivity to future Fed policy, short-term funding rates, mortgage spreads, prepayments and MBS valuations.
- Market-risk scenarios estimate that an immediate 100-basis-point rate increase would reduce projected shareholder equity by 19.07%; a 25-basis-point widening in MBS spreads would reduce it by 14.38%. These are model-based estimates, not forecasts, and assume specified conditions.
- Key risks include short-term repo funding against longer-duration MBS, margin calls, leverage, possible forced asset sales, derivative/counterparty exposure, changing prepayment speeds, and uncertainty around Fannie Mae and Freddie Mac. BUCKLER, an affiliated broker-dealer, represented 50.1% of repo borrowings; collateral and amount-at-risk exposures also warrant review.
- Nine putative class-action suits relating to ARMOUR’s 2016 JAVELIN tender offer and merger remain unresolved. The company says it cannot estimate the outcome; an adverse resolution could involve damages and defense costs.
- The management agreement runs through December 31, 2029. ACM waived $1.65 million of Q3 fees and was waiving $0.55 million monthly until further notice. Common dividends of $0.40 per share for October, November and December 2023 had been declared after quarter-end.
Important facts for investors to verify
- Whether repo funding costs and net interest margin stabilize, and how any further rate or spread moves affect earnings and book value.
- Current liquidity, unencumbered collateral, margin-call capacity and the concentration of funding with BUCKLER and other counterparties.
- The sustainability and tax character of common dividends relative to taxable income and cash generation; the filing forecast positive 2023 ordinary REIT taxable income but did not provide earnings guidance.
- The effect of ATM share issuance and the reverse split on per-share value, dilution and dividend coverage.
- Developments in the JAVELIN litigation and any material change in the company’s assessment of potential exposure.