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ARMOUR Residential REIT, Inc. (ARR) Q4 2022 Earnings Call Transcript

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ARMOUR Residential REIT, Inc. (NYSE:ARR) Q4 2022 Earnings Conference Call February 16, 2023 8:00 AM ET

Company Participants

James Robert Mountain - Chief Financial Officer

Scott Ulm - Co-Chief Executive Officer, Head of Risk Management and Co-Vice Chairman

Jeffrey Zimmer - Co-Chief Executive Officer, President and Co-Vice Chairman

Mark Richard Gruber - Chief Investment Officer

Conference Call Participants

Doug Harter - Credit Suisse

Trevor Cranston - JMP Securities

Matthew Howlett - B. Riley

Christopher Nolan - Ladenburg Thalmann

Operator

Good morning, and invited to ARMOUR Residential REIT’s Fourth Quarter 2022 Earnings Conference Call. All participants will beryllium successful listen-only mode. [Operator Instructions] Please note, this arena is being recorded.

I’d now for illustration to move nan convention complete to ARMOUR’s Chief Financial Officer, Jim Mountain. Please spell ahead.

James Robert Mountain

Thank you, Anthony, and convey you each for joining our telephone to talk ARMOUR’s 4th fourth 2022 results. This morning, I’m joined by ARMOUR’s Co-CEOs, Scott Ulm and Jeff Zimmer; and Mark Gruber, our CIO. By now, everyone has entree to ARMOUR’s net release, which tin beryllium recovered connected ARMOUR’s website www.armourreit.com.

This convention telephone includes forward-looking statements, which are intended to beryllium taxable to nan Safe Harbor protections provided by nan Private Securities Litigation Reform Act of 1995. The Risk Factors conception of ARMOUR’s nationalist reports revenge pinch nan Securities and Exchange Commission described definite factors beyond ARMOUR’s power that could origin existent results to disagree materially from those expressed aliases implied by these forward-looking statements. Those periodic filings tin beryllium recovered connected nan SEC’s website astatine www.sec.gov. All of today’s forward-looking statements are taxable to alteration without notice. We disclaim immoderate responsibility to update them unless required by law.

Also, today’s chat refers to definite non GAAP measures. These measures are reconciled pinch comparable GAAP measures successful our net release. An online replay of this convention telephone will beryllium disposable connected ARMOUR’s website soon and will proceed location for 1 year.

ARMOUR’s Q4 broad income disposable to communal stockholders was $39.5 million. That includes $39.4 cardinal of GAAP nett income. Net liking income was $11.6 cardinal and nett liking separator for nan quarter improved 38 ground points to 2.59%. Distributable net disposable to communal stockholders was $38.8 million, aliases $0.27 per communal share. This non-GAAP measurement is defined arsenic nett liking income positive TBA Drop Income adjusted for nan nett coupon effect of our liking complaint swaps minus nett operating expenses.

ARMOUR paid monthly communal dividends of $0.10 per communal stock during nan 4th and has paid dividends astatine that complaint since January and has announced dividends astatine that complaint for January 2023 and February 2023. Yesterday, we announced an accommodation to our dividend complaint to $0.08 per communal stock monthly.

As we person discussed successful our erstwhile calls, our purpose is to salary an charismatic dividend that is due successful discourse and unchangeable complete nan medium-term. We support a keen oculus connected economical conditions and nan ARMOUR Board believes that this dividend complaint achieves those objectives. With this dividend declaration, life cumulative communal and preferred dividends are approaching $2.1 billion.

During nan 4th quarter, we purchased 449,700 shares of our communal banal astatine an mean costs of $5.01 per stock nether our opinionated repurchase authorization. On nan income side, our communal banal ATM programme has been very successful.

During nan 4th quarter, we issued 30,721,405 shares, raising $174.2 cardinal of superior aft fees and expenses. That represents an mean nett landed value of $5.67 per share. So acold successful Q1 2023, we’ve issued astir 29,863,000 shares, raising nett superior of $181.3 million. This represents an mean value of $6.07 per share. This brings our communal stock count to 192,774,581 shares, representing a communal stock marketplace capitalization of complete $1.1 cardinal based connected past night’s closing marketplace prices.

In summation to providing superior to return advantage of appealing existent finance opportunities, stock issuances build a larger guidelines complete which to dispersed our mostly fixed moving costs. Our book worth astatine quarter-end was $5.78 per communal share. Our astir existent disposable estimate of book worth is arsenic of Monday night, February 13. We estimate that our book worth was $6.04 per stock aft providing for nan February dividends.

We finalized our taxation projections for almanac 2022, and arsenic expected, each communal banal dividends and Series C preferred dividends were treated for national income taxation purposes arsenic a return of superior and are not presently taxable. This is comparable to 2021’s taxation results.

Looking guardant to 2023, we expect that Series C preferred banal dividends will apt beryllium treated arsenic afloat taxable mean income to those shareholders. We besides expect communal dividends for 2023 will apt beryllium treated astatine slightest partially arsenic taxable mean income.

Now fto maine move nan telephone complete to Co-Chief Executive Officer, Scott Ulm, to talk ARMOUR’s portfolio position and existent strategy successful much detail. Scott?

Scott Ulm

Thanks, Jim. While 2022 marked an all-time worst twelvemonth for full returns connected U.S. Treasuries and agency mortgages since their inclusion successful fixed income indices, respective trends opening successful nan 4th fourth and extending into nan caller twelvemonth springiness america optimism that 2023 will spot a very constructive situation for MBS and our finance strategy.

MBS volatility, which was exceptionally precocious successful 2022, is declining. While nan Fed seems by nary intends to beryllium astatine nan extremity of complaint increases, nan size is mean and we should yet spot a much unchangeable complaint environment. We besides expect nan economical and complaint situation to proceed to mean proviso and mortgages.

Most importantly, nan unprecedented diminution successful enslaved prices generated unthinkable values arsenic measured by zero volatility adjusted MBS spreads, reaching conscionable awkward of 150 ground points. Spread levels person not observed since nan awesome financial situation of 2008/2009. While spreads person tightened driving our book worth gain, we proceed to spot an charismatic finance environment.

Responding to caller finance opportunities, ARMOUR purchased complete $3 cardinal of MBS pools and TBA positions successful nan 4th fourth of 2022, divided $2.2 cardinal successful MBS and $800 cardinal astatine TBA. ARMOUR continued to turn successful its portfolio successful 2023 pinch nan summation of $5.9 cardinal of MBS divided $4.9 cardinal of MBS and $1 cardinal of TBA.

As of February 13, ARMOUR’s portfolio size is complete $12.3 billion. ARMOUR supported nan caller purchases done our ATM aliases stock issuance programme raising complete $345 cardinal successful superior since nan 3rd 4th of 2022. MBS assets we purchased are concentrated successful nan astir liquid, debased premium slope work accumulation coupon MBS pools.

We judge these pools will use nan astir arsenic volatility eases from its caller highs and reverts to humanities norms. These investments besides bespeak historically nan indebtedness prepayment rates since nan MBA refinance scale has fallen to its lowest level since nan 1990s.

ARMOUR’s mean prepayment complaint for each MBS assets to nan 4th fourth of 2022 was 4.3 CPR and conscionable 3.7 CPR truthful acold successful 2023. Although owe rates person already declined from nan caller highs of 7.2% successful early November 2022 to 6.3% successful mid-February 2023, a important refinance activity would require owe rates good beneath nan 4.5% to supply astir 20% of existing borrowers pinch capable inducement to prepay early.

ARMOUR maintains very patient levels of disposable liquidity. Our full leverage closed nan twelvemonth astatine 6.8x and presently sits astatine 8x, providing america pinch room to summation our finance portfolio size arsenic early opportunities travel along. ARMOUR continues to money conscionable complete 50% of borrowings to a agent trader affiliate, BUCKLER Securities.

Despite nan wide summation successful marketplace volatility, agency repo backing remained connected a beardown footing passim nan 4th pinch spreads ranging 10 to 20 ground points supra nan SOFR benchmark. The weighted mean haircut connected our repo book remained exceptionally debased astatine 3.6% of year’s mean numbers. We spot leveraged and hedge returns successful nan existent marketplace successful nan debased to mid-teens. For prospective investments arsenic good arsenic nan existent book, a important magnitude of output is provided by hedges. Nonetheless, we’ve ever viewed our finance book is holistically comprised of MBS and related hedging.

As we’ve ever noted, we group our dividend to beryllium due for nan medium-term. Earnings disposable for distribution person moderated, and we consciousness it is due to trim our dividend by $0.02 to $0.08 per month. We will, arsenic always, proceed to measure nan level of nan dividend. We are besides mindful that this situation could present upside for surprises arsenic good they could move our metrics substantial.

Now unfastened nan statement to questions.

Question-and-Answer Session

Operator

We will now statesman nan question-and-answer session. [Operator Instructions] Our first mobility will travel from Doug Harter pinch Credit Suisse. You whitethorn now spell ahead.

Doug Harter

Thanks a lot. I was hoping you could talk astir wherever you spot disposable returns connected incremental investments and conscionable thief put nan caller dividend successful nan discourse of those returns alternatively than an EAD perspective.

Jeffrey Zimmer

Good morning, Doug. This is Jeff here.

Doug Harter

Good morning.

Jeffrey Zimmer

Thanks for calling in. Available returns are successful nan 14% to 16% area. Some of that’s supported by – these are caller marginal investments, of course. They’re supported by swaps. They’re still positive. You’ve been connected a swap. You’re really getting paid. So looking backmost 2 years ago, you paid connected a switch and it possibly detrimental to your net capabilities. Well, now, nan swaps that we person and nan swaps we put connected are incremental to nan net and that’s a use shareholders. So we salary that out.

$6 a share, you sewage astir a 16% payout correct now. We deliberation that’s due based connected nan book that we person and wherever we’ve been capable to invest. I conjecture Scott stated a 150 ground points, conscionable a nominal dispersed is almost arsenic bully arsenic it gets. And I deliberation successful October, we mightiness spiked retired to 175, 180 for a very short play of time. But these are nan champion finance opportunities that we’ve seen successful a agelong clip and we’re making nan investments pinch our caller superior and paying that use retired to shareholders.

Doug Harter

Okay. And past conscionable connected expenses, you talked astir 1 of nan rationales for utilizing nan ATM being to benignant of dispersed nan disbursal base. I conjecture if I look astatine nan operating disbursal arsenic a percent of equity, it’s really been going up complete nan people of nan year, since nan guidance interest is…

Jeffrey Zimmer

Doug, are you there? Yes, Doug, we mislaid you. Let maine effort and jump successful and look. Did we get you back, Doug?

Operator

His statement is connected silent.

Jeffrey Zimmer

Why don’t you spell ahead, Jim?

James Robert Mountain

Hopefully, listening aliases will prime up nan reply connected replay, Doug. Sort of nan measurement we look astatine disbursal and nan ATM, erstwhile we look astatine nan benignant of nan dollar quality betwixt nett landed proceeds and caller book worth that we really usage to guideline nan ATM programme for nan full-year that dollar quality that we disclosed successful nan 10-K is astir $9.5 cardinal if you disagreement that by ending stock count astatine nan extremity of nan twelvemonth of astir 163 cardinal shares, you get $0.06 a share, aliases nan $6 ending stock price, that’s benignant of 1 percentage.

But if you look astatine moving costs for 2021 divided by ending shares that’s $0.37 a stock ending nan moving costs for 2022 divided by ending stock of $0.23 a share. So $0.14 per stock pickup. If it costs you $0.06 a stock to prime up $0.14 annually, that’s a payback of – seems to america little than six months, bully deal.

Jeffrey Zimmer

So Doug, convey you for calling in. If you’d for illustration to telephone back, I’m judge nan usability tin put you in. Otherwise, operator, if there’s different mobility available, we’re present to answer. Thank you.

Operator

Okay. Our adjacent mobility will travel from Trevor Cranston pinch JMP Securities. You whitethorn now spell ahead.

Trevor Cranston

Hey, thanks. Good morning. Looking astatine nan portfolio complete nan past fewer months, arsenic you guys person added MBS and moved up successful coupons, it looks for illustration nan hedge positions haven’t changed each that much. So I conjecture there’s 2 questions.

First, tin you opportunity what nan treasury hedges that you show successful nan descent deck? Could you item what those are? And tin you much mostly conscionable talk astir really you guys are approaching hedging complaint consequence arsenic you make incremental investments here? Thanks.

Jeffrey Zimmer

Sure. Mark, why don’t you get into that, please. Chief Investment Officer, Mark Gruber.

Mark Richard Gruber

Thanks, Jeff. So Trevor, truthful nan first reply is nan treasuries are going to beryllium a operation of futures and rate treasuries and it’s going to beryllium crossed nan curve. So [$2.57]. So it’s conscionable a operation of that. And yes, arsenic we’ve added assets, we person moved up successful coupon. So nan long of nan plus broadside has shortened, but – and we didn’t adhd a batch of hedges besides because we took our long up a small bit. We were a small much comfortable arsenic rates were higher. Did not adhd hedges and widen nan portfolio long conscionable a small bit. So that’s what’s going connected there.

Trevor Cranston

Okay. Got it. That makes sense. And past successful position of leverage, obviously, nan portfolio has been increasing and it looks for illustration leverage is up to astir 8x aliases truthful currently. Is that benignant of wherever you guys are targeting for nan near-term aliases could we expect immoderate further portfolio maturation complete nan adjacent period aliases so? Thanks.

Jeffrey Zimmer

Historically, Trevor – spell ahead, Mark, either way.

Mark Richard Gruber

I was going to say, we were targeting location betwixt 8 and nine. So we person a small spot of barren powder. Historically, we’ve been person to nine. So you’ll astir apt spot it drift up a small spot from here, but not overmuch from wherever we are today.

Trevor Cranston

Got it. Okay. Thank you.

Operator

[Operator Instructions] Our adjacent mobility will travel from Matthew Howlett pinch B. Riley. You whitethorn now spell ahead.

Matthew Howlett

Hey, guys. Good morning. Thanks for taking my question. On nan taxable of leverage, I mean, obviously, you’ve had awesome occurrence to entree from nan equity superior markets. When I look astatine nan preferred marketplace here, location has been immoderate caller activity successful this space. Look astatine your Series C is trading astatine [indiscernible] I mean, connected a 7% coupon. What’s nan outlook? Your communal equity ground accrued to nan grade that you do person room to do different preferred series. What benignant of – if you looked astatine that market, is it open? Would you look astatine it present successful 2023?

Jeffrey Zimmer

Hey. Good morning, Matt. Jeff Zimmer here. So if you look astatine our preferred past night, I judge it closed astatine 22.5, okay? So it’s a existent portion output of thing for illustration 7.78, okay? The logic that we issued a fixed, fixed and we are nan only institution whose superior issuance complete nan past 3 years person been fixed, fixed because we did not want to taxable our equilibrium expanse and our income connection successful nan early to nan anticipation of rates going up and rates are higher. And nan astir caller issuance by different firms successful our broader abstraction person been astatine higher coupons and nan existing issues that they person outstanding that were fixed for 5 years and spell to floating will mean their coupons are going to spell to 9% and 10%.

So successful nan situation that we person today, we’re capable to raise communal equity correct astir par, correct astir book worth arsenic Jim Mountain stated. And we deliberation that’s a amended measurement to tally nan institution correct now. We tin entree mortgages pinch immoderate of nan widest spreads they’ve been successful a decade. We entree superior astir book worth and nan costs spell down. You would not spot america successful nan adjacent early going backmost to nan preferred market. It’s conscionable excessively costly correct now. I dream that answers your question.

Matthew Howlett

No, it does. And it’s – look, I surely admit that you don’t person those 5 years switching to floating. So that was a bully move connected your part. And it surely looks nan equilibrium expanse has room. But if you take to hold for nan marketplace to travel backmost that would make sense.

And past Jeff, conscionable connected nan macro question, it looks for illustration nan Fed – I’d emotion to perceive your thoughts and it looks for illustration markets reasoning 25 successful March, 25 successful June, and past pausing, emotion to perceive if you deliberation nan adjacent move aft that would beryllium a cut. And past connected nan Fed, obviously, nan equilibrium sheet, I deliberation Powell said it’ll return a mates of years to shrink nan MBS. Just your thoughts connected nan effect connected MBS spreads. Would they – you deliberation that they’ll – that should commencement selling? Or it – what could astonishment us, I guess?

Jeffrey Zimmer

So I’ll reside that, and I’ll – past I’ll spot if Mark aliases Scott want to improve. We do expect an summation astatine nan adjacent 2 meetings of 25 ground points. Our patient does not expect nan Fed cutting rates successful 2023. If they cut, it would beryllium successful 2024. The economical numbers that are coming retired are conscionable showing that nan employment image is very beardown and that’s not going to spell away. It’s going to return immoderate time. They whitethorn internally person to alteration their target from 2% to, like, 3% to 4% without announcing it. And to easiness disconnected nan pedal a small bit.

But connected nan different hand, we did spot an announcement yesterday that already we’re seeing commercialized in installments defaults are not without saying company’s names. There were 2 defaults conscionable announced for agency buildings successful New York and LA. So moreover though you person a very beardown employment business arsenic you spot in installments defaults and we’re judge nan Federal Reserve expects these in installments defaults, you’ll spot that will dispersed to nan employment assemblage conscionable takes a while. So that’s wherever we are now. Now we besides judge mortgages, arsenic I said, number of times connected today’s call, are historically very good priced and attractive. We would expect successful nan adjacent early for owe spreads to enactment wherever they are aliases moreover possibly tighten a small bit.

We are not tense astir nan Fed trading mortgages down nan road. As a matter of fact, astir of what they would person to sell, they’re not successful our portfolio, frankly. We’ve sewage a mid to higher coupon matrix correct now that Mark and his squad person put together and if I conscionable don’t ain that stuff. So they want to spell up and waste their 2 and 2 and a halves, which are areas that others possibly invested in, that’s fine. But there’s nary different proviso different than them and there’s nary originations successful that sector. So we’re ever going to beryllium alert of it. And we’re acutely aware, I guess, is to say, of nan anticipation of them selling, but it shouldn’t person an atrocious nonstop effect.

Now look astatine – erstwhile nan tide goes out, each shifts spell down, okay? And we understand that, but we will not person a nonstop effect connected nan assets we ain from them trading nan coupons successful our portfolio. So does that reply your question?

Matthew Howlett

No, absolutely. And it’s ever bully to perceive your penetration connected that. And I conjecture nan past topic, nan CPRs, I mean, I deliberation you said 4.7, well, these are nan lowest numbers I’ve seen successful my career. And look astatine – and I asked a mobility successful nan past telephone astir convexing. It looks for illustration you’re buying worldly adjacent to par now here. I mean, conscionable you deliberation you said – immoderate consciousness connected – if there’ll beryllium a pickup successful CPRs, I mean, what you’re looking astatine erstwhile you put connected your caller plus these higher coupons? Thanks a lot.

Jeffrey Zimmer

I’m going to manus that complete to Mark because he and his squad spent a batch of clip moving connected that. Mark?

Mark Richard Gruber

Yes. We would expect successful our portfolio of CPRs prime up a small spot arsenic we’re adding newer bonds. So they’re going to commencement astatine zero and they’re going to slow ramp up. And it really conscionable going to dangle connected rates. If rates decline, your owe rates decline, we’ll spot a pickup. But we don’t spot thing systemic wherever we spell backmost to 15, 20 CPR correct now.

Matthew Howlett

And nan premium you’re adding, is it conscionable benignant of minimal successful position of what you’re putting connected that what you’re booking?

Jeffrey Zimmer

Scott, spell ahead.

Scott Ulm

It’s minimal. The salary ups successful general, for illustration we said earlier, are usually azygous digits, possibly half a point. But erstwhile you look astatine 5.5 aliases 6 coupons, it’s 2 points aliases so.

Matthew Howlett

Got it. Thanks a lot. Appreciate it.

Jeffrey Zimmer

Thanks for calling in.

Operator

Our adjacent mobility comes from Christopher Nolan pinch Ladenburg Thalmann. Thalmann, you whitethorn now spell ahead.

Christopher Nolan

Hey, guys. I deliberation I’ll effort to return up from nan – I deliberation nan statement of questioning Doug Harter was pursuing. On nan dividend, I’m proceeding mixed signals from nan standpoint that you’re saying that nan situation is good, and you’re going to get debased to mid-teen returns and past we’re cutting nan dividend. And I conjecture my mobility really centers, is nan dividend cutting conscionable expectations of a dramatically increasing stock count going forward? Or tin you springiness immoderate explanation connected that, please?

Jeffrey Zimmer

Sure. In each cases, erstwhile we summation our stock count, it’s to use existing shareholders and not conscionable caller shareholders. So arsenic I said before, we look astatine it very holistically. Repo rates person gone from 25 ground points to 4.5 and 4.7 correct now. So arsenic those repo rates spell up and nan tenure remains inverted to those rates, it’s mostly going to put a accent connected your net rate. So whether we had raised zero aliases $300 million, we would beryllium cutting nan dividend correct now. So please look astatine that arsenic nan holistic attack and a abstracted things. I dream that’s helpful.

Christopher Nolan

Yes, it’s helpful. It’s conscionable – I thought I heard your comments wherever – you’re going to person debased to mid-teen equity returns, which is beautiful accordant pinch what you’ve been seeing caller quarters. I mightiness person misheard it, but conscionable trying to get a clarification.

Jeffrey Zimmer

The returns disposable successful nan 14% to 16% scope and we’re presently paying astir 16%. But what I besides said and I wanted to beryllium crystal clear connected that. We person a very ample switch book that was put connected astatine very debased rates. And that still covers astir 65% of our repo book. So that is simply a existent large driver and use that we’re passing on to shareholders successful position of earnings. So that’s a trailing facet and immoderate of that has rather a ways to go.

Christopher Nolan

Okay. Thank you.

Jeffrey Zimmer

Thanks very much.

Operator

It appears location are nary further questions. This concludes our question-and-answer session. I would for illustration to move nan convention backmost complete to Jim Mountain for immoderate closing remarks.

James Robert Mountain

Well, we’d for illustration to convey you each for joining america this greeting for nan attraction that you springiness to our patient and our banal and our shareholders, and look guardant to speaking again successful April until then.

Operator

The convention has now concluded. Thank you for attending today’s presentation. You whitethorn now disconnect.

Editor: Naga



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