Earnings call transcript: ARMOUR Residential misses Q4 2024 EPS forecasts

ARMOUR Residential REIT Inc. (NYSE:ARR) reported its fourth-quarter 2024 earnings, revealing a net loss and earnings per share (EPS) that fell short of analyst expectations. The company reported an EPS of $0.78, missing the forecasted $0.97. Revenue also came in below expectations at $49.5 million, compared to the forecast of $66.67 million. Following the announcement, ARMOUR Residential’s stock price experienced a slight decline, closing at $18.91, down 0.32% from the previous day. According to InvestingPro data, the company maintains a market capitalization of $1.05 billion and currently trades slightly above its InvestingPro Fair Value.

Key Takeaways

• ARMOUR Residential’s Q4 2024 EPS of $0.78 missed the forecast by 19.6%.
• Revenue fell short by $17.17 million from the expected $66.67 million.
• The stock price decreased by 0.32% in the aftermath of the earnings release.
• The company raised $136.2 million through an at-the-market offering.
• ARMOUR’s book value per share is estimated at $19.07.

Company Performance

ARMOUR Residential REIT faced a challenging fourth quarter in 2024, reporting a GAAP net loss of $49.4 million, or $0.83 per common share. Despite the loss, the company generated $46.5 million in distributable earnings, equating to $0.78 per share. The firm’s financial results were impacted by lower-than-expected revenue and earnings, as well as broader market conditions affecting the real estate investment trust sector.

Financial Highlights

• Revenue: $49.5 million, below the forecast of $66.67 million.
• Earnings per share: $0.78, missing the forecast of $0.97.
• Net interest income: $12.7 million.
• Raised $136.2 million through an at-the-market offering.

Earnings vs. Forecast

ARMOUR Residential’s actual EPS of $0.78 was significantly below the forecasted $0.97, marking a 19.6% shortfall. Revenue also missed expectations by approximately $17.17 million. This marks a notable deviation from the company’s historical performance, where it has typically met or exceeded forecasts.

Market Reaction

Following the earnings report, ARMOUR Residential’s stock price decreased by 0.32%, closing at $18.91. This movement reflects investor concerns about the company’s ability to meet future earnings expectations and the broader impact of market conditions on the REIT sector. The stock remains within its 52-week range, which saw a high of $21.93 and a low of $17.35.

Outlook & Guidance

Looking ahead, ARMOUR Residential anticipates a stable interest rate environment, with expectations for continued low volatility. The company aims to exceed its Q1 dividend rate with earnings available for distribution. InvestingPro analysis reveals the company has maintained dividend payments for 16 consecutive years, and analysts predict a return to profitability this year. However, potential government-sponsored enterprise (GSE) reforms present a market uncertainty. For deeper insights into ARMOUR’s financial health and future prospects, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Executive Commentary

CEO Scott Ulm stated, "We’ve been able to deploy at those expected numbers," underscoring management’s confidence in their strategic initiatives. Co-CIO Sergey Lozef added, "We don’t see an abrupt exit as the base case scenario," suggesting stability in their market approach. Co-CIO Desmond McAuley expressed comfort with the company’s leverage strategy.

Risks and Challenges

• Potential GSE reforms could impact the mortgage-backed securities market.
• Fluctuations in interest rates may affect earnings and asset valuations.
• Market volatility could influence investor sentiment and stock performance.
• Changes in the regulatory environment may pose operational challenges.

Q&A

During the earnings call, analysts inquired about the potential impacts of GSE reforms, leverage strategies, and the outlook for swap spreads. ARMOUR’s management provided insights into their strategic positioning and market expectations, addressing concerns about the repo market conditions and leverage strategy.

Full transcript - Armour Residential R (ARR) Q4 2024:

Conference Operator: Good morning, and welcome to the ARMOUR Residential REIT Fourth Quarter twenty twenty four Earnings Conference Call. All participants will be in listen only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO.

Please go ahead.

Scott Ulm, CEO, ARMOUR Residential REIT: Good morning and welcome to our fourth quarter twenty twenty four conference call. This morning, I’m joined by our CFO, Gordon Harper as well as our Co CIOs, Sergey Lozef and Desmond McAuley. I’ll now turn

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: the call over to Gordon to

Scott Ulm, CEO, ARMOUR Residential REIT: run through the financial results.

Gordon Harper, CFO, ARMOUR Residential REIT: Thank you, Scott. By now, everyone has access to ARMOUR’s earnings release, which can be found on ARMOUR’s website, www.armorate.com. This conference call includes forward looking statements, which are intended to be subject to the Safe Harbor protection provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR’s periodic reports filed with the Securities and Exchange Commission describe certain factors beyond ARMOUR’s control that could cause actual results to differ materially from those expressed in or implied by these forward looking statements. Those periodic filings can be found on the SEC’s website at www.sec.gov.

All of today’s forward looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law. Also, today’s discussion refers to certain non GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR’s website shortly and will continue for one year.

Turning to results. ARMOUR’s Q4 GAAP net loss related to common stockholders was $49,400,000 or $0.83 per common share. Net interest income was $12,700,000 Distributable earnings available to common stockholders was $46,500,000 or $0.78 per common share. This non GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. ARMOUR Capital Management continues to waive a portion of the management fees waiving $1,650,000 for Q4 which offsets operating expenses.

The waiver continues until further notice. During Q4, ARMOUR raised approximately $136,200,000 of capital by issuing approximately 7,200,000 shares of common stock to an at the market offering program. These issuances were mildly diluted to book value of $0.02 per share. Since December 31, we have continued to be active in our ATM programs, assuming approximately 14,000,000 common shares and 17,364 preferred C shares through 02/04/2025 raising approximately $259,000,000 of total net capital which again were mildly dilutive. Our work paid a monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter.

As we stated previously, we aim to pay an attractive dividend in this appropriate context and stable over the medium term. Taken together with contractual dividends on the current stock, ARMOR has made cumulative distributions to stockholders of $2,400,000,000 over its history. Quarter end book value was $19.07 per common share. Our most current available estimate of book value as of Monday, February was $19.18 per common share. Now, I will turn the call over to our Chief Executive Officer, Scott Olm to discuss ARMY’s portfolio position and current strategy.

Scott Ulm, CEO, ARMOUR Residential REIT: Thank you, Gordon. Twenty twenty four was a year of transition for Fed policy as the FOMC reduced the Fed funds rate by 50 basis points in September after keeping it unchanged at 5.25% since July 2023. The Fed stated that weakness in the labor markets prompted the larger than typical 25 basis point rate cut. If The U. S.

Economy remained resilient in the fourth quarter and as economic data continued to improve, investors reduced the number of expected rate cuts and extended their timing leading to increased bond yields and wider spreads. The outcome of the U. S. Presidential elections with a supportive pro growth agenda and a potentially larger fiscal spending program added another layer of concern for the treasury. Lastly, a hawkish rate cut at the December FOMC meeting injected another round of volatility in a month that has been historically favorable for bond investors.

Despite the fourth quarter’s swings in MBS valuations, ARMOUR maintains a constructive view on agency MBS spreads. Our positively slowed steeper yield curve and historically attractive MBS prints are currently generating approximately 150 basis points positive versus cash. Moreover, a duration hedge levered ROE measure produces some of the most attractive yields in ARMOUR’s history at 18% to 19% on the production and premium coupon MBS. Although macroeconomic and geopolitical themes continue to prevail, such an attractive carry profile leads us as buyers of MBS during episodes of spread weakness or volatility. Our view is supported by less volatile spreads of 2025 as well as the growing diversification of the mortgage investor base, which is steadily growing from money managers to continued overseas buying and bank demand turning net positive in 2024.

With monetary policy on hold, we expect rates to trade in a range bound environment over the earlier part of the year, until for consistent MBS returns.

Gordon Harper, CFO, ARMOUR Residential REIT: Of course, it is just as

Scott Ulm, CEO, ARMOUR Residential REIT: important to recognize potential headwinds facing MBS investors this year. The recent reemergence of headlines around GSE reform adds to the already busy list of macro drivers that could keep investors in cash for longer than expected. Due to bureaucratic and regulatory complexity and GSE’s outsized role in the housing market, we did not see reforms as an imminent risk, but acknowledge that the new administration, including Scott Bessner as Head of the U. S. Treasury Department and Bill Pulte as Head of the FHFA, could begin to introduce details and steps needed for eventual exit.

Our exposure to Ginnie MBS helps mitigate some of the reformers to conventional MBS for now. But until we see more concrete proposals, the current situation will leave us looking to fade headline driven volatility. Secondly, we believe the bank’s seemingly slower than expected deployment in Agency MBS assets could be driven by lack of clarity in the proposed regulatory changes, which though appearing to turn more favorable in recent months, lack certainty of details and timing. Tulsa is a win, not an issue, which we will see more transaction if Michelle Bowman has strong performance of banking regulations gets nominated and confirms as new Vice Chair for Banking Supervision. Similarly, we’ve been encouraged by Treasury Secretary of Investment’s plans to keep future coupon treasury issuance steady and tackle the budget deficit, steps that strengthen investors confidence and incentivize banks to allocate the reserves into treasury and MBS markets.

Let me turn it over to Desmond for more detail on our portfolio. Desmond?

Gordon Harper, CFO, ARMOUR Residential REIT: Thank you, Scott.

Desmond McAuley, Co-CIO, ARMOUR Residential REIT: In Q4, our agency portfolio experienced approximately four basis points of widening in nominal spreads versus approximately five basis points of widening in production MBS treasury basis. Year to date, portfolio assets have tightened approximately three basis points and our book value stands at approximately $19.18 per share as of market close on February 10. Net portfolio duration and implied leverage were at zero point three six years and 7.9 turns respectively, while cash and box liquidity is at approximately 50% of the total capital. The hedge book is composed of approximately 25% treasury based hedges and the remainder in OIS and so forth pay swaps. This allocation benefits us if swap spreads continue to appreciate and help diversify some of the risk if concerns around term funding premium resurface.

We maintain healthy levels of available capital liquidity with room to grow leverage in the appropriate market conditions. We are successful in bolstering our capital base through issuance of common and deferred equity in late twenty twenty four and in the first quarter of this year. Given our favorable outlook for MBS carry, we deployed newly raised capital to purchase approximately $2,000,000,000 of mortgage assets and TBAs year to date, which earn at or above our hurdle rate after accounting for costs and expenses. We expect earnings available for distribution to exceed our Q1 dividend rate. The overall investment portfolio remains liquid with 100% Agency MBS and well diversified across the thirty year coupon stack ranging from 2.5% to 6.5% with particular overweight to 5.56% coupons where spreads and carry are most attractive.

Portfolio MBS repayment rates have averaged 8.7 CPR in Q4 and trending at around 6.4 average CPR so far in Q1. We expect the prepayment environment to remain on eventful for our portfolio mix of modest price premiums and discount MBS and while mortgage rates remain above 6.5%. Despite the slow prepayment environment, we continue to favor specified pools, which exhibit better convexity over TBA and are less exposed to refinancings should mortgage rates rally to twenty twenty four lows of 6%. Having said that, we have increased our exposure to TBA roll in coupons where we see some return in roll specialness since the start of the year. While these are not core long term positions, they help enhance market liquidity and flexibility of the portfolio.

The repo market experienced some pricing pressures at the year end as expected, but have since returned to a more typical so far plus 15 basis points repo spread. We fund 40% to 60% of our MBS portfolio with our affiliate Boklo Securities, while spreading out the remaining repo balances across 15 to 20 other counterparties to provide ARMOR with the best financing opportunities. Overall, repo funding for Agency MBS remains plentiful and competitively priced across the board and Fed Chairman Powell continues to reiterate that banking reserves remain abundant. Back to you, Scott.

Scott Ulm, CEO, ARMOUR Residential REIT: Thank you very much. At this point, I think we’d like to open up for any questions.

Conference Operator: Yes, sir. We will now begin the question and answer session. The first question comes from Doug Harter with UBS. Please go ahead.

Doug Harter, Analyst, UBS: Thanks. First, just a clarification on the book value update. How does that factor in February’s dividend?

Gordon Harper, CFO, ARMOUR Residential REIT: It does not, as we know, ex dividend by the end of this week.

Doug Harter, Analyst, UBS: Okay. I appreciate that. And then just I guess how are you thinking about the outlook for volatility and the potential costs of volatility on your returns?

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: Yes. Good morning, Doug. This is Sergei. How are you? Thank you for your question.

We’ve seen volatility decline here both in rates and spread. And I think this has been kind of really the tailwind for the MBS market to earn consistent ROE without the volatility that we’ve seen over the last two years. We expect this volatility to continue to run lower. With the Fed on hold, we feel like this will be more range bound environment that we’ve seen in prior years. At the same time, we do feel like there’s more cuts in the table.

The question is going to be their timing, but overall, the volatility aspect of the market looks very favorable.

Conference Operator: The next question comes from Jason Weaver with Jones Trading.

Jason Weaver, Analyst, Jones Trading: Scott, I think in your initial comments, you mentioned you expect something like 18%, nineteen % ROE on generics concurrently. How does that compare with your actual deployment, the $2,000,000,000 of actual deployments year to date? What are you expecting there?

Scott Ulm, CEO, ARMOUR Residential REIT: We’ve been able to deploy at those expected numbers.

Jason Weaver, Analyst, Jones Trading: Okay. That’s fair. I just want to verify.

Scott Ulm, CEO, ARMOUR Residential REIT: Yes. I can’t tell you what tomorrow brings, but we’ve been pretty encouraged by what we’ve been able to achieve with the capital.

Jason Weaver, Analyst, Jones Trading: Got it. Thank you for that. And what we’re seeing on the screen, at least year to date is mirroring your expectation of somewhat tight spreads even in the face of some of these hotter inflationary prints. I was curious, internally, what are the biggest sort of risk factors you’re concerned about for spread widening going forward?

Scott Ulm, CEO, ARMOUR Residential REIT: There’s always stuff to worry about as you know, right? It starts with geopolitical stuff that’s out there. It follows through. We’ve got GSE reforms have been of a wild card. As we said, the outlook, I think that’s going to be a heavy lift.

It’s been on the agenda for past Trump administrations and didn’t quite get there and there is certainly headline risk there, comments on what could happen, but there’s a lot of wood to chop on that one. But that could introduce some headline stuff there. We’ve got ongoing fiscal issues, treasury supply that might be there and obviously we’ve got this inflation story which continues to evolve. Probably another couple of pages of things that we’ve come up with. There’s always a lot to worry about something going bump in the night.

Conference Operator: The next question comes from Jason Stewart with Janney Montgomery Scott. Please go ahead.

Doug Harter, Analyst, UBS: Hey, good morning. Thank you. I wanted to follow-up on the GSE reform topic. Thanks for the color and the comments there. Maybe if you could put a finer point on how much you think is priced into the mortgage basis right now?

And as we go through that process and that we see headlines, what kind of widening you would expect to see in terms of basis points? And how you would position the portfolio and risk for that environment?

Scott Ulm, CEO, ARMOUR Residential REIT: That’s a tough one. Look, I saw some research that said if the agencies were stood on their own, they’d be single A rated and cuff that at 70 or 70 basis points or a point of additional spread required, that’s a big number. On the other hand, I think it’s a little beyond the pale to think that after the better part of a century of enjoying a implicit government guarantee, Now we’ve got and then obviously there is just making it explicit in law, but we’ve got preferred purchase stuff and five treasury secretaries that say they backed the agencies that we’re going to walk away from the implicit support that we’ve got. My bad is that we’ll see efforts to exit Conservancy and probably tie that with substantial private capital tied to the front bumper to protect the taxpayer, but still leaving some version of what’s been in place for a long time. How much is priced in today?

I don’t know a lot. I wouldn’t say it’s done because it’s hard to say none. But I don’t think there’s a whole lot priced in right now.

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: Yes. A good measuring tool for that are Genie Fannie Swaps, which haven’t really reacted to many of the headlines that you see in the equity markets. So that kind of underlines what Scott just mentioned. The steady growth of retained earnings could put them on the path to eventual exit. So the new FHFA Director could look to increase their profitability through certain ways like increasing the risk premiums on loans and things like that.

So this could reshape the footprint of GSEs going forward, but we don’t see an abrupt exit as the base case scenario.

Scott Ulm, CEO, ARMOUR Residential REIT: Okay.

Doug Harter, Analyst, UBS: That’s helpful. So net takeaway for ARR would be debt to equity probably doesn’t change much unless we get a material shift in terms of the path forward?

Scott Ulm, CEO, ARMOUR Residential REIT: Agree with that.

Doug Harter, Analyst, UBS: Okay. That was it for me. Thank you.

Scott Ulm, CEO, ARMOUR Residential REIT: Thanks.

Conference Operator: The next question comes from Mikhail Goberman with Citizens JMP. Please go ahead.

Mikhail Goberman, Analyst, Citizens JMP: Hey, good morning guys. Thanks for taking the question. Sitting in for Trevor today. Just curious, what would you guys need to see to either increase or decrease leverage from this point on?

Desmond McAuley, Co-CIO, ARMOUR Residential REIT: Yes. Hi, Mikhail. So we are very comfortable with the current leverage. The last time we checked, we were somewhat above the average of our peers. So we like the leverage where it is today given the compelling returns, profile of assets that we purchase.

Yet as we mentioned in our prepared remarks, there are some questions that

Scott Ulm, CEO, ARMOUR Residential REIT: we

Desmond McAuley, Co-CIO, ARMOUR Residential REIT: are looking to have answered in order for us to increase our leverage that is the GSE reforms, QT, the timing of any potential tapering of QT. These are the things that we are kind of looking for more clarity on in order to increase leverage from here. In terms of potentially decreasing leverage, we don’t see that in our base case. But if for example, we see the curve flattening for some reason, maybe more Fed hikes get priced in, those could be the areas of concern that may cause us to reduce our leverage. But those are tail risks.

We don’t see that as base case.

Mikhail Goberman, Analyst, Citizens JMP: Got it. Thank you. And what is your outlook on swap spreads for this year and the trade off of using swaps versus treasuries for hedges?

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: Yes. So swaps spreads have got quite a move this year. I think we moved more than 10 basis points from the site late December. This was all driven by the fact that Treasury Secretary’s commentary and commitment to bringing term premium lower, as well as some of the banking deregulation proposals by the Fed and potentially new Vice Chair, Michelle Bowman. So a lot has been priced in behind those comments already.

I think the next pricing point is going to be what actions are actually going to be taking. So we use our slot position of 75% versus 25% in treasuries as kind of very base case comfortable position where we are well positioned for the further widening appreciation of swap spreads. But if things turn around, we do have a treasury position to diversify some of that risk.

Mikhail Goberman, Analyst, Citizens JMP: Great. Thank you for that color. And just to confirm on current book value, that’s $19.18

Gordon Harper, CFO, ARMOUR Residential REIT: Correct. Dollars 19.18.

Mikhail Goberman, Analyst, Citizens JMP: Great. Thanks a lot. Best of luck going forward, guys. Thank you.

Conference Operator: The next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Scott Ulm, CEO, ARMOUR Residential REIT: Hey

Christopher Nolan, Analyst, Ladenburg Thalmann: guys. First on the ATM 136.2%, was that gross or net?

Scott Ulm, CEO, ARMOUR Residential REIT: Net.

Christopher Nolan, Analyst, Ladenburg Thalmann: Okay. And then as memory serves, last quarter, you guys basically were increasing your portfolio waiting into lower coupon shorter term MBS on the expectations of further Fed rate cuts. Now fast forward to the fourth quarter, has your expectations of rate cuts changed with the outcome of the presidential election? And are you positioned the portfolio more for a higher long end? Or if you can give a little color in terms of how your portfolio position has changed?

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: Yes. Thank you. So we followed the model, don’t fight the Fed. In December meeting, they’ve indicated that rates are still well restricted territory and that’s well above the neutral rate. Now since then, we did have new economic data releases, including unemployment and CPI.

So a lot of these things will continue to move the timing of further cuts, but we still firmly believe that there’s more cuts on the table and we’re positioned for underation and coupon stack positioning. Now, what the guys said in terms of ROE, the most attractive part in the coupon stack is in 5.56 higher coupon positioning. So we’ve been particularly active there.

Doug Harter, Analyst, UBS: Great. Okay. Thank

Conference Operator: The next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen, Analyst, BTIG: Thanks. Good morning. Another follow-up on the asset selection. I mean, I think you mentioned liking higher coupon specified pools. How are the pay ups right now relative to pay ups in the current coupon historically?

And do you feel like payoffs maybe have as much value as they have historically, just given how aggressive the originators are in targeting borrowers for a refi?

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: Yes, that’s a good question, Eric. A lot of this spec payoffs have appreciated over the last few months. We’re seeing the theoretical breakeven on the payoffs versus the model approaching close to 100%. So this is why we’ve increased our positioning in TBA dollar rolls as well to kind of diversify away from full pay up premiums. But so that’s been the strategy to wait out into some of the TBA positions to be able to swap back in spec when we see them more attractive.

Eric Hagen, Analyst, BTIG: Okay, interesting. Going over to repo market conditions, I mean, do you feel like the steeper yield curve is supportive for spreads and liquidity in the repo market? And how much demand do you guys see to extend repo pick up term repo right now? Thank

Sergey Lozef, Co-CIO, ARMOUR Residential REIT: you. Yes. So the repo curve, let’s pick up as we look at one to two months is relatively flat. So it’s really more depends on kind of what the initiatives out of the Treasury Department are coming in terms of their funding and their financings and how that affects the calendar rates. But overall, repo market has been extremely well behaved since the year end.

I think we’re seeing kind of sulfur plus mid teens type of spreads and that part of the market is very beneficial to the agency MBS.

Conference Operator: This concludes our question and answer session. I would like to turn the conference back over to Scott Olm for any closing remarks.

Christopher Nolan, Analyst, Ladenburg Thalmann: Thank you so much for joining us this morning,

Scott Ulm, CEO, ARMOUR Residential REIT: and we look forward to speaking with you. Feel free to call us with any follow ups you have. Thank you.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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