Armour (ARR) дзвінок щодо прибутків за 2 квартал 2025 року, транскрипт

Image source: The Motley Fool.

DATE

Thursday, July 24, 2025 at 8 a.m. ET

CALL PARTICIPANTS

- Chief Executive Officer — Scott Jeffrey Ulm

- Co-Chief Investment Officer — Desmond E. Macauley

- Managing Director — Sergey Losyev

- Chief Financial Officer — Gordon Harper

Need a quote from a Motley Fool analyst? Email [email protected]

Full Conference Call Transcript

ARMOUR's Q2 GAAP net loss related to common stockholders was $78.6 million or $0.94 per common share. Net interest income was $33.1 million. Distributable earnings available to common stockholders was $64.9 million or $0.77 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 waived a portion of their management fees, waiving $1.65 million for the Q2, which offsets operating expenses. During Q2, ARMOUR raised approximately $104.6 million of capital by issuing approximately 6.3 million shares of common stock through an at-the-market offering program.

Since June 30, we have raised approximately $58.8 million of capital by issuing approximately 3.5 million shares of common stock through an at-the-market offering program. We currently have outstanding 91.5 million common shares. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On July 30, 2025, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on July 15, 2025.

We have also declared a cash dividend of $0.24 per outstanding common share payable August 29 to the holders of record on August 15, 2025. Quarter ending book value was $16.90 per common share. Our estimate of book value as of Monday, July 21, was $16.81 per common share, reflective of the accrual of the July common dividend. I will now turn the call over to Chief Executive Officer, Scott Ulm, to discuss ARMOUR's portfolio position and current strategy.

Scott Jeffrey Ulm: Thanks, Gordon. Just a note to the team. I had a connectivity problem a second ago. So if I disappear, just continue with what we have to say here, but we should be just fine. Well, thanks all. As we entered the second half of 2025, the debate around U.S. fiscal sustainability, Fed independence and trade dynamics continues to weigh on the macro landscape. While we don't expect these issues to be resolved quickly, markets appear to have digested much of the initial shock as rates and spreads have settled into stable ranges and volatility has drifted lower. On the monetary policy front, incoming U.S. economic data indicates solid economic growth that's supportive of the Fed's wait-and-see approach.

While Fed policy rates remain on hold, elevated short-term yields are absorbing investor liquidity. However, we believe that a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into Agency MBS. Current coupon MBS spreads have retraced from April's historically distressed levels, supported by declining volatility. The MBS to SOFR spreads have consolidated back towards an average of the spread levels observed in 2025. They widened by approximately 10 basis points quarter- over-quarter and remain historically cheap. The 30-year fixed mortgage rate was near 6.75% through late June and early July, effectively dampening refinancing activity and keeping net mortgage supply muted.

This tightening backdrop, while a challenge for borrowers, continues to create compelling opportunities for investors in high carry production Agency MBS. At the policy level, the U.S. housing finance system remains a central topic in D.C. The FHFA Director, Bill Pulte, has begun to implement reforms aimed at streamlining the GSEs, Fannie Mae and Freddie Mac, with administration officials signaling support for retaining an implicit government guarantee for the GSEs. While public rhetoric hints at an eventual need to end conserverthip, we view these developments as constructive yet not imminent. I'll now turn it over to Desmond for more detail on our portfolio. Desmond?

Desmond E. Macauley: Thank you, Scott. ARMOUR's estimated net portfolio duration and implied leverage are closely managed at 0.46 years and 8 turns, respectively. Our total liquidity is strong at approximately 52% of the total capital as of July 21. Our hedge book reflects a balanced view of duration with a bias for further Fed easing. Hedges are composed of about 33% in treasury shorts and futures with the remainder in OIS and SOFR swaps as measured on a DVO1 basis. While SOFR swaps are cheaper hedges, treasuries have proven to be a more effective hedge instrument for mortgages as of late. ARMOUR is invested 100% in Agency MBS, Agency CMBS and U.S. treasuries.

Our MBS portfolio remains concentrated in production MBS with ROEs in the 18% to 20% range. The portfolio remains well diversified across the 30-year coupon stack, Ginnie Mae's and in DUS whose positive convexity and short duration attributes offer better value over comparable 15-year MBS pools. Portfolio MBS prepayment rates have averaged 7.7 CPR in Q2 and are trending at around 8.3 CPR so far in Q3. We see no signs of material acceleration unless mortgage rates drop significantly. We continue to favor higher loan balance and credit specified pools with favorable convexity and prepayment profiles to TBA and generic collateral. Our TBA exposure is light at $300 million and remains a tactical tool to manage MBS coupon positioning.

ARMOUR forms 40% to 60% of our MBS portfolio with our affiliate BUCKLER Securities, while spreading out the remaining repo balances across 15 to 20 other counterparties to provide ARMOUR with the best financing opportunities at an average gross haircut of 2.75%. Overall, MBS repo funding remains ample and competitively priced, ranging at around SOFR plus 15 to 17 basis points. We are increasingly optimistic that structural demand for MBS may improve later this year. Evolving regulatory clarity around banking reform and a resumption of the Fed easing policy could act as meaningful catalysts for increasing banking demand.

This, combined with constrained mortgage supply, sets up a highly constructive technical backdrop for Agency MBS, while historically wide spreads signal strong risk to reward incentive to own mortgage assets. I'll turn it over back to you, Scott.

Scott Jeffrey Ulm: Thanks, Desmond. ARMOUR's approach remains unchanged: grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity and dynamically adjust hedges for disciplined risk management. We're confident in our positioning, strategy and ability to deliver value for shareholders. As you know, we determine our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns available. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions.

Operator: [Operator Instructions] The first question comes from the line of Doug Harter with UBS.

Douglas Michael Harter: I was hoping you could just talk about your philosophy for managing spread duration risk as you go through a volatile period like you did in April and the second quarter in total and kind of just give us a little more on the thought process.

Scott Jeffrey Ulm: Yes. Doug. So on spread risk, I can start with just our leverage, which we are very comfortable with at this point. We think that spreads remain historically attractive. And for that reason, we could potentially look to even modestly increase our leverage here. Currently, we are around just a little bit below the average over the last 6 to 12 months, our own average over the last 6 to 12 months. In terms of duration, we manage it dynamically. We've recently increased our hedges in longer duration assets, longer duration beyond the 10-year point to adjust for what we saw in Q2 where there was steepness of the curve in 10-year maturities and beyond.

Operator: The next question comes from the line of Trevor Cranston with JMP Securities.

Trevor John Cranston: Looking at the portfolio data, it looks like the allocation to higher coupons like 6s and above declined during the second quarter. Can you guys just comment on where you're seeing the best value in the coupon stack and kind of where you guys are deploying marginal dollars as you raise capital?

Sergey Losyev: Trevor, this is Sergey. Yes, so I think we might have talked about it on the last earnings call, there was a volatility during the first half of April. That is probably where the sizes might have been reduced. But overall, we remain favorable of 5.5 and 6 coupons. These are the highest ROE coupons that we are currently modeling. So with the prepayment environment remains very benign. This is -- remains our focal point for the portfolio. We don't really expect large changes near term.

Trevor Cranston: Got it. Okay. And I guess the other notable thing there was the -- there's the new line item for the long treasury position. Can you just comment on kind of the -- what the role of that is within the portfolio?

Sergey Losyev: Yes. So as you know, we view 5-year point on the yield curve as a very important pivotal point for managing overall portfolio duration risk and just responding to the monetary policy and all across the yield curve. So 5-year treasury serves as part of that hedging strategy, but it also is used as a proxy for our Agency CMBS position. As we know, we hold slightly just below maybe 5% of our portfolio. And we are very tactical about that market. We tend to go in when spreads widen and reduce our allocations when we see spreads on the more richer side.

And 5-year treasuries help us kind of hedge that position and be able to rotate among those asset classes.

Operator: The next question comes from the line of Randy Binner with B. Riley.

Randy Binner: I just have one on the model and total expenses after fees waived reported in the quarter was $14.3 million. That was just a little bit higher than what trend was and what we were looking for. Was there anything unusual in that line item this quarter or seasonal? Or is that a level we would expect going forward?

Scott Jeffrey Ulm: I wouldn't say it's a level we'd expect going forward. We had a bit more professional fees than we had probably in the first quarter, just on things that we were working on. So that -- as we explained in the 10-Q, some of that can just vary quarter-to-quarter, but not expecting sort of the same run rate on expenses.

Randy Binner: And that's helpful. And then just to be, I guess, 100% clear, that line item, if you had higher hedge costs or volatility there because of interest rates moving around in April, that would be netted -- that would not be in that line item. That would be elsewhere, correct?

Scott Jeffrey Ulm: Yes. That's up in the derivatives.

Randy Binner: Yes, got it. Okay.

Operator: The next question comes from the line of Jason Stewart with Janney.

Jason Michael Stewart: Just big picture, as you think about constructing the hedge portfolio and the coupon stack, how do you balance total return versus carry as we start to see some of these dislocations in swaps versus treasuries?

Desmond E. Macauley: Jason, so in terms of our portfolio, on the hedge side, we mentioned our duration. We are positioned for a bullish steepener, and we adjust our hedges appropriately. And it's pretty dynamic. It's our view of the macroeconomic environment. We like to stay diversified across the coupon stack. The lower coupons would benefit if we do see rate rally. We expect that a rally could take place when the Fed resumes normalization. -- which we are expecting later on this year to the fall -- in the fall or later. The higher coupons could benefit in a steepener where in any steepness scenario, the CPRs, projected CPRs could be slower and those could benefit the higher coupons.

We're looking to reinvest muscle in production coupon 5.5 and 6s. These are specified pools. They have the prepayment characteristics that we talked about in our prepared remarks. And that is supposed to improve the overall convexity of our portfolio. And last, of course, we also have those securities with even positive convexity. So best to stay diversified across the coupon stack, and looking to add more in production coupons in terms of reinvesting paydowns and also reinvesting any equity capital raises.

Sergey Losyev: Yes. And just to add on the hedge book side, Desmond mentioned, on DV01 basis, we're about 33% in treasuries. On a notional basis, it's closer to 20-80. We still like to use interest rate swaps as the main hedge instrument. It's a cheaper hedge. Obviously, from a total return, treasuries have been a more effective hedge as of late. So we're keeping this -- the balance of the hedge book right where we feel like it provides both the carry and the total return opportunity from both sides.

Jason Michael Stewart: Okay. So does the 18% to 20% range keep the hedge book with the same composition that you have right now in 20-80 notional?

Desmond E. Macauley: So 18% to 20% would be for like our production coupon 5.5 and 6s. In terms of -- that would -- if you look at it from a total return perspective, then it -- the hedge -- like if we use swap hedges and we run swap hedges to forwards, the total return would be roughly 0 in that case. So a 20% return on production coupons, it's pretty much -- doesn't matter whether we use swaps or treasury futures. So in that framework, 18% to 20%, I should also point that, that's in the base case, right? We think spreads are really attractive at this point.

So if we take, for example, we see a 10 basis points tightening in OAS, that can add another 4% to that number. And also keep in mind as well that the repo rate has been stable throughout the entire year. The Fed has not cut this year. If we do see resumption in normalization, we can expect even in the base case for those returns to look even more attractive. But as it is right now, they are more attractive. They either meet or exceed our hurdle rate. And that's one of the reason that we are very optimistic about our current environment.

Jason Michael Stewart: Okay. That's helpful color. And then just on the ATM program quarter-to-date in 3Q, could you give us an idea of how that was raised relative to book and where book was today?

Scott Jeffrey Ulm: I don't have book value for you as of today, but book is, as we said, was $16.81 as of Monday. And the issuances were just mildly dilutive, just a couple of cents per share.

Operator: The next question comes from the line of