Earnings Labs

ARMOUR Residential REIT, Inc. (ARR)

Q3 2021 Earnings Call· Thu, Oct 28, 2021

$17.60

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Transcript

Operator

Operator

Hello, and welcome to the ARMOUR Residential REIT's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to your host today, Jim Mountain. Mr. Mountain, please go ahead.

James Mountain

Analyst

Thank you, Keith, and thanks to all of you for joining us this morning to discuss ARMOUR's third quarter 2021 results. Today, I'm joined by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer; and our CIO, Mark Gruber. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armourreit.com. This conference call may contain statements that are not recitations of historical fact and, therefore, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protections provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by these forward-looking statements due to the impact of many factors beyond the control of ARMOUR. Certain factors that could cause actual results to differ materially from those contained in forward-looking statements are included in the Risk Factors section of ARMOUR's periodic reports, which are filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. All forward-looking statements made in this conference call are made as of today's date only. They are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless we're required to do so by law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to our most comparable GAAP measures are included in our earnings release, which can be found on ARMOUR's website. An online replay of today's conference call will be available on ARMOUR's website shortly and will continue for 1 year. ARMOUR continues to concentrate its portfolio activity in agency MBS for the foreseeable future. Quarter-end book value was $11.09 per common share, down $0.19 from the end…

Scott Ulm

Analyst

Thanks, Jim. Interest rates remained at a stalemate in the third quarter between underwhelming monthly increases in employment and elevated inflation driven by supply chain disruptions and an upswing in pent-up demand. Cognizant of risks that rising prices may prove to be longer than transitory, the FOMC has finally signaled its intention to taper asset purchase amounts down to 0 by mid-2022, with the start date as soon as November 2021. Unfazed by the increasing imminence of the long-anticipated announcement on tapering, bond markets instead focused on the timing and pace of official interest rate hikes likely to follow. As of mid-October, the short-term OIS rates are pricing in approximately 2 rate hikes in 2022, followed by perhaps another 3 rate hikes in 2023. Despite higher expectations for shorter-term borrowing rates, the yield on 10-year treasuries remains below the year-to-date hybrid of 1.75%, muddying the longer outlook for an economic growth recovery. The market seems to be pricing in the looming taper, as seen by the spread widening that happened earlier this year. However, since the second quarter of 2021, option-adjusted spreads on production 30-year mortgages tightened modestly. The wall of cash from the banking community continues to provide a backstop bid to any measurable cheapening from current levels. We see a potential shift in bank demand in 2022. A continuing strong economic recovery could mean opportunity for bank lending portfolios to expand at the expense of their securities portfolios. Nominal premiums on production-specified pools were nearly unchanged in the third quarter, while OAS spreads improved by 3 to 5 basis points. Specified pools have underperformed TBAs in 2021, and we continue to view this sector as rich, supported by demand from outright yield buyers without access to the TBA dollar roll market. The specialness in production dollar rolls is…

Operator

Operator

[Operator Instructions] And the first question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan

Analyst

A couple of quick questions. Jim, was there any nonrecurring expenses or revenue items in the earnings?

James Mountain

Analyst

I think that the -- from an expense perspective, the answer is no. From a revenue perspective, we did have 1 DUS bond prepaid that had some interest make-whole in that. And I'm looking at Mark and I think that was $2 million?

Mark Gruber

Analyst

Yes.

Christopher Nolan

Analyst

Got you. And then in your comments, did you indicate that the ATM issuance was accretive to book value in the quarter?

James Mountain

Analyst

Not in the quarter. If you look at the reconciliation in the press release, I think it was $0.01 dilutive for the quarter, and the comment that I made was year-to-date, it's $0.03 accretive.

Christopher Nolan

Analyst

Great. And then I guess just a general question in terms of the overall market outlook. I mean, I appreciate the color that you guys provided in terms of your macro view. Where do you see long rates going? I mean, they've sort of been moving up and down a bit. And do you have a particular perspective as to what you're expecting for the fourth quarter and into the first quarter on that?

Jeffrey Zimmer

Analyst

It's Jeffrey. The rise in oil prices recently has caused the curve to flatten a little bit and that's taken some people by surprise. Internally, our year-end target for the 10-year note was 1.75% and we've touched that recently for a cup of coffee. If you have persistent inflation and a lot of it's exhibited itself in energy prices and commodity prices, it's flat or may stay around for a while before you have economic output increase again, with inflation slowing down a little bit. That being said, if the economy continued to perform well, you would expect the 10-year rates to be modestly higher. And the Fed will give us guidance on November 3 in terms of when they're going to do lift-off, which we think would not start until well after they stop taper. So we wouldn't expect lift-off until at least the fourth quarter of 2022. That being said, the way we're hedged, our performance is going to be driven, in the medium term, certainly by what mortgage spreads do. And although everybody in the world expect mortgage spreads to widen a little bit and we do as well, when the Fed winds down, they'll be doing constant reinvestment of their paydowns. And when the Fed gets out of the markets, it brings in other participants who have decided not to participate into the market. And generally, as Scott said in his comments, the Fed's absorbing the worst of the worst of the mortgage deliverable product, okay, and the best stuff's out there for us to buy. And we talked earlier, obviously, about the fact that we're at least 1.5 turns underneath our leverage, which provides a lot of clean air to exceed our dividend rate. So anyway, the short answer is we did expect the 10-year to get up to 1.75% by 10-year. We have achieved that. The bull flattener due to the energy and the concerns around commodity prices, it was a surprise to some but it doesn't affect what we do long term. I hope that's helpful.

Christopher Nolan

Analyst

Great. It helps, Jeff.

Operator

Operator

[Operator Instructions] And the next question will come from Mikhail Goberman with JMP Securities.

Mikhail Goberman

Analyst

Wondering how much spread widening you need to see to be able to increase leverage from this point where it is now, and also just a quick question on your outlook for prepay speeds going forward.

Jeffrey Zimmer

Analyst

Mark, why don't you address our prepay outlook because we have those in our models here for the rest of the quarter?

Mark Gruber

Analyst

Yes. For the rest of the quarter, we don't really see really any increase in prepaid speeds. We would assume maybe flat to down just slightly. So for the rest of the -- basically, for the rest of the year.

Jeffrey Zimmer

Analyst

And so what we're waiting for, and maybe everybody is waiting for this, so we might not have spreads widen so much. Let's see what the Fed says on November 3. It's widely anticipated that they would start to taper, if not toward the end of November, starting in December. And if everybody is expecting that, it'd be hard to believe you're just going to get a big 5 or 10 basis point widener. But you get 5 OAS widener here, we'll start putting a little bit of money to work. And we're not here to pick the wides or what the next perfect opportunity is going to be. We do get paydowns every month. That gives us the ability to take advantage of wideners. If spreads tighten, we'll still have to go ahead and reinvest our paydowns. Does that answer what you're looking for?

Mikhail Goberman

Analyst

Yes, that's helpful.

Operator

Operator

Thank you. And that does conclude the question session as well as the conference call. Thank you so much for attending today's presentation. You may now disconnect your phone lines.