Good morning, and welcome to the ARMOUR Residential REIT's Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead.

Thank you, Andrew, and thank you all for joining our call this morning to discuss ARMOUR's fourth quarter 2021 results. I'm joined today by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer; and Mark Gruber, our Chief Investment Officer. 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 provisions provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the 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 the forward-looking statements are included in the Risk Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. All forward-looking statements included in this conference call are made only as of today's date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required by law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included in our earnings release. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for 1 year. Since we last spoke, the interest rate and mortgage markets have been marked by choppy waters. ARMOUR's quarter end book value was $10.33 per common share, down $0.76 from September 30, 2021. This quarter-over-quarter decrease reflects spread widening…

Thanks, Jim. December's FOMC meeting resulted in a hawkish pivot, signaling the end of the quantitative easing program in at least 4 to 5 federal funds rate hikes in 2022. In addition, the FOMC hinted at a possible reduction of the Fed's balance sheet by midyear 2022. January's FOMC meeting further reinforced the resolve to address the high inflation rate, leaving all options open for an even more aggressive tightening policy on the table, including a possible 50-basis point hike in March. This hockey shifts send a strong warning to investors to reassess historically tight valuations on most asset categories, and for us, particularly U.S. Agency MBS. After OAS widened in the fourth quarter at mortgage-backed securities, there's been a further OAS widening of 15 to 20 basis points in the first quarter. While these levels are now significantly closer to longer-term historical averages, the uncertainty around the policy response to the rising rate of inflation remains high, posing further risk of widening. ARMOUR substantially reduced the risk in our mortgage portfolio early in 2022. We lowered the spread risk in our portfolio by net selling $2.9 billion of MBS, rotating our TBA positions into $600 million specified pool MBS and $1.6 billion of U.S. treasuries. This action significantly improved the negative convexity of our portfolio and lowered our implied leverage ratio from 7.5x at the end of the fourth quarter, down to 6.5x today. The other side of this wider spread and higher rate environment is better investment opportunities, and ARMOUR is well positioned to take advantage of them. 30-year agency-backed mortgage rates now exceed 4%, signaling at least a temporary end to the pandemic and our refinance wave. This will slow down prepayment speeds and potentially increase net margin on the existing portfolio and new investments. Our lower leverage gives us room for 2 or more turns of leverage to take advantage of improving investment opportunities. And we have substantial excess liquidity to support a larger portfolio and hedge book. Because we have 101% of our repo book hedged out with current pay swaps, we have removed much of the uncertainty and added borrowing expense around the exact timing and sizing of the future Fed hikes. If you include our forward-starting swaps, 123% of our repo book is hedged, and 90% of our current asset portfolio is hedged. Our average repo rate today is still historically low at just 13 basis points. ARMOUR is active with 19 different repo counterparties and approximately 49% of our principle is borrowed with our broker-dealer affiliate, BUCKLER Securities. We do see potentially significant opportunity around the corner. But for today, we maintain a lower-risk profile going into the Fed tightening and quantitative easing ending. As we've noted before, we set our dividend policy based on the medium-term outlook in our business. We continue to see our dividend level as appropriate. With that, we'd like to open up for any questions.

[Operator Instructions] The first question comes from Doug Harter with Credit Suisse.

Can you talk about the timing of the first quarter portfolio changes that you discussed, and then what conditions you would be looking for in order to kind of move -- to redeploy that capital or move out of treasuries back into MBS?

Sure, Doug. This is Mark. So those portfolio moves were pretty much towards the end of January and a little bit in February. It's kind of really throughout the first quarter, so far. To answer your question on reinvestments, look, we're looking for -- we think there should be some wider spreads going forward. We'll look at opportunities, and when we're comfortable with both the yield targets and the risk profile, we'll start to reinvest. . We don't -- there's no real timing per se where we think we have to invest. We just think there are going to be opportunities coming forward.

So the Fed meets March 16, Doug. And I think between now and then, they're going to dribble out through interviews and conferences with all the Fed members, and we're going to learn more and more and more as we get closer to that. So we believe when we get there, there'll be no surprises. And then between now and then, we suspect to see a little bit more widening. But when we start seeing low double-digit returns with all the safety features like good convexity, okay, they're not on the prepayment spectrum, in other words, they're not -- characteristically could be heavy prepays 1 month and then slow the next month, custody kind of stuff. We get all the good characteristics, you'll see us start investing. And we may invest, actually, before March '16. We'll see how things develop.

Got it. And then just on the dividend. If you look at the current rate, the $0.10 monthly divided by your current book value, that would imply, call it, a 13% return on book value. Do you think that, that is an achievable return in the current environment or where spreads might go to?

So all reinvestment right now is actually marginal money, right? Your overhead is already covered. If you look at the historical leverage in this space, it's a high 7s to high 8s kind of range. We're 2 full turns down from that. So if we invest in another $2 billion, it's more than achievable. We're just being very careful. You just have the degradation recently of the mortgage spreads. So as I just said, we're going to be slow about reinvesting. But yes, it's very achievable.

Not to mention, the swap of treasuries into mortgage-backed securities, which doesn't affect the leverage, but certainly with the mortgage-backed securities potentially a much more interesting category. But we kind of like treasuries and their lack of spread risk right now.

The next question comes from Trevor Cranston with JMP Securities.

Follow up on the question about the dividend level. With the moves you guys made so far in the first quarter, it seems like that would reduce the earnings power of the portfolio a decent amount, at least over the near term. But you guys reiterated that you're comfortable with the dividend level. Can you just sort of share your thinking around why you guys want to maintain that level with the yield that the stock is currently trading at versus maybe taking it down a notch and retaining some more capital for reinvestment in the future?

So what we've said over the last 5, 6, 7 conference calls is that we look at the dividend rate over the medium term, maybe even a little longer, what is appropriate and what this machine can earn. Although we've been a few cents under it for each of the last few quarters, it's because despite the fact that we lost some book value here, we're being defensive. And we just indicated how 2 turns of mortgage investment would add $2 billion, and I think $1.6 billion to $1.7 billion of swapping out of treasuries and the mortgages will add a lot of earnings power. So we're very comfortable with where we are right now with the dividend. We would not expect that to change in the near future.

Okay. Got it. And then on the prepay outlook, it looks like the portfolio had a pretty meaningful drop in speeds in February. Do you guys think that is sort of close to bottomed out? Or is there any additional room for that to drop, given the spec higher rates we've seen so far in the first quarter?

So our portfolio speeds are pretty low as is. We think there may be a little more room for it to drop a little bit, but we're getting closer to, we think, the turnover speeds. So a little upside to the speeds for us on the amortization earnings forefront, but we think we're close to the bottom here for us in speeds.

Okay. And would that imply that you think the portfolio is pretty fully extended with the durations where they're at currently?

Yes. Our spec portfolio, yes.

Just to be clear, Trevor, when he said a little upside, he didn't mean the upside in speed, he meant the upside in potential earnings from reduced amortization expense, just to be clear there.

Yes, I got that.

[Operator Instructions] The next question comes from Christopher Nolan with Ladenburg Thalmann.

Based on your comments, should we be expecting more investments into 30-year agencies?

I would say, yes, in that that's where we think there are going to be opportunities because we expect more spread widening there. There are already some low double-digit opportunities. But like we said, we expect some more spread widening, a little bit rise in rates. But yes, 30 years is where we'll target.

Okay. And then given your comments where the Fed -- or excuse me, the market is expecting 4 to 5 Fed hikes, are you -- and given that's been the case for at least a few weeks, did we expect further going into treasuries in the coming weeks as you guys -- you're thinking the market is not fully baking in what's going to transpire? I mean, basically, should we expect further defensive posturing of the portfolio than where it is right now?

So in regard to Scott's comments, that was more of what the Fed was implying in December meeting. What the market is implying now, I think, is a little more than that. From a portfolio perspective, I don't think we will get more defensive. We've already moved a lot into treasuries. We've taken leverage down. So I think the next time we talk, we'll probably have, hopefully, been able to do some reinvesting and added assets as the opportunities present themselves. But I think more defensive is not really where we want to go right now. I think we're set up based on our profile, our risk profile that we're very comfortable with.

Great. And are you seeing anything in terms of non-agency investments that you might consider, going back into the old CRTs or anything? Or is that too premature?

Exactly.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Mountain for any closing remarks.

Thank you, Andrew, and thank you all for joining us. We look forward to continuing the dialogue in the intervening months. So you know where to find us. If questions arise, please feel free to reach out. And until next time, everybody, stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.