Participants

Scott Ulm; Co-Chief Executive Officer, Co-Vice Chairman of the Board and Head of Risk Management; ARMOUR Residential REIT Inc

Gordon Harper; Chief Financial Officer, Controller, Company Secretary; ARMOUR Residential REIT Inc

Sergey Losyev; Deputy Chief Investment Officer; ARMOUR Residential REIT Inc

Doug Harter; Analyst; UBS Equities

Trevor Cranston; Analyst; Citizens

Randy Binner; Analyst; B. Riley Securities

Eric Hagen; Managing Director; BTIG LLC

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc

Presentation

Operator

Good day, and welcome to ARMOUR Residential REIT's first quarter 2025 earnings conference call. (Operator Instructions) Please note, the event is being recorded.
I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Scott Ulm

Good morning, and welcome to ARMOUR Residential REIT's first quarter 2025 conference call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley.
I'll now turn the call over to Gordon to run through the financial results. Gordon?

Gordon Harper

Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armourreit.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 on most 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.
ARMOUR's Q1 GAAP net income available to common stockholders was $24.3 million or $0.32 per common share. Net interest income was $36.3 million. Distributable earnings available to common stockholders was $64.6 million or $0.86 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 or futures contracts, minus net operating expenses.
ARMOUR Capital Management, we had a portion of their management fees, waiving $1.65 million for Q1, which offsets operating expenses. During Q1, ARMOUR raised approximately $371 million of capital by issuing approximately 20 million shares of common stock turn at the market offering program and $300,000 of capital by issuing approximately 17,000 shares of preferred C shares. These issuances were mildly dilutive to book value.
Since March 31, we have repurchased 666,000 common shares. ARMOUR paid monthly common stock dividends 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 April 29, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15. We have also declared a cash dividend of $0.24 per outstanding common stock payable May 29 to holders of record on May 15, 2025.
Quarter end book value was $18.59 per common share. Our most current available estimate of book value is as of April 23 and was $16.56 per common share. This is after the accrual of April dividends to be paid next week.
Now I will turn the call over back to Scott Ulm to discuss ARMOUR's portfolio position and current strategy.

Scott Ulm

Thank you, Gordon. Substantial policy changes in trade, immigration, fiscal policy, and regulations of Asherton pronounced macroeconomic uncertainty, along with upward pressure on longer interest rates, volatile markets, and dislocations in asset swap spreads. ARMOUR's strong liquidity of over $750 million, we believe that ARMOUR is positioned to withstand short-term headline volatility as well. The recent steepening performance in the rates curve, along with MBS SOFR spreads hovering close to 200 basis points, levels comparable only to extreme and short-lived disruptions in the past, offer significant value to mortgage investors.
On a duration hedged and levered basis, the ROEs on production and premium coupon MBS look very compelling, with estimates ranging from 18% to 21%, among the highest seen in our history. We're also paying attention to the developments in GSE reform under this administration. Comments and actions by Bill Pulte at the HFA and Scott Bessent at the treasury suggests that this administration may seek to accelerate the framework for eventual GSE exit. We still view structural changes as a long-term process and believe that the complexity and systemic importance of the GSEs make near-term action unlikely.
Given that the mortgage and housing market make up as much as 28% to 30% of the economy, any reform efforts must be approached with caution as they carry broad implications for economic stability and growth.
As we move further into 2025, we expect the macro backdrop to remain dynamic. The rates market is pricing in over three Fed rate cuts this year, a reflection of the Fed's anticipated dovish reaction function to support a weakening economy, a positive for MBS. Renewed discussions around modifications to the supplementary leverage ratio or SLR, coupled with sooner-than-expected tapering of the quantitative tightening program, layer on a structural tailwind to bank demand for Agency MBS.
With increasingly supportive technicals, strong carry, and historically wide valuations, Agency MBS remains a core opportunity within the fixed income landscape. ARMOUR continues to seek value during bounce of spread weakness with confidence in the sector's resilience and the long-term strength of the US housing finance system.
Let me turn it over to Sergey for more detail on our portfolio.

Sergey Losyev

Thank you, Scott. In Q1, our agency portfolio experienced a modest 2 basis points of tightening. Amidst the global market volatility in April, our portfolio agency assets have widened approximately 15 basis points in (inaudible) quarter-to-date. Our estimated net portfolio duration and implied leverage at 0.5 years and 8.1 times, respectively, while total liquidity is approximately 50% of the total capital. The hedge book is composed of nearly 30% treasury-based hedges and the remainder is in OIS and SOFR based swaps. This allocation benefits us if swap spreads will begin normalizing while also help diversify some of the risk is concerned around the term funding premiums (inaudible).
ARMOUR's investment portfolio is in 95% of most liquid Agency MBS, which includes TBA deliverable specified pools and TBA contracts. The portfolio is diversified across the 30-year coupon stack ranging from 2.5 to 6.5 coupons with overweight in 5.5% and 6% coupons, where spread and carry are most attractive. The remaining 5% market value is allocated to five-year Agency CMBS pools whose positive convexity and short duration attributes offer much more value and upside versus comparable 15-year MBS pools.
Portfolio MBS prepayment rates have averaged 6.1 CPR in Q1 and are trading at around 7.8 CPR so far in Q2. We expect the prepayment environment to remain uneventful for our portfolio mix of modest price premiums and discount MBS, while mortgage rates remain elevated above 6%, keeping the refinance activity and net supply at bay. Despite the slow prepayment environment, we continue to favor credit in investor specified pools, which help improve overall portfolio convexity and will benefit from a potential increase in loan level pricing adjustments or LLPAs under Bill Pulte's FHFA leadership.
We also maintained some exposure to TBA rolls, which, while not a core long-term position, help enhance market liquidity and flexibility of our portfolio. We fund 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, reflective of the broader backdrop of abundant banking system liquidity, a point that's consistently empathized by (inaudible) members.
And now back to you, Scott.

Scott Ulm

Thank you, Sergey. 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 that are available. Thank you for joining today's call and your interest in ARMOUR.
We're happy to now answer your questions.

Question and Answer Session

Operator

(Operator Instructions) Doug Harter, UBS.

Doug Harter

Thank you. Hoping you could talk about how you're approaching risk management in this type of environment, thoughts of how you're thinking about leverage levels, the kind of the cost of kind of selling assets and potentially missing on a recovery of spreads versus kind of taking risk off in an incredibly unpredictable environment.

Scott Ulm

Well, that is the question, Doug. And that's what we focus on. It seems like every day, every hour in the last few weeks. Look, liquidity is king. And we are intensely focused on liquidity.
We have the advantage of being an agency portfolio. So we don't have some of the exogenous stuff that can happen elsewhere in the market. On the other hand, agencies are highly liquid. And when people need to raise cash, I suspect they're number two on the list of places to raise cash.
We look closely at leverage. We've been running in the [7%] to [8%] level, though, as I think we've said in the past, that's sort of more of an output than an actual input, but it's an important metric to look at. And all of that is against the temptation of very attractive investment opportunities that are out there. And further, the opportunity that you think about buying back stock, which we did a little bit of. But again, liquidity is king, and we are very jealous of our liquidity in volatile times.
And I don't see that changing. But striking that balance is important among all of the factors that are there both in terms of opportunities and maintaining an appropriate level of defensiveness.

Operator

Trevor Cranston, JMP Securities.

Trevor Cranston

Hey, thanks. Looking at the portfolio data, it looks like during the first quarter, the allocation (inaudible) went up a little bit. Can you guys talk a little bit about where you're seeing the best opportunities within the coupon stack? And post quarter end, it looks like the portfolio size is down a little. If you could just comment on what you might have sold post quarter end. Thanks.

Gordon Harper

Yes. Hi, Trevor. So we seek to maintain a diversified portfolio. Our bias right now is to continue to buy production coupons. We see very attractive ROEs there. We are probably [biased] to slightly below par, so 5% and 5.5% coupon, expecting that a weakening economy could cause our lower treasury yields.
And yeah, we want to stay diversified. We may also buy five [via those] securities just based on the positive convexity, which we like to balance in our portfolio is a good diversifier to MBS, and it benefits in the core steepener as well. And their prices are looking attractive.
You mentioned -- I guess, your second question was post quarter end, so we still like the Agency MBS landscape. There are many factors, many tailwinds here. The levels are very attractive. The curve has steepened significantly. We also see prepayments as muted, as we said in our prepared remarks, given mortgage available 6.5%, and the funding markets are very stable. With that said, on April 2 was a very significant risk event, and we saw the shocks that went through the market.
We decided to sell some assets there, understanding that even post sales, our leverage was still significant enough, where we felt we had enough spread risk to participate in any further spread tightening.

Trevor Cranston

Got it. Okay. That's helpful. And you were talking about maintaining adequate levels of liquidity, obviously, in a volatile market. You did buy back some shares in April. Could you just comment on like how much capacity you think you have to continue potentially buying back shares while still maintaining levels of liquidity that you're happy with? Thanks.

Scott Ulm

Yeah, there's some capacity there, and how we view that capacity depends on our outlook over a short term and a bit of a medium term, but we maintain very substantial liquidity. But obviously, when you buy back shares, you're talking about an adjustment that has knock-on effects through the portfolio as well. And we like the returns available in that portfolio. So we're not looking to cut the size of the portfolio per se.
But certainly, we have capacity, and we look at it. And I think the point is that we're willing to be on both sides of the market here.

Trevor Cranston

Okay. Appreciate the comment. Thank you.

Operator

Randy Binner, B. Riley.

Randy Binner

Thank you. I appreciate your comments on GSE reform and Pulte's comments that it seems like something is going to move forward, and there's been staff changes at Fannie Mae in particular. I think it would be interesting to hear your perspective on the key things that we should look for as we learn more about the potential reform. I mean, I understand from your comments that it's a big change, and it's longer term. But it would be helpful to think of how the details of it could manifest themselves early on.
And I mean if there's any scenario where it doesn't need to be necessarily a headwind but could be a tailwind for the market. Just interested in a little bit of kind of like what we should look for as observers of this and as it relates to ARMOUR.

Scott Ulm

Well, as it relates to ARMOUR, it really relates to all of us in a lot of ways, right? Nothing specific to us. But to my mind, the big one is the sovereign backstop, which, obviously, we have explicitly with Ginnie, and we've got in structural format with Fannie and Freddie. But that is, to my mind, hugely important impacts potentially on risk weights and things like that and also as a touchstone for the conversation, which is what makes the GSEs a different kind of competitor in the mortgage market than private entities.
So that, to me, is the big one to look for. And then you get to the whole mosaic of guarantee fees and capital that would be put in and what sort of rating might exist on a stand-alone basis, which is important as well. All of those things go into the mix. I just hope that as this rolls out, that the communication is carefully, carefully modulated and presented and rather than sort of bits and pieces coming out. We always worry about headline risk that even if it gets resolved, can make life interesting for everybody for more than a few days.

Randy Binner

Right. That's helpful. And I guess the follow-up question would be, have you -- I think there was some commentary on the last call and the Q&A about -- some had asked you all if you thought it was priced in and I think Ginnie and Fannie swaps were kind of a data point, but do you -- just being in the market every day, there's been more comments from Pulte since our last call. Do you get a sense that this is more priced into the market at all with just kind of observing what you see every day?

Sergey Losyev

No, we see kind of stability in Ginnie swaps mostly reacting to interest rate volatility that we've seen as of late. So in our regard, I think the mortgage market is just looking for more concrete ideas. We're seeing a lot of ideas floating out there. But until we see a road map or some sort of a blueprint from either Bill Pulte or treasury or any part of the administration, it's really hard to try to price things.
And as we mentioned in our prepared remarks, I think the easiest step -- the first step for any kind of GSE reform, we'll be streamlining the profitability of the enterprises. And I think Bill Pulte has been very clear about adjusting some of the risk fees on the loans and based on the credit worthiness of the borrowers. So I think we're going to see some signs of that first before we see any kind of longer-term exit plans I think that's kind of the plan we're following here as well.

Randy Binner

Okay. Understood. That's very helpful. Thanks for the comments.

Operator

Eric Hagen, BTIG.

Eric Hagen

Thanks. Good to hear from you, guys. Just given this dislocation in swap spreads, how do you feel like that drives the way in which you rebalance your hedges around volatility on a go-forward basis, like the hedges in the backlog of the existing portfolio? Thank you, guys.

Gordon Harper

Yeah. So hi, Eric. So in regards to swap spreads, we want to maintain a diversified portfolio of our hedges. So in Q1, we increased the share of our treasury-based hedges slightly from 25% to 30%. And that benefited our portfolio when we saw a very significant tightening of swap spreads.
So now we have about roughly 70% of our portfolio hedges in swaps, we are actually comfortable with that larger share. We feel it's been a very significant dislocation in swaps spreads so far, and we expect that at some point, we will see normalization.
Now it can come in different ways. It could be through the supplementary leverage ratio, which may allow banks to intermediate better and buy more trade spreads in case we see potentially higher term premium. So yeah, so we're happy and content with our current share. With that said, if we do get any more dislocation, the 30% of treasury-based hedges would be there to help protect our portfolio.

Eric Hagen

Yeah. Okay. That's helpful. I appreciate that. Can you guys share how you think release on the supplementary leverage ratio could drive both supply and demand for repo funding, specifically at FICC, the venue where you guys have direct access to the repo dealer?

Scott Ulm

The primary driver is -- so you're talking about banks here and supplementary leverage has always worked to make low -- high quality, low ROE assets less attractive on the balance sheet. And that's kind of precisely what Agency MBS is and even more precisely what repo is.
So to the degree that assets which have extremely high quality but lower ROE but occupied balance sheet become more attractive or even possible to hold, not crowding out more profitable assets, it should work to the favor of repo overall, meaning improving ability of tradition -- but have always been traditional holders to have more of that.

Eric Hagen

Got you. All right. That's helpful. Thank you, guys.

Operator

(Operator Instructions) Christopher Nolan, Ladenburg Tallman.

Christopher Nolan

Thanks for taking my questions. Gordon, did you mention that the book value is currently roughly $16.50?

Gordon Harper

It's $16.56 as of last night.

Christopher Nolan

Great.

Gordon Harper

And that is acting equal of our dividends that we're paying out next week.

Christopher Nolan

Okay. Thank you. And then turning on the dividend, what impact does declines in book value have on the sustainability of the dividend?

Scott Ulm

At a certain point, yeah, it could -- because that certainly is the capital that you have available to invest in, and it ultimately rebounds into liquidity and leverage. On the other hand, this has been a volatile period. And there's a whole lot of stuff going on. And as we said, we look to the medium term here and in particular, look to the returns available. So as I said, we're comfortable with the level we're at.

Christopher Nolan

Okay. And then, I guess, can you characterize the bank's appetite for mortgage-backed securities in recent quarters? It seems to be there in the sidelines. Has that changed in the quarter?

Gordon Harper

Yes. Hi, Christopher. Yeah, I think Q1, we saw probably largest CMO creation volumes, both in February and January, kind of indicating that banks were back in the market. Now a lot of their focus is still on the floating rate asset nature of MBS. This is why the majority of CMO creation has been in Agency MBS floaters.
March has been much more quieter months. We also saw spreads on the tighter side during that time. So it's not surprising that some demand has backed up.
Obviously, in times of volatility21 like right now, a lot of investors are on the sidelines waiting out these ballots volatility. But as Desmond mentioned, such wide spreads versus swaps, steeper curve, a lot of these things are pointing to the fact that the demand side of the equation is in a good spot. And as soon as volatility and peak uncertainty is behind us, I think we'll see bank demand return to the levels we saw in Q1 and maybe even greater.

Christopher Nolan

Great. Final question. Do you think the second-quarter distributable EPS would be in excess of the dividend?

Scott Ulm

We traditionally have not commented on that. So I'm hesitant to provide a forward-looking statement on that, but I think you can probably get to your own conclusion pretty quickly by looking at the returns available.

Christopher Nolan

Okay. Thanks, guys, for taking my questions.

Operator

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

Scott Ulm

Well, thank you for joining us for our conference call today. We appreciate your interest in ARMOUR REIT, and we are always available for follow-ups. Don't be strangers. Thanks so much.

Operator

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