Armour Residential REIT's Q4 2024: Navigating Contradictions in Leverage, Hedging, and MBS Yields
Earnings DecryptThursday, Feb 13, 2025 12:23 pm ET
1min read
These are the key contradictions discussed in ARMOUR Residential REIT's latest 2024Q4 earnings call, specifically including: Leverage Strategy and Volatility Outlook, Hedge Strategy and Yield Curve Expectations, and MBS Yield Expectations:
Attractive MBS Carry Profile:
- ARMOUR's levered return on equity (ROE) for MBS investments is currently around 18% to 19%, indicating strong carry profile.
- This is driven by a positively sloped, steeper yield curve and historically attractive MBS spreads, which are generating about 150 basis points positive versus cash.
Capital Raise and Deployment:
- ARMOUR raised approximately $259 million of net capital since December 31, 2024, through ATM programs and preferred shares, which were mildly dilutive.
- The raised capital was deployed to purchase approximately $2 billion of MBS assets and TBAs, earning at or above the hurdle rate after costs and expenses.
Portfolio Composition and Strategy:
- ARMOUR's agency portfolio has a net duration of 0.36 years and an implied leverage of 7.9 turns, with about 50% cash and box liquidity.
- The portfolio is hedged with 25% treasury-based hedges and 75% in OIS and SOFO swaps, aiming to benefit from swap spread appreciation while diversifying risks.
Regulatory and Geopolitical Concerns:
- ARMOUR anticipates potential challenges from GSE reforms and geopolitical issues, such as U.S. Treasury market concerns and fiscal issues.
- These factors could introduce volatility but are not expected to cause abrupt changes in policy direction, as the process may be slow and gradual.
Attractive MBS Carry Profile:
- ARMOUR's levered return on equity (ROE) for MBS investments is currently around 18% to 19%, indicating strong carry profile.
- This is driven by a positively sloped, steeper yield curve and historically attractive MBS spreads, which are generating about 150 basis points positive versus cash.
Capital Raise and Deployment:
- ARMOUR raised approximately $259 million of net capital since December 31, 2024, through ATM programs and preferred shares, which were mildly dilutive.
- The raised capital was deployed to purchase approximately $2 billion of MBS assets and TBAs, earning at or above the hurdle rate after costs and expenses.
Portfolio Composition and Strategy:
- ARMOUR's agency portfolio has a net duration of 0.36 years and an implied leverage of 7.9 turns, with about 50% cash and box liquidity.
- The portfolio is hedged with 25% treasury-based hedges and 75% in OIS and SOFO swaps, aiming to benefit from swap spread appreciation while diversifying risks.
Regulatory and Geopolitical Concerns:
- ARMOUR anticipates potential challenges from GSE reforms and geopolitical issues, such as U.S. Treasury market concerns and fiscal issues.
- These factors could introduce volatility but are not expected to cause abrupt changes in policy direction, as the process may be slow and gradual.
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