For the quarter ended September 30, 2024, Armour Residential REIT, Inc. reported total revenues of $43.1 million, a decrease of 14.1% compared to the same period in the prior year. Net income was $14.1 million, or $0.25 per diluted share, compared to net income of $21.4 million, or $0.38 per diluted share, in the same period last year. The company’s net asset value per share decreased to $4.44 at September 30, 2024, compared to $4.63 at September 30, 2023. The decrease in net income was primarily due to a decline in interest income and an increase in interest expense. The company’s liquidity and capital resources remained strong, with cash and cash equivalents of $143.1 million and total debt of $1.35 billion at September 30, 2024.
Overview
ARMOUR Residential REIT, Inc. (ARMOUR) is a Maryland corporation that has elected to be taxed as a real estate investment trust (REIT). ARMOUR is managed by ARMOUR Capital Management LP (ACM), an investment advisor registered with the SEC. ARMOUR brings private capital into the mortgage markets to support home ownership, seeking to create stockholder value through thoughtful investment and risk management of a leveraged and diversified portfolio of mortgage-backed securities (MBS).
ARMOUR is committed to implementing sustainable environmental, responsible social, and prudent governance practices. At September 30, 2024 and December 31, 2023, ARMOUR invested primarily in Agency Securities, which are MBS issued or guaranteed by U.S. government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, or government agencies such as Ginnie Mae. ARMOUR earns returns on the spread between the yield on its assets and its borrowing costs, after giving effect to its hedges.
Factors Affecting Results
ARMOUR’s results are affected by various factors, including net interest income, market value of assets, and supply and demand for its investments. Key factors include:
Interest Rates: Changes in interest rates, particularly short-term rates, can significantly influence ARMOUR’s net interest income. ARMOUR uses interest rate hedging strategies but does not hedge all its exposure to rate changes.
Prepayment Rates: Prepayments on MBS can be influenced by various factors and impact ARMOUR’s anticipated yield. Declining interest rates tend to increase prepayments.
Management: ARMOUR is externally managed by ACM under an agreement that runs through 2029.
Market and Interest Rate Trends
The Federal Reserve (Fed) has lowered the target federal funds rate, which has affected ARMOUR’s borrowing costs. The Fed has also been reducing its holdings of Treasury and agency MBS. Developments at Fannie Mae and Freddie Mac, such as potential changes to their structure, could impact the availability of Agency Securities.
Results of Operations
ARMOUR reported net income of $65,880 and $32,046 for the three and nine months ended September 30, 2024, respectively, compared to net losses in the prior-year periods. This reflected gains on its trading securities offset by losses on derivatives.
Net interest income was $1,839 and $14,139 for the three and nine months ended September 30, 2024, respectively, down from the prior-year periods. The decrease was due to a lower yield on interest-earning assets and higher interest expense.
Other income (loss) included:
Expenses, after fees waived, were $10,446 and $42,162 for the three and nine months ended September 30, 2024, respectively, compared to $11,063 and $32,315 in the prior-year periods. The increase was primarily due to expenses related to a Special Committee internal investigation.
Financial Condition
At September 30, 2024, ARMOUR’s securities portfolio consisted of $12,422,762 in Agency Securities, up from $11,159,754 at December 31, 2023. ARMOUR financed its securities portfolio with $10,186,415 in repurchase agreements at September 30, 2024, up from $9,647,982 at December 31, 2023.
ARMOUR had a debt-to-equity ratio of 7.74:1 at September 30, 2024, up from 7.59:1 at December 31, 2023, as it substituted Agency MBS for TBA Agency Securities. Implied leverage, including TBA Securities and forward settling sales and unsettled purchases, was 8.18:1 at September 30, 2024, up from 7.96:1 at December 31, 2023.
ARMOUR had $667,427 in liquidity at September 30, 2024, consisting of $63,855 in cash and $603,572 in unencumbered securities. ARMOUR’s primary sources of funds are borrowings under repurchase agreements, monthly principal and interest payments on its MBS, and cash from operating results.
ARMOUR uses various derivatives, including interest rate swaps and TBA Agency Securities, to manage its interest rate risk. At September 30, 2024, ARMOUR had interest rate swap contracts with an aggregate notional balance of $6,686,000 and a weighted average swap rate of 1.42%.
Outlook and Risks
ARMOUR believes it has sufficient liquidity and capital resources for acquiring additional investments, repaying repurchase borrowings, and paying dividends. However, the company faces various risks, including:
ARMOUR’s performance and ability to execute its business strategy are subject to these and other risks and uncertainties.
Conclusion
ARMOUR Residential REIT reported improved financial results in the first nine months of 2024, driven by gains on its trading securities portfolio that offset losses on derivatives. The company continues to maintain a leveraged, diversified portfolio of Agency MBS, financed primarily through repurchase agreements.
While ARMOUR’s net interest income declined compared to the prior-year period, the company was able to generate positive net income by effectively managing its trading portfolio. However, ARMOUR faces ongoing risks related to interest rates, prepayment activity, and regulatory and market developments that could impact its financial condition and operating performance.
Overall, ARMOUR appears to be navigating the current market environment reasonably well, but investors should closely monitor the company’s ability to generate consistent returns while managing its interest rate and credit risks.