Earnings Call Transcript - ARR Q1 FY2026

Operator

Good day, and welcome to the Armour Residential REIT First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please check to a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than 1 on your telephone keypad, and to withdraw your question, please press star than 2. Please note, today's event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Scott Ulm, CEO

Thank you, and good morning, and welcome to Armour Residential Reads' first quarter 2026 conference call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officers, Sergey Loisif and Desmond McCauley. I'll now turn the call over to Gordon to run through the financial results.

Gordon Harper, CFO

By now, everyone has access to Armour's earnings release, which can be found on Armour's website, www.armorite.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 Armors' periodic reports filed with the Securities and Exchange Commission described certain factors beyond Armors' 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 just claim any obligation to update them unless 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 more year. Notwithstanding the market turbulence and MBS volatility, due to geopolitical events experienced in the latter portion of the first quarter of the year, the company delivered solid results for the first quarter of 2026 with total economic return of negative 2.6%. Since March 31, 2026, we have seen improvements in MBS spreads and volatility. Armour's Q1 gap net loss related to common stockholders was $58 million, or $0.49 per common share. Net interest income was $70.7 million. Distributable earnings available to common stockholders was $90.5 million or $0.76 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense under interest rate swaps and futures contracts minus operating expenses. During Q1, Armour raised approximately $215 million of capital by issuing approximately 11.8 million shares of common stock and 6.4 million of capital by issuing approximately 306,000 shares of preferred stock through our at-the-market offering programs. Through April 15, 2026, we raised approximately 7.2 million of capital by issuing 416,000 shares of common stock and $179,000 of capital by issuing 8,600 shares of preferred stock through the at-the-market offering programs. In March 2026, we repurchased 125,000 shares of common stock through our stock repurchase program. Armory paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. We are going to pay an attractive dividend that is appropriate in context and stable over the medium term. On April 29, 2026, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15, 2026. We have also declared a cash dividend of $0.24 per outstanding common share payable May 28, 2026 to holders of record on May 15, 2026. Quarter-end book value was $17.42 per common share, down 6.5% from December 31, 2025. As of Monday, April 20th, our estimate of book value was $18.05 per common share, which reflects the accrual of the April common dividend. I will now turn the call over to Chief Executive Officer Scott Oden to discuss Armour's portfolio position and current strategy. Scott?

Scott Ulm, CEO

Thank you, Gordon. Tightened uncertainty returned to the market in 2026, driven by renewed geopolitical tensions and a sharp rise in oil prices has put further Fed easing on hold for now. As concerns around the Middle Eastern conflict intensified, the yield curve bare flat, shallower path of Fed cuts, implied volatility more than doubled, and nominal mortgage spreads widened from 95 basis points to as much as 130 basis points from trough to peak over the course of the first quarter. That combination of wider spreads and elevated volatility ultimately proved to be a buying opportunity for Armour, as the risk-reward and valuations last observed in Q3 of last year turned decisively favorable. As interest rates stabilized, MBS spreads retraced tighter, driving a recovery in our book value of 3.5% quarter to-to-date net of dividend. Against a more balanced picture of mortgage spreads today, market technicals remain firmly supportive. The rise in treasury yields and mortgage rates is tempered prepayment concerns, and elevated mortgage rates continue to weigh on an already soft housing market, keeping a lid on primary origination supply. On the demand side, while the GSE's pace of purchases slowed in the first two months of the first quarter, reflecting tight MBS spreads, we expect Fannie and Freddie to report that they re-accelerated holdings growth in March during the period of wider spread. This would be consistent with our view of the GSEs as backstop buyers with substantial dry powder to step in when mortgage spreads widen. Another emerging source of demand is coming from banks. March recorded the highest CMO creation on record, reflecting a strong bid for structured MBS that typically signals growing bank appetite. While the bank demand story has failed to materialize in recent years, the regulatory relief now taking shape fuels growth and capital for banks' MBS portfolio at a time when deposit bases are also expanding. Sustained inflows into fixed income, both domestically and from overseas, provide an additional tailwind for demand in the first quarter as high-quality, liquid agency MBS serves as an attractive alternative to corporate credit, where valuation questions persist. I'll now turn it over to Sergei for more detail on our portfolio.

Sergey Losyev, CIO

Thank you, Scott. Armour's most recent net balance sheet duration stands at approximately 0.4 years, reflecting our view of further stabilization yield and the return of expectations for the future Fed rate cuts, as consistent with the Fed's committee's own expectations. The implied leverage, excluding the Treasury shorts, is 7.85 times, a balanced posture that reflects our constructive view on the market and incorporates MBS purchases as the wider spreads in March. Our expected month-end liquidity position, including April's paydowns, remains strong at $1.2 billion, or nearly 50% of Monday's total equity. Armour's asset portfolio remains 100% agency MBS, agency CMBS, and U.S. Treasuries. It now stands at over $21 billion, notching a fourth consecutive quarter of growth in both assets and capital base. Consistent with our balance sheet growth, we have net added nearly $900 million of MBS pools and does since Armour's last conference call in Q1. Our purchase mix continues to roll by coupon and product as rates and spreads move. In March, we took advantage of widening in the near-production coupons where GSE activity is most concentrated. We also added seasoned, deeper discount MBS, along with 15-year NGMA TBA rolls. Within premium price bonds, we continue to focus on prepayment protection in the higher-tier maximum long-balance pools. The portfolio remains concentrated in specified pools with favorable prepaid characteristics, which now represent 95% of Armour's MBS holdings. In agency CMBS, we have gradually moved a large portion of our dust portfolio out on the yield curve rotating out of the five-year sector, which experienced notable tightening into this year, and swapping into the 10-year dust paper. This rebalance allows us to take advantage of the positive convexity profile of these longer bonds and take an additional 30 to 40 basis points of spread of longer SOFR hedges. Our hedge strategy aims to reduce duration risk across the entire yield curve. Roughly 86% of Armour's hedges are OIS and SOFR pay fixed swaps with a balance in Treasury futures. As the recent market volatility subsided, the 10-year Treasury's SOFR Treasury spread recovered from its recent tights of minus 49 basis points, the most negative level since October of last year. Despite the recovery to levels closer to fair value models and pre-liberation date historical averages, SOFR swaps remain an attractive hedge instrument for us, with pay fixed rates at approximately 44 basis points below the comparable Treasury yields. We expect further normalization in swap spreads to hinge on a path of policy debate around the Fed's desired balance sheet and banking deregulation. Aggregate portfolio for payments averaged 12.1 CPR year-to-date through April versus 11.1 CPR in Q4 of 2025, stable but running at a slightly higher level versus the prior quarter. Mortgage rates were not spared from volatility. After hitting a low of 5.9% in February, rates backed up by almost 60 basis points the following month, stifling near-term refinance activity. Despite the rate rally we've seen so far in April, 30-year mortgage rates remain elevated around 6.2%, which should anchor premium prepayment expectations through the next several prepayment reports. Funding markets have been refreshingly uneventful in Q1. The repo remains liquid and stable, with spreads trading inside 15 basis points above SOFR and Fed funds rate. The Fed's response to last year's funding pressures appears to have done its work and stabilized banking reserves. As expected, the Fed has announced an incoming step down in its reserve management T-bill purchases from $40 billion to $25 billion per month. It is a notable reduction, yet one that still leaves the Fed as the net provider of new liquidity to funding markets. and we expect repo conditions to remain easy. As of today, we finance portfolio across 24 active repo counterparties. Approximately 80% of our repo principal is financed at 3% haircut or lower, and weighted average haircut across the entire repo book is approximately 2.75%. Buckler Securities accounts for roughly 45% of our repo financing book. Thank you, and back to you, Scott.

Scott Ulm, CEO

Thanks, Sergei. The case to own NBS remains strong and should strengthen further if the Fed resumes its easing cycle later this year. We believe lower funding rates combined with a steeper curve would reinforce the catalyst for strong demand and broaden the investor base for agency NBS. We saw some volatility this quarter driven by geopolitical events, but the impact overall was manageable and has dissipated significantly more recently. Our balance sheet management over the quarter gave us some options, and we were able to take advantage of lower MBS prices and bought back some of our own stock. We continue to set our dividend with a medium-term outlook, and we review our dividend as appropriate in the current environment. Our approach remains unchanged. Stress test our liquidity, apply systematic hedging, and deploy capital when opportunities present themselves. Overall, we're confident in our positioning, our strategy, and our ability to perform well for shareholders in 2026. Before we open the line for questions, we'd also note again that we've launched a new quarterly investor presentation, now available on Armour's website. Thank you for joining today's call and for your continued interest in Armour. You can open the line for questions, please.

Operator

Yes, sir, absolutely. We will now begin the question and answer session. To ask a question, you may press star than 1 on your telephone keypad. To remove yourself from Q, please press star than 2. Once again, that's star than 1 if you have a question. And today's first question comes from Marissa Lobo at UBS. Please go ahead.

Marissa Lobo, Analyst — UBS

Good morning. Thank you for taking my question. You noted the heightening of spreads in Q2 to date. So what does the current ROE on new agency purchases look like, and where do you see the long-term equilibrium of spread settling versus swaps?

Desmond Macauley, CIO

Yes. Hi, Marissa. This is Desmond.

Gordon Harper, CFO

So looking at – yeah, hi, how are you?

Desmond Macauley, CIO

So looking at par and premium securities, return on equity is in the mid to high teens. That's assuming about eight tons of leverage and hedge to half duration. Now, that's somewhat of a static view. We also do scenario analysis where we look at horizon returns. So, for example, if OAS is tightened by 10 business points, that adds about 3% to 5% in total return that will accrue through book value. So, that takes, let's say, for example, the return is around 16%. You add 3% to 5% there, then now you're getting to the 19%, 20% area. Now, in terms of long-term stability of our long-term view on spreads, we think spreads are still attractive. That's why we are constructive on the sector. You can look back at a period like 2019 when the Fed was running off its mortgage portfolio and also cutting rates. If we look at spread to swaps, let's say a blended 5-year, 10-year swap, those levels were around 120 basis points on average mortgage spreads, and currently they are around 150. So that suggests that we are wider by 30 basis points. If you look at it versus treasuries, you get something around 20 basis points wider today versus back then. So, we think conservatively, we can see another 20 basis points of tightening here over the medium term.

Marissa Lobo, Analyst — UBS

Great. Thank you. And can you share your view on the opportunity for dollar rolls in agencies, and how does that inform your current preference for TBAs versus specified pools?

Sergey Losyev, CIO

Hi, Marissa. This is Sergey. Yeah, so the TBA market, you know, specialness has certainly returned to some level this year, but it remains, you know, fairly volatile, unstable. So we have some TBA roles in our portfolios. We mentioned we've reallocated to a little bit of the 15-year sector to GMAs, but we don't expect them necessarily to be our strongest carry trades. We kind of use these opportunistically for total return opportunities. So right now, we still prefer specified pool cash flow yields. Even if there isn't a lot of OAS pick versus the TBAs, we like the certainty of cash flows and certainly kind of protects us from the tail risk if mortgage rates turn lower in the future.

Marissa Lobo, Analyst — UBS

Got it. Thanks for the answers.

Operator

Thank you. And our next question today comes from Trevor Cranston with J&P Securities. Please go ahead.

Trevor Cranston, Analyst — J&P Securities

Thanks. Good morning. um you know looking at your leverage it's come in kind of consistent around you know the eight times level for the last few quarters um you know given your your commentary around the positive backdrop in terms of the technical environment and you know the gse is sort of acting as a backstop buyer um does that change how you guys are viewing the appropriate leverage level at all or how are you thinking about that in the current environment?

Desmond Macauley, CIO

Yes, hi, Trevor. First, we are comfortable with our current leverage. We did increase it after spreads widened in March, which benefited our book value. We think that the current level is appropriate. It would allow us to participate in terms of spread risk if we see more spreads tightening, as we expect. We prioritize risk management. We stress test our liquidity to ensure that it can sustain extreme bouts of volatility. And as long as we are comfortable with those stress tests, then we'd look to add leverage to take opportunity if we see more spreads widening. As long as we think that if there's a bout of volatility, it's not systemic.

Trevor Cranston, Analyst — J&P Securities

Okay, that's helpful. Thank you.

Operator

And our next question today comes from Timothy D'Agostino with B-Riley Securities. Please go ahead.

Timothy D'Agostino, Analyst — B. Riley Securities

Thank you. Good morning and congrats on the quarter. The first question for me, I guess, could you provide just a little bit more color on the widening of the economic interest spread? Ed, I think it went from about 188 basis points to 194. It would just be great to get any color on, you know, the movement there.

Gordon Harper, CFO

George, do you want to handle that one? Yeah, just one second. I think the main real driver, I think, is our – you can see that our rate on our repo has gone down. And then the other real driver is the rate that we have on our swaps. So when you factor all that together, that's your answer.

Timothy D'Agostino, Analyst — B. Riley Securities

all right perfect awesome i appreciate it and then as a second question just on capital formation i guess just kind of getting a better understanding of the playbook a little bit obviously when you're above book value you're issuing off your equity atm but when you are below book value do you turn to repurchasing shares and issuing preferreds um just trying to understand how you all think about going and raising capital and then putting that capital work thank you sure um well look it's all

Scott Ulm, CEO

about price. It's all about price, and it's all about opportunity. And by opportunity, I mean what the investment horizons are for us. So the clear, simple answer is it depends. And there are also other factors, which include when we increase the shareholder base, Our expenses decline per share, and our cost of running the shop declines as well on average. So, you know, we are very focused on all of those factors in terms of how they coalesce in making a decision on whether we issue or we repurchase, as the case may be. And we're very committed to being on both sides of the market. You know, clearly, clearly when we repurchase, it has to be a fairly definitive view that that we want to take back that capital. But when we issue, it's also a very carefully calibrated view on on on where the price is compared to book, what the opportunity for deploying that capital is and how it impacts the overall overall operation. Not a clear first answer, sorry, but it is all those factors that coalesce in how we manage it. And you'll see, if you look back, there are quarters where we're active and there are quarters where we're not active at all, which might give you a sense of how tightly we manage that.

Timothy D'Agostino, Analyst — B. Riley Securities

Okay, great. Thank you so much. I appreciate the color. Congrats again on the quarter.

Operator

Thank you. And our next question today, and actually, as a reminder, if you'd like to ask a question, please press star than 1 at this time. Our next question today comes from David Storms at Stonegate Capital. Please go ahead.

David Storms, Analyst — Stonegate Capital

Morning, and thank you for taking my questions. I actually wanted to follow up on that last question around capital formation and ask, does times of increased volatility like we saw in Q1 play any sort of meaningful factor into issuing or repurchasing shares?

Scott Ulm, CEO

Yes, for sure. You know, generally, volatility is not a positive for share price. So, you know, I'd say generally, you know, volatility means that we're likely to be less active on the issuance side, but maybe a little more active on the repurchase side. And certainly, certainly we saw some volatility this quarter and you saw some, you know, early on in the quarter. It was a, you know, we're still enjoying some, we're still enjoying some tightening. And later on the quarter, we had some geopolitical stuff that happened, which maybe pushed us the other way. So, yes, absolutely correct that volatility impacts us. But generally in a period of lower volatility, I would guess you're going to see us more active on issuance and higher volatility, maybe a little less active.

David Storms, Analyst — Stonegate Capital

Thank you. And then maybe just one question around your outlook. With the Fed being in a bit of a wait and hold period, given some of the conflicts of late, are you keeping an eye out for any sort of second order impacts, such as increased fertilizer prices or increased shipping prices that may maybe force the Fed's hand? Are you tracking anything like that?

Scott Ulm, CEO

yeah look we look at all this stuff and uh yeah you're absolutely right that there's a pilot of secondary impacts uh out there that uh you know they could go either way uh and you know we we keep a close eye on it but oh my you know multi-level tetris game there right that's perfect

Operator

thank you for the commentary thank you and that concludes our question and answer session i'd like to turn the conference back over to mr home for any closing remarks thanks for joining we

Scott Ulm, CEO

We appreciate your participation in our conference call here. And any follow-up questions, we're around. Thanks so much.

Operator

Thank you, sir. And that does conclude our conference call for today. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.