Armour Residential Reit Inc (NYSE: ARR) Q2 2025 Earnings Call dated Jul. 24, 2025
Corporate Participants:
Scott Jeffrey Ulm — Chief Executive Officer and Vice Chairman
Gordon Mackay Harper — Chief Financial Officer & Secretary
Desmond E. Macauley — Co-Chief Investment Officer & Head of Risk Management
Sergey Losyev — Co-chief Investment Officer
Analysts:
Douglas Michael Harter — Analyst
Trevor John Cranston — Analyst
Randy Binner — Analyst
Jason Michael Stewart — Analyst
Matthew Erdner — Analyst
Eric J Hagen — Analyst
Presentation:
Operator
Good morning, and welcome to ARMOUR Residential REIT’s Second Quarter 2025 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Scott Ulm. Please go ahead.
Scott Jeffrey Ulm — Chief Executive Officer and Vice Chairman
Good morning, and welcome to ARMOUR Residential REIT’s Second 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 Mackay Harper — Chief Financial Officer & Secretary
Thanks, 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 who 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 describes 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 unless required by law.
Also, today’s discussion refer 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 Q2 GAAP net loss related to common stockholders was $78.6 million, or $0.94 per common share. Net interest income was $33.1 million. Distributable earnings available to common stockholders was $64.9 million, or $0.77 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 and futures contracts minus net operating expenses. ARMOUR Capital Management waived a portion of their management fees, waiving $1.65 million for the Q2, which offsets operating expenses.
During Q2, ARMOUR raised approximately $104.6 million of capital by issuing approximately 6.3 million shares of common stock through an at-the-market offering program. Since June 30, we have raised approximately $58.8 million of capital by issuing approximately 3.5 million shares of common stock through an at-the-market offering program. We currently have outstanding 91.5 million common shares. ARMOUR 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 aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On July 30, 2025, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on July 15, 2025. We have also declared a cash dividend of $0.24 per outstanding common share payable August 29, 2025, to the holders of record on August 15, 2025. Quarter ending book value was $16.90 per common share. Our estimate of book value as of Monday, July 21, was $16.81 per common share, reflective of the accrual of the July common dividend. I will now turn the call over to Chief Executive Officer, Scott Ulm, to discuss ARMOUR’s portfolio position and current strategy.
Scott Jeffrey Ulm — Chief Executive Officer and Vice Chairman
Thanks, Gordon. Just a note to the team. I had a connectivity problem a second ago. So if I disappear, just continue with what we have to say here, but we should be just fine. Well, thanks all. As we entered the second half of 2025, the debate around U.S. fiscal sustainability, Fed independence and trade dynamics continues to weigh on the macro landscape. While we don’t expect these issues to be resolved quickly, markets appear to have digested much of the initial shock, as rates and spreads have settled into stable ranges and volatility has drifted lower. On the monetary policy front, incoming U.S. economic data indicates solid economic growth that’s supportive of the Fed’s wait-and-see approach. While Fed policy rates remain on hold, elevated short-term yields are absorbing investor liquidity. However, we believe that a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into Agency MBS.
Current coupon MBS spreads have retraced from April’s historically distressed levels, supported by declining volatility. The MBS to SOFR spreads have consolidated back towards an average of the spread levels observed in 2025. They widened by approximately 10 basis points quarter-over-quarter and remain historically cheap. The 30-year fixed mortgage rate was near 6.75% through late June and early July, effectively dampening refinancing activity and keeping net mortgage supply muted. This tightening backdrop, while a challenge for borrowers, continues to create compelling opportunities for investors in high carry production Agency MBS. At the policy level, the U.S. housing finance system remains a central topic in D.C. The FHFA Director, Bill Pulte, has begun to implement reforms aimed at streamlining the GSEs, Fannie Mae and Freddie Mac, with administration officials signaling support for retaining an implicit government guarantee for the GSEs. While public rhetoric hints at an eventual need to end conservatorship, we view these developments as constructive yet not imminent. I’ll now turn it over to Desmond for more detail on our portfolio. Desmond?
Desmond E. Macauley — Co-Chief Investment Officer & Head of Risk Management
Thank you, Scott. ARMOUR’s estimated net portfolio duration and implied leverage are closely managed at 0.46 years and eight turns, respectively. Our total liquidity is strong at approximately 52% of the total capital as of July 21. Our hedge book reflects a balanced view of duration, with a bias for further Fed easing. Hedges are composed of about 33% in Treasury shorts and futures, with the remainder in OIS and SOFR swaps as measured on a DVO1 basis. While SOFR swaps are cheaper hedges, Treasuries have proven to be a more effective hedge instrument for mortgages as of late. ARMOUR is invested 100% in Agency MBS, Agency CMBS and U.S. Treasuries. Our MBS portfolio remains concentrated in production MBS with ROEs in the 18% to 20% range. The portfolio remains well diversified across the 30-year coupon stack, Ginnie Mae’s and in DUS whose positive convexity and short duration attributes offer better value over comparable 15-year MBS pools. Portfolio MBS prepayment rates have averaged 7.7 CPR in Q2 and are trending at around 8.3 CPR so far in Q3.
We see no signs of material acceleration unless mortgage rates drop significantly. We continue to favor higher loan balance and credit specified pools with favorable convexity and prepayment profiles to TBA and generic collateral. Our TBA exposure is light at $300 million and remains a tactical tool to manage MBS coupon positioning. ARMOUR forms 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, ranging at around SOFR plus 15 to 17 basis points. We are increasingly optimistic that structural demand for MBS may improve later this year. Evolving regulatory clarity around banking reform and a resumption of the Fed easing policy could act as meaningful catalysts for increasing banking demand. This, combined with constrained mortgage supply, sets up a highly constructive technical backdrop for Agency MBS, while historically wide spreads signal strong risk to reward incentive to own mortgage assets.
I’ll turn it over back to you, Scott.
Scott Jeffrey Ulm — Chief Executive Officer and Vice Chairman
Thanks, Desmond. ARMOUR’s approach remains unchanged: grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity, and dynamically adjust hedges for disciplined risk management. We’re confident in our positioning, strategy, and ability to deliver value for shareholders. 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 available. Thank you for joining today’s call and your interest in ARMOUR. We’re happy to now answer your questions.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from the line of Doug Harter with UBS. Please go ahead.
Douglas Michael Harter
Thanks and good morning. So hoping you could just talk about your philosophy for managing spread duration risk as you go through a volatile period like you did in April and the second quarter in total and kind of just give us a little more on the thought process.
Scott Jeffrey Ulm
Yes, hi, Doug. So on spread risk, I can start with just our leverage, which we are very comfortable with at this point. We think that spreads remain historically attractive. And for that reason, we could potentially look to even modestly increase our leverage here. Currently, we are around just a little bit below the average over the last six to 12 months, our own average over the last six to 12 months. In terms of duration, we manage it dynamically. We’ve recently increased our hedges in longer duration assets, longer duration beyond the 10-year point to adjust for what we saw in Q2 where there was steepness of the curve in 10-year maturities and beyond.
Douglas Michael Harter
Great. Thank you
Operator
The next question comes from the line of Trevor Cranston with JMP Securities. Please go ahead.
Trevor John Cranston
Thanks. Looking at the portfolio data, it looks like the allocation to higher coupons like sixes and above declined during the second quarter. Can you guys just comment on where you’re seeing the best value in the coupon stack and where you guys are deploying marginal dollars as you raise capital? Thanks.
Sergey Losyev
Good morning, Trevor. This is Sergey. Yeah, so I think we might have talked about it on the last earnings call, there was a volatility during the first half of April. That is probably where the sizes might have been reduced. But overall, we remain favorable of 5.5 and six coupons. These are the highest ROE coupons that we are currently modeling. So with the prepayment environment remains very benign. This remains our focal point for the portfolio. We don’t really expect large changes near term.
Trevor John Cranston
Got it. Okay. And I guess the other notable thing there was the — there’s the new line item for the long treasury position. Can you just comment on what the role of that is within the portfolio?
Sergey Losyev
Yeah, so as you know, we view 5-year point on the yield curve as a very important pivotal point for managing overall portfolio duration risk and just responding to the monetary policy and all across the yield curve. So 5-year treasury serves as part of that hedging strategy, but it also is used as a proxy for our Agency CMBS position. As we know, we hold slightly just below maybe 5% of our portfolio. And we are very tactical about that market. We tend to go in when spreads widen and reduce our allocations when we see spreads on the more richer side. And 5-year treasuries help us hedge that position and be able to rotate among those asset classes.
Trevor John Cranston
Got it. Okay, appreciate the comments. Thank you.
Operator
The next question comes from the line of Randy Binner with B. Riley. Please go ahead.
Randy Binner
Hey, good morning. I just have one on the model and total expenses after fees waived reported in the quarter was $14.3 million. That was just a little bit higher than what trend was and what we were looking for. Was there anything unusual in that line item this quarter or seasonal? Or is that a level we would expect going forward?
Gordon Mackay Harper
I wouldn’t say it’s a level we’d expect going forward. We had a bit more professional fees than we had probably in the first quarter, just on things that we were working on. So as we explained in the 10-Q, some of that can just vary quarter-to-quarter, but not expecting the same run rate on expenses.
Randy Binner
And that’s helpful. And then just to be, I guess, 100% clear, that line item, if you had higher hedge costs or volatility there because of interest rates moving around in April, that would be netted — that would not be in that line item. That would be elsewhere, correct?
Gordon Mackay Harper
Yes, that’s up in the derivatives.
Randy Binner
Yep, got it. Okay. Thank you.
Operator
The next question comes from the line of Jason Stewart with Janney. Please go ahead.
Jason Michael Stewart
Hey, good morning, thanks. Just big picture, as you think about constructing the hedge portfolio and the coupon stack, how do you balance total return versus carry as we start to see some of these dislocations in swaps versus treasuries?
Desmond E. Macauley
So hi, Jason. So, in terms of our portfolio, on the hedge side, we mentioned our duration. We are positioned for a bullish steepener, and we adjust our hedges appropriately. And it’s pretty dynamic. It’s our view of the macroeconomic environment. We like to stay diversified across the coupon stack. The lower coupons would benefit if we do see rate rally. We expect that a rally could take place when the Fed resumes normalization which we are expecting later on this year to the fall — in the fall or later. The higher coupons could benefit in a steepener where in any steepness scenario, the CPRs, projected CPRs could be slower and those could benefit the higher coupons. We’re looking to reinvest muscle in production coupon 5.5 and sixes. These are specified pools. They have the prepayment characteristics that we talked about in our prepared remarks. And that is supposed to improve the overall convexity of our portfolio. And last, of course, we also have those securities with even positive convexity. So best to stay diversified across the coupon stack and looking to add more in production coupons in terms of reinvesting paydowns and also reinvesting any equity capital raises.
Sergey Losyev
Yeah, and just to add on the hedge book side, Desmond mentioned, on DV01 basis, we’re about 33% in Treasuries. On a notional basis, it’s closer to 20:80. We still like to use interest rate swaps as the main hedge instrument. It’s a cheaper hedge. Obviously, from a total return, Treasuries have been a more effective hedge as of late. So we’re keeping this — the balance of the hedge book right where we feel like it provides both the carry and the total return opportunity from both sides.
Jason Michael Stewart
Okay. So does the 18% to 20% range keep the hedge book with the same composition that you have right now in 20:80 notional?
Desmond E. Macauley
So 18% to 20% would be for like our production coupon 5.5 and 6s. In terms of — if you look at it from a total return perspective, then the hedge — like if we use swap hedges, and we run swap hedges to forwards, the total return would be roughly zero in that case. So a 20% return on production coupons, it’s pretty much — doesn’t matter whether we use swaps or treasury futures. So in that framework, 18% to 20%, I should also point that, that’s in the base case, right? We think spreads are really attractive at this point. So if we take, for example, we see a 10 basis points tightening in OAS, that can add another 4% to that number. And also keep in mind as well that the repo rate has been stable throughout the entire year. The Fed has not cut this year. If we do see resumption in normalization, we can expect even in the base case for those returns to look even more attractive. But as it is right now, they are more attractive. They either meet or exceed our hurdle rate. And that’s one of the reason that we are very optimistic about our current environment.
Jason Michael Stewart
Okay. That’s helpful. Thank you for that color. And then just on the ATM program, quarter-to-date in 3Q, could you give us an idea of how that was raised relative to book, and where book was today?
Gordon Mackay Harper
I don’t have book value for you as of today, but book is, as we said, was $16.81 as of Monday. And the issuances were just mildly dilutive, just a couple of cents per share.
Jason Michael Stewart
Okay, thank you.
Operator
The next question comes from the line of Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner
Hey guys, good morning. Thanks for taking the question. Just a quick one for me. You guys talked on leverage a little bit with it running back up quarter-to-date, still below those historical levels. What exactly are you looking for to take leverage up? Is it more clarity from the Fed? Is it a little more stability on the long end of the curve? I would just like your thoughts there.
Scott Jeffrey Ulm
Thanks. Go ahead, Desmond.
Desmond E. Macauley
Okay. So first, I should just say our leverage strategy is — it’s very flexible. And it’s designed to reflect our view on the attractiveness of spreads, our view on market volatility, and just where we want our liquidity to be. So we took our leverage down tactically quarter to date. Our spreads are tightening locally, and we saw volatility also come up significantly since early April. So in addition, there were swirling headlines around Fed independence, and those headlines have now subsided. So given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage from where we are. So does that answer your question?
Matthew Erdner
Yeah, a little bit. But I guess going forward over the next three months, when you guys are expecting the Fed cut, are you going to put leverage on in front of that as you go into that event kind of thing?
Gordon Mackay Harper
Yeah, I’d just say we think about all this. We think about all this stuff, but are generally not in the — try not to be in the business of putting big bets on. What’s behind your question is exactly right. It’s a view that there’s more stability across all the axes that we look at. And to the degree that — and, of course, that’s a reflection of how stable we feel liquidity is going to be, which is really the driver behind what leverage you’re comfortable with. And we’ll react accordingly. I think you could probably expect us not to take a big bet. But as you see elements of greater stability come into the market across those axes, there may well be a pretty good case for going up a little bit. Remember, historically, leverage in this sort of business model, if you go back decades, was a lot higher. And generally, people have been keeping their head down, which has served everybody pretty well, frankly. But less volatility, more stability, means that the model can take a little more leverage. Sorry, go ahead.
Matthew Erdner
Yeah, that’s helpful. Thanks for the comments, Seth. Sorry, go ahead.
Sergey Losyev
Just — and as a catalyst, of course, the big elephant in the room is bank demand so far year-to-date, and it has probably disappointed most industry investors, and we are closely watching developments on deregulation fronts. Just yesterday, there was the first Fed capital framework conference that a lot of color came out of that industry-wide participants are looking to speed up and agree that currently capital framework is too confusing, too stringent. Banks are sitting on record excess capital. So we feel like it’s just a — it’s a question of if not when we start to see greater participation from the banks, and this will be the tailwind that we outlined in our script as well.
Matthew Erdner
Yeah, I definitely agree there. Thank you.
Operator
The next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Eric J Hagen
Hey, thanks. Good morning. Sticking on this conversation around hedging. I mean, do you think there’s any value at this point in hedging the short end of the yield curve? I mean, how attractive do you think it is to buy swaptions at this point, just considering volatility has come down a little bit. Thank you, guys.
Sergey Losyev
Hi, Eric. Yeah, so I mean, look, the two-year yield has been extremely stable over the last year. Obviously, the talk of hikes are not on the table at this point. But we express that in our both steepener bias of our yield curve hedging. Whatever front-end hedges we have on they’re there for the risk management to express that exposure. We currently don’t play in the swaptions market. We always evaluate it. But from where mortgages are trading and how wide the spreads are, we feel like that the better trade-off is to express the view on volatility through the current coupon basis, for example.
Eric J Hagen
Yeah, that’s helpful. Maybe continuing on that theme. You guys offer good information and color on your duration gap. Just looking at these current coupons specifically, do you maybe have an estimate for what your duration gap would extend to if mortgage rates backed up, let’s call it, like 50 basis points. And in that extension scenario, would you be more likely at this point to let your leverage run a little higher? Or would you look to sell assets in that scenario?
Sergey Losyev
Yeah, that’s a good question. We obviously run risk, stress test scenarios. We can get some numbers for you. And do you mean selloff on the long end or on the front end, since that was the initial question?
Eric J Hagen
Yeah, maybe more on the long end, right, like that curve steepener you guys are positioned for?
Sergey Losyev
Yeah, I think — look, I think we hedge our current exposure on a dynamic basis. We’re not going to let duration extend over certain levels where we feel like would require a rebalancing of duration. So from that standpoint, we stay very disciplined. And our risk metrics in the shock scenarios don’t pose any large extension beyond which liquidity would be compromised.
Eric J Hagen
Thank you guys so much.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks. Thank you.
Scott Jeffrey Ulm
Thanks for joining us this morning. Please feel free to give us a ring at the office. Happy to catch up if other things occur as you’re thinking about what’s going on in mortgage land. Thank you for joining us this morning, and good morning to you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.