Armour Residential Reit Inc (ARR) Q3 2025 Earnings Call Transcript

Armour Residential Reit Inc (NYSE: ARR) Q3 2025 Earnings Call dated Oct. 23, 2025

Corporate Participants:

Scott J. Ulm — Chief Executive Officer and Vice Chairman

Gordon M. Harper — Chief Financial Officer and Secretary

Sergey Losyev — Co-chief Investment Officer

Analysts:

Doug Harter — Analyst

Jason Weaver — Analyst

Trevor Cranston — Analyst

Timothy D’Agostino — Analyst

Eric Hagen — Analyst

Presentation:

Operator

Good day, and welcome to the ARMOUR Residential REIT Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Scott J. Ulm — Chief Executive Officer and Vice Chairman

Good morning, and welcome to ARMOUR Residential REIT’s third quarter 2025 conference call. This morning I’m joined by our Chief Financial Officer, Gordon Harper; as well as our Co-Chief Investment Officers, Sergey Losyev; and Desmond Macauley.

I’ll now turn the call over to Gordon to run through the financial results. Gordon.

Gordon M. Harper — Chief Financial Officer and Secretary

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 Security 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 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 Q3 GAAP net income available to common stockholders was $156.3 million or $1.49 per common share. Net interest income was $38.5 million. Distributable earnings available to common stockholders was $75.3 million or $0.72 per common share. This non-GAAP measure is defined as net interest income plus TBA Drop Income adjusted for interest income or expense on interest rate swaps and futures contracts minus net operating expenses.

Total economic return for the quarter was 7.75%. Quarter end book value was $17.49 per common share, up 3.5% from June 30 and up 2.8% from August 8, the last date which we have reported book Value. Our most recent current available estimate of book value is as of Tuesday, October 21 and was $17.50 per common share, which reflects the accrual of the October common dividend of $0.24 per share payable on October 30th.

During Q3, ARMOUR raised approximately $99.5 million of capital by issuing approximately 6 million shares of common stock through an after the market offering program. In August, we completed the sale of 18.5 million shares of common stock for proceeds of approximately $298.6 million net of underwriting, discounts and commissions, and in September we repurchased 700,000 shares of common stock through our Common Stock Repurchase Program.

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 October 30th, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record on October 15. We have also declared a cash dividend of $0.24 per outstanding common share payable November 28 to holders of record on November 17, 2025.

I’ll now turn the call over to Scott Ulm to discuss ARMOUR’s portfolio and current strategy.

Scott J. Ulm — Chief Executive Officer and Vice Chairman

Thank you, Gordon. The third quarter unfolded against a backdrop of shifting macroeconomic currents. Downward revisions to employment data confirmed that the U.S. labor market had been softer than earlier reports suggested. In response, the Federal Reserve resumed its easing cycle and implementing a 25 basis point cut in September.

Chair Powell described the move as a risk management cut, reflecting growing caution around labor conditions updated projections now signal two additional cuts by year end, setting the stage for a constructive environment for Agency MBS as financing conditions continue to improve. Markets responded positively to the Fed’s pivot. Treasury yields declined, Agency MBS spreads tightened by roughly 20 basis points and volatility fell to its lowest level since 2022. These dynamics produced a total economic return of 7.75% for the quarter as previously mentioned by Gord. Following this strong performance, MBS spreads are now near the tightest levels of the year. Near term consolidation is possible. Valuations remain compelling on a medium term horizon.

As we entered the fourth quarter, macro and political visibility became more clouded. The federal government shutdown that began on October 1, delayed key data releases and introduced increased incremental uncertainty to growth forecasts. Even so, the market continues to expect an easing bias through year end. That’s likely to redirect liquidity from the short end of the rates curve into Agency MBS.

Chair Powell’s recent comments also indicated that quantitative tightening may conclude in the coming months. Although details are still evolving, the Fed’s MBS runoff is likely to continue with pay downs from MBS and Treasuries expected to be reinvested in the treasury market.

Together with a broader push toward banking deregulation, these shifts are aimed to ease balance sheet constraints and reinforce demand for Treasuries and Agency MBS. Notably, SOFR treasury spreads have turned more positive in recent weeks, strengthening the effectiveness of pay fixed SOFR swaps as portfolio hedges.

On the policy front, reports suggest that major banks are positioning to lead potential IPOs for Fannie Mae and Freddie Mac collectively estimated around $30 billion. Although the process has been delayed by the U.S. government shutdown and the absence of a formal roadmap for privatization, administration officials have reiterated support for retaining an implicit government guarantee and outcome that could transform GSE reform from a potential headwind into a tailwind for MBS investors.

An additional and somewhat unexpected source of demand could come from GSEs themselves. After years of balance sheet contraction under conservatorship, Fannie Mae and Freddie Mac now have roughly $250 billion of combined capacity to invest in mortgage loans and MBS should it align with GSE’s earnings and valuation objectives. While no formal plan has been announced, recent disclosures point to greater flexibility within their investment mandates, hinting at a more dynamic approach to managing their portfolios than in the prior cycles.

I’ll now turn it over to Sergey for more detail on our portfolio. Sergey.

Sergey Losyev — Co-chief Investment Officer

Thank you, Scott, and good morning. ARMOUR’s most recent net duration and implied leverage were 0.2 years and 8.1 times respectively, a balanced stance with a bias towards further Fed easing. Roughly 87% of our hedges are in OIS and SOFR pay fixed swaps with a balance in treasury futures.

Our liquidity remains robust at approximately 55% of total capital. The portfolio is invested entirely in Agency MBS, Agency CMBS and U.S. Treasuries. Our recent activity has centered on par to slight premium coupon mortgages, where levered and hedge ROEs range from 16% to 18%. Higher premium pools continue to offer up to 19% returns, though with greater sensitivity to prepayment risk. Diversification across 30 year coupon stack, Ginnie Mae and DUS Securities, whose positive convexity and shorter duration provide relative value, remain a key advantage.

During the second half of the year, 30 year mortgage rate briefly reached 6.15%, lowest level of this year while rates remain just above 2024 lows, refinancing activity has already exceeded last year’s pace, elevating prepayment concerns for TBA and generic premium MBS. This reinforces our long standing focus on specified pools which represent over 92% of the portfolio.

Aggregate portfolio prepayment raise rose to 9.6 CPR in October, compared with a third quarter average of 8.1 CPR, a 19% increase and consistent with our expectations. We anticipate a similar uptick in November before prepayments stabilize towards the year end as refinance volumes moderate. Should mortgage rates move down below 6%, levels we’ve not seen since early 2022. The MBS coupon stack offers a deep market of lower priced coupons as a hedge against higher prepayments. Roughly 40% of our assets are already positioned in prepayment protected Agency CMBS pools and discount MBS.

As usual, we finance 40% to 60% of the MBS portfolio through BUCKLER Securities, distributing the balance across 15 to 20 additional repo counterparties. Average gross haircuts stand near 2.75%. Repo market liquidity remains healthy with only modest 2 to 3 basis points increase in repo SOFR spreads versus Q3 average. More meaningfully, the spread between SOFR and Fed funds widened from 3 basis points in Q3 to roughly 10 basis points through October, muting the transmission of the Fed’s recent cut to funding markets and by extension to broader economy.

An increase in Treasury bills issuance and a gradual decline in banking reserves means banks can lend cash at higher prices. This makes repo funding a key area of focus heading into year end, yet despite a recent bump in SOFR rates, we view funding conditions as stable with standing repo facility to supply liquidity if needed.

Looking ahead, we expect structural demand for Agency MBS to continue to strengthen, regulatory clarity around banking reform and resumed easing cycle have historically been a powerful catalyst for high quality liquid assets like MBS. While spreads have compressed underlying fundamentals and market dynamics remain favorable.

Back to you, Scott.

Scott J. Ulm — Chief Executive Officer and Vice Chairman

Thanks, Sergey. We executed a $300 million overnight underwritten bought deal in August, first on we’ve done this decade, while it was somewhat more expensive than our ATM execution, it allowed us to put a significant amount of capital to work at attractive spread levels. In fact, we estimate that the spread tightening from the newly purchased assets alone contributed about 0.6% to our increase in book value this quarter, along with a meaningful reduction in operating expenses per share.

We saw some weakness in our stock in mid August and as in the past, we repurchased some shares in the open market. We’ll continue to look at both sides, selling and buying in our equity account. 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.

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.

Thank you for joining today’s call and your interest in ARMOUR. We’re happy to now answer your questions. Please open the line for some questions, please.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Doug Harter with UBS. Please go ahead.

Doug Harter

Thanks, and good morning. Hoping you could talk a little bit about where you see current returns on incremental investments and kind of the importance of the hedge choice you make in that and how that factors into your view of the attractiveness of the market today?

Scott J. Ulm

Yes. Hi, Doug. So expected roes hedged roes in the 16% to 18% range, obviously a touch lower than where they were at the end of June given the tightness in mortgage spreads. So over a short-term basis here you can assume a tons of leverage and hedge to swaps. So that’s also picking up the the swap income.

Now we are still constructive medium-term given the resumption of the normalization cycle and also because spreads while at local tights are still attractive over a longer time horizon. So if we see another 10 basis points of tightening, that could add about 4% in return on equity to that base case of 16% to 18% range for production coupon.

Doug Harter

I guess, then how do you think about what the outlook is for swap spreads and then how do you think about the attractiveness if you looked at mortgage spreads on an OIS basis?

Sergey Losyev

Hey, Doug, this is Sergey. Yeah, so swap spreads have also had a big move since September meeting. We think swap spreads will continue to normalize. If you look at some of the average prior to Liberation Day, we see a 10 year swap somewhere in mid 30s, currently trading around 44. So we’ve gone a long way from minus 60 earlier in Q2. And we feel like this is going to continue to be a tailwind for the portfolio as effect of more effective hedges to hedge MBS. Currently we have about 87% notional allocated to SOFR and OIS swaps. So, that’s, that’s a good positioning. We will probably tailor it if we do get back to those averages. But, a lot of things have been lining up to see balance sheet expansion as well as, potentially the Fed looking at changing the target policy rate from the Fed funds to SOFR or another repo measure, and that will provide, lower volatility to funding rates and potentially wider SOFR spreads as well. So a lot of tailwinds are lining up there.

Doug Harter

Great, thank you.

Operator

And the next question comes from Jason Weaver with JonesTrading. Please go ahead.

Jason Weaver

Hi, good morning. Thanks for taking my question. Scott, along with your prepared remarks, if the administration is actively looking for ways to reduce borrower rates via GSE deregulation, do you have any thoughts on what the actual implementation looks like? Whether that’s, G fee[Phonetic] manipulation, changes in LLPAs underwriting guidelines?

Scott J. Ulm

There are a lot of levers they could pull and Lord knows we get a lot of levers pulled these days that we may or may not expect. So, I think, and I think that probably, fits somewhere on their agenda. So, the answer is yes, I think we could see a lot of things, a lot of things move around here and, and particularly if, but particularly, I think you have to put it through the lens. If they are thinking about a capital raise here for the GSEs, they’re going to want to configure the GSEs to be, as attractive a proposition as they can. So that, that may put the brakes on a couple of things as well.

So there’s a balance there. I have no further, further insight into it other than, then just note that, there are two competing things going there. One is, undoubtedly they’d like to see lower mortgage rates, but they also want to see the GSEs as an attractive investment proposition.

Jason Weaver

Agree, that’s helpful. And then noticing the hedge ratio ticked down quite a bit from Q2. Is that more of a timing issue or just along with the greater confidence in the face of easing activity? You can be a bit more directional here.

Scott J. Ulm

There are a lot of things going on in that. Sergey, Desmond, maybe you want to give a little more color on that. But there’s a lot that goes into the way that, that ratio on itself in itself works. Sergey, Desmond, you want to give a little more color on that?

Sergey Losyev

Yes. Hi, Jason. So, I mean, the way we kind of look at hedges, it’s really to hedge our duration across the entire curve, right? So as we said earlier, our duration of 0.2, we are taking a balanced view with a bias towards more Fed easing. So our goal is to most of that point to duration is actually in the front end of the curve, whereas in the back end we aim to stay flat and ultimately, we move our hinges around to accomplish, our duration targets across the curve.

Jason Weaver

All right, thank you for that. I appreciate the color.

Operator

And the next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Trevor Cranston

Hey, thanks. Good morning. There’s a pretty significant drop in interest rate volatility in the third quarter, which had a carryover impact to MBS, obviously. Can you guys share your thoughts on kind of how you think volatility evolves going forward and since it’s being priced significantly lower today, how that factors into the potential to maybe add some swaptions or options into the hedge portfolio? Thanks.

Sergey Losyev

Yes. Hi, Trevor. So in terms of volatility hedging, you can think of two approaches to it. One, obviously is you can use swaptions. We have used swaptions in the past. We continue to look at hedges, even those that are not in our balance sheet. But the other approach is actually through asset selection right? So you can pick assets that have low optionality about 40% of our book, as we said in our prepared remarks, is in shorter duration, lower coupons, and also DUS Securities. And these actually have very low optionality and another benefit of these securities is that their convexity in some cases is even positive. So they act as a good offset to the negative convexity that you see in production coupons.

Now, one more point on volatility is that, yes, volatility has come down a lot so far this year, but if you expand the timescale, if you go back and look at other periods that are similar to this one, you can pick 2019, that was a period when the Fed had resumed normalization. They had started turning back, not buying mortgage backed securities. That period of time, volatility was actually lower than where they are right now.

If you take for example, obviously it’s an entire volatility surface, but if you look at one year by 10 year, today’s about 82 basis points, the average over that period was about 64 basis points. So still we’re still about 18 basis points higher. If the Fed continues normalization, we can expect that the tail risks around rates will become compressed and for that reason we can see volatility in the medium-term continue to decline, right? Now that’s not going to prevent short-term bouts of volatility, but over medium-term we can see volatility decline, and if you’re long options, then the valuation of options would decline if volatility declines.

So yeah, I mean we always, it’s a very dynamic position. We’re always looking at our hedges but for now we think just keeping low optionality assets is the better approach.

Trevor Cranston

Got it. Okay, very helpful, thank you.

Operator

And the next question comes from Timothy D’Agostino with B. Riley Securities. Please go ahead.Good morning. Thanks for taking the question. Just one for me. Regarding economic net interest margin, it seems like it widened about 1 basis point, quarter-over-quarter. Looking forward to year end and maybe to halfway through 2026, what would we need to see for this trend to kind of continue and if not pick up pace? Thank you.

Gordon M. Harper

Well, I guess you’re going to, it really depends on our portfolio and where, continued cuts in the Fed rate and that will imply how it impacts on our financing costs. We think we’ve constructed a very good portfolio and I think, the returns that we’re generating, I think are reasonable under the circumstances. I don’t know, Sergey and Desmond have other things to add to that, what they think of the horizon. But yeah, we don’t normally get for too much forward-looking statements on where we think, earnings are going to be in the future. But it’s really going to be dependent on how fast the rates cut and also how the market reacts to that. But we think we’ve constructed a very good portfolio for the future.

Sergey Losyev

Yeah, so just to continue to continue Gord’s comment there. Yeah, so we kind of typically just look at forward ROEs as well. Another way to look at the same way of looking at things. So 16% to 18% in production coupons. Our dividend yield, weighted average dividend yield, both preferred and common plus operational expenses all in is about 18%. So that could be sort of as the hurdle rate. We already have assets we are buying that are at 18%. There are others that are slightly lower than that. But as we said, we’re still constructive medium-term here. So just a few more basis points of tightening and those assets would meet or exceed our hurdle rate.

Timothy D’Agostino

Okay, thank you. So much. That’s it for me.

Operator

[Operator Instructions]. Our next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen

Hey, thanks. Good morning, guys. Maybe following up on some of this conversation here. I mean, what do you think is priced into MBS spreads with respect to the Fed cutting rates? Like right now it looks like there’s 125 basis points of cuts priced into the forward curve through the end of next year. Do you feel like spreads would widen if those expectations got walked back for any reason? And do you feel like spreads would actually have room to tighten once they actually deliver those cuts?

Sergey Losyev

Hey Eric, this is Sergey. Yes to both. Definitely a pause in the easing cycle or something that would cause them to walk back their projections would be potential source of volatility in the market. But, in terms of delivering cuts to the market, I think a lot of the bank demand will get unlocked there. If you look at the current coupon mortgages versus yields on money markets or T bills, it’s compressed again over the course of the year closer to 100 basis points.

So I think as you get closer to, 152% on the spread of mortgage yields versus cash, you start to see more and more engagement from other players in the market that we’ve seen. We haven’t seen as much demand as expected earlier this year. So I think, I think that kind of answers yes to both scenarios. And we know in our prepared remarks that spreads have, have tightened significantly over the course of the quarter. We do see upside, but I think it’s overall macro picture, the lack of government economic data coming through that’s given us a little bit of pause here. But over medium-term horizon, that’s a clear positive to have lower Fed funds rates.

Eric Hagen

Yep, gotcha. That’s good color. The move to raise capital and buy back stock in the quarter, can you kind of share the rough level of your stock valuation when you did those transactions? And like what’s the best way to compare the value from having done each of those deals? Transactions.

Scott J. Ulm

Yeah. So Gordon will maybe give me the, if he can pull up the level where we bought back. But, look, we’re committed to being on both sides and when we get a dislocation, we’ll buy back some stock, and when we see good valuations, we’ll sell stock. Stock buybacks are always, are always, always fraught because they happen, when a bunch of other things are going on and it’s always expensive to get the stock back out there as well. But, we had a pretty good spread between where we, where we executed both those. Gordon, you have those numbers to hand?

Gordon M. Harper

Yeah, I know offhand, we. Yeah, when we did the buybacks, it was about, a couple cents accretive on the days. And it was in the 14, just get you the right number. Second. Price we were buying them back at. Yeah, it was in the, 14 40 handle around that on the days that averaged out. So you can see we’ve bounced back since those days and we bought back the stock.

Scott J. Ulm

Is that useful?

Eric Hagen

Yeah, that was helpful. I appreciate you guys.

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 J. Ulm

Thanks for joining the call today. We appreciate it. Any further questions occur to you, give a ring at the office and we’ll be back to you as soon as we can. Very good. Thank you and have a nice day.

Operator

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