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ARMOUR Residential REIT book value per share declines 25%

ARMOUR Residential REIT is an agency REIT focusing largely on 30-year fixed-rate mortgages

ARMOUR Residential REIT (ARR) is a Real Estate Investment Trust (REIT) that invests in mortgage-backed securities (MBS) guaranteed by the U.S. government—either Ginnie Mae, Fannie Mae, or Freddie Mac. It invests in both fixed-rate mortgage-backed securities as well as adjustable-rate and hybrid adjustable-rate MBS. In 2011, ARR voted to allow the REIT to invest in non-agency securities. So far, it has chosen not to, but it retains that flexibility. It generally finances its balance sheet with repurchase agreements. The vast majority of its portfolio is in Fannie Mae 30-year fixed-rate mortgage-backed securities.

ARREnlarge Graph

Highlights of the quarter

ARMOUR reported GAAP earnings per share of $1.28 per share and core earnings of $0.18 per share. The core earnings were slightly below the Street estimate of $0.20 per share. Book value dropped 25%, from $7.24 per share to $5.43 per share. Its MBS portfolio was $22.6 billion as of June 30, and it has continued to de-leverage, selling another $4.2 billion of MBS since June 30. The portfolio consisted of 94% fixed-rate agency securities. Its portfolio was financed with $19.8 billion of repo borrowings and its debt-to-equity ratio was 9.77 to 1, putting the company at the high end of levered mortgage REITs. Its portfolio yield was 2.53%, while its cost of funds was 1.14%, giving it a net interest spread of 1.38% for the quarter.

Read-across to other names in the sector

ARMOUR had probably the worst portfolio for the interest rate environment we just experienced. Because it’s an agency REIT, almost all of its risk is interest rate risk—as opposed to non-agency REITs like Two Harbors (TWO) or PennyMac (PMT), which have a mix of credit risk and interest rate risk. In many ways, ARMOUR’s portfolio most closely resembles the portfolios of Annaly (NLY) or American Capital Agency (AGNC) in that these companies have a lot of exposure to fixed-rate agency mortgage-backed securities. We already heard from American Capital, and it reported a big decline in book value per share. Annaly should report in the next few weeks.

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