ARMOUR Residential REIT, Inc.

Greetings and welcome to the Armour Residential REIT first quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, you may press the star followed by the 0. As a reminder, this conference is being recorded Friday, May 1, 2020. I will now turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead.

Thank you, Nelson, and thank you all for joining Armour's first quarter 2020 conference call. We hope that all of you have been able to remain safe and healthy. This morning, I'm joined by Armour's co-CEO, Scott Allman, Jeff Zimmer, and our Chief Investment Officer, Mark Gruber. By now, everyone has access to Armour's earnings release, which can be found on Armour's website, www.armour.com. armorreek.com. This conference call may contain statements that are not recitations of historical fact and therefore constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements due to the impact of many factors beyond the control of Armour. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factor section of Armour's periodic reports filed with the Securities and Exchange Commission. Copies of those reports are available on the SEC's website at www.sec.gov. All forward-looking statements included in this conference call are made only as of today's date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required by law to do so. Also, our discussion today may include reference to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included in our earnings release, which can be found on Armour's website. An online replay of this conference call will be available on Armour's website shortly, and it will continue to be there for one year. Like other firms in our sector and across the economy, Armour was impacted negatively by the sudden and historic levels of market volatility in March, resulting from the COVID-19 pandemic. On March 31, 2020, Armour's total assets stood at approximately $5.1 billion, and down nearly 62% from the $13.3 billion level at the beginning of the quarter. This reflects Armour's successful results and actions to aggressively prune the investment portfolio, reduce risk, and preserve liquidity. By comparison, Armour's total comprehensive loss for the quarter of $537 million represents only 37% of stockholders' equity at the beginning of the quarter. Total equity was also reduced by $113.5 million by the company's January decision to replace its outstanding 7.875% preferred stock with a new 7% series, as well as the payment of previously declared dividends. Having weathered what we expect to be the worst weeks of this emergency, Armour ended Q1 with book value per common share of $11.10, corresponding to total stockholders' equity of $786 million. That included cash and unpledged liquid securities of $360 million. Today, Armour's equity stands at approximately $470 million. Since March 31st, Armour's done a number of things. Armour's issued approximately 5.7 million shares of common stock through its at-the-market offering program, raised approximately $8.4 million of additional capital. We continue to enjoy sufficient access to repurchase funding and interest rate swaps with a diversified group of counterparts. Armour's affiliate, Buckler Securities, continues to play a major role in the company's funding strategy. Armour has also taken advantage of relatively attractive opportunities to sell certain of its credit risk transfer and other non-agency positions. The company is also selectively rebuilding its agency path through portfolio and is refreshing its swap book. We expect to continue on this course for the rest of Q2. As of yesterday evening, the Armour portfolio stood at $5.6 billion, which includes $1.3 billion of TBAs and $308 million market value of CRT positions. They have a weighted average mark above 76, and 37% of those positions have investment-grade ratings. The $4 billion of agency securities in portfolio is a nice mix of legacy, higher coupon 30-year, and dust positions, combined with newer 15-year and 30-year products. When the last few legacy swaps run off in July, our hedge book will stand at $3.7 billion with an average pay rate of 22 basis points, based on our current positioning. In addition to anticipated improvements in portfolio composition and lower hedging costs, we expect future net interest margin will also be positively affected by favorable repo financing rates as term transactions roll off and are replaced at substantially lower current rates. For example, three-month term repos for agency collateral were pricing just under 180 basis points in early March. Today, we're seeing one-month repo prices inside of 30 basis points and less for overnight. Contractual management fee expense for Q2 will be reduced by 40% as further described in the company's Form 10Q, which will be filed with the SEC shortly. Earlier this week, Armour paid the April cash dividend on the Series C preferred stock, and declared the May cash dividend at the rate of $0.14583 per share to holders of record on the 15th of May 2020. That dividend will be payable on May 27, 2020. As previously announced, Armour is moving to a quarterly dividend on its common stock for the second quarter. Expect a further announcement on the amount and timing of Q2 common dividends in the latter part of June. Now let me turn the call over to Scott, Jeff, and Mark to discuss further Armour's portfolio position, strategy, and view towards the future. Scott?

Thanks, Jim. Good morning. The world has changed significantly from our last earnings call in February. Our team has been working remotely since early March, and our business continuity plan has worked well for us. While we'll be talking today about the pandemic's financial impact on us, We're mindful of the personal cost to so many of our friends and colleagues. We hope everyone joining us today stays healthy. March was a profoundly bad month for the mortgage investment industry. As a senior management team with each professional having 35 years or so of average experience in the capital markets, March was the worst environment we have had to deal with in our careers. The market movement was more sudden and violent than 2008. Our results were driven by several phenomena that occurred simultaneously. Interest rates on 10-year Treasury bonds whipsawed from 1.16% at the beginning of March down to the new historic lows of 0.54% and back up to 1.2% in a matter of days. Despite the historic risk-off rally in Treasuries, mortgage-backed security PBA prices declined. This resulted in the widest MBS spread since the financial crisis. Armour, as well as many others in our investment sector, experienced the double shock of both interest rate hedges and asset prices moving against us. Premiums on best criteria-specified pools evaporated as forced selling by levered investors, mutual funds, and REITs quickly ground out all available balance sheeted banks, the lack of which was further exacerbated by quarter end pressures. In the Fannie Mae dust 10-9.5 market, spreads exploded from approximately swaths plus seven days to 50% This transferred to an all-state dividend of $13.9 million. Many of the transfer bonds fell from par or 100 price levels to as high as 110 price levels to as low as 60 to 80 points on the dollar price levels, if a bid could be found at all. Repo terms in the agency asset class were very stable, and in particular, Armour's always found very sound funding through its broker-dealer affiliate, Buckler Securities. However, outside of the agency business, funding propositions degraded dramatically as haircuts and financing rates doubled or tripled on CRTs. Amidst the non-agency funding chaos, one large money-centered bank abruptly ended its financing of CRTs altogether, causing further turmoil as many investors were forced to sell at the same time into a tumultuous market, further lowering prices. Liquidity in many respects simply disappeared. Off-the-run treasuries sharply underperformed on-the-runs, indicated bid offer spreads on current production TBAs widened by multiples. 30-day commercial paper oscillated between 0.95% and 1.81%, even as Fed funds went to 0.05%. FX swap funding all but dried up in the middle of March. To reduce risk, leverage, and free up available cash, we acted early by selling $1.7 billion of agency securities in the first two weeks of March, In the last two weeks of March, we sold another $7.4 billion of primarily agency securities. If we had not acted promptly and decisively, there's little question that we might have found ourselves in the midst of forbearance discussions with creditors, like many others in our sector face today and with a most uncertain future. The Fed's announcement of unlimited support for agency mortgages on March 23rd caused prices to stabilize and increase. In order to increase liquidity for an uncertain future, we've sold many agency mortgage assets and were not able to fully participate in the subsequent agency mortgage price cut recovery. Standing here today, we see a changed landscape from prior years. We believe that substantial uncertainties will surround mortgage credit for the remainder of the year and perhaps longer. Agency securities are again a bright investment spot but require careful selection. The Fed buying program has given definitive support to the market but has also caused substantial increases in prices that are exacerbated by the low-rate environment. We believe close attention to credit characteristics in agency securities will be rewarded with superior performance. We believe elevated prepayments will return as a concern later in the year, not in the immediate future, and focused portfolio selection now can mitigate that medium-term risk. Currently, 85% of our agency-specified pools have some kind of prepay protection. We're methodically investing and expect our leverage to increase over the coming few weeks with our emphasis on liquid agency securities that offer attractive risk return profiles. We previously announced that we will declare a dividend for the second quarter in late June, and we believe our ongoing dividend policy should be as stable as possible and reflect our medium-term view of our net profitability. We believe our dividend should not chase period-to-period net profitability. At this point in the investment cycle, We're very constructive on our business for the following reasons. As we move through the pandemic and the economy revives, we expect to see the yield curve modestly steepen, providing improved opportunities for investment. At the same time, we believe the Fed will keep short-term rates low in order to nurture a nascent recovery, which will keep our funding rates low. The Fed has already begun to taper its MBS purchases, and we expect we'll continue to do so as the agency market normalizes. Some spreads feel unnaturally tight today, and Fed tapering should allow more conventional pricing relationships. Pre-payments will likely remain subdued until staffing and financial conditions are much closer to normal. This is a great tailwind for new investments. Financing for agencies is abundant and at its most attractive levels in years. We are highly confident of our access to financing in excellent terms through our affiliate Buckler securities, as well as the almost three dozen other relationships we maintain with other repo counterparties. There's clearly uncertainty in the timing and realization of all these factors. That said, we believe that a medium-term net yield expectation should be in the high single-digit to low double-digit range. We're delighted to be through the month of March and standing here with great liquidity, solid financing, and dry powder to continue to design our portfolio for the present environment. We'll now be happy to take any questions.