ARMOUR Residential REIT, Inc.

Greetings, everyone, and welcome to the Armour Residential REIT Inc. Third Quarter 2020 Earnings Call. During today's presentation, all participant lines will remain in a listen-only mode. Afterwards, we will conduct a question and answer session with instructions to follow. If at any time during today's briefing you need to reach an operator, please press star zero on your telephone. Please note as well, today's conference is being recorded Thursday, October 22nd, 2020. It is now with pleasure that I turn today's presentation over to Mr. Jim Mountain, Chief Financial Officer. Please go ahead, sir.

Thank you, Bridget, and thank you all for joining our call to discuss ARMR's third quarter 2020 results. This morning, as usual, I am joined by Armour's co-CEOs, Scott Ulm and Jeff Zimmer, and by our CIO, Mark Gruber. By now, everyone has access to Armour's earnings release and Form 10-Q, which can be found on Armour's website, www.armourrete.com. This conference call may contain statements that are not mere 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 protections 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 armor. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of Armour's periodic reports filed with the Securities and Exchange Commission. Copies 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 we're required to do so by law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to our 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 our website shortly and will continue for one year. Quarter end book value for Armour was $11.74 per common share, up 63 cents from Q2 2020. Armour's Q3 comprehensive income was $61.9 million, or 91 cents per common share, and that includes $58.4 million worth of GAAP net income. Core income, on the other hand, was $25.4 million, or 35 cents per common share. Core income includes TVA drop income and excludes market value adjustments. A complete definition and reconciliation showing how we compute core income is included in yesterday's press release. Core income for the quarter represents an annualized return on equity of 12.6% based on per share book value at the beginning of the quarter. Armour's portfolio consists exclusively of agency MBS totaling over $5.5 billion. Since the beginning of Q2, we have continued to designate any agency MBS purchased as trading securities, and the fair value changes for these investments are reported in net income. Commencing with the second quarter of 2020 and continuing until further notice, the company's external manager is waiving 40% of its management fee. This waiver offset $2.95 million of operating expenses in the quarter. Armour paid dividends of 10 cents per common share for each month in the third quarter. We've also declared October and November common dividends continuing at that rate of 10 cents per common share. And the Series C preferred stock dividends for Q4 2020 at their contractual rate of .14583 dollars per share. Now let me turn the call over to our Co-Chief Executive Officer, Scott Ulm, to discuss Armour's portfolio position in further detail and give us an insight on our current strategy.

Thanks, Jim. The quarter of 2020 saw a return to calmer conditions across the mortgage market and dramatically improved sentiment. The Federal Reserve flooded the market with funding in agency and treasury markets, and their outright purchases helped drive the bond market's recovery and stabilization. We completed the previously announced strategic transition of our investment portfolio to solely agency mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises, treasury securities, and cash. With Armour's common equity closing at $9.43 yesterday, a 20% discount to the third quarter ending book value, the current yield on the common is 12.7%. Our core income for common share of 35 cents, was 16.7% higher than the $0.30 in dividends we paid in the quarter. The Federal Reserve's large footprint in the agency MBS market continued to be a major factor in MBS performance during the third quarter, driving OAS tighter, volatility lower, and greatly improving liquidity. The Fed purchased about $330 billion of agency MBS throughout the third quarter, absorbing almost the entirety of new net agency MBS supply. Falling treasury yields and tightening mortgage spreads drove primary mortgage rates to all-time lows during the quarter. Armour continued its strategy of focusing its investments on prepaid protected, lower coupon mortgage passers to protect its MBS portfolio from the expected refinance wave triggered by these ultra-low rates. In addition to stable income, these specified stories delivered considerable results in book value appreciation for the quarter. As of September 30th, Armour held 94% of its MBS portfolio in securities with favorable prepayment protection characteristics. These include 58% in bonds with loan balances less than or equal to $225,000, 22% in agency CMBS with lockouts and prepayment penalties, 11% in bonds with loan-to-value ratios greater than 95%, FICO scores less than 700, and or seasoning of greater than 24 months. and 4% in bonds with 100% of the loans in states that have additional taxes on refinancing and cash-out transactions, such as Texas, Florida, and New York. We saw a strong dollar roll performance in the production coupons where the Fed's purchases matched new supply throughout the quarter. We expect dollar rolls to continue to yield double-digit returns over the medium-term horizon. Armour's duration as of the end of the third quarter was 0.86%. We're comfortable with the portfolio's interest rate risk in both up and down rate scenarios. Our portfolio's convexity profile is significantly more favorable than that of newly issued MBS. We manage our net duration gap within a tight range dictated by our team's outlook on the rates mark. It should be noted the significant portion of the portfolio's duration is in the key rate buckets inside of 3.5 years, where we expect yields to be pegged close to zero for the foreseeable future. Our exposure to the long end of the curve is considerably less than our overall duration. While our third quarter ending debt to equity was approximately five times, we maintained our all-in leverage, which includes the implied leverage of dollar rolls, between 7.5 and eight times throughout the quarter. This provides us with ample dry powder should new investment opportunities arise. We expect this leverage range to persist at least through the fall, absent some attractive opportunities arising. The repo market continues its benign course with financing costs that are at all-time lows with little to no term premium for longer-dated repo. Ample year-end funding, as we see it today, reinforces that. Our broker-dealer affiliate, Buckler Securities, continues to provide us with attractive terms and, perhaps more importantly, reliable financing. Our earnings outlook remains constructive despite the rich reinvestment market in cash securities with attractive convexity characteristics. As noted, the high returns available in the TBA market are very attractive, but will remain a distinctly smaller portion of our portfolio than specified pool cash securities. Based on these investment opportunities, we believe that our core earnings will cover our dividend in the fourth quarter. While third quarter 2020 marked a bright spot in a bleak year, Armour continues to monitor and plan for what's ahead. The Fed's statements suggest a strong commitment to lower rates in the medium term and continued support for the mortgage-backed securities market. Over the longer term, the timeline and future sizing for the Fed's QE program remains in question, as does the shorter-term uncertainty surrounding next month's elections. Pre-payment speeds have stabilized but remain elevated as lenders continue to streamline their technology and grow staff to capture the refinancing business. We believe our portfolio is balanced considering these uncertainties. It's an excellent convexity profile right amount of exposure to QE buying, and enough dry powder to take advantage of opportunities ahead. Operator, we'll now take any questions.