ARMOUR Residential REIT, Inc.

Good morning and welcome to the Armour Residential REIT's fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead.

Thank you, Andrew, and thank you all for joining our call this morning to discuss Armour's fourth quarter 2021 results. I'm joined today by Armour's co-CEO, Scott Allman, Jeff Zimmer, and Mark Gruber, our Chief Investment Officer. By now, everyone has access to Armour's earnings release, which can be found on Armour's website, www.armourreit.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 provisions 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 armor'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 required by law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included 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. Since we last spoke, the interest rate and mortgage markets have been marked by choppy waters. Armour's quarter end book value was $10.33 per common share, down 76 cents from September 30th, 2021. This quarter-over-quarter decrease reflects spread widening across our MBS portfolio, which is likely the result of the market ruminating on talk of inflation, Fed interest rate hikes, and future reductions in agency mortgage purchases. We expect this tightening and taper market will be with us for a while, and we're optimistic that it will remain relatively orderly and avoid throwing another tantrum. For an apples-to-apples comparison across the sector, book value was $9.76 per common share on January 31st, 2022. As the close of business on February 15th, we estimated Armour's book value per common share to be approximately $9.17. While spread widening negatively impacts the current market value of our existing MBS portfolio, it also reflects increasing current asset yields, and improving opportunities for new MBS investments. At December 31st, 2021, Armour's portfolio consisted of $4.4 billion of agency securities and TBA positions, representing another $4.5 billion. We also had $200 million of U.S. Treasury securities. Since then, Armour has reduced its agency and TBA portfolio by $2.9 billion and and increased its U.S. Treasury position by $1.6 billion to be ready to take advantage of those improving opportunities. Armour's Q4 comprehensive loss was $37.8 million, which includes $20.8 million of gap net loss, distributable earnings, which exclude gains or losses from security sales and early termination of derivatives, as well as market value adjustments. But it does include TBA drop income, was $27.7 million, or 27 cents per common share. During the fourth quarter, Armour issued 6,386,724 shares of common stock through the ATM programs, raising $67.5 million of capital after fees and expenses. As we've discussed on prior calls, increases in our common share base reduce per share administrative costs. For the full year, Armour's Common share count is up 44%, which reduces the administrative expense load by 17 cents per common share on an annualized pro forma basis. Armour Capital Management, the company's external manager, continues to waive a portion of its management fee. The waiver currently offsets $650,000 of operating expenses each month. The company paid dividends of 10 cents per common share for each month in the fourth quarter for a total of $30.9 million. Armour maintained that monthly dividend rate of 10 cents per share with the recently announced March 2022 common dividend. The Series C preferred stock dividends for Q1 2022 have also been declared at the contractual rate of 7% per annum. Now I'll turn the call over to Co-Chief Executive Officer Scott Ulm, to discuss Armour's portfolio positioning and current strategy in further detail. Scott?

Thanks, Jim. December's FOMC meeting resulted in a hawkish pivot, signaling the end of the quantitative easing program and at least four to five federal funds rate hikes in 2022. In addition, the FOMC hinted at a possible reduction of the Fed's balance sheet by mid-year 2022. January's FOMC meeting further reinforced the resolve to address the high inflation rate leaving all options open for an even more aggressive tightening policy on the table, including a possible 50 basis point hike in March. This hawkish shift sent a strong warning to investors to reassess historically tight valuations on most asset categories, and for us, particularly U.S. agency MBS. After OAS widened in the fourth quarter on mortgage-backed securities, there's been a further OAS widening of 15 to 20 basis points in the first quarter. While these levels are now significantly closer to longer-term historical averages, the uncertainty around the policy response to the rising rate of inflation remains high, posing further risk of widening. Armour substantially reduced the risk in our mortgage portfolio early in 2022. We lowered the spread risk in our portfolio by net selling $2.9 billion of MBS, rotating our TBA positions into $600 million specified pool MBS and $1.6 billion of U.S. Treasuries. This action significantly improved the negative convexity of our portfolio and lowered our implied leverage ratio from 7.5 times at the end of the fourth quarter down to 6.5 times today. The other side of this wider spread and higher rate environment is better investment opportunities, and Armour is well positioned to take advantage of them. 30-year agency-backed mortgage rates now exceed 4%, signaling at least a temporary end to the pandemic-era refinance wave. This will slow down prepayment speeds and potentially increase net margin on the existing portfolio and new investments. Our lower leverage gives us room for two or more terms of leverage to take advantage of improving investment opportunities. And we have substantial excess liquidity to support a larger portfolio and hedge book. Because we have 101% of our repo book hedged out with current pay swaps, We have removed much of the uncertainty and added borrowing expense around the exact timing and sizing of the future Fed hikes. If you include our forward starting swaps, 123% of our repo book is hedged and 90% of our current asset portfolio is hedged. Our average repo rate today is still historically low at just 13 basis points. Armour is active with 19 different repo counterparties, and approximately 49% of our principal is borrowed with our broker-dealer affiliate, Buckler Securities. We do see potentially significant opportunity around the corner, but for today, we maintain a lower risk profile going into the Fed tightening and quantitative easing ending. As we've noted before, we set our dividend policy based on the medium-term outlook in our business. We continue to see our dividend level as appropriate. With that, we'd like to open up for any questions.