ARMOUR Residential REIT, Inc.

Good morning and welcome to Armour Residential REIT's fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 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'd like to turn it over to Armour's Chief Financial Officer, Jim Mountain. Please go ahead.

Thank you, Anthony, and thank you all for joining our call to discuss Armour's fourth quarter 2022 results. This morning, I'm joined by Armour's co-CEOs, Scott Ulm and Jeff Zimmer, and Mark Gruber, our CIO. By now, everyone has access to Armour's earnings release, which can be found on Armour's website, www.armourreet.com. This conference call includes forward-looking statements which are intended to be subject to the safe harbor protections provided by the Private Securities Litigation Reform Act of 1995. The risk factor section of Armour's public reports filed with the Securities and Exchange Commission describes certain factors beyond Armour's control that could cause actual results to differ materially from those expressed 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 there for one year. Armour's Q4 comprehensive income available to common stockholders was $39.5 million. That includes $39.4 million of GAAP net income. Net interest income was $11.6 million, and net interest margin for the quarter improved 38 basis points to 2.59%. Distributable earnings available to common stockholders was $38.8 million, or 27 cents per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for the net coupon effect of our interest rate swaps minus net operating expenses. ARMA paid monthly common dividends of $0.10 per common share during the quarter and has paid dividends at that rate since January and has announced dividends at that rate for January 2023 and February 2023. Yesterday, we announced an adjustment to our dividend rate to $0.08 per common share monthly. As we have discussed in our previous calls, our aim is to pay an attractive dividend that is appropriate in context and stable over the medium term. We keep a keen eye on economic conditions, and the Armor Board believes that this dividend rate achieves those objectives. With this dividend declaration, lifetime cumulative common and preferred dividends are approaching $2.1 billion. During the fourth quarter, we purchased 449,700 shares of our common stock at an average cost of $5.01 per share under our standing repurchase authorization. On the sales side, our common stock ATM program has been very successful. During the fourth quarter, we issued 30,721,405 shares, raising $174.2 million of capital after fees and expenses. That represents an average net landed price of $5.67 per share. So far in Q1 2023, we've issued approximately 29,863, or 29,863,000 shares, raising net capital of 181.3 million. This represents an average price of $6.07 per share. This brings our common share count to 192,774,581 shares representing a common share market capitalization of over $1.1 billion based on last night's closing market prices. In addition to providing capital to take advantage of appealing current investment opportunities, share issuances build a larger base over which to spread our mostly fixed running costs. Our book value at quarter end was $5.78 per common share. Our most current available estimate of book value is as of Monday night, February 13th. We estimate that our book value was $6.04 per share after providing for the February dividends. We finalized our tax projections for calendar 2022, and as expected, all common stock dividends and Series C preferred dividends were treated for federal income tax purposes as a return of capital and are not currently taxable. This is comparable to 2021's tax results. Looking forward to 2023, we expect that Series C preferred stock dividends will likely be treated as fully taxable ordinary income to those shareholders. We also expect common dividends for 2023 will likely be treated at least partially as taxable ordinary income. Now let me turn the call over to Co-Chief Executive Officer Scott Holm to discuss Armour's portfolio position and current strategy in more detail. Scott.

Thanks, Jim. Well, 2022 marked an all-time worst year for total returns on U.S. Treasuries and agency mortgages since their inclusion in fixed income indices. Several trends beginning in the fourth quarter and extending into the new year give us optimism that 2023 will see a very constructive environment for MBS and our investment strategy. MBS volatility, which was exceptionally high in 2022, is declining. While the Fed seems by no means to be at the end of rate increases, the size is moderating and we should eventually see a more stable rate environment. We also expect the economic and rate environment to continue to moderate the supply of mortgages. Most importantly, the unprecedented decline in bond prices generated incredible values as measured by zero volatility adjusted MBS spreads, reaching just shy of 150 basis points. Spread levels not observed since the great financial crisis of 2008-9. While spreads have tightened, driving our book value, we continue to see an attractive investment environment. Responding to the new investment opportunities, Armour purchased over $3 billion of MBS pools and TBA positions in the fourth quarter of 2022, split $2.2 billion in MBS and $800 million in TBA. Armour continued to grow its portfolio in 2023 with the addition of 5.9 billion of MBS divided 4.9 billion of MBS and 1 billion of TVA. As of February 13th, Armour's portfolio size is over $12.3 billion. Armour supported the new purchases through our ATM share issuance program, raising over 345 million in capital since the third quarter of 2022. The MBS assets we purchased are concentrated in the most liquid, low premium, bank service production coupon MBS pools. We believe these pools will benefit the most as volatility eases from its recent highs and reverts to historical norms. These investments also reflect historically low prepayment risks as the MBA refinance index has fallen to its lowest level since the 1990s. Armour's average prepayment rate for all MBS assets in the fourth quarter of 2022 was 4.3 CPR and just 3.7 CPR so far in 2023. Although mortgage rates have already declined from the recent highs of 7.2% in early November 2022 to 6.3% in mid-February 2023, a substantial refinance wave would require mortgage rates well below the 4.5% to provide approximately 20% of existing borrowers with enough incentive to prepay early. Armour maintains very healthy levels of available liquidity. Our total leverage flows the year at 6.8 times and currently sits at 8 times, providing us with room to increase our investment portfolio size as future opportunities come along. Armour continues to fund just over 50% of borrowings through our broker-dealer affiliate, Buckler Securities. Despite the overall increase in market volatility, agency repo funding remained on a strong footing throughout the quarter, with spreads ranging 10 to 20 basis points above the SOFR benchmark. The weighted average haircut on our repo book remained exceptionally low at 3.6% of year's end numbers. We see leveraged and hedged returns in the current market in the low to mid teens. For prospective investments as well as the current book, a substantial amount of yield is provided by hedges. Nonetheless, we've always viewed our investment book as holistically comprised of MBS and related hedging. As we've always noted, we set our dividend to be appropriate for the medium term. Earnings available for distribution are moderated, and we feel it is appropriate to reduce our dividend by $0.02 to $0.08 per month. We will, as always, continue to evaluate the level of the dividend. We're also mindful that this environment can deliver upside surprises as well. They can move our metrics substantially. We'll now open the line to questions.