ARMOUR Residential REIT, Inc.

Good morning and welcome to Armour Residential REIT's second quarter 2023 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, Drew, and thank you to all of you for joining us on our call this morning to discuss Armour's second quarter 2023 results. With me today are Armour's co-CEOs, Scott Ulm and Jeff Zimmer, and our CIO, Mark Gruber. By now, everyone has access to Armour's earnings release, which can be found on Armour's website, www.armourreit.com. This conference call includes forward-looking statements which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factors section of Armour's periodic reports filed with the Securities and Exchange Commission describe certain factors beyond armor's control that could cause actual results to differ materially from those expressed in 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 it will continue for one year. Armour's Q2 earnings available to common shareholders was $40 million, which includes $43 million of GAAP net income. We sold the last of our legacy available for sale mortgage-backed securities in Q1. Going forward, there will be no mark-to-market items excluded from GAAP net income. We will continue to report total comprehensive income for comparable prior periods as long as they remain relevant. Net interest income was $5.8 million. Distributable earnings available to common stockholders increased. was $45.4 million, or 23 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 interest rate swaps, less net operating expenses. Our asset yield of 4.24%, less net cost of funds of 2.49%, gave us net interest margin of 1.75% for the quarter. Armour Capital Management continues to waive a portion of their management fees. They waived $1.65 million for Q2, which offset operating expenses. This waiver will continue until further notice. Armour paid monthly common stock dividends of $0.08 per common share, that total of $0.24 per common share for the quarter. We've maintained the $0.08 per share common dividend rate for July and August, As we've discussed on our previous calls, our aim is to pay an attractive dividend that is appropriate in context and stable over the medium term. Taken together with the contractual dividends on preferred stock, Armour has made cumulative distribution to stockholders of $2.1 billion over its history. During the second quarter, we issued 15,160,000 shares under our common stock ATM program, raising $77.5 million of capital after fees and expenses. During the second quarter, we also repurchased 425,000 shares of common stock at an average cost of $4.88 per share. That was under our existing standing repurchase authorization. For the first half of the year, our capital activities have been accretive to book value per common share and reducing per share running costs. So far in Q3, we've issued another 21,499,175 common shares, raising net capital of $109.3 million. That completes our current ATM program. This brings our common share count to 228,309,234 common shares. Recently, we've approved a new ATM program offering up to 75 million shares through our affiliate, Buckler, and four other agents. Order in book value was $5.38 per common share. Our most recent available book value estimate as of Monday night, July 24th, was estimated to be $5.25 per common share. Now let me turn the call over to Co-Chief Executive Officer Scott Ulm, Scott, if you'd like to discuss in more detail our portfolio position and current strategy, please go ahead.

Thanks, Jim. Market conditions in the second quarter continue to support our thesis that we are entering into a compelling period for investment in agency MBS. Spreads remain near historic highs. Funding and hedging are widely available. With the Fed nearing the end of its hiking cycle, we believe MBS will offer significant returns through carry, spread tightening, or both. Throughout this hiking cycle, U.S. Treasuries have had a persistent trend of extreme fluctuations. The two-year Treasury yield surged by 112 basis points from its low of 3.78% for the quarter. Simultaneously, the 10-year Treasury yield experienced a gain of over 50 basis points, reaching a quarter high of 3.84%. Notably, the spread between these two tenors also made history, closing the week below negative 100 basis points for the first time since 1981. In response, the portfolio team rebalanced the hedge book to favor a steeper yield curve environment, which we expect will begin later this year. In early May, Armour sold $1.8 billion of the lowest premium specified pools as a looming fight over the debt ceiling greatly increased the likelihood of more volatility in the market. Armour decreased its net portfolio leverage and duration from 8.9 times and 1.15, respectively, down to 6.8 times and 0.87 to address this increase in risk. Production coupon MBS underperformed significantly into this event, which presented a good opportunity to buy back exposure to 5.5% and 6% pools shortly after the debt ceiling resolution occurred. The other widely anticipated event was the liquidation of the FDIC portfolio. Mid-sales of agency mortgage passives have now surpassed 75% in what has been a remarkably orderly affair. The fear of a major market disruption is baited with demand stronger than initially thought, and we do not expect the remaining liquidation of the FDIC's MBS portfolio to have a material impact on valuations. Despite this, we view the relevant valuation of FDIC coupons as too rich versus the opportunities up the coupon stack where we own over 60% of our mortgage assets. We're maintaining our short position of negative 500 million Fannie 33% PBAs, in a reallocated capital towards agency CMBS dust 10, 9.5 pools. These dust pools are trading at over 100 basis points wide to sulfur swaps, which is almost double the ZVOAS of lower coupon pools. Couple this with favorable financing-like pools, Armour likes this trade from a total return perspective. Although spreads may remain at these valuations for a while, we see long-term value to positive convexity dust swaps. Additionally, we've recently allocated over $1.3 billion of recently issued capital in 5% and 5.5% Ginnie Mae pools. Their 0% risk weighting and wider spreads favor domestic and foreign bank demand in the second half of the year. We feel that the newly proposed banking regulation should provide a greater boost to the Ginnie Mae MBS sector longer term. Our leverage closed the quarter at 7.6 times and currently sits at 7.8 times as of the 20th of July. a number that reflects attractive valuations, yet is prudent enough to withstand still elevated and highly unpredictable levels of daily market volatility. Additionally, Armour maintains healthy levels of available liquidity at $714 million, which includes cash, unleveraged securities, and principal and interest receivables as of the 20th of July. Our current portfolio is concentrated in the most liquid, low premium production coupon pools, featuring more favorable demographics, LTVs, FICO scores, and loan balance characteristics versus generic production cohorts. We continue to favor specified pools over TBAs, as we expect no improvement in the deliverable collateral and the implied funding of dollar rolls lag current repo rates. These lower pay-up premium specified stories should perform strongly as demand for agency MBS remains. Despite seasonals driving up CPRs marginally, these investments reflect historically low prepayment risks and still a significant amount of borrowers are out of the money. Armour's average prepayment rate for all NBS assets in the second quarter of 2023 was 6.3 CPR, and still a very low 6 CPR for July. Although mortgage rates have already declined from the highs of 7.2% in early November of 2022 to 6.8% in mid-July 2023, a substantial refinancing wave will require mortgage rates to fall below 5% in our view. Armour continues to fund just over 50% of its borrowings through our broker-dealer affiliate, Butler Securities. Since the debt ceiling resolution, the rebuilding of the Treasury general account has been orderly, and agency MBS repo funding has been stable. The weighted average haircut on a repo book remained exceptionally low at 2.7% as of the 18th of July. As we've already noted, we set our dividend to be appropriate for the medium term. We will, as always, continue to evaluate the level of the dividend. We're also mindful that this environment can deliver upside surprises. It can move our metrics substantially. Thank you very much. And with that, we will open for questions.