ARMOUR Residential REIT, Inc.

Good morning and welcome to Armour Residential REIT's third 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 this morning to discuss Armour's third quarter 2023 results. Today, I'm joined by 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 our website, www.armorrete.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 factor section of Armour's periodic 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 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 gap measures in our earnings release. An online replay of this conference call will be available on our website shortly and will continue for one year. On September 29, 2023, Armour completed the previously announced one for five reverse stock split. All of the common share and per share amounts reflect the reverse stock split. Armour's Q3 GAAP net loss was $179.2 million. Net interest income was $3.6 million. Distributable earnings available to common stockholders was $50.2 million, or $1.08 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 and futures contracts minus operating expenses net of management fee waivers. Asset yield of 4.65%, less cost of funds of 2.92%, resulted in a net interest margin of 1.73% for the quarter. Armour Capital Management is continuing to waive a portion of their management fees. They waived $1.65 million for Q3, which offsets operating expenses. The waiver will continue until further notice. Armour paid monthly common stock dividends per share of 40 cents for a total of $1.20 per share for the quarter. We previously announced that we will maintain the 40 cent per share common monthly dividend rate for the remainder of 2023. We prioritize maintaining a common share dividend appropriate for the intermediate term. rather than focusing on short-term market fluctuations. We expect to provide dividend guidance in late December, which will reflect our best understanding of current market conditions and outlooks at that time. Taken together with contractual dividends on preferred stock, Armour has made cumulative distributions to stockholders approaching $2.2 billion over our history. During the third quarter, we issued 7,628,578 shares under our common stock ATM program. That raised $191.4 million in capital after fees and expenses. This represents an average net proceeds of $25.09 per share. We also repurchased fractional shares for $233,000 in connection with the reverse stock split. We have historically been active repurchasing Armour common shares in the open market when trading price dislocation opportunities present themselves. Armour's board of directors has increased the company's stock repurchase authority to 2.5 million common shares effective Monday, October 30th, when our current blackout period ends. Quarter end book value was $21.73 per common share. The Treasury and mortgage markets have continued to be highly volatile since then. As of Tuesday night, October 24th, we estimated our book value to be approximately $17.95 per common share. Now let me turn the call over to Co-Chief Executive Officer Scott Ohm. Scott?

Thanks, Jim. The end of the third quarter and beginning of the fourth quarter presented some of the most difficult conditions for mortgage-backed securities since the onset of COVID-19 in March of 2020. We've seen a significant decline in MBS prices, primarily because of the nearly 125 basis point increase in 10-year treasury yields dropped to peak since June 30th. The widening in OAS caused mortgage assets to underperform similar duration treasuries even further. As a result, there have been broader investor redemptions in various bond funds, adding to the significant price pressures in the agency MBS market. We believe that much of this selling is driven by investors' existing overweight exposure to mortgage allocations relative to other investments. Our current book value of $17.95 as of October 24th fully reflects this decline in agency mortgage prices. However, the market value decline of Armoury common shares seems to have substantially overshot this book value move. It's important to note against this backdrop that the market is offering once-in-a-decade opportunities to invest in agency MBS with compelling returns and no appreciable credit risk. Despite the tough market conditions recently, we remain very constructive on the MBS market and its potential as we move towards the end of the Fed's tightening cycle. We continue to assess share repurchases when we trade significantly below book value. We have increased our authorized repurchase authority effective next week As always, we need to balance the value in historically cheap MBS against the accretion available from below-book stock-free purchases, as well as liquidity on the balance sheet. In response to the increased market volatility, Armour took measured steps towards a more conservative portfolio risk profile in order to safeguard our capital in this turbulent environment. These steps included a 25% reduction of our agency CMBS dust positions, We've long valued how our DUS allocation bolsters both the convexity and the diversification of our agency MBS portfolio. While we acknowledge DUS spreads are at recent wides, we execute these trades due to DUS outperformance versus MBS pools in the last two months. We sold lower coupon TBA position against our conventional seasoned loan balance pools to rotate into higher coupon JMA2 TBAs and pools, improving the duration profile of the portfolio through the shorter cash flows of Gini Collateral. Their explicit U.S. government guarantee gives these pools a 0% risk weighting on par with U.S. Treasuries and makes them particularly attractive to banks and overseas investors. This trade brought our overall exposure to the Gini 2 sector to 1.5 billion, or 16% of the total portfolio market value as of 10-24. We also sold four, four and a half, and 5% coupon TVAs and pools, These are shielded from supply by the FDIC and organic new mortgage issuers. These belly coupons have outperformed on a relative basis. We plan to eventually reinvest these proceeds into more attractive higher coupons with higher yields and wider spread characteristics. We rebalanced nearly all of our cleared short-duration swaps and treasury futures into 10-year SOPR swap hedges. This shifted negative duration to longer tenors, at a time when the 210 spread was inverted by more than negative 100 basis points. We also added 700 million in 10-year treasury short positions. This timely strategic shift enhanced our portfolio's resilience to rising treasury yields and MBS duration extension while improving our liquidity. All in, these trades allowed our portfolio to be more flexible in the face of a less predictable market environment. The portfolio's implied leverage and duration currently sit at 7.9 times and 0.9 years, respectively. We expect selling pressures to begin to subside, and this risk profile should benefit from even a modest improvement in current market conditions. Additionally, Armour maintains healthy levels of available liquidity. Despite seasonal effects driving CPRs marginally higher, the overall mortgage refinancing activity remains at historically low prepayment levels. Armour's average prepayment rate for all MBS assets in the third quarter was 5.3 CPR and a still very low 4.2 CPR in October. With our assets now priced on average seven to nine points below par, any prepayment activity in the portfolio is accretive to book value and is welcome to current prices. Armour continues to fund just over 50% of its borrowings through our broker-dealer affiliate, Buckley Securities, with repo generally priced around SOFR plus 15 basis points. In late August, prior to most of the negative price action, Armour gave guidance that we intended to maintain the same 40 cents per common share monthly dividend through the fourth quarter. The company followed through by declaring common dividends for October, November, and December on October 3rd. The resulting dividend rate is extremely high for conditions today, a level beyond what can be earned with reasonable risk. We're committed to paying the previously announced Q4 dividends. We will also be carefully considering market conditions and outlooks through the remainder of the fourth quarter. We expect to provide guidance on future dividends in late December, which will reflect the company's best assessment for the intermediate term at that time. That concludes my remarks.