Frequently Asked Questions:

Below are a number of frequently asked questions about ARMOUR Residential REIT, Inc. (“ARMOUR”), its strategy and operations. All of the information below is qualified in its entirety by company filings with the Securities and Exchange Commission (“SEC”). These filings are available directly through the SEC’s website ( or the company’s website (

What is the history of ARMOUR?

ARMOUR is a Maryland corporation incorporated in 2008.

On July 29, 2009, ARMOUR and ARMOUR Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of ARMOUR, entered into an Agreement and Plan of Merger with Enterprise. The Merger Agreement provided for two primary transactions: (i) the Merger of Merger Sub Corp. with and into Enterprise with Enterprise surviving the Merger and becoming a wholly-owned subsidiary of ARMOUR, and (ii) ARMOUR becoming a new publicly‐traded corporation of which the holders of Enterprise securities would be security holders. The merger was consummated on November 6, 2009.

ARMOUR’s common stock and warrants are traded on the NYSE and Amex respectively under the ticker symbols “ARR” and “ARR.W”.

What assets does ARMOUR invest in?

As an Agency-only REIT, ARMOUR invests in mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, as well as short term instruments and deposits for cash awaiting reinvestment.

How does ARMOUR produce returns which currently exceed the returns available on Agency mortgage assets?

ARMOUR leverages its Agency mortgage investment portfolio with borrowings, which are generally short term and are secured by ARMOUR’s investment securities. The broad target leverage ratio is six to ten times debt to equity based on ARMOUR’s permanent capital equity base (additional paid-in-capital), though ARMOUR is not constrained by that range.

How does ARMOUR report its results? What are the differences between GAAP, Core, and taxable earnings?

ARMOUR reports its earnings according to Generally Accepted Accounting Principles, (“GAAP”). Earnings disclosure is supplemented with a measure called “Core Earnings,” which typically represents the majority of taxable REIT income. ARMOUR pays dividends out of taxable REIT income. Core earnings represents a non-GAAP measure and is defined as net income (loss) excluding impairment losses, gains or losses on sales of securities and early termination of interest rate hedges, unrealized gains or losses on interest rate hedges, and certain non-recurring expenses. Core Earnings may differ from GAAP earnings primarily because GAAP earnings includes the unrealized change in the value of ARMOUR’s interest rate hedging program and certain non-recurring expenses.

As a REIT, ARMOUR is required to pay out at least 90% of its taxable earnings in dividends. Any retained earnings are subject to corporate level taxation. Taxable income is generally the net interest income less current period realized expense deductions plus capital gains or losses. Taxable income excludes the unrealized change in the value of the interest rate hedging program. Capital gains or losses in taxable income would typically arise from the sale of securities or termination of an interest rate hedge.

What are the risks of this investment strategy? How does ARMOUR attempt to mitigate them?

ARMOUR’s investment strategy entails numerous risks that are detailed in its Current Report on Form 10-K filed with the SEC. The risks factors that are most frequently asked about are (1) rising interest rates, (2) faster than expected prepayments, and (3) ARMOUR’s ability to fund the portfolio. Each is summarized independently below.

Interest Rates: If interest rates rise, most of ARMOUR’s funding costs would increase almost simultaneously while asset yields would potentially change quite slowly or not at all. The potential result would be a decrease in the net interest spread earned and the potential dividends paid. If the mismatch between asset yields and funding costs is severe enough, ARMOUR might consider selling assets at prices which could be lower than those originally paid, resulting in a loss.

ARMOUR’s investment and liability strategy endeavors to protect the portfolio and earnings potential from rising rates in several ways; First, the portfolio strategy is focused on shorter duration assets. Duration is a measure of the sensitivity of an investment’s value to changes in interest rates. To maintain a shorter duration balance sheet, ARMOUR engages in a program of interest rate hedging through the use of interest rate swaps and futures. The overall objective of the hedging program is to hold instruments that will move in value and cashflow in the opposite direction of the value and cashflow of ARMOUR’s assets and liabilities. These instruments will generally provide increased cash flow and/or rise in value if rates rise. Conversely, they may decrease cashflow and decline in value if rates decline. ARMOUR’s objective is to hedge approximately 40% of the non-adjustable rate mortgage portfolio. As a result, the amount of hedging protection may be smaller or larger than the change in our assets and liabilities. ARMOUR seeks to keep the net duration of the portfolio at approximately 1.5 or below, after the impact of the hedging program.

Because mortgage borrowers (homeowners) can usually pay off a mortgage at any time without notice, or default at any time, it can be challenging to hedge a mortgage portfolio perfectly. Moreover, when the portfolio manager takes into consideration a variety of different interest rate environments that might occur over a period of years in advance, the task becomes even more complex. ARMOUR balances all of these considerations when employing a hedging program.

It is also possible to suffer from over-hedging as well as under-hedging interest rate risk. ARMOUR’s objective is to maintain a hedging program that provides a significant amount of interest rate protection balanced against the prospects for earnings (dividends).

Prepayments: ARMOUR typically purchases Agency mortgage securities with prices that are in excess of “par,” or 100 cents on the dollar, which means ARMOUR usually pays a premium dollar price above par for Agency Securities. Principal payments on these Agency mortgages are repaid at par. ARMOUR expenses the premium associated with each dollar of principal in the period received. Similarly, in the event of refinancing, serious delinquency, default, and loan modification, the mortgages underlying the Agency security pool are repurchased by the government
agency at par under the Agencies’ guarantee. ARMOUR expenses the premium associated with these prepayments in the period received as well.

Whenever a security is purchased, ARMOUR, through its manager, ARMOUR Residential Management LLC (“ARRM”), projects an expected pattern of prepayment in order to calculate its expected yield. As a result, prepayments that are in line with expectations simply result in the realization of the expected yield. Slower prepayment results than expected increase yields, while faster prepayments than expected reduce yields.

As a result of this dynamic, ARMOUR through ARRM, seeks to identify and purchase Agency securities that are expected to have a more consistent and/or slower than expected prepayment profile than the general inventory of Agency mortgages available for purchase. In addition to the potential for a modestly higher yield, Agency securities with these characteristics can be easier to hedge. ARRM reviews a broad variety of factors in assessing an Agency security before purchase, including borrowers’ credit profiles, principal, balance levels, seasoning, origination profile, geography and other characteristics that, combined with judgment and market price levels, produce the most attractive investment profile.

Financing: ARMOUR borrows funds using the the Agency mortgage assets it purchases through the repurchase (“REPO”) market. In today’s environment, the cost of these borrowings is significantly lower than the yield on Agency mortgages and thereby increasing ARMOUR’s earning considerably above the yield of the Agency mortgage portfolio. If the terms of the financings became unattractive or the REPO market becomes simply unavailable, it would be difficult for ARMOUR to produce substantial returns. ARMOUR seeks to protect its financing sources in two ways: (1) diversifying its sources of financing and (2) maintaining substantial liquidity in order to satisfy potential margin calls. ARMOUR currently has repurchase borrowings outstanding with numerous counterparties which are detailed in the most recent monthly Company Update posted on the company’s website.

ARMOUR maintains liquidity in order to be prepared to resolve margin cash requirements or other borrowing related cash requirements. ARMOUR’s objective is to retain 40% of its unlevered equity in cash (which typically means approximately 16%– 19% of all equity between prepayment margin call periods). From a lending credit officer’s perspective, cash, as opposed to additional securities, is always the preferable way to resolve margin call issues.

When does ARMOUR pay dividends and how does it determine the amount?

ARMOUR pays dividends on a monthly basis. The monthly dividend for the quarter is typically declared at or prior to the beginning of each quarter. The dividend amount is generally calculated to equal ARMOUR’s estimated taxable REIT income for the quarter. However, as the dividend estimates are made substantially in advance of each quarter’s operations, actual taxable REIT income results can differ from dividend declarations. As a REIT, ARMOUR is required to distribute 90% of its taxable income on a yearly basis.

What are the terms of the ARMOUR warrants?

ARMOUR has 32.5 million warrants outstanding with a strike price of $11.00. The warrants expire on November 6, 2013. ARMOUR has no plans to change the strike price or other terms of the warrants. ARMOUR is obligated to maintain the effectiveness of the SEC registration statement covering the issuance of common stock underlying the outstanding warrants. ARMOUR is also contractually obligated to register the resale of the warrants and underlying common stock held by the founders of Enterprise.

Who are ARMOUR’s auditors, legal counsel, custodian, and prime broker?

Auditor: Delloitte and Touche
Legal counsel: Akerman Senterfitt
Securities Custodian: JP Morgan
Prime Broker: AVM L.P.