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 (www.sec.gov) or the company’s website (www.armourreit.com).
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
dividends. Any retained earnings are subject to corporate level taxation.
income is generally the net interest income less current period realized
deductions plus capital gains or losses. Taxable income excludes the
change in the value of the interest rate hedging program. Capital gains or
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
frequently asked about are (1) rising interest rates, (2) faster than
prepayments, and (3) ARMOUR’s ability to fund the portfolio. Each is
Interest Rates: If interest rates rise, most of ARMOUR’s funding costs would
increase almost simultaneously while asset yields would potentially change
slowly or not at all. The potential result would be a decrease in the net
spread earned and the potential dividends paid. If the mismatch between
yields and funding costs is severe enough, ARMOUR might consider selling
prices which could be lower than those originally paid, resulting in a loss.
ARMOUR’s investment and liability strategy endeavors to protect the
earnings potential from rising rates in several ways; First, the portfolio
focused on shorter duration assets. Duration is a measure of the sensitivity
investment’s value to changes in interest rates. To maintain a shorter
balance sheet, ARMOUR engages in a program of interest rate hedging through
use of interest rate swaps and futures. The overall objective of the hedging
is to hold instruments that will move in value and cashflow in the opposite
of the value and cashflow of ARMOUR’s assets and liabilities. These
generally provide increased cash flow and/or rise in value if rates rise.
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
than the change in our assets and liabilities. ARMOUR seeks to keep the net
of the portfolio at approximately 1.5 or below, after the impact of the
Because mortgage borrowers (homeowners) can usually pay off a mortgage at
time without notice, or default at any time, it can be challenging to hedge
mortgage portfolio perfectly. Moreover, when the portfolio manager takes
consideration a variety of different interest rate environments that might
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
risk. ARMOUR’s objective is to maintain a hedging program that provides a
significant amount of interest rate protection balanced against the
Prepayments: ARMOUR typically purchases Agency mortgage securities with
prices that are in excess of “par,” or 100 cents on the dollar, which means
usually pays a premium dollar price above par for Agency Securities.
payments on these Agency mortgages are repaid at par. ARMOUR expenses the
premium associated with each dollar of principal in the period received.
in the event of refinancing, serious delinquency, default, and loan
mortgages underlying the Agency security pool are repurchased by the
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
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
expected reduce yields.
As a result of this dynamic, ARMOUR through ARRM, seeks to identify and
Agency securities that are expected to have a more consistent and/or slower
expected prepayment profile than the general inventory of Agency mortgages
available for purchase. In addition to the potential for a modestly higher
Agency securities with these characteristics can be easier to hedge. ARRM
broad variety of factors in assessing an Agency security before purchase,
borrowers’ credit profiles, principal, balance levels, seasoning,
geography and other characteristics that, combined with judgment and market
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,
cost of these borrowings is significantly lower than the yield on Agency
and thereby increasing ARMOUR’s earning considerably above the yield of the
Agency mortgage portfolio. If the terms of the financings became
the REPO market becomes simply unavailable, it would be difficult for ARMOUR
produce substantial returns. ARMOUR seeks to protect its financing sources
ways: (1) diversifying its sources of financing and (2) maintaining
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
ARMOUR maintains liquidity in order to be prepared to resolve margin cash
requirements or other borrowing related cash requirements. ARMOUR’s
is to retain 40% of its unlevered equity in cash (which typically means
approximately 16%– 19% of all equity between prepayment margin call
From a lending credit officer’s perspective, cash, as opposed to additional
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
is typically declared at or prior to the beginning of each quarter. The
amount is generally calculated to equal ARMOUR’s estimated taxable REIT
for the quarter. However, as the dividend estimates are made substantially
advance of each quarter’s operations, actual taxable REIT income results can
from dividend declarations. As a REIT, ARMOUR is required to distribute 90%
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.
warrants expire on November 6, 2013. ARMOUR has no plans to change the
price or other terms of the warrants. ARMOUR is obligated to maintain the
effectiveness of the SEC registration statement covering the issuance of
stock underlying the outstanding warrants. ARMOUR is also contractually
to register the resale of the warrants and underlying common stock held by
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.