Good morning, everyone, and welcome to the ARMOUR Residential REIT's second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Mountain, Chief Financial Officer. Sir, please go ahead.
Thank you, Jamie, and thank you all for joining our call to discuss ARMOUR's second quarter 2022 results. This morning, I am joined by ARMOUR's Co-Chief Executive Officers, Scott Ulm and Jeff Zimmer, and our Chief Investment Officer, Mark Gruber. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armorreit.com. This conference call may contain statements that are not recitations of historical fact and therefore constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements. That would be due to the impact of many factors beyond the control of ARMOUR.
Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. All forward-looking statements included in this conference call are made only as of today's date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required to do so by law. Also, our discussion today may include reference to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure is included in our earnings release, which can be found on ARMOUR's website. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for one year.
Net interest margin for the quarter was 2.22%, an increase of 44 basis points compared to Q1 2022. ARMOUR's Q2 comprehensive loss related to common stockholders was $96.2 million, which includes $58.6 million of GAAP net loss. Distributable earnings available to common shareholders was $31.2 million. That's up 16.8% from Q1. On a per share basis, that represents $0.29 per common share. That non-GAAP measure excludes gains or losses from security sales and early termination of derivatives, as well as market value adjustments, but it does include TBA drop income. ACM, the company's external manager, continues to voluntarily waive $1.95 million of its management fee, which offsets Q2 operating expenses.
ARMOUR paid monthly common dividends of $0.10 per common share during the quarter and has announced dividends at that rate for July and August of 2022. Taken together with contractual dividends on the preferred stock, ARMOUR has made cumulative distributions to stockholders of over $1.9 billion throughout its history. On the capital markets front, ARMOUR took advantage of the brief sell-off in Q2 to repurchase 248,000 shares of common stock at an average cost of $6.23 per share. The existing repurchase authority stands at just under eight million shares, which will allow us to take advantage when and if future market dislocations present similarly compelling opportunities.
The company also raised approximately $80 million worth of equity capital in Q2 by issuing 10.4 million shares of common stock at an average price of $7.65 per share through its At-The-Market program. In July, the company raised an additional $28.5 million worth of equity capital with the issuance of about 4 million shares of common stock. Quarter end book value was $7.25 per common share, down 10.7% from Q1 2022. Through the close of business on Tuesday, the 26th, we estimate that ARMOUR has picked up a nickel on book value at approximately $7.30 per common share. Liquidity remains strong at more than $650 million.
At June 30th, 2022, ARMOUR's portfolio consisted of $6.7 billion of Agency Securities plus TBA positions, representing another $700 million or so, and $600 million plus or minus of U.S. Treasury securities. With the sale of our DUS portfolio, ARMOUR's legacy available-for-sale portfolio now represents less than 4% of total specified pool positions. Now let me turn the call over to Co-Chief Executive Officer Scott Ulm, who will discuss ARMOUR's portfolio position and current strategy in further detail. Scott?
Thanks, James. Historical sell-off in bond markets continued through the second quarter of 2022, as global central banks set on a path of aggressive tightening of financial conditions to fight rising rates of inflation. The two-year Treasury yield reached 3.45%.
Its highest level since 2007, and up from just 20 basis points only a year ago. The 10-year benchmark yield rose to just under 3.5%, surpassing 2018's high of 3.25% to break out of a multi-decade trend of lower yields. Rapid tightening of financial conditions did not avoid the housing finance sector, where conventional mortgage rates surged to 6%, driving mortgage refinancing activity to the lowest levels since the early 2000s. Historically wide Agency MBS spreads and discount coupons on nearly all existing mortgages presented an exceptionally attractive environment for our Agency MBS portfolio strategy.
Continuing with our Q1 strategy to redeploy risk back into the MBS market, during the second quarter, ARMOUR sold U.S. Treasury bonds at lower- yielding assets totaling almost $4 billion to purchase newly issued MBS specified pools with levered yields ranging between 15% and 18%. The asset sales included our entire DUS portfolio of just under $1 billion, which were sold at rich levels in the face of a widening in credit spreads and rising worries of a recession. The sale also included $1 billion in lower- coupon MBS pools with particularly slow prepay characteristics to take advantage of tight spreads and to pare down the portfolio risk for potential Fed sales in those coupons.
We believe the Fed will exhibit particular care and caution in approaching the question of portfolio MBS sales, both in terms of the announcement timing and the sizing of potential sales, as to not produce an outsized impact on the mortgage market. We hold approximately 20% of the total portfolio by market value in 2%-3% coupon pools with faster turnover prepayment speeds collateral and very low negative convexity. At approximately 44% market value, our core portfolio holdings are in 3.5% and 4% coupon pools, which are shielded from both the risk of the Fed selling and of new origination supply. The remaining exposure is in MBS with 4.5% and 5% coupons, where nominal spreads offer a value proposition we haven't seen since the 2010/2011 environment.
As of the end of June, our net portfolio duration was 0.48, and our convexity was -0.91. This is indeed a great time to be an agency mortgage investor. Our overall reallocation of capital is reflected in a quarter-on-quarter increase in NIM by 44 basis points. A still historically low leverage of 7.6x as of the end of June, and Distributable Earnings just slightly below our stated dividend amount. We estimate our earnings capacity to exceed the dividend of $0.30 for the third quarter and persist at least into the year end. We anticipate that high volatility will produce many additional opportunities ahead. ARMOUR maintains a healthy amount of dry powder of over $700 million in U.S. Treasury notes, capacity for at least one turn of additional leverage and ample excess liquidity.
Despite rapidly rising rates, 104% of our repo book as of the end of June is hedged with current and forward starting swaps, which reset daily. This allows us to be relatively agnostic to sizing and timing of Fed moves, which have been extremely unpredictable this year. ARMOUR continues to monitor the term structure in the repo market, but for now, we prefer to keep our MBS term repo a month or shorter. As of 6/30, it stood at 22 days with an average rate of 137 basis points. We continue to believe that our current dividend rate is appropriate for current conditions and gains further support from the investment opportunities available. Thank you very much. We'd now like to open up for questions.
Ladies and gentlemen, at this time, we'll begin the question- and- answer session. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask you please pick up your handset prior to pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from Doug Harter from Credit Suisse. Please go ahead with your question.
Thanks. Can you talk about where you see incremental returns on new investments today? You know, and then, you know, I guess if we were to truly mark-to-market the entire portfolio from a return perspective, would the returns be kind of comparable to that?
Sure. I'll defer to Mark Gruber, Chief Investment Officer. Mark?
Sure. Thanks, Doug. Right now we see, you know, asset yields, levered yields somewhere in the mid-teens, so 14%-16% yields on new investment opportunities. You know, like we said, you know, Scott had said, we've turned around the portfolio pretty, you know, quite a bit over the last few months. You know, we think, you know, the return profile of the whole company, the whole portfolio is gonna be somewhere in the low to mid-teens also. Like Scott also said in his remarks, you know, we think our earnings capacity is higher than where it's been over the last 6-9 months.
I mean, I guess just on the dividend with that construct, right? If I take the current dividend over the current book value, you know, that gets me something in the 16% range. If you're saying that, you know, that's you have to earn that sort of after expenses, you know, just, you know, if you're saying returns are in the 14% range, just curious around the commentary that the, you know, around the sustainability of the dividend.
Hi, this is Jeffrey. The dividend's very sustainable here. Make special note of the fact that the amortization expense that we currently have, Doug, is very low. The prepayments that our portfolio is exhibiting now are at the lowest levels since we started the company. Particularly, by two reasons.
Higher mortgage rates of near 6% mean that prepayments on existing portfolio attributes are very low. It also means because over 90% of our portfolio is specified assets, that we pay a premium over TBAs to identify characteristics that will keep prepayments slow. If you get faster prepayments, you could have a situation where you're not being able to support the $0.30 dividend. I think Scott was very clear in his comments that we feel, you know, in the foreseeable future that the portfolio after expenses, you know, will support a $0.30 dividend per quarter. I hope that's helpful.
Okay. Sure. Thank you.
Our next question comes from Trevor Cranston from JMP Securities. Please go ahead with your question.
Hi. Thanks. Can you talk about how you guys are thinking about, you know, the risk of any potential further spread widening from here and, kind of what you guys are looking for to maybe be a little more aggressive in terms of taking leverage up to a higher level? Thanks.
Once again, Scott also commented in his prepared remarks that we believe it's low likelihood at this point that the Federal Reserve is gonna sell mortgages and create a big spread wider. We've protected ourselves specifically by reducing exposure to those coupons that the Federal Reserve owns. Should they be selling, you know, we have very low exposure to that spread- widening risk. However, if the, you know, seas in the ocean the tide goes down, you know, all boats go down a little bit, and we do understand that. For right now, we're one turn under where our actual historic, you know, mid-eight leverage had been. When we see assets that we think that have good longer- term attributes, we'll go ahead and buy them.
We do have a big slug of Treasuries, and the Treasury position as well can be turned into mortgages. We have two ways to go ahead and increase our exposure to spread, but we're just being very cautious and careful here, understanding of course, that we are supporting and we expect to be supporting our dividend for at least a few foreseeable couple quarters. We will not see a reason to go ahead and extend ourselves. Hope that answers your question.
Okay. Yeah, it does. In terms of, as you guys are buying new securities in the spec market, can you talk about how much, you know, premium you're paying for prepayment protected pools at this point?
Sure. I'll hand it back over to Mark to give you some details on that. Before he starts, I will tell you, we're being very cautious about that, because in March and April of 2020, a lot of those premiums disappeared, and it was painful for owners of mortgages. Mark, you wanna give a little more specifics on some of those attributes?
Yeah. Most of the spec pools we buy have pay-ups by half a point or under. And specifically, that's the reason is because of what Jeff just said, is that prepayment volatility was kind of extreme a few years ago. We've kept our pay-ups pretty low. Now we're also trying to find assets that have the right convexity characteristics. There are cases where we'll pay more than that for really good assets. We'll. I would say a half a point and under is where we try to keep it.
Okay. Got it. Thank you.
Thank you.
Our next question comes from Matthew Howlett from B. Riley. Please go ahead with your question.
Oh, hey, guys. Thanks for taking my question. Just on hedging, I mean, with the curve inverted, Jeff, I know you've seen a lot of flat inverted yield curves over your time. Do you think about taking out the hedging longer? And then, you know, there's been some talk or some forecast of possibly the Fed cutting next year. Just talk a little bit about how you look at hedging today.
If we get to a point where we actually think the Fed's gonna be cutting or, you know, even perhaps a little bit before that, we may adjust. Let's walk through this. About you know, close to 100% of our portfolio is hedged with pay fixed, receive floating. A lot of that pay fixed is low single digits that we put on in 2020. We're paying low amounts, and we're receiving, you know, in the 200s now, right, as the Federal Reserve, you know, raises the short-term rates. For the foreseeable future, we could see, you know, short-term rates, federal funds rate going up another 150 basis points before they take a deep breath and take a look at things.
We'd be a net receiver of those against the increase that we would equally have on our repo book. For right now, we're gonna keep that hedge position in. It helps earnings. The way we have it set up is across the curve, so a little inversion or you know, a little steepening doesn't really play around with book value as much as it might think. You know, in that regard, we were doing some work you know, earlier in the year. Think about this. The two-year note in Q2 moved an average of seven basis points daily. Every single day, on average, it moved seven basis points. For the last 20 years, it moved 3.4 on average. You got a lot of moving around.
That's why Mark and his team have been very good about hedging across the curve. In that same respect, the ten-year during the second quarter moved an average of 7.1 basis points in yield. Over the last 20 years, it was 4.4. Once again, not quite double, but, you know, certainly near that. You know, that was the mountain that we were fighting, the uphill battle against. I think they've done a very, very good job about that. I hope that addresses your question.
Yeah, it does. Thank you. Then I guess last question on just, you know, on topic of just capital. I mean, the stock's, you know, held up. I mean, it's above book here. You look at, you know, the preferred markets. You know, I know you don't have a crystal ball, but what do you think? With all the preferreds, the mortgage REITs are trading below it's sort of to me, you know, as you outlined on your statements, it's one of the best environments you've seen in a while. Any sense on, you know, when the preferred market would open up? And would you access that? It looks like your capital you have room to add some preferred in the capital structure.
We spend every quarter on this very subject. Let's take a look at it right now. When the 10-year note was trading at, you know, 1.25%-2%, it would make sense that 6.5, 7.25 coupon preferred would be trading at around their $25 par. 10-year works its way up to 2.75%-3.5%. You can see that just nominally, that return is not enough to compete with risk-free treasuries. In our opinion, the preferreds are trading more or less where they make sense. Now, there's two ways to look at what you could do with your preferreds at this point in time. You could buy some back at $21 a share.
I believe, the float for all of our peers, in whether it's a 6.5% or 7.5% coupon, they all seem to be trading $20-$21.50. It's not as accretive to book value as you would think. Now, the real yields on those are like 8.25%-8.75% because they're trading under par. Mark and his team can invest at 12%, 14%, 16%, maybe even 18% right now. We have better investment opportunities in, our primary asset class of agency mortgages rather than buying back the preferreds. What you commented on was that you thought we had a good balance between preferreds currently and the amount of common equity that we have outstanding. We agree with that 100%. Preferreds start trading above par again.
If our common equity is larger, we might look at issuing those. That's not something that we're interested in doing right now for all the reasons I just mentioned.
Right. Well, you have a 7%, I think, on the current preferred. I mean, with the returns available today, would you issue at 7.5%-8% if that was, you know, tight a little bit and open up? Would it make sense? It looks like it would be accretive where you mentioned, you know, returns are for agency.
I think it's unlikely at this point we'd be issuing any coupons above where our current outstanding issue is. Once again, if we traded up toward par again and we felt we wanted to access the capital markets in that fashion, we'd probably increase the size of that issue. We'll remind you, twice in our history, we've bought issues out. We bought all the As back. We bought all the B issues.
Yep.
A large issue too. Bought all the Bs back. We'll see what the future, you know, presents itself. We're actively use that class of, you know, equity structure actively as part of the way we run our company. Yes, I really appreciate the question because not enough people understand the value in having that optionality.
Yeah. It just looks like they're at incredible discounts today. Yeah, thanks, Scott. That really helps. Thanks, Jeff.
Thank you.
Once again, if you would like to ask a question, please press star and then one. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead with your question.
Hey, Jeff. Most of my questions have been asked. Just a clarification on your earlier comment in terms of the earnings run rate, given the shift into the higher- yielding agencies. Should we be expecting the management fee waiver to decline in the second half of the year?
I haven't discussed that with the board of directors this week. Our opinion I think globally would be that it would more or less stay where it is right now.
Great. In case I missed it, what is the leverage level of the portfolio, you know, as of July 26th?
I think we can release that information. Mark, can you take that off the recent report? There's two ways to look at it. There's absolute debt to equity, and then there's implied. We do have a small $300-$400 million dollar rolled up. Mark, can you help on that?
Yeah. It's gonna be in the mid-7s right now.
Great. Okay. Thank you, guys.
Thank you very much.
Ladies and gentlemen, at this point, seeing no additional questions, I'd like to turn the floor back over to management for any closing remarks.
Well, we thank you all for joining us today.
Thanks for joining us today.
Take it away, Scott.
Thanks for joining us today. We appreciate your time. We're always available to you guys if you ring the office. Thanks.
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.