Good morning. Welcome to ARMOUR Residential REIT's Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by 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'd like to turn the call over to ARMOUR's Chief Financial Officer, Jim Mountain. Please go ahead.
Thank you, Anthony, and thank you all for joining our call to discuss ARMOUR's fourth quarter 2022 results. This morning I'm joined by ARMOUR's Co-CEOs, Scott Ulm and Jeff Zimmer, and Mark Gruber, our CIO. 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 protections provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR's public reports filed with the Securities and Exchange Commission describe certain factors beyond ARMOUR's control that could cause actual results to differ materially from those expressed 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. 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 will continue there for one year. ARMOUR's Q4 comprehensive income available to common stockholders was $39.5 million. That includes $39.4 million of GAAP net income. Net interest income was $11.6 million, net interest margin for the quarter improved 38 basis points to 2.59%. Distributable Earnings available to common stockholders was $38.8 million, or $0.27 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income, adjusted for the net coupon effect of our interest rate swaps, minus net operating expenses.
ARMOUR paid monthly common dividends of $0.10 per common share during the quarter and has paid dividends at that rate since January. Has announced dividends at that rate for January 2023 and February 2023. Yesterday, we announced an adjustment to our dividend rate to $0.08 per common share monthly. As we have discussed in our previous calls, our aim is to pay an attractive dividend that is appropriate in context and stable over the medium term. We keep a keen eye on economic conditions, and the ARMOUR board believes that this dividend rate achieves those objectives. With this dividend declaration, lifetime cumulative common and preferred dividends are approaching $2.1 billion.
During the fourth quarter, we purchased 449,700 shares of our common stock at an average cost of $5.01 per share under our standing repurchase authorization. On the sales side, our common stock ATM program has been very successful. During the fourth quarter, we issued 30,721,405 shares, raising $174.2 million of capital after fees and expenses. That represents an average net landed price of $5.67 per share. Far in Q1 2023, we've issued approximately 29,863 or 29,863,000 shares, raising net capital of $181.3 million. This represents an average price of $6.07 per share.
This brings our common share count to 192,774,581 shares, representing a common share market capitalization of over $1.1 billion based on last night's closing market prices. In addition to providing capital to take advantage of appealing current investment opportunities, share issuances build a larger base over which to spread our mostly fixed running costs. Our book value at quarter end was $5.78 per common share. Our most current available estimate of book value is as of Monday night, February 13th. We estimate that our book value was $6.04 per share after providing for the February dividends.
We finalized our tax projections for calendar 2022, and as expected, all common stock dividends and Series C preferred dividends were treated for federal income tax purposes as a return of capital and are not currently taxable. This is comparable to 2021's tax results. Looking forward to 2023, we expect that Series C preferred stock dividends will likely be treated as fully taxable ordinary income to those shareholders.
We also expect common dividends for 2023 will likely be treated at least partially as taxable ordinary income. Let me turn the call over to Co-Chief Executive Officer Scott Ulm to discuss ARMOUR's portfolio position and current strategy in more detail. Scott?
Thanks, Jim. While 2022 marked an all-time worst year for total returns on US Treasuries and agency mortgages since their inclusion in fixed income indices, several trends beginning in the fourth quarter and extending into the new year give us optimism that 2023 will see a very constructive environment for MBS and our investment strategy. MBS volatility, which was exceptionally high in 2022, is declining. While the Fed seems by no means to be at the end of rate increases, the size is moderating and we should eventually see a more stable rate environment. We also expect the economic and rate environment to continue to moderate the supply of mortgages. Most importantly, the unprecedented decline in bond prices generated incredible values as measured by Zero Volatility Adjusted MBS Spreads, reaching just shy of 150 basis points.
Spread levels not observed since the great financial crisis of 2008, 2009. While spreads have tightened, driving our book value, we continue to see an attractive investment environment. Responding to new investment opportunities, ARMOUR purchased over $3 billion of MBS pools and TBA positions in the fourth quarter of 2022, split $2.2 billion in MBS and $800 million TBA. ARMOUR continued to grow its portfolio in 2023 with the addition of $5.9 billion of MBS, divided $4.9 billion of MBS and $1 billion of TBA. As of February 13th, ARMOUR's portfolio size is over $12.3 billion. ARMOUR supported the new purchases through our ATM share issuance program, raising over $345 million in capital since the third quarter of 2022.
The MBS assets we purchased are concentrated in the most liquid, low premium bank service production coupon MBS pools. We believe these pools will benefit the most as volatility eases from its recent highs and reverts to historical norms. These investments also reflect historically low prepayment risks, as the MBA Refinance Index has fallen to its lowest level since the 1990s. ARMOUR's average prepayment rate for all MBS assets in the fourth quarter of 2022 was 4.3 CPR and just 3.7 CPR so far in 2023.
Although mortgage rates have already declined from the recent highs of 7.2% in early November 2022 to 6.3% in mid-February 2023, a substantial refinance wave would require mortgage rates well below 4.5% to provide approximately 20% of existing borrowers with enough incentive to prepay early. ARMOUR maintains very healthy levels of available liquidity. Our total leverage closed the year at 6.8x and currently sits at 8x, providing us with room to increase our investment portfolio size as future opportunities come along. ARMOUR continues to fund just over 50% of borrowings through our broker-dealer affiliate, BUCKLER Securities. Despite the overall increase in market volatility, agency Repo funding remained on a strong footing throughout the quarter, with spreads ranging 10-20 basis points above the SOFR benchmark.
The weighted average haircut on our Repo book remained exceptionally low at 3.6% of year-end numbers. We see leveraged and hedged returns in the current market in the low to mid-teens. For prospective investments as well as the current book, a substantial amount of yield is provided by hedges. We've always viewed our investment book as holistically comprised of MBS and related hedging. As we've always noted, we set our dividend to be appropriate for the medium term. Earnings available for distribution have moderated, we feel it is appropriate to reduce our dividend by $0.02 to $0.08 per month. We will, as always, continue to evaluate the level of the dividend. We're also mindful that this environment can deliver upside surprises as well, that can move our metrics substantially. We'll now open the line to questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Doug Harter with Credit Suisse. You may now go ahead.
Thanks a lot. I was hoping you could talk about where you see available returns on incremental investments and just help put the new dividend in the context of those returns rather than, you know, rather than an EAD perspective.
Morning, Doug. It's Jeff here.
Morning.
Thanks for calling in. Available returns are in the 14%-16% area. You know, some of that's supported by, these are new marginal investments, of course, they're supported by swaps are still positive. You put on a swap, you're actually getting paid. You know, back, looking back two years ago, you paid on a swap, and, you know, it may have been detrimental to your earnings capabilities. Well, now the swaps that we have and swaps we put on are incremental to the earnings, and that's a benefit to shareholders. We pay that out. You know, at $6 a share, you got about a 16% payout right now, and we think that's appropriate based on the book that we have and where we've been able to invest.
I think as Scott stated, 150 basis points, just a nominal spread is, you know, almost as good as it gets. I think in October, we might spike that to 175, 180 for, you know, a very short period of time. These are the best investment opportunities that we've seen in a long time, and we're, you know, making the investments with our new capital and paying that benefit out to shareholders.
Okay. Just on expenses. You know, you talked about one of the rationales for using the ATM being, you know, to kind of spread the expense base. You know, I guess if I look at the operating expense as a percentage of equity, it's actually been going up over the course of the year, you know, since the management fee is-
Doug, are you there?
Yeah. Doug, we lost you. Well, let me try and jump in and look... Did we get you back, Doug?
I know his line's on silent.
Why don't you go ahead, Jim, and address that question.
Hopefully he's listening or will pick up the answer on replay. Sort of the way we look at expense and the ATM, when we look at the sort of the dollar difference between net landed proceeds and recent book value that we actually use to guide the ATM program for the full year, that dollar difference that we disclosed in the 10-K is about $9.5 million. If you divide that by ending share count at the end of the year of about 163 million shares, you get $0.06 a share or, you know, at a $6 ending share price, that's kind of 1%-ish. If you look at running costs for 2021 divided by ending shares, that's $0.37 a share.
Ending the running cost for 2022 divided by ending share, $0.23 a share, so $0.14 per share pickup. If it costs you $0.06 a share to pick up $0.14 annually, that's a payback of, seems to us, less than six months. Good deal.
Doug, thank you for calling in. If you'd like to call back, I'm sure the Operator can put you in. Otherwise, Operator, if there's another question available, we're here to answer it. Thank you.
Okay. Our next question will come from Trevor Cranston with JMP Securities. You may now go ahead.
Hey, thanks. Good morning. you know, looking at the portfolio over the last few months as you guys have added MBS and moved up in coupon, it looks like the hedge positions haven't changed all that much. I guess there's two questions. First, can you say what the Treasury hedges that you show in the slide deck, could you detail what those are? Can you more generally just talk about how you guys are approaching hedging rate risk as you make incremental investments here? Thanks.
Sure. Mark, why don't you get into that, please?
Sure.
Chief Investment Officer Mark Gruber.
Thanks, Jeff. Trevor, the first answer is, you know, the Treasuries are going to be a mix of futures and cash Treasuries, and it's going to be across the curve. You know, two, five, sevens, tens. It's just a mix of that. Yes, as we've added assets, we have moved up in coupons, so the duration of the asset side has shortened a bit. We didn't add a lot of hedges also because we took our duration up a little bit. We were a little more comfortable as rates were higher to not add hedges and extend the portfolio duration just a little bit. That's what's going on there.
Okay. Got it. That makes sense. Then in terms of leverage, obviously, you know, the portfolio's been growing and it looks like leverage is up to around 8x or so currently. Is that kind of where you guys are targeting for the near term, or could we expect some additional portfolio growth over the next month or so? Thanks.
Historically, Trevor, Go ahead, Mark, either way.
I was gonna say, we're targeting somewhere between 8x and 9x, so we have a little bit of dry powder. You know, historically, we've been closer to 9x. You'll probably see it drift up a little bit from here, but not much from where we are today.
Got it. Okay. Thank you.
Again, if you have a question, please press star then one. Our next question will come from Matthew Howlett with B. Riley Securities. You may now go ahead.
Oh, hey, guys. Good morning. Thanks for taking my question. You know, on the topic of leverage, I mean, obviously you've had great success accessing the equity capital markets. When I look at the preferred markets here, you know, there's been some recent activity in this space. I look at your Series Cs trading at you know, $22 on a, on a $25 face, I mean, on a 7% coupon. What's the outlook? I mean, your common equity base is increased to the extent that you do have room to do another preferred series. Have you looked at that market? Is it open? Would you look at it here in 2023?
Hey, morning, Matt . Jeff Zimmer here. If you look at our preferred last night, I believe it closed at twenty-two and a half. Okay? That's a current strip yield of something like 7.78%. Okay. The reason that we issued a fixed, and we are the only company whose primary issuance over the last three years have been fixed, is because we did not want to subject our balance sheet and our income statement in the future to the possibility of rates going up. Rates are higher. The most recent issuance by other firms in our broader space have been at higher coupons. The existing issues that they have outstanding that were fixed for five years and go to floating will mean their coupons are going to go to 9% and 10%.
Right.
In the environment that we have today, we're able to raise common equity right around par, right around book value, as Jim Mountain stated. We think that that's a better way to run the company right now. We can access mortgages at some of the widest spreads they've been in in a decade. We access capital around book value, and the costs go down. You would not see us in the near future going back to the preferred market. It's just too expensive right now. I hope that answers your question.
No, it does. It's... You know, look, I certainly acknowledge that you don't have that, those five years switching to floating, so that was a good move on your part. It certainly looks the balance sheet has room, but, you know, if you choose to wait for the market to come back, that would make sense. Jeff, just on a macro, you know, question. I mean, look, looks like the Fed... You know, I'd love to hear your thoughts. I mean, it looks like market's thinking 25 in March, 25 in June, and then pausing. I'd love to hear if you think the next rate, you know, next move after that would be a cut.
On the Fed, obviously the balance sheet, I think Powell said it'll take a couple of years to shrink the MBS. Just your thoughts on, you know, the impact on MBS spreads. You think that they'll eventually start selling? Or what could surprise us, I guess?
I'll address that, and then I'll see if Mark or Scott want to improve. We do expect an increase at the next two meetings of 25 basis points. Our firm does not anticipate the Fed cutting rates in 2023. If they cut, it would be in 2024. The economic numbers that are coming out are just showing that the employment picture is very strong, and that's not gonna go away. It's gonna take some time. They may internally have to change their target from 2% to, like, 3% to 4% without announcing it, and to ease off the pedal a little bit. On the other hand, you know, we did see an announcement yesterday that already we're seeing commercial credit defaults.
Without saying companies' names, there were two defaults just announced for office buildings in New York and L.A. Even though you have a very strong employment situation, as you see credit defaults, and we're sure the Federal Reserve expects these credit defaults, you'll see that will spread to the employment sector. It just takes a while. That's where we are now. Now, we also believe mortgages, as I said a number of times on today's call, are historically very well priced and attractive. We are not nervous about the Fed selling mortgages down the road. You know, as a matter of fact, most of what they would have to sell, they're not in our portfolio, frankly.
You know, we've got a mid to higher coupon matrix right now that Mark and his team have put together. The Fed just doesn't own that stuff. If they wanna go ahead and sell their two and two and a halves, which are, you know, areas that others may be invested in, that's fine. There's no other supply other than them. There's no originations in that sector. We're always gonna be aware of it. You know, we're acutely aware, I guess, as they say, of the possibility of them selling. It shouldn't have an awful direct effect. Look, when the tide goes out, all ships go down, okay? We understand that. We will not have a direct impact on the assets we own from them selling the coupons in our portfolio.
Does that answer your question?
Oh, absolutely. It's always good to hear your insights on that. I guess the last topic, the CPRs. I mean, I think you said 4.7%. These are the lowest numbers, you know, I've seen in my career. I look at, you know. I asked a question on the last call about convexity, and it looks like, you know, you're buying stuff close to par now here. I mean, just you think you said, you know, any sense on, you know, if there'll be a pickup in CPRs, you know, what you're looking at when you put on your new MBS at, you know, these higher coupons? Thanks a lot.
I'm gonna hand that over to Mark because he and his team spent a lot of time working on that. Mark?
Yeah. We would expect in our portfolio, CPRs to pick up a little bit as we're adding, you know, newer bonds. They're gonna start at zero and they're gonna slowly ramp up. It really is gonna depend on rates. If rates decline, you know, mortgage rates decline, we'll see a pickup. We don't see anything systemic where we go back to, you know, 15, 20 CPR right now.
The premium you're adding, is it just sort of minimal in terms of the, what you're putting on the, what you're booking?
Scott's good.
It's minimal. You know, the payoffs in general, like we said earlier, are usually single digits, maybe half a point.
Right.
When you look at, you know, 5.5% or 6% coupons, you know, it's two points or so.
Gotcha. Thanks a lot. Appreciate it.
Thanks for calling in.
Our next question will come from Christopher Nolan with Ladenburg Thalmann.
Hey, guys.
You may now go ahead.
Hey, guys. I think I'll try to take up from the line of questioning Doug Harter was pursuing. On the dividend, I'm hearing mixed signals from the standpoint that you're saying that, you know, the environment is good and that you're going to get low to mid-teen returns, and then we're cutting the dividend. I guess my question really centers is the dividend cutting just expectations or a dramatically growing share count going forward? Can you give some clarification on that, please?
Sure. In all cases, when we increase our share count, it's to benefit existing shareholders and not just new shareholders. As I said before, we look at it very holistically. Repo rates have gone from 25 basis points to, you know, 4.5% and 4.7% right now. As those repo rates go up and the tenure remains inverted to those rates, it's generally gonna put a stress on your earnings rate. Whether we had raised zero or $300 million, we would be cutting the dividend right now. Please look at that as the holistic approach and a separate, you know, separate things. I hope that's helpful.
Yeah, it's helpful. It's just, you know, I thought I heard your comments where, you know, you're gonna have low to mid-teen equity returns, which is pretty consistent with what you've been saying recent quarters. I might have misheard it, just trying to get a clarification on that.
Returns available are in the 14%-16% range. We're currently paying approximately 16%. What I also said, and I wanted to be crystal clear on that, is we have a very large swap book that was put on at very low rates, and that still covers about 65% of our repo book. That is a real big driver and benefit that we're passing along to shareholders in terms of earnings. That's a trailing aspect and, you know, some of that has quite a ways to go.
Okay. Thank you.
Thanks very much.
It appears there are no further questions. This concludes our question and answer session. I'd like to turn the comments back over to Jim Mountain for any closing remarks.
Well, we'd like to thank you all for joining us this morning, for the attention that you give to our firm and our stock and our shareholders. Look forward to speaking again in April. Until then.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.