Good morning, and welcome to ARMOUR Residential REIT's First 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, Andrew, and thank you all for joining our call to discuss ARMOUR's first quarter 2023 results. This morning, I'm joined by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer, and by 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 protection 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 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 ARMOUR's 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 to do so 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 for one year. ARMOUR's Q1 comprehensive loss related to common stockholders was $22.8 million, which includes $31.4 million of GAAP net loss. Net interest income was $12 million, and net interest margin for the quarter was 1.97%. Distributable earnings available to common stockholders were $49.3 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 interest rate swaps, and then minus our net operating expenses.
ARMOUR Capital Management is continuing to waive a portion of its management fees. They waived $1.65 million for Q1, which offsets operating expenses. The waiver will continue until further notice. ARMOUR paid monthly common dividends of $0.10 per share for January, $0.10 for February, and $0.08 for March, for a total of $0.28 for the quarter. We have maintained the $0.08 per share common dividend rate for April and May. As we've discussed in our previous calls, our aim is to pay an attractive dividend that is appropriate in context and stable over the medium term. The ARMOUR board believes that this dividend rate achieves those objectives.
Taken together with contractual dividends on the preferred stock, ARMOUR has made cumulative distributions to stockholders of more than $2 billion over our history. During the first quarter, we issued 29,862,647 shares of our common stock through our ATM program, raising $181.2 million of capital after fees and expenses. That represents average net proceeds of $6.07 per share. During the first quarter, we also repurchased 842,927 shares of common stock at an average net cost of $5.11 per share. That was under our outstanding repurchase authorizations. By accretively managing our common share count, we were able to add $0.06 per share of value for common shareholders.
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. In Q2 2023, we've issued 3,509,700 shares. That brings our common share count to 192,512,577 as of today. Quarter- end book value was $5.44 per common share. Our most current available estimate of book value is as of Monday night, April 24. We estimate that book value was $5.30 per common share. We increased the regulatory capital at our broker-dealer affiliate, BUCKLER Securities , to $203 million. BUCKLER continues to represent a strategic advantage for ARMOUR by providing repo funding, ATM placement, and other capital market access.
Finally, I'd like to remind all of our shareholders of the annual meeting for ARMOUR Residential REIT. It will be held at 8:00 A.M. Eastern Time next Thursday, May 4th . We received proxies representing a quorum of shares eligible to vote, and all matters have strong support. A number of shares eligible to vote have not yet provided their proxies. We encourage all shareholders to return their proxies and to participate in your annual meeting next week. Shareholders should contact their brokers if they need another copy of their proxy materials. Let me turn the call over to Co-Chief Executive Officer Scott Ulm. Scott?
Thanks, Jim. In January 2023, the agency MBS index delivered the third best monthly total return since 1989, reflecting the value proposition in mortgage spreads after their worst one- year performance on record in 2022. Despite positive fund inflows back into MBS and the broader fixed income markets in the first quarter of this year, the elevated levels of volatility and steep inversion along the Treasury yield curve are keeping many investors on the sidelines. This is evidenced by the significant increase in the sizes of money market funds in the Federal Reserve's reverse repo program. Moreover, the failure of Silicon Valley Bank and Signature Bank this spring resulted in an FDIC portfolio with more than $100 billion of MBS to be liquidated over the course of the next 10 months.
As of this week, the sales of the bank bonds and FDIC receivership have gone as planned. Quotes: "Gradual and orderly." Tuesday's headline that First Republic may sell up to $100 billion in assets to raise liquidity stoked additional fear of a lingering banking contagion. While most of these assets are presumed to be non-agency mortgage loans, the headlines caused MBS spreads to widen approximately 5 to 10 basis points. This has left investors demanding an additional discount to absorb the unanticipated supply. Despite all these challenges, the spreads on MBS have remained tighter versus the wides seen last fall, implying that there is a significant appetite for mortgage assets near their current valuations. We're confident that highly liquid U.S. government-sponsored mortgage-backed securities trading at multi-decade-wide spreads with muted refinance activity will grow increasingly attractive to the investor base in 2023.
ARMOUR continues to pursue favorable investment opportunities while growing the portfolio, adding $3 billion in mortgage-backed securities since year-end, bringing total portfolio size to just over $11.9 billion. Vigilant tight valuations and relative richness and deep discount coupons, ARMOUR sold the remainder of our Fannie 2.0 and 2.5 coupon positions early in the first quarter. Proceeds were reinvested into new, higher yielding current coupon mortgages. Sales proved to be well-timed as lower coupon MBS accounted for most of the securities transferred into FDIC receivership from the two failed banks. ARMOUR continued to hedge our exposure to FDIC-held assets by decreasing our 30-year 3% MBS bucket from 7.1% down to just about 1% of total portfolio value.
We're closely monitoring the ongoing FDIC liquidation for the opportunity to buy back lower coupons once spreads offer a discount versus that in the higher coupon production MBS. Our leverage closed the quarter at 8.7x and currently sits at 9x , a number that reflects attractive valuations, yet is prudent enough to withstand still elevated and highly unpredictable levels of daily market volatility. Additionally, ARMOUR maintains healthy levels of available liquidity at $590 million, which includes cash, unlevered securities, and principal and interest as of the 24th of April. Our purchased MBS are concentrated in the most liquid, low-premium, bank-serviced production coupon pools featuring more favorable geographics, LTVs, FICO scores, and loan balance characteristics versus generic production cohorts. We continue to favor these lower payoff premium specified stories, which we believe will perform best when volatility reverts to its historical norms.
These investments also reflect historically low prepayment risks, as the MBA Mortgage Applications Index has remained at suppressed levels. ARMOUR's average prepayment rate for all MBS assets in the first quarter of 2023 was 4.7 CPR, and still a very low 6.7 CPR for April. Although mortgage rates have already declined from the highs of 7.2% in early November of last year to 6.5% in mid-April 2023, a substantial refinancing wave would require mortgage rates to fall below 5%. ARMOUR continues to fund just over 50% of our borrowers through our broker-dealer affiliate, BUCKLER Securities . Despite March's precipitous drop in liquidity within the interbank lending community itself, agency repo funding remained on a strong footing throughout the quarter, with spreads ranging from 10-20 basis points above the SOFR benchmark.
The enormous supply of cash from money market funds, combined with a growing shortage of available T- bills, have created incredibly liquid conditions for overnight agency repo and term agency repo funding that benefits ARMOUR. The weighted average haircut on our repo book remained exceptionally low at 2.6% as of the 24th of April. As we've always noted, we set our dividend to be appropriate for the medium term. 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 could move our metrics. Thanks for that, and over to you, Jim.
Let's take some questions, Andrew.
Yes, sir. 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 the 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 will pause momentarily to assemble our roster. The first question comes from Trevor Cranston with JMP Securities. Please go ahead.
Hey, thanks. You guys talked a little bit about the, you know, the pending sales of the failed bank portfolios. You briefly mentioned, you know, the prospect of another bank selling assets. Can you comment in general on how you guys are thinking about the potential risk of, you know, maybe some other banks needing to sell MBS, as a risk on top of the sales that we already know about happening? Thanks.
Hey, good morning. It's Jeff Zimmer here. Thanks for dialing in. As long as volatility stays where it is and the Federal Reserve continues to tighten, which we do expect another 25 basis points at the next meeting, there is risk of a bank having to sell more assets. We're distinctly aware of that, and that's why we continue to keep large amounts of liquidity on hand, as Scott mentioned in his comments. We will continue to approach the mortgage market as a long-term investor, and we will take advantage of some of these wider spreads. We also have dry powder if we want to use it. We are very aware that there are risks out there.
Okay, got it. It looks like you guys added some swaps during the quarter. Can you just give the details on kind of what the maturity of the newly added swaps was?
Sure. This is Jeff. You know, it's interesting because we were talking about this in our board meeting the other day. There's two things going. The average weighted maturity of our OTC swaps is 75 months right now. We have been managing off of OTC swaps over to exchange- traded swaps, and they're a little shorter that we've been putting on partly because they're much lower haircuts. Mark, you could perhaps provide some detail on the recent exchange- traded swaps that we put on the books.
Sure. Yeah, the cleared swaps are, you know, 1-3-year swaps we put on really to protect the front end of the curve. The bilateral swaps, the existing book is mainly longer term.
Got it. Thank you.
Thank you.
The next question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks. You just mentioned, you know, keeping dry powder. You know, I guess how would you size the amount of dry powder in terms of leverage that you think you could add? What would be the conditions that would cause you to, you know, want to deploy some of that dry powder?
Thank you. Thanks for continuing to write about ARMOUR. We appreciate that, and we wish you the best of luck with the Credit Suisse merger.
Thank you.
A couple things. You're very welcome. A couple things here. We have probably another full turn of capabilities to invest in mortgage-backed securities. I think our team would rather see it slightly tighter, and that would indicate that the market in general is now willing to, or has accepted the fact that many of the securities that are for sale have been absorbed into the pricing structure of the MBS market. If it widens a little bit more, we'll be there to watch and perhaps invest at that point. We wanna see others invest. It is our belief that we're not gonna see large bank investing, Doug. The investing is gonna come from privately managed funds or hedge funds or but not banks. We're gonna be aware. We talk to our counterparties on The Street.
We get a general feeling of who's now involved in the market, where things are, and then we'll deploy some money. I suspect that that's not this month. It is a longer term perspective, and it will be over the next couple quarters. I hope that answers your question.
Yeah, absolutely. Then just on the, on the funding market, you know, kind of, what are you seeing kind of, around, you know, debt ceiling debate, anything around those maturities? You know, how does BUCKLER, does BUCKLER help, you know, kind of in that, in that context?
BUCKLER helps a lot. That's why we went ahead and started in 2016 putting together the BUCKLER structure. You know, we are very fortunate to have, you know, direct access into that whole system. We also get very, very good color from BUCKLER. I'll hand it over to Mark to talk about specific rates and where they are out in the curve. Generally, we feel very comfortable doing a lot of overnights with BUCKLER. We wouldn't feel as comfortable doing it with our other, you know, 20- some other counterparties in the repo market, because the will and changes of how they may approach the markets could happen at any single day.
We have great security in the fact that we can go through the banking system with BUCKLER. Mark, perhaps just talk a little bit about different maturities and where we are there and the cost of those maturities and the access to it.
Sure. We don't see any issue with repo, both overnight or term. Obviously, we do a lot more overnight with BUCKLER Securities than we would with anybody else just because of our relationship. That funding has been great. I haven't heard really any talk on from our repo counterparties about the debt ceiling and its impact. I think because of the debt ceiling, because of the banks, a lot of people want to be in repo. It's actually helped us. Like Scott said in his remarks, you know, SOFR + 10-15 is kind of what we're seeing, you know, across the maturities.
It widened a little bit at one point when we were kinda in the middle of the SVB and Signature Bank crisis, but it came back with no issue. We see plenty of liquidity in the repo and financing markets.
Great. Appreciate that. Thank you.
Thank you, Doug.
The next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Hey, guys. If you guys can give an update in terms of where you're seeing the investment spreads, particularly funding costs, in the second quarter to date?
Sure. Mark, you want to detail that, Mark ?
You said funding costs?
Funding costs.
Funding costs? Low 5s is where we're seeing repo. Somewhere, you know, 5.15%, 5.10%, somewhere. It just depends upon the maturity and the counterparty for about a 30-day term.
Okay. Given that, I mean, how should we think about the earnings power for the company in terms of, sustaining the current $0.28 dividend, excuse me, $0.24 dividend.
Good morning. All right, as Jim said in his comments, and quite frankly, as we've said, you know, in the last 10- 12 earnings calls, we set the dividend based on the medium term. Right now we think that the $0.08 dividend on a monthly basis suits the investment opportunities on the medium term. Now as actually Doug Harter reflected in an earlier report on ARMOUR, some of the earnings and, you know, quite a bit of it actually comes from our well-managed swap position that we put on in April and May of 2020, when rates were very low.
As a matter of fact, it was noted in the board meeting on Tuesday that we actually had a swap where they had paid us on both sides that just rolled off, so we're starting to see that go. You know, Fannie 6s are trading around, you know, par, so they're yielding 6%. Funding's at 5%, so that gives you 100 basis points, 8x . There's only 8% right there. Then you have some overhead costs as well. Correct? Where does that funding power come from? That large swap position. 75 months left on that swap position as I noted earlier on the over-the-counter swaps. It does provide earnings power. The reason you set up those swap positions is exactly for situations like this. Okay?
If we sense that rates for some reason were gonna go dramatically lower, both on the short end or even on the tenure, we might actually unwind some of those swaps. Right now, we put on those positions, you know, 3+ years ago, exactly where we want to be, and we're getting the benefit of it today. I hope that answers your question.
It does. Thank you for the detail.
You bet.
Again, if you have a question, please press star then one. The next question comes from Matthew Howlett with B. Riley. Please go ahead.
Hello, Jeff, everybody. Thanks for taking my question. Jeff, on the prepayments outlook, I'm just, you know, things have already ticked up, you know, obviously off a very, very low rate in the winter. Was it seasonal in nature? What's the outlook for speeds? It just seems like the housing market's a lot stronger than I think people would have imagined at this point in the cycle. Any sort of update on where speeds could go for the five or six coupon?
Sure. We as a company, Mark, please go ahead.
Sure. You know, we expect prepayments to increase over the next 2 months, probably up 20%. That's for our portfolio. That's what we're expecting based on where rates are today, the pull-through of rates versus over time. Again, we plan for that. It's so it won't be a surprise. You know, mortgage rates are lower than they were when they peaked.
Is there any sense, I mean, when you. Obviously, a lot of this is going to be dependent on the Fed. There were some changes recently at the FHFA GSE, just curious what you think of those, first of all, in terms of in-investment selection. Are you still focused on sort of the, you know, special, you know, the specified pool or credit-impaired nature? I mean, how are you approaching investing up in the, you know, higher up in the coupon today, given, you know, if the Fed could be cutting rates here back half of the year and, you know, mortgage rates could be a lot lower at some point?
We have structured the portfolio in higher coupons because of the wider spreads. It's the other reason why our duration is higher than we probably would have been in a normal environment where the Fed has been continuing to raise rates. That's to balance that effect of if rates do rally and we do get prepayments to increase more than we expect, we have duration on to protect us against that. It is a balance we try to maintain.
You can get that duration on your balance sheet by also using Treasuries and futures. You have your mortgage core position, you have your hedge core position, then you can manage it with very liquid other products. I believe your duration today, Mark, is 0.82- 0.88 area. That's the benefit that he's talking about, Matt.
Right. You guys have been very active with that. Just any comments on the changes with the GSE?
I would say we take it into account, you know, when we look at asset selection. You know, we are for the most part looking at bonds that have low pay-ups because that's where we like to play because we don't want that additional risk of having big pay-ups that could evaporate in different scenarios. Again, it's part of our liquidity management. If you remember back in 2020, pay-ups on, you know, liquid MBS basically evaporated. They went to 0 or negative in some cases. That's one of our risk management techniques, is to keep in lower pay-ups and to find bonds that have, you know, characteristics that we like, but we're not paying up a lot for.
Gotcha. Great. Thank you for taking my question.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Jim Mountain for any closing remarks.
Thank you, Andrew, and thanks to everyone who's joined us this morning. One final shout-out to all the shareholders that have dialed in on the Internet or hear this shortly on replay. We look forward to having you join us this time next week for our annual meeting. Until then, stay safe.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.