ARMOUR Residential REIT, Inc. Aktie

Good day, and welcome to the ARMOUR Residential REIT First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Thank you, and good morning, and welcome to ARMOUR Residential REIT's First Quarter 2026 Conference Call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper; as well as our Co-Chief Investment Officers, Sergey Losyev and Desmond Macauley.

I'll now turn the call over to Gordon to run through the financial results.

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 harbo protection provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR's periodic 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 in 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. Also, 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 1 more year.

Notwithstanding the market turbulence and MBS volatility due to geopolitical events experienced in the latter portion of the first quarter of the year, the company delivered solid results for the first quarter of 2026 with total economic return of negative 2.6%. Since March 31, 2026, we have seen improvements in MBS spreads and volatility. ARMOUR's Q1 GAAP net loss related to common stockholders was $58 million or $0.49 per common share. Net interest income was $70.7 million. Distributable earnings available to common stockholders was $90.5 million or $0.76 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus operating expenses.

During Q1, ARMOUR raised approximately $215 million of capital by issuing approximately 11.8 million shares of common stock and $6.4 million of capital by issuing approximately 306,000 shares of preferred stock through our at the market offering programs. Through April 15, 2026, we raised approximately $7.2 million of capital by issuing 416,000 shares of common stock and $179,000 of capital by issuing 8,600 shares of preferred stock through the at the market offering programs.

In March 2026, we repurchased 125,000 shares of common stock through our stock repurchase program. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month, for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On April 29, 2026, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15, 2026. We have also declared a cash dividend of $0.24 per outstanding common share payable May 28, 2026, to holders of record on May 15, 2026. Quarter end book value was $17.42 per common share, down 6.5% from December 31, 2025. As of Monday, April 20, our estimated book value was $18.05 per common share, which reflects the accrual of the April common dividend.

I will now turn the call over to Chief Executive Officer, Scott Ulm, to discuss ARMOUR's portfolio position and current strategy.

Scott?

Thank you, Gordon. Heightened uncertainty returned to the market in 2026, driven by renewed geopolitical tensions and a sharp rise in oil prices has put further Fed easing on hold for now. As concerns around the Middle Eastern conflict intensified, the yield curve bear flat shallower path of Fed cuts. Implied volatility more than doubled and nominal mortgage spreads widened from 95 basis points to as much as 130 basis points from trough to peak over the course of the first quarter. That combination of wider spreads and elevated volatility ultimately proved to be a buying opportunity for ARMOUR, as the risk reward and valuations last observed in Q3 of last year turned decisively favorable.

As interest rates stabilized, MBS spreads retraced tighter, driving a recovery in our book value of 3.5% quarter 2 to date, net of dividend. Against a more balanced picture for mortgage spreads today, market technicals remain firmly supportive. The rise in treasury yields and mortgage rates has tempered prepayment concerns and elevated mortgage rates continue to weigh on an already soft housing market, keeping a lid on primary origination supply. On the demand side, while the GSEs pace of purchases slowed in the first 2 months of the first quarter, reflecting tight MBS spreads, we expect Fannie and Freddie to report that they reaccelerated holdings growth in March during the period of wider spread. This would be consistent with our view of the GSEs as backstop buyers with substantial dry powder to step in when mortgage spreads widen.

Another emerging source of demand is coming from banks. March recorded the highest CMO creation on record, reflecting a strong bid for structured MBS that typically signals growing bank appetite. While the bank demand story has failed to materialize in recent years, the regulatory relief now taking shape fuels growth and capital for bank's MBS portfolio at a time when deposit bases are also expanding. Sustained inflows into fixed income, both domestically and from overseas, provide an additional tailwind for demand in the first quarter as high-quality liquid Agency MBS serve as an attractive alternative to corporate credit where valuation questions persist.

I'll now turn it over to Sergey for more detail on our portfolio.

Thank you, Scott. ARMOUR's most recent net balance sheet duration stands at approximately 0.4 years, reflecting our view of further stabilization in yields and the return of expectations for the future Fed rate cuts as consistent with the Fed's committee's own expectations. The implied leverage, excluding the treasury shorts is 7.85x, a balanced posture that reflects our constructive view on the market and incorporate MBS purchases at the wider spread in March.

Our expected month-end liquidity position, including April's paydowns, remains strong at $1.2 billion or nearly 50% of Monday's total equity. ARMOUR's asset portfolio remains 100% Agency MBS, Agency CMBS and U.S. treasuries. It now stands at over $21 billion, matching a fourth consecutive quarter of growth in both assets and capital base. Consistent with our balance sheet growth, we have net added nearly $900 million of MBS pools and DUS since ARMOUR's last conference call in Q1. Our purchase mix continues to evolve by coupon and product as rates and spreads moved.

In March, we took advantage of widening in the near production coupons where GSE activity is most concentrated. We also added seasoned deeper discount MBS along with 15-year and Ginnie Mae TBA rolls. Within premium priced bonds, we continue to focus on prepayment protection in the higher tier maximum loan balance pools.

The portfolio remains concentrated in specified pools with favorable prepayment characteristics, which now represent 95% of ARMOUR's MBS Holdings. In Agency CMBS, we have gradually moved a large portion of our DUS portfolio, out on the yield curve rotating out of the 5-year sector, which experienced notable tightening into this year and swapping into the 10-year DUS paper. This rebalance allows us to take advantage of the positive convexity profile of these longer bonds and pick an additional 30 to 40 basis points of spread of longer SOFR hedges. Our hedge strategy aims to reduce duration risk across the entire yield curve. Roughly 86% of ARMOUR's hedges are OIS and SOFR pay fixed swaps, with the balance in treasury futures.

As recent market volatility subsided, the 10-year treasury -- SOFR treasury spread recovered from its recent tight of minus 49 basis points, the most negative level since October of last year. Despite the recovery to levels closer to fair value models and pre-liberation date historical averages, SOFR swaps remain an attractive hedge instrument for us with pay fixed rates at approximately 44 basis points below the comparable treasury yields. We expect further normalization in swap spreads to hinge on a path of policy debate around the Fed's desired balance sheet and banking deregulation.

Aggregate portfolio prepayments averaged 12.1 CPR year-to-date through April versus 11.1 CPR in Q4 of 2025, stable but running at a slightly higher level versus the prior quarter. Mortgage rates were not spared from volatility. After hitting a low of 5.9% in February, rates backed up by almost 60 basis points the following month, cycling near-term refinance activity. Despite the rate rally we've seen so far in April, 30-year mortgage rates remain elevated around 6.2%, which should anchor premium prepayment expectations through the next several prepayment reports. Funding markets have been refreshingly uneventful in Q1.

The REPO remains liquid and stable with spreads trading inside 15 basis points above SOFR and Fed funds rate. The Fed's response to last year's funding pressures appears to have done its work and stabilized banking reserves. As expected, the Fed has announced an incoming step down in its reserve management T-Bill purchases from $40 billion to $25 billion per month. It is a notable reduction, yet one that still leaves the Fed as the net provider of new liquidity to funding markets, and we expect REPO conditions to remain easy.

As of today, we finance portfolio across 24 active REPO counterparties. Approximately 80% of our REPO principal is financed at 3% haircut or lower and weighted average haircut across the entire REPO book is approximately 2.75%. BUCKLER Securities accounts for roughly 45% of our REPO financing book.

Thank you, and back to you, Scott.

Thanks, Sergey. The case to own MBS remains strong and should strengthen further if the Fed resumes its easing cycle later this year. We believe lower funding rates, combined with a steeper curve would reinforce the catalyst for strong demand and broaden the investor base for Agency MBS. We saw some volatility this quarter driven by geopolitical events, but the impact overall was manageable and has dissipated significantly more recently.

Our balance sheet management over the quarter gave us some options, and we were able to take advantage of lower MBS prices and bought back some of our own stock. We continue to set our dividend with a medium-term outlook, and we review our dividend as appropriate in the current environment. Our approach remains unchanged, stress test our liquidity, apply systematic hedging and deploy capital when opportunities present themselves. Overall, we're confident in our positioning, our strategy and our ability to perform well for shareholders in 2026.

Before we open the line for questions, we'd also note again that we've launched a new quarterly investor presentation now available on ARMOUR's website. Thank you for joining today's call and for your continued interest in ARMOUR.

[Operator Instructions] And today's first question comes from Marissa Lobo at UBS.

You noted the tightening of spreads in Q2 to date. So what does the current ROE on new agency purchases look like? And where do you see the long-term equilibrium of spread settling versus swaps?

Yes. Marissa, this is Desmond. So looking at par and premium securities, return on equity is in the mid- to high teens. That's assuming about 8 turns of leverage and hedge to half duration. Now that's somewhat of a static view. We also do scenario analysis where we look at horizon returns. So for example, if OAS is tightened by 10 basis points, that adds about 3% to 5% in total return that will accrue through book value. So that takes -- let's say, for example, the return is at around 16%. You had 3% to 5% there, then now you're getting to the 19%, 20% area. Now in terms of long-term stability of our long-term view on spreads, we think spreads are still attractive. That's why we are constructive on the sector.

You can look back at a period like 2019 when the Fed was running off its mortgage portfolio and also cutting rates. If we look at spread to swaps, let's say, a blended 5-year, 10-year swap, those levels were around 120 basis points on average mortgage spreads. And currently, they are around 150 basis points. So that suggests that we are wider by 30 basis points. If you look at it versus treasuries, you get something around 20 basis points wider today versus back then. So we think conservatively, we can see another 20 basis points of tightening here over the medium term.

Great. And can you share your view on the opportunity for dollar rolls in agencies? And how does that inform your current preference for TBAs versus specified pools?

Marissa, this is Sergey. Yes. So the TBA market specialness has certainly returned to some level this year, but it remains fairly volatile, unstable. So we have some TBA rolls in our portfolio. As we mentioned, we've reallocated to a little bit of a 15-year sector to Ginnie Mae, but we don't expect them necessarily to be our strongest carry trades. We kind of use these opportunistically for total return opportunities. So right now, we still prefer specified pool cash flow yields -- even if there isn't a lot of OAS pick versus the TBAs, we like the certainty of cash flows and certainly kind of protects us from the tail risk if mortgage rates turn lower in the future.

And our next question today comes from Trevor Cranston with JMP Securities.

Looking at your leverage, it's been kind of consistent around the 8x level for the last few quarters. Given your commentary around the positive backdrop in terms of the technical environment and the GSEs sort of acting as a backstop buyer, does that change how you guys are viewing the appropriate leverage level at all? Or how are you thinking about that in the current environment?

Yes. Trevor. First, we are comfortable with our current leverage. We did increase it after spreads widened in March, which benefited our book value. We think that the current level is appropriate. It would allow us to participate in terms of spread risk if we see more spreads tightening as we expect. We prioritize risk management. We stress test our liquidity to ensure that it can sustain extreme bouts of volatility.

And as long as we are comfortable with those stress tests, then we'd look to add leverage to take opportunity if we see more spreads widening as long as we think that if there's a bout of volatility, it's not systemic.

Okay, that's helpful.

And our next question today comes from Timothy D'Agostino with B. Riley Securities.

Congrats on the quarter. First question for me. I guess, could you provide just a little bit more color on the widening of the economic interest spread? I think it went from about 188 basis points to 194 basis points. It would just be great to get any color on the movement there.

Gordon, do you want to handle that one?

Yes. Just one second. I think the main real driver, I guess our -- you could see that our rate on our REPO has gone down. And then the other real driver is the rate that we have on our swaps. So when you put all that together, that's your answer.

Perfect. Awesome. I appreciate it. And then as a second question, just on capital formation. I guess just kind of getting a better understanding of the playbook a little bit. Obviously, when you're above book value, you're issuing off your equity ATM. But when you are below book value, do you turn to repurchasing shares and issuing preferreds? Just trying to understand how you all think about going and raising capital and then putting that capital to work.

Sure. Well, look, it's all about price. We -- it's all about price and it's all about opportunity. And by opportunity, I mean what the investment horizons are for us. So the clear simple answer is it depends. So we -- and there are also other factors, which include that when we increase the shareholder base, our expenses decline per share and our cost of running the shop declines as well on average. So we are very focused on all of those factors in terms of how they coalesce in making a decision on whether we issue or we repurchase as the case may be. And we're very committed to being on both sides of the market.

Clearly, when we repurchase, it has to be a fairly definitive view that we want to take back that capital. But when we issue, it's also a very carefully calibrated view on where the price is compared to book. What the opportunity for deploying that capital is, and how it impacts the overall operation. Not a clear, crisp answer, sorry, but it is all those factors that coalesce in how we manage it. And you'll see, if you look back, there are quarters where we're active and there are quarters we're not active at all, which might give you a sense of how tightly we manage that.

Okay, great. I appreciate the color. Congrats again on the quarter.

[Operator Instructions] Our next question today comes from David Storms at Stonegate Capital.

Actually, wanted to follow up on that last question around capital formation and ask, does times of increased volatility like we saw in Q1 play any sort of meaningful factor into issuing or repurchasing shares?

Yes, for sure. Generally, volatility is not a positive for share price. So I'd say, generally, volatility means that we're likely to be less active on the issuance side, but maybe a little more active on the repurchase side.

And certainly, we saw some volatility this quarter, and you saw us some -- early on in the quarter, it was a -- we're still enjoying some tightening. And later on in the quarter, we had some geopolitical stuff that happened, which maybe pushed us the other way. So yes, absolutely correct that volatility impacts us. But generally, in a period of lower volatility, I would guess you're going to see us more active on issuance and higher volatility, maybe a little less active.

Understood. And then maybe just one question around your outlook. With the Fed being in a bit of a wait and hold period given some of the conflicts of late. Are you keeping an eye out for any sort of second quarter impacts such as increased fertilizer prices or increased shipping prices that may, maybe force the Fed's hands? Are you tracking anything like that?

Look, we look at all this stuff. And yes, you're absolutely right that there's a pilot of secondary impacts out there that they could go either way. And we keep a close eye on it, but [indiscernible] came there, right?

And that concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Ulm for any closing remarks.

Thanks for joining. We appreciate your participation in our conference call here. And any follow-up questions, we're around. Thank you so much.

Thank you, sir. And that does conclude our conference call for today. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good day, and welcome to the ARMOUR Residential REIT's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO. Please go ahead.

Good morning, and welcome to ARMOUR Residential REIT's Fourth Quarter 2025 Conference Call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper; as well as our Co-Chief Investment Officers, Sergey Losyev and Desmond Macauley.

I'll now turn the call over to Gordon to run through the financial results.

Thank you, Scott. 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 periodic 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 in 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. Also, 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 1 year.

Q4 was a strong quarter for ARMOUR with a total economic return of 10.63% for the quarter as we benefited from MBS spreads tightening, lower MBS volatility and a lower interest rate environment. The market momentum we saw in Q4 has continued so far into Q1. ARMOUR's Q4 GAAP net income available to common stockholders was $208.7 million or $1.86 per share. Net interest income was $50.4 million. Distributable earnings available to common stockholders was $79.8 million or $0.71 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. Quarter end book value was $18.63 per common share, up 6.5% from September 30. Our most recent current available estimate of book value as of Tuesday, February 17, was $18.37 per common share, which reflects the payment of our January dividend of $0.24 and the accrual of the entire February common dividend payable on February 27, 2026, again, of $0.24 per common share.

During Q4, ARMOUR raised approximately $3.8 million of capital by issuing approximately 183,000 shares of preferred stock through an at the market offering program. Through February 11, 2026, we raised approximately $138 million of capital under our common at the market program by issuing approximately 7.5 million shares of common stock, which is mildly dilutive. We also issued $4.8 million of capital from the issuance of 230,000 shares of preferred stock under our preferred at the market program. ARMOUR paid monthly common dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. As we have stated previously, we aim to pay an attractive dividend that is appropriate in the context of stable over the medium term. On January 29, we paid a cash dividend of $0.24 per outstanding common share to the holders of record as of January 15, 2026. We have also declared cash dividends of $0.24 per outstanding common share payable on February 27, 2026, and March 30, 2026, to holders of record on February 17 and March 16, respectively.

I will now turn the call back over to CEO, Scott Ulm, to discuss ARMOUR's portfolio position and current strategy.

Thank you, Gordon. ARMOUR REIT delivered a robust fourth quarter, marking a 6.5% increase in book value in the fourth quarter. The strong growth extended to our balance sheet. The portfolio grew for a second consecutive quarter, increasing by more than 10% from the end of the third quarter of 2025, driven by roughly 22 basis points of spread tightening while maintaining moderate leverage throughout the quarter. ARMOUR's mortgage assets now total over $20 billion, supported by a strong capital liquidity position of approximately 54% of total shareholders' equity as of the end of January. We viewed Agency MBS as a high conviction opportunity from the onset of the Fed's easing cycle in the third quarter of 2024, and the backdrop for 2026 has now turned materially more supportive. .

Despite spreads tightening meaningfully so far in 2026, the market's appeal remains anchored in declining rate volatility and easing funding costs, supported by the Fed's efforts to lower rates and maintain ample banking liquidity. While prepayments have moved off their cyclical lows in recent years, they remain contained with primary mortgage rates still anchored around 6%. Add in a steeper yield curve and the result is a market that we expect to continue to favor MBS with compelling returns relative to returns in corporate credit where spreads are trading at historically tight valuations.

Technical supply and demand dynamics are now working with us, not against us. The administration's focus on lowering mortgage spreads reinforces a clear North Star for a stable mortgage market, an objective we expect Fannie Mae and Freddie Mac to support through FHFA's $200 billion MBS purchase mandate. The GSEs have posted strong monthly purchases of mortgage assets throughout last year, while net issuance of conventional MBS remained negative in the fourth quarter. The imbalance has provided attractive returns in the TBA roll market, creating a liquid carry environment and expanding the buyer base for Agency MBS.

I'll now turn it over to Desmond for more detail on our portfolio.

Thanks, Scott. ARMOUR's most recent net balance sheet duration stands at 0.14 years with a modest positive bias to the front end of the curve, consistent with easing monetary policy. Implied leverage, excluding treasury loans is 7.9 turns, a balanced posture that reflects tighter spreads and a lower volatility backdrop versus the prior year. The portfolio remains nearly 100% Agency MBS, Agency CMBS or DUS and U.S. treasuries to target specific yield curve exposures. Consistent with our balance sheet growth, we added over [ 3 billion ] of MBS pools and DUS across the fourth quarter and early first quarter, and our purchase mix has evolved as rates and spreads have moved.

Early in the fourth quarter, we determined it was most attractive to overweight premium dollar MBS, which offer the most attractive spreads and yields. Anticipating that GSE purchases would most likely concentrate in near par coupons where the impact on primary mortgage rates is most direct, we added over [ 1 billion ] of 4.5 and 5 coupon MBS ahead of Trump's GSE announcement in early January. As belly coupons tightened to historically rich levels to near single-digit OAS, we shifted toward lower coupons and seasoned collateral where affordability initiatives aimed at on freezing the housing market could drive higher turnover speeds while preserving higher yields in deeper discount MBS.

Within premium bonds, we focus more on call protection in higher-tier maximum loan size pools, while keeping payoff targets at 24 ticks or lower. In Agency CMBS, our 5-year DUS position experienced extreme spread tightening. On a relative value basis, 10-year DUS bonds now screen more attractive, particularly when hedged with longer-dated SOFR swaps with pay fixed rates still cheaper than treasury hedges. Roughly 86% of our hedges are in OIS and SOFR pay fixed swaps with the balance in treasury futures. The benchmark 10-year SOFR swap spread has normalized back to its pre-liberation day average of approximately negative 37 basis points, and we anticipate further gains will likely hinge on the path of policy debate around the Fed's desired balance sheet size and banking deregulation.

Aggregate portfolio prepayments averaged 11.1 CPR through Q4 2025 and Q1 2026 to date versus 8.1 CPR in Q3 2025, stable but running at a somewhat higher level versus the prior year. Despite tighter mortgage spreads, the 30-year mortgage rate has remained in a tight 6% to 6.3% band, though it has recently shifted towards the low end of that range. The administration's push for affordability without sacrificing home price appreciation leaves mortgage rates and spreads as the 2 primary levers to accomplish that. However, the easy work has already been done. The mortgage rate spread to the 10-year treasury is now below its 15-year average. Further declines in mortgage rates will therefore require lower long-end treasury yields, which have not declined in sync with front-end rate cuts since the start of the easing cycle in 2024.

Still, we remain mindful that many originators have built significant capacity to ramp up refinancing, which could be triggered by a sustained move below 6% and may accelerate speeds in par and premium coupons in coming quarters. Refi activity has proven to be highly sensitive to marginal mortgage rate declines, keeping prepayment risk in TBAs and the generic premium MBS elevated. Coupon selection and specified collateral remain the key to containing the prepayment risk. We are positioned accordingly. Nearly 30% of assets are in prepayment protected agency CMBS pools and discount MBS, while specified MBS pools with some form of prepayment protection comprise over 92% of ARMOUR's portfolio.

Funding markets have also turned the corner. 2026 REPO conditions have improved materially versus last year. Markets are liquid and financing levels have eased with REPO rates averaging roughly SOFR plus 15 basis points. The SOFR to Fed funds spread has also normalized to near flat. As REPO rate back up in late 2025, the Fed moved quickly to contain intra-month funding pressures tied to falling reserves and elevated T-bill supply. First, the Fed continues to implement a policy of easing the overnight Fed funds rate. Second, it has shifted its reinvestments by directing paydowns of its treasury and MBS Holdings back into the treasury market. Third, it initiated outright purchases of up to $40 billion per month in treasury bills and other short-dated treasuries to stabilize reserve balances and maintain ample system liquidity.

This response reinforces the systemic importance of REPO markets as the foundation for liquid financial conditions and underscores the Fed's low tolerance for a repeat of the September 2019 episode when reserve scarcity and balance sheet frictions contributed to a sharp dislocation in secured funding. While the incoming chair has signaled an appetite for a smaller Fed footprint and a reduced balance sheet over time, we expect the Central Bank's focus on orderly funding markets to remain the highest priority with the willingness to respond preemptively ahead of any emerging stress. As of today, we financed the portfolio across 23 active REPO counterparties. Approximately 80% of our REPO principal is financed at a 3% haircut or lower and the weighted average haircut across the REPO book is approximately 2.75%. BUCKLER Securities accounts for roughly 40% to 60% of our REPO financing.

Back to you, Scott.

Thanks, Desmond. We continue to set our dividend with a medium-term outlook. While acknowledging relatively tighter spreads versus the prior year, we expect the backdrop of a steeper yield curve and lower volatility remains supportive for a consistent and predictable return profile for our assets. Our approach remains unchanged: stress test our liquidity, buy systematic hedging and deploy capital when opportunities present themselves. Overall, we're confident in our positioning, our strategy and our ability to deliver value for shareholders in 2026.

Before we open the line for questions, we'd also like to highlight that we've launched a new investor presentation now available on ARMOUR's website. It provides additional insight for investors, including how our portfolio has transformed over time. Thank you for joining today's call and for your continued interest in ARMOUR.

[Operator Instructions] First question comes from Timothy D'Agostino with B. Riley Securities.

I was wondering on the portfolio and interest-bearing assets. By my estimates, it increased year-over-year around like 49%. I was wondering the outlook in '26, do you see potential for similar growth or maybe a little bit less given the increase in 2025?

I think there are a couple of elements there, but certainly one of the most important is capital raising. And we are -- when we see an opportunity to raise capital, combined with investment opportunities we like, we'll execute on that. But we are -- we discriminate a fair amount in terms of what we -- what is going to be attractive or not. So I'm afraid I got to tell you, it depends on how the market behaves, both on the investment side and the equity side, of whether we will be similar or smaller or in some other relationship to what we're able to do last year.

Okay. Great. And then just to confirm, book value as of Tuesday was $18.37 per share?

Correct. And that's after the accrual of our full February dividend and the payment of our January dividend.

The next question comes from Trevor Cranston with Citizens.

Can you guys talk about where you're seeing incremental returns on new investment today given the spread tightening that's occurred? And how you view that incremental level of return compared to the dividend you're currently paying?

Trevor, this is Desmond Macauley. So on a carry basis, the levered yield on 30-year 5s, which are currently production coupon is around the mid-teens, let's say, about 15%. This assumes 8 turns of leverage hedged to 0.5 duration using swap hedges. And it's a static framework over a period of just about 3 months. It doesn't assume any more spread tightening. Now we think at least in the medium term, we could see a bit more spread tightening. So let's say we get another 10 basis points of OAS tightening, that adds about 4% to that return. And also the curve would steepen some more. So if we have another -- if we see another 50 basis points in curve steepening, particularly led by the front end through more Fed cuts, which is we anticipate, that will also add about another 1% or so. So those are all parts of the full total return framework, some of that would accrue to our book value.

Now in terms of marginal capital raise, we see that, that hurdle rate is about 16%. So that would be dividend yield to common and the management fee is just 75 basis points on new equity. So you add that together, that's roughly about 16%. So you can see that for production coupon, the base case returns are close to that level already and with just a little bit more steeper and if we see more tightening, it would surpass that by a couple of more points. Does that answer your question?

Yes, that's very helpful. And then I guess, in general, can you guys talk about how you're thinking about the likelihood of further actions driven by the government to attempt to lower mortgage rates, things such as increasing the GSE portfolio limits further or potentially doing other things like lowering GPs, et cetera?

This is Sergey. Yes. So around the week in Dallas, we were expecting maybe a few more announcements on the affordability push that the administration has announced with the GSE purchases. We haven't gotten anything. It feels to us that maybe the low-hanging fruit has been picked in terms of pressuring spreads and mortgage rates lower, but without affecting home prices. I think the next steps kind of have both positives and negatives for that push in terms of GSE, the G-fee cuts for the GSEs, take away some of the profitability, make them less of a private enterprise, profitable enterprise and more of a policy tool. It will introduce negative complexity to investors who may demand wider spreads.

So some of the further steps may work counter to what administration has called the North Star in terms of keeping mortgage spreads nice and stable. We do expect more announcements. Obviously, there have been announcements on importability, assumability of mortgage loans, 50-year loans has been taken off the table. So there's a lot of announcements have been made. But once you get to the implementation stage of it, things have been quite slow. Having said that, we definitely expect in the midterm here, for these announcements to be quite active.

The next question comes from Dave Storms with Stonegate Capital.

I wanted to start with just asking for a little more thoughts on your current liquidity. It looks like quarter-over-quarter you put a little more to work, but then it looks like it's back up as of last month end. I guess how do you think about this in the near term?

So yes, I think our liquidity, we mentioned is about 54% of the total equity at the month end. It's a really good spot, reflects our moderate leverage kind of where we have been steady in terms of liquidity. So we don't foresee any sharp changes given our current position in the portfolio.

Understood. And then I also know you mentioned in the prepared remarks that about maybe 30% of your portfolio is payment protected. With mortgage rates hovering around to 6%. Do you -- I know the market like nice round numbers. Do you see any risk of a tipping point or it's more maybe a linear situation as mortgage rates may continue to take lower?

Yes. I mean, look, prepayments have increased from Q4 so far in Q1. We noted in our script. We're definitely towards the lower range of the mortgage rates that we've have been over the last couple of years, February prevailing mortgage rate will be lower after the GSE announcements as well. So the risk of faster prepayments has increased, right? And I think in sync with that, our portfolio has morphed over the last couple of quarters to protect us more from lower mortgage rates, 30% in discounts and thus, specified pools make up 92%. Within the 92%, almost 40% is in the loan balance stories, other credit and geo stories. So we feel like there's -- there are faster refinances are in the future, but we've built our portfolio to -- for that environment.

[Operator Instructions] The next question comes from Eric Hagen with BTIG.

I think you guys mentioned in the opening remarks, haircuts for MBS have come down, which is kind of an interesting comment. Can you maybe frame kind of like where that level is relative to like the historical levels? And then if the GSEs are helping reduce volatility in the market, could we see that haircut level come down even further potentially?

We would hope so. I mean a lot of the guidance on the haircuts comes from FICC. But in terms of our bilateral counterparty REPO haircuts, we have worked with a lot of our counterparts to bring down the maximum haircuts closer to our weighted average of 2.75% I think a lot of -- almost 80% of our repo book is closer to at 3%.

Okay. Following up on the conversation around just where you are in the coupon stack. I mean you mentioned originators have been really able to leverage some of their tools to be aggressive on refi. I mean, how does that drive the appetite for the current coupon specifically? And like the OAS that's in the current coupon, how do you compare that to some of the lower coupons and just where you feel comfortable taking prepayment risk?

Yes. We've been looking away from current coupon because that's kind of where the biggest impact from the announcement has been really all throughout the Q4. We did add in Q4, a little over [ 1 billion ] and 4.5 and 5s. But since then, probably we are more looking at the wings, deeper discount coupons where we can see some of the housing activity perhaps reignite with any of these affordability measures. In terms of premium coupons, they're still our core holding. If you look at the OAS spread difference between 102 priced and current coupon MBS, we're at close to 2 centers deviations and not spread historically speaking, right? So a lot of the fares and prepayments and G-fee cuts have already been priced into the premiums. So it's really looking at kind of a barbelled approach in the coupon stack at this point. But even within the belly at the coupon stack, you can find stories which pick OAS versus TBA, specifically maybe like seasoned collateral, things like that.

How many Fed cuts do you feel like are currently priced into the mortgage basis?

How many Fed cuts?

Yes, how many Fed cuts for the rest of this year, do you think are priced into the mortgage basis?

The market is expecting by the end of December, a little bit over 2 cuts. And from our perspective, we think it's reasonable. We think that normalization will continue this year. It looks like when we get to around June, the probability is about 100%, getting close to 100%. And that will be a very good environment for the MBS market and mortgage spreads. We think that the curve has already steepened. If we do see more cuts, then funding costs will come down, the curve would steepen even more. And that makes the entire space more attractive and it adds to our overall total return.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Thank you very much for your interest in ARMOUR REIT. If there are follow-up questions, don't hesitate to call the office, and we will get back to you soon as we can. Thanks so much, and good morning to you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the ARMOUR Residential REIT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Good morning, and welcome to ARMOUR Residential REIT's Third Quarter 2025 Conference Call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officer, Sergey Losyev and Desmond Macauley.

I'll now turn the call over to Gordon to run through the financial results. Gordon?

Thank you, Scott. 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 periodic reports filed with the Securities and Exchange Commission describe certain factors beyond ARMOUR's control could that cause actual results to differ materially from those expressed in 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. Also, 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 1 year.

ARMOUR's Q3 GAAP net income available to common stockholders was $156.3 million or $1.49 per common share. Net interest income was $38.5 million. Distributable earnings available to common stockholders was $75.3 million or $0.72 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses.

Total economic return for the quarter was 7.75%. Quarter end book value was $17.49 per common share, up 3.5% from June 30 and up 2.8% from August 8, the last date which we have reported book value. Our most recent current available estimate of book value is as of Tuesday, October 21, and was $17.50 per common share, which reflects the accrual of the October common dividend of $0.24 per share payable on October 30.

During Q3, ARMOUR raised approximately $99.5 million of capital by issuing approximately 6 million shares of common stock through an after the market offering program. In August, we completed the sale of 18.5 million shares of common stock for proceeds of approximately $298.6 million, net of underwriting discounts and commissions. And in September, we repurchased 700,000 shares of common stock through our common stock repurchase program. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter.

We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On October 30, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record on October 15. We have also declared a cash dividend of $0.24 per outstanding common share payable November 28, to holders of record on November 17, 2025.

I'll now turn the call over to Scott Ulm to discuss ARMOUR's portfolio and current strategy.

Thank you, Gordon. The third quarter unfolded against the backdrop of shifting macroeconomic currents. Downward revisions to employment data confirmed that the U.S. labor market had been softer than earlier reports suggested. In response, the Federal Reserve resumed its easing cycle, implementing a 25 basis point cut in September. Chair Powell described the move as a risk management cut, reflecting growing caution around labor conditions. Updated projections now signal 2 additional cuts by year-end, setting the stage for a constructive environment for Agency MBS as financing conditions continue to improve.

Markets responded positively to the Fed's pivot. Treasury yields declined, Agency MBS spreads tightened by roughly 20 basis points and volatility fell to its lowest level since 2022. These dynamics produced a total economic return of 7.75% for the quarter, as previously mentioned by Gordon. Following this strong performance, MBS spreads are now near the tightest levels of the year. Near-term consolidation is possible valuations remain compelling on a medium-term horizon.

As we entered the fourth quarter, macro and political visibility became more clouded. The federal government shutdown that began on October 1, delayed key data releases and introduced incremental uncertainty to growth forecast. Even so, the market continues to expect an easing bias through year-end that's likely to redirect liquidity from the short end of the rates curve into Agency MBS. Chair Powell's recent comments also indicated that quantitative tightening may conclude in the coming months. Although details are still evolving, the Fed's MBS runoff is likely to continue with paydowns from MBS and treasuries expected to be reinvested in the treasury market.

Together with a broader push toward banking deregulation, these shifts are aimed to ease balance sheet constraints and reinforce demand for treasuries and Agency MBS. Notably, SOFR treasury spreads have turned more positive in recent weeks, strengthening the effectiveness of pay fixed SOFR swaps as portfolio hedges.

On the policy front, reports suggest that major banks are positioning to lead potential IPOs for Fannie Mae and Freddie Mac, collectively estimated around $30 billion. Although the process has been delayed by the U.S. government shutdown and the absence of a formal road map for privatization, administration officials have reiterated support for retaining an implicit government guarantee, an outcome that could transform GSE reform from a potential headwind into a tailwind for MBS investors.

An additional and somewhat unexpected source of demand could come from GSEs themselves. After years of balance sheet contraction under conservatorship, Fannie Mae and Freddie Mac now have roughly $250 billion of combined capacity to invest in mortgage loans and MBS should it align with GSE's earnings and valuation objectives. While no formal plan has been announced, recent disclosures point to greater flexibility within their investment mandates, hinting at a more dynamic approach to managing their portfolios than in the prior cycles.

I'll now turn it over to Sergey for more detail on our portfolio. Sergey?

Thank you, Scott, and good morning. ARMOUR's most recent net duration and implied leverage were 0.2 years and 8.1x, respectively, a balance stance with a bias towards further Fed easing. Roughly 87% of our hedges are in OIS and SOFR pay fixed swaps with the balance in treasury futures. Our liquidity remains robust at approximately 55% of total capital. The portfolio is invested entirely in Agency MBS, Agency CMBS and U.S. treasuries.

Our recent activity has centered on par to slight premium coupon mortgages where levered and hedge ROEs range from 16% to 18%. Higher premium pools continue to offer up to 19% returns, though with greater sensitivity to prepayment risk. Diversification across 30-year coupon stack, Ginnie Mae and DUS securities whose positive convexity and shorter duration provide relative value remain a key advantage.

During the second half of the year, 30-year mortgage rate briefly reached 6.15%, lowest level of this year. While rates remain just above 2024 lows, refinancing activity has already exceeded last year's pace, elevating prepayment concerns for TBA and generic premium MBS. This reinforces our long-standing focus on specified pools, which represent over 92% of the portfolio. Aggregate portfolio prepayment rates rose to 9.6 CPR in October compared with the third quarter average of 8.1 CPR, a 19% increase and consistent with our expectations.

We anticipate a similar uptick in November before prepayments stabilize towards the year-end as refinance volumes moderate. Should mortgage rates move down below 6%, levels we've not seen since early 2022. The MBS coupon stack offers a deep market of lower-priced coupons as a hedge against higher prepayments. Roughly 40% of our assets are already positioned in prepayment of protected Agency CMBS pools and discount MBS. As usual, we financed 40% to 60% of the MBS portfolio through BUCKLER Securities, distributing the balance across 15 to 20 additional repo counterparties.

Average gross haircuts stand near 2.75%. Repo market liquidity remains healthy with only a modest 2 to 3 basis points increase in repo SOFR spreads versus Q3 average. More meaningfully, the spread between SOFR and Fed funds widened from 3 basis points in Q3 to roughly 10 basis points through October, muting the transmission of the Fed's recent cut to funding markets and by extension to broader economy. An increase in treasury bill issuance and a gradual decline in banking reserves means banks can lend cash at higher prices.

This makes repo funding a key area of focus heading into year-end, yet despite a recent bump in SOFR rates, we view funding conditions as stable with standing repo facility to supply liquidity if needed. Looking ahead, we expect structural demand for Agency MBS to continue to strengthen. Regulatory clarity around banking reform and resumed easing cycle have historically been a powerful catalyst for high-quality liquid assets like MBS. While spreads have compressed, underlying fundamentals and market dynamics remain favorable.

Back to you, Scott.

Thanks, Sergey. We executed a $300 million overnight underwritten bought deal in August, first one we've done this decade. While it was somewhat more expensive than our ATM execution, it allowed us to put a significant amount of capital to work at attractive spread levels. In fact, we estimate that the spread tightening from the newly purchased assets alone contributed about 0.6% to our increase in book value this quarter, along with a meaningful reduction in operating expenses per share.

We saw some weakness in our stock in mid-August. And as in the past, we repurchased some shares in the open market. We will continue to look at both sides, selling and buying in our equity account. As you know, we determined our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns available. ARMOUR's approach remains unchanged, grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity and dynamically adjust hedges for disciplined risk management.

We are confident in our positioning strategy and ability to deliver value for shareholders. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions. Please open the line for some questions, please.

[Operator Instructions]

Our first question comes from Doug Harter with UBS.

Hoping you could talk a little bit about where you see current returns on incremental investments and kind of the importance of the hedge choice you make in that and how that factors into your view of the attractiveness of the market today?

Yes. Doug. So expected ROEs, hedged ROEs are in the 16% to 18% range. Obviously, a touch lower than where they were at the end of June, given the tightness in mortgage spreads. So over a short-term basis here, you can assume 8 tons of leverage and hedge to swaps. So that's also picking up the swap income. Now we are still constructive medium term, given the resumption of the normalization cycle and also because of spreads, while local types are still attractive over a longer time horizon.

So if we see another 10 basis points of tightening, that could add about 4% in return on equity to that base case of 16% to 18% range for production coupon.

I guess how do you think about what the outlook is for swap spreads? And then how do you think about the attractiveness if you looked at mortgage spreads on like an OIS basis?

Doug, this is Sergey. Yes. So swap spreads have also had a big move since September meeting. We think swap spreads will continue to normalize. If you look at some of the average prior to Liberation Day, we see 10-year swaps somewhere in the mid-30s, currently trading around 44%. So we've gone a long way from minus 60 earlier in Q2, and we feel like this is going to continue to be a tailwind for the portfolio as effect of more effective hedges to hedge MBS.

Currently, we have about 87% notional allocated to SOFR and OIS swaps. So that's a good positioning. We will probably tailor it if we do get back to those averages, but a lot of things have been lining up to see balance sheet expansion as well as potentially the Fed looking at changing the target policy rate from the Fed funds to SOFR or another repo measure, and that will provide lower volatility to funding rates and potentially wider SOFR spreads as well.

So a lot of tailwinds are lining up there.

And the next question comes from Jason Weaver with Jones Trading.

Scott, along with your prepared remarks, if the administration is actively looking for ways to reduce borrower rates via GSE deregulation, do you have any thoughts on what the actual implementation looks like, whether that's GP manipulation, changes in LLPAs, underwriting guidelines?

There are a lot of levers they could pull. And what knows we get a lot of levers pulled these days that we may or may not expect. So I think -- and I think that probably fits somewhere on their agenda. So the broad answer is yes. I think we could see a lot of things move around here. And particularly, if -- but particularly, I think you have to put it through the lens if they are thinking about a capital raise here for the GSEs. They're going to want to configure the GSEs to be as attractive a proposition as they can.

So that may put the brakes on a couple of things as well. So there's a balance there I have no further insight into it other than just note that there are 2 competing things going there. One is undoubtedly, they'd like to see lower mortgage rates, but they also want to see the GSEs as an attractive investment proposition.

Agree. That's helpful. And then noticing the hedge ratio ticked down quite a bit from Q2. Is that more of a timing issue? Or just along with the greater confidence in the pace of easing activity, you can be a bit more directional here?

There are a lot of things going on in that. Sergey, Desmond, maybe you want to give a little more color on that, but there's a lot that goes into the way that, that ratio in itself works. Sergey, Desmond, do you want to give a little more color on that?

Yes, Jason. So I mean, the way we kind of look at hedges, it's really to hedge our duration across the entire curve, right? So as we said earlier, our duration of 0.2, we are taking a balanced view with a bias towards more Fed easing. So our goal is to -- most of that 0.2 duration is actually in the front end of the curve, whereas in the back end, we aim to stay flat. And ultimately, we move our hedges around to accomplish our duration targets across the curve.

And the next question comes from Trevor Cranston with Citizens JMP.

All right. There was a pretty significant drop in interest rate volatility in the third quarter, which had a carryover impact to MBS, obviously. Can you guys share your thoughts on kind of how you think volatility evolves going forward? And since it's being priced significantly lower today, how that factors into your -- the potential to maybe add some swaptions or options into the hedge portfolio?

Yes. Trevor. So in terms of volatility hedging, you can think of 2 approaches to it. One, obviously, is you can use swaptions. We have used swaptions in the past. We continue to look at hedges even those that are not in our balance sheet. But the other approach is actually through asset selection, right? So you can pick assets that have low optionality. About 40% of our book, as we said in our prepared remarks, is in shorter -- lower coupons and also DUS securities. And these actually have very low optionality and another benefit of these securities is that their convexity in some cases, is even positive.

So they act as a good offset to the negative convexity that you see in our production coupons. Now one more point on volatility is that, yes, volatility has come down a lot so far this year. But if you expand the time scale if you go back and look at other periods that are similar to this one, you can pick 2019. That was a period when the Fed had resumed normalization. They had started [indiscernible] back -- not buying mortgage-backed securities. That period of time, volatility was actually lower than where they are right now.

If you take, for example, obviously, it's an entire volatility surface, but if you look at the swaptions for 1 year by 10-year, today is about 82 basis points. The average over that period was about 64 basis points. So still we are still about 18 basis points higher. If the Fed continues normalization, we can expect that the tail risks around rates will become compressed. And for that reason, we can see volatility in the medium term continue to decline, right?

Now that's not going to prevent short-term bouts of volatility. But over the medium term, we can see volatility decline. And if you are long options, then the valuation of options would decline if volatility declines. So yes, I mean, we always -- it's a very dynamic position. We're always looking at our hedges. But for now, we think just keeping low optionality assets is the better approach.

And the next question comes from Timothy D'Agostino with B. Riley Securities.

Just one for me. Regarding economic net interest margin, it seems like it widened about 1 basis point quarter-over-quarter. Looking forward to year-end and maybe to halfway through 2026, what would we need to see for this trend to kind of continue and if not pick up pace?

Well, I guess you're going to -- it really depends on our portfolio and where continued cuts in the Fed rate, and that will imply how it impacts on our financing costs. And we think we've constructed a very good portfolio. And I think the returns that we're generating, I think, are reasonable under the circumstances. I don't know, Sergey and Desmond have other things to add to that what they think on the horizon, but we don't normally give too much forward-looking statements on where we think earnings are going to be in the future, but it's really going to be dependent on how fast the rates cut and also how the market reacts to that. But we think we've constructed a very good portfolio for the future.

Yes. Yes. So just on that to continue God's comment there. Yes, so we kind of typically just look at forward ROEs as well, another way to look at the same way of looking at things. So 16% to 18% in production coupons. Our dividend yield, weighted average dividend yield, both preferred and common plus operational expenses all in is about 18%. So that could be sort of as a hurdle rate. We already have assets we are buying that are at 18%. There are others that are slightly lower than that. But as we said, we're still constructive medium term here. So just a few more basis points of tightening and those assets would meet or exceed our hurdle rate.

[Operator Instructions] Our next question comes from Eric Hagen with BTIG.

Maybe following up on some of this conversation here. I mean what do you think is priced into MBS spreads with respect to the Fed cutting rates? Like right now, it looks like there's 125 basis points of cuts priced into the forward curve through the end of next year. Do you feel like spreads would widen if those expectations got walked back for any reason? And do you feel like spreads would actually have room to tighten once they actually deliver those cuts?

Eric, this is Sergey. Yes, to both. Definitely, a pause in the easing cycle or something that would cause them to walk back their projections would be a potential source of volatility in the market. But in terms of delivering cuts to the market, I think a lot of the bank demand will get unlocked there. If you look at the current coupon mortgages versus yields on money markets or T-bills, it's compressed again over the course of the year, closer to 100 basis points.

So I think as we get closer to 152% on the spread of mortgage yields versus cash you start to see more and more engagement from other players in the market that we've seen -- we haven't seen as much demand as expected earlier this year. So I think that kind of answers yes to both scenarios. And we note in our prepared remarks that spreads have tightened significantly over the course of the quarter. We do see upside, but I think it's overall macro picture, the lack of government economic data coming through that's given us a little bit of pause here. But over a medium-term horizon, that's a clear positive for -- to have lower Fed funds rates.

Yes. Got you. That's good color. The move to raise capital and buy back stock in the quarter, can you kind of share the rough level of your stock valuation when you did those transactions? And like what's the best way to compare the value from having done each of those deals, transactions?

Yes. So Gordon will maybe give me the -- if you can pull up the level where we bought back. But look, we're committed to being on both sides. And when we get a dislocation, we'll buy back some stock. And when we see good valuations, we'll sell stock. Stock buybacks are always fraught because they happen when a bunch of other things are going on, and it's always expensive to get the stock back out there as well. But we had a pretty good spread between where we executed both of those. Gordon, do you have those numbers to hand?

Yes, I know offhand, we -- when we did the buybacks, it was about a couple of cents accretive on the days, and it was in the 14 -- just get you the right number. Got it. We were buying it back at -- yes, it was in the [ $14.40 ] handle around that on the days that averaged out. So you can see we've bounced back since those days and we bought back the stock.

Is that useful?

Yes, that was helpful. I appreciate you guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Thanks for joining the call today. We appreciate it. Any further questions occur to you, give a ring at the office, and we'll be back to you as soon as we can. Very good. Thank you, and have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to ARMOUR Residential REIT's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Scott Ulm. Please go ahead.

Good morning, and welcome to ARMOUR Residential REIT's Second Quarter 2025 Conference Call. This morning, I'm joined by our CFO, Gordon Harper, as well as our co-CIOs, Sergey Losyev and Desmond Macauley. I'll now turn the call over to Gordon to run through the financial results. Gordon?

Thanks, Scott. 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 who 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 periodic 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 in 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. Also, today's discussion refer 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 1 year. ARMOUR's Q2 GAAP net loss related to common stockholders was $78.6 million or $0.94 per common share. Net interest income was $33.1 million. Distributable earnings available to common stockholders was $64.9 million or $0.77 per common share.

This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. ARMOUR Capital Management waived a portion of their management fees, waiving $1.65 million for the Q2, which offsets operating expenses. During Q2, ARMOUR raised approximately $104.6 million of capital by issuing approximately 6.3 million shares of common stock through an at-the-market offering program. Since June 30, we have raised approximately $58.8 million of capital by issuing approximately 3.5 million shares of common stock through an at-the-market offering program.

We currently have outstanding 91.5 million common shares. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On July 30, 2025, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on July 15, 2025. We have also declared a cash dividend of $0.24 per outstanding common share payable August 29 to the holders of record on August 15, 2025. Quarter ending book value was $16.90 per common share. Our estimate of book value as of Monday, July 21, was $16.81 per common share, reflective of the accrual of the July common dividend. I will now turn the call over to Chief Executive Officer, Scott Ulm, to discuss ARMOUR's portfolio position and current strategy.

Thanks, Gordon. Just a note to the team. I had a connectivity problem a second ago. So if I disappear, just continue with what we have to say here, but we should be just fine. Well, thanks all. As we entered the second half of 2025, the debate around U.S. fiscal sustainability, Fed independence and trade dynamics continues to weigh on the macro landscape. While we don't expect these issues to be resolved quickly, markets appear to have digested much of the initial shock as rates and spreads have settled into stable ranges and volatility has drifted lower. On the monetary policy front, incoming U.S. economic data indicates solid economic growth that's supportive of the Fed's wait-and-see approach.

While Fed policy rates remain on hold, elevated short-term yields are absorbing investor liquidity. However, we believe that a resumption of the Fed cutting cycle this year should reignite the flow of liquidity into Agency MBS. Current coupon MBS spreads have retraced from April's historically distressed levels, supported by declining volatility. The MBS to SOFR spreads have consolidated back towards an average of the spread levels observed in 2025. They widened by approximately 10 basis points quarter-over-quarter and remain historically cheap. The 30-year fixed mortgage rate was near 6.75% through late June and early July, effectively dampening refinancing activity and keeping net mortgage supply muted.

This tightening backdrop, while a challenge for borrowers, continues to create compelling opportunities for investors in high carry production Agency MBS. At the policy level, the U.S. housing finance system remains a central topic in D.C. The FHFA Director, Bill Pulte, has begun to implement reforms aimed at streamlining the GSEs, Fannie Mae and Freddie Mac, with administration officials signaling support for retaining an implicit government guarantee for the GSEs. While public rhetoric hints at an eventual need to end conserverthip, we view these developments as constructive yet not imminent. I'll now turn it over to Desmond for more detail on our portfolio. Desmond?

Thank you, Scott. ARMOUR's estimated net portfolio duration and implied leverage are closely managed at 0.46 years and 8 turns, respectively. Our total liquidity is strong at approximately 52% of the total capital as of July 21. Our hedge book reflects a balanced view of duration with a bias for further Fed easing. Hedges are composed of about 33% in treasury shorts and futures with the remainder in OIS and SOFR swaps as measured on a DVO1 basis. While SOFR swaps are cheaper hedges, treasuries have proven to be a more effective hedge instrument for mortgages as of late. ARMOUR is invested 100% in Agency MBS, Agency CMBS and U.S. treasuries. Our MBS portfolio remains concentrated in production MBS with ROEs in the 18% to 20% range.

The portfolio remains well diversified across the 30-year coupon stack, Ginnie Mae's and in DUS whose positive convexity and short duration attributes offer better value over comparable 15-year MBS pools. Portfolio MBS prepayment rates have averaged 7.7 CPR in Q2 and are trending at around 8.3 CPR so far in Q3. We see no signs of material acceleration unless mortgage rates drop significantly. We continue to favor higher loan balance and credit specified pools with favorable convexity and prepayment profiles to TBA and generic collateral. Our TBA exposure is light at $300 million and remains a tactical tool to manage MBS coupon positioning. ARMOUR forms 40% to 60% of our MBS portfolio with our affiliate BUCKLER Securities, while spreading out the remaining repo balances across 15 to 20 other counterparties to provide ARMOUR with the best financing opportunities at an average gross haircut of 2.75%.

Overall, MBS repo funding remains ample and competitively priced, ranging at around SOFR plus 15 to 17 basis points. We are increasingly optimistic that structural demand for MBS may improve later this year. Evolving regulatory clarity around banking reform and a resumption of the Fed easing policy could act as meaningful catalysts for increasing banking demand. This, combined with constrained mortgage supply, sets up a highly constructive technical backdrop for Agency MBS, while historically wide spreads signal strong risk to reward incentive to own mortgage assets. I'll turn it over back to you, Scott.

Thanks, Desmond. ARMOUR's approach remains unchanged: grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity and dynamically adjust hedges for disciplined risk management. We're confident in our positioning, strategy and ability to deliver value for shareholders. As you know, we determine our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns available. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions.

[Operator Instructions] The first question comes from the line of Doug Harter with UBS.

I was hoping you could just talk about your philosophy for managing spread duration risk as you go through a volatile period like you did in April and the second quarter in total and kind of just give us a little more on the thought process.

Yes. Doug. So on spread risk, I can start with just our leverage, which we are very comfortable with at this point. We think that spreads remain historically attractive. And for that reason, we could potentially look to even modestly increase our leverage here. Currently, we are around just a little bit below the average over the last 6 to 12 months, our own average over the last 6 to 12 months. In terms of duration, we manage it dynamically. We've recently increased our hedges in longer duration assets, longer duration beyond the 10-year point to adjust for what we saw in Q2 where there was steepness of the curve in 10-year maturities and beyond.

The next question comes from the line of Trevor Cranston with JMP Securities.

Looking at the portfolio data, it looks like the allocation to higher coupons like 6s and above declined during the second quarter. Can you guys just comment on where you're seeing the best value in the coupon stack and kind of where you guys are deploying marginal dollars as you raise capital?

Trevor, this is Sergey. Yes, so I think we might have talked about it on the last earnings call, there was a volatility during the first half of April. That is probably where the sizes might have been reduced. But overall, we remain favorable of 5.5 and 6 coupons. These are the highest ROE coupons that we are currently modeling. So with the prepayment environment remains very benign. This is -- remains our focal point for the portfolio. We don't really expect large changes near term.

Got it. Okay. And I guess the other notable thing there was the -- there's the new line item for the long treasury position. Can you just comment on kind of the -- what the role of that is within the portfolio?

Yes. So as you know, we view 5-year point on the yield curve as a very important pivotal point for managing overall portfolio duration risk and just responding to the monetary policy and all across the yield curve. So 5-year treasury serves as part of that hedging strategy, but it also is used as a proxy for our Agency CMBS position. As we know, we hold slightly just below maybe 5% of our portfolio. And we are very tactical about that market. We tend to go in when spreads widen and reduce our allocations when we see spreads on the more richer side. And 5-year treasuries help us kind of hedge that position and be able to rotate among those asset classes.

The next question comes from the line of Randy Binner with B. Riley.

I just have one on the model and total expenses after fees waived reported in the quarter was $14.3 million. That was just a little bit higher than what trend was and what we were looking for. Was there anything unusual in that line item this quarter or seasonal? Or is that a level we would expect going forward?

I wouldn't say it's a level we'd expect going forward. We had a bit more professional fees than we had probably in the first quarter, just on things that we were working on. So that -- as we explained in the 10-Q, some of that can just vary quarter-to-quarter, but not expecting sort of the same run rate on expenses.

And that's helpful. And then just to be, I guess, 100% clear, that line item, if you had higher hedge costs or volatility there because of interest rates moving around in April, that would be netted -- that would not be in that line item. That would be elsewhere, correct?

Yes. That's up in the derivatives.

Yes, got it. Okay.

The next question comes from the line of Jason Stewart with Janney.

Just big picture, as you think about constructing the hedge portfolio and the coupon stack, how do you balance total return versus carry as we start to see some of these dislocations in swaps versus treasuries?

Jason, so in terms of our portfolio, on the hedge side, we mentioned our duration. We are positioned for a bullish steepener, and we adjust our hedges appropriately. And it's pretty dynamic. It's our view of the macroeconomic environment. We like to stay diversified across the coupon stack. The lower coupons would benefit if we do see rate rally. We expect that a rally could take place when the Fed resumes normalization. -- which we are expecting later on this year to the fall -- in the fall or later.

The higher coupons could benefit in a steepener where in any steepness scenario, the CPRs, projected CPRs could be slower and those could benefit the higher coupons. We're looking to reinvest muscle in production coupon 5.5 and 6s. These are specified pools. They have the prepayment characteristics that we talked about in our prepared remarks. And that is supposed to improve the overall convexity of our portfolio. And last, of course, we also have those securities with even positive convexity. So best to stay diversified across the coupon stack, and looking to add more in production coupons in terms of reinvesting paydowns and also reinvesting any equity capital raises.

Yes. And just to add on the hedge book side, Desmond mentioned, on DV01 basis, we're about 33% in treasuries. On a notional basis, it's closer to 20-80. We still like to use interest rate swaps as the main hedge instrument. It's a cheaper hedge. Obviously, from a total return, treasuries have been a more effective hedge as of late. So we're keeping this -- the balance of the hedge book right where we feel like it provides both the carry and the total return opportunity from both sides.

Okay. So does the 18% to 20% range keep the hedge book with the same composition that you have right now in 20-80 notional?

So 18% to 20% would be for like our production coupon 5.5 and 6s. In terms of -- that would -- if you look at it from a total return perspective, then it -- the hedge -- like if we use swap hedges and we run swap hedges to forwards, the total return would be roughly 0 in that case. So a 20% return on production coupons, it's pretty much -- doesn't matter whether we use swaps or treasury futures. So in that framework, 18% to 20%, I should also point that, that's in the base case, right? We think spreads are really attractive at this point. So if we take, for example, we see a 10 basis points tightening in OAS, that can add another 4% to that number. And also keep in mind as well that the repo rate has been stable throughout the entire year. The Fed has not cut this year. If we do see resumption in normalization, we can expect even in the base case for those returns to look even more attractive. But as it is right now, they are more attractive. They either meet or exceed our hurdle rate. And that's one of the reason that we are very optimistic about our current environment.

Okay. That's helpful color. And then just on the ATM program quarter-to-date in 3Q, could you give us an idea of how that was raised relative to book and where book was today?

I don't have book value for you as of today, but book is, as we said, was $16.81 as of Monday. And the issuances were just mildly dilutive, just a couple of cents per share.

The next question comes from the line of Matthew Erdner with Jones Trading.

Just a quick one for me. You guys talked on leverage a little bit with it running back up quarter-to-date, still below those historical levels. What exactly are you looking for to take leverage up? Is it more clarity from the Fed? Is it kind of a little more stability on the long end of the curve? I would just like your thoughts there.

Go ahead, Desmond.

Okay. So first, I should just -- our leverage strategy is -- it's very flexible. And it's designed to reflect our view on the attractiveness of spreads our view on market volatility and just where we want our liquidity to be. So we took our leverage down tactically quarter-to-date. Our spreads are tightening locally, and we saw volatility also come up significantly since early April. So in addition, there were swirling headlines around Fed independence and those headlines have now subsided. So given that spreads are still near historically wide levels and liquidity conditions are now stable, we are comfortable modestly increasing our leverage from where we are. So does that answer your question?

Yes, a little bit. But I guess going forward over the next 3 months, when you guys are expecting the Fed cut, are you going to put leverage on in front of that as you go into that event kind of thing?

We are optimistic...

Yes, I'd just say we think about all this stuff and -- but are generally not in the -- try not to be in the business of putting big bets on. What's behind your question is exactly right. It's a view that there's more stability across all the axes that we look at. And to the degree that -- and of course, that's a reflection of how stable we feel liquidity is going to be, which is really the driver behind what leverage you're comfortable with. And we'll react accordingly. I think you can probably expect us not to take a big bet. But as you see elements of greater stability come into the market across those axes, there may well be a pretty good case for going up a little bit. Remember, historically, leverage in this sort of business model, if you go back decades, was a lot higher. And generally, people have been keeping their head down, which has served everybody pretty well, frankly. But less volatility, more stability means that the model can take a little more leverage. Sorry, go ahead.

Just -- and as a catalyst, of course, the big elephant in the room is bank demand so far year-to-date, and it has probably disappointed most industry investors, and we are closely watching developments on the regulation front. Just yesterday, there was the first Fed capital framework conference that a lot of color came out of that industry-wide participants are looking to speed up and agree that currently capital framework is too confusing, too stringent. Banks are sitting on record excess capital. So we feel like it's just a -- it's a question of if not when we start to see greater participation from the banks, and this will be the tailwind that we outlined in our script as well.

Yes, I definitely agree. Yes.

The next question comes from the line of Eric Hagen with BTIG.

Sticking on this conversation around hedging. I mean, do you think there's any value at this point in hedging the short end of the yield curve? I mean how attractive do you think it is to buy swaptions at this point, just considering volatility has come down a little bit?

Eric, yes. So I mean, look, the 2-year yield has been extremely stable over the last year. Obviously, the talk of hikes are not on the table at this point. But we express that in our bull steepener bias of our yield curve hedging. Whatever front-end hedges we have on, they're there for kind of the risk management to express that exposure. We currently don't play in the swaptions market. We always evaluate it. But from where mortgages are trading and how wide the spreads are, we feel like that the better trade-off is to express the view on volatility through the current coupon basis, for example.

Yes. That's helpful. I mean maybe continuing on that theme, I mean, you guys offer good information and color on your duration gap. I mean just looking at these current coupons specifically, do you maybe have an estimate for what your duration gap would extend to if mortgage rates backed up, let's call it, like 50 basis points. And in that extension scenario, would you be more likely at this point to let your leverage run a little higher? Or would you look to sell assets in that scenario?

Yes, that's a good question. We obviously run risk stress test scenarios. We can get some numbers for you. And do you mean selloff on the long end or on the front end since that was the initial question?

Yes, maybe more on the long end, right, like that curve steepener you guys are positioned for.

Yes. I think -- look, I think we hedge our current exposure on a dynamic basis. We don't -- we're not going to let duration extend over certain levels where we feel like would require a rebalancing of duration. So from that standpoint, we stay very disciplined. And our risk metrics in the shock scenarios don't pose any large extension beyond which liquidity would be compromised.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Thanks for joining us this morning. Please feel free to give us a ring at the office. Happy to catch up if other things occur as you're thinking about what's going on in mortgage land. Thank you for joining us this morning, and good morning to you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.