2023-06-14 00:18:36 ET
Summary
- ARMOUR Residential's dividend yield has been pushed to 18.4% on the back of material stock price weakness.
- The mREIT's book value remains under pressure, with the monthly paid dividends down markedly versus their pre-pandemic comps.
- Whilst future performance might be better with the Fed set to pause interest rates, the mREIT's preferreds continue to offer a better option.
ARMOUR Residential ( ARR ) is struggling. The mortgage REIT is down 24% over the last 12 months as a toxic combination of a Fed funds rate hiked to its highest level since 2008 at 5% to 5.25%, the March banking panic, and still pertinent fears around a hard landing drove shares of the externally managed mREIT to post-IPO lows. Its price chart is not pretty with the monthly dividends helping to pad the overall pain for shareholders. Total returns stand at around 3% over the last 12 months as the dividend worked wholesale to wipe out losses over the last year and eke out a gain. Hence, its safety against the current torrid climate for investing in agency-backed residential mortgage-backed securities forms the most important forward factor for investors.
The monthly dividend was $0.17 per share immediately prior to the pandemic but has since declined by 53%. The mREIT last declared a monthly cash dividend of $0.08 per share , in line with its prior payment and for an 18.4% annualized forward yield. What's the near-term outlook for a monthly payout that's been under consistent pressure since ARMOUR Residential went public? Not great. The mREIT last reported fiscal 2023 first-quarter earnings that saw net interest income fall by 61.3% year-over-year with continued pressure on its book value. Bears, who form the 8.27% short interest, are betting that continued pressure on NAV will continue to weigh down the common shares.
Book Value And Distributable Earnings
ARMOUR Residential's first quarter was mixed. On one hand, net interest income of $12 million was a huge fall over its year-ago comp with interest expenses rising 4,317% versus a 254% increase in interest income. However, the mREIT recorded a $120.4 million gain on agency securities trading, up from a loss of $254.4 million in the year-ago quarter. Total other losses improved markedly to $33.4 million from $88.17 million in the year-ago period with ARMOUR Residential realizing distributable earnings available to common stockholders of $49.3 million, around $0.27 per share. This was actually a huge improvement from distributable earnings of $26.7 million in the year-ago quarter. Their external manager ARMOUR Capital Management waived $1.65 million in fees for the quarter, a move to partially compensate for the poor performance of the mREIT.
However, distributable earnings per share for the year-ago quarter was $0.28, around $0.01 higher than the most recent first quarter. The mREIT's weighted average common shares outstanding rose to 184.59 million from 96.23 million in the year-ago comp. This 91.8% rise is shares outstanding was driven by the mREIT's at-the-market offering program which sold 29.86 million shares during the first quarter. This was as book value per share of $5.44 fell from $8.48 in the year-ago period.
ARMOUR Residential's portfolio composition as of the end of the first quarter was 100% agency mortgage-backed securities with a debt-to-equity ratio of 8.7 to 1. In a post-period end update the mREIT's portfolio was roughly valued at $9.56 billion as of the 9th of June. Overall, the portfolio will continue to see pressure on its net interest margin, which came in at 1.97% during the first quarter. This was down 62 basis points from a net interest margin of 2.59% in the fourth quarter but was up from 1.78% in the year-ago comp.
A Yield For The Risk Takers
Don't chase yield here with ARMOUR Residential currently in a state of flux and with the dividends having a torrid long-term trendline even against the more normalized conditions for agency MBS investing before the pandemic. ARMOUR Residential's 7.00% Series C Cumulative Preferred Stock ( ARR.PC ) continues to offer a better alternative to the commons. The preferreds are outperforming the commons year-to-date, up 6.14% on a total return basis versus a loss of 2.36% for the commons.
They're currently swapping hands at $20.24 per share, a roughly 19% discount to their $25 par value and with a yield on cost of 8.6%. Whilst the yield is markedly lower, they offer more stability against a still uncertain macroeconomic context. They should also start moving up to par value once interest rates start moving lower. Whilst the mREIT is not a clear sell, capital preservation should go hand in hand with income and ARMOUR Residential has not done a great job of keeping its book value stable. The long-term performance of its commons reflects this. However, the dire conditions for MBS investing are set to start recovering with inflation continuing its fall and the Fed set to pause rate at its June FOMC meeting. The risk of another dividend cut in 2023 is real and shareholders should not anchor around the present payout.
For further details see:
ARMOUR Residential: It's Not Time To Buy The 18.4% Yield