Armour Residential REIT (ARR) is focused on investing in agency residential mortgage-backed securities. Armour's residential mortgage-backed securities portfolio consists of hybrid adjustable-rate, adjustable-rate and fixed-rate residential mortgage-backed securities issued or guaranteed by the United States government-chartered entities. ARR makes its money based on the shape of the yield curve (borrows short term, lends long term). Because ARR is required to pay out 90% of its income as dividends to maintain its REIT status, any growth is achieved by issuing debt and/or equity. This article analyzes ARR's public offerings of common stock, and provides a strategy to profit from these stock issuances.
Secondary Offering History
Since January 2011, ARR has done 10 common stock secondary offerings, as outlined in the table below. This count does not include preferred stock and debt issuance.
|Date||Close Price||Close Price +1 day||Difference ($)|
Depending on the size of the secondary offering, the ARR stock price has declined anywhere from 12 cents to 50 cents on the day following a secondary offering. On average, ARR's stock price declines 23 cents.
Stock Price Action Post-Secondary
ARR's stock price has returned to the closing stock price pre-public offering announcement each of the 9 times between 2011 and 2013 as seen in the table below. In certain cases (e.g. the 1/20/2011 offering), the stock price rebounds to pre-secondary levels in just 6 days. Here, no dividends are captured, but realized gains can be quick (and look good when annualized). In other instances (e.g. 2/2/2012), the rebound takes about 5 months. Under this scenario, one can capture multiple dividends while waiting for stock price appreciation.
|Secondary Date||# days to reach pre-secondary closing price||Stock Price Return||Accumulated Dividends ($)||Dividend Return||Total Return|
As a baseline, let us consider the total returns from ARR using a buy and hold strategy. We will consider the starting point for this analysis on 1/21/2011, or the date following the first of 10 ARR public offerings of common stock. Since this date, one would have accumulated $2.73 in dividends (36.0% return), while watching the stock price decline from $7.58 to $6.60 (closing price on 2/15/2013; -13.0% return). Combining the two components yields a return of 23% over this two-year period (note that this analysis neglects compounding from dividend reinvestment).
The proposed strategy is to buy ARR the day following a public offering of common stock and to sell when the price reaches the closing price the day the secondary is announced (i.e. pre-secondary closing price). This strategy will be evaluated over the same time frame as the baseline. Based on the data in the second table, utilization of this strategy would capture $1.57 in dividends per share across the 9 public offerings (not including the latest offering). Since the price has returned to the pre-secondary closing in each of the 9 events, the total stock price appreciation is equivalent to the absolute value of the sum of the data in the 4th column in Table 1. The per share stock price return is $2.26. Combining the stock price capture with the dividend capture from this strategy yields a total return of $3.83 per share, or 50.5% over the same two-year period.
A comparison of the return generated from buying ARR following a secondary offering versus a buy-and-hold strategy from 1/21/2011 is 50.5% total return vs. 23.0% total return. In other words, the proposed strategy for trading ARR more than doubles one's return (again, it should be noted that compounding from dividend reinvestment is neglected). The takeaway here is that ARR secondary offerings come fast and furious. The methodology outlined above is a potential strategy to profit from these public offerings rather than having your ARR holdings get subjected to significant stock price declines every few months.
Finally, it should be noted that ARR recently announced a secondary offering on 2/13/2013. The stock price dropped 39 cents following the announcement to close at $6.70. Now would be a good time to make use of this strategy, as history suggests that ARR will gradually rebound to the $7.09 pre-secondary closing price, while accumulating a few dividends along the way.
Disclosure: I am long ARR.