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Armour Residential REIT, Inc. (NYSE:ARR) is an agency mortgage REIT ("mREIT"). Armour is unique among mREITs in that it pays its dividends on a monthly basis instead of quarterly. Shares of Armour have recently been quite volatile due to a recent equity offering and dividend reduction. Armour's current monthly dividend is $0.07 per share, or $0.84 annually. At current prices, Armour yields about 12.8%.


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While the dividends are paid monthly, Armour announces the dividend rate every quarter. The recently announced monthly dividend of $0.07 per share is a 14% reduction from the previous monthly dividend of $0.08 per share. This new dividend rate corresponds to the second quarter of 2013 (April, May, June) and marks the third straight quarter of lower dividends for Armour.

I had previously warned my followers of the probability of a dividend cut for Armour:


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This was quite easy to determine, as Armour announced a rather large equity offering for over 65M shares in the middle of Q1 2013. These extra funds were only able to generate income for half of Q1 2013. In addition, this offering represents over 20% of Armour's float. Even worse, was that this offering was priced at only $6.75 per share. This massively diluted Armour's shareholders, considering that Armour reported a book value of $7.29 per share as of December 31, 2012. Indeed, included in its Q4 2012 report, Armour announced that its estimated book value as of February 13, 2013, was between $6.70 to $6.76. This represents at least a 7.7% decline in book value in only 2 months.

These equity offerings should not come as much of a surprise, as Armour's management benefits enormously from the increase in equity size. Armour's management is entitled to receive a monthly management fee that is based on the total of all gross equity raised, regardless of performance:


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Indeed, during 2012, Armour announced five large equity offerings, which dramatically increased its size:


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The size of this management fee has ballooned since 2010, reaching $19.5M for full year 2012. As of Q4 2012, This fee now represented over 6% of the net interest income generated by Armour.


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As of Q4 2012, Armour was one of the riskier mREITs, with a debt to equity ratio of 8.25X. The Q4 2012 net interest margin stood at 1.55% and has declined every quarter since Q1 2012. During the fourth quarter, the prepayment rate stood at 14.1%.

Armour's leverage ratio is quite worrisome, as it is higher than it peers, such as American Capital Agency (NASDAQ:AGNC), CYS Investments (NYSE:CYS), and Invesco Mortgage Capital (NYSE:IVR). Even with its higher leverage, Armour also does not offer a yield as high as AGNC, nor does it trade at a large discount to book value such as CYS.

ARR AGNC CYS IVR
Leverage Ratio 8.25X 7.0X 7.7X 6.1X
Price as of 3/13/13 $6.56 $32.99 $12.18 $21.41
Book value $6.76 $31.64 $13.30 $20.83
Premium/ (Discount) (3%) 4.2% (8.5%) 3%

Conclusion

Armour has consistently been one of the worst performing mREITs. The constant equity offerings have diluted shareholders and has accelerated Armour's book value decline. The only reason for Armour's current high yield is due to its use of excessive leverage, which is well above many of its peers. It is my opinion that investors should avoid Armour.

Source: Avoid Armour Residential