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Armour Residential REIT (ARR) continues to be one of the more popular mREITs due to its monthly dividend and high yield. However, Armour has recently seen several of its key operating metrics decline such as book value, net interest rate spread, and return on equity. Armour's current monthly dividend is $0.07 per share, or $0.84 annually. At current prices, Armour yields about 13.30%.

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On May 2, Armour reported its Q1 2013 results. For the quarter, Armour saw estimated taxable REIT income of approximately $86.0 million, or about $0.23 per share. Armour saw GAAP income of about $102.3 million, or $0.29 per share, and core income of about $67.5 million, or $0.20 per share. During the quarter, Armour booked about $18.5 million, or $0.05 per share, in realized gains on sales of agency securities.

What really stood out in the report was Armour's book value. Armour reported a $6.69 per share book value as of March 31, 2013. This is a 8.3% decline from the $7.29 book value reported on December 31, 2012, and lower than the previously estimated range of $6.70 to $6.76 on February 13, 2013. Armour joins other agency mREITs such as American Capital Agency Corp (AGNC) and Invesco Mortgage Capital Inc (IVR) in reporting sharp declines in book values during the quarter.

Armour also experienced a decline in its net interest rate spread during the quarter. Armour's annualized yield on average assets was 2.33%, a 14 bps decline from the 2.47% reported in Q4 2012. Armour's annualized cost of funds, including hedges,was 0.98%, a 6 bps increase from the 0.92% reported in Q4 2012. Armour's resulting net interest spread was 1.35% for the quarter, a 20 bps, or 13%, decline from the 1.55% reported in Q4 2012. Armour's net spread decline was the exception, as most of the other pure-play agency mREITs did not show as large as a decline as Armour.

Due to its decreased net interest rate spread, Armour was forced to increase its overall leverage ratio during the quarter to maintain a decent ROE. Armour's debt-to-total shareholder equity ratio was 9.17X as of March 31, 2013. This is an increase from the 7.96X reported in Q4 2012. Even with the increase in leverage, Armour's annualized ROE decreased to 13.8% during the quarter, down from 16.2% reported in Q4 2012.

There were a few areas of growth for Armour -- its management fee, total expenses, and shares outstanding.

During the quarter, Armour's management fee totaled $6.63 million, a 9% increase from the $6.10 million management fee reported in Q4 2012 and an 89% increase from the $3.51 million reported in Q1 2012. Armour's total expenses totaled $8.63 million, a 12% increase from the $7.67 million reported in Q4 2012 and a 80% increase from the $4.83 million reported in Q1 2012. During the quarter, Armour's diluted shares outstanding averaged 339.7 million, up 51% from the 224.2 million reported in Q4 2012 and up 250% from the 135 million reported in Q1 2012.

Conclusion

Even though I like monthly income, I would avoid Armour. Armour's current leverage ratio is the highest I know of amongst the agency mREITs. In addition, it has been a serial share diluter, constantly issuing shares, regardless of the impact on book value. When factoring in the collapse in its interest rate spread during the quarter, this all sums up to make Armour a very high-risk stock, even for being a mREIT.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Source: Armour Residential: A High-Risk mREIT With A Monthly Dividend