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Summary

  • ARMOUR holds over $16.7 billion in fixed rate securities and $192 million in ARM and hybrid securities.
  • Leverage ratio has climbed to 8.2x to 1, as the company target is 8x to 9x to 1.
  • ARR continues to repurchase common shares.
  • Recommend ARR as a buy and hold long-term investment.

ARMOUR Residential REIT, Inc. (NYSE: ARR) filed its monthly Form 8-K with the SEC on 30 May 2014. ARMOUR reported its balance sheet on multiple slides describing its current investments, but slide 7 is the most descriptive for our evaluation.

The most weighted investments are the Fixed Rate Securities. The company holds over $16.7 billion in this portfolio.

1. The Agency Multifamily Ballooning in 120 months or less hold 2.3% of the Fixed Rate Securities, of which the current value is appraised at $378 million.

2. The Fixed Rates Maturing in 120 months or less hold $1.8 million.

3. The largest in the Fixed Rate Maturing between 121 and 180 months, at 69.1% with near $11.6 billion.

4. The Maturing Between 181 and 240 months holds 28.6%, $4.8 billion in portfolio.

In the smaller investment section of its portfolio, ARM and Hybird Securities, ARR holds $192 million:

1. 81.1% or $155.7 million with 0-18 months to reset.

2. 15.2% or $29.1 million with 19-36 months to reset.

3. 3.7% or $7.1 million with 36-48 months to reset.

The company has a current policy of hedging a minimum of 40% of assets and funding rate risk. The company has over $1 billion in liquidity, $490 million in cash and $590 million in unlevered securities. The company's long-term debt to equity target is between 8x and 9x to 1, whereas the current rate is 8.2 to 1, based on shareholders' first quarter reports. In my last article, published here, I highlighted the company's leverage ratio jumped from 6.92 to 1 in December 2013 to 8.12 to 1 as of March 31, 2014. This was a large jump, but largely due to the buyback of shares in the first quarter and the increase in investments in the portfolio. The company's management is comfortable with the leverage ratio between 8x and 9x to 1, and the company is on track at the current 8.2 to 1 figure reported in the May 30 SEC filing.

The company currently has 357,110 307 shares outstanding, as the company issued 19,463 shares of common stock under its dividend reinvestment plan. During the first quarter, the company repurchased 600,000 shares of outstanding common stock for approximately $2.6 million. The company reduced the total count of common shares by 580,537. During 2013, the company repurchased 13 million shares. As the company continues more buybacks, the value of the shares is expected to increase respectively.

The company has nearly 2.2 million shares of Series A Preferred stock paying a dividend of $0.1719 per share each month and Series B Preferred stock paying a monthly dividend of $0.1641. Both of these pay about 8% return, but preferred shares always get paid before the common shares.

ARMOUR Residential REIT, Inc.'s SEC monthly filing is consistent with its history and management's projections. The company has produced profits over the last several years and is expected to remain profitable using its current methodology. The company's standards of discipline in its investments and hedging should remain steady in the current market, and flexible enough to adapt to changes in the market. The risk of interest rate changes is the largest factor; however, the company has what appears by market standards to have sufficient hedges in place to protect its portfolio and investors' interests.

We do anticipate, later this fall, ARMOUR will pay a catch up dividend as the company must pay out at least 90% of its taxable income to maintain its REIT status.

Source: Strength In ARMOUR Residential REIT's Portfolio - May 2014 SEC Filing