On July 31, 2014 ARMOUR Residential REIT, Inc. (NYSE: ARR) announced financial results for the second quarter ending June 30, 2014. ARR's report is a mixed bag, demonstrating the investment market is a highly competitive and challenging to be successful each quarter. The company's leadership has done above average in many areas and should be recognized for a strong performance, but a little slow and less agile with the ability to react to a changing marketplace.
The key takeaways included the estimated taxable income of approximately $50.9 million, or $0.13 per common share, which represents a 10.9% return on stockholders' equity. This is down from first quarter's numbers of $58.3 million, or $0.15 per common share, which represented a 12.28% return. The marketplace is crowded with many companies all competing for money.
The Generally Accepted Accounting Principles ("GAAP") net loss was approximately $(70.2) million or $(0.21) per common share. This loss is much higher than first quarter that posted a net loss of approximately $(19.8) million or $(0.07) per common share. This accounting loss held the taxable income down for the second quarter. Because the loss grew from $19.8 million to $70.2 million, the $50 million change stopped a healthy increase from being recognized. For future reference, this was only an accounting loss (on paper) and may change in the future. This is one of the areas that we considered strongly when we addressed a possible bonus dividend in late 2014. We will continue to watch the effects of the market on the GAAP reporting methods.
The company's largest change in the quarterly reports was the changes in interest rate contracts, which netted $116 million during the second quarter. During first quarter the changes in derivatives netted the company $153 million. The bottom line in comparing the two quarterly reports side-by-side is the GAAP paper shuffle reported 4.5 million less in taxable REIT income for the second quarter. There are many factors that will affect the reporting of numbers each quarter. The two true numbers that are important are the dividend payouts and the book value.
Maybe the second most important stat after the dividend to be paid is the book value of the common stock. The book value was estimated at $4.90 per common share for second quarter. This is up from the first quarter's value of $4.67. A $0.23 increase in the quarter is a strong demonstration of growth in the value of the portfolio. This could allow investors to bid the stock price up from the current stock price of $4.20 to near $4.50 by the end of the year.
The company's leverage ratio as of June 30, 2014 was 7.90 to 1. The company lowered its leverage from 8.12 to 1, which means it has less money borrowed by percentage of its portfolio. Keeping the ratio under 8.0 is a positive position for the company. Last quarter I commented on it going over 8%, now I must commend the company on bringing this ratio down. The largest cost of doing business is the cost of money and with a lower percentage of money borrowed, this keeps more of its hard earned money as profits for investors.
Second quarter's average yield on assets was 2.86% and average net interest margin was 1.46%. These were down compared to first quarter where the average yield on assets was 3.19% and average net interest margin was 1.82%. This is representative of a tough market and strong competition. I would anticipate the company's leadership will address this over the next quarter and with any improvement should keep profits over $50 million and push higher.
Armour Residential REIT is a strong profitable company that will continue to pay its dividend with a yield currently over 14%. Armour pays a monthly dividend that is an excellent source of cash for those investors looking for a monthly cash machine. Although this was not a glowing quarterly report, it was very profitable for investors. Armour is a strong company and worthy investment to grow your portfolio by reinvesting dividends or taking the cash each month.
Disclosure: The author is long ARR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.