Armour Residential REIT (ARR) issued 1.4MM shares of a new Series A preferred stock, making them the most recent mortgage REIT issuing perpetual preferred in order to lock in lower rates and extend their liabilities.
Details of the offering are (prospectus):
| Issuer | ARMOUR Residential REIT, Inc |
| Series | Series A |
| Ticker | ARR PrA or ARR-A (OTC ARROP) |
| Coupon | 8.25% |
| Rating | Not rated |
| Shares | 1,400,000 (210,000 greenshoe) |
| Dividends | Cumulative. Paid monthly on the 27th or next business day |
| Optional Redemption | June 7, 2017 |
| Special Optional Redemption | conversion option upon change of control if company does not elect to redeem at par. |
| Voting Rights | Right to elect 2 members of the board of directors after 18 missed months |
| Use of Proceeds | Proceeds will be used to acquire additional Agency Securities and general corporate purposes. |
The underwriting discount on the offering is $0.7875, so it is reasonable that this will trade below par in the OTC market, possibly closer to $24.50.
The Issuer
ARMOUR is a mortgage REIT that invests primarily in agency hybrid adjustable rate, adjustable rate and fixed rate residential mortgage backed securities.
A quick snapshot of their balance sheet/portfolio is as follows:
| Mortgage Assets | $12,120.9MM |
| Fixed Rate Mortgages | $9,593MM |
| ARM & Hybrid Mortgages | $2,528MM |
| Leverage | 8.91x |
| Portfolio Effective Duration | 2.62 |
| Derivatives | $6.37B (58% of Repo) |
| Net Balance Sheet Duration | 0.38 |
Source: May Company Update
The dividend payments for the first quarter of 2012 totaled $46.8 million while estimated Core Income (income excluding impairments and gains/losses) for the quarter ended March 31, 2012, was approximately $41.3 million. This represents a core income payout of 113%.
Valuation
To determine valuation, the comparison will be made between the Armour offering and the recent offerings of Annaly Capital Management (NLY), Colony Financial (CLNY) and American Capital Agency Corp (AGNC). (I wrote about mREIT preferreds here).
| Issuer | Series | Coupon | Price | Yield |
| Armour | A | 8.25% | $25.00 | 8.25% |
| Annaly | C | 7.625% | $24.75 | 7.70% |
| Colony | A | 8.50% | $25.33 | 8.38% |
| American Capital Agency | A | 8.00% | $25.41 | 7.88% |
The Armour Series A preferred seems to be priced appropriately for being smaller than the "big dogs" in the space, Annaly and American Capital.
Equity Snapshot
Below is a brief comparison between the referenced mortgage REITs (and some thrown in for good measure):
| Company | Ticker | Px | 52wk Hi | Mkt Cap | Yield |
| Armour | ARR | $7.02 | $7.78 | 1.2B | 17.0% |
| Annaly Capital | NLY | $16.65 | $16.67 | 16.2B | 13.2% |
| American Capital | AGNC | $32.56 | $32.74 | 9.7B | 15.3% |
| Colony Financial | CLNY | $16.82 | $18.56 | 556MM | 8.0% |
| Two Harbors | TWO | $10.27 | $11.06 | 2.2B | 15.6% |
| MFA Financial | MFA | $7.66 | $8.35 | 2.7B | 12.5% |
Bottom Line: The Series A preferred stock issued by Armour Residential is in line with where it should price given its size in the market and the non-rated nature of the security. Investors who wish to invest in this issuer have to choose between the common stock (currently yielding 17% - but see payout comment under issuer) and the new preferred. While I can appreciate the significant "give" versus the equity, the payout on the equity relies on portfolio sales and 9x leverage - both of which seem risky in our current environment. Armour's new issue increases the available securities for an mREIT preferred portfolio (linked earlier) which affords investors diversification.
Disclosure: I am long REM.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.
