Armour Residential REIT (NYSE: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|
|Ticker||ARR PrA or ARR-A (OTC ARROP)|
|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.
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:
|Fixed Rate Mortgages||$9,593MM|
|ARM & Hybrid Mortgages||$2,528MM|
|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%.
To determine valuation, the comparison will be made between the Armour offering and the recent offerings of Annaly Capital Management (NYSE:NLY), Colony Financial (NYSE:CLNY) and American Capital Agency Corp (NASDAQ:AGNC). (I wrote about mREIT preferreds here).
|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.
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|
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.
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.