ARMOUR Residential REIT Q1 2026 Earnings Call - Navigating Volatility with Tactical MBS Purchases

Conference Call Operator: Good day, and welcome to the ARMOUR Residential REIT first quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please let us know by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note, today’s event is being recorded. I would now like to turn the conference over to Scott J. Ulm, Chief Executive Officer. Please go ahead.

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Thank you, and good morning, and welcome to ARMOUR Residential REIT’s first quarter 2026 conference call. This morning, I’m joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officers, Sergey Losyev and Desmond Macauley. I’ll now turn the call over to Gordon to run through the financial results.

Gordon Harper, Chief Financial Officer, ARMOUR Residential REIT: By now, everyone has access to ARMOUR’s earnings release, which can be found on ARMOUR’s website, www.armourreit.com. This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR’s periodic reports, filed with the Securities and Exchange Commission, describe certain factors beyond ARMOUR’s control that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements. Those periodic filings can be found on the SEC’s website at www.sec.gov. All of today’s forward-looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law. Also, today’s discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release.

An online replay of this conference call will be available on ARMOUR’s website shortly and will continue for one year. Notwithstanding the market turbulence and MBS volatility due to geopolitical events experienced in the latter portion of the first quarter of the year, the company delivered solid results for the first quarter of 2026, with total economic return of -2.6%. Since March 31, 2026, we have seen improvements in MBS spreads and volatility. ARMOUR’s Q1 GAAP net loss related to common stockholders was $58 million, or $0.49 per common share. Net interest income was $70.7 million. Distributed earnings available to common stockholders was $90.5 million, or $0.76 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income, adjusted for interest income or expense on our interest rate swaps and futures contracts, minus operating expenses.

During Q1, ARMOUR raised approximately $215 million of capital by issuing approximately 11.8 million shares of common stock and $6.4 million of capital by issuing approximately 306,000 shares of preferred stock through our at-the-market offering programs. Through April 15th, 2026, we raised approximately $7.2 million of capital by issuing 416,000 shares of common stock and $179,000 of capital by issuing 8,600 shares of preferred stock through the at-the-market offering programs. In March 2026, we repurchased 125,000 shares of common stock through our stock repurchase program. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month, for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term.

On April 29th, 2026, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15th, 2026. We have also declared cash dividends of $0.24 per outstanding common share payable May 28th, 2026, to owners of record on May 15th, 2026. Quarter end book value was $17.42 per common share, down 6.5% from December 31, 2025. As of Monday, April 20th, our estimated book value was $18.05 per common share, which reflects the accrual of the April common dividend. I will now turn the call over to Chief Executive Officer Scott Ulm to discuss ARMOUR’s portfolio position and current strategy. Scott?

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Thank you, Gordon. Heightened uncertainty returned to the market in 2026, driven by renewed geopolitical tensions and a sharp rise in oil prices that put further Fed easing on hold for now. As concerns around the Middle Eastern conflict intensified, the yield curve bear-flattened on a shallower path of Fed cuts. Implied volatility more than doubled, and nominal mortgage spreads widened from 95 basis points to as much as 130 basis points from trough to peak over the course of the first quarter. That combination of wider spreads and elevated volatility ultimately proved to be a buying opportunity for ARMOUR, as the risk/reward at valuations last observed in Q3 of last year turned decisively favorable. As interest rates stabilized, MBS spreads retraced tighter, driving a recovery in our book value of 3.5% quarter-to-date net of dividend.

Against a more balanced picture for mortgage spreads today, market technicals remain firmly supportive. The rise in Treasury yields and mortgage rates has tempered prepayment concerns, and elevated mortgage rates continue to weigh on an already soft housing market, keeping a lid on primary origination supply. On the demand side, while the GSEs’ pace of purchases slowed in the first two months of the first quarter, reflecting tight MBS spreads, we expect Fannie and Freddie to report that they re-accelerated holdings growth in March during the period of wider spread. This would be consistent with our view of the GSEs as backstop buyers with substantial dry powder to step in when mortgage spreads widen. Another emerging source of demand is coming from banks. March recorded the highest CMO creation on record, reflecting a strong bid for structured MBS that typically signals growing bank appetite.

While the bank demand story has failed to materialize in recent years, the regulatory relief now taking shape fuels growth and capital for bank’s MBS portfolio at a time when deposit bases are also expanding. Sustained inflows into fixed income, both domestically and from overseas, provide an additional tailwind for demand in the first quarter as high-quality liquid agency MBS serve as an attractive alternative to corporate credit, where valuation questions persist. I’ll now turn it over to Sergey for more detail on our portfolio.

Sergey Losyev, Co-Chief Investment Officer, ARMOUR Residential REIT: Thank you, Scott. ARMOUR’s most recent net balance sheet duration stands at approximately 0.4 years, reflecting our view of further stabilization in yields and the return of expectations for the future Fed rate cuts, as consistent with the Fed’s committee’s own expectations. The implied leverage excluding the Treasury shorts is 7.85x, a balanced posture that reflects our constructive view on the market and incorporates MBS purchases at the wider spreads in March. Our expected month-end liquidity position, including April’s pay downs, remains strong at $1.2 billion or nearly 50% of Monday’s total equity. ARMOUR’s asset portfolio remains 100% agency MBS, agency CMBS, and U.S. Treasuries. It now stands at over $21 billion, notching a fourth consecutive quarter of growth in both assets and capital base.

Consistent with our balance sheet growth, we have net added nearly $900 million of MBS pools since ARMOUR’s last conference call in Q1. Our purchase mix continues to evolve by coupon and product as rates and spreads move. In March, we took advantage of widening in the new production coupons where GSE activity is most concentrated. We also added seasoned, deeper discount MBS along with 15-year agency MBS TBA rolls. Within premium price bonds, we continue to focus on prepayment protection in the higher tier maximum loan balance pools. The portfolio remains concentrated in specified pools with favorable prepayment characteristics, which now represent 95% of ARMOUR’s MBS holdings. In agency CMBS, we have gradually moved a large portion of our DUS portfolio out on the yield curve, rotating out of the 5-year sector, which experienced notable tightening into this year, and swapping into the 10-year DUS paper.

This rebalance allows us to take advantage of the positive convexity profile of these longer bonds and take an additional 30-40 basis points of spread of longer SOFR hedges. Our hedge strategy aims to reduce duration risk across the entire yield curve. Roughly 86% of ARMOUR’s hedges are OIS and SOFR pay-fixed swaps with a balance in Treasury futures. As the recent market volatility subsided, the 10-year SOFR Treasury spread recovered from its recent tights of -49 basis points, the most negative level since October of last year. Despite the recovery to levels closer to fair value models and pre-liberation date historical averages, SOFR swaps remain an attractive hedge instrument for us, with pay-fixed rates at approximately 44 basis points below the comparable Treasury yields.

We expect further normalization of swap spreads to hinge on a path of policy debate around the Fed’s desired balance sheet and banking deregulation. Aggregate portfolio prepayments averaged 12.1 CPR year to date through April versus 11.1 CPR in Q4 of 2025, stable but running at a slightly higher level versus the prior quarter. Mortgage rates were not spared from volatility. After hitting a low of 5.9% in February, rates backed up by almost 60 basis points the following month, stifling near-term refinance activity. Despite the rate rally we’ve seen so far in April, 30-year mortgage rates remain elevated around 6.2%, which should anchor premium prepayment expectations through the next several prepayment reports. Funding markets have been refreshingly uneventful in Q1. The repo remains liquid and stable, with spreads trading inside 15 basis points above SOFR and Fed funds rate.

The Fed’s response to last year’s funding pressures appears to have done its work and stabilized banking reserves. As expected, the Fed has announced an incoming step down in its reserve management T-bill purchases from $40 billion-$25 billion per month. It is a notable reduction, yet one that still leaves the Fed as the net provider of new liquidity to funding markets, and we expect repo conditions to remain easy. As of today, refinance portfolio across 24 active repo counterparties, approximately 80% of our repo principal is financed at 3% haircut or lower, and weighted average haircut across the entire repo book is approximately 2.75%. Buckler Securities accounts for roughly 45% of our repo financing book. Thank you, and back to you, Scott.

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Thanks, Sergey. The case to own MBS remains strong and should strengthen further if the Fed resumes its easing cycle later this year. We believe lower funding rates combined with a steeper curve would reinforce the catalyst for strong demand and broaden the investor base for agency MBS. We saw some volatility this quarter driven by geopolitical events, but the impact overall was manageable and has dissipated significantly more recently. Our balance sheet management over the quarter gave us some options, and we were able to take advantage of lower MBS prices and bought back some of our own stock. We continue to set our dividend with a medium-term outlook, and we review our dividend as appropriate in the current environment. Our approach remains unchanged. Stress test our liquidity, apply systematic hedging, and deploy capital when opportunities present themselves.

Desmond Macauley, Co-Chief Investment Officer, ARMOUR Residential REIT: Overall, we’re confident in our positioning, our strategy, and our ability to perform well for shareholders in 2026. Before we open the line for questions, we’d also note again that we’ve launched a new quarterly investor presentation now available on ARMOUR’s website. Thank you for joining today’s call and for your continued interest in ARMOUR. You can open the line for questions, please.

Conference Call Operator: Yes, sir. Absolutely. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To remove yourself from queue, please press star then two. Once again, that’s star then one if you have a question. Today’s first question comes from Marissa Lobo at UBS. Please go ahead.

Marissa Lobo, Analyst, UBS: Good morning. Thank you for taking my question. You noted the tightening of spreads in Q2 to date. What does the current ROE on new agency purchases look like? And where do you see the long-term equilibrium of spreads settling versus swaps?

Desmond Macauley, Co-Chief Investment Officer, ARMOUR Residential REIT: Yes. Hi, Marissa. This is Desmond.

Marissa Lobo, Analyst, UBS: Hi, Desmond.

Desmond Macauley, Co-Chief Investment Officer, ARMOUR Residential REIT: Yeah, hi. How are you? Looking at par and premium securities, return on equity is in the mid- to high-teens. That’s assuming about 8 times of leverage and hedged to half duration. Now, that’s somewhat of a static view. We also do scenario analysis where we look at horizon returns. For example, if OAS is tightened by 10 basis points, that adds about 3%-5% in total return that will accrue through book value. That takes, let’s say for example, the return is at around 16%, you add 3%-5% there, then now you’re getting to the 19%-20% area. Now, in terms of our long-term view on spreads, we think spreads are still attractive. That’s why we are constructive on the sector.

You can look back at a period like 2019 when the Fed was running our fixed mortgage portfolio and also cutting rates. If we look at spread to swaps, let’s say a blended 5-year, 10-year swap, those levels were around 120 basis points on average mortgage spreads, and currently they are around 150. That suggests that we are wider by 30 basis points. If you look at it versus Treasuries, you get something around 20 basis points wider today versus back then. We think conservatively, we can see another 20 basis points of tightening here over the medium term.

Marissa Lobo, Analyst, UBS: Great. Thank you. Can you share your view on the opportunity for dollar rolls in agencies and how does that inform your current preference for TBAs versus specified pools?

Sergey Losyev, Co-Chief Investment Officer, ARMOUR Residential REIT: Hi, Marissa Lobo. This is Sergey Losyev. Yeah. The TBA market spread has certainly returned to some level this year, but it remains fairly volatile and unstable. We have some TBA rolls in our portfolio. As we mentioned, we’ve reallocated a little bit to the 15-year sector to Ginnie Maes, but we don’t expect them necessarily to be our strongest carry trades. We kind of use these opportunistically for total return opportunities. Right now, we still prefer specified pool cash flow yields even if there isn’t a lot of OAS pickup versus the TBAs. We like the certainty of cash flows, and it certainly kind of protects us from the tail risk if mortgage rates turn lower in the future.

Marissa Lobo, Analyst, UBS: Got it. Thanks for the answers.

Conference Call Operator: Thank you. Our next question today comes from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston, Analyst, JMP Securities: Hey, thanks. Good morning. Looking at your leverage, it’s been kind of consistent around the 8x level for the last few quarters. Given your commentary around the positive backdrop in terms of the technical environment and the GSE sort of acting as a backstop buyer, does that change how you guys are viewing the appropriate leverage level at all? Or how are you thinking about that in the current environment? Thanks.

Desmond Macauley, Co-Chief Investment Officer, ARMOUR Residential REIT: Yes. Hi, Trevor. First, we are comfortable with our current leverage. We did increase it after spreads widened in March, which benefited our book value. We think that the current level is appropriate. It would allow us to participate, in terms of spread risk if we see more spreads tightening as we expect. We prioritize risk management. We stress test our liquidity to ensure that it can sustain extreme bouts of volatility. As long as we are comfortable with those stress tests, then we’d look to add leverage to take opportunity if we see more spreads widening as long as we think that if there’s a bout of volatility, it’s not systemic.

Trevor Cranston, Analyst, JMP Securities: Right. Okay. That’s helpful. Thank you.

Conference Call Operator: Thank you. Our next question today comes from Timothy D’Agostino with B. Riley Securities. Please go ahead.

Timothy D’Agostino, Analyst, B. Riley Securities: Thank you. Good morning, and congrats on the quarter. The first question for me, I guess. Could you provide just a little bit more color on the widening of the economic interest spread? I think it went from about 188 basis points to 194. Would just be great to get any color on the movement there.

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Gordon, do you want to handle that one?

Gordon Harper, Chief Financial Officer, ARMOUR Residential REIT: Yeah, just one second. I think the main real driver, I think, is you could see that our rate on our repos has gone down. The other real driver is the rate that we have on our swaps.

Okay, great.

When you factor all that together. That’s your answer.

Timothy D’Agostino, Analyst, B. Riley Securities: All right, perfect. Awesome. I appreciate it. As a second question, just on capital formation, I guess just kind of getting a better understanding of the playbook a little bit. Obviously, when you’re above book value, you’re issuing off your equity ATM. When you are below book value, do you turn to repurchasing shares and issuing preferreds? Just trying to understand how you all think about going and raising capital and then putting that capital to work. Thank you.

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Sure. Well, look, it’s all about price. It’s all about price, and it’s all about opportunity. By opportunity, I mean what the investment horizons are for us. The clear simple answer is it depends. There are also other factors which include when we increase the shareholder base, our expenses decline per share, and our cost of running the shop declines as well on average. We are very focused on all of those factors in terms of how they coalesce in making a decision on whether we issue or we repurchase, as the case may be. We’re very committed to being on both sides of the market. Clearly, when we repurchase, it has to be a fairly definitive view that we want to take back that capital.

When we issue, it’s also a very carefully calibrated view on where the price is compared to book, what the opportunity for deploying that capital is, and how it impacts the overall operation. Not a clear, crisp answer, sorry. It is all those factors that coalesce in how we manage it. You’ll see if you look back, there are quarters where we’re active, and there are quarters where we’re not active at all, which might give you a sense of how tightly we manage that.

Timothy D’Agostino, Analyst, B. Riley Securities: Okay, great. Thank you so much. I appreciate the color. Congrats again on the quarter.

Conference Call Operator: Thank you. Our next question today. Actually, as a reminder, if you’d like to ask a question, please press star then one at this time. Our next question today comes from David Storms at Stonegate Capital. Please go ahead.

David Storms, Analyst, Stonegate Capital: Morning, and thank you for taking my questions. I actually wanted to follow up on that last question around capital formation and ask, does times of increased volatility like we saw in Q1 play any sort of meaningful factor into issuing or repurchasing shares?

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Yes, for sure. Generally, volatility is not a positive for share price. I’d say generally, volatility means that we’re likely to be less active on the issuance side, but maybe a little more active on the repurchase side. Certainly, we saw some volatility this quarter, and you saw us. Early on in the quarter, we were still enjoying some tightening. Later on in the quarter, we had some geopolitical stuff that happened, which maybe pushed us the other way. Yes, absolutely correct that volatility impacts us. Generally, in a period of lower volatility, I would guess you’re going to see us more active on issuance and higher volatility, maybe a little less active.

David Storms, Analyst, Stonegate Capital: Understood. Thank you. Maybe just one question around your outlook. With the Fed being in a bit of a wait-and-hold period, given some of the conflicts of late, are you keeping an eye out for any sort of second-order impacts, such as increased fertilizer prices or increased shipping prices that may maybe force the Fed’s hand? Are you tracking anything like that?

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Yeah, look, we look at all this stuff, and yeah, you’re absolutely right that there’s a pile load of secondary impacts out there that they could go either way. We keep a close eye on it, but multi-level Tetris game there, right?

David Storms, Analyst, Stonegate Capital: That’s perfect. Thank you for the commentary.

Conference Call Operator: Thank you. That concludes our question and answer session. I’d like to turn the conference back over to Scott Ulm for any closing remarks.

Scott J. Ulm, Chief Executive Officer, ARMOUR Residential REIT: Thanks for joining. We appreciate your participation in our conference call here. Any follow-up questions, we’re around. Thanks so much.

Conference Call Operator: Thank you, sir. That does conclude our conference call for today. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.