ARMOUR Residential REIT (NYSE:ARR) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

Benzinga APIs provide real-time access to earnings call transcripts and financial data. Visit https://www.benzinga.com/apis/ to learn more.

The full earnings call is available at https://event.choruscall.com/mediaframe/webcast.html?webcastid=wQ5O4Se4

Summary

ARMOUR Residential REIT reported a strong Q2 2026 with a total economic return of 4.8% and GAAP net income of $111.5 million, or $0.86 per common share.

The company raised approximately $218.7 million through common stock and $4.1 million through preferred stock offerings, with continued capital raising efforts through July 14, 2026.

ARMOUR paid monthly dividends totaling $0.72 per common share for the quarter and maintained a stable book value at $17.53 per common share.

Strategically, the company focuses on agency MBS with a portfolio size of over $22 billion, and adjusts its hedging strategy to manage interest rate risks effectively.

Management highlighted the impact of market supply-demand dynamics on MBS valuations and emphasized a cautious approach given potential macroeconomic and Federal Reserve policy shifts.

Full Transcript

OPERATOR

Good morning and welcome to ARMOUR Residential REIT's second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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. To withdraw your question, please press star then two.

Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO. Please go ahead, sir.

Scott Ulm, CEO

Good morning and welcome to ARMOUR Residential REIT's second quarter 2026 conference call. This morning I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officers, Sergei Loesyev and Desmond McCauley. Now I'd like to turn the call over to Gordon to run through the financial results.

Gordon Harper, CFO

Thank you, Scott. By now everyone has access to ARMOUR's earnings release and our Q2 2026 investor presentation, which can be found on ARMOUR's website at 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 reports 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 discussions refer 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.

Our portfolio benefited from MBS spreads tightening. We delivered strong results for the quarter with total economic return of 4.8%. ARMOUR's Q2 GAAP net income available to common stockholders was $111.5 million, or $0.86 per common share. Net interest income was $76.8 million. Distributable earnings available to common stockholders was $93.2 million, or $0.72 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income, adjusted for income or expense on our interest rate swaps and futures contracts, minus operating expenses.

During Q2, ARMOUR raised approximately $218.7 million of capital by issuing approximately 12.7 million shares of common stock and $4.1 million of capital by issuing approximately 198,000 shares of preferred stock through our at-the-market offering programs. Through July 14, 2026, we raised approximately $88.3 million of capital by issuing 5.2 million shares of common stock through our common stock at-the-market offering program. ARMOUR paid monthly common stock dividends 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 July 30, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record on July 15, 2026. We have also declared cash dividends of $0.24 per outstanding common share payable August 28, 2026 to the holders of record on August 17, 2026. Quarter-end book value was $17.53 per common share, up 0.6% from March 31, 2026. Our estimated book value as of Monday, July 20 was $17.00 per common share, which reflects the accrual of the July common dividend of $0.24 per share.

I will now turn the call over to Chief Executive Officer Scott Ulm to discuss our portfolio position and current strategy.

Scott Ulm, CEO

Thanks, Gordon. Agency MBS delivered a positive second quarter performance despite a macroeconomic backdrop that would normally weigh on the sector. The U.S. Treasury curve continued to bear flatten, with the 2-year yield rising 38 basis points compared with a 15 basis point increase in the 10-year yield, while geopolitical uncertainty in the Middle East remained elevated. Strong economic data and an energy-driven rise in headline inflation exposed division within the Federal Reserve and led markets to shift from pricing year-end rate cuts to rate hikes under Chairman Walsh's new leadership.

With traditional forward guidance receding and the Fed's broader policy framework under review, a less predictable central bank could push interest rate volatility higher. Historically, this combination of elevated uncertainty and a flatter yield curve has produced a meaningful headwind for mortgages. Even so, mortgage option-adjusted spreads tightened 7 basis points across ARMOUR's asset classes, helping deliver a positive book value gain in the second quarter.

Second quarter has reinforced an important point: market supply-demand dynamics are currently exerting greater influence on agency MBS valuations than the broader macroeconomic narrative. Looking ahead, the technical backdrop remains supportive into the third quarter. Elevated mortgage rates are constraining new loan production as net issuance of Fannie Mae and Freddie Mac securities continues to run negative this year. On the demand side, strong inflows into bond funds from domestic and international investors continue to support agency MBS, which remain an attractive alternative to tightly valued corporate credit.

The modest contraction in the GSEs' retained portfolios in May was not surprising given less compelling valuations than in March when they added nearly $20 billion in mortgages. Even so, the pullback contrasted with the broader strength of investor demand. With more than $100 billion of capacity remaining under their regulatory cap, we continue to view Fannie Mae and Freddie Mac as potential backstop buyers on wider spreads, helping support a stable spread environment heading into the third quarter.

Mortgage spreads are modestly wider but still just inside of their long- and short-term averages. While favorable market technicals are expected to provide a range-bound environment through the summer, we remain mindful of forces outside our market that could threaten to disrupt this stability. Firmer inflation, a more hawkish Fed, and a sustained rise in volatility could prompt investors to demand greater compensation for mortgage risk, pushing spreads and yields wider.

These risks warrant discipline at current valuations until markets have a better understanding of the Fed's reaction function in response to shifting macroeconomic factors. I'll now turn it over to Desmond for more detail on our portfolio.

Desmond McCauley, Co-Chief Investment Officer

Thank you, Scott. ARMOUR's end-second-quarter net balance sheet duration registered at near zero, reflecting our more neutral view on interest rates and the shape of the yield curve than in prior quarters. The remaining positive bias incorporates our expectation that the Federal Reserve will remain on hold through the fall as signs of cooling economic activity and inflation have emerged in recent weeks. Our implied leverage, excluding Treasury holdings, was around 7.5 turns, a modestly lighter level to reflect some caution while allowing the portfolio to continue to benefit from carry in an environment where volatility remains subdued.

Our expected July month-end liquidity position, including monthly paydowns, remains strong at over $1.2 billion, or nearly 50% of total equity. ARMOUR's asset portfolio remains 100% agency MBS, agency CMBS, and U.S. Treasuries. The portfolio size is over $22 billion, notching a fifth consecutive quarter of growth in both our assets and capital base. Consistent with our balance sheet growth, we've net added nearly $1.3 billion of new mortgage assets since ARMOUR's last conference call in April.

Our purchase mix has been concentrated in par and slight-premium coupons that benefit from a slower prepayment environment, overlaid with positive convexity and the near bullet-like structure of 5-year and 10-year DUS bonds. The portfolio remains concentrated in specified pools with favorable prepayment characteristics, which represent over 95% of ARMOUR's MBS holdings. Q2's aggregate portfolio prepayments averaged 11.4 CPR, just above the first quarter average of 11.2 CPR.

Recent prepayment speeds have since declined meaningfully, falling to 8.8 CPR in the July report, and we expect speeds to persist around these levels in the current rate environment. Our hedging strategy is designed to reduce duration risk across the yield curve, using both long and short hedge instruments to protect against sharp rallies and sell-offs. About 86% of ARMOUR's hedges are OIS and SOFR pay-fixed swaps. We continue to favor swaps in shorter and intermediate maturities where spread volatility is lower.

At longer maturities, where swap spreads sit closer to historical averages, we prefer a more balanced mix of swaps, Treasury futures, and Treasury shorts. Although the Fed has reduced its Treasury bill purchases to $10 billion a month, repo spreads to SOFR remain tight, providing stable funding for the portfolio. With some probability of rate increases now embedded in the front end of the SOFR curve, term funding carries a larger premium, making shorter-dated and overnight financing through Buckler, our broker-dealer affiliate, a more attractive proposition.

Our base case remains that the Fed stays on hold, which allows current repo conditions to persist. While Fed Chair Walsh has moved quickly to establish policy task forces, we do not expect balance sheet proposals disruptive to the repo or agency MBS markets, particularly as we approach midterm elections. Back to you, Scott.

Scott Ulm, CEO

Thanks, Desmond. The company delivered strong results for the second quarter 2026 with total economic return of 4.8% despite a macroeconomic backdrop that would normally weigh on our sector. We continue to prioritize maintaining common share dividends appropriate for the intermediate term rather than focusing on short-term market fluctuations. Our approach remains unchanged. We stress test our liquidity, apply systematic hedging, and deploy capital appropriately.

We're well positioned to attenuate downside risks while taking advantage of opportunities that present themselves. Thank you for joining today's call and for your continued interest in ARMOUR. We would now like to open up for any questions.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Doug Harter with BTIG. Please go ahead.

Doug Harter, Analyst at BTIG

Good morning, Scott. Hoping you could talk about your outlook for capital raising, you know, kind of tie that to your comments that, you know, on the one hand you expect kind of range-bound spreads but kind of mindful of the risks. So you could just kind of tie all that together and how you're thinking about capital raising.

Scott Ulm, CEO

Yeah, you know, the way we've always approached capital is, you know, to look at what we can do with it and what the opportunities are. And so, you know, we continue along that course. You know, we're also mindful that, you know, raising capital lowers our costs. You know, we're able to spread costs obviously over a much larger capital base. And we also, you know, as you know our marginal fee is 75 basis points. So, you know, we lower our costs on average with any capital we raise.

So, you know, look, we look at all those factors and tie them together and figure out what the opportunity set is in the market and then figure out how we're going to execute on it.

Doug Harter, Analyst at BTIG

Okay, that makes sense. And can you talk about what you're seeing in terms of incremental returns as you kind of raise and deploy capital in today's market?

Scott Ulm, CEO

You know, Desmond, Sergey, why don't you run through the investment horizon here for him?

Desmond McCauley, Co-Chief Investment Officer

Yes, sure. Hi, Doug. So we see static returns in the mid-teens for, say, 30-year 5s to 6s, where we've been adding most of our reinvestments of late. And this is assuming about 8 turns of leverage and hedged to half a year duration with swaps. Now, if spreads were to tighten by, say, 10 basis points in OAS, that could add another 4% to 5% that would accrue into our total return through book value. We are not penciling that in at this time given that we expect spreads to stay range-bound near term, but we are constructive on the market longer term.

Doug Harter, Analyst at BTIG

Okay, that makes sense. Desmond, thank you very much.

OPERATOR

Thank you. The next question comes from Marissa Lobo with UBS. Please go ahead.

Marissa Lobo, Analyst at UBS

Morning and thank you. Could you speak to just how you're thinking about specified pools versus TBAs today? Has the relative value of prepayment protection changed given current dollar roll economics?

Sergei Loesyev, Co-Chief Investment Officer

Yes, good morning, Marissa, this is Sergey. Yeah, so we view specified pools as probably fully valued here versus TBAs. Some specialness has come back into the TBA market, but it's been still quite volatile. So, you know, we look to buy assets into the portfolio over the longer term. So even being kind of fully valued versus the financing implied financing on TBAs, we view, you know, finding good convexity collateral still additive to the portfolio to book value over the long term.

We still focus on credit, you know, lower loan-balance stories. But we play mostly in the, you know, most liquid section of the specified market, kind of under 32 ticks or so. So that allows us to continue to grow the asset book from a specified-pool standpoint. But we have also increased size in TBA positions as well since last quarter. But they remain more of a tactical play rather than, you know, an alternative to specified pools.

Marissa Lobo, Analyst at UBS

Okay, thank you. And just thinking about supply-demand in the market, you know, it's been talked about money managers seeing relative value for MBS versus corporates. Are you still seeing continued inflows at these levels or are valuations reaching a point where you see demand beginning to moderate?

Sergei Loesyev, Co-Chief Investment Officer

Yeah, so we are still seeing both foreign and domestic inflows into bond funds. Now, like you said, a lot of those inflows are coming into the corporate sector, but just even on the margin, we continue to see that in the mortgage funds and ETFs. And having said that, we are seeing signs of demand cooling a bit this quarter. Obviously we had the GSEs report their first net decline in their retained portfolios. And the overall picture signals that investors may be waiting to see what the Fed's reaction function to the shifting macroeconomic picture will be.

Having said that, you know, given how low supply has been and projections continue to decline since, you know, beginning of the year, we feel like this strong technical picture will remain. It's just really some of the mindfulness is around the outside forces to the mortgage market and particularly, you know, Fed monetary policy.

Marissa Lobo, Analyst at UBS

Great, thank you for the answers.

OPERATOR

Thank you. The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Trevor Cranston, Analyst at Citizens JMP

All right, thanks. Good morning. It looks like on the hedge side of things, the swap portfolio notional increased a decent amount this quarter and your net duration position declined a little bit. Can you guys talk about kind of generally how you're approaching your rate hedging given the flattening of the yield curve and if the potential for Fed hikes coming up later this year has any impact on the choice of using swap versus Treasury hedges. Thanks.

Desmond McCauley, Co-Chief Investment Officer

Yes. Hi, Trevor. So as we mentioned in our prepared remarks, our net balance sheet duration ending the quarter was close to zero. We look to maintain a flat profile both in duration and shape of the curve. On the back end, we look for that to be roughly flat, and on the front end there's a slight positive bias there. And that's because we think that the Fed could stay on hold for longer, and market pricing at this point is for hikes to take place by the end of this year and over next year as well.

In terms of our hedge, our swaps versus Treasuries, it's really about what our view there is on swap spreads. Currently we favor adding swaps in the front end of the curve. There's less spread volatility there up to, like, the five-year point. And we look for a more balanced mix when it comes to the longer-duration instruments. So we use both Treasuries, Treasury futures, and swaps in the longer end of the curve. Now from our perspective, though, if we see inflation normalize, we may actually be looking to increase our position in duration and position more for bull steepness.

But we are not there yet. Obviously, we're seeing oil prices are higher. So yes, there is a tail risk that the Fed could hike. If oil prices stay in a more sustained period at a very high level, then that could flow over to headline inflation. But our view here is more along the lines of looking to see whether we might even add to our directional positioning if we see inflation normalize.

Trevor Cranston, Analyst at Citizens JMP

Got it. Okay, that makes sense. Thank you.

OPERATOR

Thank you. The next question comes from Jason Weaver with JonesTrading. Please go ahead.

Jason Weaver, Analyst at JonesTrading

Hey guys. Good morning. I was wondering, can you talk a little bit about the new CMBS position? How the new CMBS position complements the portfolio and if you expect that to grow materially ahead in proportion.

Sergei Loesyev, Co-Chief Investment Officer

Yes. So, you know, currently we feel like it's an appropriate position given where we see the valuations. It's very similar to how we look at mortgage spreads, very opportunistically. Having said that, you know, we began rotating out of some of the five-year pools in the CMBS position out to the 10-year where, you know, negative swap spreads allow for, you know, pick and carry as well as the better convexity profile versus some of the other mortgages we own.

So that really serves two things. Number one, it helps our portfolio optimization from the negative convexity side. And number two, it allows us to have a more targeted approach to where we want to be longer on the yield curve, how we want to hedge, and how we want to kind of provide a substitute to some of the more expensive specified pools by using the CMBS position.

Jason Weaver, Analyst at JonesTrading

Got it, thank you. And then just talking about the migration upward in coupon, can you talk about specific call protection on those five and six fixes amid some of the softer economic data we've seen the last couple weeks.

Sergei Loesyev, Co-Chief Investment Officer

Yeah, so, you know, like you pointed out, certainly the last few prints both on labor and inflation data have been a little bit more favorable to what the Fed's looking for. At the same time, you know, we're seeing real-time oil prices continue to increase. So we have to be prepared for both scenarios, and that's why we continue to look at both loan balance, something that's maybe over $300k size, as well as relative value stories in credit/geo stories.

So we're starting to look at that seasoning a little bit. So everything's on the table. We want to protect the portfolio convexity from both sides of the rate move and really just kind of try to avoid the more generic paper that has very high average loan sizes. And we know the propensity of technology and servicer capacity have grown, so any rate move could continue to worsen the deliverability of more generic TBA-like pools.

Jason Weaver, Analyst at JonesTrading

All right, thanks for the color, guys.

OPERATOR

Thank you again. If you have a question, please press star then one. The next question comes from Dave Storms with Stonegate Capital. Please go ahead.

Dave Storms, Analyst at Stonegate Capital

Morning. Thank you for taking my question. Just want to circle back. You mentioned earlier that inflation normalization would maybe cause you to increase duration. Would you also consider levering up, back up in this situation? Maybe said a different way, how are you thinking about your leverage position right now?

Desmond McCauley, Co-Chief Investment Officer

Yes. Hi, Dave. So there are a number of factors that actually go into how we set our leverage targets. First, we have to look at spreads and think what our view is on spreads, the macroeconomic environment even. That includes what's going on geopolitically as well, and our liquidity—and not just our current liquidity—but we stress test our liquidity to ensure that it can withstand extreme scenarios. So that all plays into it in terms of whether we could increase our leverage.

So, yeah, spreads could widen, for example. If we think it's a temporary bout of volatility, then that may cause us to increase our leverage, with the view here that if the Fed stays on hold for longer, then that volatility will decline subsequently and spreads will tighten again. So that could be a scenario there. But right now we are comfortable with where our leverage is, cognizant of the current risks in the market and the Fed's reaction function that we still need to get better understanding of, which we will over time.

Dave Storms, Analyst at Stonegate Capital

That's perfect, I appreciate that. If I could just ask one follow-up on that. With your current liquidity profile, I see as a percent of common equity it's up a little bit year over year, but it's kind of been on a downtrend for the last couple quarters. Are you comfortable with your liquidity as a percent of total equity, or is this something you might focus on in the short term?

Desmond McCauley, Co-Chief Investment Officer

We are comfortable with our liquidity. As I mentioned, we stress test it over, you know, some extreme scenarios. We did add some longer-duration hedges, and their haircut percentages are higher. So that's part of the reason why our liquidity is lower. But with that, we are still very comfortable with where we are.

Dave Storms, Analyst at Stonegate Capital

Understood. Thank you for taking my questions.

OPERATOR

Thank you. The next question comes from Timothy D'Agostino with B. Riley Securities. Please go ahead.

Timothy D'Agostino, Analyst at B. Riley Securities

Yeah, hi. Thank you and good morning. Just a quick question for me on raising capital. You know, looking at the press release, you talk about raising about $219 million through your common stock ATM versus about $4 million on your preferred ATM. I guess could you just provide a little color on why you prefer the common stock ATM compared to the preferred? Just trying to understand the rationale and how you think about both programs. Thank you.

Scott Ulm, CEO

Well, it's price, and preferred has been, it's been trading at a strip yield that's still pretty attractive, but it's volume. Volume is relatively low in that, and so the existing issue that we're adding to is not particularly big. You know, we certainly have room for more preferred, but, you know, we got to see prices that we like. So, you know, that is really it. You know, obviously the volumes are vastly higher on the common side of things, and, you know, despite the attractive accretion for common shareholders of preferred issuance, we just have to see prices that we like, and whether that, you know, whether that is, you know, adding to our existing, you know, or someday a new issue. But we haven't seen the real opportunities in volume there that we'd love to see. And I think we remain pretty convinced that the preferred is a compelling value and credit story.

Timothy D'Agostino, Analyst at B. Riley Securities

Okay, great. Thank you so much. That's all from me.

OPERATOR

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.

Scott Ulm, CEO

Thank you very much. We appreciate your interest in ARMOUR REIT and feel free to give us a ring if any follow-up questions occur. Thanks so much.

OPERATOR

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.