ARMOUR REIT (ARR) Q4 2025 Earnings Call Transcript

DATE

Thursday, February 19, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Scott Ulm
• Chief Financial Officer — Gordon Mackay Harper
• Chief Investment Officer — Desmond E. Macauley
• Chief Risk Officer — Sergey Losyev

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TAKEAWAYS

• Total Economic Return -- 10.63% for the quarter, driven by MBS spread tightening, reduced MBS volatility, and a lower interest rate environment.
• GAAP Net Income Available to Common Stockholders -- $28.7 million, or $1.86 per share.
• Net Interest Income -- $50.4 million.
• Non-GAAP Distributable Earnings Available to Common Stockholders -- $79.8 million, or $0.71 per share, calculated as net interest income plus TBA drop income, adjusted for hedging results and net operating expenses.
• Book Value per Common Share -- $18.63 at quarter-end, a 6.5% increase from September 30, and estimated at $18.37 as of February 17, 2026, reflecting dividend payments and accruals.
• Capital Raised Under Equity Offerings -- $3.8 million via preferred stock ATMs in Q4; $138 million via 7.5 million shares of common stock through ATMs by February 11, 2026; $4.8 million via an additional 230,000 preferred shares, with management describing this as "mildly dilutive."
• Dividend Policy -- Common dividends paid monthly at $0.24 per share, totaling $0.72 for the quarter, declared for February and March at the same per-share rate.
• Portfolio Growth -- Mortgage assets exceeded $20 billion, with the portfolio rising more than 10% sequentially from year-end 2025, fueled by 22 basis points of spread tightening and moderate leverage.
• Capital Liquidity Ratio -- 54% of total shareholders' equity as of January, described as a robust position supporting portfolio growth and risk management.
• Portfolio Composition -- Nearly 100% of portfolio assets are in agency MBS, agency CMBS or DUS, and U.S. Treasuries to target specific yield curve risks.
• Leverage -- Implied leverage, excluding treasury loans, was 7.9 turns at quarter end, reflecting a balanced risk posture given the tighter spreads and reduced volatility.
• Prepayment Protection -- Over 92% of MBS holdings are specified pools with forms of prepayment protection; about 30% of asset exposure is in prepayment-protected agency CMBS pools and discount MBS.
• Aggregate Prepayment Rate -- 11.1 Conditional Prepayment Rate (CPR) for Q4 2025 and into Q1 2026, up from 8.1 CPR in Q3 2025 but stable compared to the prior year.
• Coupon Concentration -- Over $1 billion invested in 4.5% and 5% coupon MBS early in Q4, with an ongoing barbell strategy including deep-discount and premium bonds depending on market movements and GSE activity.
• Hedging Mix -- Approximately 86% of risk hedged using OIS and SOFR PPA swaps; remainder hedged with Treasury futures.
• Repo Funding -- Average repo haircuts are about 2.75%, with ~80% of repo principal financed at haircuts of 3% or less, distributed across 23 active counterparties; Buckner securities constitute 40%-60% of repo funding.
• Funding Environment -- Repo rates averaged SOFR plus 15 basis points; the SOFR to Fed Funds spread has normalized to near flat, helped by Fed policy adjustments.
• Estimated Levered Yield on New Investments -- Mid-teens, approximately 15% for thirty-year 5% coupons assuming eight turns of leverage and swap hedging, with potential for higher returns if spreads tighten further and the yield curve steepens.
• Hurdle Rate for New Capital -- Management cites a roughly 16% threshold, combining dividend yield expectations and management fee impact for newly raised equity.
• Market Outlook -- Management described Agency MBS as a "high-conviction opportunity" amid declining volatility, steeper yield curve, and attractive relative returns versus corporate credit.
• GSE Activity -- The Federal Housing Finance Agency (FHFA) $200 billion MBS purchase mandate, along with the GSEs' strong buying and negative net MBS issuance, has bolstered agency MBS returns and market liquidity.
• Fed Rate Cut Expectations -- Management states, "The market is expecting by December a little bit over two cuts," and views this as favorable for the MBS market.

SUMMARY

Management reported a rising book value and highlighted a 10.63% total economic return, attributing performance to tighter MBS spreads and lower volatility. Executives described a proactive portfolio adjustment strategy, shifting capital allocations across coupon segments and emphasizing prepayment protection. Fed policy actions and GSE purchase mandates were acknowledged as direct drivers of market dynamics and funding cost normalization, shaping both risk posture and portfolio yields.

• Management framed capital raising under at-the-market programs as "mildly dilutive," providing immediate capacity for balance sheet expansion and investment amid market opportunities.
• Executives referenced a "barbell" coupon allocation, actively responding to GSE buying trends and evolving OAS differentials across premium and discount MBS tiers.
• Prevailing mortgage rates held steady in the 6%-6.3% range, but leadership warned that "easy work has already been done" in reducing spreads, implying further rate declines require movement in longer-term Treasury yields.
• Macauley noted that 92% of MBS positions include prepayment protection, positioning the company defensively against potential spikes in refinancing should rates fall below current levels.
• Repo funding was described as highly liquid, with haircuts reduced to a weighted average of 2.75%, and distributed broadly across 23 counterparties, securing stable financing for ongoing portfolio growth.

INDUSTRY GLOSSARY

• CPR (Conditional Prepayment Rate): The annualized rate at which principal is expected to be prepaid on a pool of mortgage-backed securities.
• DUS (Delegated Underwriting and Servicing): Multifamily mortgage-backed securities issued by Fannie Mae, offering prepayment protection and tailored underwriting.
• TBA (To-Be-Announced): A contract for the forward purchase or sale of agency mortgage-backed securities where the specific pools to be delivered are not identified at the time of trade.
• OAS (Option-Adjusted Spread): A yield spread metric that incorporates the embedded options within mortgage-backed securities relative to risk-free rates.
• SOFR (Secured Overnight Financing Rate): A widely used benchmark interest rate for overnight, collateralized U.S. dollar loans.
• PPA (Par Price Adjusted) Swap: A swap contract adjusted or structured to align cashflows with the par value of an underlying asset, often used in hedging agency MBS.

Full Conference Call Transcript

Gordon Mackay Harper: Q4 was a strong quarter for ARMOUR Residential REIT, Inc., with a total economic return of 10.63% for the quarter as we benefited from MBS spreads tightening, lower MBS volatility, and a lower interest rate environment. The market momentum we saw in Q4 has continued so far into Q1. ARMOUR Residential REIT, Inc.'s Q4 GAAP net income available to common stockholders was $28.7 million, or $1.86 per share. Net interest income was $50.4 million. Distributable earnings available to common stockholders was $79.8 million, or $0.71 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 net operating expenses.

Gordon Mackay Harper: Q4 book value was $18.63 per common share, up 6.5% from September 30. Our most recent current available estimate of book value as of Tuesday, February 17, 2026, was $18.37 per common share, which reflects the payment of our January dividend of $0.24 and the accrual of the entire February common dividend payable on 02/27/2026, again, of $0.24 per common share. During Q4, ARMOUR Residential REIT, Inc. raised approximately $3.8 million of capital by issuing approximately 183,000 shares of preferred stock through an at-the-market offering program. Through 02/11/2026, we have raised approximately $138 million of capital under our common at-the-market program by issuing approximately 7.5 million shares of common stock, which is mildly dilutive.

We also issued $4.8 million of capital from the issuance of 230,000 shares of preferred stock under our preferred at-the-market program.

Gordon Mackay Harper: ARMOUR Residential REIT, Inc. paid monthly common dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. As we have stated previously, we aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On January 29, 2026, we paid a cash dividend of $0.24 per outstanding common share to the holders of record at 01/15/2026. We have also declared cash dividends of $0.24 per outstanding common share, payable on February 27, 2026, and 03/30/2026 to holders of record of February 17 and March 16, respectively.

I will now turn the call back over to CEO Scott Ulm to discuss ARMOUR Residential REIT, Inc.'s portfolio position and current strategy.

Scott Ulm: Thank you, Gordon. ARMOUR Residential REIT, Inc. delivered a robust fourth quarter, marking a 6.5% increase in book value. Strong growth extended to our balance sheet. The portfolio grew for a second consecutive quarter, increasing by more than 10% from the end of 2025, driven by roughly 22 basis points of spread tightening while maintaining moderate leverage throughout the quarter. ARMOUR Residential REIT, Inc.'s mortgage assets now total over $20 billion, supported by a strong capital liquidity position of 54% of total shareholders' equity as of January.

Scott Ulm: We viewed Agency MBS as a high-conviction opportunity from the onset of the Fed's easing cycle in 2024, and the backdrop for 2026 has now turned materially more supportive. Despite spreads tightening meaningfully so far in 2026, the market's appeal remains anchored in declining rate volatility and easing funding costs supported by the Fed's efforts to lower rates and maintain ample banking liquidity. While prepayments have moved off their cyclical lows of recent years, they remain contained with primary mortgage rates still anchored around 6%.

Add in a steeper yield curve, and the result is a market that we expect to continue to favor MBS with compelling returns relative to returns in corporate credit where spreads are trading at historically tight valuations.

Scott Ulm: Technical supply and demand dynamics are now working with us, not against us. The administration's focus on lowering mortgage spreads reinforces a clear north star for a stable mortgage market, an objective we expect Fannie Mae and Freddie Mac to support through FHFA's $200 billion MBS purchase mandate. The GSEs have posted strong monthly purchases of mortgage assets throughout last year, while net issuance of conventional MBS remained negative in the fourth quarter. The imbalance has revived attractive returns in the TBA roll market, creating a liquid carry environment and expanding the buyer base for agency MBS. I will now turn it over to Desmond E. Macauley for more detail on our portfolio.

Desmond E. Macauley: Thanks, Scott. ARMOUR Residential REIT, Inc.'s most recent net balance sheet duration stands at 0.14 years, with a modest positive bias to the front end of the curve, consistent with easing monetary policy. Implied leverage excluding treasury loans is 7.9 turns, a balanced posture that reflects tighter spreads and the lower volatility backdrop versus the prior year. The portfolio remains nearly 100% agency MBS, agency CMBS or DUS, and U.S. Treasuries to target specific U-curve exposures. Consistent with our balance sheet growth, we added over $3 billion of MBS pools and DUS across the fourth quarter and early first quarter. And our purchase mix has evolved as recent spreads have moved.

Desmond E. Macauley: Early in the fourth quarter, we determined it was most attractive to overweight premium dollar MBS, which offered the most attractive spreads and yields. Anticipating that GSE purchases would most likely concentrate in near-par coupons where the impact on primary mortgage rates is most direct, we added over $1 billion of 4.5% and 5% coupon MBS ahead of the GSE announcement in early January. As belly coupons tightened to historically rich levels, to near single-digit OAS, we shifted toward lower coupons and seasoned collateral where affordability initiatives aimed at unfreezing the housing market could drive higher turnover speeds while preserving higher yields in deeper discount MBS.

Within premium bonds, we focused more on call protection in higher-tier maximum loan size pools while keeping payoff targets at 24 ticks or lower.

Desmond E. Macauley: In agency CMBS, our five-year DUS position experienced extreme spread tightening. On a relative value basis, ten-year DUS bonds now screen more attractive, particularly when hedged with longer-dated SOFR swaps, with pay-fixed rates still cheaper than Treasury hedges. Roughly 86% of our hedges are in OIS and SOFR PPA swaps, with the balance in Treasury futures. The benchmark ten-year SOFR swap spread has normalized back to its pre-LIBOR-ation day average of approximately negative 37 basis points, and we anticipate further gains will likely hinge on the path of policy debate around the Fed's desired balance sheet size and banking deregulation.

Desmond E. Macauley: Aggregate portfolio prepayments averaged 11.1 CPR through Q4 2025 and Q1 2026 to date, versus 8.1 CPR in Q3 2025, stable but running at a somewhat higher level versus the prior year. Despite tighter mortgage spreads, the thirty-year mortgage rate has remained in a tight 6% to 6.3% band, though it has recently shifted toward the low end of that range. The administration's push for affordability without sacrificing home price appreciation leaves mortgage rates and spreads as the two primary levers to accomplish that. However, the easy work has already been done. The mortgage rate spread to the ten-year Treasury is now below its fifteen-year average.

Further declines in mortgage rates will therefore require lower long-end Treasury yields, which have not declined in sync with front-end rate cuts since the start of the easing cycle in 2024.

Desmond E. Macauley: Still, we remain mindful that many originators have built significant capacity to ramp up refinancing, which could be triggered by a sustained move below 6% and may accelerate speeds in par and premium coupons in coming quarters. Refi activity has proven to be highly sensitive to marginal mortgage rate declines, keeping prepayment risk in TBAs and the generic premium MBS elevated. Coupon selection and specified collateral remain the key to containing the prepayment risk. We are positioned accordingly. Nearly 30% of assets are in prepayment-protected agency CMBS pools and discount MBS. While specified MBS pools with some form of prepayment protection comprise over 92% of ARMOUR Residential REIT, Inc.'s portfolio.

Desmond E. Macauley: Funding markets have also turned a corner. In 2026 repo conditions have improved materially versus last year. Markets are liquid, and financing levels have eased with repo rates averaging roughly SOFR plus 15 basis points. The SOFR to Fed Funds spread has also normalized to near flat. As repo rates backed up in late 2025, the Fed moved quickly to contain intra-month funding pressures tied to falling reserves and elevated T-bill supply.

Scott Ulm: First,

Desmond E. Macauley: the Fed continues to implement a policy of easing the overnight Fed Funds rate. Second, it has shifted its reinvestments by directing paydowns of Treasury and MBS holdings back into the Treasury market. Third, it initiated outright purchases of up to $40 billion per month in Treasury bills and other short-dated Treasuries to stabilize reserve balances and maintain ample system liquidity. This response reinforces the systemic importance of repo markets as the foundation for liquid financial conditions and underscores the Fed's low tolerance for a repeat of the September 2019 episode when reserve scarcity and balance sheet frictions contributed to a sharp dislocation in secured funding.

While the incoming Chair has signaled an appetite for a smaller Fed footprint and a reduced balance sheet over time, we expect the central bank's focus on orderly funding markets to remain the highest priority with a willingness to respond preemptively ahead of any emerging stress. As of today, we finance the portfolio across 23 active repo counterparties. Approximately 80% of our repo principal is financed at a 3% haircut or lower, and the weighted average haircut across the repo book is approximately 2.75%. Buckner securities accounts for roughly 40% to 60% of our repo financing. Back to you, Scott.

Scott Ulm: Thanks, Desmond. We continue to set our dividend with a medium-term outlook. While acknowledging relatively tighter spreads versus the prior year, we expect the backdrop of a steeper yield curve and lower volatility to remain supportive for a consistent and predictable return profile for our assets. Our approach remains unchanged: stress test our liquidity, buy systematic hedging, and deploy capital when opportunities present themselves. Overall, we are confident in our positioning, our strategy, and our ability to deliver value for shareholders in 2026. We will now open for questions. We would also like to highlight that we have launched a new investor presentation now available on ARMOUR Residential REIT, Inc.'s website.

It provides additional insight for investors, including how our portfolio has transformed over time. Thank you for joining today's call and for your continued interest in our

Operator: We will now begin the question and answer session. The first question comes from Timothy D'Agostino with B. Riley Securities. Please go ahead.

Scott Ulm: I was wondering on the portfolio interest-bearing assets,

Timothy D'Agostino: by my estimates, increased year-over-year around 49%. I was wondering the outlook in 2026. Do you see potential for similar growth or maybe a little bit less given the increase in 2025? Thank you.

Scott Ulm: There are a couple of elements there, but certainly one of the most important is capital raising. And when we see an opportunity to raise capital combined with investment opportunities we like, we will execute on it. But we discriminate a fair amount in terms of what we know, what is going to be attractive or not. So I am afraid I have to tell you it depends on how the market behaves, both on the investment side and the equity side, whether we will be similar or smaller or in some other relationship to what we were able to do last year.

Timothy D'Agostino: Okay. Great. Thank you so much. And then just to confirm, book value as of Tuesday was $18.37 per share?

Scott Ulm: Correct. And that is after the accrual of our full February dividend and the payment of our January dividend.

Timothy D'Agostino: Alright. Perfect. Thank you so much.

Operator: The next question comes from Trevor John Cranston with Citizens. Please go ahead.

Desmond E. Macauley: Hey, thanks. Good morning.

Scott Ulm: Can you guys talk about where you are seeing incremental returns on new investment today given the spread tightening that has occurred and how you view that incremental level of return compared to the dividend you are currently paying? Thanks.

Desmond E. Macauley: Yes. Hi, Trevor. This is Desmond E. Macauley. So on a priori basis,

Scott Ulm: the levered yield on thirty-year 5s, which

Desmond E. Macauley: is currently production coupon, is around the mid-teens, let us say, about 15%. This assumes eight turns of leverage,

Scott Ulm: hedged to 0.5

Desmond E. Macauley: duration using swap hedges, and it is a static framework over a period of just about three months. It does not assume any more spread tightening. Now we think, at least in the medium term, we could see a bit more spread tightening. So let us say we get another 10 basis points of OAS tightening; that adds about 4%

Scott Ulm: to that return.

Desmond E. Macauley: And also the curve would steepen some more. So if we see another 50 basis points in curve steepening, particularly led by the front end through more Fed cuts, as we anticipate, that can also add about another 1% or so. So those are all parts of the full total return framework. Some of that would accrue to our book value. Now in terms of marginal capital raise, we see that hurdle rate is about 16%. So that would be dividend yield to common, and the management fee is just 75 basis points on new equity. So you add that together, that is roughly about 16%.

So you can see that for production coupon, the base case returns are close to that level already, and with just a little bit more steepener, and if we see more tightening, it would surpass that by a couple more points. Does that answer your question?

Scott Ulm: Yeah. That is very helpful. Thank you. And then, in general, can you guys talk about how you are thinking about the likelihood of further actions driven by the government to attempt to lower mortgage rates, such as increasing the GSE portfolio limits further or potentially doing other things like lowering G-fees, etc.? Thanks.

Sergey Losyev: Hey, Trevor, this is Sergey.

Timothy D'Agostino: Yes. So around the week in Davos, we were

Sergey Losyev: expecting maybe a few more announcements on

Desmond E. Macauley: affordability push that the administration has announced with the GSE purchases. We have not gotten anything. It feels to us that maybe the lowest hanging fruit has been picked in terms of pressuring spreads and mortgage rates lower but without affecting home prices. I think the next steps kind of have both positives and negatives for that push. In terms of G-fee cuts for the GSEs, you take away some of the profitability, make them less a private, profitable enterprise, and more a policy tool. It will introduce negative convexity to investors, who may demand wider spreads.

So some of the further steps may work counter to what the administration has called the north star in terms of keeping mortgage spreads nice and stable. We do expect more announcements. Obviously, there have been announcements on portability, assumability of mortgage loans. Fifty-year loans have been taken off the table. So there are a lot of announcements that have been made, but once you get to the implementation stage of it, things have been quite slow. Having said that, we definitely expect in the midterm year for these announcements to be quite active.

Scott Ulm: Okay. Appreciate the comments. Thank you.

Operator: The next question comes from Dave Storms with Stonegate Capital. Please go ahead.

Desmond E. Macauley: Good morning, and thanks for taking my questions. I wanted to start with just asking for a little more

Gordon Mackay Harper: thoughts on your current liquidity. It looks like quarter-over-quarter, you put a little more to work, but then it looks like it is back up as of last month-end. How do you think about this in the near term?

Operator: So

Desmond E. Macauley: hi, Dave. So, yeah, I think our liquidity, we mentioned, is about 54% of the total equity at the month-end. It is a really good spot. It reflects our moderate leverage, kind of where we have been steady in terms of liquidity. So we do not foresee any sharp changes given our current position and the portfolio. Understood. Thank you.

Gordon Mackay Harper: And then I also know you mentioned in prepared remarks that about maybe 30% of your portfolio is prepayment protected. With mortgage rates hovering around 6%, I know the market likes nice round numbers. Do you see any risk of a tipping point, or more maybe a linear situation as mortgage rates maybe continue to tick lower?

Desmond E. Macauley: Yes. I mean, look, prepayments have, so far in Q1—we noted it in our script—definitely increased from Q4 toward the lower range of the mortgage rates that we have been over the last couple of years. February prevailing mortgage rate will be lower after the GSE announcements as well. So the risk of faster prepayments has increased, and I think in sync with that, our portfolio has morphed over the last couple of quarters to protect us more from lower mortgage rates. Thirty percent in discounts, and thus, specified pools make up 92%. Within the 92%, almost 40% is in the loan balance stories; others are credit and geo stories.

So we feel like faster refinances are in the future, but we have built our portfolio for that environment.

Scott Ulm: Understood. Thank you.

Operator: Again, if you have a question, next question comes from Eric J. Hagen with BTIG. Please go ahead.

Scott Ulm: Hey, thanks. Good morning.

Eric J. Hagen: I think you guys mentioned in the opening remarks haircuts for MBS have come down. It was a bit of an interesting comment. Can you maybe frame where that level is relative to the historical levels? If the GSEs are helping reduce volatility in the market, could we see that haircut level come down even further, potentially? We would hope so. I mean, a lot of

Desmond E. Macauley: guidance on the haircuts comes from FICC. But in terms of our bilateral haircuts, we have worked with a lot of our counterparties to bring down the maximum haircuts closer to our weighted average of 2.75%. I think almost 80% of our repo book is closer to 3%.

Eric J. Hagen: Okay. Following up on the conversation around just where you are in the coupon stack, you mentioned originators have been able to leverage some of their tools to be aggressive on refi. How does that drive the appetite for the current coupon specifically? And the OAS that is in the current coupon, how do you compare that to some of the lower coupons and where you feel comfortable taking prepayment risk?

Desmond E. Macauley: We have been looking away from current coupon because that is where the biggest impact from the announcement has been really all throughout Q4. We did add in Q4 a little over $1.04 billion in 4.5s and 5s. But since then, we are more looking at the wings: deeper discount coupons where we can see some of the housing activity perhaps reignite with any of these affordability measures. In terms of premium coupons, they are still our core holding. If you look at the OAS spread difference between a 102 price and current coupon MBS, we are at close to two standard deviations on that spread historically speaking.

So a lot of the fears in prepayments and G-fee cuts have already been priced into the premiums. So it is really looking at a kind of barbell approach in the coupon stack at this point. But even within the belly of the coupon stack, you can find stories which pick OAS versus TBA specifically, maybe like seasoned collateral, things like that.

Eric J. Hagen: How many Fed cuts do you feel like are currently priced into the mortgage basis? It is a very—I mean, it is fair enough. Yeah.

Sergey Losyev: How many Fed cuts?

Eric J. Hagen: For the rest of this year do you think are priced into the

Sergey Losyev: mortgage basis? The market is expecting by December a little bit over two cuts. And from our perspective, we think it is reasonable. We think that normalization will

Desmond E. Macauley: continue this year.

Sergey Losyev: It looks like when we get to around June, the probability is getting close to 100%. And that will be a very good environment for the MBS market and mortgage spreads. We think that the curve has already steepened. If we do see more cuts, then funding costs will come down. The curve would steepen even more, and that makes the entire space more attractive, and it adds to overall

Scott Ulm: total return.

Eric J. Hagen: Right. Thank you guys so much. Appreciate your comments.

Operator: 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: Thank you very much for your interest in ARMOUR Residential REIT, Inc. If there are follow-up questions, do not hesitate to call the office, and we will get back to you as soon as we can. Thanks so much, and good morning to you.

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

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