ARMOUR Residential REIT, Inc. Stock

Good day, and welcome to the ARMOUR Residential REIT's Third Quarter 2026 Earnings Conference Call [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to the CEO, Mr. Scott Ulm. Please go ahead, sir.

Good morning, and welcome to our third quarter 2026 conference call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper; as well as our Co-Chief Investment Officer, Sergey Losyev; and Desmond Macauley. Let me turn the call over now to Gordon to run through the financial results.

Thank you, Scott. By now, everyone has access to ARMOUR's earnings release and our Q3 2026 investor presentation, which can be found on ARMOUR's website, www.rmmerit.com. This conference call includes forward-looking statements 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 1 year.

Our results for the quarter reflect the significant widening of mortgage spreads in the last 3 weeks of the quarter as interest rates rose and the markets reacted to a more hawkish Federal Reserve. ARMOUR's Q3 GAAP net loss related to common stockholders was $327 million or a loss of $2.26 per common share. Net interest income was $83.7 million. Distributable earnings available to common stockholders was $102.3 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. Total economic return was a negative 12.9% for the quarter.

During Q3, ARMOUR raised approximately $205.7 million of capital by issuing approximately 12.4 million shares of common stock and $2.5 million of capital by issuing approximately 123,000 shares of preferred stock through our at-the-market offering programs. We also repurchased at the end of September 363,700 common shares. ARMOUR paid monthly common dividend 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 October 29, 2026, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on October 15, 2026.

We've also declared a cash dividend of $0.24 per outstanding common share payable on November 27 to holders of record on November 16, 2026. Quarter end book value was $14.55 per common share, down 17% from June 30, 2026. Our most current available estimate of book value is as of Monday, October 19, and was $14.65 per common share, which reflects the accrual of the October common dividend I discussed previously.

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

Thanks, Gordon. Agency MBS faced a challenging late third quarter as macroeconomic pressures overwhelmed the favorable supply-demand dynamics that had supported the market earlier in the year. Persistent inflation prompted the Federal Reserve to raise rates by 25 basis points in September, its first hike since 2023 and signal further tightening. Expectations for higher policy rates, geopolitical tensions, rising fiscal deficits and increased corporate debt issuance drove broad repricing of global bond markets.

Treasury yields rose 70 to 80 basis points over the quarter, while interest rate volatility spiked in September. The sharp increase in yields extended mortgage duration with associated selling pressures likely amplifying the MBS sell-off as the speed of the move sideline potential buyers. Today, mortgage spreads sit near their widest of the year, offering more compelling valuations that support our constructive medium-term outlook. Near term, we believe a sustained recovery in mortgage prices would require greater stability in treasury yields and volatility. Renewed inflation pressures could prompt further Fed tightening action, while geopolitical tensions could prolong market volatility.

Our base case remains a shallow Fed hiking cycle rather than a repeat of 2022, '23 as labor market continues to show no buildup in wage pressures, reducing the risk of a wage price spiral. This view is broadly consistent with the Fed's September summary of economic projections in which even some of the more hawkish participants anticipated only one additional 25 basis point hike in 2026, followed by another 25 basis point increase in 2027.

Looking ahead to the fourth quarter, the underlying supply-demand backdrop remains supportive. Elevated mortgage rates continue to constrain origination and net Agency MBS supply, while limited financing activity and favorable repo conditions support portfolio carry. GSE retained portfolios declined modestly by a reported $2.5 billion in July and August, following substantial purchases earlier in the year, likely reflecting paydowns that were not fully reinvested rather than outright asset sales. We believe Fannie Mae and Freddie have resumed buying during September's volatility, consistent with their role in supporting the Agency MBS market, although official holdings data remain pending. With more than $100 billion of capacity remaining under their regulatory caps, we continue to view the GSEs as meaningful potential backstop buyers at wider spreads. I'll now turn it over to Sergey for more detail on our portfolio.

Thank you, Scott. ARMOR REIT entered the third quarter with historically low leverage and limited net duration exposure, which helped us navigate heightened market volatility. Still, the portfolio's option adjusted spread widened by 20 basis points with approximately 80% of that widening occurring in September. This, in turn, pressured book value and pushed implied leverage, excluding treasuries to 8.2x and net duration exposure to 0.38 years by quarter end, higher yet still historically moderate levels. The available liquidity stood at an ample $1.02 billion at the end of Q3 and is expected to remain near that level through the end of October.

ARMOUR net added approximately $1.4 billion of MBS assets over the course of the third quarter. Starting in late September, we sold approximately $900 million, consisting primarily of DUS pools and deep discount seasoned MBS. Those sales capture relative out performance versus the broader mortgage market and help maintain our strong liquidity position and portfolio target leverage. We plan to eventually reinvest these proceeds and paydowns into moderate discount priced MBS, which have widened the most in September and present the most attractive opportunities with levered returns running from 15% to 18% depending on the coupon.

Portfolio prepayments averaged 8.5% CPR in Q3, down 25% from the prior quarter. With the 30-year conforming mortgage rates nearing 7.5%, we expect prepayment speeds to remain broadly stable in the coming months, providing greater predictability for portfolio earnings and improving convexity profile of our mortgage assets. ARMOR's mortgage portfolio remains invested exclusively in Agency MBS and DUS securities, consistent with its strategy since the 3rd October, since the third quarter of 2020.

And over 96% of our MBS holdings are concentrated in specified pools with favorable prepayment characteristics. Our hedging strategy is designed to manage duration risk across the yield curve and limit exposure to rising funding costs. Our swap hedge to ratio -- hedge to repo ratio stands at approximately 89%, its highest level since 2022. While we believe markets may be pricing in more Fed rate hikes than will ultimately materialize, our hedging position is designed to protect earnings against further increases in short-term rates should inflation and macroeconomic pressures persist.

Despite the New York Fed suspension of treasury bill purchases in August, repo spreads to SOFR have remained tight. Supporting stable portfolio funding through September's Fed rate hike, and we financed nearly 50% of our portfolio through affiliated broker-dealer Buckler Securities, securities, where we selectively use overnight repo to avoid paying term premiums on longer-term financing.

While Chair Powell has moved quickly to establish policy task forces, we do not anticipate significant changes to the Fed's balance sheet policy that would disrupt repo or Agency MBS markets, particularly ahead of the midterm elections. And back to you, Scott.

Thanks, Sergey. Monthly dividends are central to ARR's investment approach, providing shareholders with a regular source of income. We set our dividend at a level we consider appropriate for the medium term. Recent volatility in interest rates and Agency MBS spreads has pressured both our share price and book value, resulting in an unusually high dividend at current market prices.

We remain constructive on the Agency MBS market and believe many of the factors driving recent volatility are likely to resolve over the coming months and into next year. Thank you for joining today's call and for your continued interest in ARMOUR.

[Operator Instructions] and our first question for today will come from Doug Harter with BTIG please go ahead.

Hoping you [Technical Difficulty] Could talk about the decision to sell assets in September and kind of the thought process of taking leverage up versus selling assets?

This is Sergey. Yes. So we sold primarily 5-year and 10-year DUS pools as well as some of the deeper discount coupon with maybe 50 to 60 WALA seasoning. This type of collateral really outperformed in September. So the opportunity presented itself to manage our liquidity, manage our leverage and also take profits on some of these assets that have outperformed. So it was really a combination of things that were driving that trade decision. We plan to reinvest the proceeds into some of the coupons that have widened the most over the course of September, particularly 4.5, 5, but as well as some of the higher coupons, which have benefited from slower prepayment environment here at higher rates.

Great. Appreciate that. And then on kind of the capital actions, you guys both issued common and preferred, but also bought back stock. Just hoping you could talk about kind of what levels you kind of see interesting to kind of undertake kind of all the various capital actions that you did in the quarter?

Yes. Sure, Doug. Look, we look at issuing under the ATM when we have an attractive price, which means that we're pretty tight to book value when -- and that was sort of the story of the first part of the quarter. And the story of the second part of the quarter is we hit some volatility and saw that we were a good ways away. And that's when we feel we should always be on both sides of the market. And so we just felt the need to put a mark in the book there and buy back some stock. So it's really just that simple. Of course, the moment when you're seeing attractive prices to repurchase is probably when you're also very mindful of liquidity. So we keep that in mind, too, but there is always our sense that we need to look at both sides here.

The next question will come from Trevor Cranston with JMP please go ahead.

You made the comment towards the end of the prepared remarks about the dividend yield being unusually high right now. Can you maybe expand on your comments around that and how you guys are thinking about the appropriate dividend level today in light of where you're seeing current market returns?

Well, look, we've had volatility both in stock price and book value, which has driven those down. Our view remains constructive here and that a number of the factors that have driven this are -- have a good probability of resolving, maybe not this month, but over the not too long period. And so that plus the fact that we feel that our -- while we don't give forward guidance, as you guys know, our earnings available for distributions, we think, are going to be in the range of the dividend for the coming quarter. So given all of that, also the fact that we've already announced November should give you a sense of how we're feeling. Suggests that there's really, really nothing to do here. And we are where we are on this.

The next question will come from Marissa Lobo with UBS.

I just wanted to ask about leverage, just given where wider mortgage spreads are and what you described as favorable repo conditions, how are you feeling about the willingness to add to leverage here? Or -- and what is your target range?

Yes. Marissa, this is Desmond Macauley. So our leverage as of Monday, October 19 was 7.9 turns. That's excluding our treasury loans and making some adjustments for expected paydowns. We are comfortable with that level. In the near term, there could be bouts of volatility in the period leading up to the elections.

In addition, recent inflation data has been higher than expected. In the medium term, however, we are constructive given mortgage spreads around the wides of the year plus improved technicals and fundamentals in the mortgage market. So we do have dry powder to add leverage as warranted when we have greater clarity on the macroeconomic outlook as well as inflation.

Okay. Great. And on policy, I mean, just given the increased use of housing policy to influence rate and MBS demand, how are you incorporating that risk into your portfolio construction? And do you see it as primarily an upside to book value or impacting prepayments ultimately?

Stability is good. I think there's a lot of desire to improve affordability here. But we're -- I think across -- we are so out of the money. You'd have to have a pretty good move that would start to impact the optionality there. So delighted that there's focus on keeping stability and improving mortgage rates. But I would -- my sense would be we are -- we've got a long way to go before we start to see a different prepayment environment.

The next question will come from Jason Weaver with JonesTrading.

This is Val Almar filling in for Jason Weaver. So that duration moved up to 0.38 from about 0. Was that a deliberate position or extension you haven't fully hedged yet there?

Yes, Jason. So as you know, we came into the quarter with our duration relatively flat. And we managed it very closely to a moderate duration profile even with a sharp increase in rates. Now in the back end, we are targeting around flat duration but within our band. So we allow that duration to move as our negative convexity plays a role in moving duration in the back end. So -- and then in the front end of the curve, we target just a very slight positive duration, given that we think market pricing of rate hikes are more than we anticipate. So overall, we manage our duration across the curve. We are looking to keep it within very tight bands. But at the same time, we allow some amount of duration movement so that we don't rehedge very frequently. Does that answer your question?

Yes, it does. And then just a quick one here. With the Fed now, hiking, are you thinking about like swaps versus futures from here or...

We still like on a nominal basis, about an 80-20 mix of swaps versus futures. At the longer end of the curve, we think swaps fair value -- and on the shorter end of the curve, we favor using swaps largely because of swap spread volatility. But overall, the mix that we are still looking at is about 80% swaps, 20% futures.

The next question will come from Timothy D'Agostino with B. Riley Securities.

Just in mind, I know we kind of talked about share repurchases and leverage. But I guess just trying to see if you have any thoughts or providing color on whether you see any kind of friction between the 2 What -- where earlier you talked about repurchasing stock when it's attractive. But then again, you mentioned in another question about additional dry powder to add leverage where you see opportunity.

So I just want to know how you balance maybe share repurchases versus adding more leverage? And then if you kind of feel any friction between the 2 as you kind of progress through the quarter, if you see attractive options to put capital -- leverage capital to work while your stock continues to trade below book value.

So the issue is -- leverage is largely an output here. The real driver is managing liquidity. So that's where that question really comes in, which is -- how are you feeling about liquidity? How much do you want to spend? Also, always mindful that when you take the stock back in, it may be both -- it has both a cost and it may not necessarily be a good time to get it back out there. So you have all of those factors that weigh on your question of, gee, is now the time to buy some stock back. So you have to see something pretty compelling, and it also has to fit in the context of how you are managing your overall liquidity levels, and that weighs on what sort of quantum you're willing to do. I think we're probably conservative in making that decision. But as I said before, we always feel that we have to be willing to be on both sides of the market. I hope that's responsive.

The next question will come from Jason Stewart with Compass Point.

A question on liquidity and funding markets. Sometimes we see the funding markets become a little skittish going into the end of the year when volatility is high. How are you feeling about the depth of repo today and managing that going into the end of the year?

Jason, this probably was one of the few quarters when the quarter end repo was extremely liquid and soft. So we continue to see tight repo to SOFR spreads here early in Q4. We do expect some balance sheet tightening up into year-end. But we also know that the New York Fed stands by in terms of reopening their RRPs or the T-bill purchases that we were doing earlier in the year in case liquidity gets tight in the banking system. So from that standpoint, repo has really been the shining star here of the market and giving us a lot of confidence into year-end even.

And I'd also note, while we're active with 20 counter parties across the global street, if you will, we also enjoy the ability to finance about half of our portfolio through our securities affiliate BUCKLER. And that also gives us access across the curve as we mentioned, the ability to go overnight if we wish as well as access to term opportunities. So we try to keep all of those options open, which has been extremely helpful when we found things a little bit tighter, even though that's not the situation we're in this quarter, thankfully.

Got it. Okay. That's helpful. And then on the GSEs, I mean, I think we all know how much capacity is left to buy and where we're at in terms of spread levels. Are you looking for any markers for increased activity and maybe as a catalyst for spread tightening from the GSEs?

Yes. So I mean, look, we had an official confirmation from pool data in September regarding GSE activity. We've also seen them cut down the specified pool auction sizes throughout the month. So some of these signs do point to the fact that they were engaged in the market. We haven't seen the official numbers yet. Of course, they're coming towards the end of the month, but it will be interesting to see back in March, when we had similar spread levels, volatility spike, we saw them policing in the market from the spread standpoint. So we do expect some buying to show up.

The next question will come from David Storms with Stonegate Capital.

Just curious with the volatility in September, have you made any changes to the liquidity stress testing that you do? Or are you kind of looking through some of this volatility and keeping a focus on the medium term?

Yes. Dave, the stress testing that we had even going into September is pretty robust, and we test our liquidity on the extreme stress scenarios. We use COVID-like levels in terms of what took place at that time. So we like to be consistent there. We've not had to change anything. We continue to monitor our liquidity. And that obviously plays a role in terms of how we look at leverage too in deciding whether we want to increase leverage or keep it around these levels. So haven't changed it, but it was pretty robust. And extreme stress testing scenario we had going into September. And that enabled us to stay focused and not have to sell assets because of liquidity.

Understood. And if I could sneak one more in, just maybe a clarification on where you expect Fed rates to go. It sounded like in the prepared remarks, you were in line with market expectations on fund rate cut this year and one next year. But then an answer to one of the questions, it sounded like you were positioning yourself to be a little more dovish on the short end of the curve, thinking that markets were pricing in early rate cuts. Did I miss something there?

Markets are pricing about 3 to 4 cuts by the end of 2027. And our view here is the base case is 2 cuts by the end of 2027. So we are on the dovish side of the market. But if you compare our view to the dot plot by the FOMC, that's really on the hawkish side. The most hawkish members are expecting just 2 cuts, one at the end of this year and one at the end of next year. The reason for us having just a slight positive duration in the front end is because we do feel that market pricing of Hikes is more than we anticipate. Does that clear that up?

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Scott Ulm for any closing remarks. Please go ahead.

Thank you very much. We appreciate your interest in ARMOUR REIT, and thank you for attending this morning.

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

Good morning, and welcome to ARMOUR Residential REIT's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Scott Ulm, CEO. Please go ahead, sir.

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, Sergey Losyev and Desmond Macauley.

Now, I'd like to turn the call over to Gordon to run through the financial results.

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 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 1 year.

Our portfolio benefit from MBS spread is 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 offered 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 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 ARMOUR's portfolio position and current strategy.

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 divisions within the Federal Reserve and led markets to shift from pricing year-end rate cuts to rate hikes.

Under Chairman Warsh'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 as an attractive alternative to tightly valued corporate credit.

The modest contraction in the GSE's 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 in 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 disrupt this stability.

Firmer inflation, more hawkish Fed and the 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?

Thank you, Scott. ARMOUR's end second quarter net balance sheet duration registered at near 0, 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 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 Warsh 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.

Thanks, Desmond. The company delivered strong results for the second quarter of 2026 with total economic return of 4.8% despite a macroeconomic backdrop that 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 are 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 Instructions] The first question comes from Doug Harter with BTIG.

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

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

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

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?

Yes. Desmond, Sergey, why don't you run through the investment horizon here for?

Yes, sure. 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 hedge to 0.5 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 in the near term, but we are constructive on the market longer term.

The next question comes from Marissa Lobo with UBS.

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?

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

We still focus on credit -- lower loan balance stories, but we play mostly in the most liquid section of 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 alternative to specified pools.

Okay. And just thinking about supply/demand in the market, 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?

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

The next question comes from Trevor Cranston with Citizens JMP.

It looks like on the hedge side of things, the swap portfolio notional increased a decent amount this quarter as 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?

Yes. Trevor, so as we mentioned in our prepared remarks, our net balance sheet duration ending the quarter was close to 0. We look to maintain a flat profile, both in duration and the 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 at the end of this -- 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 5-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, it's really more if we see inflation normalize, we may actually be looking to increase our position in duration and position more for bull steepener. 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 can 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 duration positioning if we see inflation normalize.

The next question comes from Jason Weaver with JonesTrading.

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

Yes. So 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, we began rotating out of the some of the 5-year pools in the CMBS position out to the 10-year, where negative swap spreads allow for pick and carry as well as a better convexity profile versus some of the other mortgages we own. So that really serves 2 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.

Got it. And then just talking about the migration upward in coupon. Can you talk about specific call protection on those 5s and 6s amid some of the softer economic data we've seen in the last couple of weeks?

Yes. So like as you pointed out, certainly, the last few prints, both on labor and inflation data, have been quite a bit more favorable to what the Fed is looking for. At the same time, 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 $300,000 size as well as relative value stories in credit, geo story. So we're starting to look at that seasoning a little bit.

So everything is 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.

The next question comes from Dave Storms with Stonegate Capital.

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? Or maybe said a different way, how are you thinking about your leverage position right now?

Yes, 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 of what our view is on spreads, the macroeconomic environment, 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 yes, if 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 a 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 a bearish reaction function that we still need to get better understanding of, which we will over time.

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 down trend for the last couple of 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?

We are comfortable with our liquidity. As I mentioned, we stress tested over some extreme scenarios. We did add some longer duration hedges, and they have -- 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.

The next question comes from Timothy D'Agostino with B. Riley Securities.

Just a quick question for me on raising capital. Looking at the press release, you talked 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.

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 is relatively low in that, and so the existing issue that we're adding to is not particularly big. But we certainly have room for more preferred, but we got to see prices that we like. So that is really it.

Obviously, the volumes are vastly higher on the common side of things. And despite the attractive accretion for common shareholders of preferred issuance, we just have to be -- have to see prices that we like. And whether that is adding to our existing 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.

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

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.

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

Good day, and welcome to the ARMOUR Residential REIT First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

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.

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 harbo 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 1 more 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 negative 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. Distributable 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 15, 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 29, 2026, a cash dividend of $0.24 per outstanding common share will be paid to holders of record on April 15, 2026. We have also declared a cash dividend of $0.24 per outstanding common share payable May 28, 2026, to holders of record on May 15, 2026. Quarter end book value was $17.42 per common share, down 6.5% from December 31, 2025. As of Monday, April 20, 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?

Thank you, Gordon. Heightened uncertainty returned to the market in 2026, driven by renewed geopolitical tensions and a sharp rise in oil prices has put further Fed easing on hold for now. As concerns around the Middle Eastern conflict intensified, the yield curve bear flat 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 and 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 2 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 2 months of the first quarter, reflecting tight MBS spreads, we expect Fannie and Freddie to report that they reaccelerated 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.

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 incorporate MBS purchases at the wider spread in March.

Our expected month-end liquidity position, including April's paydowns, 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, matching 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 and DUS since ARMOUR's last conference call in Q1. Our purchase mix continues to evolve by coupon and product as rates and spreads moved.

In March, we took advantage of widening in the near production coupons where GSE activity is most concentrated. We also added seasoned deeper discount MBS along with 15-year and Ginnie Mae TBA rolls. Within premium priced 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 pick an additional 30 to 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 the balance in treasury futures.

As recent market volatility subsided, the 10-year treasury -- SOFR treasury spread recovered from its recent tight of minus 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 in 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, cycling 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 to $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, we finance 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.

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. 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.

[Operator Instructions] And today's first question comes from Marissa Lobo at UBS.

You noted the tightening of spreads in Q2 to date. So what does the current ROE on new agency purchases look like? And where do you see the long-term equilibrium of spread settling versus swaps?

Yes. Marissa, this is Desmond. So looking at par and premium securities, return on equity is in the mid- to high teens. That's assuming about 8 turns of leverage and hedge to half duration. Now that's somewhat of a static view. We also do scenario analysis where we look at horizon returns. So for example, if OAS is tightened by 10 basis points, that adds about 3% to 5% in total return that will accrue through book value. So that takes -- let's say, for example, the return is at around 16%. You had 3% to 5% there, then now you're getting to the 19%, 20% area. Now in terms of long-term stability 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 off its 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 basis points. So 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. So we think conservatively, we can see another 20 basis points of tightening here over the medium term.

Great. And 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?

Marissa, this is Sergey. Yes. So the TBA market specialness has certainly returned to some level this year, but it remains fairly volatile, unstable. So we have some TBA rolls in our portfolio. As we mentioned, we've reallocated to a little bit of a 15-year sector to Ginnie Mae, but we don't expect them necessarily to be our strongest carry trades. We kind of use these opportunistically for total return opportunities. So right now, we still prefer specified pool cash flow yields -- even if there isn't a lot of OAS pick versus the TBAs, we like the certainty of cash flows and certainly kind of protects us from the tail risk if mortgage rates turn lower in the future.

And our next question today comes from Trevor Cranston with JMP Securities.

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 GSEs 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?

Yes. 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.

And 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.

Okay, that's helpful.

And our next question today comes from Timothy D'Agostino with B. Riley Securities.

Congrats on the quarter. 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 basis points. It would just be great to get any color on the movement there.

Gordon, do you want to handle that one?

Yes. Just one second. I think the main real driver, I guess our -- you could see that our rate on our REPO has gone down. And then the other real driver is the rate that we have on our swaps. So when you put all that together, that's your answer.

Perfect. Awesome. I appreciate it. And then 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. But 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.

Sure. Well, look, it's all about price. We -- it's all about price and it's all about opportunity. And by opportunity, I mean what the investment horizons are for us. So the clear simple answer is it depends. So we -- and there are also other factors, which include that when we increase the shareholder base, our expenses decline per share and our cost of running the shop declines as well on average. So 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. And 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. But 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, but it is all those factors that coalesce in how we manage it. And you'll see, if you look back, there are quarters where we're active and there are quarters we're not active at all, which might give you a sense of how tightly we manage that.

Okay, great. I appreciate the color. Congrats again on the quarter.

[Operator Instructions] Our next question today comes from David Storms at Stonegate Capital.

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?

Yes, for sure. Generally, volatility is not a positive for share price. So 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.

And certainly, we saw some volatility this quarter, and you saw us some -- early on in the quarter, it was a -- we're still enjoying some tightening. And later on in the quarter, we had some geopolitical stuff that happened, which maybe pushed us the other way. So yes, absolutely correct that volatility impacts us. But 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.

Understood. And then 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 quarter impacts such as increased fertilizer prices or increased shipping prices that may, maybe force the Fed's hands? Are you tracking anything like that?

Look, we look at all this stuff. And yes, you're absolutely right that there's a pilot of secondary impacts out there that they could go either way. And we keep a close eye on it, but [indiscernible] came there, right?

And that concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Ulm for any closing remarks.

Thanks for joining. We appreciate your participation in our conference call here. And any follow-up questions, we're around. Thank you so much.

Thank you, sir. And 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.

Good day, and welcome to the ARMOUR Residential REIT's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO. Please go ahead.

Good morning, and welcome to ARMOUR Residential REIT's Fourth Quarter 2025 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.

Thank you, Scott. 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 1 year.

Q4 was a strong quarter for ARMOUR 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's Q4 GAAP net income available to common stockholders was $208.7 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. Quarter end 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, 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 February 27, 2026, again, of $0.24 per common share.

During Q4, ARMOUR raised approximately $3.8 million of capital by issuing approximately 183,000 shares of preferred stock through an at the market offering program. Through February 11, 2026, we 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. ARMOUR 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 the context of stable over the medium term. On January 29, we paid a cash dividend of $0.24 per outstanding common share to the holders of record as of January 15, 2026. We have also declared cash dividends of $0.24 per outstanding common share payable on February 27, 2026, and March 30, 2026, to holders of record on February 17 and March 16, respectively.

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

Thank you, Gordon. ARMOUR REIT delivered a robust fourth quarter, marking a 6.5% increase in book value in the fourth quarter. The strong growth extended to our balance sheet. The portfolio grew for a second consecutive quarter, increasing by more than 10% from the end of the third quarter of 2025, driven by roughly 22 basis points of spread tightening while maintaining moderate leverage throughout the quarter. ARMOUR's mortgage assets now total over $20 billion, supported by a strong capital liquidity position of approximately 54% of total shareholders' equity as of the end of January. We viewed Agency MBS as a high conviction opportunity from the onset of the Fed's easing cycle in the third quarter of 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 in 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.

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 provided attractive returns in the TBA roll market, creating a liquid carry environment and expanding the buyer base for Agency MBS.

I'll now turn it over to Desmond for more detail on our portfolio.

Thanks, Scott. ARMOUR'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 a 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 yield 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 rates and spreads have moved.

Early in the fourth quarter, we determined it was most attractive to overweight premium dollar MBS, which offer 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 Trump's 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 on freezing the housing market could drive higher turnover speeds while preserving higher yields in deeper discount MBS.

Within premium bonds, we focus more on call protection in higher-tier maximum loan size pools, while keeping payoff targets at 24 ticks or lower. In Agency CMBS, our 5-year DUS position experienced extreme spread tightening. On a relative value basis, 10-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 pay fixed swaps with the balance in treasury futures. The benchmark 10-year SOFR swap spread has normalized back to its pre-liberation 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.

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 30-year mortgage rate has remained in a tight 6% to 6.3% band, though it has recently shifted towards the low end of that range. The administration's push for affordability without sacrificing home price appreciation leaves mortgage rates and spreads as the 2 primary levers to accomplish that. However, the easy work has already been done. The mortgage rate spread to the 10-year treasury is now below its 15-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.

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's portfolio.

Funding markets have also turned the corner. 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 rate back up in late 2025, the Fed moved quickly to contain intra-month funding pressures tied to falling reserves and elevated T-bill supply. First, the Fed continues to implement a policy of easing the overnight Fed funds rate. Second, it has shifted its reinvestments by directing paydowns of its 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 the willingness to respond preemptively ahead of any emerging stress. As of today, we financed 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%. BUCKLER Securities accounts for roughly 40% to 60% of our REPO financing.

Back to you, Scott.

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 remains 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're confident in our positioning, our strategy and our ability to deliver value for shareholders in 2026.

Before we open the line for questions, we'd also like to highlight that we've launched a new investor presentation now available on ARMOUR'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 ARMOUR.

[Operator Instructions] First question comes from Timothy D'Agostino with B. Riley Securities.

I was wondering on the portfolio and interest-bearing assets. By my estimates, it increased year-over-year around like 49%. I was wondering the outlook in '26, do you see potential for similar growth or maybe a little bit less given the increase in 2025?

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

Okay. Great. And then just to confirm, book value as of Tuesday was $18.37 per share?

Correct. And that's after the accrual of our full February dividend and the payment of our January dividend.

The next question comes from Trevor Cranston with Citizens.

Can you guys talk about where you're seeing incremental returns on new investment today given the spread tightening that's occurred? And how you view that incremental level of return compared to the dividend you're currently paying?

Trevor, this is Desmond Macauley. So on a carry basis, the levered yield on 30-year 5s, which are currently production coupon is around the mid-teens, let's say, about 15%. This assumes 8 turns of leverage hedged to 0.5 duration using swap hedges. And it's a static framework over a period of just about 3 months. It doesn't assume any more spread tightening. Now we think at least in the medium term, we could see a bit more spread tightening. So let's say we get another 10 basis points of OAS tightening, that adds about 4% to that return. And also the curve would steepen some more. So if we have another -- if we see another 50 basis points in curve steepening, particularly led by the front end through more Fed cuts, which is we anticipate, that will 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, 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's 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 steeper and if we see more tightening, it would surpass that by a couple of more points. Does that answer your question?

Yes, that's very helpful. And then I guess, in general, can you guys talk about how you're thinking about the likelihood of further actions driven by the government to attempt to lower mortgage rates, things such as increasing the GSE portfolio limits further or potentially doing other things like lowering GPs, et cetera?

This is Sergey. Yes. So around the week in Dallas, we were expecting maybe a few more announcements on the affordability push that the administration has announced with the GSE purchases. We haven't gotten anything. It feels to us that maybe the low-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 GSE, the G-fee cuts for the GSEs, take away some of the profitability, make them less of a private enterprise, profitable enterprise and more of a policy tool. It will introduce negative complexity to investors who may demand wider spreads.

So some of the further steps may work counter to what 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 importability, assumability of mortgage loans, 50-year loans has been taken off the table. So there's a lot of announcements 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 here, for these announcements to be quite active.

The next question comes from Dave Storms with Stonegate Capital.

I wanted to start with just asking for a little more thoughts on your current liquidity. It looks like quarter-over-quarter you put a little more to work, but then it looks like it's back up as of last month end. I guess how do you think about this in the near term?

So yes, I think our liquidity, we mentioned is about 54% of the total equity at the month end. It's a really good spot, reflects our moderate leverage kind of where we have been steady in terms of liquidity. So we don't foresee any sharp changes given our current position in the portfolio.

Understood. And then I also know you mentioned in the prepared remarks that about maybe 30% of your portfolio is payment protected. With mortgage rates hovering around to 6%. Do you -- I know the market like nice round numbers. Do you see any risk of a tipping point or it's more maybe a linear situation as mortgage rates may continue to take lower?

Yes. I mean, look, prepayments have increased from Q4 so far in Q1. We noted in our script. We're definitely towards the lower range of the mortgage rates that we've 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, right? 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, 30% in discounts and thus, specified pools make up 92%. Within the 92%, almost 40% is in the loan balance stories, other credit and geo stories. So we feel like there's -- there are faster refinances are in the future, but we've built our portfolio to -- for that environment.

[Operator Instructions] The next question comes from Eric Hagen with BTIG.

I think you guys mentioned in the opening remarks, haircuts for MBS have come down, which is kind of an interesting comment. Can you maybe frame kind of like where that level is relative to like the historical levels? And then 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 the guidance on the haircuts comes from FICC. But in terms of our bilateral counterparty REPO haircuts, we have worked with a lot of our counterparts to bring down the maximum haircuts closer to our weighted average of 2.75% I think a lot of -- almost 80% of our repo book is closer to at 3%.

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

Yes. We've been looking away from current coupon because that's kind of where the biggest impact from the announcement has been really all throughout the Q4. We did add in Q4, a little over [ 1 billion ] and 4.5 and 5s. But since then, probably 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're still our core holding. If you look at the OAS spread difference between 102 priced and current coupon MBS, we're at close to 2 centers deviations and not spread historically speaking, right? So a lot of the fares and prepayments and G-fee cuts have already been priced into the premiums. So it's really looking at kind of a barbelled approach in the coupon stack at this point. But even within the belly at the coupon stack, you can find stories which pick OAS versus TBA, specifically maybe like seasoned collateral, things like that.

How many Fed cuts do you feel like are currently priced into the mortgage basis?

How many Fed cuts?

Yes, how many Fed cuts for the rest of this year, do you think are priced into the mortgage basis?

The market is expecting by the end of December, a little bit over 2 cuts. And from our perspective, we think it's reasonable. We think that normalization will continue this year. It looks like when we get to around June, the probability is about 100%, 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 our overall total return.

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

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

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

Good day, and welcome to the ARMOUR Residential REIT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead.

Good morning, and welcome to ARMOUR Residential REIT's Third Quarter 2025 Conference Call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officer, Sergey Losyev and Desmond Macauley.

I'll now turn the call over to Gordon to run through the financial results. Gordon?

Thank you, Scott. 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 could that 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 1 year.

ARMOUR's Q3 GAAP net income available to common stockholders was $156.3 million or $1.49 per common share. Net interest income was $38.5 million. Distributable earnings available to common stockholders was $75.3 million or $0.72 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.

Total economic return for the quarter was 7.75%. Quarter end book value was $17.49 per common share, up 3.5% from June 30 and up 2.8% from August 8, the last date which we have reported book value. Our most recent current available estimate of book value is as of Tuesday, October 21, and was $17.50 per common share, which reflects the accrual of the October common dividend of $0.24 per share payable on October 30.

During Q3, ARMOUR raised approximately $99.5 million of capital by issuing approximately 6 million shares of common stock through an after the market offering program. In August, we completed the sale of 18.5 million shares of common stock for proceeds of approximately $298.6 million, net of underwriting discounts and commissions. And in September, we repurchased 700,000 shares of common stock through our common 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 October 30, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record on October 15. We have also declared a cash dividend of $0.24 per outstanding common share payable November 28, to holders of record on November 17, 2025.

I'll now turn the call over to Scott Ulm to discuss ARMOUR's portfolio and current strategy.

Thank you, Gordon. The third quarter unfolded against the backdrop of shifting macroeconomic currents. Downward revisions to employment data confirmed that the U.S. labor market had been softer than earlier reports suggested. In response, the Federal Reserve resumed its easing cycle, implementing a 25 basis point cut in September. Chair Powell described the move as a risk management cut, reflecting growing caution around labor conditions. Updated projections now signal 2 additional cuts by year-end, setting the stage for a constructive environment for Agency MBS as financing conditions continue to improve.

Markets responded positively to the Fed's pivot. Treasury yields declined, Agency MBS spreads tightened by roughly 20 basis points and volatility fell to its lowest level since 2022. These dynamics produced a total economic return of 7.75% for the quarter, as previously mentioned by Gordon. Following this strong performance, MBS spreads are now near the tightest levels of the year. Near-term consolidation is possible valuations remain compelling on a medium-term horizon.

As we entered the fourth quarter, macro and political visibility became more clouded. The federal government shutdown that began on October 1, delayed key data releases and introduced incremental uncertainty to growth forecast. Even so, the market continues to expect an easing bias through year-end that's likely to redirect liquidity from the short end of the rates curve into Agency MBS. Chair Powell's recent comments also indicated that quantitative tightening may conclude in the coming months. Although details are still evolving, the Fed's MBS runoff is likely to continue with paydowns from MBS and treasuries expected to be reinvested in the treasury market.

Together with a broader push toward banking deregulation, these shifts are aimed to ease balance sheet constraints and reinforce demand for treasuries and Agency MBS. Notably, SOFR treasury spreads have turned more positive in recent weeks, strengthening the effectiveness of pay fixed SOFR swaps as portfolio hedges.

On the policy front, reports suggest that major banks are positioning to lead potential IPOs for Fannie Mae and Freddie Mac, collectively estimated around $30 billion. Although the process has been delayed by the U.S. government shutdown and the absence of a formal road map for privatization, administration officials have reiterated support for retaining an implicit government guarantee, an outcome that could transform GSE reform from a potential headwind into a tailwind for MBS investors.

An additional and somewhat unexpected source of demand could come from GSEs themselves. After years of balance sheet contraction under conservatorship, Fannie Mae and Freddie Mac now have roughly $250 billion of combined capacity to invest in mortgage loans and MBS should it align with GSE's earnings and valuation objectives. While no formal plan has been announced, recent disclosures point to greater flexibility within their investment mandates, hinting at a more dynamic approach to managing their portfolios than in the prior cycles.

I'll now turn it over to Sergey for more detail on our portfolio. Sergey?

Thank you, Scott, and good morning. ARMOUR's most recent net duration and implied leverage were 0.2 years and 8.1x, respectively, a balance stance with a bias towards further Fed easing. Roughly 87% of our hedges are in OIS and SOFR pay fixed swaps with the balance in treasury futures. Our liquidity remains robust at approximately 55% of total capital. The portfolio is invested entirely in Agency MBS, Agency CMBS and U.S. treasuries.

Our recent activity has centered on par to slight premium coupon mortgages where levered and hedge ROEs range from 16% to 18%. Higher premium pools continue to offer up to 19% returns, though with greater sensitivity to prepayment risk. Diversification across 30-year coupon stack, Ginnie Mae and DUS securities whose positive convexity and shorter duration provide relative value remain a key advantage.

During the second half of the year, 30-year mortgage rate briefly reached 6.15%, lowest level of this year. While rates remain just above 2024 lows, refinancing activity has already exceeded last year's pace, elevating prepayment concerns for TBA and generic premium MBS. This reinforces our long-standing focus on specified pools, which represent over 92% of the portfolio. Aggregate portfolio prepayment rates rose to 9.6 CPR in October compared with the third quarter average of 8.1 CPR, a 19% increase and consistent with our expectations.

We anticipate a similar uptick in November before prepayments stabilize towards the year-end as refinance volumes moderate. Should mortgage rates move down below 6%, levels we've not seen since early 2022. The MBS coupon stack offers a deep market of lower-priced coupons as a hedge against higher prepayments. Roughly 40% of our assets are already positioned in prepayment of protected Agency CMBS pools and discount MBS. As usual, we financed 40% to 60% of the MBS portfolio through BUCKLER Securities, distributing the balance across 15 to 20 additional repo counterparties.

Average gross haircuts stand near 2.75%. Repo market liquidity remains healthy with only a modest 2 to 3 basis points increase in repo SOFR spreads versus Q3 average. More meaningfully, the spread between SOFR and Fed funds widened from 3 basis points in Q3 to roughly 10 basis points through October, muting the transmission of the Fed's recent cut to funding markets and by extension to broader economy. An increase in treasury bill issuance and a gradual decline in banking reserves means banks can lend cash at higher prices.

This makes repo funding a key area of focus heading into year-end, yet despite a recent bump in SOFR rates, we view funding conditions as stable with standing repo facility to supply liquidity if needed. Looking ahead, we expect structural demand for Agency MBS to continue to strengthen. Regulatory clarity around banking reform and resumed easing cycle have historically been a powerful catalyst for high-quality liquid assets like MBS. While spreads have compressed, underlying fundamentals and market dynamics remain favorable.

Back to you, Scott.

Thanks, Sergey. We executed a $300 million overnight underwritten bought deal in August, first one we've done this decade. While it was somewhat more expensive than our ATM execution, it allowed us to put a significant amount of capital to work at attractive spread levels. In fact, we estimate that the spread tightening from the newly purchased assets alone contributed about 0.6% to our increase in book value this quarter, along with a meaningful reduction in operating expenses per share.

We saw some weakness in our stock in mid-August. And as in the past, we repurchased some shares in the open market. We will continue to look at both sides, selling and buying in our equity account. As you know, we determined our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns available. ARMOUR's approach remains unchanged, grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity and dynamically adjust hedges for disciplined risk management.

We are confident in our positioning strategy and ability to deliver value for shareholders. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions. Please open the line for some questions, please.

[Operator Instructions]

Our first question comes from Doug Harter with UBS.

Hoping you could talk a little bit about where you see current returns on incremental investments and kind of the importance of the hedge choice you make in that and how that factors into your view of the attractiveness of the market today?

Yes. Doug. So expected ROEs, hedged ROEs are in the 16% to 18% range. Obviously, a touch lower than where they were at the end of June, given the tightness in mortgage spreads. So over a short-term basis here, you can assume 8 tons of leverage and hedge to swaps. So that's also picking up the swap income. Now we are still constructive medium term, given the resumption of the normalization cycle and also because of spreads, while local types are still attractive over a longer time horizon.

So if we see another 10 basis points of tightening, that could add about 4% in return on equity to that base case of 16% to 18% range for production coupon.

I guess how do you think about what the outlook is for swap spreads? And then how do you think about the attractiveness if you looked at mortgage spreads on like an OIS basis?

Doug, this is Sergey. Yes. So swap spreads have also had a big move since September meeting. We think swap spreads will continue to normalize. If you look at some of the average prior to Liberation Day, we see 10-year swaps somewhere in the mid-30s, currently trading around 44%. So we've gone a long way from minus 60 earlier in Q2, and we feel like this is going to continue to be a tailwind for the portfolio as effect of more effective hedges to hedge MBS.

Currently, we have about 87% notional allocated to SOFR and OIS swaps. So that's a good positioning. We will probably tailor it if we do get back to those averages, but a lot of things have been lining up to see balance sheet expansion as well as potentially the Fed looking at changing the target policy rate from the Fed funds to SOFR or another repo measure, and that will provide lower volatility to funding rates and potentially wider SOFR spreads as well.

So a lot of tailwinds are lining up there.

And the next question comes from Jason Weaver with Jones Trading.

Scott, along with your prepared remarks, if the administration is actively looking for ways to reduce borrower rates via GSE deregulation, do you have any thoughts on what the actual implementation looks like, whether that's GP manipulation, changes in LLPAs, underwriting guidelines?

There are a lot of levers they could pull. And what knows we get a lot of levers pulled these days that we may or may not expect. So I think -- and I think that probably fits somewhere on their agenda. So the broad answer is yes. I think we could see a lot of things move around here. And particularly, if -- but particularly, I think you have to put it through the lens if they are thinking about a capital raise here for the GSEs. They're going to want to configure the GSEs to be as attractive a proposition as they can.

So that may put the brakes on a couple of things as well. So there's a balance there I have no further insight into it other than just note that there are 2 competing things going there. One is undoubtedly, they'd like to see lower mortgage rates, but they also want to see the GSEs as an attractive investment proposition.

Agree. That's helpful. And then noticing the hedge ratio ticked down quite a bit from Q2. Is that more of a timing issue? Or just along with the greater confidence in the pace of easing activity, you can be a bit more directional here?

There are a lot of things going on in that. Sergey, Desmond, maybe you want to give a little more color on that, but there's a lot that goes into the way that, that ratio in itself works. Sergey, Desmond, do you want to give a little more color on that?

Yes, Jason. So I mean, the way we kind of look at hedges, it's really to hedge our duration across the entire curve, right? So as we said earlier, our duration of 0.2, we are taking a balanced view with a bias towards more Fed easing. So our goal is to -- most of that 0.2 duration is actually in the front end of the curve, whereas in the back end, we aim to stay flat. And ultimately, we move our hedges around to accomplish our duration targets across the curve.

And the next question comes from Trevor Cranston with Citizens JMP.

All right. There was a pretty significant drop in interest rate volatility in the third quarter, which had a carryover impact to MBS, obviously. Can you guys share your thoughts on kind of how you think volatility evolves going forward? And since it's being priced significantly lower today, how that factors into your -- the potential to maybe add some swaptions or options into the hedge portfolio?

Yes. Trevor. So in terms of volatility hedging, you can think of 2 approaches to it. One, obviously, is you can use swaptions. We have used swaptions in the past. We continue to look at hedges even those that are not in our balance sheet. But the other approach is actually through asset selection, right? So you can pick assets that have low optionality. About 40% of our book, as we said in our prepared remarks, is in shorter -- lower coupons and also DUS securities. And these actually have very low optionality and another benefit of these securities is that their convexity in some cases, is even positive.

So they act as a good offset to the negative convexity that you see in our production coupons. Now one more point on volatility is that, yes, volatility has come down a lot so far this year. But if you expand the time scale if you go back and look at other periods that are similar to this one, you can pick 2019. That was a period when the Fed had resumed normalization. They had started [indiscernible] back -- not buying mortgage-backed securities. That period of time, volatility was actually lower than where they are right now.

If you take, for example, obviously, it's an entire volatility surface, but if you look at the swaptions for 1 year by 10-year, today is about 82 basis points. The average over that period was about 64 basis points. So still we are still about 18 basis points higher. If the Fed continues normalization, we can expect that the tail risks around rates will become compressed. And for that reason, we can see volatility in the medium term continue to decline, right?

Now that's not going to prevent short-term bouts of volatility. But over the medium term, we can see volatility decline. And if you are long options, then the valuation of options would decline if volatility declines. So yes, I mean, we always -- it's a very dynamic position. We're always looking at our hedges. But for now, we think just keeping low optionality assets is the better approach.

And the next question comes from Timothy D'Agostino with B. Riley Securities.

Just one for me. Regarding economic net interest margin, it seems like it widened about 1 basis point quarter-over-quarter. Looking forward to year-end and maybe to halfway through 2026, what would we need to see for this trend to kind of continue and if not pick up pace?

Well, I guess you're going to -- it really depends on our portfolio and where continued cuts in the Fed rate, and that will imply how it impacts on our financing costs. And we think we've constructed a very good portfolio. And I think the returns that we're generating, I think, are reasonable under the circumstances. I don't know, Sergey and Desmond have other things to add to that what they think on the horizon, but we don't normally give too much forward-looking statements on where we think earnings are going to be in the future, but it's really going to be dependent on how fast the rates cut and also how the market reacts to that. But we think we've constructed a very good portfolio for the future.

Yes. Yes. So just on that to continue God's comment there. Yes, so we kind of typically just look at forward ROEs as well, another way to look at the same way of looking at things. So 16% to 18% in production coupons. Our dividend yield, weighted average dividend yield, both preferred and common plus operational expenses all in is about 18%. So that could be sort of as a hurdle rate. We already have assets we are buying that are at 18%. There are others that are slightly lower than that. But as we said, we're still constructive medium term here. So just a few more basis points of tightening and those assets would meet or exceed our hurdle rate.

[Operator Instructions] Our next question comes from Eric Hagen with BTIG.

Maybe following up on some of this conversation here. I mean what do you think is priced into MBS spreads with respect to the Fed cutting rates? Like right now, it looks like there's 125 basis points of cuts priced into the forward curve through the end of next year. Do you feel like spreads would widen if those expectations got walked back for any reason? And do you feel like spreads would actually have room to tighten once they actually deliver those cuts?

Eric, this is Sergey. Yes, to both. Definitely, a pause in the easing cycle or something that would cause them to walk back their projections would be a potential source of volatility in the market. But in terms of delivering cuts to the market, I think a lot of the bank demand will get unlocked there. If you look at the current coupon mortgages versus yields on money markets or T-bills, it's compressed again over the course of the year, closer to 100 basis points.

So I think as we get closer to 152% on the spread of mortgage yields versus cash you start to see more and more engagement from other players in the market that we've seen -- we haven't seen as much demand as expected earlier this year. So I think that kind of answers yes to both scenarios. And we note in our prepared remarks that spreads have tightened significantly over the course of the quarter. We do see upside, but I think it's overall macro picture, the lack of government economic data coming through that's given us a little bit of pause here. But over a medium-term horizon, that's a clear positive for -- to have lower Fed funds rates.

Yes. Got you. That's good color. The move to raise capital and buy back stock in the quarter, can you kind of share the rough level of your stock valuation when you did those transactions? And like what's the best way to compare the value from having done each of those deals, transactions?

Yes. So Gordon will maybe give me the -- if you can pull up the level where we bought back. But look, we're committed to being on both sides. And when we get a dislocation, we'll buy back some stock. And when we see good valuations, we'll sell stock. Stock buybacks are always fraught because they happen when a bunch of other things are going on, and it's always expensive to get the stock back out there as well. But we had a pretty good spread between where we executed both of those. Gordon, do you have those numbers to hand?

Yes, I know offhand, we -- when we did the buybacks, it was about a couple of cents accretive on the days, and it was in the 14 -- just get you the right number. Got it. We were buying it back at -- yes, it was in the [ $14.40 ] handle around that on the days that averaged out. So you can see we've bounced back since those days and we bought back the stock.

Is that useful?

Yes, that was helpful. I appreciate you guys.

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

Thanks for joining the call today. We appreciate it. Any further questions occur to you, give a ring at the office, and we'll be back to you as soon as we can. Very good. Thank you, and have a nice day.

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