ARR Q3 2026 earnings call transcript, October 22, 2026

Good day, and welcome to the ARMA Residential REIT's 3rd Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touch-tone phone. And to withdraw your question, please press star, then 2. 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 Officers, Sergei Lesyev and Desmond McCauley. Let me turn the call over now to Gordon to run through the financial results. Thank you, Scott. By now, everyone has access to ARR's earnings release in our Q3 2026.

This conference call includes foreign-looking statements were intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The risk factors section of ARR's periodic reports filed with the Securities Exchange Commission describe certain factors beyond ARR's control that could cause actual results to differ materially from those expressed in or implied by these foreign 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 would 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 ARR's website shortly and will continue for one year. Our results for the quarter reflect a significant widening of mortgage spreads in the last three weeks of the quarter as interest rates rose and the markets reacted to a more hawkish Federal Reserve. ARR'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 under interest rate swaps and futures contracts minus net operating expenses. Total economic return was a negative 12.9% for the quarter. During Q3, ARMA 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. ARMA 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 the 15th, 2026. We've also declared a cash dividends of $0.24 per outstanding common share payable November the 27th to holders of record on November the 16th, 2026. Quarter end book value was $14.55 per common share, down 17% from GM 30th, 2026. Our most current available estimate of book values was Monday, October the 19th and was $14.55 per common share. $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 Ohm to discuss ARMR's 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.

Armored 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 8.2 times and net duration exposure to 0.38 years by quarter end, higher yet still historically moderate leverage. 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. ARMR 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 dust pools and deep discount season MBS. Those sales capture relative outperformance 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 levels of 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 a 30-year conforming mortgage rates nearing 7.5%, we expect prepayment speeds to remain broad.

Broadly stable in the coming months, providing greater predictability for portfolio earnings and improving convexity profile of our mortgage assets. Armour's mortgage portfolio remains invested exclusively in agency MBS and does securities, consistent with its strategy since the 3rd of October, since the 3rd quarter of 2020. In 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-repo ratio stands at approximately 89%, its highest level since 2022. While we believe markets may be pricing in Fed rate hikes, then we'll 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 software 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, where we selectively use overnight repo to avoid paying term premiums on longer-term financing. While Chair Wars 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 ARMR.

We will now begin the question and answer session. To ask a question, you may press star than one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star, then two. And our first question for today will come from Doug Harder with BTIG. Please go ahead.

Thanks, and good morning. I'm hoping you –

Pardon me, Mr. Harder. You may have self-muted.

We're going to move on to our next question that will come from Trevor. Go ahead, Mr. Harder. We can hear you now.

Great. Sorry about that. I'm hoping you could talk about the decision to sell assets in September and kind of the thought process of taking leverage up versus selling assets.

Good morning. This is Sergey. Yeah, so we sold primarily five-year and 10-year dust pools as well as some of the deeper discount coupon with, you know, maybe a 50 to 60 wall of 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 four and a half, five, but as well as some of the higher coupons, which have benefited from, you know, slower prepayment environment here at higher rates.

Great. Appreciate that. And then on kind of the capital actions, you guys, you know, both issued common and preferred, but also bought back stock. You know, just hoping you could talk about, you know, kind of what, you know, what levels you kind of see interesting to kind of undertake, you know, kind of all the various capital actions that you did in the quarter. Yeah, sure, Doug. Look, we, you know, we, we, we look. Look at issuing under the ATM when we have an attractive price, which means that, you know, we're pretty tight to book value when, you know, saying 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, that we were, we were, we were a good ways away. And, and that's when, you know, we, we, we, you know, we feel we should always be on both sides of the market. And so, you know, we, we. We just felt the need to put a mark in the book there and, and buy back some stocks. So it's, it's really, really just that simple. You know, of course, you know, the moment when you're, when you're, 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, you know, there, there is always, always, you know, our sense that we, we need to, need to look at both sides here.

Great. Appreciate it. Thank you.

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

Well, look, you know, we've had volatility both in the stock price and book value, which has driven those down. You know, our view remains constructive here and that a number of the factors that have driven this are, you know, have a good probability of resolving, you know, maybe not this month, but, you know, over. Over the not too long period. And so that plus the fact that we feel that our project, while we don't we don't get 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, you know, given all of that, also the fact that we've already announced November should give you a sense of how we're feeling, suggest that. There's really, really, really nothing to do here. And, you know, we are where we are on this.

Got it. Okay. That's helpful. Thank you.

The next question will come from Marissa Lobo with UBS. Please go ahead.

Yes. Hi, Marissa. This is Desmond McCauley. So our leverage as of Monday, October 19 was 7.9 turns. That's excluding our treasury longs 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, giving mortgage spreads around the wires 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 a greater clarity. On the macroeconomic outlook, as well as inflation.

Okay, great. Thank you. And on policy, just given the increased use of housing policy to influence rate and MBS demand, how are you incorporating that risk into your portfolio construction? I mean, do you see it as primarily an upside to book value or impacting prepayments ultimately? You know, stability. You know, I think there's a lot of desire to improve affordability here, but I think across, you know, 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 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.

Got it. Thank you.

The next question will come from Jason Weaver with Jones Trading. Please go ahead.

Yes. Hi, Jason. So as you know, we came into the quarter with a 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 bands. So we allow that duration to move as 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're 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 re-hedge very frequently. Does that answer your question? Yes, it does. Thank you for that. Just a quick one here. With the Fed now hiking, are you thinking about, like, swaps versus futures from here?

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 are fair value. And on the shorter end of the curve, we favor using swaps, largely because of swap spread volatility. What over... All the mix that we are still looking at is about 80% swaps, 20% futures. Great. Thank you so much.

The next question will come from Timothy D'Agostino with B-Riley Securities. Please go ahead.

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

Yes. Thanks so much for answering the question.

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

Yes, hi, 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 sulfur spreads here early in Q4. We do expect some, you know, balance sheet tightening up into the year end. But we also know that the New York Fed stands by in terms of reopening their ARR. MPs or the T-bill purchases that we're 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, you know, while we're active with 20 counterparties, you know, across the global street, if you will, we also enjoy the ability to finance about half of our portfolio. You know, through our securities affiliate, Buckler. And that also gives us access, you know, across the curve as we maintain the ability to go overnight, if we wish, as well as, you know, access to term opportunities. So we try to keep all of those options open, which has been extremely helpful when we've 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. Thanks. 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?

Yeah. So, I mean, look, we had an official confirmation from Bill Pulte in September regarding GSE activity. We're also seeing them cut down the specified pool auction sizes throughout the month. 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 the market from the spread standpoint. So, we do expect some buying to show up.

Okay. Thank you.

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

Yes. Hi, Dave. The stress testing that we have. And 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. All right. In terms of how we look at leverage, too, in deciding whether we want to increase leverage or keep it around these levels. So I haven't changed it, but it was a 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. Thank you. And if I could sneak one more in just to.

It sounded like in the prepared remarks, you were in line with market expectations of one rate cut this year and one next year. But then in 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 rates early. Did I miss something there?

Markets are pricing about three to four courts by the end of 2027. Our view here is the base case is two courts by the end of 2027. So we are the dovish side of the markets. But if you compare our view to the dot plots by the FOMC, that's really on the hawkish side. The most hawkish members are expecting just two more courts, 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 of... We do feel that market pricing of hikes is more than we anticipate. Does that clear that up? Understood. That's perfectly clear. Thank you for taking my questions.

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

Thank you very much. We appreciate your interest in ARMA read and thank you for attending this morning.

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