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ARMOUR Residential REIT: How To Find The Opportunities

Summary

This is an updated version of a subscription article. It shows investors what I was thinking two months ago and what I'm thinking today.

The leverage looks lower, but ARR used some TBA positions and doesn't include them in the leverage calculations.

Swaps were changed with a 10-year forward cancelled and a seven-year current cancelled.

Cash and share count data suggest that ARR might have bought back some shares or planned to do so (Update: It did not do this).

This is an updated version of an article previously restricted to subscribers. The focus here is to show investors how to find opportunities, so I'll keep the original text and add sections marked *Update* to bring the information to the current period. Investors can see what I thought two months ago and what I am seeing today. The original article was prepared without the benefit of having the Q2 earnings release.

ARMOUR Residential REIT (NYSE:ARR) provided its portfolio presentation after the market closed on 06/21/2016. This is just time for a quick update on discounts, changes in positions, and my investment thesis.

*Update to Link and Date*

The most recent presentation was 08/16/2016. Here is a link to the most recent presentation.

*End Update*

Discount

The following slide shows the common stock price and estimated book value along with several other metrics. I will be writing on the slides in red text for simplicity sake.

Price-to-book ratio is about 77%. This is one of the lowest in the sector. Other mREITs trading at larger discounts have very serious flaws and are not good for comparisons. Large simple mortgage REITs like this are tending to trade at a discount of 6% to 15%, but not 23%.

By my estimation, I figure ARR should usually trade at a 3% to 5% discount to other large mREITs like American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY), and CYS Investments (NYSE:CYS). I see those mREITs trading much closer to 10% to 13% discounts. To be fair, my estimates on book value are a couple days out of date, but I think that is close enough to get the job done. On a relative basis, I see ARR trading at an extra 10% discount, and I think it should be a 3% to 5% difference.

*Update on Discounts*

When this article was published for subscribers, I was long ARR following my analysis in prior articles. I have since closed that position because I felt the expected returns relative to risk were less compelling. Since closing my position, ARR's common stock declined in price.

As it stands, ARR's discount to current book value appears to be in the range of 17% to 22%. When I say that, I am referring to current book value, not trailing book value. I am not stuck using the book values from the end of Q2.

I still believe that when ARR trades at a discount of about 13% greater than the discount on those other mREITs, it becomes very attractive.

*End Update*

Leverage

I was a little disappointed...


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