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Actionable news in ARR: ARMOUR RESIDENTIAL REIT Inc,

ARMOUR Residential REIT Announces 18.2% Dividend Cut, What Now?

Summary

Core EPS seemed strong to some observers, but changes in the hedge portfolio signaled weaker future earnings.

Management referenced the challenges clearly in their Q4 earnings call.

My previous estimate of book value needs a revision that increases the value materially.

ARMOUR Residential REIT (NYSE:ARR) announced their dividend cut Monday, April 4th. Since shares are down over 1%, it would appear that the market was reacting unfavorably to the news. That might be the case, but most of the mREITs I'm following were down between 1.1% and .5% on the day, so I don't see any reason to believe that this is a strong reaction.

The new dividend was announced at $.27 per month for the second quarter. Relative to the prior dividend of $.33 per share, the 18.2% cut is bound to sting. The news shouldn't come as a surprise. I've been telling shareholders that ARR's dividend was unsustainable for months and indicated that I expect several mREITs to announce dividend cuts during 2016.

Core EPS

Many analysts and investors use Core EPS as their primary metric for assessing the sustainability of the dividend. In the last two quarters Core EPS appeared solid and provided investors with the illusion of safety in the dividend. Unfortunately, the strong performance on Core EPS was tied to a low net interest payment required on swaps relative to the amount of hedge protection ARR was carrying. The smaller net interest payment is a natural consequence of using "forward starting swaps" rather than "current pay swaps." Seeing the way forward starting swaps were rolling towards their start dates gave me reason to believe Core EPS would see a significant decline in 2016.

Usually there is a transcript on Seeking Alpha for the earnings call, but there was none for the Q4 2015 earnings call by ARR. I found an alternative edited transcript on Yahoo. On the earnings call management stated:

"Our core earnings of $1.10 a share exceeded dividends paid of $0.99 in the fourth quarter. We have...


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