Mortgage REITs are known for their high dividend yields, but there’s quite a bit more investors should know before they jump in. And that’s even true when it comes to a mortgage REIT like ARMOUR Residential REIT (NYSE: ARR), which invests exclusively in mortgages backed by government agencies like Fannie Mae and Freddie Mac.
In this article, we’ll take a closer look at ARMOUR’s investment strategy, recent developments, and its performance history.
ARMOUR Residential REIT company profile
ARMOUR Residential REIT is a mortgage REIT, founded in 2009, with a portfolio of mortgage-backed securities that are issued or guaranteed by government-sponsored agencies such as Fannie Mae and Freddie Mac. These types of securities are referred to as agency mortgage-backed securities, or agency MBS for short.
While agency MBS typically come with lower yields than other types of mortgage securities such as corporate or non-agency residential, they also have the protection that comes with a government guarantee of the principal, which protects the company from loss in the event the borrower defaults on their loan obligation.
ARMOUR previously invested in a combination of agency and non-agency MBS, but completed its strategic transition to an agency MBS portfolio in August 2020. As of April 30, 2021, 100% of ARMOUR’s portfolio is made up of agency residential mortgages, about 14% of which are multifamily loans (such as for apartment buildings) and the rest are various single-family mortgage loans, most of which have fixed interest rates.
Like most mortgage REITs, ARMOUR uses a significant amount of leverage to boost returns and enable its double-digit dividend yield. As of April 19, 2021, ARMOUR’s leverage ratio was 6.9-to-1, indicating that for every $690 in debts, the company owned $100 in net assets.
ARMOUR Residential REIT news
The biggest news item in recent history for ARMOUR was the COVID-19 pandemic, as it was for most mortgage REITs. Without getting into too much detail, when the COVID-19 pandemic swept across the United States in March 2020, it sent the financial markets into a volatile roller-coaster ride, and asset values (including those of mortgage-backed securities) plunged. After all, with so much uncertainty, nobody knew if we were about to see a massive wave of loan defaults or even a total collapse of the housing finance system.
Thankfully, such a doomsday scenario didn’t materialize, but as the value of MBS plunged, many mortgage REITs were forced to liquidate assets at fire-sale prices in order to meet leverage requirements. In fact, from the end of 2019 through the first quarter of 2020, ARMOUR’s total assets declined from $13.3 billion to $5.1 billion and the company posted a loss of more than $500 million for the quarter (keep in mind that ARMOUR’s market cap is less than $1 billion). As the company put it, “To increase liquidity in March, ARMOUR significantly reduced its portfolio of Agency Securities…by 68% compared to December 31, 2019.” I’ll get into the effect on the stock’s price in the next section, but let’s just say it wasn’t a positive catalyst.
As a result of the COVID-19 pandemic, ARMOUR suspended its monthly dividend payments for April and May 2020, and when the payment was reimplemented in June, it was at just over half of the pre-COVID rate. As you’ll see in the next section, ARMOUR’s dividend is still not even close to where it was prior to the pandemic. In a nutshell, the volatility in March 2020 did serious, lasting damage to the company and its investors.
ARMOUR Residential REIT stock price
Since 2010, ARMOUR Residential REIT’s stock price has declined by 82%, as of May 2021. However, this doesn’t tell the whole story.
First of all, it doesn’t include dividends. Mortgage REITs are designed to maximize income, not to produce long-term stock price appreciation. Now, it’s fair to say that a decline of more than 80% is sub-par performance, but the point is that it isn’t fair to judge a mortgage REIT’s performance without considering total returns, which includes income as well as price changes. And ARMOUR’s total return does look a little better at negative 7% since 2010.
Prior to the COVID-19 pandemic, the company was in positive territory in terms of total returns, but has dramatically underperformed the S&P 500 in most time intervals, aside from the past year that included the post-COVID rebound. Here’s a quick chart of ARMOUR’s total returns versus the S&P 500 benchmark index over the past several years:
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