ARMOUR Residential REITARR

Key highlights

• Investment losses hit profit: The company reported a net loss of $327 million, or $2.26 per share, largely because of a $1.17 billion drop in the market value of its mortgage backed securities. This is a common risk for mortgage real estate investment trusts, which own bundles of home loans that lose value when interest rates rise quickly.
• Dividend coverage tightened: Distributable earnings, the money available to pay out to owners, fell to $0.71 per share from $0.72 last quarter. This is just below the $0.72 in total dividends the company paid during the three month period, leaving no cushion to cover the current payout if earnings slide further.
• Book value declined: Book value, the theoretical value of the company if it sold everything and paid its debts, fell to $14.55 per share from $18.63 at the end of last year. This 22% drop reflects the pain of higher interest rates on the company's bond holdings over the first nine months of the year.
• Capital raised via shares: The company raised $205.7 million by selling over 12 million new shares of common stock during the quarter. While this brings in fresh cash to invest, it also spreads future earnings and dividends across a larger number of shares.
• Dividend payments confirmed: Management confirmed it will pay monthly dividends of $0.24 per share for October and November, but noted that future rates depend on market conditions and tax rules. The board must distribute nearly all taxable income to keep its status as a real estate investment trust, a structure that avoids corporate taxes by passing profits to shareholders.

Our take: This was a difficult quarter where market volatility took a heavy toll on the value of the company's portfolio. While the business still earns enough to nearly cover its dividend, the shrinking book value leaves less room for error. We are keeping a close watch on whether earnings can stay above the payout level.