Armour leverages steepening yield curve to US$320m raise
Armour Residential REIT reloaded for new investments by raising US$302.5m overnight Tuesday on a risk-free basis, providing the mortgage REIT some US$1.5bn of buying power but at the cost of diluting existing shareholders.
Goldman Sachs offloaded its purchase of 18.5m shares at US$16.35 after marketing overnight at US$16.35 to the US$16.80 Tuesday closing share price.
The residential mortgage REIT's shares were trading midday Wednesday at US$16.22, down 3.5% and below offer.
Armour sold a hefty 17% of itself on the offering but just six days' trading volume.
Mortgage REITs are a fixed-income proxy in a highly liquid equity wrapper. In the case of Armour, it has declared a 24-cent monthly dividend payable August 29 to holders of record August 15, implying a 17.5% annual dividend yield (!).
Armour achieves such a high payout by using equity as collateral for short-term debt and investing that money in long-dated, higher-yielding residential mortgages. The REIT owned a US$15.4bn portfolio of residential mortgages as of June 30, levering it at 7.7x equity and implying US$1.5bn of additional buying power on last night's equity raise.
A rising yield curve – the spread between 2-year and 30-year Treasury now stands at about 115bp – seemingly has presented Armour with an opportunity.
In addition to high leverage, one rub is that Armour sold stock below the US$16.90 per share book value of its investment portfolio, making the equity raise dilutive unless it can earn a higher return on new investments.
This isn't a completely one-sided trade. As of August 6, 9.3% of Armour's shares were sold short (despite the high cost of shorting the stock).