Armour leverages yield curve for US$302m deal
Armour Residential REIT reloaded for new investments by raising US$302.5m overnight on Tuesday on a risk-free basis, providing the mortgage REIT with 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 closed on Wednesday at US$15.90, or 2.8% below the offer price. Armour issued a hefty 17% of share capital in 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 on August 29 to holders of record on 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 7.7-times equity and implying US$1.5bn of additional buying power on this equity raise.
A rising yield curve – the spread between two-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 raising 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.