What I Think Of ARMOUR Residential REIT, Inc. (ARR)

Cash flow hedges are simply hedges, the gain or loss of which are not reported in the income statement until the forecasted transaction occurs. As the company is not qualified for hedge accounting, they use these derivative instruments on a non-designated basis, and thus the volatility in the gains and losses on the instruments are reported on the income statement. But notably, the company is hedging a lot these days. And losing market value in the derivatives might say that derivative assets are getting eroded over time, for which realized losses might increase over time.

Having said that, total realized plus unrealized losses on derivatives were recorded at $50.4 million in Q3FY2012, compared to $74.3 million in Q3FY11 and $3.6 million in Q3FY10.

The interest rate spread has decreased 2.05% in 2011 from 3.87% in 2009. With the recent QE3 and rising mortgage rates, the interest spread rate might improve this year. Average portfolio yield decreased to 3% in 2011, as compared to 4.59% in 2009. This is good, keeping in mind that the portfolio value might be increasing over time. In addition to that, repurchase agreements reached $5.2 billion in Q3FY12, compared to $971.7 million in Q3FY11. With a current ratio of 0.1, I am counting on increased funds flow from operations in the next few quarters to deal with that large amount of liability.

One thing I am absolutely disappointed to see is that while the dividend per share is tanking, management and compensation fees reached around $6 million in Q3FY12.

Now let’s take a look at how Armor Residential is doing in comparison with the competition.

Disclaimer: Ratios and numbers can differ according to different sites. But when used comparatively, they should meaningfully show the financial standing of the company against that of the rest.

Valuation – With the stock price declining over 8% in the last 6 months, Armor Residential is trading at a medium-valued level. While the PE ratio is expected to fall in the next couple of years, you might want to wait a bit before putting your money in.

Efficiency – The asset turnover ratio (a proxy for portfolio yield) of 0.03 is not much below the 0.04 of American Capital Agency Corp. (NASDAQ:AGNC) and 0.05 of MFA Financial, Inc. (NYSE:MFA).

Profitability – A gross margin (a proxy for net interest income margin) at 89.92% is pretty high in comparison with the rest. Perhaps the interest spread, acquired by Armor Residential, is much better than the rest.