Armour Residential: Higher Borrowing Rates Threaten ARR's Yield, Some Bullish Signs In The Charts

Mortgage rates have drifted back up near 6.5% after momentarily falling under 6%, according to Mortgage News Daily. With the Treasury yield curve the most inverted in more than 40 years, leveraged firms are in a tough spot while real estate-related stocks have faced ongoing pressures. Still, perhaps we are toward the end of the rate-hike cycle, and those same names could benefit from a rate reversal.

What do the fundamentals and technicals look like for one super-high-yielder – ARMOUR Residential? Let’s investigate.

Mortgage Rates Jump in February

According to CFRA Research, ARMOUR Residential REIT, Inc. (NYSE:ARR) invests in residential mortgage-backed securities (MBS) in the United States. The company’s securities portfolio primarily consists of the United States Government-sponsored entity (GSE) and the Government National Mortgage Administrations issued or guaranteed securities backed by fixed rate, hybrid adjustable rate, and adjustable-rate home loans, as well as unsecured notes and bonds issued by the GSE and the United States treasuries, as well as money market instruments.

The Florida-based $815 million market cap Mortgage Real Estate Investment Trusts (REITs) industry company within the Financials sector does not have positive trailing 12-month GAAP earnings and pays an extremely high 19.4% dividend yield, according to The Wall Street Journal. About 10% of the float is short – important ahead of earnings next week.

Back in October, ARR reported an operating earnings beat with $0.32 of per-share profits while ARMOUR’s book value per common share was listed at $5.83, currently 6% below the latest closing stock price. A key risk for this leveraged REIT is higher interest rates and the inverted yield curve. A perk up recently in short-term rates appears to have dinged shares. Also, uncertainty in the Southeast real estate market is a risk, but I acknowledge that the region is a great spot to be for real estate firms.

On valuation, Seeking Alpha data show shares trade at a low 5.3 trailing 12-month non-GAAP P/E, well below the 10.5 sector median while its price-to-book ratio is attractive under 1. Still, with a very high total debt to equity at 875%, higher interest rates could hurt the firm. CFRA notes that sales should more than double in the quarter that just ended while ARMOUR’s net margin is below the peer average.

With negative return on equity and ROA in the last 12 months, we need to see evidence of a turnaround. I would like to see a string of quarters of improving GAAP and operating EPS along with a more manageable debt situation to help ensure the dividend holds up.

ARMOUR: Big Annual Sales, Troubling Return Figures

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Wednesday, February 15 AMC. Before that, shares trade ex-div on Valentine’s Day.

Corporate Event Risk Calendar

The Options Angle

Data from Option Research & Technology Services (ORATS) do not show a liquid straddle right now to estimate the expected earnings stock price move. Still, previous straddles were priced in the 4% range on the low end to above 8% in advance of the October release. Even with a high short interest on this small REIT, the post-reporting share move has been seen as relatively muted – no more than 5.7% up or down dating back to July 2020.

Since the Q3 report, there have been a pair of analyst EPS upward revisions, and $0.29 of per-share operating profits are expected to be reported in next week’s Q4 release – that would be a minor increase from $0.27 earned in the same quarter a year ago. There have been 5 straight quarters of earnings topping analysts’ expectations, so I would anticipate another beat here, but stock price reaction history is mixed. Let’s look to the charts on this high-yielding earnings mover.

ARR: 5 Straight EPS Beats, Higher Profit Expected on the 15th

The Technical Take

ARR attempted to rise above its falling 200-day moving average in recent days, but the bears rejected the upward trend. Notice in the chart below that shares plunged to $4.38 at the October low, but then managed to gap above the 50-day moving average in November on high volume.

I see support near $5.57 while the February high is near-term resistance – I’d like to see a close above that and the 200-day. If a breakout indeed happens, then next resistance is in the $7.50 to $8 range. What’s bullish here is that the RSI momentum indicator shows a range in the bullish 40 to 80 zone. For now, I am a hold on the chart as there are signs of life, but the bulls still have work to do.

ARR: Shares Print A Bullish False Breakdown in October, Testing 200-Day

The Bottom Line

With troubling debt ratios and unproven earnings amid an uncertain rate market, I’m a hold on ARR for now. I expect an EPS beat next week and the chart has some positive signals, but a bullish breakout has not yet been confirmed.