Ladies and gentlemen, thank you for standing by. Welcome to the ARMOUR Residential REIT Incorporated First Quarter 2017 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, May 2, 2017. I would now like to turn the conference over to Chief Financial Officer, Jim Mountain. Please go ahead.

Thank you, operator, and thank you all for joining ARMOUR's first quarter 2017 earnings call. By now, everyone has access to ARMOUR's earnings release and Form 10-Q, which can be found on ARMOUR's website. This conference call may contain statements that are not recitations of historical fact. Therefore constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection of the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements due to the impact of many factors beyond the control of ARMOUR. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factor section of ARMOUR's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. All forward-looking statements included in this conference call are made only as of today's date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required to do so by law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measures is included in our earnings release, which can be found on ARMOUR's website. An online replay of this conference call will be available on our ARMOUR’s website shortly and will continue for one year. ARMOUR's Q1 GAAP net income was $52.7 million or $1.33 per common share. Core earnings were $29.1 million or $0.69 per common share, which represents an annualized return on equity of 10.7% based on book value at the beginning of the quarter. Differences between GAAP and core income are mostly…

Good morning. In addition to the customary SEC filings, we also continue to provide a company update, which is furnished to the SED and available on EDGAR as well as our website www.armourreit.com. The company update contains considerable amount of information about our portfolio, our hedge book and our repo financing book. These company updates along with the comments we made during our last conference call provide our shareholders and analysts with substantial information on the state of the company. Thus the quarterly financial report we filed last night should contain very few surprises for any of our listeners today. ARMOUR realized total shareholder return of 7.5% and total economic return of 7.4% for the first quarter of 2017 or approximately 30% annualized. Additionally, core income exceeded dividends declared and paid for the third quarter in a row. Our book value increased by 5% during the quarter. As of April 27, our book value was $26.07, up 1.8% in the second quarter versus the end of the first quarter. The prepayment rate on our agency assets declined during the quarter from 11.2 CPR in the fourth quarter to 8 CPR in the first quarter. Our portfolio paid 7.8 CPR in April. Please note that a majority of our agency portfolio excluding TBAs is composed of assets with prepayment protections with lower loan balances or contractual repayment lockouts. Our notional swap position is unchanged from 4.2 million at the end of the fourth quarter. Repo financing remains consistent and reasonably priced for business. ARMOUR maintains MRAs with 43 counterparties and is currently active with 27 of those for a total financing 6.5 billion at the end of the first quarter. We carefully analyze opportunities for longer-term financing and will add to this - add to the start book when it’s attractive.…

[Operator Instructions] Our first question comes from the line of Douglas Harter from Credit Suisse. Please go ahead.

Thanks. I was wondering if you -- how you're thinking about possibly using some of the strengths in book value this quarter to take down some of the risk and maybe try to damp down volatility going forward.

I think what we have been doing with that is I think we've broadly seen two avenues. One is we've been keeping leverage as moderate as we can, consistent with our goals. And secondly, I think it's portfolio selection and we actively look at contributors to risk within the portfolio versus return and likely end up trimming guys that look like on balance choices. So that’s probably the two major avenues.

Yeah. Doug, the leverage is down three full turns from where it was two years ago and the addition of the floating rate assets in the CRT has helped to mute some of the volatility that we exhibit in the past, partly because we don't have the amount of hedging that we have to be caretakers of. In the first quarter of 2016, like so many of our peers, the hedges got in trouble rather than have book value go up there. So we feel very balanced right now with our portfolio and our leverage numbers. I'd anticipate that what you're looking at today may look very similar another one, two quarters down the line. And we’re up a book value again this quarter, more than 1% so far.

[Operator Instructions] Our next question comes from the line of Mickey Schleien from Ladenburg Thalmann. Please go ahead.

Yes. Good morning, everyone. I wanted to start with a question about leverage. At around 6 times, it's relatively conservative and you also had a net receivable for securities sold, which means you could -- we could see the balance sheet shrink some more this quarter. Does that trend imply a strategy of retaining liquidity ahead of potential market volatility when the Fed unwinds its balance sheet or is there some other factor that's on your mind that's keeping leverage down a bit?

Well, I think there are two factors involved there. One, liquidity, with liquidity, we've always maintained at a robust level. But I think the advantage of lower leverage is, it manifests itself in a number of different ways, which are first obviously dry powder to the group. There are opportunities and we can certainly take advantage of those and still have relatively modest leverage. And that's, I think important in all the markets that we operate in. Secondly, it limits the element of other risks that we have, in particular spread risk gets moderated a bit by lower leverage as well. So I think it's largely a response to a time in which there may be opportunities, but there certainly may be risks as well.

Just a reminder, to remind you, for every CRT we bought, we probably sold four times pass-through, so that in and of itself will reduce the leverage, but to Scott’s point, we do feel we have dry powder right now if we see some great opportunities, however we feel we’ve reduced the risk profile considerably in anticipation of volatility related around the Trump’s policies and the volatility related around the Ben’s policies.

I appreciate that. A few more questions, how will the investment in Buckler [ph], potentially help to reduce your repo costs?

The principal of Jack [indiscernible] is to provide more certainty and control over a portion of our repo book. That is really the driving element there. Away from that, we think Bucker can make a little bit of money. And so, if we can make some money, that will effectively lower ARMOUR REIT’s financing costs.

Okay. Just some questions about the actual results for the quarter. I estimate your economic yield was essentially flat fourth quarter to first quarter, but as you noted CPR declined pretty meaningfully, what caused -- what hampered your yield from one quarter to the next from expanding?

Mark, you want to take that one or Jim?

Yeah. I would start with the number one. We have a reduction in leverage, so for actual cash earnings, if I have the leverage down, your numbers are going to be lower as your primary driver right there. We didn't unwind any swaps during the period and so that's -- you would have those even quarter-over-quarter. So the size, basically the leverage number is the main driver. I would anticipate and we do anticipate, maybe a month or two down the road here, having repayments go up a little bit and so we -- in the back of our minds, we're trying to earn the $0.19 to $0.20 a month to pay the dividends we declared for May. We feel very good where we are right now. Mark, do you want to approve on that?

No. I mean, those are going to be the mean drivers, that and some -- just some portfolio reallocations during the quarter.

Okay. And on the flip side, your economic cost of funds actually went down according to my calculations about 10 basis points and that's in a quarter, we had a Fed increase in December and March. Can you just walk us through what factors helped you contain your interest expense.

Sure. I mean repo expenses went down, the rates on repo declined from the end of the year to the mid-year, so the mid-quarter, so that was the biggest benefit for cost of funds.

You may remember Mickey about 2.5 weeks before the Fed increased in March, people weren't expecting a March increase and all of a sudden, every Fed members got on the tape and said, Mohamed El-Erian, I was like the first non-Fed member, he said something and then you kept hearing day after day, you got to be prepared and then rates went back up, but what we were paying on December 15th was much higher than we were paying on January 15th.

Okay. That's helpful. My last question is, you had a nice unrealized, net unrealized gain in the multi-family MBS investments, can you just give us some background on what generated that gain.

It's mainly spread tightening. So remember, these are bullet bonds, so they roll down the curve a little bit, they get a little tighter. But just in general, they tighten just overall spread for the market.

Our next question comes from the line of Trevor Cranston from JMP Securities. Please go ahead.

Hi. Thanks. Can you talk about on the margin, when you're thinking about redeploying paydowns or allocating capital, kind of what sectors you're finding the most attractive today, given the tightening we've seen in most of the credit assets over the last few months. Thanks.

The drop in income in the dollar roll positions have been quite attractive and we haven't released our portfolio. Of course, we do at the end of January, end of February, we’ll be releasing it after the end of April, but you will see a little more emphasis on some of the dollar rolls now. I’m talking low teens to even a little bit higher drop income from that. So that's been a very good place for us. CRT, as Mark and Scott indicated on his comments can tighten in a lot. We’re not investing everything in CRT now for a couple quarters.

And there are no further questions on the phone lines at this time.

Well, Scott and I and Mark and Jim want to thank everybody for dialing in. Once again, you can call the office and ask for any of us and we'll be happy to address your questions and we’ll look forward to either seeing you in person or talking to you one quarter from now. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.