Ladies and gentlemen, thank you for standing by. Welcome to the ARMOUR Residential REIT Fiscal Fourth 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 Thursday, February 15, 2018. I would just now like to turn the conference over to Jim Mountain, Chief Financial Officer. Please go ahead, sir.

Thank you, Julie, and thank you all for joining us for our call to discuss ARMOUR's fourth quarter and annual 2017 results. This morning, I'm joined by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer; and our Chief Operating Officer, Mark Gruber. By now, everyone has access to ARMOUR's earnings release, Form 10-K, and January 2018 Company Updates, all of which can be found on ARMOUR's Web site www.armourreit.com. This conference call may contain statements that are not recitations of historical fact, and 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 protections provided by that 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 Web site 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 we are required to do by law. Also, our discussions 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 Web site. An online replay of this conference call will be available on ARMOUR's Web site shortly, and will continue to be available for one year. ARMOUR's Q4 GAAP net income was $71 million,…

Thanks Jim, good morning. Let me begin by pointing out something new in our most recent monthly company update which we posted last night on our website and furnished to the SEC on its EDGAR system. We've added a statement of our strategy for long-term value creation and ARMOUR's contribution to society, ARMOUR management and the board of directors are using this statement to guide our daily operation and oversight of ARMOUR. The statement reads ARMOUR seems to create shareholder value through thoughtful investment and risk management that produces current yield and superior risk adjusted returns over the long-term. Our focus on residential real estate finance supports home ownership for a broad and diverse spectrum of Americans by bringing private capital into the mortgage markets. Now let's turn to fourth quarter results and recent developments. ARMOUR in the fourth quarter realized total economic return $0.57 of dividends plus change in book value of negative $0.06 of $0.51 net. For fourth quarter, return of 1.9% not annualized, the decline in our share price from $26.90 to $25.72 reduced total shareholder returns based on market price and dividends to negative 2.3% for the quarter. Core income of $0.68 exceeded dividends declared and paid of $0.57. Our 0.2% book value declined during the fourth quarter was driven by rate and spread increases. As of February 13, our book value was $24.72 down 7.1% since December 31 caused by the significant increases in rates and MBS spreads over the last few weeks. 2017 was a successful year for ARMOUR REIT shareholders, our book value increased by $2.23 or 9.1%, our stock price increased $4.03 per share or 18.6%, our total economic return in 2017 was 18.5%, our total shareholder return was 30.1% and ARR paid a $0.19 dividend every month in 2017. 2017 was…

Thank you. [Operator Instructions] Our first question comes from the line of Douglas Harter with Credit Suisse. You may proceed with your question.

Thanks. First question, is wondering if you could talk about any portfolio actions you might have taken in the first quarter as rates have been rising to try to help mitigate further book value -- protect against further book value declines if we are to see rates continue to rise from here.

Sure. The monthly company update, which as of January 31st, does not encompass trades that may have been done in the first week of February. So if you look at page six of the monthly company update the TBA portfolio has changed dramatically. We now have $1.1 billion of 30-year four-and-a-halves on the roll, and $850 million of 15-year three-and-a-halves on the roll. And we do not have any of the three-and-a-halves anymore. So that's one of the things we've done. We've also added $300 million of swaps. I think the tenure is in the low 170s and of that $300 million approximately 60% of those are 10-years and the other 40% are seven-year swaps. And we maintained the lower leverage during this period of time. As we all know leverages are tradeoff between earnings, power, and a variety of other risks. And, Doug, our perspective right now is that we are comfortable with our leverage ratio as an appropriate balance between producing returns and containing risks. They also give us the ability to take advantage of some opportunities that may appear in this volatile market. So for us the risk of implementing a general increase in leverage are certainly today outweighed by the exposure to volatility and giving up on the margin the ability to participate and maybe some future opportunities. For example, we get another big backup here; perhaps we sell some 15-years and buy 30-years, which can produce mid double-digit returns right now on dollar rolls.

And I guess just on leverage, when you're talking about not increasing it, or I guess are you able to hold asset size constant given the 7% decline in book value you've seen through February 13th?

Well, what's happened is some of the dollar roll opportunities have increased such that even with the lower amount of assets we're still going -- as Scott said in his comments, we still believe the first quarter alone is going to be able to return earnings that are equal to or exceed the dividend we're paid. Now, as we look toward April, and having a feds fund increase in March, that may be reduced slightly, and may mean that we have to adjust that a little bit. However, I would note that, you look at last year; the book value was up 9% year-over-year. The 7% change in book value, the vast majority of that has come over the last three weeks, particularly with the 7.5 OAS widening. And I noted in the report, I appreciate you writing a report on us last night. You had noted that our book value change was a little different than what you had done. And I don't know when you last updated OAS' but I did read some other firms' research, that some of our peers down double-digit book values this year. And particularly, as I said, at least 50% of that is OAS.

All right. And then I guess shifting to the broker-dealer, can you just talk about the thoughts of having as high a percentage you do kind of in your internal broker-dealer. Just help us understand if there are any risks in having kind of a high percentage of your repo there?

So, we feel quite a bit safer controlling our own destiny, and dealing with the FICC through our own broker-dealer at the end of the day than we do with any other counterparty, quite frankly. So that's where we are right now. I wouldn't expect under anything we can see in the future to be exceeding a percentage of total repo more than we have today with the broker-dealer. I would also note that they are funded, as I said through the FICC, but extremely diversified as well. And we can do things with our own broker-dealer that aren't normal course of business with other firms. For example, we might be able to do overnights, which can save considerable amount of money on financing. But yes, we'll do overnight on a term basis.

And there, Doug, broadly the target has been kind of half of our outstandings. I guess the flipside of that is it's reduced our footprint by about half elsewhere. So if anything, we've increased overall capacity, we feel. And as Jeff says, being master of your own destiny is an important part for a big chunk of our portfolio as well as the sort of information advantages and term advantages that come from it.

I can remember when we started ARMOUR, and that talking to all the broker-dealers, including yours, of course, and they go, "Well, where are you going to get financing?" Nobody wanted to provide financing. Well, now there's a lot of financing available. And during this period of time, where there's a lot of financing available, is a perfect time for us to say, "Hey, let's control a little bit of our destiny in case the world doesn't look as pretty as it does today, more like 2009."

That's helpful. Thank you.

You're welcome. Thank you.

Our next question comes from the line of Trevor Cranston with JMP Securities. You may proceed with your question.

Hi, thanks. Couple of follow-ups to some of Doug's questions, first one, Jeff, I think you mentioned that the book value change, a lot of which has occurred in February, was largely driven by OAS widening. I was wondering if you could sort of break out the components, and specifically also talk about what you're seeing with CRT spreads so far this year, and particularly in February?

So the last CRT deal I'd go to first, priced a little weak, and that's now trading 20 to 25 inside worth that price. So I don't have the head of my CRT trading in the room with me, Trevor. But you can look at where price, it traded strong the next day, and is in 25. So year-end marks on CRTs are at that level or slightly in, that's CRTs. The OAS widening, predominantly on 30-year threes, which we did not own any of, and 30-year three-and-a-halves which we did mostly in the dollar roll. The other three-and-a-halves that we own would be more seasoned or like low loan balance stuff. So as rates went up the models had those extending, and as a result implied that you needed more hedging out. So, of our book value decline this year, as of Tuesday night, we are almost exactly 50% OAS widening, and a 50% rates included. And the OAS widening includes the effective wall that's helpful to you.

Got it. Yes, that's very helpful. And then the second question, you commented a little bit on the shifts you've made to the portfolio so far in February. Just curious, the duration gap, I guess, was around 0.8 years at the end of January. Would you guys estimate that it's kind of roughly the same after you've made the moves up in coupon and adding a little bit of hedges, or has that changed much where we see it today?

I think Scott said it's actually 0.8 as of Tuesday night.

Okay, got you. Perfect.

So, right, you would think it might be a little higher. But with some of the changes -- so what happens, when the markets move very quickly you make subtle changes to maintain your duration because you don't want that to extend too much, okay. And then at some point, as I said to Doug, there may be a case where, okay, the world feels a little better with sell some 15-years and extend into 30-years. I mean the yield pickup on 30-years is a considerable amount different than it would've been six weeks ago. You can guy outright stuff, like a $175,000 max in double digits, so that that was like a 9% leverage yield a while ago. So the backup has provided opportunities. That what we're not going to do though is sell $2 billion worth of assets just to buy higher assets than maybe book some losses. So things will done through prepayment, reinvestment, or maybe some subtle changes in the portfolio.

Got it. Okay, appreciate the comments. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann & Co. Please proceed with your question.

Hi. Could you quantify the savings you get by financing with BUCKLER?

So, as I said in the last earnings call, we estimated it would be 5 to 7 basis points, because there was a back-up in FICC approvals and Federal approvals post the sub-prime credit things. Five to seven firms came online over the last two quarters, and ARMOUR savings exceeded those estimates thus far. I expect that to normalize as these new firms have already put collateral loan, and they are going to have to -- if they are going to have to make money in the future, is that losing money, so I expect that to be close or back to the 5 to 7 basis points.

Got you. And what is the upper limit -- I'm sorry, please.

Yes, you just also have to add that in -- we achieved a little better haircut, which you know, also puts a little less potential liquidity demand on us as well. Liquidity is notoriously hard to value, but we definitely know it has…

Yes. So we would increase our liquidity because of our haircuts are lower with BUCKLER than they are with any of our other counterparties.

Okay. And then, what is the upper limit for your leverage ratios?

We don't have a stated limit. I did -- when Duck Harder mentioned leverage on that, we are comfortable with the leverage that we have right now. I would not anticipate in the near future us exceeding any of the numbers you are seeing not by more than one turn, and there could be a cause to make it lower, but we have no stated leverage range.

And then, given where the stock prices, I mean, buybacks or selling positions and actually buying into higher-yielding assets, I mean, how should we look at capital management at this point?

So, let me talk about selling positions, I also said to Trevor; we might sell, as I said, some three-and-halves -- 15 years, our lower-yielding assets or maybe some stuff to buy some longer assets, if we build, the market stabilize a little bit, but we'd rather watch for a while and see what happens. So, yes, the capacity and the ability to do that particularly with our lower leverage numbers are definitely there. And we got to look forward to the opportunity, because if we create surprise on the earnings side down the road. Now, in the stewardship of capital or buybacks, let me address that; stewardship, again, the stewardships of ARMOUR's equity is the primary responsibility of both our management team and of course the Board of Director's customer. This group accesses regularly the benefits or detriments of issuing equity or repurchasing equity in the secondary marketplace. Okay? So, typically, as I said in earnings calls before, I remember in early late '15 and '16 when we were trading well under book value, three things generally, the place to issue equity, so I want to talk about both sides of it. So, we are very clear, and if you had it writing up, you know, this is stuff I could -- please feel free to call me back, and I can give you a little more detail or try to repeat what we talked about. The issue, I agree there must be beneficial use of proceeds, meaning the investment of ARMOUR was promised -- the opportunity to improve the company's portfolio, let's say. Accretive offerings are always preferred, but current shareholders should not be diluted to the extent that the other benefits of issuance clearly outweigh the dilution, let's say. The secondary market is also expected to absorb…

Yes, and I appreciate the detail. Final question; the strategic statements -- as I just read, the response to the things borrowed by the Blackrock CEO?

That is a really good question.

Yes, that clearly is part of it. I guess, that was certainly a bit of a nudge that we should do. We are thinking about the overall perspective here. And I think it's an inappropriate nudge. Nothing -- we already had a statement that was a little bit longer, I guess, our chances was just much more to think.

Right. They happen to own a 14.8% of our stock. So, we really care about them, and we continue to hope to have them as a long-term shareholder.

Okay. I was reading the article about when they wanted that, and it sounded like their strategic statement was pretty much -- it sounded somewhat boiler plate, I mean, is there a certain standard that Blackrock expects you to meet in terms of your strategic statement or just anything will do?

We did not talk to Blackrock at all in putting our strategic statement. If you look at like a one-year-old 10-K of ours, there is somewhat of a strategic statement in there, and when they released that, and I received the note of letter on that, we should let it down and make sure that with the Board that we understood what we are trying to do as a company, and if we are having positive impact on society. So, we address that directly, and the result is our strategic statement, which we think encompasses everything we do as a company and what we do to the society. And it is private capital put into public markets that help people finance. I mean that's exactly what this business does.

Great, I appreciate the details.

You are welcome. Thank you.

Mr. Mountain, there are no further questions at this time. I'll now turn the call back to you.

Well, thank you Operator, and thank you all for joining us. We say regularly in these calls, we are always open and available for conversations with our investors and our shareholders. So, if you need anything more, call us at the office, and we will pick up for trying to get back to you in short order. Thanks much, and we will talk to you next quarter.

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