Ladies and gentlemen, thank you for standing by. And welcome to the ARMOUR Residential REIT, Incorporated Fourth Quarter 2018 Earnings 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 on Friday, February 15, 2019. I would now like to turn the conference over to the Chief Financial Officer, Mr. Jim Mountain. Please go ahead.

Thank you, Frank. And thank you all for joining our call today to discuss ARMOUR's fourth quarter 2018 results. This morning, I am joined as usual by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer; and by my colleague Mark Gruber, our Chief Operating and Chief Investment Officer. By now everyone has access to ARMOUR's earnings release and Form 10-K, which can be found on ARMOUR's website www.armourreit.com. This conference call may contain statements that are not mere 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 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's 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 ARMOUR's website shortly and will continue for one year. ARMOUR's Q4 GAAP net loss was $212 million or $5.07 per common share. The net…

Thanks, Jim. Good morning. The completion of third quarter of 2018 served as a calm before the storm precursor to the fourth quarter's volatility. By early fall, a looming trade war like Gridlocked Congress and down trending data out of Europe and China gathered like dark clouds over economic projections for 2019 and 2020. Suddenly, the fed's vision of a tighter monetary policy on autopilot collided with market's growing concerns over maturing economic cycle. Widening credit spreads and rising funding costs cut quickly into growth expectations, resulting in the worst quarterly plans for the U.S. equity markets since 2011. Yields on the 10 year treasury declined by 55 basis points from their highs of 3.24% down to 2.69% on December 31. The yield on the two year note declined in step with longer tenures, ending the year or 2.49% or just 9 basis points above Fed funds, implying almost no chance of further Fed hikes in the near-term. Due to the superior liquidity and U.S. government backing, agency MBS served as a haven in the turbulent markets and outperformed credit by a wide margin. However, negative convexity and exposure to volatility meant that agency mortgage bonds couldn't keep up with the U.S. treasury and interest rate swap curves resulting in wider mortgage spreads versus both. This was particularly pronounced in higher coupon MBS where high risk of refinancings and shorter durations led to underperformance versus lower coupon cohorts. The CRT or credit risk transfer market traded in sympathy with widening credit. Newer 2017 and 2018 vintages underperformed more seasoned M2 cohorts by as much as 30 basis points, supporting our negative view on weaker credits in newer issues. As we noted last quarter, we view the new issued CRT market as nearly fully priced, but acknowledges strong participation and support…

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

Thanks. Just following up on one of the last comments that you made about leverage, I guess where do you see kind of leverage going to and what is kind of the right level in this current environment?

Good morning, Doug. This is Jeff. So the APAC's and spread widening was the day after Christmas. And since then, 30 year for us for example in say 30 years, 15 years or in 50S [ph]. Since that period of time DUS bonds which we're trading is 70 to 71 swaps are now into the 60 to 61, so they've tightened quite a bit. However, at 8.2 times leverage should spreads widened a little bit, we have some dry powder. So I would not at this point our leverage to go down. If we see opportunities, it might go out a half a turn. And I think that range will be kind of quantifies here for the first quarter.

Got it. And then I guess how, just how are you thinking about that risk reward of kind of if you see another spread widening taking up leverage, obviously with that comes extra return, but with that potentially comes extra spread risk from being higher leverage. So how are you thinking about trying to protect yourself versus kind of another fourth quarter versus kind of the ability to generate extra return with that higher leverage?

So in the fourth quarter we were probably a full turn less leverage. So if we've been where we are right now, the book value performance would have been little bit worse. When spreads widen out to historical wide levels in a multi-year period, it never leaves a very good time to invest. You cannot pick the wide APAC's point all the time and certainly didn't do that this time, but that's a good place to invest if we're looking out for the next year. So once again if we do see spreads widening and we think they're good investment opportunities, we'll up-leverage a little bit. But all these things change every single week. And if for some reason something happens with economic data that would show that the fed is now maybe we're not going to be so dubbish then we have a different perspective than partially reduced leverage. Sometimes we led monthly prepayments just roll up in that reinvestment. That's also a way that you can modestly reduce leverage. So I hope that answers your question?

It does. Thank you.

Thank you.

Our next question comes from the line of Trevor Cranston with JMP Securities. Please proceed.

Hi, thanks. A question on what are the last comments about the portfolio being somewhat negative duration at this point and you guys obviously being relatively comfortable with spread risk. How are you guys thinking about the risk to the portfolio of spreads and rates being correlated in the sense that if there is a spread widening event, it may be likely that rates drop and could sort of being negative duration along with having spread risk amplify the book value exposure in that scenario. I'm just curious how you guys are sort of thinking about that correlation risk?

That's a good question. So we're modeled out as such, just looking at the curve evenly across the curve, the whole curve goes up and down 25 basis points, our model show our book value is very stable. The risk that we have is the business that we're in and that's only mortgages. So as I just told Doug, we love the leverage where we are right now and that's why we're there. We do own mortgages; we are in the mortgage investment business. If spreads do widen a little bit, we will potentially invest in more mortgages. If we feel that the markets change and we're going to get a bull flatter here the 10 year and the fiber going to run a little bit, we'll either take off some hedges or maybe add a little bit more convexity. One of the reasons that we added so many DUS bonds after our capital raise is to address exactly what you're asking about, because they're going to trade like corporate bonds in a rally. So we are better positioned for a move even though the duration is slightly negative than we have been in a number of quarters.

Got you. Okay. That makes sense. And then looking at the latest portfolio update it looks like you added both some spec pools and some TBAs. How are you guys thinking about the trade-off between spec pools versus TBAs today? I know I've seen some commentary about risk in TBAs given wider gross spreads versus bond coupons. So just curious how you're thinking about that allocation going forward?

That research that you're reading is completely correct. Now the Fed-March rolls on a lot of the higher coupon, Ginnie, Fannie 4.5, Ginnie, 2.5 were actually really good, a low-teens, 12, 13, even more than we did some 14% kind of return stuff. The March-April and the March-May roles don't look as good. So as we go forward and address those role opportunities, we'll either take delivery and sell or most likely swapping with some specified pools are very good opportunities, still double-digit opportunities in specified for us and some of the other Ginnie 2 products as well. So what happens on a month-to-month is the dollar rolls progress. Sometimes they look kind of crummy 30 days out and all of a sudden you get 10 days in advance and they pop-up because dealers have to start covering their short position. So we take that a month at a time, but always looking simultaneously at the investment opportunities in taking collateral and specified cool basis.

Okay. I appreciate the comments. Thank you.

All right. Thanks for calling.

Our next question comes from the line of David Walrod with JonesTrading Canada. Please proceed.

Good morning. You obviously raised capital in January and you put out your monthly update last night. When we look at the asset allocation, it looks like you put a lot of new capital to work in the agency space. Is that just temporary thing and you're going to look to allocate more to non-agencies or are you seeing the agency space more attractive today?

Hey David, good to hear from you. So as Scott alluded to and I think somewhat specifically we talked - let's talk about CRTs first. The seasoned CRTs that we own, the 2014, 2016 vintage is really high quality vintage. The newer CRT so the non-agency space, we don't see the quality is good. And I discussed that in detail in the last quarter's conference call. So we'd have to see a real nice widener in the current production CRTs for us to add, and that's the only non-agency area where we're spending any time focusing at all. In terms of the specified, as I just told Trevor, we did a mix of investing DUS, specified pools and some dollar rolls and we will take a look and see, if vintage paper looks good as we get into the next dollar roll or if we - to knew the dollar roll product. DUS right now however are a little tight. I will tell you an area we will not invest in and that's the adjustable rate or hybrid securities. We don't like that sector right now. We feel the pricing is opaque and the trading is very limited in it.

Okay. That's very helpful. And my other question is the dividend. You noted in your press release that your core earnings have exceeded dividend for 10 consecutive quarters. How's the board thinking about the dividend today?

As we said, and Scott said in his comments, we are going to - core earnings are expected to equal or exceed the dividend for the first quarter. And as we look out to the future, we feel that our investment run rate is very sustainable. And I talked about that in two earnings calls about the sustainability of earnings is very important to our investor base. So we're going to try without doing anything like excessive leverage to maintain our dividend and the board is comfortable with the way we're operating in that regard right now.

Okay. Thank you very much.

Thanks, David. Good to hear from you.

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann and Company. Please proceed.

Hi. Given where your stock price is right now and given your positive comments in terms of the environment, what are your thoughts about additional equity raises?

So equity raises are as I want to say the pleasure of the board and the - if opportunities and our stock prices are in a good spot, we will look to raise capital, I mean it's something that we're doing this morning.

Great. That's my question. Thank you.

Mr. Mountain, there are no further questions at this time, please continue with your presentation or closing remarks.

Well, Frank thank you and thank you all for joining our call this morning. As always, if anybody has other questions, feel free to call us at the office, we try and either pick right up or get back to you as promptly as possible. We look forward to constructive dialogue with everybody in the investor community and we'll talk again soon.

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. Have a great day everyone.