An 11.48% Yield That Is Stronger Than It Looks

Recent analysis suggested this company's dividend was in trouble, but I am disputing that thesis. One challenge in evaluating the REIT is the different meanings of "leverage". When this company provides its portfolio updates, the leverage figures exclude its TBA positions. While I'm not saying the company's dividend is rock-solid, I do believe an informed investor could come away from the piece thinking that a dividend cut was a near certainty. While there are quite a few mortgage REITs that are clearly not covering their current dividend, this stock does not fall into that group.

A recent article on ARMOUR Residential REIT (NYSE:ARR) brought out some concern among shareholders and potential investors in the mREIT. Did ARMOUR Residential REIT reduce leverage? The company reduced it dramatically, if we are discussing the GAAP leverage. If the discussion focuses on the total economic leverage, which includes TBA securities, then the decline in leverage would've been much smaller. The leverage ARR is providing is simply dividing repurchase agreements by total equity. At the end of August, the value was $7.77 billion. Dividing that by about $1.2 billion (rounded) in total equity (including preferred shares) gives investors a leverage of 6.5. If you incorporate $2.5 billion in TBA securities, the leverage would move up to about 8.6.

Source: Seeking Alpha

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