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ARMOUR Residential REIT (NYSE:ARR)
Q4 2019 Earnings Call
Feb 20, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the ARMOUR Residential REIT fourth quarter and year-end 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded on Thursday, February 20, 2020. I'd now like to turn the conference over to Jim Mountain, chief financial officer. Please go ahead.

Jim Mountain -- Chief Financial Officer

Thank you, Nelson. And thank you all for joining our call to discuss ARMOUR's fourth-quarter 2019 results. This morning, I'm joined by ARMOUR's co-CEOs, Scott Ulm and Jeff Zimmer; and Chief Operating Officer Mark Gruber. and today we are welcoming Co-Chief Investment Officer David Sayles.

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 Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission. Copies of these reports 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 we're 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 also 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 2019 comprehensive income was $58.5 million that includes a $108.7 million of GAAP net income.

The GAAP net income was driven primarily by an $80.4 million increase in the mark-to-market movements or interest rate swaps, while $42.2 million of unrealized loss on agency securities flow through other comprehensive income. Core income, which includes -- which excludes those mark-to-market items but includes TBA drop income was $36.5 million or $0.55 per common share. Based on stockholder's equity at the beginning of the quarter, core income for the quarter represents an annualized ROE of 10.5%. Quarter-end book value was $20.84 per common share, up 2% for the quarter.

ARMOUR's yearend mortgage-backed securities portfolio consisted of over $12.8 billion of securities including $11.9 billion of agency securities and $900 million worth of credit risk and non-agency securities. In our update presentation as of January 31, 2020, available on our website or EDGAR, we said that estimated ARMOUR book value was $21.04 per common share. We plan to update ARMOUR's estimated book value as of February 29, when we release the next company update in mid-March. After that, we plan to provide book value estimates in the updates for months co -- coinciding with our quarterly reporting cycle, which are March, June, September, and December.

On January 28, 2020, we issued 3,450,000 shares of our 7% Series C preferred stock and through February 14, 2020, we have issued another 1.2 million shares of the Series C preferred stock through our aftermarket offering program which we established on January 29. This results in to -- total current Series C net proceeds of $113.4 million after allowing for commissions and offering expenses. We also announced the redemption of all 8,383,344 shares of the outstanding Series B preferred stock, effective on February 27, 2020. That will be redeemed at $25 per share for a total of $209.6 million of redemption proceeds.

The final full monthly Series B preferred stock dividends will also be paid on that date to the holders of record as of February 15, 2020. During the fourth quarter, we also purchased 45,000 common shares at a discounted book value. We paid dividends of $0.17 per common share during the month for each of the months in the fourth quarter of 2019, that's a total of $30.2 million or $0.51 per common share. We've also announced monthly common dividends for February and March of 2020 at the rate of $0.17 per share and the Series C preferred stock dividends for February and March 2020 at the contractual rate of $0.14583 per share.

Now let me turn our call over to David, Jeff, Mark, and Scott, who will discuss ARMOUR's portfolio positions, current strategy and other matters. David?

David Sayles -- Co-Chief Investment Officer

Good morning, everyone. In the fourth quarter of 2019, the fed -- federal reserve's well-coordinated actions delivered a sharp boost for risk markets, with a lower and consistent overnight rate policy, new purchases of short-term treasury debt aimed at replenishing bank reserves, as well as its commitment to support repo liquidity far into 2020. Major U.S. equity indices climb to record highs, corporate credit spreads tightened to pre-crisis levels and interest rate volatility declined below its recent trends.

The yield on a 10 year U.S. treasury maintained a trading range between 1.5% and 2% throughout the quarter, pushing the spread between two year and 10-year treasuries to 34 basis points, it's widest in 2019. The prevailing 30-year home mortgage rates stayed between 3.5% and 4%, supporting the MBI -- MBA refi index at somewhat elevated levels. The average prepayment rate on our mortgage securities portfolio was 17.1 CPR in the fourth quarter, up from 13.3 CPRs Q3 average.

Headlines around declining borrowing rates at an easing federal reserve policy generated a strong media effect responsible for healthy refinancing activity, while our technological advances in the mortgage origination industry expanded its operational capacity to process applications more efficiently. We expect seasonably -- seasonally muted prepayments in the first quarter to ramp-up in Q2 reflective of these trends along with the recent decline in mortgage rates. With that in mind, it is important to note that over 92% of ARMOUR's January 31, 2020 agency portfolio, excluding TBA dollar roll have characteristics that mute prepayments. These include prepayment penalties, loan balances less than or equal to $225,000 max, seasoned collateral, low FICO scores, and favorable loan-to-value ratios.

2019 was an extremely favorable year for specified pools as supply; convexity and the introduction of the UMBS market have had a sharply adverse impact on TBA roll carry, which serves as an alternative to owning specified pools. Although we've used specified premiums as fully valued, we don't foresee this dynamic changing at current levels of expected supply and refinance ability. As of January 31st, our portfolio consists of a well-diversified asset mix, 19% market value in multifamily does pools, 17% market value in 15-year MBS with a very low negative convexity, and nearly 30% in 30-year MBS with gross coupons of 100 basis points above current new origination rates. Our analysis suggests a high level of prepaid burnout in these latter securities.

Our focus on greatly improving our portfolios aggregate negative convexity through a more defensive asset mix and collateral selection has served us well so far in Q1 2020 when lower coupon mortgages underperformed their treasury hedges. During the fourth quarter, ARMOUR's balance sheet average deposit duration gap of approximately 0.7 years and saw approximately 7 basis points up OAS tightening across its holdings on average. Benefiting from the decline in interest rate volatility 30-year pass-throughs were the primary drivers of book value performance with the spread tightening ranging between 12 basis points to 21 basis points across the coupon stack. 15-year pass-throughs benefited from the steeper curve and produced 22 basis points up OAS tightening, while our DUS portfolio recorded minimal changes to spread as gains on lower priced bonds were offset by somewhat weaker performance in bonds with extremely high premiums.

In the fourth quarter, our seasoned credit risk transfer holdings tightened approximately 22 basis points. In addition, the interquarter volatility in spreads presented us with opportunities to add seasoned CRT vintages when the market prepayment fears exceeded our own projections. Additionally, during the fourth quarter ARMOUR purchased bonds in the first of its kind commercial mortgage-backed CRT deal and Fannie Mae's first-ever seasoned HARP CRT deal. Given the continued flattening of the credit curve and mortgage-backed product we saw great value in the M2 tranches.

There has also been considerable tightening in these asset classes in 2020. We continue to hold the majority of our seasoned CRTs as they offer excellent credit protection deriving from home price appreciation and deleveraging. Our legacy non-agency portfolio is small relative to the size of our portfolio, but continues to perform well and is additive to overall income. The Fed's actions to alleviate year-end funding pressures and remove questions around the sufficiency and availability of banking reserves were effective enough to avoid a repeat of the funding crisis in September and make the year-end a relative non-event.

Our affiliated broker-dealer, Buckler Securities, allows us to capture low-cost overnight funding during the year-end turn. This was an excellent alternative to the considerably higher priced longer-term repo available elsewhere in the funding markets. The positives of having our affiliate Buckler for funding activities become stronger every quarter. During Q1 of 2020, we called all 210 million of our Series B Preferreds with a 7 7/8 coupon.

Between January 28th and February 14th of this year, we issued a fixed-fixed 7% Series C Preferred issue with total net proceeds of $113.4 million or 54% of the amount we called in the Series B issue. The reason we replaced just 54% of the Series B with Series C is because spreads in our investible asset classes had recently tightened and appeared moderately -- modestly less attractive than they'd been in the middle of Q4 2019, a time when we were increasing our exposure. However, instead of selling mortgage assets due to our slightly smaller capital base from the Series B call, we maintain the vast majority of assets we already had on the balance sheet associated with the Series B capital. These assets purchased in a wider spread environment are providing a nice breeze for earnings.

As opportunities for investments avail themselves, we can issue more preferred fees to increase capital. Whenever we can invest at a leverage yield exceeding the cost of the preferred, the net result is accretive to earnings for our common stock shareholders. Our new 7% fixed coupon makes that a relatively modest goal. Over the next couple of quarters, we expect the fed to keep the fed funds rate steady, providing us with very attractive funding rates.

We also expect the yield curve to maintain its recent trading range. We believe this environment should play out very well for our shareholders who wish to see consistent earnings and low book value volatility. Operator, that concludes our prepared remarks, we'll now take any questions.

Questions & Answers:

Operator

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

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just one of those last points you made about kind of the timing to issue more of the preferred. Can you talk about, as January and February have unfolded? How yields have performed and kind of how you see the attractiveness of the investment opportunity today versus a kind of when you were doing the preferred issuance?

Jeff Zimmer -- Co-Chief Executive Officer

Hey, good morning, Doug, its Jeffrey here. So couple of things on the preferred. I believe you would be aware when you do an initial underwriting on the preferred; you're paying a full underwriting fee of approximately 3.15%. So internally, we thought it would be more cost-effective for our shareholders to just issue 75 million of that issue and then as we saw some opportunities to do at the markets, which we spend about 1% issuing, we did as you can see subsequently after the initial 75 million-plus issue -- issue another $30 million worth.

Spreads are tighter now than they were in the fourth quarter as David just discussed. And we're not aggressively adding to the portfolio right now. I might note, there has been a lot of discussion about what's going on in the DUS market, and I think it's a good time to bring that up and probably answer some of your questions. As you know, some people engineered and there has been DUS resecuritizations where you've been selling at the money par coupon pass-through and keeping the IO.

We have reverse engineered this numbers of times and recently actually sold some DUS to a reverse inquiry from a broker-dealer who then subsequently went ahead and did a deal. Having looked at all the numbers on that, we felt we were better off selling some of that. So by not issuing the $210 million a full B shares with the new Series C shares, it's given us some flexibility to take advantage of areas that are tighter. And when things loosen up a little bit, we can sell some stuff, and make some dry powder or issue some more Series C to go ahead and buy some assets.

Doug Harter -- Credit Suisse -- Analyst

That makes sense. Thank you, Jeff. You could just sort of help with the thought process of that you went through between kind of reducing the balance sheet in terms of assets versus when you redeemed it. When you issued the new -- why not just kind of reduce the balance sheet, kind of just the thought process there.

If your thought spreads were a little bit less attractive than they had previously been?

Jeff Zimmer -- Co-Chief Executive Officer

Maybe less attractive to invest in at that moment in time, but maybe not completely attractive enough to start selling assets. So as you can see are actually leverages down at the end of the year. And if you look at the January numbers is just slightly back up. If you look at the numbers at the end of February, which we will go ahead and release in mid-March, you'll see the leverage is up a little bit because of course, we didn't back hold the whole Series B fulfillment.

And Mark could you improve on that, please?

Mark Gruber -- Chief Operating Officer

Just one other typically, we do expect prepayments to increase. So instead of selling assets, we'll deliver naturally, you know, just as those increase.

Doug Harter -- Credit Suisse -- Analyst

All right, makes sense. Thank you.

Operator

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

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. Question on the net duration gap on the balance sheet, it was obviously running somewhat modestly positive throughout the fourth quarter and it looks like it's come down to a slightly negative number in the first quarter as rates have rallied. Could you share your thoughts around, how you're managing that as rates have come down? Are you comfortable keeping it somewhat negative on the view that rates are going to be kind of range-bound or just generally how you're thinking about that? Thanks.

Jim Mountain -- Chief Financial Officer

We did permit the duration gap to run a little bit negative. We did add some duration explicitly to avoid getting too negative. We wanted to keep that pattern moderated. We're comfortable at this point with a shorter call it targeted duration, of course, one varies from that target when you've got a mortgage portfolio with rate movements.

But our target has definitely shortened and part of that is motivated by the risks of sharp interest rate movements, which have risen with the virus problems and so forth. But also the increase in curve inversion at the front end of the curve. So the incentive for maintaining the 0.7 target is somewhat less right now than it might've been last quarter.

David Sayles -- Co-Chief Investment Officer

And I would know that with the work that the team has done here, we've had nice book value performance so far through the year and I think it's been very helpful. At one point we added some treasuries when the market started running and we still own the vast majority of those albeit in small size.

Trevor Cranston -- JMP Securities -- Analyst

OK. Gotcha. And then you just made the comment that you are expecting prepaid speech to increase. Can you provide any additional color around that in terms of how fast they're likely to get over the coming few months? Kind of relative to how fast they got, I guess last fall when they peaked? Thanks.

David Sayles -- Co-Chief Investment Officer

One way to get a handle on that is to take a look at estimates that the sell-side participants are coming up with and there's a fairly hefty increase projected for April prepayments arising out of the rates declines that we've seen recently and -- and that number is around 30%. Effectively, we'll likely have somewhat similar experience probably not quite as dramatic given that we already had quite a bit of refinancing. The primary mortgage rate is not lower in any material way than it was in the fall. So a lot -- majority of those people probably don't have much incentive at this point to refinance.

So it will definitely pick up some both because of the lower rate environment and the seasonal. But I don't think it's going to be the nosebleed kind of level that we saw in the third quarter.

Jim Mountain -- Chief Financial Officer

And of course, you have to translate that for the amount of prepayment protected securities we have in the portfolio as well, which really represents a significant proportion and we'll probably use the effect compared to generic estimate.

David Sayles -- Co-Chief Investment Officer

Yeah. I mean, 20% more of the portfolios is prepaid for tech in some way than it was three quarters ago, big number.

Jim Mountain -- Chief Financial Officer

We -- most of our purchases since the third quarter have been in prepayment protected paper.

Trevor Cranston -- JMP Securities -- Analyst

OK. Gotcha. And then last question, you guys commented that you're anticipating discontinuing the monthly book value disclosure after the first quarter. Can you just provide any commentary you have around why you chosen to make that decision going forward? Thanks.

Jeff Zimmer -- Co-Chief Executive Officer

Good morning, Trevor. It's Jeffrey. It looks consistent with the industry practice is what we're trying to be doing here. Alright, we did have reports from people who bankers at firms like yours and other people saying that you publish this every month and we noticed your stock is quite a bit more volatile than those who don't publish and we're not sure that shareholders actually benefit from that volatility.

So as a result, we are going to be consistent with what the rest of the industry does and just produce these numbers quarterly. We do, however, occasionally I have to go on roadshows and make presentations and at those points, in time we'll see if it's in the best interests of shareholders to go and release that information.

Trevor Cranston -- JMP Securities -- Analyst

OK. Makes sense. Thank you.

Jeff Zimmer -- Co-Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Jason Stewart with JonesTrading Institutional Services. Please proceed.

Jason Stewart -- JonesTrading Institutional Services

Hey, good morning. Thanks. One follow-up on the preferred. Could you just give us an update on where over time you a target preferred as a percentage of the capital stack?

David Sayles -- Co-Chief Investment Officer

I believe we've had it as high as 22.5% of the total capital structure and word is right now, the lowest it's been since 2012. We've talked internally among the management team, of course, the board; we can't see it being very favorable and much more above that 22.5%, certainly 25% level.

Jeff Zimmer -- Co-Chief Executive Officer

And if you look at the current issue when we established it, I think we established if memory serves a reservoir of 10 million shares total of the Series C now, certainly, if we decided that there was a reason to go beyond that, you could add to that number with new corporate action. But I think that's where the current reserve -- the reservoir is.

David Sayles -- Co-Chief Investment Officer

One question, you want to ask, I think the interesting topic is, we are a little bit different than what the rest of the group is doing in terms of prefers. We're issuing a fixed-fixed. If we were to issue a fixed floating, we actually probably could have done that deal at six and three quarters or 25 basis points lower. We think that's a little risky.

It seems like rates will never go up at this point and perhaps they never will. But we like kind of knowing what our future holds for our shareholders. So we like issuing the fixed-fix, if we were buying, we'd want to buy the fixed floating of course.

Jason Stewart -- JonesTrading Institutional Services

Right. Thank you for it. That's a good distinction. And then on the repo rate, it looked like there was a nice drop in January relative to the end of the fourth quarter.

Is that something you'd expect to continue to drop or is that the January rates, sort of what's baked in for February?

David Sayles -- Co-Chief Investment Officer

So are you referencing the monthly update in January or the December 31st number?

Jason Stewart -- JonesTrading Institutional Services

Correct.

David Sayles -- Co-Chief Investment Officer

Yes. So that incorporates the turn. So that's a spot number as of January 31st and we did have some open repos just for the one-day turn. So that is just the spot rate for the whole portfolio as of January -- as of December 31st.

So incorporates some year-end turn numbers in there. That it -- doesn't incorporate what that number is not – is the weighted average for the entire quarter. So the number will definitely be down in Q1 from there. And if you look at the K, the overall number for the Q4 was way lower than that number also reported.

Jim Mountain -- Chief Financial Officer

Yeah. Let me explain a little bit more on that. What we did and a couple of analysts called us actually and we walked them through this. So in October/November we did some two-night trades that were forward trades.

In other words, they started on December 31st and then ended on the next business day, which I think was the three days later, two nights, up to that period we took billions of dollars of bonds and did them in overnight financing at very, very low rates. So you don't see those high-170, low-180 numbers in that number because that's a snapshot of what we were paying on December 31st, for just two nights. And those two nights were anywhere between 3% and 4% depending on when we did it. But we did it way in advance because we didn't want to take any over year-end risk, particularly on the events of September 16th and 17th, highlighting what can go wrong.

This also highlights the benefit of Buckler because we only trusted through an affiliated broker dealer to take billions of dollars on overnight financing.

Jason Stewart -- JonesTrading Institutional Services

Right. So I guess, I understand where 4Q played out, and the 181 in January relative to GC, like the mid-170s, maybe a little lower. I guess I was asking more so, is there anything in 1Q that you would expect to change that trend relative to where GC is?

Jim Mountain -- Chief Financial Officer

The numbers you should see probably at the end of February would kind of be our straight line numbers and once again we'll put those out in March because all the trades we did to get over year-end all were done by early February, they rolled-off and right now by the way, rates of 173, 175, 176 for short-term and it's pretty flat. Repo right now is very benign, there's no -- there's been no real issues and like Jeff said, the curve is very, very just flat.

Jason Stewart -- JonesTrading Institutional Services

Got it. That answers my question. Thanks.

Operator

Thank you. Our next question comes from the line of Matthew Howlett with Instinet. Please proceed.

Matthew Howlett -- Nomura Instinet -- Analyst

Morning, guys, thanks for taking my question. Just on the trajectory of that margin done pretty well, fairly well, we're looking at. It looks like the funding cost rate to come down in 1Q only for your February numbers, but is there anything to believe that that would be sustained if knuckle higher here early in the year?

Jim Mountain -- Chief Financial Officer

So I think you're correct on the cost of funds side. On the asset side, it's a little harder to say only because, as we said in Q4 we bought a lot of assets when spreads were wider and in Q2 we do expect prepayments to increase. So, I won't expect it to go higher a lot, but I definitely wanted to see NIM go, come crashing down.

Jeff Zimmer -- Co-Chief Executive Officer

One other thing to keep an eye on as you think about this is the curve shape and part of what we do is capture term premium and there's less of it right now. We don't control right of course, but that's going to be a determinant, right.

Matthew Howlett -- Nomura Instinet -- Analyst

Right. Got --

Jim Mountain -- Chief Financial Officer

We were in a better place in Q4 on that account.

Matthew Howlett -- Nomura Instinet -- Analyst

Got it. Now, Jeff, just on your comments, I mean we look out in the spring time and we could get this prepayment ways and we could only get a lower tenure. I mean, is there, are you sort of waiting for more relative value to merge across the coupon stack, when you look at sort of adding at some point growing this portfolio.

Jeff Zimmer -- Co-Chief Executive Officer

Well, so right now, because we've -- as I discussed earlier, because we did buy all these Series B back, but we didn't issue as much Series C, we have the ability to just run-off for a couple months, while still maintaining a good source of core income. However, we do believe and has been the case most of the times in the past that our faster prepayment wave provides opportunities to go ahead and add mortgages and we will certainly want to take advantage of that, that could include selling some other mortgages that we have and buying more. It could include issuing more Series C or it could include upright, increasing our leverage if we think that opportunity in the risk profile adjusted looks good.

Matthew Howlett -- Nomura Instinet -- Analyst

Got it, makes sense. And then the CRT, I mean that's interesting you're doing -- the [Inaudible] commercial CRT, talk about sort of the difference between the commercial and the residential CRT. Would you like to someday get larger in that space, move down the capital stack? They know that the GSEs are constantly innovating that program, extending terms and doing seasons, how much more involved would you like to get in or is it just spreads or just so tight that it's limited at this point?

Jeff Zimmer -- Co-Chief Executive Officer

Well, we do look at it in the context, both of relative value as compared to say the traditional residential exposures as well as a source of diversification. The structures of deals are very different, convexity characteristics are very different. So there are core benefits to staying in that market and continuing to be active. There are also a total-return opportunities, it's been a terrific sector historically though with the rally we've seen in all kinds of credit product ranging all the way to corporates and high yield, it is getting compressed.

So we are going to stay very active in the sector. We have stepped back from a couple of transactions that have come to market where we just felt that we didn't want to be the last man buying. So it is, we've continued to allocate resources to it and in fact just allocated some more, I mean human resources this is a focus for us.

Jim Mountain -- Chief Financial Officer

We do like the commercial space and the hot deals are very interesting because they're shorter pieces of paper. So you're looking at versus two- and-a-half year kind of paper versus the longer part, the commercial directory is longer than the residential. So the last deal came quite a bit wider than the residential, the new deals due in the next 10 days, 14 days we'll see how that pre-talks.

Matthew Howlett -- Nomura Instinet -- Analyst

How are -- how is liquidity or how it's financing rates, haircuts in that space, just still holding steady?

Jeff Zimmer -- Co-Chief Executive Officer

For our portfolio, it's gotten better. In general, portfolio was unrated, when we bought it. And now I think everything as said maybe one Tranche beyond in our investment grade. So all the financing has gotten better over time for our existing portfolio.

For the new stock, it's -- financing is still great for that. It works. So, I mean originally we're buying on ready paper, we're financing it at one 160, 175, even 180 at some of the earliest years in early 2016 and now I think, well more than 50% of our portfolio has been upgraded to some sort of investment, so your funding is 75, 80, 85 haircuts are half in some cases what they used to be. So that benefits us in every way.

Matthew Howlett -- Nomura Instinet -- Analyst

Yeah, it's been a terrific trade acquisition for you guys. Thanks for the comments Jeff, appreciate it.

Jeff Zimmer -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann and Company. Please proceed.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Hey, guys, just a clarification on Matt's question. Are you guys intending or thinking about expanding your portfolio in non-agency type of securities?

Jeff Zimmer -- Co-Chief Executive Officer

Yeah, we love to. We like, we've had -- we've had a tremendously positive experience with credit securities. We view the environment is still quite benign on the-on the mortgage credit front. We'd just like to see a little more yield there.

We look at everything, all across the stack, all across the asset categories and I can assure you that when we see opportunity we're going to be the first guys to show up there.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. And am I correct, that for these non-agency securities, they're -- they don't really lend themselves to repo funding or am I incorrect on that?

Scott Ulm -- Co-Chief Executive Officer

Oh, repos, plentiful for non-agency securities these days. And indeed in many ways they are – the somewhat higher yield available to dealers on non-agencies makes them somewhat more attractive as a product on the street than agencies.

Jeff Zimmer -- Co-Chief Executive Officer

We've always funded our agencies, ever since we began buying them, in the old JAVELIN portfolio.

Jim Mountain -- Chief Financial Officer

Yes, I mean the reverse inquiry and not agencies, people are saying, you're Ginnie, Mae, threes are cute, but I'd rather lend against your CRTs, better balance sheet proposition for them as Scott discussed.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Interesting. OK, last question. Where do you think leverage is going? Including TBAs, I mean?

Jim Mountain -- Chief Financial Officer

So I noted this earlier, if you look at leverage just versus our equity common shareholder capital base, would not go down from here, flat to slightly up. If you look forward inclusive of our Series B's, which we called, issued half as much approximately 54% of the Series C's, you would see the leverage would be slightly up, if you look at all the capital holistically. As I also indicated earlier, we will use -- if there is indeed a widening due to faster prepayments, we'd like to utilize that opportunity to go ahead and invest in some securities at wider OESs assuming that we can hedge the convexity appropriately. David?

David Sayles -- Co-Chief Investment Officer

Leverage isn't so much at target, though there's a range in which we operate. It's not a dial that we turn independently. It's a dial we use in conjunction with the other decisions we're making. And so I think we're glad to be where we are right now, because we've got the flexibility to take on more leverage when we start to see some more attractive product, which we anticipate will happen probably in the next month or two.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. Thanks for taking my questions. Thank you.

David Sayles -- Co-Chief Investment Officer

Thank you.

Operator

Thank you. I am showing no further questions at this time.

Jim Mountain -- Chief Financial Officer

Well, thank you all for joining us this morning. We very much appreciate everyone's interest in ARMOUR Residential REIT, and as always if other questions occur to you later on or throughout the quarter, give us a call at the office and we'd enjoy the conversation. Until next time, goodbye.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Jim Mountain -- Chief Financial Officer

David Sayles -- Co-Chief Investment Officer

Doug Harter -- Credit Suisse -- Analyst

Jeff Zimmer -- Co-Chief Executive Officer

Mark Gruber -- Chief Operating Officer

Trevor Cranston -- JMP Securities -- Analyst

Jason Stewart -- JonesTrading Institutional Services

Matthew Howlett -- Nomura Instinet -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Scott Ulm -- Co-Chief Executive Officer

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