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ARMOUR Residential (ARR) Downgraded To 'Hold' By Deutsche Bank On Valuation

 February 17, 2013 10:02 PM


(By Balaseshan) Deutsche Bank analyst Stephen Laws downgraded rating of ARMOUR Residential REIT Inc. (NYSE: ARR) to "Hold" from "Buy" given valuation, and lowered price target to $6.75 from $8.30.

On February 13, ARR reported an estimated current book value per share (BVPS) range of $6.70 and $6.76, down 13% from the last reported BVPS of $7.77 at September 30. Given the book value range and yesterday's equity offering, Laws estimates pro forma post-deal book value of $6.73 per share.

As a result of the BVPS decline and a reduction in the analyst's BV premium from 5% to 0%, he lowered his price target. Given his new target relative to the current valuation, he is reducing his rating. Since 2000, agency MBS managers have traded in a range of 50% to 275% of BV; however, the post-2008 range has narrowed to 75% to 135% of BV.

[Related -The Highest-Yielding Stock In The United States]

Given Laws' portfolio return estimates, valuation multiples for other agency MBS managers, and taking into account ARR's willingness to issue stock at levels roughly neutral to BV (when new investments are accretive to earnings), he believes shares trading in line with BVPS is appropriate.

ARR provided selected financial data in conjunction with yesterday's equity offering. 4Q GAAP EPS is expected to be 36-38 cents, which is not comparable to the analyst's core EPS estimate of 25 cents as the GAAP number includes gains on sale of MBS.

The company reported a year end BVPS range of $7.28-$7.30, however, ARR reported a February 12 BVPS range of $6.70-$6.76. ARR expects taxable REIT income for 4Q and 2012 to be in line with the dividends paid of 27 cents and $1.20 per share, respectively, the analyst noted.

[Related -ARMOUR Residential REIT Initiated As 'Buy' By Deutsche Bank, PT $7.75]

Yesterday, ARR priced a secondary offering of 65 million shares at $6.84 per share, raising net proceeds estimate at roughly $440 million, Laws noted.

Given currently available spreads versus the existing portfolio ROEs, the analyst believes the new capital can be deployed at slightly accretive levels assuming roughly 9.0 times leverage. He will review his estimates after ARR provides detailed 4Q financials, and he remains comfortable with the monthly dividend rate of 8 cents.

ARR is trading down 1.34% at $6.61 on Friday.

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