Ellington Residential Mortgage REIT Reports First Quarter 2020 Results
Highlights
-
Net loss of
$(16.7) million , or$(1.35) per share. -
Core Earnings1 of
$3.4 million , or$0.27 per share. -
Book value of
$11.34 per share as ofMarch 31, 2020 , which includes the effect of a first quarter dividend of$0.28 per share. - Net interest margin2 of 1.20%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 15.4%.
-
Dividend yield of 12.7% based on the
May 4, 2020 closing stock price of$8.83 . -
Debt-to-equity ratio of 7.9:1 as of
March 31, 2020 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 7.2:1. -
Net mortgage assets-to-equity ratio of 5.6:13 as of
March 31, 2020 . -
Cash and cash equivalents of
$59.7 million as ofMarch 31, 2020 , in addition to other unencumbered assets of$12.1 million . -
Repurchased 136,142 shares during the quarter, or approximately 1% of our outstanding shares as of the beginning of the quarter, at an average price of
$7.24 per share.
First Quarter 2020 Results
"The spread of COVID-19 generated severe dislocations in virtually all financial markets, and the residential mortgage market was not spared. The first quarter of 2020 will be remembered as one of the most challenging environments for leveraged mortgage portfolios in recent history," said
"For EARN, the precipitous decline in interest rates and high levels of interest rate volatility generated net losses on our hedges, and while our Agency RMBS assets did rally in price during the quarter, they significantly underperformed our hedges. As a result, we experienced a significant net loss for the quarter. In light of the heightened levels of market volatility and systemic liquidity risk, we proactively reduced the size of our Agency portfolio by 25%, thereby bolstering our liquidity and lowering our leverage. By reducing our Agency portfolio in an orderly and measured way, we entirely avoided any forced asset sales, which would have exacerbated losses. As we reported in early April, we met all margin calls during the quarter. While losses are always disappointing, I believe—given that leveraged mortgage portfolios were in the crosshairs of the distress in the financial markets this past quarter—that it is a testament to our portfolio management, risk management, and liquidity management capabilities that we were able to limit those losses and preserve book value per share to the extent we did.
"Moving forward, the investment opportunities look exceptional given the continued dislocations in most sectors of the residential mortgage market. Net interest margins available in many RMBS sectors are the widest we've seen in years, and given our strong liquidity position, we believe that we are in an excellent position to take advantage of these opportunities. At the same time, in this volatile and uncertain environment, we believe that our disciplined approach to risk management and liquidity management will continue to be critical in the months ahead."
1 Core Earnings is a non-GAAP financial measure. See "Reconciliation of Core Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Core Earnings.
2 Net interest margin excludes the effect of the Catch-up Premium Amortization Adjustment.
3 The Company defines its net mortgage assets-to-equity ratio as the net aggregate market value of its mortgage-backed securities (including the underlying market values of its long and short TBA positions) divided by total shareholders' equity. As of
Financial Results
The following table summarizes the Company's portfolio of RMBS as of
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(In thousands) |
Current
|
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Fair Value |
|
Average
|
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Cost |
|
Average
|
|
Current
|
|
Fair Value |
|
Average
|
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Cost |
|
Average
|
||||||||||||||||||||
Agency RMBS(2) |
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|
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||||||||||||||||||||
15-year fixed-rate mortgages |
$ |
124,511 |
|
|
$ |
132,375 |
|
|
$ |
106.32 |
|
|
$ |
127,030 |
|
|
$ |
102.02 |
|
|
$ |
173,350 |
|
|
$ |
181,231 |
|
|
$ |
104.55 |
|
|
$ |
176,848 |
|
|
$ |
102.02 |
|
20-year fixed-rate mortgages |
1,087 |
|
|
1,187 |
|
|
109.20 |
|
|
1,165 |
|
|
107.18 |
|
|
1,276 |
|
|
1,385 |
|
|
108.54 |
|
|
1,356 |
|
|
106.27 |
|
||||||||||
30-year fixed-rate mortgages |
708,062 |
|
|
765,220 |
|
|
108.07 |
|
|
738,821 |
|
|
104.34 |
|
|
996,451 |
|
|
1,058,878 |
|
|
106.26 |
|
|
1,041,550 |
|
|
104.53 |
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||||||||||
ARMs |
28,823 |
|
|
30,233 |
|
|
104.89 |
|
|
29,836 |
|
|
103.51 |
|
|
32,122 |
|
|
33,255 |
|
|
103.53 |
|
|
33,049 |
|
|
102.89 |
|
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Reverse mortgages |
90,656 |
|
|
98,357 |
|
|
108.49 |
|
|
97,215 |
|
|
107.24 |
|
|
91,560 |
|
|
99,934 |
|
|
109.15 |
|
|
98,407 |
|
|
107.48 |
|
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Total Agency RMBS |
953,139 |
|
|
1,027,372 |
|
|
107.79 |
|
|
994,067 |
|
|
104.29 |
|
|
1,294,759 |
|
|
1,374,683 |
|
|
106.17 |
|
|
1,351,210 |
|
|
104.36 |
|
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Non-Agency RMBS |
10,507 |
|
|
7,520 |
|
|
71.57 |
|
|
6,620 |
|
|
63.01 |
|
|
10,947 |
|
|
8,851 |
|
|
80.85 |
|
|
6,924 |
|
|
63.25 |
|
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Total RMBS(2) |
963,646 |
|
|
1,034,892 |
|
|
107.39 |
|
|
1,000,687 |
|
|
103.84 |
|
|
1,305,706 |
|
|
1,383,534 |
|
|
105.96 |
|
|
1,358,134 |
|
|
104.02 |
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Agency IOs |
n/a |
|
15,629 |
|
|
n/a |
|
17,266 |
|
|
n/a |
|
n/a |
|
18,244 |
|
|
n/a |
|
17,795 |
|
|
n/a |
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Total mortgage-backed securities |
|
|
$ |
1,050,521 |
|
|
|
|
$ |
1,017,953 |
|
|
|
|
|
|
$ |
1,401,778 |
|
|
|
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$ |
1,375,929 |
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(1) Represents the dollar amount (not shown in thousands) per
(2) Excludes Agency IOs.
The Company's overall RMBS portfolio decreased by 25% to
Primarily as a result of asset sales, the Company's net mortgage assets-to-equity ratio declined to 5.6:1 as of
As of
The Company had a net loss for the quarter, as declining interest rates and high levels of interest rate volatility generated net realized and unrealized losses on interest rate hedges which, combined with operating expenses, exceeded net interest income and net realized and unrealized gains on Agency RMBS investments. With heightened interest rate volatility and a flight to the perceived safe haven of
In the Company's non-Agency RMBS portfolio, as with most other fixed income credit assets, yield spreads widened substantially and resulted in mark-to-market losses for the quarter. Given this substantial yield spread widening, the Company is currently considering increasing its capital allocation to this sector.
Core Earnings and net interest margin increased quarter over quarter driven by a lower cost of funds, mainly on the Company's repo borrowings, which more than offset lower asset yields.
Reconciliation of Core Earnings to Net Income (Loss)
Core Earnings consists of net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding, if applicable, any non-recurring items of income or loss. Core Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on the Company's Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on the Company's then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. Core Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.
Core Earnings is a supplemental non-GAAP financial measure. The Company believes that Core Earnings provides information useful to investors because it is a metric that the Company uses to assess its performance and to evaluate the effective net yield provided by the portfolio. Moreover, one of the Company's objectives is to generate income from the net interest margin on the portfolio, and Core Earnings is used to help measure the extent to which this objective is being achieved. In addition, the Company believes that presenting Core Earnings enables its investors to measure, evaluate and compare its operating performance to that of its peer companies. However, because Core Earnings is an incomplete measure of the Company's financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP.
The following table reconciles, for the three-month periods ended
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Three-Month Period Ended |
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(In thousands except share amounts) |
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Net Income (Loss) |
|
$ |
(16,745 |
) |
|
$ |
9,706 |
|
Adjustments: |
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Net realized (gains) losses on securities |
|
(1,093 |
) |
|
(972 |
) |
||
Change in net unrealized (gains) losses on securities |
|
(6,768 |
) |
|
(3,691 |
) |
||
Net realized (gains) losses on financial derivatives |
|
6,499 |
|
|
16,251 |
|
||
Change in net unrealized (gains) losses on financial derivatives |
|
20,600 |
|
|
(21,199 |
) |
||
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
1,333 |
|
|
(1,717 |
) |
||
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
(1,149 |
) |
|
1,954 |
|
||
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
683 |
|
|
2,493 |
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||
Subtotal |
|
20,105 |
|
|
(6,881 |
) |
||
Core Earnings |
|
$ |
3,360 |
|
|
$ |
2,825 |
|
Weighted Average Shares Outstanding |
|
12,434,755 |
|
|
12,449,936 |
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Core Earnings Per Share |
|
$ |
0.27 |
|
|
$ |
0.23 |
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About
Conference Call
The Company will host a conference call at
A dial-in replay of the conference call will be available on
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from the Company's beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Examples of forward-looking statements in this press release include, without limitation, the Company's beliefs regarding the current economic and investment environment, the Company's ability to implement its investment and hedging strategies, the Company's future prospects and the protection of the Company's net interest margin from prepayments, volatility and its impact on the Company, the performance of the Company's investment and hedging strategies, the Company's exposure to prepayment risk in the Company's Agency portfolio, and statements regarding the drivers of the Company's returns. The Company's results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond the Company's control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of the Company's securities, changes in mortgage default rates and prepayment rates, the Company's ability to borrow to finance its assets, changes in government regulations affecting the Company's business, the Company's ability to maintain its exclusion from registration under the Investment Company Act of 1940 and other changes in market conditions and economic trends, including changes resulting from the ongoing spread and economic effects of the novel coronavirus (COVID-19). Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) |
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Three-Month Period Ended |
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(In thousands except share amounts) |
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INTEREST INCOME (EXPENSE) |
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Interest income |
|
$ |
9,881 |
|
|
$ |
8,609 |
|
Interest expense |
|
(6,100 |
) |
|
(7,239 |
) |
||
Total net interest income |
|
3,781 |
|
|
1,370 |
|
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EXPENSES |
|
|
|
|
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Management fees to affiliate |
|
526 |
|
|
606 |
|
||
Professional fees |
|
208 |
|
|
163 |
|
||
Compensation expense |
|
151 |
|
|
113 |
|
||
Insurance expense |
|
76 |
|
|
73 |
|
||
Other operating expenses |
|
327 |
|
|
320 |
|
||
Total expenses |
|
1,288 |
|
|
1,275 |
|
||
OTHER INCOME (LOSS) |
|
|
|
|
||||
Net realized gains (losses) on securities |
|
1,093 |
|
|
972 |
|
||
Net realized gains (losses) on financial derivatives |
|
(6,499 |
) |
|
(16,251 |
) |
||
Change in net unrealized gains (losses) on securities |
|
6,768 |
|
|
3,691 |
|
||
Change in net unrealized gains (losses) on financial derivatives |
|
(20,600 |
) |
|
21,199 |
|
||
Total other income (loss) |
|
(19,238 |
) |
|
9,611 |
|
||
NET INCOME (LOSS) |
|
$ |
(16,745 |
) |
|
$ |
9,706 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
||||
Basic and Diluted |
|
$ |
(1.35 |
) |
|
$ |
0.78 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
12,434,755 |
|
|
12,449,936 |
|
||
CASH DIVIDENDS PER SHARE: |
|
|
|
|
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Dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
CONSOLIDATED BALANCE SHEET (UNAUDITED) |
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As of |
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(In thousands except share amounts) |
|
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ASSETS |
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
59,671 |
|
|
$ |
35,351 |
|
Mortgage-backed securities, at fair value |
|
1,050,521 |
|
|
1,401,778 |
|
||
Other investments, at fair value |
|
355 |
|
|
— |
|
||
Due from brokers |
|
49,966 |
|
|
34,596 |
|
||
Financial derivatives–assets, at fair value |
|
1,732 |
|
|
4,180 |
|
||
Reverse repurchase agreements |
|
2,218 |
|
|
2,084 |
|
||
Receivable for securities sold |
|
111,596 |
|
|
5,500 |
|
||
Interest receivable |
|
4,219 |
|
|
5,016 |
|
||
Other assets |
|
867 |
|
|
604 |
|
||
Total Assets |
|
$ |
1,281,145 |
|
|
$ |
1,489,109 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
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LIABILITIES |
|
|
|
|
||||
Repurchase agreements |
|
$ |
1,109,342 |
|
|
$ |
1,296,272 |
|
Payable for securities purchased |
|
— |
|
|
19,433 |
|
||
Due to brokers |
|
2,348 |
|
|
33 |
|
||
Financial derivatives–liabilities, at fair value |
|
20,234 |
|
|
2,047 |
|
||
|
|
2,154 |
|
|
2,070 |
|
||
Dividend payable |
|
3,449 |
|
|
3,488 |
|
||
Accrued expenses |
|
690 |
|
|
588 |
|
||
Management fee payable to affiliate |
|
526 |
|
|
605 |
|
||
Interest payable |
|
2,679 |
|
|
3,729 |
|
||
Total Liabilities |
|
1,141,422 |
|
|
1,328,265 |
|
||
SHAREHOLDERS' EQUITY |
|
|
|
|
||||
Preferred shares, par value |
|
— |
|
|
— |
|
||
Common shares, par value |
|
123 |
|
|
124 |
|
||
Additional paid-in-capital |
|
229,432 |
|
|
230,358 |
|
||
Accumulated deficit |
|
(89,832 |
) |
|
(69,638 |
) |
||
Total Shareholders' Equity |
|
139,723 |
|
|
160,844 |
|
||
Total Liabilities and Shareholders' Equity |
|
$ |
1,281,145 |
|
|
$ |
1,489,109 |
|
PER SHARE INFORMATION |
|
|
|
|
||||
Common shares, par value |
|
$ |
11.34 |
|
|
$ |
12.91 |
|
(1) Derived from audited financial statements as of
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Investors:
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
for
(212) 257-4170
Ellington@gasthalter.com
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