Ellington Residential Mortgage REIT Reports Second Quarter 2018 Results
Highlights
-
Net income of
$1.8 million , or$0.14 per share. -
Core Earnings1 of
$5.1 million , or$0.40 per share, and Adjusted Core Earnings1 of$4.6 million , or$0.36 per share. -
Book value of
$13.70 per share as of June 30, 2018, after giving effect to a second quarter dividend of$0.37 per share. - Net interest margin of 1.28%, and adjusted net interest margin2 of 1.17%.
- Weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio of 8.2%.
-
Dividend yield of 13.4% based on the
August 1, 2018 closing stock price of$11.07 . - Debt-to-equity ratio of 8.8:1 as of June 30, 2018; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.6:1.
- Net mortgage assets-to-equity ratio of 7.4:13 as of June 30, 2018.
-
Repurchased 115,800 shares during the quarter, or approximately 1% of
our outstanding shares as of the beginning of the quarter, at an
average price of
$11.01 per share.
Second Quarter 2018 Results
"In the second quarter, Ellington Residential had net income of
"The bear market flattening of the yield curve over the past 18 months has put downward pressure on our net interest margin, but we continue to take advantage of the asset opportunities and higher yields by turning over meaningful portions of our portfolio, in order to recharge our net interest margin and boost core earnings. We expect this activity to continue throughout the third quarter.
"Despite the ongoing technical drag from Fed tapering, we believe that Agency RMBS offer attractive relative value today, with favorable prepayment fundamentals and yield spreads that remain near their two-year widest levels, in contrast to many credit sectors where spreads remain near their two-year tightest levels. As a result, after having covered a significant portion of our TBA short position in March in response to the market selloff, we continue to keep our net mortgage exposure relatively high.
"Looking forward, as quantitative easing around the globe continues to give way to quantitative tightening, the market will continue to lose an important stabilizing force. The market is pricing in continued record low volatility, but if volatility returns, we would expect more investment opportunities and chances to differentiate ourselves. We believe that our hedging strategy and our highly liquid portfolio will allow us to take advantage of such opportunities while also preserving book value."
Market Overview
-
In June, the Federal Reserve raised the target range for the federal
funds rate by 0.25%, to 1.75%–2.00%, its seventh rate increase since
December 1, 2015 and its second rate increase so far in 2018. LIBOR rates, which drive many of our financing costs, increased in sympathy, with one-month LIBOR increasing 21 basis points to end the second quarter at 2.09%. -
In April and July, the Federal Reserve continued to increase the
amount of the tapering of its reinvestments in line with the schedule
it had laid out in
September 2017 . The tapering of Agency RMBS purchases increased to$12 billion per month in April and to$16 billion per month in July. The tapering of U.S. Treasury purchases increased to$18 billion per month in April and to$24 billion per month in July. - The yield curve flattened for the sixth consecutive quarter: the 2-year U.S. Treasury yield rose 26 basis points to end the second quarter at 2.53%, while the 10-year U.S. Treasury yield rose 12 basis points to 2.86%. The spread between the 2-year and 10-year tightened to just 33 basis points, as compared to 47 basis points at the end of the first quarter.
-
Mortgage rates increased in the second quarter, with the
Freddie Mac survey 30-year mortgage rate rising 11 basis points to end the quarter at 4.55%. -
Overall Agency RMBS prepayment rates continued to be muted during the
quarter.
The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, fell 11.9% quarter over quarter, dropping intra-quarter to its lowest seasonally-adjusted level in more than 17 years.
The second quarter of 2018 saw the extreme equity volatility of the
first quarter subside, but interest rate choppiness and yield curve
flattening continue. During the first part of the quarter, interest
rates continued their recent upward trend, with the 10-year U.S.
Treasury yield rising 37 basis points to an almost seven-year high of
3.11% on
Performance was mixed for the quarter across the various credit-sensitive sectors. Investment grade and high yield corporate credit spreads tightened during April but then widened in May and June, and finished the quarter approximately flat. Meanwhile, CMBS credit spreads generally tightened during the quarter (with especially strong demand for higher-yielding, non-investment grade CMBS securities), and the legacy non-Agency RMBS market continued to be well supported. The continued increase in LIBOR boosted coupons of floating-rate debt instruments, benefiting CLOs, leveraged loans, and other structured credit products.
Despite higher rates and the continued increase of Fed tapering, Agency
RMBS spreads generally held firm over the quarter, continuing to benefit
from a muted prepayment environment. As measured by the
Financial Results
Holdings
As of June 30, 2018, our mortgage-backed securities portfolio consisted
of
Our overall RMBS portfolio decreased by 3.1% to
With Agency RMBS yield spreads remaining near their two-year widest
levels in the second quarter, we continued to maintain a smaller short
TBA position that we use for hedging purposes, as well as a larger long
TBA portfolio held for investment purposes, compared to how we were
positioned in previous years. As of June 30, 2018, we had short TBAs of
With Agency RMBS prices declining again during the second quarter, our portfolio had significant realized and unrealized losses. While these losses were partially offset by significant gains on our interest rate swaps, futures, and TBA short positions, strong TBA dollar rolls and muted prepayments caused TBAs to outperform specified pools, which further dampened our results. Short positions in TBAs continue to represent a significant portion of our interest rate hedging portfolio.
Average pay-ups on our specified pools were essentially unchanged at 0.58% as of June 30, 2018, as compared to 0.59% as of March 31, 2018. Pay-ups are price premiums for specified pools relative to their TBA counterparts. Additionally, our GNMA portfolio benefited from a significant drop in GNMA prepayment speeds during the quarter, which reflected the impact of a new law inhibiting "churning" of VA loans, as well as certain disciplinary actions taken by GNMA against several originators whose loans have exhibited abnormally high prepayment speeds.
Our non-Agency RMBS performed well during the quarter, driven by strong
net interest income, which was slightly offset by net realized and
unrealized losses as prices declined marginally in the sector during the
quarter. Fundamentals underlying non-Agency RMBS continue to remain
strong, led by a stable housing market. Our total investment in
non-Agency RMBS was relatively unchanged at
Earnings and Net Interest Margin
We had net income of
For the quarter ended June 30, 2018, the weighted average yield of our portfolio of Agency and non-Agency RMBS was 3.26%, while our average cost of funds, including interest rate swaps and U.S. Treasury securities, was 1.98%, resulting in a net interest margin for the quarter of 1.28%. By comparison, for the quarter ended March 31, 2018, the weighted average yield of our Agency and non-Agency RMBS was 2.99%, while our average cost of funds, including interest rate swaps and U.S. Treasury securities, was 1.93%, resulting in a net interest margin of 1.06%. Excluding the impact of the Catch-up Premium Amortization Adjustment, the weighted average yield of our portfolio increased to 3.15% for the second quarter as compared to 3.02% for the first quarter, and our adjusted net interest margin was 1.17% and 1.09%, respectively.
On a quarter-over-quarter basis, our cost of funds, including the cost of repo, interest rate swaps, and short positions in U.S. Treasury securities, increased to 1.98% from 1.93%. This quarter-over-quarter increase resulted mainly from an increase in our repo borrowing rates, which increased as LIBOR rose. Our average repo borrowing rate increased 33 basis points quarter over quarter to 1.96%. This increase was partially offset by lower costs related to our short positions in U.S. Treasury securities and interest rate swaps, which decreased 28 basis points from the prior quarter.
For the quarter ended June 30, 2018, prices on our Agency RMBS portfolio
declined, and we had total net realized and unrealized losses of
During the quarter we continued to hedge interest rate risk, primarily
through the use of interest rate swaps, short positions in TBAs, U.S.
Treasury securities, and futures. For the quarter, we had total net
realized and unrealized gains of
After giving effect to a second quarter dividend of
1 |
Core Earnings and Adjusted Core Earnings are non-GAAP financial measures. Adjusted Core Earnings represents Core Earnings excluding the effect of the Catch-up Premium Amortization Adjustment on interest income. See "Reconciliation of Core Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Core Earnings, Adjusted Core Earnings, and the Catch-up Premium Amortization Adjustment. | |
2 | Adjusted net interest margin represents net interest margin excluding the effect of the Catch-up Premium Amortization Adjustment on interest income. | |
3 | We define our net mortgage assets-to-equity ratio as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity. As of June 30, 2018 the market value of our mortgage-backed securities and our net short TBA position was $1.580 billion and $(294.8) million, respectively, and total shareholders' equity was $174.2 million. | |
4 | "10-year equivalents" for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. | |
Securities Portfolio
The following table summarizes our portfolio of securities as of June 30, 2018 and March 31, 2018:
June 30, 2018 | March 31, 2018 | |||||||||||||||||||||||||||||||||||||
(In thousands) |
Current |
Fair Value |
Average |
Cost |
Average |
Current |
Fair Value |
Average |
Cost |
Average |
||||||||||||||||||||||||||||
Agency RMBS(2) | ||||||||||||||||||||||||||||||||||||||
15-year fixed-rate mortgages | $ | 147,080 | $ | 148,499 | $ | 100.96 | $ | 153,512 | $ | 104.37 | $ | 151,969 | $ | 154,850 | $ | 101.90 | $ | 158,690 | $ | 104.42 | ||||||||||||||||||
20-year fixed-rate mortgages | 8,143 | 8,421 | 103.41 | 8,767 | 107.66 | 8,432 | 8,773 | 104.04 | 9,078 | 107.66 | ||||||||||||||||||||||||||||
30-year fixed-rate mortgages | 1,263,388 | 1,294,483 | 102.46 | 1,329,912 | 105.27 | 1,304,988 | 1,341,220 | 102.78 | 1,375,171 | 105.38 | ||||||||||||||||||||||||||||
ARMs | 20,124 | 20,730 | 103.01 | 21,521 | 106.94 | 22,613 | 23,382 | 103.40 | 24,010 | 106.18 | ||||||||||||||||||||||||||||
Reverse mortgages | 71,781 | 76,831 | 107.04 | 78,603 | 109.50 | 69,813 | 75,382 | 107.98 | 76,536 | 109.63 | ||||||||||||||||||||||||||||
Total Agency RMBS | 1,510,516 | 1,548,964 | 102.55 | 1,592,315 | 105.42 | 1,557,815 | 1,603,607 | 102.94 | 1,643,485 | 105.50 | ||||||||||||||||||||||||||||
Non-Agency RMBS | 14,839 | 12,024 | 81.03 | 10,278 | 69.26 | 15,258 | 12,442 | 81.54 | 10,503 | 68.84 | ||||||||||||||||||||||||||||
Total RMBS(2) | 1,525,355 | 1,560,988 | 102.34 | 1,602,593 | 105.06 | 1,573,073 | 1,616,049 | 102.73 | 1,653,988 | 105.14 | ||||||||||||||||||||||||||||
Agency IOs | n/a | 19,115 | n/a | 18,583 | n/a | n/a | 14,526 | n/a | 14,264 | n/a | ||||||||||||||||||||||||||||
Total mortgage-backed securities | 1,580,103 | 1,621,176 | 1,630,575 | 1,668,252 | ||||||||||||||||||||||||||||||||||
U.S. Treasury securities sold short | (16,300 | ) | (16,195 | ) | 99.36 | (15,999 | ) | 98.15 | (44,350 | ) | (44,377 | ) | 100.06 | (44,002 | ) | 99.22 | ||||||||||||||||||||||
Reverse repurchase agreements | 21,373 | 21,373 | 100.00 | 21,373 | 100.00 | 44,617 | 44,617 | 100.00 | 44,617 | 100.00 | ||||||||||||||||||||||||||||
Total | $ | 1,585,281 | $ | 1,626,550 | $ | 1,630,815 | $ | 1,668,867 |
(1) | Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security. | |
(2) | Excludes Agency IOs. | |
Our weighted average holdings of RMBS based on amortized cost was
Financial Derivatives Portfolio
The following table summarizes fair value of our financial derivatives as of June 30, 2018 and March 31, 2018:
June 30, 2018 | March 31, 2018 | |||||||
(In thousands) | ||||||||
Financial derivatives–assets, at fair value: | ||||||||
TBA securities purchase contracts | $ | 422 | $ | 295 | ||||
TBA securities sale contracts | — | 1 | ||||||
Fixed payer interest rate swaps | 17,026 | 12,652 | ||||||
Fixed receiver interest rate swaps | — | 194 | ||||||
Swaptions | 470 | 386 | ||||||
Futures | 2,177 | — | ||||||
Total financial derivatives–assets, at fair value | 20,095 | 13,528 | ||||||
Financial derivatives–liabilities, at fair value: | ||||||||
TBA securities purchase contracts | (1 | ) | (122 | ) | ||||
TBA securities sale contracts | (1,394 | ) | (2,450 | ) | ||||
Fixed payer interest rate swaps | (260 | ) | (1,191 | ) | ||||
Fixed receiver interest rate swaps | — | (1 | ) | |||||
Futures | — | (2,112 | ) | |||||
Total financial derivatives–liabilities, at fair value | (1,655 | ) | (5,876 | ) | ||||
Total | $ | 18,440 | $ | 7,652 | ||||
Interest Rate Swaps
The following tables provide details about our fixed payer interest rate swaps as of June 30, 2018 and March 31, 2018:
June 30, 2018 | ||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) | ||||||||||||||||
2020 | $ | 86,000 | $ | 1,916 | 1.60 | % | 2.35 | % | 1.82 | |||||||
2021 | 133,400 | 3,677 | 1.89 | 2.35 | 2.91 | |||||||||||
2022 | 68,480 | 2,206 | 2.00 | 2.36 | 3.94 | |||||||||||
2023 | 119,466 | 2,786 | 2.30 | 2.36 | 4.77 | |||||||||||
2024 | 8,900 | 436 | 1.99 | 2.31 | 5.76 | |||||||||||
2025 | 47,722 | 650 | 2.57 | 2.33 | 6.67 | |||||||||||
2026 | 40,885 | 3,761 | 1.63 | 2.35 | 8.21 | |||||||||||
2027 | 30,000 | 1,458 | 2.29 | 2.35 | 8.85 | |||||||||||
2028 | 7,923 | (13 | ) | 2.85 | 2.36 | 9.61 | ||||||||||
2043 | 12,380 | (111 | ) | 2.99 | 2.35 | 24.89 | ||||||||||
Total | $ | 555,156 | $ | 16,766 | 2.05 | % | 2.35 | % | 4.93 | |||||||
March 31, 2018 | ||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) | ||||||||||||||||
2020 | $ | 86,000 | $ | 1,372 | 1.60 | % | 1.76 | % | 2.07 | |||||||
2021 | 161,400 | 2,428 | 2.03 | 1.90 | 3.14 | |||||||||||
2022 | 68,480 | 1,511 | 2.00 | 1.80 | 4.19 | |||||||||||
2023 | 150,466 | 1,984 | 2.38 | 1.82 | 4.99 | |||||||||||
2024 | 8,900 | 316 | 1.99 | 1.69 | 6.01 | |||||||||||
2025 | 57,822 | 361 | 2.62 | 1.97 | 6.93 | |||||||||||
2026 | 40,885 | 3,423 | 1.63 | 1.87 | 8.46 | |||||||||||
2027 | 30,000 | 934 | 2.29 | 1.79 | 9.10 | |||||||||||
2028 | 36,663 | (397 | ) | 2.89 | 2.01 | 9.93 | ||||||||||
2043 | 12,380 | (471 | ) | 2.99 | 1.83 | 25.13 | ||||||||||
Total | $ | 652,996 | $ | 11,461 | 2.15 | % | 1.86 | % | 5.31 | |||||||
The following table provides details about our fixed receiver interest
rate swaps as of March 31, 2018. As of
March 31, 2018 | ||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) | ||||||||||||||||
2021 | $ | 13,000 | $ | (1 | ) | 2.31 | % | 2.66 | % | 3.01 | ||||||
2025 | 9,700 | 194 | 1.72 | 3.00 | 7.30 | |||||||||||
Total | $ | 22,700 | $ | 193 | 2.06 | % | 2.80 | % | 4.84 | |||||||
Interest Rate Swaptions
The following tables provide information about our swaptions as of June 30, 2018 and March 31, 2018:
June 30, 2018 | ||||||||||||||
Option | Underlying Swap | |||||||||||||
Type | Fair Value |
Months to |
Notional |
Term (Years) |
Fixed Rate |
|||||||||
($ in thousands) | ||||||||||||||
Fixed Payer | $ | 470 | 1.0 | $ | 10,000 | 10 | 2.40% | |||||||
March 31, 2018 | ||||||||||||||
Option | Underlying Swap | |||||||||||||
Type | Fair Value |
Months to |
Notional |
Term (Years) |
Fixed Rate |
|||||||||
($ in thousands) | ||||||||||||||
Fixed Payer | $ | 386 | 4.0 | $ | 10,000 | 10 | 2.40% | |||||||
Futures
The following tables provide information about our short positions in futures as of June 30, 2018 and March 31, 2018:
June 30, 2018 | ||||||||||
Description | Notional Amount | Fair Value |
Remaining Months to |
|||||||
($ in thousands) | ||||||||||
U.S. Treasury Futures | $ | (296,100 | ) | $ | 2,177 | 2.84 | ||||
March 31, 2018 | ||||||||||
Description | Notional Amount | Fair Value |
Remaining Months to |
|||||||
($ in thousands) | ||||||||||
U.S. Treasury Futures | $ | (296,100 | ) | $ | (2,112 | ) | 2.84 | |||
TBAs
The following table provides information about our TBAs as of June 30, 2018 and March 31, 2018:
June 30, 2018 | March 31, 2018 | |||||||||||||||||||||||||||||||
TBA Securities |
Notional |
Cost |
Market |
Net |
Notional |
Cost |
Market |
Net |
||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Purchase contracts: | ||||||||||||||||||||||||||||||||
Assets | $ | 136,754 | $ | 139,946 | $ | 140,368 | $ | 422 | $ | 98,555 | $ | 99,949 | $ | 100,244 | $ | 295 | ||||||||||||||||
Liabilities | 12,710 | 13,343 | 13,342 | (1 | ) | 41,149 | 42,763 | 42,641 | (122 | ) | ||||||||||||||||||||||
149,464 | 153,289 | 153,710 | 421 | 139,704 | 142,712 | 142,885 | 173 | |||||||||||||||||||||||||
Sale contracts: | ||||||||||||||||||||||||||||||||
Assets | — | — | — | — | (3,600 | ) | (3,770 | ) | (3,769 | ) | 1 | |||||||||||||||||||||
Liabilities | (441,893 | ) | (447,161 | ) | (448,555 | ) | (1,394 | ) | (378,653 | ) | (379,954 | ) | (382,404 | ) | (2,450 | ) | ||||||||||||||||
(441,893 | ) | (447,161 | ) | (448,555 | ) | (1,394 | ) | (382,253 | ) | (383,724 | ) | (386,173 | ) | (2,449 | ) | |||||||||||||||||
Total TBA securities, net | $ | (292,429 | ) | $ | (293,872 | ) | $ | (294,845 | ) | $ | (973 | ) | $ | (242,549 | ) | $ | (241,012 | ) | $ | (243,288 | ) | $ | (2,276 | ) |
(1) | Notional amount represents the principal balance of the underlying Agency RMBS. | |
(2) | Cost basis represents the forward price to be paid for the underlying Agency RMBS. | |
(3) | Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of the respective period end. | |
(4) | Net carrying value represents the difference between the market value of the TBA contract as of the respective period end and the cost basis, and is reported in Financial derivatives-assets, at fair value and Financial derivatives-liabilities, at fair value on the Consolidated Balance Sheet, for each respective period end. | |
We primarily use TBAs to hedge interest rate risk, typically in the form of short positions. However, from time to time we also invest in TBAs as a means of acquiring exposure to Agency RMBS, or for speculative purposes, including holding long positions. Overall, we typically hold a net short position.
The following tables detail gains and losses on our financial derivatives for the three-month periods ended June 30, 2018 and March 31, 2018:
Three-Month Period Ended June 30, 2018 | |||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net |
|||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Interest rate swaps | $ | (1,341 | ) | $ | 528 | $ | (813 | ) | $ | 1,472 | $ | 3,686 | $ | 5,158 | |||||||||
Swaptions | — | — | 84 | 84 | |||||||||||||||||||
TBAs | (460 | ) | (460 | ) | 1,304 | 1,304 | |||||||||||||||||
Futures | (2,429 | ) | (2,429 | ) | 4,288 | 4,288 | |||||||||||||||||
Total | $ | (1,341 | ) | $ | (2,361 | ) | $ | (3,702 | ) | $ | 1,472 | $ | 9,362 | $ | 10,834 | ||||||||
Three-Month Period Ended March 31, 2018 | ||||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net |
||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest rate swaps | $ | 1,132 | $ | 2,441 | $ | 3,573 | $ | (1,511 | ) | $ | 6,098 | $ | 4,587 | |||||||||||
Swaptions | — | — | 205 | 205 | ||||||||||||||||||||
TBAs | 11,303 | 11,303 | (1,944 | ) | (1,944 | ) | ||||||||||||||||||
Futures | 1,079 | 1,079 | (2,283 | ) | (2,283 | ) | ||||||||||||||||||
Total | $ | 1,132 | $ | 14,823 | $ | 15,955 | $ | (1,511 | ) | $ | 2,076 | $ | 565 | |||||||||||
Interest Rate Sensitivity
The following table summarizes, as of June 30, 2018, the estimated effects on the value of our portfolio, both overall and by category, of immediate downward and upward parallel shifts of 50 basis points in interest rates.
Estimated Change in Fair Value(1) | ||||||||||||||
(In thousands) |
50 Basis Point Decline
in Interest Rates |
50 Basis Point Increase
in Interest Rates |
||||||||||||
Market Value |
% of Total |
Market Value |
% of Total |
|||||||||||
Agency RMBS—ARM Pools | $ | 197 | 0.11 | % | $ | (213 | ) | (0.12 | )% | |||||
Agency RMBS—Fixed Pools and IOs | 26,767 | 15.37 | % | (34,693 | ) | (19.92 | )% | |||||||
TBAs | (6,746 | ) | (3.87 | )% | 8,077 | 4.63 | % | |||||||
Non-Agency RMBS | 288 | 0.17 | % | (283 | ) | (0.16 | )% | |||||||
Interest Rate Swaps | (12,271 | ) | (7.05 | )% | 11,843 | 6.80 | % | |||||||
Swaptions | (432 | ) | (0.25 | )% | 424 | 0.24 | % | |||||||
U.S. Treasury Securities | (817 | ) | (0.47 | )% | 763 | 0.44 | % | |||||||
U.S. Treasury Futures | (9,011 | ) | (5.17 | )% | 8,742 | 5.02 | % | |||||||
Repurchase and Reverse Repurchase Agreements | (919 | ) | (0.53 | )% | 919 | 0.53 | % | |||||||
Total | $ | (2,944 | ) | (1.69 | )% | $ | (4,421 | ) | (2.54 | )% | ||||
(1) | Based on the market environment as of June 30, 2018. Results are based on forward-looking models, which are inherently imperfect, and incorporate various simplifying assumptions. Therefore, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual value of the overall portfolio that would differ from those presented above and such differences might be significant and adverse. | |
Repo Borrowings
The following table details our outstanding borrowings under repo agreements as of June 30, 2018 and March 31, 2018:
June 30, 2018 | March 31, 2018 | |||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||
Remaining Days to Maturity |
Borrowings |
Interest Rate |
Remaining |
Borrowings |
Interest Rate |
Remaining |
||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||
30 days or less | $ | 481,649 | 2.00 | % | 16 | $ | 468,222 | 1.67 | % | 16 | ||||||||
31-60 days | 732,797 | 2.10 | 45 | 818,835 | 1.76 | 45 | ||||||||||||
61-90 days | 322,770 | 2.18 | 76 | 302,262 | 1.90 | 75 | ||||||||||||
Total | $ | 1,537,216 | 2.09 | % | 42 | $ | 1,589,319 | 1.76 | % | 42 | ||||||||
As of June 30, 2018, we had no outstanding borrowings other than under repo agreements. Our repo borrowings were with 16 counterparties as of June 30, 2018. The above figures are as of the respective quarter ends; over the course of the quarters ended June 30, 2018 and March 31, 2018 our average cost of repo was 1.96% and 1.63%, respectively.
Other
We incur an annual base management fee, payable quarterly in arrears, in an amount equal to 1.50% of shareholders' equity (as defined in our management agreement). For the quarter ended June 30, 2018, our expense ratio, defined as management fees and operating expenses as a percentage of average shareholders' equity, was 3.2% on an annualized basis for the quarter ended June 30, 2018, as compared to 3.3% as of March 31, 2018. The decrease in our annualized expense ratio resulted primarily from lower professional fees and other operating expenses during the quarter.
Dividends
On
Share Repurchase Program
On
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, if applicable, items of income or loss that are of a non-recurring nature. Core Earnings includes net realized and change in net unrealized gains (losses) associated with payments and accruals of periodic payments on interest rate swaps. Adjusted Core Earnings represents Core Earnings excluding 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 our 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 our then assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.
Core Earnings and Adjusted Core Earnings are supplemental non-GAAP financial measures. We believe that Core Earnings and Adjusted Core Earnings provide information useful to investors because they are metrics that we use to assess our performance and to evaluate the effective net yield provided by the portfolio. Moreover, one of our objectives is to generate income from the net interest margin on the portfolio, and Core Earnings and Adjusted Core Earnings are used to help measure the extent to which this objective is being achieved. However, because Core Earnings and Adjusted Core Earnings are incomplete measures of our financial results and differ from net income (loss) computed in accordance with GAAP, they should be considered as supplementary to, and not as substitutes for, net income (loss) computed in accordance with GAAP.
The following table reconciles, for the three-month periods ended June 30, 2018 and March 31, 2018, our Core Earnings and Adjusted Core Earnings on a consolidated basis to the line on our Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure on our Consolidated Statement of Operations to Core Earnings:
(In thousands except share amounts) |
Three-Month Period Ended June 30, 2018 |
Three-Month Period Ended March 31, 2018 |
||||||
Net Income (Loss) | $ | 1,786 | $ | (3,953 | ) | |||
Less: | ||||||||
Net realized gains (losses) on securities | (7,114 | ) | 1,927 | |||||
Net realized gains (losses) on financial derivatives, excluding periodic payments(1) | (2,361 | ) | 14,823 | |||||
Change in net unrealized gains (losses) on securities | (3,218 | ) | (27,061 | ) | ||||
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) | 9,362 | 2,076 | ||||||
Subtotal | (3,331 | ) | (8,235 | ) | ||||
Core Earnings | $ | 5,117 | $ | 4,282 | ||||
Less: Catch-up Premium Amortization Adjustment | 480 | (150 | ) | |||||
Adjusted Core Earnings | $ | 4,637 | $ | 4,432 | ||||
Weighted Average Shares Outstanding | 12,715,277 | 13,224,214 | ||||||
Core Earnings Per Share | $ | 0.40 | $ | 0.32 | ||||
Adjusted Core Earnings Per Share | $ | 0.36 | $ | 0.34 | ||||
(1) | For the three-month period ended June 30, 2018, represents Net realized gains (losses) on financial derivatives of $(3.7) million less Net realized gains (losses) on periodic settlements of interest rate swaps of $(1.3) million. For the three-month period ended March 31, 2018, represents Net realized gains (losses) on financial derivatives of $16.0 million less Net realized gains (losses) on periodic settlements of interest rate swaps of $1.1 million. | |
(2) | For the three-month period ended June 30, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $10.8 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $1.5 million. For the three-month period ended March 31, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $0.6 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $(1.5) million. | |
About
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August 3, 2018, at approximately
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 our
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, our beliefs regarding
the current economic and investment environment, our ability to
implement our investment and hedging strategies, our future prospects
and the protection of our net interest margin from prepayments,
volatility and its impact on us, the performance of our investment and
hedging strategies, our exposure to prepayment risk in our Agency
portfolio, estimated effects on the fair value of our RMBS and interest
rate derivative holdings of a hypothetical change in interest rates,
statements regarding our share repurchase program, and statements
regarding the drivers of our returns. Our results can fluctuate from
month to month and from quarter to quarter depending on a variety of
factors, some of which are beyond our control and/or are difficult to
predict, including, without limitation, changes in interest rates and
the market value of our securities, changes in mortgage default rates
and prepayment rates, our ability to borrow to finance our assets,
changes in government regulations affecting our business, our ability to
maintain our exclusion from registration under the Investment Company
Act of 1940 and other changes in market conditions and economic trends.
Furthermore, forward-looking statements are subject to risks and
uncertainties, including, among other things, those described in Item 1A
of our Annual Report on Form 10-K for the fiscal year ended
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) |
||||||||||||
Three-Month |
Six-Month |
|||||||||||
June 30,
2018 |
March 31,
2018 |
June 30,
2018 |
||||||||||
(In thousands except share amounts) | ||||||||||||
INTEREST INCOME (EXPENSE) | ||||||||||||
Interest income | $ | 14,081 | $ | 13,426 | $ | 27,506 | ||||||
Interest expense | (7,668 | ) | (7,248 | ) | (14,915 | ) | ||||||
Total net interest income | 6,413 | 6,178 | 12,591 | |||||||||
EXPENSES | ||||||||||||
Management fees to affiliate | 656 | 671 | 1,327 | |||||||||
Professional fees | 217 | 234 | 452 | |||||||||
Compensation expense | 187 | 189 | 375 | |||||||||
Insurance expense | 74 | 74 | 148 | |||||||||
Other operating expenses | 293 | 349 | 641 | |||||||||
Total expenses | 1,427 | 1,517 | 2,943 | |||||||||
OTHER INCOME (LOSS) | ||||||||||||
Net realized gains (losses) on securities | (7,114 | ) | 1,927 | (5,188 | ) | |||||||
Net realized gains (losses) on financial derivatives | (3,702 | ) | 15,955 | 12,253 | ||||||||
Change in net unrealized gains (losses) on securities | (3,218 | ) | (27,061 | ) | (30,279 | ) | ||||||
Change in net unrealized gains (losses) on financial derivatives | 10,834 | 565 | 11,399 | |||||||||
Total other income (loss) | (3,200 | ) | (8,614 | ) | (11,815 | ) | ||||||
NET INCOME (LOSS) | $ | 1,786 | $ | (3,953 | ) | $ | (2,167 | ) | ||||
NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||
Basic and Diluted | $ | 0.14 | $ | (0.30 | ) | $ | (0.17 | ) | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | 12,715,277 | 13,224,214 | 12,968,340 | |||||||||
CASH DIVIDENDS PER SHARE: | ||||||||||||
Dividends declared |
$ | 0.37 | $ | 0.37 | $ | 0.74 | ||||||
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||||||
As of | ||||||||||||
June 30, |
March 31, |
December 31, |
||||||||||
(In thousands except share amounts) | ||||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 41,402 | $ | 46,025 | $ | 56,117 | ||||||
Mortgage-backed securities, at fair value | 1,580,103 | 1,630,575 | 1,685,998 | |||||||||
Due from brokers | 26,946 | 32,061 | 26,754 | |||||||||
Financial derivatives–assets, at fair value | 20,095 | 13,528 | 8,792 | |||||||||
Reverse repurchase agreements | 21,373 | 44,617 | 81,461 | |||||||||
Receivable for securities sold | 51,614 | 73,560 | 21,606 | |||||||||
Interest receivable | 5,988 | 5,645 | 5,784 | |||||||||
Other assets | 748 | 523 | 575 | |||||||||
Total Assets | $ | 1,748,269 | $ | 1,846,534 | $ | 1,887,087 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
LIABILITIES | ||||||||||||
Repurchase agreements | $ | 1,537,216 | $ | 1,589,319 | $ | 1,597,206 | ||||||
Payable for securities purchased | 1,387 | 17,612 | 3,830 | |||||||||
Due to brokers | 7,312 | 1,025 | 489 | |||||||||
Financial derivatives–liabilities, at fair value | 1,655 | 5,876 | 1,863 | |||||||||
U.S. Treasury securities sold short, at fair value | 16,195 | 44,377 | 81,289 | |||||||||
Dividend payable |
4,703 | 4,746 | 4,936 | |||||||||
Accrued expenses | 849 | 911 | 728 | |||||||||
Management fee payable to affiliate | 656 | 671 | 725 | |||||||||
Interest payable | 4,127 | 3,685 | 3,318 | |||||||||
Total Liabilities | 1,574,100 | 1,668,222 | 1,694,384 | |||||||||
SHAREHOLDERS' EQUITY | ||||||||||||
Preferred shares, par value $0.01 per share, 100,000,000 shares authorized; (0 shares issued and outstanding, respectively) |
— | — | — | |||||||||
Common shares, par value $0.01 per share, 500,000,000 shares authorized; (12,712,050, 12,827,850, and 13,340,217 shares issued and outstanding, respectively) |
127 | 128 | 134 | |||||||||
Additional paid-in-capital | 233,152 | 234,376 | 240,062 | |||||||||
Accumulated deficit | (59,110 | ) | (56,192 | ) | (47,493 | ) | ||||||
Total Shareholders' Equity | 174,169 | 178,312 | 192,703 | |||||||||
Total Liabilities and Shareholders' Equity | $ | 1,748,269 | $ | 1,846,534 | $ | 1,887,087 | ||||||
PER SHARE INFORMATION | ||||||||||||
Common shares, par value $0.01 per share |
$ | 13.70 | $ | 13.90 | $ | 14.45 | ||||||
(1) Derived from audited financial statements as of December 31, 2017. | ||
View source version on businesswire.com: https://www.businesswire.com/news/home/20180802006009/en/
Source:
Investors: JR Herlihy, Chief Operating Officer, Ellington Residential
Mortgage REIT, (203) 409-3773 or info@earnreit.com;
or
Media:
Amanda Klein or Kevin Fitzgerald, Gasthalter & Co., for Ellington
Residential Mortgage REIT, (212) 257-4170 or Ellington@gasthalter.com