Ellington Residential Mortgage REIT Reports Second Quarter 2020 Results
Highlights
-
Net income of
$21.3 million , or$1.73 per share; year-to-date net income of$4.6 million , or$0.37 per share. -
Core Earnings1 of
$3.2 million , or$0.26 per share. -
Book value of
$12.80 per share as ofJune 30, 2020 , which includes the effect of a second quarter dividend of$0.28 per share. Economic return of 15.3% for the quarter, and year-to-date economic return of 3.5%. - Net interest margin2 of 1.86%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 18.0%.
-
Dividend yield of 10.1% based on the
August 3, 2020 closing stock price of$11.09 . -
Debt-to-equity ratio of 5.8:1 as of
June 30, 2020 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 6.8:1. -
Net mortgage assets-to-equity ratio of 5.9:13 as of
June 30, 2020 . -
Cash and cash equivalents of
$50.9 million as ofJune 30, 2020 , in addition to other unencumbered assets of$45.1 million .
Second Quarter 2020 Results
"During the second quarter, Ellington Residential generated net income of
"Coming into the second quarter, pay-ups on specified pools were extremely depressed, and represented compelling value in our view. Indeed, our specified pools performed exceptionally well during the second quarter, as investors sought prepayment protection amidst record-low mortgage rates and a spike in CPRs. In addition, we saw a highly attractive entry point in non-Agency RMBS, and grew those holdings substantially at heavily discounted prices; this decision also paid off handsomely, as prices recovered sharply as the quarter progressed. Finally, our results benefited from the strong performance of reverse mortgage pools, which have rebounded significantly from the distress in March, and which we believe will attract even greater investor demand in this low interest rate environment.
"I am extremely pleased with our performance so far in 2020. Throughout the severe market distress of March and early April, our risk and liquidity management protected book value and preserved liquidity, putting us in excellent position to play offense in the second quarter. We took advantage of some very attractive investment opportunities, in both Agency and non-Agency RMBS, and as a result, we benefited from the rebound in the second quarter, more than earning back the first quarter loss. Our strong performance also enabled us to maintain our dividend, despite historically low interest rates and high volatility.
"Looking forward, we believe that our smaller size will continue to be an advantage, as it enables us to be nimble and react quickly to reposition our portfolio in response to changing market conditions. With mortgage rates near all-time lows and prepayment rates again on the rise, we see a market environment that we believe will continue to play to our strengths, where pool selection, hedging choices, and risk management will continue to drive performance. And as always, our disciplined interest rate hedging and active portfolio management should continue to be critical in both protecting book value and enabling us to benefit from upside, in these uncertain times."
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
|
|
|
|
||||||||||||||||||||||||||||||||||||
(In thousands) |
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
|
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
||||||||||||||||||||
Agency RMBS(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
15-year fixed-rate mortgages |
$ |
64,491 |
|
|
$ |
69,169 |
|
|
$ |
107.25 |
|
|
$ |
66,172 |
|
|
$ |
102.61 |
|
|
$ |
124,511 |
|
|
$ |
132,375 |
|
|
$ |
106.32 |
|
|
$ |
127,030 |
|
|
$ |
102.02 |
|
20-year fixed-rate mortgages |
1,077 |
|
|
1,191 |
|
|
110.58 |
|
|
1,148 |
|
|
106.59 |
|
|
1,087 |
|
|
1,187 |
|
|
109.20 |
|
|
1,165 |
|
|
107.18 |
|
||||||||||
30-year fixed-rate mortgages |
825,850 |
|
|
900,003 |
|
|
108.98 |
|
|
861,994 |
|
|
104.38 |
|
|
708,062 |
|
|
765,220 |
|
|
108.07 |
|
|
738,821 |
|
|
104.34 |
|
||||||||||
ARMs |
25,471 |
|
|
26,827 |
|
|
105.32 |
|
|
26,030 |
|
|
102.19 |
|
|
28,823 |
|
|
30,233 |
|
|
104.89 |
|
|
29,836 |
|
|
103.51 |
|
||||||||||
Reverse mortgages |
89,561 |
|
|
100,393 |
|
|
112.09 |
|
|
95,451 |
|
|
106.58 |
|
|
90,656 |
|
|
98,357 |
|
|
108.49 |
|
|
97,215 |
|
|
107.24 |
|
||||||||||
Total Agency RMBS |
1,006,450 |
|
|
1,097,583 |
|
|
109.05 |
|
|
1,050,795 |
|
|
104.41 |
|
|
953,139 |
|
|
1,027,372 |
|
|
107.79 |
|
|
994,067 |
|
|
104.29 |
|
||||||||||
Non-Agency RMBS |
58,642 |
|
|
41,987 |
|
|
71.60 |
|
|
39,016 |
|
|
66.53 |
|
|
10,507 |
|
|
7,520 |
|
|
71.57 |
|
|
6,620 |
|
|
63.01 |
|
||||||||||
Total RMBS(2) |
1,065,092 |
|
|
1,139,570 |
|
|
106.99 |
|
|
1,089,811 |
|
|
102.32 |
|
|
963,646 |
|
|
1,034,892 |
|
|
107.39 |
|
|
1,000,687 |
|
|
103.84 |
|
||||||||||
Agency IOs |
n/a |
|
14,477 |
|
|
n/a |
|
16,023 |
|
|
n/a |
|
n/a |
|
15,629 |
|
|
n/a |
|
17,266 |
|
|
n/a |
||||||||||||||||
Total mortgage-backed securities |
|
|
$ |
1,154,047 |
|
|
|
|
$ |
1,105,834 |
|
|
|
|
|
|
$ |
1,050,521 |
|
|
|
|
$ |
1,017,953 |
|
|
|
(1) |
Represents the dollar amount (not shown in thousands) per |
|
(2) |
Excludes Agency IOs. |
After reducing the size of its portfolio in response to the volatility of the first quarter, the Company opportunistically increased the size of both its Agency RMBS and non-Agency RMBS holdings during the second quarter, as markets stabilized. Notably, the Company took advantage of an attractive entry point in non-Agency RMBS, increasing its holdings in this sector more than fivefold to
In total, the Company's overall RMBS portfolio increased by approximately 10% to
Despite the growth of the portfolio during the quarter, the Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, actually declined to 6.8:1 as of
As of
The Company's Agency RMBS portfolio performed exceptionally well during the second quarter, driven by significantly higher pay-ups on its specified pools. Pay-ups are price premiums for specified pools relative to their TBA counterparts. During the first quarter of 2020, pay-ups had declined in the face of market-wide liquidity stresses, exacerbated by quarter-end balance sheet pressures as well as the implementation in March of the
During the second quarter, asset purchases by the
The Company's results also benefited from the appreciation of its reverse mortgage pools, driven by strong investor demand and a recovery in yield spreads after the distress in March.
During the second quarter the Company continued to hedge interest rate risk, primarily through the use of interest rate swaps, and to a lesser extent through the use of short positions in TBAs,
Finally, the Company added significantly to its non-Agency RMBS portfolio during the quarter, and this portfolio performed extremely well as prices increased throughout the quarter. The Company may continue to increase its allocation to non-Agency RMBS going forward.
Net interest margin increased significantly quarter over quarter driven by a lower cost of funds, mainly on the Company's repo borrowings, which more than offset lower asset yields. Despite the increase in net interest margin, the Company's Core Earnings decreased slightly as a result of significantly lower average holdings quarter over quarter.
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
|
|
Three-Month Period Ended |
||||||
(In thousands except share amounts) |
|
|
|
|
||||
Net Income (Loss) |
|
$ |
21,345 |
|
|
$ |
(16,745) |
|
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
(5,175) |
|
|
(1,093) |
|
||
Change in net unrealized (gains) losses on securities |
|
(15,690) |
|
|
(6,768) |
|
||
Net realized (gains) losses on financial derivatives |
|
8,452 |
|
|
6,499 |
|
||
Change in net unrealized (gains) losses on financial derivatives |
|
(9,505) |
|
|
20,600 |
|
||
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
(1,223) |
|
|
1,333 |
|
||
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
896 |
|
|
(1,149) |
|
||
Deferred offering costs expensed |
|
313 |
|
|
— |
|
||
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
3,782 |
|
|
683 |
|
||
Subtotal |
|
(18,150) |
|
|
20,105 |
|
||
Core Earnings |
|
$ |
3,195 |
|
|
$ |
3,360 |
|
Weighted Average Shares Outstanding |
|
12,319,616 |
|
|
12,434,755 |
|
||
Core Earnings Per Share |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
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 economic effects related to the COVID-19 pandemic, and associated responses to the pandemic. 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
|
|
Six-Month
|
||||||||
|
|
|
|
|
|
|
||||||
(In thousands except share amounts) |
|
|
|
|
|
|
||||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
|
|
||||||
Interest income |
|
$ |
3,489 |
|
|
$ |
9,881 |
|
|
$ |
13,370 |
|
Interest expense |
|
(2,330) |
|
|
(6,100) |
|
|
(8,430) |
|
|||
Total net interest income |
|
1,159 |
|
|
3,781 |
|
|
4,940 |
|
|||
EXPENSES |
|
|
|
|
|
|
||||||
Management fees to affiliate |
|
594 |
|
|
526 |
|
|
1,119 |
|
|||
Professional fees |
|
598 |
|
|
208 |
|
|
806 |
|
|||
Compensation expense |
|
142 |
|
|
151 |
|
|
293 |
|
|||
Insurance expense |
|
82 |
|
|
76 |
|
|
158 |
|
|||
Other operating expenses |
|
316 |
|
|
327 |
|
|
643 |
|
|||
Total expenses |
|
1,732 |
|
|
1,288 |
|
|
3,019 |
|
|||
OTHER INCOME (LOSS) |
|
|
|
|
|
|
||||||
Net realized gains (losses) on securities |
|
5,175 |
|
|
1,093 |
|
|
6,268 |
|
|||
Net realized gains (losses) on financial derivatives |
|
(8,452) |
|
|
(6,499) |
|
|
(14,951) |
|
|||
Change in net unrealized gains (losses) on securities |
|
15,690 |
|
|
6,768 |
|
|
22,458 |
|
|||
Change in net unrealized gains (losses) on financial derivatives |
|
9,505 |
|
|
(20,600) |
|
|
(11,096) |
|
|||
Total other income (loss) |
|
21,918 |
|
|
(19,238) |
|
|
2,679 |
|
|||
NET INCOME (LOSS) |
|
$ |
21,345 |
|
|
$ |
(16,745) |
|
|
$ |
4,600 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
||||||
Basic and Diluted |
|
$ |
1.73 |
|
|
$ |
(1.35) |
|
|
$ |
0.37 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
12,319,616 |
|
|
12,434,755 |
|
|
12,377,185 |
|
|||
CASH DIVIDENDS PER SHARE: |
|
|
|
|
|
|
||||||
Dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.56 |
|
CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||||||
|
|
As of |
||||||||||
|
|
|
|
|
|
|
||||||
(In thousands except share amounts) |
|
|
|
|
|
|
||||||
ASSETS |
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
50,935 |
|
|
$ |
59,671 |
|
|
$ |
35,351 |
|
Mortgage-backed securities, at fair value |
|
1,154,047 |
|
|
1,050,521 |
|
|
1,401,778 |
|
|||
Other investments, at fair value |
|
411 |
|
|
355 |
|
|
— |
|
|||
Due from brokers |
|
38,024 |
|
|
49,966 |
|
|
34,596 |
|
|||
Financial derivatives–assets, at fair value |
|
3,115 |
|
|
1,732 |
|
|
4,180 |
|
|||
Reverse repurchase agreements |
|
— |
|
|
2,218 |
|
|
2,084 |
|
|||
Receivable for securities sold |
|
40,977 |
|
|
111,596 |
|
|
5,500 |
|
|||
Interest receivable |
|
4,289 |
|
|
4,219 |
|
|
5,016 |
|
|||
Other assets |
|
539 |
|
|
867 |
|
|
604 |
|
|||
Total Assets |
|
$ |
1,292,337 |
|
|
$ |
1,281,145 |
|
|
$ |
1,489,109 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
LIABILITIES |
|
|
|
|
|
|
||||||
Repurchase agreements |
|
$ |
909,821 |
|
|
$ |
1,109,342 |
|
|
$ |
1,296,272 |
|
Payable for securities purchased |
|
205,950 |
|
|
— |
|
|
19,433 |
|
|||
Due to brokers |
|
1,372 |
|
|
2,348 |
|
|
33 |
|
|||
Financial derivatives–liabilities, at fair value |
|
12,144 |
|
|
20,234 |
|
|
2,047 |
|
|||
|
|
— |
|
|
2,154 |
|
|
2,070 |
|
|||
Dividend payable |
|
3,450 |
|
|
3,449 |
|
|
3,488 |
|
|||
Accrued expenses |
|
837 |
|
|
690 |
|
|
588 |
|
|||
Management fee payable to affiliate |
|
594 |
|
|
526 |
|
|
605 |
|
|||
Interest payable |
|
492 |
|
|
2,679 |
|
|
3,729 |
|
|||
Total Liabilities |
|
1,134,660 |
|
|
1,141,422 |
|
|
1,328,265 |
|
|||
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
Preferred shares, par value |
|
— |
|
|
— |
|
|
— |
|
|||
Common shares, par value |
|
123 |
|
|
123 |
|
|
124 |
|
|||
Additional paid-in-capital |
|
229,491 |
|
|
229,432 |
|
|
230,358 |
|
|||
Accumulated deficit |
|
(71,937) |
|
|
(89,832) |
|
|
(69,638) |
|
|||
Total Shareholders' Equity |
|
157,677 |
|
|
139,723 |
|
|
160,844 |
|
|||
Total Liabilities and Shareholders' Equity |
|
$ |
1,292,337 |
|
|
$ |
1,281,145 |
|
|
$ |
1,489,109 |
|
PER SHARE INFORMATION |
|
|
|
|
|
|
||||||
Common shares, par value |
|
$ |
12.80 |
|
|
$ |
11.34 |
|
|
$ |
12.91 |
|
(1) |
Derived from audited financial statements as of |
View source version on businesswire.com: https://www.businesswire.com/news/home/20200804006070/en/
Investors:
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
for
(212) 257-4170
Ellington@gasthalter.com
Source: