Ellington Residential Mortgage REIT Reports Second Quarter 2013 Results
Summary of Financial Results
- Incurred a net loss for the quarter of
$9.7 million or$1.55 per share.- Primary driver of net loss was net realized and unrealized losses on Agency RMBS.
- Core Earnings1 for the quarter was
$1.3 million or$0.21 per share. - Book value declined 5.5% to
$18.57 per share as ofJune 30, 2013 from$19.65 per share as ofMarch 31, 2013 .- Net realized and unrealized gains on hedges successfully offset roughly three quarters of the net realized and unrealized losses on RMBS assets.
- Much of the book value decline was the result of the significant widening in Agency RMBS yield spreads during the quarter.
- Looking forward, this yield spread widening has enabled Agency RMBS to provide a much "higher quality" net interest margin, in that the wider spreads coincide with a higher interest rate environment in which prepayment risk and policy risk are substantially reduced.
- Weighted average yield on the Agency and non-Agency RMBS portfolio was 2.8% for the quarter, while average cost of funds excluding interest rate swaps was 0.38% and including interest rate swaps was 1.19%.
- In
May 2013 , the Company completed an initial public offering and concurrent private placement resulting in net proceeds to the Company of$148.5 million .- Proceeds were fully invested as of
June 30, 2013 .
- Proceeds were fully invested as of
- Declared second quarter dividend of
$0.14 per share inJune 2013 . - Debt-to-equity ratio of 7.2:1 as of
June 30, 2013 . - The Company's Board of Trustees has authorized a
$10 million share repurchase program.
Second Quarter 2013 Results
For the quarter ended
During the quarter, the Company deployed the vast majority of the proceeds from its IPO in its primary targeted asset class, Agency pools. As interest rates rose precipitously following the IPO, prices of Agency pools fell sharply, with lower coupon securities faring the worst. The general components of the declines in Agency RMBS were as follows: (1) interest rates rose; (2) pools extended in duration as expected future prepayments declined, thus exacerbating the price declines; (3) Agency RMBS, as the primary focus of the Federal Reserve's buying efforts, came under particular selling pressure, so Agency RMBS widened dramatically relative to U.S. Treasuries and swaps; and (4) "pay-ups" (i.e., price premiums over TBAs) for specified Agency pools contracted significantly, as a direct and indirect result of the dramatic increase in interest rates.
"The last two months of the second quarter were extremely challenging for the Agency RMBS market, as interest rates surged and many market participants came under great pressure to sell assets and reduce risk," said
As it deployed the proceeds of the IPO during the quarter, the Company also implemented its hedging program, primarily using a mix of interest rate swaps and short TBA positions. However, as interest rates rose, future expected prepayments declined, and as a result the Company's assets lengthened in expected duration. To better hedge against these movements, the Company employed a dynamically managed hedging strategy whereby it extended the terms of its interest rate swaps throughout the selloff (the TBA hedging positions "automatically" extend in expected duration). While the interest rate swap hedges, even dynamically managed, were less effective than the TBA hedges, overall the Company was able to mitigate much of the impact of the surge in interest rates. As of
Volatility in the Agency RMBS market will likely continue to be tied to actions of the Federal Reserve and its ongoing asset purchase programs. Continued improvement in the U.S. economy, particularly in the form of declines in unemployment and the ongoing recovery in the housing market, have only added to speculation that the Federal Reserve will begin to wind down its asset purchase programs—and possibly even begin selling assets—earlier than previously predicted. However, while some statements from the Federal Reserve have supported the notion of a tapering of its accommodative monetary policies, more recently the Federal Reserve has taken steps to reiterate its earlier view that the U.S. economy is still in need of support and that its policies will be necessary for the foreseeable future. While the Federal Reserve's eventual exit from quantitative easing could expand the opportunities for the Company in the Agency RMBS market in the long term, it will no doubt cause a period of significant uncertainty. This uncertainty reinforces the importance of hedging.
In the non-Agency RMBS market, the rally of the past year continued through the first half of the second quarter. Because home prices serve as one of the most important determinants of future cash flows in distressed non-Agency RMBS, the ongoing positive momentum in home prices continued to fuel prices for non-Agency RMBS through mid-May. However, in the latter part of the quarter, prices of non-Agency RMBS were also negatively impacted by the surge in interest rates that impacted Agency RMBS and other fixed income sectors. Also weighing on non-Agency RMBS prices was the sale in late May of a
The Company completed an initial public offering and concurrent private placement of its common shares in
The Company's book value per share was
For the quarter ended
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.
The following table summarizes the Company's portfolio of real estate securities as of
June 30, 2013 |
March 31, 2013 |
||||||||||||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
|||||||||||||||||||||||||||||
Agency RMBS(2) |
|||||||||||||||||||||||||||||||||||||||
15-year fixed rate mortgages |
$ |
138,155 |
$ |
142,249 |
$ |
102.96 |
$ |
144,771 |
$ |
104.79 |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
|||||||||||||||||||
30-year fixed rate mortgages |
1,142,993 |
1,160,516 |
101.53 |
1,204,637 |
105.39 |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||||||
Total Agency RMBS |
1,281,148 |
1,302,765 |
101.69 |
1,349,408 |
105.33 |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||||||
Non-Agency RMBS |
62,358 |
38,810 |
62.24 |
38,708 |
62.07 |
20,252 |
12,360 |
61.03 |
12,099 |
59.74 |
|||||||||||||||||||||||||||||
Total RMBS(2) |
1,343,506 |
1,341,575 |
99.86 |
1,388,116 |
103.32 |
20,252 |
12,360 |
61.03 |
12,099 |
59.74 |
|||||||||||||||||||||||||||||
Interest only securities |
n/a |
9,904 |
n/a |
8,886 |
n/a |
n/a |
— |
n/a |
— |
n/a |
|||||||||||||||||||||||||||||
Total Real Estate Securities |
$ |
1,351,479 |
$ |
1,397,002 |
$ |
12,360 |
$ |
12,099 |
(1) Represents the dollar amount (not shown in thousands) per
(2) Excludes Interest only securities.
Derivatives Portfolio
The following table summarizes the Company's derivatives as of
June 30, 2013 |
||||||||
(In thousands) |
Notional |
Fair Value |
||||||
Derivative assets, at fair value: |
||||||||
TBA securities purchase contracts |
$ |
29,350 |
$ |
169 |
||||
TBA securities sale contracts |
(324,864) |
4,581 |
||||||
Fixed rate payer interest rate swaps |
(740,900) |
26,516 |
||||||
(1,036,414) |
31,266 |
|||||||
Derivative liabilities, at fair value: |
||||||||
TBA securities purchase contracts |
45,000 |
(1,923) |
||||||
TBA securities sale contracts |
(95,300) |
(737) |
||||||
Fixed rate payer interest rate swaps |
(40,000) |
(320) |
||||||
(90,300) |
(2,980) |
|||||||
Total |
$ |
(1,126,714) |
$ |
28,286 |
As of
Interest Rate Swaps
The following table provides details about the Company's interest rate swaps as of
June 30, 2013 |
|||||||||||||||||
Maturity |
Notional Amount |
Fair Value |
Weighted Average Pay Rate |
Weighted Average Receive Rate |
Weighted Average Years to Maturity |
||||||||||||
(In thousands) |
|||||||||||||||||
2017 |
$ |
40,000 |
$ |
181 |
1.05 |
% |
0.27 |
% |
3.95 |
||||||||
2018 |
183,000 |
4,117 |
1.03 |
% |
0.27 |
% |
4.89 |
||||||||||
2020 |
271,900 |
8,711 |
1.61 |
% |
0.27 |
% |
6.90 |
||||||||||
2023 |
204,000 |
10,192 |
2.10 |
% |
0.27 |
% |
9.89 |
||||||||||
2043 |
82,000 |
2,995 |
3.25 |
% |
0.26 |
% |
29.94 |
||||||||||
Total |
$ |
780,900 |
$ |
26,196 |
1.74 |
% |
0.27 |
% |
9.48 |
TBAs
The following table provides (in thousands) additional information about the Company's TBAs as of
TBA Securities |
Notional Amount (1) |
Cost Basis (2) |
Market Value (3) |
Net Carrying Value (4) |
||||||||||||
Purchase contracts: |
||||||||||||||||
Assets |
$ |
29,350 |
$ |
28,519 |
$ |
28,688 |
$ |
169 |
||||||||
Liabilities |
45,000 |
45,909 |
43,986 |
(1,923) |
||||||||||||
Sale contracts: |
||||||||||||||||
Assets |
(324,864) |
(336,878) |
(332,297) |
4,581 |
||||||||||||
Liabilities |
(95,300) |
(96,207) |
(96,944) |
(737) |
||||||||||||
Total TBA securities, net |
$ |
(345,814) |
$ |
(358,657) |
$ |
(356,567) |
$ |
2,090 |
(1) Notional amount represents the principal balance of the underlying Agency MBS.
(2) Cost basis represents the forward price to be paid for the underlying Agency MBS.
(3) Market value represents the current market value of the underlying Agency MBS (on a forward delivery basis) as of
(4) Net carrying value represents the difference between the market value of the TBA contract as of
The Company primarily uses TBAs to hedge interest rate risk, but from time to time it also holds net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.
Interest Rate Sensitivity
The following table summarizes, as of
Estimated Change in Fair Value |
||||||||
(In thousands) |
50 Basis Point Decline in Interest Rates |
50 Basis Point Increase in Interest Rates |
||||||
Agency RMBS, excluding TBAs |
$ |
36,088 |
$ |
(42,502) |
||||
TBAs |
(8,390) |
10,145 |
||||||
Non-Agency RMBS |
296 |
(295) |
||||||
Interest Rate Swaps |
(30,459) |
28,660 |
||||||
Repurchase Agreements |
(428) |
574 |
||||||
Total |
$ |
(2,893) |
$ |
(3,418) |
Repo Borrowings
The following table details the Company's outstanding borrowings under repo agreements as of
June 30, 2013 |
||||||||||
Weighted Average |
||||||||||
Original Maturity |
Borrowings Outstanding |
Interest Rate |
Days to Maturity |
|||||||
(In thousands) |
||||||||||
30 days or less |
$ |
700,812 |
0.38 |
% |
15 |
|||||
31-60 days |
289,830 |
0.37 |
% |
44 |
||||||
61-90 days |
225,054 |
0.37 |
% |
74 |
||||||
Total |
$ |
1,215,696 |
0.37 |
% |
33 |
As of
Other
The Company incurs an annual base management fee in an amount equal to 1.5% of shareholders' equity (as defined in its management agreement), which is payable quarterly in arrears. The Company expects that, based on its current level of shareholders' equity, its base management fee and operating expenses will, together, approximate 3.3% of shareholders' equity, on an annualized basis. Operating expenses exclude interest expense.
Dividends
On
Share Repurchase Program
On
Reconciliation of Core Earnings to Net Income (Loss)
Core Earnings consists of net income or net loss, excluding realized gains or losses on sales of securities and termination of interest rate swaps, unrealized gains or losses on real estate securities and interest rate swaps and realized and unrealized gains or losses on TBAs, and, if applicable, items of income or loss that are of a non-recurring nature. Core Earnings includes realized and unrealized losses associated with payments and accruals of periodic settlements of interest rate swaps. Core Earnings is a supplemental non-GAAP financial measure. We believe Core Earnings provides information useful to investors, because it is a metric used by management to assess our performance and to evaluate the effective net yield provided by our portfolio. Moreover, one of our objectives is to generate income from the net interest margin on our portfolio and we use Core Earnings to help measure the extent to which we are achieving this objective. However, because Core Earnings is an incomplete measure of our financial results and differs from net income or net 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 and six month periods ended
(In thousands except share amounts) |
Three Month Period Ended June 30, 2013 |
Six Month Period Ended June 30, 2013 |
||||||
Net Loss |
$ |
(9,704) |
$ |
(8,574) |
||||
Less: |
||||||||
Net realized losses on real estate securities |
(3,006) |
(2,117) |
||||||
Net realized gains on derivatives |
8,376 |
8,376 |
||||||
Change in net unrealized losses on real estate securities |
(45,784) |
(45,629) |
||||||
Change in net unrealized gains on derivatives |
28,286 |
28,286 |
||||||
Sub-Total |
2,424 |
2,510 |
||||||
Plus: |
||||||||
Net realized and unrealized losses on periodic payments of interest rate swaps |
(1,111) |
(1,111) |
||||||
Core Earnings |
$ |
1,313 |
$ |
1,399 |
||||
Weighted Average Shares Outstanding |
6,248,763 |
3,953,820 |
||||||
Core Earnings Per Share |
$ |
0.21 |
$ |
0.35 |
About
Conference Call
The Company will host a conference call at
A dial-in replay of the conference call will be available on Thursday, August 15, 2013, 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 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, management'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 its Agency portfolio, estimated effects on the fair value of the Company's MBS and interest rate derivative holdings of a hypothetical change in interest rates, statements regarding the Company's share repurchase program, including the amount of shares to be repurchased, 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 exemption 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 Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
ELLINGTON RESIDENTIAL MORTGAGE REIT |
||||||||||||
Three Month Period Ended |
Six Month Period Ended |
|||||||||||
June 30, 2013 |
March 31, 2013 |
June 30, 2013 |
||||||||||
(In thousands except share amounts) |
||||||||||||
INTEREST INCOME |
||||||||||||
Interest income |
$ |
4,310 |
$ |
283 |
$ |
4,592 |
||||||
Interest expense |
(525) |
— |
(525) |
|||||||||
Total net interest income |
3,785 |
283 |
4,067 |
|||||||||
EXPENSES |
||||||||||||
Management fees |
703 |
119 |
823 |
|||||||||
Professional fees |
237 |
32 |
268 |
|||||||||
Other operating expenses |
421 |
46 |
466 |
|||||||||
Total expenses |
1,361 |
197 |
1,557 |
|||||||||
OTHER INCOME (LOSS) |
||||||||||||
Net realized gains (losses) on real estate securities |
(3,006) |
888 |
(2,117) |
|||||||||
Net realized gains on derivative instruments |
8,376 |
— |
8,376 |
|||||||||
Change in net unrealized gains (losses) on real estate securities |
(45,784) |
155 |
(45,629) |
|||||||||
Change in net unrealized gains on derivative instruments |
28,286 |
— |
28,286 |
|||||||||
Total other income (loss) |
(12,128) |
1,043 |
(11,084) |
|||||||||
NET INCOME (LOSS) |
$ |
(9,704) |
$ |
1,129 |
$ |
(8,574) |
||||||
NET INCOME (LOSS) PER COMMON SHARE |
||||||||||||
Basic |
$ |
(1.55) |
$ |
0.69 |
$ |
(2.17) |
||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
6,248,763 |
1,633,378 |
3,953,820 |
ELLINGTON RESIDENTIAL MORTGAGE REIT |
||||||||||||
As of |
||||||||||||
June 30, 2013 |
March 31, 2013 |
December 31, 2012(1) |
||||||||||
(In thousands except share amounts) |
||||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ |
52,345 |
$ |
20,098 |
$ |
18,161 |
||||||
Real estate securities, at fair value |
1,351,479 |
12,360 |
13,596 |
|||||||||
Due from brokers |
41,604 |
— |
— |
|||||||||
Derivative assets, at fair value |
31,266 |
— |
— |
|||||||||
Receivable for securities sold |
15,963 |
— |
— |
|||||||||
Interest receivable |
3,943 |
43 |
39 |
|||||||||
Other assets |
367 |
439 |
360 |
|||||||||
Total Assets |
1,496,967 |
32,940 |
32,156 |
|||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||
LIABILITIES |
||||||||||||
Repurchase agreements |
1,215,696 |
— |
— |
|||||||||
Payable for securities purchased |
77,136 |
— |
— |
|||||||||
Due to brokers |
27,887 |
— |
— |
|||||||||
Derivative liabilities, at fair value |
2,980 |
— |
— |
|||||||||
Dividend payable |
1,279 |
— |
— |
|||||||||
Accrued expenses |
1,360 |
728 |
1,076 |
|||||||||
Management fee payable |
703 |
119 |
116 |
|||||||||
Interest payable |
353 |
— |
— |
|||||||||
Total Liabilities |
1,327,394 |
847 |
1,192 |
|||||||||
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; (9,133,378, 1,633,378, and 1,633,378 shares issued and outstanding, respectively) |
91 |
16 |
16 |
|||||||||
Additional paid-in-capital |
181,061 |
32,674 |
32,674 |
|||||||||
Accumulated deficit |
(11,579) |
(597) |
(1,726) |
|||||||||
Total Shareholders' Equity |
169,573 |
32,093 |
30,964 |
|||||||||
Total Liabilities and Shareholders' Equity |
$ |
1,496,967 |
$ |
32,940 |
$ |
32,156 |
(1) Derived from audited financial statements as of
SOURCE
Investors, Lisa Mumford, Chief Financial Officer, Ellington Residential Mortgage REIT, (203) 409-3773; or Media, Steve Bruce or Katrina Allen, ASC Advisors, for Ellington Residential Mortgage REIT, (203) 992-1230