Ellington Residential Mortgage REIT Reports Third Quarter 2018 Results
Highlights
-
Net income of
$0.9 million , or$0.07 per share. -
Core Earnings1 of
$3.7 million , or$0.29 per share, and Adjusted Core Earnings1 of$4.1 million , or$0.32 per share. -
Book value of
$13.40 per share as ofSeptember 30, 2018 , after giving effect to a third quarter dividend of$0.37 per share. - Net interest margin of 1.02%, and adjusted net interest margin2 of 1.12%.
- Weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio of 8.36%.
-
Dividend yield of 14.1% based on the
November 2, 2018 closing stock price of$10.48 . -
Debt-to-equity ratio of 8.8:1 as of
September 30, 2018 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.7:1. -
Net mortgage assets-to-equity ratio of 7.9:13 as of
September 30, 2018 .
Third Quarter 2018 Results
"Our third quarter results again demonstrated the effectiveness of our
hedging and portfolio management to protect book value and bolster net
income in a rising interest rate environment," stated
"We continue to believe that Agency RMBS offers attractive value today, with favorable prepayment fundamentals and yield spreads that remain near their widest levels in the past two years. We took advantage of the yield spread widening during the quarter to cover a portion of our TBA short positions and increase our net mortgage assets-to-equity ratio.
"During the first weeks of the fourth quarter, we have seen more opportunities to add assets at both higher yields and wider spreads, and expand our net interest margin and grow core earnings. At the same time, the return of volatility to the markets is underscoring the importance of our hedges to preserve book value."
| 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 | 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 September 30, 2018 the market value of the Company's mortgage-backed securities and its net short TBA position was $1.576 billion and $(223.8) million, respectively, and total shareholders' equity was $170.2 million. | |
Financial Results
The following table summarizes the Company's portfolio of RMBS as of
| September 30, 2018 | June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) |
Current |
Fair Value |
Average |
Cost |
Average |
Current |
Fair Value |
Average |
Cost |
Average |
|||||||||||||||||||||||||||||||||||||||
| Agency RMBS(2) | |||||||||||||||||||||||||||||||||||||||||||||||||
| 15-year fixed-rate mortgages | $ | 145,249 | $ | 145,769 | $ | 100.36 | $ | 151,319 | $ | 104.18 | $ | 147,080 | $ | 148,499 | $ | 100.96 | $ | 153,512 | $ | 104.37 | |||||||||||||||||||||||||||||
| 20-year fixed-rate mortgages | 7,687 | 7,866 | 102.33 | 8,287 | 107.81 | 8,143 | 8,421 | 103.41 | 8,767 | 107.66 | |||||||||||||||||||||||||||||||||||||||
| 30-year fixed-rate mortgages | 1,273,788 | 1,297,612 | 101.87 | 1,335,573 | 104.85 | 1,263,388 | 1,294,483 | 102.46 | 1,329,912 | 105.27 | |||||||||||||||||||||||||||||||||||||||
| ARMs | 18,513 | 19,051 | 102.91 | 19,735 | 106.60 | 20,124 | 20,730 | 103.01 | 21,521 | 106.94 | |||||||||||||||||||||||||||||||||||||||
| Reverse mortgages | 70,938 | 75,049 | 105.80 | 77,510 | 109.26 | 71,781 | 76,831 | 107.04 | 78,603 | 109.50 | |||||||||||||||||||||||||||||||||||||||
| Total Agency RMBS | 1,516,175 | 1,545,347 | 101.92 | 1,592,424 | 105.03 | 1,510,516 | 1,548,964 | 102.55 | 1,592,315 | 105.42 | |||||||||||||||||||||||||||||||||||||||
| Non-Agency RMBS | 14,418 | 11,952 | 82.90 | 9,908 | 68.72 | 14,839 | 12,024 | 81.03 | 10,278 | 69.26 | |||||||||||||||||||||||||||||||||||||||
| Total RMBS(2) | 1,530,593 | 1,557,299 | 101.74 | 1,602,332 | 104.69 | 1,525,355 | 1,560,988 | 102.34 | 1,602,593 | 105.06 | |||||||||||||||||||||||||||||||||||||||
| Agency IOs | n/a | 18,684 | n/a | 17,601 | n/a | n/a | 19,115 | n/a | 18,583 | n/a | |||||||||||||||||||||||||||||||||||||||
| Total mortgage-backed securities | $ | 1,575,983 | $ | 1,619,933 | $ | 1,580,103 | $ | 1,621,176 | |||||||||||||||||||||||||||||||||||||||||
|
(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. | |
The Company's overall RMBS portfolio decreased by 0.3% to
The primary drivers of net income for the quarter were strong net interest income on the Company's Agency RMBS investments and net realized and unrealized gains from its interest rate hedges. A portion of this income was offset by net realized and unrealized losses on the Company's Agency RMBS investments that occurred as Agency RMBS prices declined again during the third quarter. During the quarter the Company continued to hedge interest rate risk, primarily through the use of interest rate swaps, short positions in TBAs, U.S. Treasury securities, and futures.
The Company's non-Agency RMBS performed well during the quarter, driven by strong net interest income and net realized and unrealized gains. Fundamentals underlying non-Agency RMBS continue to remain strong, led by a stable housing market. To the extent that more attractive entry points develop in non-Agency RMBS, the Company may increase its capital allocation to this sector.
In the third quarter, Core Earnings and Adjusted Core Earnings were modestly lower than in the second quarter due to lower adjusted net interest margin, where higher asset yields quarter-over-quarter were more than offset by increases in repo borrowing rates.
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 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 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. The Company believes that Core Earnings and Adjusted Core Earnings provide information useful to investors because they are metrics that it 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 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 the Company's 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
| (In thousands except share amounts) |
Three-Month Period Ended September 30, 2018 |
Three-Month Period Ended June 30, 2018 |
||||||||
| Net Income (Loss) | $ | 946 | $ | 1,786 | ||||||
| Less: | ||||||||||
| Net realized gains (losses) on securities | (8,402 | ) | (7,114 | ) | ||||||
| Net realized gains (losses) on financial derivatives, excluding periodic payments(1) | 2,777 | (2,361 | ) | |||||||
| Change in net unrealized gains (losses) on securities | (2,636 | ) | (3,218 | ) | ||||||
| Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) | 5,499 | 9,362 | ||||||||
| Subtotal | (2,762 | ) | (3,331 | ) | ||||||
| Core Earnings | $ | 3,708 | $ | 5,117 | ||||||
| Less: Catch-up Premium Amortization Adjustment | (398 | ) | 480 | |||||||
| Adjusted Core Earnings | $ | 4,106 | $ | 4,637 | ||||||
| Weighted Average Shares Outstanding | 12,693,989 | 12,715,277 | ||||||||
| Core Earnings Per Share | $ | 0.29 | $ | 0.40 | ||||||
| Adjusted Core Earnings Per Share | $ | 0.32 | $ | 0.36 | ||||||
| (1) | For the three-month period ended September 30, 2018, represents Net realized gains (losses) on financial derivatives of $4.1 million less Net realized gains (losses) on periodic settlements of interest rate swaps of $1.3 million. 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. | |
| (2) | For the three-month period ended September 30, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $4.6 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $(0.9) million. 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. | |
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, estimated effects on
the fair value of the Company's RMBS and interest rate derivative
holdings of a hypothetical change in interest rates, statements
regarding the Company's share repurchase program, 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.
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
|
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) |
|||||||||||||||
|
Three-Month
Period Ended |
Nine-Month |
||||||||||||||
|
September 30,
2018 |
June 30,
2018 |
September 30, |
|||||||||||||
| (In thousands except share amounts) | |||||||||||||||
| INTEREST INCOME (EXPENSE) | |||||||||||||||
| Interest income | $ | 13,171 | $ | 14,081 | $ | 40,677 | |||||||||
| Interest expense | (8,519 | ) | (7,668 | ) | (23,434 | ) | |||||||||
| Total net interest income | 4,652 | 6,413 | 17,243 | ||||||||||||
| EXPENSES | |||||||||||||||
| Management fees to affiliate | 641 | 656 | 1,968 | ||||||||||||
| Professional fees | 198 | 217 | 651 | ||||||||||||
| Compensation expense | 136 | 187 | 511 | ||||||||||||
| Insurance expense | 74 | 74 | 221 | ||||||||||||
| Other operating expenses | 283 | 293 | 924 | ||||||||||||
| Total expenses | 1,332 | 1,427 | 4,275 | ||||||||||||
| OTHER INCOME (LOSS) | |||||||||||||||
| Net realized gains (losses) on securities | (8,402 | ) | (7,114 | ) | (13,590 | ) | |||||||||
| Net realized gains (losses) on financial derivatives | 4,058 | (3,702 | ) | 16,311 | |||||||||||
| Change in net unrealized gains (losses) on securities | (2,636 | ) | (3,218 | ) | (32,915 | ) | |||||||||
| Change in net unrealized gains (losses) on financial derivatives | 4,606 | 10,834 | 16,005 | ||||||||||||
| Total other income (loss) | (2,374 | ) | (3,200 | ) | (14,189 | ) | |||||||||
| NET INCOME (LOSS) | $ | 946 | $ | 1,786 | $ | (1,221 | ) | ||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | |||||||||||||||
| Basic and Diluted | $ | 0.07 | $ | 0.14 | $ | (0.09 | ) | ||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | 12,693,989 | 12,715,277 | 12,875,884 | ||||||||||||
| CASH DIVIDENDS PER SHARE: | |||||||||||||||
| Dividends declared | $ | 0.37 | $ | 0.37 | $ | 1.11 | |||||||||
|
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED BALANCE SHEET (UNAUDITED) |
|||||||||||||||
| As of | |||||||||||||||
| September 30, 2018 | June 30, 2018 | December 31, 2017(1) | |||||||||||||
| (In thousands except share amounts) | |||||||||||||||
| ASSETS | |||||||||||||||
| Cash and cash equivalents | $ | 41,016 | $ | 41,402 | $ | 56,117 | |||||||||
| Mortgage-backed securities, at fair value | 1,575,983 | 1,580,103 | 1,685,998 | ||||||||||||
| Due from brokers | 27,044 | 26,946 | 26,754 | ||||||||||||
| Financial derivatives–assets, at fair value | 23,049 | 20,095 | 8,792 | ||||||||||||
| Reverse repurchase agreements | 26,769 | 21,373 | 81,461 | ||||||||||||
| Receivable for securities sold | 52,531 | 51,614 | 21,606 | ||||||||||||
| Interest receivable | 5,675 | 5,988 | 5,784 | ||||||||||||
| Other assets | 717 | 748 | 575 | ||||||||||||
| Total Assets | $ | 1,752,784 | $ | 1,748,269 | $ | 1,887,087 | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||
| LIABILITIES | |||||||||||||||
| Repurchase agreements | $ | 1,500,632 | $ | 1,537,216 | $ | 1,597,206 | |||||||||
| Payable for securities purchased | 36,539 | 1,387 | 3,830 | ||||||||||||
| Due to brokers | 8,298 | 7,312 | 489 | ||||||||||||
| Financial derivatives–liabilities, at fair value | 333 | 1,655 | 1,863 | ||||||||||||
| U.S. Treasury securities sold short, at fair value | 26,367 | 16,195 | 81,289 | ||||||||||||
| Dividend payable | 4,700 | 4,703 | 4,936 | ||||||||||||
| Accrued expenses | 704 | 849 | 728 | ||||||||||||
| Management fee payable to affiliate | 641 | 656 | 725 | ||||||||||||
| Interest payable | 4,340 | 4,127 | 3,318 | ||||||||||||
| Total Liabilities | 1,582,554 | 1,574,100 | 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; (12,703,474, 12,712,050, and 13,340,217 shares issued and outstanding, respectively) |
127 | 127 | 134 | ||||||||||||
| Additional paid-in-capital | 232,967 | 233,152 | 240,062 | ||||||||||||
| Accumulated deficit | (62,864 | ) | (59,110 | ) | (47,493 | ) | |||||||||
| Total Shareholders' Equity | 170,230 | 174,169 | 192,703 | ||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 1,752,784 | $ | 1,748,269 | $ | 1,887,087 | |||||||||
| PER SHARE INFORMATION | |||||||||||||||
| Common shares, par value $0.01 per share | $ | 13.40 | $ | 13.70 | $ | 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/20181105005974/en/
Source:
Investors: Investor Relations, 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