Ellington Residential Mortgage REIT Reports First Quarter 2014 Results
Summary of Financial Results
- Net income for the quarter of
$2.8 million , or$0.30 per share. - Core Earnings1 for the quarter of
$7.0 million , or$0.77 per share, as compared to$6.8 million , or$0.74 per share, in the fourth quarter of 2013. - Book value decline of 1.3% to
$18.05 per share as ofMarch 31, 2014 from$18.29 per share as ofDecember 31, 2013 , after giving effect to a first quarter dividend of$0.55 per share, which was declared onMarch 12, 2014 and paid onApril 28, 2014 ; economic return on book value of 1.7%. - Increase in net interest margin to 2.34% for the quarter as compared to 2.17% for the fourth quarter of 2013.
- Weighted average prepayment speed for the Agency RMBS portfolio of 2.2% CPR for the quarter, unchanged from the fourth quarter of 2013.
- Dividend yield of 12.9% based on
May 9, 2014 closing stock price of$17.04 . - Debt-to-equity ratio of approximately 7.8:1 as of
March 31, 2014 , relatively unchanged from the fourth quarter of 2013.
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.
First Quarter 2014 Results
For the quarter ended
"Both our Agency and non-Agency strategies continue to perform well, and we are optimistic about our prospects for 2014," said
As of
Agency RMBS rallied in the first quarter, recovering much of their fourth quarter 2013 losses. The Federal Reserve has continued to taper its monthly bond purchases on a steady and measured pace, and it is expected that by late 2014 the Federal Reserve's net monthly purchases of Agency RMBS will come to an end. During the first quarter, the modest reduction in the purchase activity of the Federal Reserve was easily absorbed by other market participants. Many of these market participants, such as insurance companies and pension funds, had pulled back from the Agency RMBS market in 2013, but have since re-entered the market. The reduction in asset purchases by the Federal Reserve, coupled with the potential for an increase in new mortgage production in response to the recent drop in interest rates, is likely to cause the market dominance of the Federal Reserve to wane in the coming months. Despite the drop in interest rates, the Company's Agency interest only securities performed well during the quarter, as prepayments remain subdued.
Non-Agency RMBS assets continued to benefit from the ongoing recovery in the U.S. housing market. While national home prices have taken a pause recently from the steady increases seen since early 2012, the number of mortgage delinquencies and the size of foreclosure inventory continued to decline in the early months of 2014. Meanwhile, investor appetite for fixed income assets, especially higher yielding assets, has increased; bond funds experienced net inflows in the first quarter of 2014, in contrast to the outflows they experienced in the latter half of 2013. During the first quarter, the Company turned over approximately 17% of its non-Agency RMBS portfolio, as measured by sales and excluding principal paydowns. Proceeds from non-Agency assets sold were reinvested into other non-Agency assets the Company believed to be attractive. As of
Should long-term interest rates rise, bond funds may again experience significant net outflows as they did in 2013 in which case the resulting selling pressures might cause credit spreads to widen significantly. While recognizing this potential vulnerability, the Company remains generally positive in its outlook for non-Agency RMBS, both on fundamental and technical grounds. On the fundamental side, notwithstanding the early 2014 pause in home price appreciation, the Company expects that home prices will continue to appreciate in 2014, although not at the double-digit pace of 2013. Since home prices continue to serve as one of the most important determinants of future cashflows in distressed non-Agency RMBS, the Company believes that future home price appreciation will continue to provide significant support for the price and credit performance of non-Agency RMBS. On the technical side, greater clarity around future actions of the Federal Reserve and investor appetite for yield should help fuel demand for non-Agency RMBS.
For the quarter ended
During the first quarter, the Company's Agency RMBS purchasing activity continued to be mainly focused on higher coupon specified pools. While pay-ups (price premiums for specified pools relative to their generic pool "TBA" counterparts) increased during the first quarter, they are still well below their previous highs. Despite current low prepayment levels, the Company believes that certain sectors of the Agency pool market are still susceptible to prepayments, thereby making it attractive to buy pools with prepayment protection in those sectors. The Company is also finding attractive opportunities in seasoned specified pools, which have shorter remaining weighted average maturities relative to TBAs, and therefore their related financing costs can be hedged with a shorter, lower cost basket of interest rate hedges. Given the current steepness of the yield curve, even relatively small amounts of seasoning can translate into significantly lower hedging costs. During the first quarter, the Company increased its holdings of pools backed by reverse mortgages, a sector that the Company believes remains undervalued. Finally, the Company also increased its holdings of Agency interest only securities during the first quarter.
For the quarter ended
After giving effect to a first quarter dividend of
For the quarter ended
The following table summarizes the Company's portfolio of real estate securities as of
March 31, 2014 |
December 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 |
$ 144,422 |
$ 149,429 |
$103.47 |
$ 150,184 |
$103.99 |
$ 179,906 |
$ 183,872 |
$102.20 |
$ 187,059 |
$103.98 |
|||||||||
20-year fixed rate mortgages |
10,347 |
10,908 |
105.42 |
10,980 |
106.12 |
- |
- |
- |
- |
- |
|||||||||
30-year fixed rate mortgages |
1,004,293 |
1,040,012 |
103.56 |
1,052,115 |
104.76 |
1,029,629 |
1,043,573 |
101.35 |
1,071,194 |
104.04 |
|||||||||
ARMs |
46,804 |
49,840 |
106.49 |
49,869 |
106.55 |
43,525 |
46,115 |
105.95 |
46,172 |
106.08 |
|||||||||
Reverse mortgages |
27,081 |
29,471 |
108.83 |
29,299 |
108.19 |
7,581 |
8,268 |
109.06 |
8,254 |
108.88 |
|||||||||
Total Agency RMBS |
1,232,947 |
1,279,660 |
103.79 |
1,292,447 |
104.83 |
1,260,641 |
1,281,828 |
101.68 |
1,312,679 |
104.13 |
|||||||||
Non-Agency RMBS |
54,115 |
32,045 |
59.22 |
30,409 |
56.19 |
50,006 |
30,681 |
61.35 |
28,679 |
57.35 |
|||||||||
Total RMBS(2) |
1,287,062 |
1,311,705 |
101.91 |
1,322,856 |
102.78 |
1,310,647 |
1,312,509 |
100.14 |
1,341,358 |
102.34 |
|||||||||
Agency IOs |
n/a |
15,924 |
n/a |
13,232 |
n/a |
n/a |
13,527 |
n/a |
10,718 |
n/a |
|||||||||
Total Real Estate Securities |
$ 1,327,629 |
$ 1,336,088 |
$ 1,326,036 |
$ 1,352,076 |
(1) Represents the dollar amount (not shown in thousands) per
(2) Excludes Agency IOs.
Weighted average holdings based on amortized cost was
Financial Derivatives Portfolio
The following table summarizes fair value of the Company's financial derivatives as of
March 31, 2014 |
December 31, 2013 |
|||||||
Financial derivatives–assets, at fair value: |
(In thousands) |
|||||||
TBA securities purchase contracts |
$ |
— |
$ |
1 |
||||
TBA securities sale contracts |
898 |
2,262 |
||||||
Fixed payer interest rate swaps |
17,219 |
32,700 |
||||||
Total financial derivatives–assets, at fair value: |
18,117 |
34,963 |
||||||
Financial derivatives–liabilities, at fair value: |
||||||||
TBA securities purchase contracts |
(4) |
— |
||||||
TBA securities sale contracts |
(170) |
(28) |
||||||
Fixed payer interest rate swaps |
(1,123) |
(956) |
||||||
Swaptions |
(723) |
(85) |
||||||
Total financial derivatives–liabilities, at fair value: |
(2,020) |
(1,069) |
||||||
Total |
$ |
16,097 |
$ |
33,894 |
Interest Rate Swaps
The following tables provide details about the Company's interest rate swaps as of
March 31, 2014 |
|||||||||||||||||
Maturity |
Notional Amount |
Fair Value |
Weighted Average Pay Rate |
Weighted Average Receive Rate |
Weighted Average Remaining Years to Maturity |
||||||||||||
(In thousands) |
|||||||||||||||||
2016 |
$ |
48,000 |
$ |
(101) |
0.80 |
% |
0.24 |
% |
2.52 |
||||||||
2017 |
113,750 |
(403) |
1.20 |
0.23 |
3.34 |
||||||||||||
2018 |
81,500 |
1,685 |
0.89 |
0.24 |
4.12 |
||||||||||||
2020 |
70,500 |
2,499 |
1.44 |
0.24 |
6.13 |
||||||||||||
2023 |
210,600 |
9,087 |
2.13 |
0.24 |
9.15 |
||||||||||||
2024 |
22,500 |
(105) |
2.88 |
0.23 |
9.98 |
||||||||||||
2043 |
59,600 |
3,684 |
3.17 |
0.23 |
29.19 |
||||||||||||
2044 |
8,000 |
(250) |
3.69 |
0.23 |
29.97 |
||||||||||||
Total |
$ |
614,450 |
$ |
16,096 |
1.76 |
% |
0.24 |
% |
8.79 |
December 31, 2013 |
|||||||||||||||||
Maturity |
Notional Amount |
Fair Value |
Weighted Average Pay Rate |
Weighted Average Receive Rate |
Weighted Average Remaining Years to Maturity |
||||||||||||
(In thousands) |
|||||||||||||||||
2016 |
$ |
48,000 |
$ |
(171) |
0.80 |
% |
0.24 |
% |
2.77 |
||||||||
2017 |
124,000 |
(517) |
1.19 |
0.24 |
3.61 |
||||||||||||
2018 |
156,500 |
2,784 |
1.19 |
0.24 |
4.63 |
||||||||||||
2020 |
137,100 |
6,444 |
1.49 |
0.24 |
6.06 |
||||||||||||
2023 |
218,000 |
14,599 |
2.16 |
0.24 |
9.41 |
||||||||||||
2043 |
64,750 |
8,605 |
3.18 |
0.24 |
29.44 |
||||||||||||
Total |
$ |
748,350 |
$ |
31,744 |
1.67 |
% |
0.24 |
% |
8.14 |
Interest Rate Swaptions
The following table provides information about the Company's swaptions as of
Option |
Underlying Swap |
|||||||||||||
Type |
Fair Value |
Months to Expiration |
Notional Amount |
Term (Years) |
Fixed Rate |
|||||||||
($ in thousands) |
||||||||||||||
Fixed Payer |
$ |
(535) |
5.9 |
$ |
22,000 |
10.0 |
3.31% |
|||||||
Straddle |
$ |
(188) |
6.9 |
$ |
8,000 |
10.0 |
3.08% |
The following table provides information about the Company's swaptions as of
Option |
Underlying Swap |
|||||||||||||
Type |
Fair Value |
Months to Expiration |
Notional Amount |
Term (Years) |
Fixed Rate |
|||||||||
($ in thousands) |
||||||||||||||
Fixed Payer |
$ |
(59) |
8.9 |
$ |
22,000 |
10.0 |
3.31% |
|||||||
Straddle |
$ |
(26) |
9.9 |
$ |
8,000 |
10.0 |
3.08% |
TBAs
The following table provides information about the Company's TBAs as of
March 31, 2014 |
December 31, 2013 |
|||||||||||||||||||||||||||||||
TBA Securities |
Notional Amount (1) |
Cost |
Market Value (3) |
Net Carrying Value (4) |
Notional Amount (1) |
Cost Basis (2) |
Market Value (3) |
Net Carrying Value (4) |
||||||||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||||||||||
Purchase contracts: |
||||||||||||||||||||||||||||||||
Assets |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
1,600 |
$ |
1,725 |
$ |
1,726 |
$ |
1 |
||||||||||||||||
Liabilities |
8,450 |
8,162 |
8,158 |
(4) |
— |
— |
— |
— |
||||||||||||||||||||||||
Sale contracts: |
||||||||||||||||||||||||||||||||
Assets |
(275,308) |
(289,532) |
(288,634) |
898 |
(363,078) |
(375,524) |
(373,262) |
2,262 |
||||||||||||||||||||||||
Liabilities |
(154,669) |
(161,989) |
(162,159) |
(170) |
(16,400) |
(17,518) |
(17,546) |
(28) |
||||||||||||||||||||||||
Total TBA securities, net |
$ |
(421,527) |
$ |
(443,359) |
$ |
(442,635) |
$ |
724 |
$ |
(377,878) |
$ |
(391,317) |
$ |
(389,082) |
$ |
2,235 |
(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.
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(1) |
||||||||
(In thousands) |
50 Basis Point Decline in Interest Rates |
50 Basis Point Increase in Interest Rates |
||||||
Agency RMBS - ARM Pools |
$ |
532 |
$ |
(640) |
||||
Agency RMBS - Fixed Pools and IOs |
29,993 |
(36,470) |
||||||
TBAs |
(9,258) |
11,461 |
||||||
Non-Agency RMBS |
525 |
(518) |
||||||
Interest Rate Swaps |
(21,755) |
20,456 |
||||||
Swaptions |
(22) |
566 |
||||||
Repurchase Agreements |
(687) |
988 |
||||||
Total |
$ |
(672) |
$ |
(4,157) |
(1) Based on the market environment as of March 31, 2014. 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 the Company's outstanding borrowings under repo agreements as of
March 31, 2014 |
December 31, 2013 |
|||||||||||||||||||
Weighted Average |
Weighted Average |
|||||||||||||||||||
Remaining Days to Maturity |
Borrowings Outstanding |
Interest Rate |
Remaining Days to Maturity |
Borrowings Outstanding |
Interest Rate |
Remaining Days to Maturity |
||||||||||||||
(In thousands) |
(In thousands) |
|||||||||||||||||||
30 days or less |
$ |
355,198 |
0.36 |
% |
11 |
$ |
338,700 |
0.35 |
% |
14 |
||||||||||
31-60 days |
369,220 |
0.35 |
43 |
531,799 |
0.39 |
46 |
||||||||||||||
61-90 days |
414,722 |
0.32 |
74 |
326,386 |
0.38 |
72 |
||||||||||||||
91-120 days |
2,940 |
0.39 |
108 |
109,476 |
0.45 |
100 |
||||||||||||||
121-150 days |
47,945 |
0.39 |
134 |
3,986 |
0.56 |
136 |
||||||||||||||
151-180 days |
91,445 |
0.38 |
164 |
— |
— |
— |
||||||||||||||
Total |
$ |
1,281,470 |
0.35 |
% |
56 |
$ |
1,310,347 |
0.38 |
% |
49 |
If net paid and accrued periodic payments on interest rate swaps were to be included in the cost of funds, the weighted average cost of funds for the three month periods ended
As of
Other
The Company incurs an annual base management fee, payable quarterly in arrears, in an amount equal to 1.50% of shareholders' equity (as defined in its management agreement). For the quarter ended
Dividends
On
Share Repurchase Program
On
Reconciliation of Core Earnings to Net Income (Loss)
Core Earnings consists of net income (loss), excluding realized and unrealized gains and losses on real estate 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 unrealized gains (losses) associated with payments and accruals of periodic payments 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 used by management to assess 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. 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
(In thousands except share amounts) |
Three Month Period Ended March 31, 2014 |
Three Month |
||||||
Net Income (Loss) |
$ |
2,761 |
$ |
(124) |
||||
Less: |
||||||||
Net realized losses on real estate securities |
(3,025) |
(11,164) |
||||||
Net realized losses on financial derivatives, excluding periodic payments(1) |
(2,614) |
(160) |
||||||
Change in net unrealized gains (losses) on real estate securities |
17,581 |
(10,756) |
||||||
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) |
(16,213) |
15,167 |
||||||
Subtotal |
(4,271) |
(6,913) |
||||||
Core Earnings |
$ |
7,032 |
$ |
6,789 |
||||
Weighted Average Shares Outstanding |
9,139,842 |
9,139,842 |
||||||
Core Earnings Per Share |
$ |
0.77 |
$ |
0.74 |
(1) For the three month period ended
(2) For the three month period ended
About
Conference Call
The Company will host a conference call at
A dial-in replay of the conference call will be available on Tuesday, May 13, 2014, 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, 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 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 |
||||||||
March 31, 2014 |
December 31, 2013 |
|||||||
(In thousands except share amounts) |
||||||||
INTEREST INCOME (EXPENSE) |
||||||||
Interest income |
$ |
11,959 |
$ |
12,050 |
||||
Interest expense |
(1,155) |
(1,283) |
||||||
Total net interest income |
10,804 |
10,767 |
||||||
EXPENSES |
||||||||
Management fees |
592 |
600 |
||||||
Professional fees |
139 |
155 |
||||||
Other operating expenses |
663 |
656 |
||||||
Total expenses |
1,394 |
1,411 |
||||||
OTHER INCOME (LOSS) |
||||||||
Net realized losses on real estate securities |
(3,025) |
(11,164) |
||||||
Net realized losses on financial derivatives |
(3,409) |
(5,340) |
||||||
Change in net unrealized gains (losses) on real estate securities |
17,581 |
(10,756) |
||||||
Change in net unrealized gains (losses) on financial derivatives |
(17,796) |
17,780 |
||||||
Total other loss |
(6,649) |
(9,480) |
||||||
NET INCOME (LOSS) |
$ |
2,761 |
$ |
(124) |
||||
NET INCOME (LOSS) PER COMMON SHARE: |
||||||||
Basic |
$ |
0.30 |
$ |
(0.01) |
||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
9,139,842 |
9,139,842 |
||||||
CASH DIVIDENDS PER SHARE: |
||||||||
Dividends declared |
$ |
0.55 |
$ |
0.50 |
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||
As of |
||||||||
March 31, 2014 |
December 31, 2013(1) |
|||||||
(In thousands except share amounts) |
||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ |
51,106 |
$ |
50,112 |
||||
Real estate securities, at fair value |
1,327,629 |
1,326,036 |
||||||
Due from brokers |
10,725 |
18,347 |
||||||
Financial derivatives–assets, at fair value |
18,117 |
34,963 |
||||||
Receivable for securities sold |
119,887 |
76,692 |
||||||
Interest receivable |
5,522 |
4,766 |
||||||
Other assets |
112 |
174 |
||||||
Total Assets |
$ |
1,533,098 |
$ |
1,511,090 |
||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
LIABILITIES |
||||||||
Repurchase agreements |
$ |
1,281,470 |
$ |
1,310,347 |
||||
Payable for securities purchased |
65,812 |
2,776 |
||||||
Due to brokers |
11,764 |
22,788 |
||||||
Financial derivatives–liabilities, at fair value |
2,020 |
1,069 |
||||||
Dividend payable |
5,027 |
4,570 |
||||||
Accrued expenses |
874 |
996 |
||||||
Management fee payable |
592 |
600 |
||||||
Interest payable |
584 |
764 |
||||||
Total Liabilities |
1,368,143 |
1,343,910 |
||||||
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; (9,139,842 shares issued and outstanding, respectively) |
91 |
91 |
||||||
Additional paid-in-capital |
181,188 |
181,147 |
||||||
Accumulated deficit |
(16,324) |
(14,058) |
||||||
Total Shareholders' Equity |
164,955 |
167,180 |
||||||
Total Liabilities and Shareholders' Equity |
$ |
1,533,098 |
$ |
1,511,090 |
(1) Derived from audited financial statements as of
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