Ellington Residential Mortgage REIT Reports First Quarter 2021 Results
Highlights
-
Net income of
$0.1 million , or$0.01 per share. -
Core Earnings1 of
$3.8 million , or$0.31 per share. -
Book value of
$13.22 per share as ofMarch 31, 2021 , which includes the effect of a first quarter dividend of$0.28 per share. Economic return of 0.1% for the quarter. - Net interest margin2 of 1.96%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 23.6%.
-
Dividend yield of 9% based on the
April 30, 2021 closing stock price of$12.44 . -
Debt-to-equity ratio of 6.8:1 as of
March 31, 2021 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 7.0:1. -
Net mortgage assets-to-equity ratio of 6.2:1 3as of
March 31, 2021 . -
Cash and cash equivalents of
$52.5 million as ofMarch 31, 2021 , in addition to other unencumbered assets of$48.2 million .
First Quarter 2021 Results
"Despite rising long-term interest rates, a steepening yield curve, and increased interest rate volatility during the first quarter, EARN's book value was stable, and Core Earnings remained strong. Although most Agency RMBS prices declined during the quarter, performance across subsectors diverged sharply. The increase in interest rates led to reduced expectations for prepayment rates, which boosted performance of higher-coupon RMBS, put downward pressure on pay-ups for prepayment-protected specified pools, and caused significant price declines for lower coupon RMBS in the face of heightened extension risk," said
"Gains on our interest rate hedges and interest-only securities, together with net interest income, more than offset net realized and unrealized losses in the portfolio. Given the opportunities presented by wider yield spreads during the quarter, we used our strong balance sheet to add some attractively priced pools, which increased our leverage incrementally.
"Looking forward, while prepayment speeds remain elevated, we are seeing signs that the prepayment wave may be abating. In this environment, it's critical to be mindful of both the prepayment risks and the extension risks that are present in the market. We believe that such a rapidly shifting market plays to our strengths, where asset selection and risk management will continue to drive performance. Finally, we will continue to deploy a dynamic and adaptive hedging strategy to protect book value."
____________________ |
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 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 |
$ |
113,924 |
|
|
$ |
120,774 |
|
|
$ |
106.01 |
|
|
$ |
118,491 |
|
|
$ |
104.01 |
|
|
$ |
77,578 |
|
|
$ |
83,159 |
|
|
$ |
107.19 |
|
|
$ |
80,144 |
|
|
$ |
103.31 |
|
20-year fixed-rate mortgages |
40,845 |
|
|
41,981 |
|
|
102.78 |
|
|
42,441 |
|
|
103.91 |
|
|
42,559 |
|
|
44,763 |
|
|
105.18 |
|
|
44,247 |
|
|
103.97 |
|
||||||||||
30-year fixed-rate mortgages |
868,413 |
|
|
933,001 |
|
|
107.44 |
|
|
907,057 |
|
|
104.45 |
|
|
763,563 |
|
|
834,881 |
|
|
109.34 |
|
|
799,360 |
|
|
104.69 |
|
||||||||||
ARMs |
17,509 |
|
|
18,442 |
|
|
105.33 |
|
|
17,998 |
|
|
102.79 |
|
|
19,459 |
|
|
20,442 |
|
|
105.05 |
|
|
19,981 |
|
|
102.68 |
|
||||||||||
Reverse mortgages |
58,960 |
|
|
64,164 |
|
|
108.83 |
|
|
62,516 |
|
|
106.03 |
|
|
61,653 |
|
|
67,474 |
|
|
109.44 |
|
|
65,494 |
|
|
106.23 |
|
||||||||||
Total Agency RMBS |
1,099,651 |
|
|
1,178,362 |
|
|
107.16 |
|
|
1,148,503 |
|
|
104.44 |
|
|
964,812 |
|
|
1,050,719 |
|
|
108.90 |
|
|
1,009,226 |
|
|
104.60 |
|
||||||||||
Non-Agency RMBS |
12,835 |
|
|
10,370 |
|
|
80.79 |
|
|
8,572 |
|
|
66.79 |
|
|
23,140 |
|
|
17,612 |
|
|
76.11 |
|
|
15,369 |
|
|
66.42 |
|
||||||||||
Total RMBS(2) |
1,112,486 |
|
|
1,188,732 |
|
|
106.85 |
|
|
1,157,075 |
|
|
104.01 |
|
|
987,952 |
|
|
1,068,331 |
|
|
108.14 |
|
|
1,024,595 |
|
|
103.71 |
|
||||||||||
Agency IOs |
n/a |
|
15,897 |
|
|
n/a |
|
16,508 |
|
|
n/a |
|
n/a |
|
13,049 |
|
|
n/a |
|
15,434 |
|
|
n/a |
||||||||||||||||
Total mortgage-backed securities |
|
|
$ |
1,204,629 |
|
|
|
|
$ |
1,173,583 |
|
|
|
|
|
|
$ |
1,081,380 |
|
|
|
|
$ |
1,040,029 |
|
|
|
||||||||||||
(1) Represents the dollar amount (not shown in thousands) per |
|||||||||||||||||||||||||||||||||||||||
(2) Excludes Agency IOs. |
The Company's Agency RMBS holdings increased by 12% to
Driven primarily by increased borrowings related to the larger Agency RMBS portfolio, the Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 7.0:1 as of
During the quarter, long-term interest rates increased, actual and implied volatility rose, and the yield curve steepened. As a result, Agency RMBS durations extended and yield spreads widened, and most Agency RMBS prices declined sharply, particularly for lower coupon RMBS, which had the greatest declines. The price declines in lower coupon RMBS generated significant losses in the Company's long TBA portfolio, which was concentrated in lower coupons. The increase in long-term interest rates also reduced the demand for prepayment protection, which caused prepayment protected specified pools to further underperform. Because the Company's long investment portfolio is concentrated in prepayment-protected specified pools, this underperformance was a further drag on results for the quarter. Meanwhile, the rise in long-term interest rates drove net gains on the Company's interest rate hedges and Agency interest-only securities, which along with net carry from the portfolio, more than offset the net losses on the Company's long Agency RMBS holdings.
The declining pay-ups on the Company's existing specified pool investments, together with the Company's focus on low pay-up specified pools for its additional purchases during the quarter, caused the average pay-ups on the Company's specified pools to decline to 1.61% as of
During the quarter, the Company continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs,
Non-Agency RMBS yield spreads continued to tighten during the quarter and in response the Company continued to opportunistically reduce the size of this portfolio, which generated net realized gains. The Company expects to continue to vary its allocation to non-Agency RMBS as market opportunities change over time.
Net interest margin and core earnings decreased quarter over quarter. These decreases were primarily driven by lower asset yields.
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) |
|
$ |
127 |
|
|
$ |
7,394 |
|
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
(3,081 |
) |
|
(862 |
) |
||
Change in net unrealized (gains) losses on securities |
|
10,308 |
|
|
2,259 |
|
||
Net realized (gains) losses on financial derivatives |
|
5,150 |
|
|
(2,395 |
) |
||
Change in net unrealized (gains) losses on financial derivatives |
|
(8,215 |
) |
|
(2,338 |
) |
||
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
(386 |
) |
|
(648 |
) |
||
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
(51 |
) |
|
267 |
|
||
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
(70 |
) |
|
559 |
|
||
Subtotal |
|
3,655 |
|
|
(3,158 |
) |
||
Core Earnings |
|
$ |
3,782 |
|
|
$ |
4,236 |
|
Weighted Average Shares Outstanding |
|
12,343,542 |
|
|
12,336,088 |
|
||
Core Earnings Per Share |
|
$ |
0.31 |
|
|
$ |
0.34 |
|
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 Period Ended |
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|
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|
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(In thousands except share amounts) |
|
|
|
|
||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
||||
Interest income |
|
$ |
6,535 |
|
|
$ |
6,174 |
|
Interest expense |
|
(781 |
) |
|
(716 |
) |
||
Total net interest income |
|
5,754 |
|
|
5,458 |
|
||
EXPENSES |
|
|
|
|
||||
Management fees to affiliate |
|
614 |
|
|
626 |
|
||
Professional fees |
|
271 |
|
|
199 |
|
||
Compensation expense |
|
177 |
|
|
175 |
|
||
Insurance expense |
|
86 |
|
|
82 |
|
||
Other operating expenses |
|
317 |
|
|
318 |
|
||
Total expenses |
|
1,465 |
|
|
1,400 |
|
||
OTHER INCOME (LOSS) |
|
|
|
|
||||
Net realized gains (losses) on securities |
|
3,081 |
|
|
862 |
|
||
Net realized gains (losses) on financial derivatives |
|
(5,150 |
) |
|
2,395 |
|
||
Change in net unrealized gains (losses) on securities |
|
(10,308 |
) |
|
(2,259 |
) |
||
Change in net unrealized gains (losses) on financial derivatives |
|
8,215 |
|
|
2,338 |
|
||
Total other income (loss) |
|
(4,162 |
) |
|
3,336 |
|
||
NET INCOME (LOSS) |
|
$ |
127 |
|
|
$ |
7,394 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
||||
Basic and Diluted |
|
$ |
0.01 |
|
|
$ |
0.60 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
12,343,542 |
|
|
12,336,088 |
|
||
CASH DIVIDENDS PER SHARE: |
|
|
|
|
||||
Dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||
|
|
As of |
||||||
|
|
|
|
|
||||
(In thousands except share amounts) |
|
|
|
|
||||
ASSETS |
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
52,500 |
|
|
$ |
58,166 |
|
Mortgage-backed securities, at fair value |
|
1,204,629 |
|
|
1,081,380 |
|
||
Other investments, at fair value |
|
289 |
|
|
292 |
|
||
Due from brokers |
|
57,375 |
|
|
47,798 |
|
||
Financial derivatives–assets, at fair value |
|
11,415 |
|
|
2,791 |
|
||
Reverse repurchase agreements |
|
98,904 |
|
|
— |
|
||
Receivable for securities sold |
|
2,192 |
|
|
— |
|
||
Interest receivable |
|
4,132 |
|
|
4,114 |
|
||
Other assets |
|
651 |
|
|
270 |
|
||
Total Assets |
|
$ |
1,432,087 |
|
|
$ |
1,194,811 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
||||
LIABILITIES |
|
|
|
|
||||
Repurchase agreements |
|
$ |
1,106,724 |
|
|
$ |
1,015,245 |
|
Payable for securities purchased |
|
146,181 |
|
|
— |
|
||
Due to brokers |
|
3,456 |
|
|
1,064 |
|
||
Financial derivatives–liabilities, at fair value |
|
7,093 |
|
|
6,630 |
|
||
Dividend payable |
|
3,456 |
|
|
3,456 |
|
||
Accrued expenses |
|
811 |
|
|
918 |
|
||
Management fee payable to affiliate |
|
614 |
|
|
626 |
|
||
Interest payable |
|
613 |
|
|
470 |
|
||
Total Liabilities |
|
1,268,948 |
|
|
1,028,409 |
|
||
SHAREHOLDERS' EQUITY |
|
|
|
|
||||
Preferred shares, par value |
|
— |
|
|
— |
|
||
Common shares, par value |
|
123 |
|
|
123 |
|
||
Additional paid-in-capital |
|
229,680 |
|
|
229,614 |
|
||
Accumulated deficit |
|
(66,664 |
) |
|
(63,335 |
) |
||
Total Shareholders' Equity |
|
163,139 |
|
|
166,402 |
|
||
Total Liabilities and Shareholders' Equity |
|
$ |
1,432,087 |
|
|
$ |
1,194,811 |
|
SUPPLEMENTAL PER SHARE INFORMATION |
|
|
|
|
||||
Book Value Per Share |
|
$ |
13.22 |
|
|
$ |
13.48 |
|
(1) Derived from audited financial statements as of |
View source version on businesswire.com: https://www.businesswire.com/news/home/20210503005690/en/
Investors:
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
for
(212) 257-4170
Ellington@gasthalter.com
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