Ellington Residential Mortgage REIT Reports First Quarter 2023 Results
Highlights
-
Net income (loss) of
$2.3 million , or$0.17 per share. -
Adjusted Distributable Earnings1 ("ADE") of
$2.8 million , or$0.21 per share. -
Book value of
$8.31 per share as ofMarch 31, 2023 , which includes the effects of dividends of$0.24 per share for the quarter. - Net interest margin2 of 1.16%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 4.33.
-
Dividend yield of 13.7% based on the
May 10, 2023 closing stock price of$7.02 , and monthly dividend of$0.08 per common share declared onMay 8, 2023 . -
Debt-to-equity ratio of 7.6:1 as of
March 31, 2023 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio as ofMarch 31, 2023 was 7.5:1. -
Net mortgage assets-to-equity ratio of 6.9:14 as of
March 31, 2023 . -
Cash and cash equivalents of
$36.7 million as ofMarch 31, 2023 , in addition to other unencumbered assets of$7.4 million .
First Quarter 2023 Results
"Despite the challenges of the first quarter, Ellington Residential generated a positive economic return of 1.8%, as net gains on our specified pools exceeded net losses on our interest rate hedges," said
"2023 began on a constructive note, with interest rates and volatility declining and yield spreads tightening further. By mid-February, however, renewed anxiety over inflation and the Fed's response drove interest rates and volatility higher, and spreads widened again. Then in March, turmoil in the regional banking system roiled markets and drove a flight to safety, which put further pressure on spreads. It is noteworthy that we achieved our +1.8% economic return in a quarter when Agency MBS actually generated a negative excess return to Treasuries of (0.50%).
"Over the past several quarters, we have been opportunistically but steadily rotating out of our lowest-coupon MBS into higher coupons. So far this year, the market has been facing ever-increasing prospects of asset sales from various troubled regional banks, and given that low-coupon MBS comprise a significant portion of these banks’ portfolios, we were rewarded for having pared down our low-coupon positions. Coming into the year, only about 15% of our long Agency portfolio comprised coupons under 3%, and we also had a meaningful TBA short position in these coupons.
"Our pivot away from low-coupon pools also enabled us to enter the first quarter with reduced leverage and excess liquidity. Given the prospect of significant bank portfolio asset sales and continued volatility, we have been judicious about adding back leverage, and we closed the first quarter with only slightly larger Agency and non-Agency MBS portfolios. Meanwhile, we continue to turn over our portfolio to improve our net interest margin and Adjusted Distributable Earnings, and we still have plenty of dry powder to take advantage of investment opportunities as the year unfolds."
___________________________________ | ||
1 |
Adjusted Distributable Earnings is a non-GAAP financial measure. See "Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Adjusted Distributable Earnings. |
|
2 |
Net interest margin represents the weighted average asset yield less the weighted average secured financing cost of funds (including the effect of actual and accrued payments on interest rate swaps used to hedge such financings). Net interest margin excludes the effect of the Catch-up Premium Amortization Adjustment. |
|
3 |
Excludes recent purchases of fixed rate Agency specified pools with no prepayment history. |
|
4 |
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 |
$ |
32,671 |
|
$ |
31,948 |
|
$ |
97.79 |
|
$ |
33,021 |
|
$ |
101.07 |
|
$ |
47,453 |
|
$ |
45,324 |
|
$ |
95.51 |
|
$ |
48,899 |
|
$ |
103.05 |
20-year fixed-rate mortgages |
|
10,463 |
|
|
9,491 |
|
|
90.71 |
|
|
11,133 |
|
|
106.40 |
|
|
10,812 |
|
|
9,691 |
|
|
89.63 |
|
|
11,508 |
|
|
106.44 |
30-year fixed-rate mortgages |
|
870,847 |
|
|
825,011 |
|
|
94.74 |
|
|
867,925 |
|
|
99.66 |
|
|
841,823 |
|
|
781,754 |
|
|
92.86 |
|
|
849,168 |
|
|
100.87 |
ARMs |
|
7,797 |
|
|
7,818 |
|
|
100.27 |
|
|
8,670 |
|
|
111.20 |
|
|
8,696 |
|
|
8,663 |
|
|
99.62 |
|
|
9,595 |
|
|
110.34 |
Reverse mortgages |
|
16,222 |
|
|
16,663 |
|
|
102.72 |
|
|
18,327 |
|
|
112.98 |
|
|
17,506 |
|
|
17,852 |
|
|
101.98 |
|
|
19,659 |
|
|
112.30 |
Total Agency RMBS |
|
938,000 |
|
|
890,931 |
|
|
94.98 |
|
|
939,076 |
|
|
100.11 |
|
|
926,290 |
|
|
863,284 |
|
|
93.20 |
|
|
938,829 |
|
|
101.35 |
Non-Agency RMBS(2) |
|
18,801 |
|
|
14,724 |
|
|
78.31 |
|
|
14,375 |
|
|
76.46 |
|
|
16,895 |
|
|
12,566 |
|
|
74.38 |
|
|
12,414 |
|
|
73.48 |
Total RMBS(2) |
|
956,801 |
|
|
905,655 |
|
|
94.65 |
|
|
953,451 |
|
|
99.65 |
|
|
943,185 |
|
|
875,850 |
|
|
92.86 |
|
|
951,243 |
|
|
100.85 |
Agency IOs |
|
n/a |
|
|
9,704 |
|
|
n/a |
|
|
9,438 |
|
|
n/a |
|
|
n/a |
|
|
9,313 |
|
|
n/a |
|
|
9,212 |
|
|
n/a |
Non-Agency IOs |
|
n/a |
|
|
10,172 |
|
|
n/a |
|
|
8,099 |
|
|
n/a |
|
|
n/a |
|
|
8,138 |
|
|
n/a |
|
|
6,289 |
|
|
n/a |
Total mortgage-backed securities |
|
|
$ |
925,531 |
|
|
|
$ |
970,988 |
|
|
|
|
|
$ |
893,301 |
|
|
|
$ |
966,744 |
|
|
(1) |
Represents the dollar amount (not shown in thousands) per |
|
(2) |
Excludes IOs. |
The Company's Agency RMBS holdings increased by 3% to
The Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased slightly to 7.5:1 as of
In January, interest rates and volatility declined and Agency RMBS yield spreads tightened, as the market anticipated a slower pace of interest rate hikes by the
For the quarter, the Company had a net gain in its Agency RMBS portfolio, and positive net income overall, as net realized and unrealized gains on its specified pools exceeded net losses on its interest rate hedges and slightly negative net interest income, which was driven by sharply higher financing costs.
Average pay-ups on the Company’s existing specified pool portfolio decreased quarter over quarter, while its new purchases during the quarter consisted of pools with lower pay-ups. As a result, overall pay-ups on the Company's specified pools decreased to 1.09% 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,
The Company's non-Agency RMBS portfolio and interest-only securities also generated positive results, driven by strong net interest income. As noted in prior quarters, the Company expects to continue to increase its allocation to non-Agency RMBS based on market opportunities.
The Company's financing costs increased sharply quarter over quarter due to increasing short-term interest rates. The Company's asset yields also increased during the quarter, but by a lesser amount. As a result, the Company's net interest margin and Adjusted Distributable Earnings decreased sequentially. During the quarter the Company also continued to benefit from positive carry on its interest rate swap hedges, where it net receives a higher floating rate and pays a lower fixed rate.
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 based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements or from our 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 following factors are examples of those that could cause actual results to vary from those stated or implied by our forward-looking statements: changes in interest rates and the market value of the Company's investments, market volatility, 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, the Company's ability to maintain its qualification as a real estate investment trust, or "REIT," and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, as stated above, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of the Company's Annual Report on Form 10-K, which can be accessed through the link to the Company's
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CONSOLIDATED STATEMENT OF OPERATIONS |
||||||||
(UNAUDITED) |
||||||||
|
|
Three-Month Period Ended |
||||||
|
|
|
|
|
||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
||||
Interest income |
|
$ |
9,338 |
|
|
$ |
9,927 |
|
Interest expense |
|
|
(9,710 |
) |
|
|
(7,477 |
) |
Total net interest income |
|
|
(372 |
) |
|
|
2,450 |
|
EXPENSES |
|
|
|
|
||||
Management fees to affiliate |
|
|
433 |
|
|
|
423 |
|
Professional fees |
|
|
242 |
|
|
|
202 |
|
Compensation expense |
|
|
181 |
|
|
|
174 |
|
Insurance expense |
|
|
99 |
|
|
|
101 |
|
Other operating expenses |
|
|
350 |
|
|
|
371 |
|
Total expenses |
|
|
1,305 |
|
|
|
1,271 |
|
OTHER INCOME (LOSS) |
|
|
|
|
||||
Net realized gains (losses) on securities |
|
|
(15,126 |
) |
|
|
(15,811 |
) |
Net realized gains (losses) on financial derivatives |
|
|
1,743 |
|
|
|
810 |
|
Change in net unrealized gains (losses) on securities |
|
|
27,948 |
|
|
|
27,120 |
|
Change in net unrealized gains (losses) on financial derivatives |
|
|
(10,551 |
) |
|
|
(1,618 |
) |
Total other income (loss) |
|
|
4,014 |
|
|
|
10,501 |
|
NET INCOME (LOSS) |
|
$ |
2,337 |
|
|
$ |
11,680 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
||||
Basic and Diluted |
|
$ |
0.17 |
|
|
$ |
0.88 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
|
13,666,707 |
|
|
|
13,287,417 |
|
CASH DIVIDENDS PER SHARE: |
|
|
|
|
||||
Dividends declared |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
||||||||
CONSOLIDATED BALANCE SHEET |
||||||||
(UNAUDITED) |
||||||||
|
|
As of |
||||||
|
|
|
|
|
||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
ASSETS |
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
36,657 |
|
|
$ |
34,816 |
|
Mortgage-backed securities, at fair value |
|
|
925,531 |
|
|
|
893,301 |
|
Other investments, at fair value |
|
|
210 |
|
|
|
208 |
|
Due from brokers |
|
|
7,198 |
|
|
|
18,824 |
|
Financial derivatives–assets, at fair value |
|
|
57,665 |
|
|
|
68,770 |
|
Reverse repurchase agreements |
|
|
2,528 |
|
|
|
499 |
|
Receivable for securities sold |
|
|
90,053 |
|
|
|
33,452 |
|
Interest receivable |
|
|
3,489 |
|
|
|
3,326 |
|
Other assets |
|
|
647 |
|
|
|
436 |
|
Total Assets |
|
$ |
1,123,978 |
|
|
$ |
1,053,632 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
||||
LIABILITIES |
|
|
|
|
||||
Repurchase agreements |
|
$ |
875,670 |
|
|
$ |
842,455 |
|
Payable for securities purchased |
|
|
67,531 |
|
|
|
42,199 |
|
Due to brokers |
|
|
44,704 |
|
|
|
45,666 |
|
Financial derivatives–liabilities, at fair value |
|
|
2,384 |
|
|
|
3,119 |
|
|
|
|
12,528 |
|
|
|
498 |
|
Dividend payable |
|
|
1,106 |
|
|
|
1,070 |
|
Accrued expenses |
|
|
1,208 |
|
|
|
1,097 |
|
Management fee payable to affiliate |
|
|
433 |
|
|
|
423 |
|
Interest payable |
|
|
3,437 |
|
|
|
4,696 |
|
Total Liabilities |
|
|
1,009,001 |
|
|
|
941,223 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
||||
Preferred shares, par value |
|
|
— |
|
|
|
— |
|
Common shares, par value |
|
|
138 |
|
|
|
134 |
|
Additional paid-in-capital |
|
|
244,472 |
|
|
|
240,940 |
|
Accumulated deficit |
|
|
(129,633 |
) |
|
|
(128,665 |
) |
Total Shareholders' Equity |
|
|
114,977 |
|
|
|
112,409 |
|
Total Liabilities and Shareholders' Equity |
|
$ |
1,123,978 |
|
|
$ |
1,053,632 |
|
SUPPLEMENTAL PER SHARE INFORMATION |
|
|
|
|
||||
Book Value Per Share |
|
$ |
8.31 |
|
|
$ |
8.40 |
|
(1) |
Derived from audited financial statements as of |
|||
(2) |
Common shares issued and outstanding at |
Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)
The Company calculates Adjusted Distributable Earnings as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding other income or loss items that are of a non-recurring nature, if any. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps. Adjusted Distributable 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.
Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. The Company believes that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) the Company believes that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that the Company believes are less useful in forecasting long-term performance and dividend-paying ability; (ii) the Company uses it to evaluate the effective net yield provided by its portfolio, after the effects of financial leverage; and (iii), the Company believes that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating its operating performance, and comparing its operating performance to that of its residential mortgage REIT peers. Please note, however, that: (I) the Company's calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by its peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution.
In addition, because Adjusted Distributable Earnings is an incomplete measure of the Company's financial results and differs from net income (loss) computed in accordance with
Furthermore, Adjusted Distributable Earnings is different than REIT taxable income. As a result, the determination of whether the Company has met the requirement to distribute at least 90% of its annual REIT taxable income (subject to certain adjustments) to its shareholders, in order to maintain qualification as a REIT, is not based on whether it distributed 90% of its Adjusted Distributable Earnings.
In setting the Company’s dividends, the Company’s
The following table reconciles, for the three-month periods ended
|
|
Three-Month Period Ended |
||||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
Net Income (Loss) |
|
$ |
2,337 |
|
|
$ |
11,680 |
|
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
|
15,126 |
|
|
|
15,811 |
|
Change in net unrealized (gains) losses on securities |
|
|
(27,948 |
) |
|
|
(27,120 |
) |
Net realized (gains) losses on financial derivatives |
|
|
(1,743 |
) |
|
|
(810 |
) |
Change in net unrealized (gains) losses on financial derivatives |
|
|
10,551 |
|
|
|
1,618 |
|
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
|
1,769 |
|
|
|
1,111 |
|
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
|
2,432 |
|
|
|
1,634 |
|
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
|
299 |
|
|
|
(658 |
) |
Subtotal |
|
|
486 |
|
|
|
(8,414 |
) |
Adjusted Distributable Earnings |
|
$ |
2,823 |
|
|
$ |
3,266 |
|
Weighted Average Shares Outstanding |
|
|
13,666,707 |
|
|
|
13,287,417 |
|
Adjusted Distributable Earnings Per Share |
|
$ |
0.21 |
|
|
$ |
0.25 |
|
View source version on businesswire.com: https://www.businesswire.com/news/home/20230511005815/en/
Investors:
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
for
(212) 257-4170
Ellington@gasthalter.com
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