Ellington Residential Mortgage REIT Reports Third Quarter 2019 Results
Highlights
-
Net income of
$3.7 million , or$0.30 per share. -
Core Earnings1 of
$0.9 million , or$0.07 per share, and Adjusted Core Earnings1 of$2.4 million , or$0.19 per share. -
Book value of
$12.42 per share as ofSeptember 30, 2019 , which includes the effect of a third quarter dividend of$0.28 per share. - Net interest margin of 0.38%, and adjusted net interest margin2 of 0.81%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 14.5%.
-
Dividend yield of 10.3% based on the
November 1, 2019 closing stock price of$10.83 . -
Debt-to-equity ratio of 8.7:1 as of
September 30, 2019 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.6:1. -
Net mortgage assets-to-equity ratio of 7.7:13 as of
September 30, 2019 . -
Repurchased 33,706 shares during the quarter, or approximately 0.3% of our outstanding shares as of the beginning of the quarter, at an average price of
$9.87 per share.
Third Quarter 2019 Results
"Our disciplined hedging strategy and portfolio of high-quality specified pools helped Ellington Residential deliver strong earnings for the quarter, despite wide swings in long-term interest rates, increasing prepayment rates, and an inverted yield curve," said
"For the quarter, our net income exceeded our dividend, opportunistic share repurchases helped boost book value, and altogether our economic return for the quarter was a solid 2.4%, or 10.0% annualized. While adjusted core earnings declined quarter over quarter, we believe that the prospects to expand our net interest margin and grow core earnings are improving, as we benefit from lower repo borrowing rates and wider yield spreads on new investments following the spread widening we saw in August.
"If the prepayment wave continues to intensify from here, we would expect to see further divergence of performance between different subsectors of the Agency RMBS market, and we would expect to capitalize on the opportunities created by that divergence. We believe that the current market environment highly favors our core strengths of prepayment modeling, asset selection and dynamic interest rate hedging, while also creating meaningful short-term trading opportunities. We also believe that our smaller size is an advantage in this market environment, as it enables us to be nimble and react quickly to reposition our portfolio in response to market distress."
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, 2019 the market value of the Company's mortgage-backed securities and its net short TBA position was $1.395 billion and $(202.0) million, respectively, and total shareholders' equity was $154.6 million. |
Financial Results
The following table summarizes the Company's portfolio of RMBS as of
|
September 30, 2019 |
|
June 30, 2019 |
||||||||||||||||||||||||||||||||||||
(In thousands) |
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
|
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
||||||||||||||||||||
Agency RMBS(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
15-year fixed-rate mortgages |
$ |
153,142 |
|
|
$ |
160,012 |
|
|
$ |
104.49 |
|
|
$ |
155,913 |
|
|
$ |
101.81 |
|
|
$ |
159,586 |
|
|
$ |
165,605 |
|
|
$ |
103.77 |
|
|
$ |
162,516 |
|
|
$ |
101.84 |
|
20-year fixed-rate mortgages |
17,251 |
|
|
18,348 |
|
|
106.36 |
|
|
17,993 |
|
|
104.30 |
|
|
29,891 |
|
|
31,402 |
|
|
105.06 |
|
|
30,972 |
|
|
103.62 |
|
||||||||||
30-year fixed-rate mortgages |
996,703 |
|
|
1,058,919 |
|
|
106.24 |
|
|
1,044,699 |
|
|
104.82 |
|
|
1,049,509 |
|
|
1,106,247 |
|
|
105.41 |
|
|
1,098,108 |
|
|
104.63 |
|
||||||||||
ARMs |
36,681 |
|
|
38,112 |
|
|
103.90 |
|
|
37,874 |
|
|
103.25 |
|
|
39,196 |
|
|
40,422 |
|
|
103.13 |
|
|
40,652 |
|
|
103.71 |
|
||||||||||
Reverse mortgages |
89,444 |
|
|
98,436 |
|
|
110.05 |
|
|
96,524 |
|
|
107.92 |
|
|
86,722 |
|
|
94,690 |
|
|
109.19 |
|
|
93,831 |
|
|
108.20 |
|
||||||||||
Total Agency RMBS |
1,293,221 |
|
|
1,373,827 |
|
|
106.23 |
|
|
1,353,003 |
|
|
104.62 |
|
|
1,364,904 |
|
|
1,438,366 |
|
|
105.38 |
|
|
1,426,079 |
|
|
104.48 |
|
||||||||||
Non-Agency RMBS |
11,128 |
|
|
9,176 |
|
|
82.46 |
|
|
7,044 |
|
|
63.30 |
|
|
11,491 |
|
|
9,285 |
|
|
80.80 |
|
|
7,231 |
|
|
62.93 |
|
||||||||||
Total RMBS(2) |
1,304,349 |
|
|
1,383,003 |
|
|
106.03 |
|
|
1,360,047 |
|
|
104.27 |
|
|
1,376,395 |
|
|
1,447,651 |
|
|
105.18 |
|
|
1,433,310 |
|
|
104.14 |
|
||||||||||
Agency IOs |
n/a |
|
11,565 |
|
|
n/a |
|
12,144 |
|
|
n/a |
|
n/a |
|
11,801 |
|
|
n/a |
|
12,244 |
|
|
n/a |
||||||||||||||||
Total mortgage-backed securities |
|
|
$ |
1,394,568 |
|
|
|
|
$ |
1,372,191 |
|
|
|
|
|
|
$ |
1,459,452 |
|
|
|
|
$ |
1,445,554 |
|
|
|
(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 4.4% to
Despite large fluctuations in long-term interest rates, increasing prepayment rates, and an inverted yield curve, the Company benefited from strong performance in its Agency RMBS portfolio during the quarter. Pay-ups on the Company's specified pools increased for the fourth consecutive quarter, and along with declining interest rates, helped generate net realized and unrealized gains on its portfolio. Pay-ups are price premiums for specified pools relative to their TBA counterparts. Similar to previous quarters, the decline in mortgage rates and associated increase in actual and projected prepayments drove the expansion of pay-ups. Average pay-ups on the Company's specified pools increased to 1.86% as of
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 decline in medium-term and long-term interest rates during the quarter generated net realized and unrealized losses on the Company's interest rate hedges.
The Company's non-Agency RMBS performed well during the quarter, driven by strong net interest income and unrealized gains. Fundamentals underlying non-Agency RMBS 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.
Core Earnings and Adjusted Core Earnings were lower quarter over quarter, primarily as a result of 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, 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 periodic settlements 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-current 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 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 and Adjusted Core Earnings are used to help measure the extent to which this objective is being achieved. In addition, the Company believes that presenting Core Earnings and Adjusted Core Earnings enables its investors to measure, evaluate and compare its operating performance to that of its peer companies. 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
|
|
Three-Month
|
||||
Net Income (Loss) |
|
$ |
3,729 |
|
|
$ |
(107 |
) |
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
(1,564 |
) |
|
(1,418 |
) |
||
Change in net unrealized (gains) losses on securities |
|
(9,058 |
) |
|
(14,511 |
) |
||
Net realized (gains) losses on financial derivatives |
|
1,862 |
|
|
8,771 |
|
||
Change in net unrealized (gains) losses on financial derivatives |
|
5,351 |
|
|
8,442 |
|
||
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
2,347 |
|
|
(383 |
) |
||
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
(1,815 |
) |
|
1,045 |
|
||
Subtotal |
|
(2,877 |
) |
|
1,946 |
|
||
Core Earnings |
|
$ |
852 |
|
|
$ |
1,839 |
|
Less: Catch-up Premium Amortization Adjustment |
|
(1,564 |
) |
|
(904 |
) |
||
Adjusted Core Earnings |
|
$ |
2,416 |
|
|
$ |
2,743 |
|
Weighted Average Shares Outstanding |
|
12,459,478 |
|
|
12,467,103 |
|
||
Core Earnings Per Share |
|
$ |
0.07 |
|
|
$ |
0.15 |
|
Adjusted Core Earnings Per Share |
|
$ |
0.19 |
|
|
$ |
0.22 |
|
(1) |
Conformed to current period presentation. |
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. 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,
|
|
June 30,
|
|
September 30,
|
||||||
(In thousands except share amounts) |
|
|
|
|
|
|
||||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
|
|
||||||
Interest income |
|
$ |
10,485 |
|
|
$ |
12,139 |
|
|
$ |
35,237 |
|
Interest expense |
|
(8,820 |
) |
|
(9,662 |
) |
|
(28,038 |
) |
|||
Total net interest income |
|
1,665 |
|
|
2,477 |
|
|
7,199 |
|
|||
EXPENSES |
|
|
|
|
|
|
||||||
Management fees to affiliate |
|
582 |
|
|
582 |
|
|
1,759 |
|
|||
Professional fees |
|
216 |
|
|
207 |
|
|
652 |
|
|||
Compensation expense |
|
132 |
|
|
112 |
|
|
394 |
|
|||
Insurance expense |
|
74 |
|
|
74 |
|
|
221 |
|
|||
Other operating expenses |
|
341 |
|
|
325 |
|
|
987 |
|
|||
Total expenses |
|
1,345 |
|
|
1,300 |
|
|
4,013 |
|
|||
OTHER INCOME (LOSS) |
|
|
|
|
|
|
||||||
Net realized gains (losses) on securities |
|
1,564 |
|
|
1,418 |
|
|
1,308 |
|
|||
Net realized gains (losses) on financial derivatives |
|
(1,862 |
) |
|
(8,771 |
) |
|
(22,723 |
) |
|||
Change in net unrealized gains (losses) on securities |
|
9,058 |
|
|
14,511 |
|
|
45,540 |
|
|||
Change in net unrealized gains (losses) on financial derivatives |
|
(5,351 |
) |
|
(8,442 |
) |
|
(14,761 |
) |
|||
Total other income (loss) |
|
3,409 |
|
|
(1,284 |
) |
|
9,364 |
|
|||
NET INCOME (LOSS) |
|
$ |
3,729 |
|
|
$ |
(107 |
) |
|
$ |
12,550 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
||||||
Basic and Diluted |
|
$ |
0.30 |
|
|
$ |
(0.01 |
) |
|
$ |
1.01 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
12,459,478 |
|
|
12,467,103 |
|
|
12,464,800 |
|
|||
CASH DIVIDENDS PER SHARE: |
|
|
|
|
|
|
||||||
Dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.90 |
|
ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||||||
|
|
As of |
||||||||||
|
|
September 30,
|
|
June 30,
|
|
December 31,
|
||||||
(In thousands except share amounts) |
|
|
|
|
|
|
||||||
ASSETS |
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
50,188 |
|
|
$ |
41,473 |
|
|
$ |
18,585 |
|
Mortgage-backed securities, at fair value |
|
1,394,568 |
|
|
1,459,452 |
|
|
1,540,296 |
|
|||
Due from brokers |
|
56,734 |
|
|
41,838 |
|
|
24,051 |
|
|||
Financial derivatives–assets, at fair value |
|
475 |
|
|
1,831 |
|
|
11,839 |
|
|||
Reverse repurchase agreements |
|
43,008 |
|
|
40,097 |
|
|
379 |
|
|||
Receivable for securities sold |
|
123,594 |
|
|
106,376 |
|
|
74,197 |
|
|||
Interest receivable |
|
5,127 |
|
|
5,204 |
|
|
5,607 |
|
|||
Other assets |
|
708 |
|
|
771 |
|
|
612 |
|
|||
Total Assets |
|
$ |
1,674,402 |
|
|
$ |
1,697,042 |
|
|
$ |
1,675,566 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
LIABILITIES |
|
|
|
|
|
|
||||||
Repurchase agreements |
|
$ |
1,337,984 |
|
|
$ |
1,442,043 |
|
|
$ |
1,481,561 |
|
Payable for securities purchased |
|
114,684 |
|
|
39,528 |
|
|
11,275 |
|
|||
Due to brokers |
|
294 |
|
|
751 |
|
|
1,325 |
|
|||
Financial derivatives–liabilities, at fair value |
|
19,886 |
|
|
15,891 |
|
|
16,559 |
|
|||
U.S. Treasury securities sold short, at fair value |
|
37,835 |
|
|
34,522 |
|
|
374 |
|
|||
Dividend payable |
|
3,485 |
|
|
3,491 |
|
|
4,252 |
|
|||
Accrued expenses |
|
681 |
|
|
664 |
|
|
838 |
|
|||
Management fee payable to affiliate |
|
582 |
|
|
582 |
|
|
579 |
|
|||
Interest payable |
|
4,400 |
|
|
4,965 |
|
|
4,981 |
|
|||
Total Liabilities |
|
1,519,831 |
|
|
1,542,437 |
|
|
1,521,744 |
|
|||
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
Preferred shares, par value $0.01 per share, 100,000,000 shares
|
|
— |
|
|
— |
|
|
— |
|
|||
Common shares, par value $0.01 per share, 500,000,000 shares
|
|
124 |
|
|
125 |
|
|
125 |
|
|||
Additional paid-in-capital |
|
230,303 |
|
|
230,580 |
|
|
230,888 |
|
|||
Accumulated deficit |
|
(75,856 |
) |
|
(76,100 |
) |
|
(77,191 |
) |
|||
Total Shareholders' Equity |
|
154,571 |
|
|
154,605 |
|
|
153,822 |
|
|||
Total Liabilities and Shareholders' Equity |
|
$ |
1,674,402 |
|
|
$ |
1,697,042 |
|
|
$ |
1,675,566 |
|
PER SHARE INFORMATION |
|
|
|
|
|
|
||||||
Common shares, par value $0.01 per share |
|
$ |
12.42 |
|
|
$ |
12.40 |
|
|
$ |
12.30 |
|
(1) |
Derived from audited financial statements as of December 31, 2018. |
View source version on businesswire.com: https://www.businesswire.com/news/home/20191104005975/en/
Source:
Investors:
Ellington Residential Mortgage REIT
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
Amanda Klein or Kevin FitzGerald
Gasthalter & Co.
for Ellington Residential Mortgage REIT
(212) 257-4170
Ellington@gasthalter.com