Ellington Residential Mortgage REIT Reports Third Quarter 2020 Results
Highlights
-
Net income of
$8.1 million , or$0.66 per share; year-to-date net income of$12.7 million , or$1.03 per share. -
Core Earnings1 of
$4.8 million , or$0.39 per share. -
Book value of
$13.17 per share as ofSeptember 30, 2020 , which includes the effect of a third quarter dividend of$0.28 per share. Economic return of 5.1% for the quarter, and year-to-date economic return of 8.5%. - Net interest margin2 of 2.21%.
- Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 21.4%.
-
Dividend yield of 10.1% based on the
November 4, 2020 closing stock price of$11.13 . -
Debt-to-equity ratio of 6.5:1 as of
September 30, 2020 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was also 6.5:1. -
Net mortgage assets-to-equity ratio of 5.6:1 3 as of
September 30, 2020 . -
Cash and cash equivalents of
$61.2 million as ofSeptember 30, 2020 , in addition to other unencumbered assets of$28.1 million .
Third Quarter 2020 Results
"During the third quarter, Ellington Residential generated net income of
"The drivers of our strong third quarter results were substantially similar to those that drove our strong second quarter performance. Pay-ups on our specified pools appreciated further, as prepayments remained elevated; our non-Agency RMBS portfolio had another great quarter, as prices continued to recover from the March selloff; and by maintaining our long positions in current coupon TBAs, we again benefited from attractive dollar rolls, which continue to be driven by
"During the third quarter, with a presidential election approaching and with the economy still struggling from the pandemic, we kept our overall leverage well below our historical averages. I am extremely pleased that we were able to deliver such strong performance for the quarter while still maintaining this conservative portfolio profile.
"Finally, with mortgage rates persisting at historically low levels, and with the vast majority of outstanding mortgages refinanceable, we are decidedly in the middle of a bona fide refinancing wave. While this presents many challenges for the MBS market—especially in higher coupons—we believe that this environment plays right to our core strengths of prepayment modeling, asset selection, and dynamic interest rate hedging. As we move into the final weeks of the year, we expect this environment to create numerous attractive investment opportunities for us, and our current high levels of liquidity should enable us to capitalize on these opportunities as they arise."
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
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(In thousands) |
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
|
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
||||||||||||||||||||
Agency RMBS(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
15-year fixed-rate mortgages |
$ |
80,451 |
|
|
$ |
86,213 |
|
|
$ |
107.16 |
|
|
$ |
83,106 |
|
|
$ |
103.30 |
|
|
$ |
64,491 |
|
|
$ |
69,169 |
|
|
$ |
107.25 |
|
|
$ |
66,172 |
|
|
$ |
102.61 |
|
20-year fixed-rate mortgages |
36,481 |
|
|
37,933 |
|
|
103.98 |
|
|
37,757 |
|
|
103.50 |
|
|
1,077 |
|
|
1,191 |
|
|
110.58 |
|
|
1,148 |
|
|
106.59 |
|
||||||||||
30-year fixed-rate mortgages |
781,388 |
|
|
854,443 |
|
|
109.35 |
|
|
818,178 |
|
|
104.71 |
|
|
825,850 |
|
|
900,003 |
|
|
108.98 |
|
|
861,994 |
|
|
104.38 |
|
||||||||||
ARMs |
22,518 |
|
|
23,590 |
|
|
104.76 |
|
|
23,011 |
|
|
102.19 |
|
|
25,471 |
|
|
26,827 |
|
|
105.32 |
|
|
26,030 |
|
|
102.19 |
|
||||||||||
Reverse mortgages |
67,233 |
|
|
74,246 |
|
|
110.43 |
|
|
71,281 |
|
|
106.02 |
|
|
89,561 |
|
|
100,393 |
|
|
112.09 |
|
|
95,451 |
|
|
106.58 |
|
||||||||||
Total Agency RMBS |
988,071 |
|
|
1,076,425 |
|
|
108.94 |
|
|
1,033,333 |
|
|
104.58 |
|
|
1,006,450 |
|
|
1,097,583 |
|
|
109.05 |
|
|
1,050,795 |
|
|
104.41 |
|
||||||||||
Non-Agency RMBS |
32,062 |
|
|
24,580 |
|
|
76.66 |
|
|
21,993 |
|
|
68.60 |
|
|
58,642 |
|
|
41,987 |
|
|
71.60 |
|
|
39,016 |
|
|
66.53 |
|
||||||||||
Total RMBS(2) |
1,020,133 |
|
|
1,101,005 |
|
|
107.93 |
|
|
1,055,326 |
|
|
103.45 |
|
|
1,065,092 |
|
|
1,139,570 |
|
|
106.99 |
|
|
1,089,811 |
|
|
102.32 |
|
||||||||||
Agency IOs |
n/a |
|
12,615 |
|
|
n/a |
|
14,640 |
|
|
n/a |
|
n/a |
|
14,477 |
|
|
n/a |
|
16,023 |
|
|
n/a |
||||||||||||||||
Total mortgage-backed securities |
|
|
$ |
1,113,620 |
|
|
|
|
$ |
1,069,966 |
|
|
|
|
|
|
$ |
1,154,047 |
|
|
|
|
$ |
1,105,834 |
|
|
|
(1) Represents the dollar amount (not shown in thousands) per
(2) Excludes Agency IOs.
The Company's Agency RMBS holdings decreased by 2% to
The increase in shareholders' equity during the quarter, combined with the slight decline in the size of the overall RMBS portfolio, caused the Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, to decrease to 6.5:1 as of
As of
The Company's Agency RMBS portfolio performed well during the quarter, driven by strong net interest income and increased pay-ups on its specified pools. During the quarter, mortgage rates declined further and actual and expected prepayment rates rose, which benefited pay-ups on the Company's prepayment-protected specified pools. Average pay-ups on the Company's specified pools increased to 2.55% as of
During the third quarter the Company continued to hedge interest rate risk, primarily through the use of interest rate swaps, and to a lesser extent through the use of short positions in TBAs,
After opportunistically increasing the size of its non-Agency RMBS portfolio in the prior quarter, the Company sold a significant portion of this portfolio during the third quarter, generating 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 increased significantly quarter over quarter. These increases were driven by a lower cost of funds, mainly on the Company's repo borrowings, which more than offset lower asset yields.
4 Conformed to current period calculation methodology.
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 |
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(In thousands except share amounts) |
|
|
|
|
||||
Net Income (Loss) |
|
$ |
8,118 |
|
|
$ |
21,345 |
|
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
(4,987) |
|
|
(5,175) |
|
||
Change in net unrealized (gains) losses on securities |
|
4,575 |
|
|
(15,690) |
|
||
Net realized (gains) losses on financial derivatives |
|
648 |
|
|
8,452 |
|
||
Change in net unrealized (gains) losses on financial derivatives |
|
(2,803) |
|
|
(9,505) |
|
||
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
(271) |
|
|
(1,223) |
|
||
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
(148) |
|
|
896 |
|
||
Deferred offering costs expensed |
|
39 |
|
|
313 |
|
||
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
(405) |
|
|
3,782 |
|
||
Subtotal |
|
(3,352) |
|
|
(18,150) |
|
||
Core Earnings |
|
$ |
4,766 |
|
|
$ |
3,195 |
|
Weighted Average Shares Outstanding |
|
12,323,044 |
|
|
12,319,616 |
|
||
Core Earnings Per Share |
|
$ |
0.39 |
|
|
$ |
0.26 |
|
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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|
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Three-Month
|
|
Nine-Month
|
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(In thousands except share amounts) |
|
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INTEREST INCOME (EXPENSE) |
|
|
|
|
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|
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Interest income |
|
$ |
7,776 |
|
|
$ |
3,489 |
|
|
$ |
21,146 |
|
Interest expense |
|
(819) |
|
|
(2,330) |
|
|
(9,249) |
|
|||
Total net interest income |
|
6,957 |
|
|
1,159 |
|
|
11,897 |
|
|||
EXPENSES |
|
|
|
|
|
|
||||||
Management fees to affiliate |
|
611 |
|
|
594 |
|
|
1,731 |
|
|||
Professional fees |
|
237 |
|
|
598 |
|
|
1,043 |
|
|||
Compensation expense |
|
140 |
|
|
142 |
|
|
433 |
|
|||
Insurance expense |
|
82 |
|
|
82 |
|
|
239 |
|
|||
Other operating expenses |
|
336 |
|
|
316 |
|
|
979 |
|
|||
Total expenses |
|
1,406 |
|
|
1,732 |
|
|
4,425 |
|
|||
OTHER INCOME (LOSS) |
|
|
|
|
|
|
||||||
Net realized gains (losses) on securities |
|
4,987 |
|
|
5,175 |
|
|
11,255 |
|
|||
Net realized gains (losses) on financial derivatives |
|
(648) |
|
|
(8,452) |
|
|
(15,599) |
|
|||
Change in net unrealized gains (losses) on securities |
|
(4,575) |
|
|
15,690 |
|
|
17,883 |
|
|||
Change in net unrealized gains (losses) on financial derivatives |
|
2,803 |
|
|
9,505 |
|
|
(8,293) |
|
|||
Total other income (loss) |
|
2,567 |
|
|
21,918 |
|
|
5,246 |
|
|||
NET INCOME (LOSS) |
|
$ |
8,118 |
|
|
$ |
21,345 |
|
|
$ |
12,718 |
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
||||||
Basic and Diluted |
|
$ |
0.66 |
|
|
$ |
1.73 |
|
|
$ |
1.03 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
12,323,044 |
|
|
12,319,616 |
|
|
12,359,007 |
|
|||
CASH DIVIDENDS PER SHARE: |
|
|
|
|
|
|
||||||
Dividends declared |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.84 |
|
CONSOLIDATED BALANCE SHEET (UNAUDITED) |
||||||||||||
|
|
As of |
||||||||||
|
|
|
|
|
|
|
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(In thousands except share amounts) |
|
|
|
|
|
|
||||||
ASSETS |
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
61,193 |
|
|
$ |
50,935 |
|
|
$ |
35,351 |
|
Mortgage-backed securities, at fair value |
|
1,113,620 |
|
|
1,154,047 |
|
|
1,401,778 |
|
|||
Other investments, at fair value |
|
5,290 |
|
|
411 |
|
|
— |
|
|||
Due from brokers |
|
49,530 |
|
|
38,024 |
|
|
34,596 |
|
|||
Financial derivatives–assets, at fair value |
|
1,738 |
|
|
3,115 |
|
|
4,180 |
|
|||
Reverse repurchase agreements |
|
20,013 |
|
|
— |
|
|
2,084 |
|
|||
Receivable for securities sold |
|
7,191 |
|
|
40,977 |
|
|
5,500 |
|
|||
Interest receivable |
|
4,562 |
|
|
4,289 |
|
|
5,016 |
|
|||
Other assets |
|
380 |
|
|
539 |
|
|
604 |
|
|||
Total Assets |
|
$ |
1,263,517 |
|
|
$ |
1,292,337 |
|
|
$ |
1,489,109 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
LIABILITIES |
|
|
|
|
|
|
||||||
Repurchase agreements |
|
$ |
1,061,640 |
|
|
$ |
909,821 |
|
|
$ |
1,296,272 |
|
Payable for securities purchased |
|
5,308 |
|
|
205,950 |
|
|
19,433 |
|
|||
Due to brokers |
|
669 |
|
|
1,372 |
|
|
33 |
|
|||
Financial derivatives–liabilities, at fair value |
|
7,916 |
|
|
12,144 |
|
|
2,047 |
|
|||
|
|
19,986 |
|
|
— |
|
|
2,070 |
|
|||
Dividend payable |
|
3,454 |
|
|
3,450 |
|
|
3,488 |
|
|||
Accrued expenses |
|
1,077 |
|
|
837 |
|
|
588 |
|
|||
Management fee payable to affiliate |
|
611 |
|
|
594 |
|
|
605 |
|
|||
Interest payable |
|
455 |
|
|
492 |
|
|
3,729 |
|
|||
Total Liabilities |
|
1,101,116 |
|
|
1,134,660 |
|
|
1,328,265 |
|
|||
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
Preferred shares, par value |
|
— |
|
|
— |
|
|
— |
|
|||
Common shares, par value |
|
123 |
|
|
123 |
|
|
124 |
|
|||
Additional paid-in-capital |
|
229,551 |
|
|
229,491 |
|
|
230,358 |
|
|||
Accumulated deficit |
|
(67,273) |
|
|
(71,937) |
|
|
(69,638) |
|
|||
Total Shareholders' Equity |
|
162,401 |
|
|
157,677 |
|
|
160,844 |
|
|||
Total Liabilities and Shareholders' Equity |
|
$ |
1,263,517 |
|
|
$ |
1,292,337 |
|
|
$ |
1,489,109 |
|
SUPPLEMENTAL PER SHARE INFORMATION |
|
|
|
|
|
|
||||||
Book Value Per Share |
|
$ |
13.17 |
|
|
$ |
12.80 |
|
|
$ |
12.91 |
|
(1) Derived from audited financial statements as of
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Investors:
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(203) 409-3773
info@earnreit.com
or
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for
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