Ellington Residential Mortgage REIT (NYSE: EARN) (the "Company")
today reported financial results for the quarter ended June 30,
2023.
Highlights
- Net income (loss) of $1.2 million, or $0.09 per share.
- Adjusted Distributable Earnings1 of $2.4 million, or $0.17 per
share.
- Book value of $8.12 per share as of June 30, 2023, which
includes the effects of dividends of $0.24 per share for the
quarter.
- Net interest margin2 of 0.93%.
- Weighted average constant prepayment rate ("CPR") for the
fixed-rate Agency specified pool portfolio of 7.43.
- Dividend yield of 13.6% based on the August 9, 2023 closing
stock price of $7.07, and monthly dividend of $0.08 per common
share declared on August 7, 2023.
- Debt-to-equity ratio of 7.5:1 as of June 30, 2023; adjusted for
unsettled purchases and sales, the debt-to-equity ratio as of June
30, 2023 was 7.6:1.
- Net mortgage assets-to-equity ratio of 7.0:14 as of June 30,
2023.
- Cash and cash equivalents of $43.7 million as of June 30, 2023,
in addition to other unencumbered assets of $7.2 million.
Second Quarter 2023 Results
“The second quarter began with elevated interest rate volatility
and widening Agency MBS yield spreads, as the market prepared for
sales by the FDIC of MBS from failed regional banks. Later in the
quarter, with the FDIC sales well absorbed and with the debt
ceiling dispute resolved, volatility declined and Agency MBS yield
spreads tightened. Accordingly, we experienced moderate portfolio
losses in April, but these were reversed in May and June. On
balance, Ellington Residential had modestly positive net income for
the quarter,” said Laurence Penn, Chief Executive Officer and
President of Ellington Residential.
“Over the course of the quarter, we maintained a relatively
stable overall portfolio composition and size. We continue to
believe in the value of our specified pool portfolio, and indeed
prepayment rates on our discount specified pools increased nicely
quarter over quarter.
“Looking ahead, our outlook for Agency MBS is positive, as both
nominal yield spreads and option-adjusted spreads are still wide,
realized volatility has declined, and higher interest rates are
helping to bring inflation down. The Fed may be nearing the end of
its tightening cycle, and the FDIC sales have been well-digested by
the market. Meanwhile, we have maintained excess liquidity and
additional borrowing capacity to capitalize on attractive
investment opportunities, including should we see any weakness in
the non-Agency RMBS markets.”
_____________________________________ 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 June 30, 2023 the market value of the Company's
mortgage-backed securities and its net short TBA position was
$920.7 million and $(102.5) million, respectively, and total
shareholders' equity was $116.7 million.
Financial Results
The following table summarizes the Company's portfolio of RMBS
as of June 30, 2023 and March 31, 2023:
June 30, 2023
March 31, 2023
($ 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
$
32,920
$
31,529
95.77
$
33,107
100.57
$
32,671
$
31,948
97.79
$
33,021
101.07
20-year fixed-rate mortgages
11,040
10,021
90.77
11,707
106.04
10,463
9,491
90.71
11,133
106.40
30-year fixed-rate mortgages
880,519
824,370
93.62
869,023
98.69
870,847
825,011
94.74
867,925
99.66
ARMs
7,282
7,223
99.19
8,076
110.90
7,797
7,818
100.27
8,670
111.20
Reverse mortgages
15,521
15,885
102.35
17,510
112.81
16,222
16,663
102.72
18,327
112.98
Total Agency RMBS
947,282
889,028
93.85
939,423
99.17
938,000
890,931
94.98
939,076
100.11
Non-Agency RMBS(2)
15,276
13,013
85.19
12,602
82.50
18,801
14,724
78.31
14,375
76.46
Total RMBS(2)
962,558
902,041
93.71
952,025
98.91
956,801
905,655
94.65
953,451
99.65
Agency IOs
n/a
7,256
n/a
6,913
n/a
n/a
9,704
n/a
9,438
n/a
Non-Agency IOs
n/a
11,417
n/a
9,065
n/a
n/a
10,172
n/a
8,099
n/a
Total mortgage-backed securities
$
920,714
$
968,003
$
925,531
$
970,988
(1)
Expressed as a percentage of
current principal balance.
(2)
Excludes IOs.
The size of the Company's Agency RMBS holdings was essentially
unchanged at $889.0 million as of June 30, 2023, compared to $890.9
million as of March 31, 2023, as net purchases were roughly offset
by principal paydowns and net losses. Similarly, the Company's
aggregate holdings of non-Agency RMBS and interest-only securities
decreased only slightly over the same period. The Company’s Agency
RMBS portfolio turnover was 19% for the quarter.
The Company's leverage ratios were largely unchanged quarter
over quarter as well. The Company's debt-to-equity ratio, adjusted
for unsettled purchases and sales, was 7.6:1 as of June 30, 2023,
as compared to 7.5:1 as of March 31, 2023, while its net mortgage
assets-to-equity ratio was 7.0:1, as compared to 6.9:1 as of March
31, 2023.
In April, FDIC-directed sales of RMBS from failed regional banks
commenced, which pressured yield spreads in the month but also
attracted investor interest, in turn driving strong RMBS demand
into May even as interest rate volatility remained elevated. Then
in June, following resolution of the debt ceiling dispute, yield
spreads tightened and volatility declined into quarter end. Overall
for the second quarter, Agency RMBS generated a positive excess
return relative to U.S. Treasuries of 0.79%.
Low-coupon RMBS (i.e., with passthrough rates 2.5% and lower)
comprised a meaningful portion of the holdings of the failed
regional banks. In March, concerns about potential distressed
selling of these holdings caused low-coupon RMBS to underperform
sharply. The FDIC-directed sales were well absorbed by the market,
however, and low-coupon RMBS outperformed in the second quarter.
The Company has limited low-coupon RMBS investments, which was
beneficial in the first quarter as that cohort underperformed, but
also meant that the Company did not benefit from their relative
outperformance in the second quarter.
For the second quarter, the Company had a net gain in its Agency
RMBS portfolio, as net gains on its interest rate hedges exceeded
net losses on its Agency RMBS and 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 the pools that it
sold during the quarter had higher pay-ups than the held
population. As a result, overall pay-ups on the Company's specified
pools decreased to 0.98% as of June 30, 2023, as compared to 1.09%
as of March 31, 2023.
During the quarter, the Company continued to hedge interest rate
risk through the use of interest rate swaps and short positions in
TBAs, U.S. Treasury securities, and futures. The Company again
ended the quarter with a net short TBA position.
The Company's non-Agency RMBS portfolio and interest-only
securities also generated positive results for the quarter, driven
by strong net interest income and net gains. As noted in prior
quarters, the Company may increase its allocation to non-Agency
RMBS based on market opportunities.
During the quarter, higher short-term interest rates drove a
significant increase in the Company's cost of funds, which more
than offset the increase in its asset yields, and as a result, the
Company's net interest margin declined quarter over quarter. Driven
by the lower net interest margin, as well as lower average holdings
on the Company's Agency RMBS portfolio, Adjusted Distributable
Earnings also decreased sequentially. During the quarter, the
Company also continued to benefit from positive carry on its
interest rate swap hedges, where it overall receives a higher
floating rate and pays a lower fixed rate.
About Ellington Residential Mortgage REIT
Ellington Residential Mortgage REIT is a mortgage real estate
investment trust that specializes in acquiring, investing in and
managing residential mortgage- and real estate-related assets, with
a primary focus on residential mortgage-backed securities for which
the principal and interest payments are guaranteed by a U.S.
government Agency or a U.S. government-sponsored enterprise.
Ellington Residential Mortgage REIT is externally managed and
advised by Ellington Residential Mortgage Management LLC, an
affiliate of Ellington Management Group, L.L.C.
Conference Call
The Company will host a conference call at 11:00 a.m. Eastern
Time on Friday, August 11, 2023, to discuss its financial results
for the quarter ended June 30, 2023. To participate in the event by
telephone, please dial (800) 267-6316 at least 10 minutes prior to
the start time and reference the conference ID: EARNQ223.
International callers should dial (203) 518-9765 and reference the
same conference ID. The conference call will also be webcast live
over the Internet and can be accessed via the "For Our
Shareholders" section of the Company's web site at
www.earnreit.com. To listen to the live webcast, please visit
www.earnreit.com at least 15 minutes prior to the start of the call
to register, download, and install necessary audio software. In
connection with the release of these financial results, the Company
also posted an investor presentation, that will accompany the
conference call, on the Company's website at www.earnreit.com under
"For Our Shareholders—Presentations."
A dial-in replay of the conference call will be available on
Friday, August 11, 2023, at approximately 2:00 p.m. Eastern Time
through Friday, August 18, 2023 at approximately 11:59 p.m. Eastern
Time. To access this replay, please dial (800) 839-6803.
International callers should dial (402) 220-6056. A replay of the
conference call will also be archived on the Company's web site at
www.earnreit.com.
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 SEC filings under "For Our Shareholders"
on the Company's website (at www.earnreit.com) or at the SEC's
website (www.sec.gov). Other risks, uncertainties, and factors that
could cause actual results to differ materially from those
projected or implied may be described from time to time in reports
the Company files with the SEC, including reports on Forms 10-Q,
10-K and 8-K. The Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
ELLINGTON RESIDENTIAL MORTGAGE
REIT
CONSOLIDATED STATEMENT OF
OPERATIONS
(UNAUDITED)
Three-Month Period
Ended
Six-Month Period Ended
June 30, 2023
March 31, 2023
June 30, 2023
(In thousands except share amounts and per
share amounts)
INTEREST INCOME (EXPENSE)
Interest income
$
10,070
$
9,338
$
19,408
Interest expense
(11,686
)
(9,710
)
(21,396
)
Total net interest income
(1,616
)
(372
)
(1,988
)
EXPENSES
Management fees to affiliate
439
433
872
Professional fees
407
242
649
Compensation expense
187
181
368
Insurance expense
95
99
194
Other operating expenses
372
350
722
Total expenses
1,500
1,305
2,805
OTHER INCOME (LOSS)
Net realized gains (losses) on
securities
(11,580
)
(15,126
)
(26,706
)
Net realized gains (losses) on financial
derivatives
24,227
1,743
25,970
Change in net unrealized gains (losses) on
securities
(1,780
)
27,948
26,168
Change in net unrealized gains (losses) on
financial derivatives
(6,548
)
(10,551
)
(17,099
)
Total other income (loss)
4,319
4,014
8,333
NET INCOME (LOSS)
$
1,203
$
2,337
$
3,540
NET INCOME (LOSS) PER COMMON
SHARE:
Basic and Diluted
$
0.09
$
0.17
$
0.26
WEIGHTED AVERAGE SHARES
OUTSTANDING
13,935,821
13,666,707
13,802,007
CASH DIVIDENDS PER SHARE:
Dividends declared
$
0.24
$
0.24
$
0.48
ELLINGTON RESIDENTIAL MORTGAGE
REIT
CONSOLIDATED BALANCE
SHEET
(UNAUDITED)
As of
June 30, 2023
March 31, 2023
December 31,
2022(1)
(In thousands except share amounts and per
share amounts)
ASSETS
Cash and cash equivalents
$
43,713
$
36,657
$
34,816
Mortgage-backed securities, at fair
value
920,714
925,531
893,301
Other investments, at fair value
510
210
208
Due from brokers
17,031
7,198
18,824
Financial derivatives–assets, at fair
value
70,518
57,665
68,770
Reverse repurchase agreements
12,191
2,528
499
Receivable for securities sold
14,528
90,053
33,452
Interest receivable
4,138
3,489
3,326
Other assets
646
647
436
Total Assets
$
1,083,989
$
1,123,978
$
1,053,632
LIABILITIES AND SHAREHOLDERS'
EQUITY
LIABILITIES
Repurchase agreements
$
875,030
$
875,670
$
842,455
Payable for securities purchased
30,725
67,531
42,199
Due to brokers
49,787
44,704
45,666
Financial derivatives–liabilities, at fair
value
2,481
2,384
3,119
U.S. Treasury securities sold short, at
fair value
1,957
12,528
498
Dividend payable
1,150
1,106
1,070
Accrued expenses
1,386
1,208
1,097
Management fee payable to affiliate
439
433
423
Interest payable
4,337
3,437
4,696
Total Liabilities
967,292
1,009,001
941,223
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; (14,378,193, 13,830,403 and
13,377,840 shares issued and outstanding, respectively)(2)
144
138
134
Additional paid-in-capital
248,355
244,472
240,940
Accumulated deficit
(131,802
)
(129,633
)
(128,665
)
Total Shareholders' Equity
116,697
114,977
112,409
Total Liabilities and Shareholders'
Equity
$
1,083,989
$
1,123,978
$
1,053,632
SUPPLEMENTAL PER SHARE
INFORMATION
Book Value Per Share
$
8.12
$
8.31
$
8.40
(1)
Derived from audited financial
statements as of December 31, 2022.
(2)
Common shares issued and
outstanding at June 30, 2023, includes 547,790 common shares issued
during the second quarter under the Company's at-the-market common
share offering program.
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 U.S. GAAP, it
should be considered supplementary to, and not as a substitute for,
net income (loss) computed in accordance with U.S. GAAP.
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 Board of
Trustees considers the Company’s earnings, liquidity, financial
condition, REIT distribution requirements, and financial covenants,
along with other factors that the Board of Trustees may deem
relevant from time to time.
The following table reconciles, for the three-month periods
ended June 30, 2023 and March 31, 2023, the Company's Adjusted
Distributable Earnings to the line on the Company's Consolidated
Statement of Operations entitled Net Income (Loss), which the
Company believes is the most directly comparable U.S. GAAP
measure:
Three-Month Period
Ended
(In thousands except share amounts and per
share amounts)
June 30, 2023
March 31, 2023
Net Income (Loss)
$
1,203
$
2,337
Adjustments:
Net realized (gains) losses on
securities
11,580
15,126
Change in net unrealized (gains) losses on
securities
1,780
(27,948
)
Net realized (gains) losses on financial
derivatives
(24,227
)
(1,743
)
Change in net unrealized (gains) losses on
financial derivatives
6,548
10,551
Net realized gains (losses) on periodic
settlements of interest rate swaps
3,942
1,769
Change in net unrealized gains (losses) on
accrued periodic settlements of interest rate swaps
1,118
2,432
Non-recurring expenses
60
—
Negative (positive) component of interest
income represented by Catch-up Premium Amortization Adjustment
376
299
Subtotal
1,177
486
Adjusted Distributable Earnings
$
2,380
$
2,823
Weighted Average Shares
Outstanding
13,935,821
13,666,707
Adjusted Distributable Earnings Per
Share
$
0.17
$
0.21
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230810285836/en/
Investors: Ellington Residential Mortgage REIT Investor
Relations (203) 409-3773 info@earnreit.com or Media: Amanda
Shpiner/Sara Widmann Gasthalter & Co. for Ellington Residential
Mortgage REIT (212) 257-4170 Ellington@gasthalter.com
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