Ellington Residential Mortgage REIT (NYSE:EARN) today reported
financial results for the quarter ended September 30,
2017.
Highlights
- Net income of $6.3 million, or $0.48
per share.
- Core Earnings1 of $5.0 million, or
$0.38 per share, and Adjusted Core Earnings1 of $5.6 million, or
$0.43 per share.
- Book value of $14.76 per share as of
September 30, 2017, after giving effect to a third quarter
dividend of $0.40 per share.
- Net interest margin of 1.30%, and
adjusted net interest margin2 of 1.45%.
- Weighted average constant prepayment
rate for the fixed-rate Agency specified pool portfolio of
9.6%.
- Dividend yield of 11.9% based on
November 1, 2017 closing stock price of $13.41.
- Debt-to-equity ratio of 8.3:1 as of
September 30, 2017.
Third Quarter 2017 Results
"In the third quarter, Ellington Residential had net income of
$0.48 per share and Adjusted Core Earnings of $0.43 per share,"
said Laurence Penn, Chief Executive Officer and President. "Our
dividend of $0.40 was more than covered by our net income, and in
addition to achieving outstanding returns on our investment
portfolio, we also benefited from a lower expense ratio following
the equity raise last quarter that increased our capital base. We
generated an annualized economic return for the quarter of 12.8%,
and our book value per share increased quarter over quarter, even
after payment of the dividend.
"The quarter's results were driven by the strong performance of
Agency RMBS, which finally participated in the spread tightening
that most other fixed-income classes had already experienced this
year. In September, after the Federal Reserve announced the
initiation of its tapering program, the mortgage basis tightened
significantly, suggesting that many investors had been waiting for
policy clarity before adding Agency RMBS exposure. We were well
positioned for this spread tightening, as we had reduced our TBA
short position coming into the quarter, and we had just deployed
into Agency RMBS the vast majority of the capital we had raised in
our well-timed second quarter equity raise. We believe that we will
be able to take advantage of many more such opportunities as the
Federal Reserve continues to reduce its footprint in the Agency
RMBS market.
"Our portfolio also benefited from the outperformance of
specified pools versus TBAs, as we continued to concentrate our
long investments in specified pools. Additionally, our small
portfolio of non-Agency RMBS again performed very well this
quarter, contributing nicely to performance.
"The yield curve continued to flatten during the third quarter,
putting downward pressure on our adjusted net interest margin and
Adjusted Core Earnings. However, our portfolio management style
includes active trading, hedging along the entire yield curve, and
hedging using significant TBA short positions. As a result, and as
demonstrated by our strong results this past quarter, we believe
that our success is not dependent on the shape of the yield curve
or the absolute level of interest rates.
"Our larger equity base resulting from the second quarter equity
raise also caused our annualized expense ratio to decline from 3.6%
to 3.0% quarter over quarter. During the third quarter, we raised
$13.9 million of additional equity via our at-the-market (ATM)
program. We believe the ATM program provides an attractive,
low-cost path to growth, and we plan to continue to utilize it as
investment opportunities and market conditions warrant. Based on
our third-quarter ATM issuance alone, we project an additional
0.11% decline in our annualized expense ratio."
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" 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.
Market Overview
- In October, the Federal Reserve
initiated its balance sheet normalization program, and began
tapering asset purchases of both U.S. Treasury securities and
Agency RMBS. At the November Federal Open Market Committee, or
"FOMC," meeting, the Federal Reserve maintained the target range
for the federal funds rate at 1.00%–1.25%.
- For the third consecutive quarter, the
yield curve flattened. The 2-year U.S. Treasury yield rose 10 basis
points to end the quarter at 1.48%, while the 10-year U.S. Treasury
yield increased only 3 basis points to 2.33%.
- Despite the rise in U.S. Treasury
yields, mortgage rates declined over the course of the third
quarter, with the Freddie Mac survey 30-year mortgage rate falling
5 basis points to end the quarter at 3.83%.
- Overall Agency RMBS prepayment rates
declined slightly during the quarter. The Mortgage Bankers
Association's Refinance Index, which measures refinancing
application volumes, increased 2.0% quarter over quarter but
remains well below the multi-year high reached in mid-2016.
Volatility remained at historic lows during the third quarter.
The Merrill Lynch Option Volatility Estimate Index, or MOVE Index,
declined to an all-time low, while the Chicago Board Options
Exchange Volatility Index, known as the VIX, dropped to its lowest
level in 23 years. U.S. Treasury yields were again range-bound,
with the 10-year U.S. Treasury trading within a 35-basis point
range during the quarter.
During the quarter, yield spreads across most credit products,
including non-Agency RMBS, remained at the tightest points of their
trailing two-year ranges. Corporate credit spreads fluctuated
intra-quarter but finished the quarter tighter. As in prior
quarters, demand remained strong for floating-rate debt
instruments, including CLOs and leveraged loans. Finally, damage
from recent hurricanes and ongoing negative headlines in retail led
to heightened volatility in the CMBS market during the quarter.
Also during the third quarter, Agency RMBS finally participated
in the spread tightening that other fixed-income asset classes had
already benefited from this year. After the Federal Reserve
announced at its September meeting the initiation of its tapering
program, the Agency mortgage basis tightened significantly,
suggesting that many investors had been waiting for policy clarity
before adding Agency RMBS exposure. As measured by the Bloomberg
Barclays U.S. MBS Agency Fixed Rate Index, Agency RMBS generated an
excess return over the Bloomberg Barclays U.S. Treasury Index of 48
basis points for the quarter.
Mortgage REIT buying of Agency RMBS was also widespread
following a number of equity raises, suggesting that private
capital has been willing and able, at least so far, to replace the
Federal Reserve's footprint in the market. Year-to-date through
October 31, 2017, residential mortgage REITs have raised
approximately $8.1 billion of capital, representing over $40
billion of Agency RMBS buying power. At the same time, low interest
rate volatility and a muted prepayment environment have provided a
significant tailwind to the sector.
Financial Results
Holdings
As of September 30, 2017, our mortgage-backed securities
portfolio consisted of $1.615 billion of fixed-rate Agency
"specified pools," $27.1 million of Agency RMBS backed by
adjustable rate mortgages, or "Agency ARMs," $68.1 million of
Agency reverse mortgage pools, $12.1 million of Agency interest
only securities, or "Agency IOs," and $20.6 million of non-Agency
RMBS. Specified pools are fixed-rate Agency pools consisting of
mortgages with special characteristics, such as mortgages with low
loan balances, mortgages backed by investor properties, mortgages
originated through the government-sponsored "Making Homes
Affordable" refinancing programs, and mortgages with various other
characteristics.
Our overall RMBS portfolio increased by 5.4% to $1.743 billion
as of September 30, 2017, as compared to $1.653 billion as of
June 30, 2017. The increase in the size of our portfolio
primarily reflects the investment, on a leveraged basis, of the
proceeds received from sales of common shares under our ATM
program, though overall our debt-to-equity ratio, adjusted for
unsettled purchases and sales, decreased to 8.3:1 as of September
30, 2017 from 8.5:1 as of June 30, 2017. Our debt-to-equity ratio
may fluctuate period over period based on portfolio management
decisions, market conditions, and the timing of security purchase
and sale transactions. The majority of the ATM proceeds were
invested in fixed-rate specified pools. In addition, separate from
the net short TBA portfolio that we hold for hedging purposes, we
decreased our long TBA positions that we hold for investment
purposes to $105.8 million in notional amount at September 30,
2017, as compared to $121.3 million at June 30, 2017.
With the tightening in Agency RMBS yield spreads, our portfolio
performed well in the third quarter. We also benefited from the
outperformance of specified pools versus TBAs, as we continued to
concentrate our long investments in specified pools, and to hold
net short positions in TBAs as a significant component of our
interest rate hedging strategy. Slightly lower roll costs in higher
coupon TBAs and increased investor demand for specified pools were
key drivers of the outperformance. Average pay-ups on our specified
pools were unchanged at 0.71% as of September 30, 2017, as compared
to June 30, 2017. Pay-ups are price premiums for specified pools
relative to their TBA counterparts.
Our non-Agency RMBS performed well in the third quarter, driven
by net realized and unrealized gains and interest income. As the
case has been for some time, the fundamentals underlying non-Agency
RMBS, led by a stable housing market, continue to be strong. During
the quarter we sold assets at net gains while also adding to the
portfolio. As a result, our total investment in non-Agency RMBS
remained unchanged at $20.6 million as of September 30, 2017
as compared to June 30, 2017. To the extent that more
attractive entry points develop in non-Agency RMBS, we may further
increase our capital allocation to this sector.
Earnings and Net Interest Margin
We had net income of $6.3 million, or $0.48 per share, for the
quarter ended September 30, 2017, as compared to $1.6 million,
or $0.15 per share, for the quarter ended June 30, 2017. For
the quarter ended September 30, 2017, Core Earnings was $5.0
million, or $0.38 per share, as compared to $4.8 million, or $0.45
per share, for the quarter ended June 30, 2017. Adjusted Core
Earnings for the quarter ended September 30, 2017 was $5.6
million, or $0.43 per share, as compared to $5.1 million, or $0.47
per share, for the quarter ended June 30, 2017. Lower per
share Core Earnings and Adjusted Core Earnings in the current
quarter was mainly due to the quarter over quarter decline in net
interest margin, largely related to an increase in repo borrowing
rates in the third quarter. Core Earnings and Adjusted Core
Earnings are non-GAAP financial measures. See "Reconciliation of
Core Earnings to Net Income" below for an explanation regarding the
calculation of Core Earnings, Adjusted Core Earnings, and the
Catch-up Premium Amortization Adjustment.
For the quarter ended September 30, 2017, the weighted
average yield of our portfolio of Agency and non-Agency RMBS was
2.86%, while our average cost of funds including interest rate
swaps and U.S. Treasury securities was 1.56%, resulting in a net
interest margin for the quarter of 1.30%. In comparison, for the
quarter ended June 30, 2017, the weighted average yield of our
Agency and non-Agency RMBS was 2.94%, while our average cost of
funds including interest rate swaps and U.S. Treasury securities
was 1.38%, resulting in a net interest margin of 1.56%. For the
third and second quarters, excluding the impact of the Catch-up
Premium Amortization Adjustment, the weighted average yield of our
portfolio remained unchanged at 3.01% and our adjusted net interest
margin was 1.45% and 1.63%, respectively.
On a quarter-over-quarter basis, our cost of funds, including
the cost of repo, interest rate swaps, and short positions in U.S.
Treasury securities, increased to 1.56% from 1.38%. This
quarter-over-quarter increase resulted primarily from an increase
in our cost of repo, which increased as LIBOR rose. Our average
cost of repo increased 22 basis points quarter over quarter to
1.31%, while the cost related to our interest rate swaps and U.S.
Treasury securities decreased by 2 and 3 basis points from prior
quarter, respectively. The relative make up of our interest rate
hedging portfolio can change materially from quarter to
quarter.
For the quarter ended September 30, 2017, we had total net
realized and unrealized gains of $3.8 million, or $0.29 per share,
on our aggregate Agency RMBS portfolio. Agency RMBS spread
tightening during the period led to the net gains. For the same
period we had total net realized and unrealized gains of $0.7
million, or $0.06 per share, on our non-Agency RMBS portfolio as
underlying fundamentals remained strong.
During the quarter we continued to hedge interest rate risk,
primarily through the use of interest rate swaps and short
positions in TBAs, and to a lesser extent, short positions in U.S.
Treasury securities. For the quarter, we had total net realized and
unrealized losses of $(3.9) million, or $(0.29) per share, on our
interest rate hedging portfolio. In our hedging portfolio, the
relative proportion (based on 10-year equivalents3) of TBA short
positions increased slightly quarter over quarter relative to
interest rate swaps.
After giving effect to a third quarter dividend of $0.40 per
share, our book value per share increased to $14.76 as of
September 30, 2017, from $14.71 as of June 30, 2017, and
we had an economic return of 3.1% for the quarter. Economic return
is computed by adding back dividends declared to ending book value
per share, and comparing that amount to book value per share as of
the beginning of the quarter.
3 "10-year equivalents" for a group of positions represent
the amount of 10-year U.S. Treasury securities that would
experience a similar change in market value under a standard
parallel move in interest rates.
Securities Portfolio
The following table summarizes our portfolio of securities as of
September 30, 2017 and June 30, 2017:
September 30, 2017 June 30, 2017 (In
thousands)
CurrentPrincipal
Fair Value
AveragePrice(1)
Cost
AverageCost(1)
CurrentPrincipal
Fair Value
AveragePrice(1)
Cost
AverageCost(1)
Agency RMBS(2) 15-year fixed-rate mortgages $ 177,485
$ 185,268 $ 104.39 $ 185,456 $ 104.49 $ 174,413 $ 181,932 $ 104.31
$ 182,470 $ 104.62 20-year fixed-rate mortgages 9,280 9,901 106.69
9,990 107.65 9,721 10,359 106.56 10,461 107.61 30-year fixed-rate
mortgages 1,342,918 1,420,139 105.75 1,422,196 105.90 1,272,409
1,342,379 105.50 1,348,714 106.00 ARMs 25,967 27,058 104.20 27,485
105.85 27,375 28,591 104.44 29,031 106.05 Reverse mortgages 62,055
68,050 109.66 68,228 109.95
53,330 58,256 109.24 58,567 109.82
Total Agency RMBS 1,617,705 1,710,416 105.73
1,713,355 105.91 1,537,248 1,621,517
105.48 1,629,243 105.98 Non-Agency RMBS 25,013
20,600 82.36 17,808 71.19 24,977
20,630 82.60 18,122 72.55 Total RMBS(2)
1,642,718 1,731,016 105.38 1,731,163
105.38 1,562,225 1,642,147 105.12
1,647,365 105.45 Agency IOs n/a 12,051 n/a 12,965
n/a n/a 10,882 n/a 11,395 n/a Total
mortgage-backed securities 1,743,067 1,744,128
1,653,029 1,658,760 U.S. Treasury securities sold
short (56,876 ) (56,524 ) 99.38 (56,879 ) 100.01 (74,788 ) (72,762
) 97.29 (73,793 ) 98.67 Reverse repurchase agreements 56,875 56,875
100.00 56,875 100.00 73,470 73,470 100.00
73,470 100.00 Total $ 1,743,418 $ 1,744,124 $
1,653,737 $ 1,658,437 (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.
Our weighted average holdings of RMBS based on amortized cost
was $1.762 billion and $1.452 billion for the three month periods
ended September 30, 2017 and June 30, 2017,
respectively.
Financial Derivatives Portfolio
The following table summarizes fair value of our financial
derivatives as of September 30, 2017 and June 30,
2017:
September 30, 2017 June 30, 2017
Financial derivatives–assets, at fair value: (In thousands)
TBA securities purchase contracts $ 29 $ — TBA securities sale
contracts 1,633 1,936 Fixed payer interest rate swaps 3,121 3,294
Fixed receiver interest rate swaps 613 710 Swaptions 212 — Futures
542 166
Total financial derivatives–assets, at
fair value 6,150 6,106
Financial
derivatives–liabilities, at fair value: TBA securities purchase
contracts (204 ) (328 ) TBA securities sale contracts (30 ) (1 )
Fixed payer interest rate swaps (2,934 ) (2,357 )
Total
financial derivatives–liabilities, at fair value (3,168 )
(2,686 )
Total $ 2,982 $ 3,420
Interest Rate Swaps
The following tables provide details about our fixed payer
interest rate swaps as of September 30, 2017 and June 30,
2017:
September 30, 2017 Maturity
NotionalAmount
Fair Value
WeightedAveragePay
Rate
WeightedAverageReceive
Rate
Weighted AverageRemaining
Yearsto Maturity
(In thousands) 2017 $ 4,750 $ (1 ) 1.11 % 1.18 % 0.13 2018 65,990
268 0.97 1.31 0.68 2019 19,540 42 1.41 1.33 1.76 2020 119,900 210
1.56 1.30 2.60 2021 131,400 (646 ) 1.88 1.31 3.66 2022 71,044 (254
) 1.95 1.31 4.70 2023 54,200 91 1.93 1.29 5.72 2024 8,900 5 1.99
1.30 6.51 2025 15,322 98 2.04 1.31 7.38 2026 40,885 1,938 1.63 1.31
8.96 2027 73,416 (294 ) 2.26 1.31 9.70 2043 12,380 (1,270 )
2.99 1.24 25.63
Total $ 617,727 $ 187
1.77 % 1.30 % 4.99
June 30, 2017
Maturity
NotionalAmount
Fair Value
WeightedAveragePay
Rate
WeightedAverageReceive
Rate
Weighted AverageRemaining
Yearsto Maturity
(In thousands) 2017 $ 54,750 $ (171 ) 1.28 % 1.14 % 0.16 2018
65,990 192 0.97 1.16 0.93 2019 19,540 73 1.41 1.27 2.01 2020
119,900 465 1.56 1.18 2.85 2021 131,400 (354 ) 1.88 1.18 3.91 2022
63,044 (113 ) 1.95 1.17 4.93 2023 54,200 251 1.93 1.17 5.97 2024
8,900 41 1.99 1.15 6.76 2025 15,322 30 2.04 1.06 7.63 2026 40,885
1,943 1.63 1.19 9.21 2027 58,066 (228 ) 2.29 1.18 9.86 2043 12,380
(1,192 ) 2.99 1.12 25.89
Total $
644,377 $ 937 1.72 % 1.17 % 4.73
The following tables provide details about our fixed receiver
interest rate swaps as of September 30, 2017 and June 30,
2017:
September 30, 2017 Maturity
NotionalAmount
Fair Value
WeightedAveragePay
Rate
WeightedAverageReceive
Rate
Weighted AverageRemaining
Yearsto Maturity
(In thousands) 2025 $ 9,700 $ 613 1.30 % 3.00 % 7.79
Total $ 9,700 $ 613 1.30 % 3.00 % 7.79
June 30, 2017 Maturity
NotionalAmount
Fair Value
WeightedAveragePay
Rate
WeightedAverageReceive
Rate
Weighted AverageRemaining
Yearsto Maturity
(In thousands) 2025 $ 9,700 $ 710 1.16 % 3.00 % 8.05
Total $ 9,700 $ 710 1.16 % 3.00 % 8.05
Interest Rate Swaptions
The following tables provide information about our swaptions as
of September 30, 2017. We did not hold any interest rate
swaptions as of June 30, 2017.
September 30, 2017 Option Underlying
Swap Type Fair Value
Months toExpiration
NotionalAmount
Term (Years)
Fixed Rate
($ in thousands) Fixed Payer $ 212 10.1 $ 10,000 10 2.40 %
Futures
The following table provides information about our short
positions in futures as of September 30, 2017 and
June 30, 2017:
September 30, 2017 Description Notional
Amount Fair Value
Remaining Months
toExpiration
($ in thousands) U.S. Treasury Futures $ (25,800 ) $ 542 2.67
June 30, 2017 Description Notional
Amount Fair Value
Remaining Months
toExpiration
($ in thousands) U.S. Treasury Futures $ (25,800 ) $ 165 2.73
Eurodollar Futures $ (3,000 ) $ 1 2.67
TBAs
The following table provides information about our TBAs as of
September 30, 2017 and June 30, 2017:
September 30, 2017 June 30, 2017 TBA
Securities
NotionalAmount
(1)
CostBasis (2)
MarketValue (3)
NetCarryingValue
(4)
NotionalAmount
(1)
CostBasis (2)
MarketValue (3)
NetCarryingValue
(4)
(In thousands) Purchase contracts: Assets $ 23,549 $ 25,153 $
25,182 $ 29 $ — $ — $ — $ — Liabilities 82,255 85,698
85,494 (204 ) 126,309 132,095 131,767
(328 ) 105,804 110,851 110,676 (175 ) 126,309
132,095 131,767 (328 ) Sale contracts: Assets
(607,775 ) (634,557 ) (632,924 ) 1,633 (672,314 ) (703,405 )
(701,469 ) 1,936 Liabilities (93,430 ) (99,947 ) (99,977 ) (30 )
(2,100 ) (2,231 ) (2,232 ) (1 ) (701,205 ) (734,504 ) (732,901 )
1,603 (674,414 ) (705,636 ) (703,701 ) 1,935 Total
TBA securities, net $ (595,401 ) $ (623,653 ) $ (622,225 ) $ 1,428
$ (548,105 ) $ (573,541 ) $ (571,934 ) $ 1,607
(1) Notional amount represents the principal balance of the
underlying Agency RMBS. (2) Cost basis represents the forward price
to be paid for the underlying Agency RMBS. (3) Market value
represents the current market value of the underlying Agency RMBS
(on a forward delivery basis) as of the respective period end. (4)
Net carrying value represents the difference between the market
value of the TBA contract as of the respective period end and the
cost basis, and is reported in Financial derivatives-assets, at
fair value and Financial derivatives-liabilities, at fair value on
the Consolidated Balance Sheet, for each respective period end.
We primarily use TBAs to hedge interest rate risk, typically in
the form of short positions. However, from time to time we also
invest in TBAs as a means of acquiring exposure to Agency RMBS, or
for speculative purposes, including holding long positions.
Overall, we typically hold a net short position.
The following tables detail gains and losses on our financial
derivatives for the three month periods ended September 30,
2017 and June 30, 2017:
Three Month Period Ended September 30, 2017
Derivative Type
Net RealizedGains (Losses)
onPeriodicSettlements ofInterest
RateSwaps
Net RealizedGains
(Losses)Other ThanPeriodicSettlements
ofInterest RateSwaps
Net RealizedGains
(Losses)on FinancialDerivatives
Change in
NetUnrealizedGains (Losses)on
AccruedPeriodicSettlements ofInterest
RateSwaps
Change in NetUnrealized
Gains(Losses) OtherThan on
AccruedPeriodicSettlements ofInterest
RateSwaps
Change in
NetUnrealizedGains (Losses)on
FinancialDerivatives
(In thousands) Interest rate swaps $ 957 $ (76 ) $ 881 $ (1,657 ) $
808 $ (849 ) Swaptions — — (37 ) (37 ) TBAs (3,475 ) (3,475 ) (179
) (179 ) Futures (387 ) (387 ) 376 376
Total $ 957 $ (3,938 ) $ (2,981 ) $ (1,657 ) $ 968 $
(689 )
Three Month Period Ended June 30, 2017
Derivative Type
Net RealizedGains (Losses)
onPeriodicSettlements ofInterest
RateSwaps
Net RealizedGains
(Losses)Other ThanPeriodicSettlements
ofInterest RateSwaps
Net RealizedGains
(Losses)on FinancialDerivatives
Change in
NetUnrealizedGains (Losses)on
AccruedPeriodicSettlements ofInterest
RateSwaps
Change in NetUnrealized
Gains(Losses) OtherThan on
AccruedPeriodicSettlements ofInterest
RateSwaps
Change in
NetUnrealizedGains (Losses)on
FinancialDerivatives
(In thousands) Interest rate swaps $ (936 ) $ 34 $ (902 ) $ 317 $
(2,435 ) $ (2,118 ) TBAs (7,718 ) (7,718 ) 3,458 3,458 Futures
(508 ) (508 ) 188 188 Total $ (936 ) $
(8,192 ) $ (9,128 ) $ 317 $ 1,211 $ 1,528
Interest Rate Sensitivity
The following table summarizes, as of September 30, 2017,
the estimated effects on the value of our portfolio, both overall
and by category, of immediate downward and upward parallel shifts
of 50 basis points in interest rates.
Estimated Change in Fair Value(1) (In
thousands)
50 Basis Point Declinein
Interest Rates
50 Basis Point Increasein
Interest Rates
Market Value
% of TotalEquity
Market Value
% of TotalEquity
Agency RMBS—ARM Pools $ 180 0.09 % $ (231 ) (0.12 )% Agency
RMBS—Fixed Pools and IOs 24,096 12.24 % (34,574 ) (17.57 )% TBAs
(9,257 ) (4.70 )% 13,789 7.01 % Non-Agency RMBS 354 0.18 % (375 )
(0.19 )% Interest Rate Swaps (141 ) (0.07 )% 290 0.15 % U.S.
Treasury Securities (1,868 ) (0.95 )% 1,794 0.91 % U.S. Treasury
Futures (14,901 ) (7.57 )% 14,337 7.28 % Repurchase and Reverse
Repurchase Agreements (962 ) (0.49 )% 962 0.49 % Total $
(2,499 ) (1.27 )% $ (4,008 ) (2.04 )% (1) Based on
the market environment as of September 30, 2017. Results are based
on forward-looking models, which are inherently imperfect, and
incorporate various simplifying assumptions. Therefore, the table
above is for illustrative purposes only and actual changes in
interest rates would likely cause changes in the actual value of
the overall portfolio that would differ from those presented above
and such differences might be significant and adverse.
Repo Borrowings
The following table details our outstanding borrowings under
repo agreements as of September 30, 2017 and June 30,
2017:
September 30, 2017 June 30, 2017
Weighted Average Weighted Average Remaining
Days to Maturity
BorrowingsOutstanding
Interest Rate
RemainingDays
toMaturity
BorrowingsOutstanding
Interest Rate
RemainingDays
toMaturity
(In thousands) (In thousands) 30 days or less $ 475,779 1.33 % 17 $
688,807 1.21 % 15 31-60 days 950,188 1.31 45 707,251 1.22 47 61-90
days 212,389 1.36 75 205,465 1.33 77 91-120 days 2,051 1.40 104
16,927 1.17 105 151-180 days 1,906 1.45 166 10,000
1.45 171 Total $ 1,642,313 1.32 % 41 $
1,628,450 1.23 % 39
As of September 30, 2017, we had no outstanding borrowings
other than under repo agreements. Our repo borrowings were with
fifteen counterparties as of September 30, 2017. The above
figures are as of the respective quarter ends; over the course of
the quarters ended September 30, 2017 and June 30, 2017
our average cost of repo was 1.31% and 1.09%, respectively.
Other
We incur an annual base management fee, payable quarterly in
arrears, in an amount equal to 1.50% of shareholders' equity (as
defined in our management agreement). For the quarter ended
September 30, 2017, our expense ratio, defined as management
fees and operating expenses as a percentage of average
shareholders' equity, was 3.0% on an annualized basis for the
quarter ended September 30, 2017 as compared to 3.6% as of
June 30, 2017. The decline in our annualized expense ratio
resulted primarily from the increase in our capital base as a
result of our second quarter equity offering.
Dividends
On September 12, 2017, our Board of Trustees declared a third
quarter dividend of $0.40 per share, or $5.3 million, which was
paid on October 25, 2017 to shareholders of record on September 29,
2017.
At-the-Market Program
We have entered into equity distribution agreements for an "at
the market" offering program whereby we are able to sell shares
from time to time in the open market or in negotiated transactions.
Under the program, which is open-ended in duration, we can sell
shares with a value of up to $100 million. For the three month
period ended September 30, 2017, we sold 958,230 shares under
the offering program at an average price of $14.49 for proceeds of
$13.9 million, net of commissions and fees. Since the inception of
the program through November 1, 2017, we have sold 964,968 shares
under the offering program at an average price of $14.49 for
proceeds of $14.0 million, net of commissions and fees.
Reconciliation of Core Earnings to Net Income
Core Earnings consists of net income, 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 payments and accruals of periodic payments 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 our 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 our then 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. We believe that Core Earnings and
Adjusted Core Earnings provide information useful to investors
because they are metrics that we use to assess our performance and
to evaluate the effective net yield provided by the portfolio.
Moreover, one of our 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. However, because Core Earnings and
Adjusted Core Earnings are incomplete measures of our 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 September 30, 2017 and June 30, 2017, our Core
Earnings and Adjusted Core Earnings on a consolidated basis to the
line on our Consolidated Statement of Operations entitled Net
Income, which we believe is the most directly comparable GAAP
measure on our Consolidated Statement of Operations to Core
Earnings:
(In thousands except share amounts)
Three MonthPeriod
EndedSeptember 30, 2017
Three MonthPeriod
EndedJune 30, 2017
Net Income $ 6,340 $ 1,603
Less: Net realized gains
(losses) on securities 349 (359 ) Net realized gains (losses) on
financial derivatives, excluding periodic payments(1) (3,938 )
(8,192 ) Change in net unrealized gains (losses) on securities
3,994 4,136 Change in net unrealized gains (losses) on financial
derivatives, excluding accrued periodic payments(2) 968
1,211 Subtotal 1,373 (3,204 )
Core Earnings $
4,967 $ 4,807 Catch-up Premium Amortization
Adjustment (667 ) (274 )
Adjusted Core Earnings $ 5,634
$ 5,081
Weighted Average Shares Outstanding
13,136,106 10,741,074
Core Earnings Per Share $ 0.38 $ 0.45
Adjusted Core Earnings Per Share $ 0.43 $ 0.47
(1) For the three month period ended September 30, 2017, represents
Net realized gains (losses) on financial derivatives of $(2,981)
less Net realized gains (losses) on periodic settlements of
interest rate swaps of $957. For the three month period ended June
30, 2017, represents Net realized gains (losses) on financial
derivatives of $(9,128) less Net realized gains (losses) on
periodic settlements of interest rate swaps of $(936). (2) For the
three month period ended September 30, 2017, represents Change in
net unrealized gains (losses) on financial derivatives of $(689)
less Change in net unrealized gains (losses) on accrued periodic
settlements of interest rate swaps of $(1,657). For the three month
period ended June 30, 2017, represents Change in net unrealized
gains (losses) on financial derivatives of $1,528 less Change in
net unrealized gains (losses) on accrued periodic settlements of
interest rate swaps of $317.
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
We will host a conference call at 11:00 a.m. Eastern Time on
Friday, November 3, 2017, to discuss our financial results for
the quarter ended September 30, 2017. To participate in the
event by telephone, please dial (877) 437-3698 at least 10 minutes
prior to the start time and reference the conference ID number
97175634. International callers should dial (810) 740-4679 and
reference the same conference ID number. The conference call will
also be webcast live over the Internet and can be accessed via the
"For Our Shareholders" section of our 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, we also posted an investor
presentation, that will accompany the conference call, on our
website at www.earnreit.com under "For Our
Shareholders—Presentations."
A dial-in replay of the conference call will be available on
Friday, November 3, 2017, at approximately 2:00 p.m. Eastern
Time through Friday, November 10, 2017 at approximately 11:59
p.m. Eastern Time. To access this replay, please dial (800)
585-8367 and enter the conference ID number 97175634. International
callers should dial (404) 537-3406 and enter the same conference ID
number. A replay of the conference call will also be archived on
our 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
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, our beliefs
regarding the current economic and investment environment, our
ability to implement our investment and hedging strategies, our
future prospects and the protection of our net interest margin from
prepayments, volatility and its impact on us, the performance of
our investment and hedging strategies, our exposure to prepayment
risk in our Agency portfolio, estimated effects on the fair value
of our RMBS and interest rate derivative holdings of a hypothetical
change in interest rates, statements regarding our share repurchase
program, and statements regarding the drivers of our returns. Our
results can fluctuate from month to month and from quarter to
quarter depending on a variety of factors, some of which are beyond
our control and/or are difficult to predict, including, without
limitation, changes in interest rates and the market value of our
securities, changes in mortgage default rates and prepayment rates,
our ability to borrow to finance our assets, changes in government
regulations affecting our business, our ability to maintain our
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 our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 filed on March 13, 2017 which can be accessed
through the link to our SEC filings under "For Our Shareholders" on
our website (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 we file with
the SEC, including reports on Forms 10-Q, 10-K and 8-K. We
undertake 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 MonthPeriod Ended
Nine MonthPeriod Ended
September 30,2017
June 30,2017
September 30,2017
(In thousands except share amounts)
INTEREST INCOME
(EXPENSE) Interest income $ 12,867 $ 10,883 $ 36,078 Interest
expense (5,719 ) (4,020 ) (12,917 )
Total net interest
income 7,148 6,863 23,161
EXPENSES
Management fees to affiliate 741 685 1,953 Professional fees 157
178 510 Compensation expense 222 216 597 Other operating expenses
361 358 1,130
Total expenses 1,481
1,437 4,190
OTHER INCOME (LOSS) Net
realized gains (losses) on securities 349 (359 ) (3,001 ) Net
realized gains (losses) on financial derivatives (2,981 ) (9,128 )
(10,455 ) Change in net unrealized gains (losses) on securities
3,994 4,136 5,783 Change in net unrealized gains (losses) on
financial derivatives (689 ) 1,528 (1,302 )
Total other
income (loss) 673 (3,823 ) (8,975 )
NET INCOME $
6,340 $ 1,603 $ 9,996
NET INCOME PER COMMON
SHARE: Basic and Diluted $ 0.48 $ 0.15 $ 0.91
WEIGHTED
AVERAGE SHARES OUTSTANDING 13,136,106 10,741,074 11,017,363
CASH DIVIDENDS PER SHARE: Dividends declared $ 0.40 $ 0.40 $
1.20 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED
BALANCE SHEET (UNAUDITED)
As of
September 30,2017
June 30,2017
December31,
2016(1)
(In thousands except share amounts)
ASSETS Cash and cash
equivalents $ 50,271 $ 41,660 $ 33,504 Mortgage-backed securities,
at fair value 1,743,067 1,653,029 1,226,994 Due from brokers 41,821
34,924 49,518 Financial derivatives–assets, at fair value 6,150
6,106 6,008 Reverse repurchase agreements 56,875 73,470 75,012
Receivable for securities sold 29,825 156,348 33,199 Interest
receivable 5,720 5,966 4,633 Other assets 548 687 266
Total Assets $ 1,934,277 $ 1,972,190 $
1,429,134
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES Repurchase agreements $ 1,642,313 $ 1,628,450 $
1,197,973 Payable for securities purchased 24,845 77,054 5,516 Due
to brokers 787 318 1,055 Financial derivatives–liabilities, at fair
value 3,168 2,686 1,975 U.S. Treasury securities sold short, at
fair value 56,524 72,762 74,194 Dividend payable 5,334 4,947 3,652
Accrued expenses 980 1,114 647 Management fee payable to affiliate
741 685 533 Interest payable 2,790 2,269 1,912
Total Liabilities 1,737,482 1,790,285
1,287,457
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;
(13,335,804, 12,367,598, and 9,130,897
shares issued and outstanding, respectively)
134 124 92 Additional paid-in-capital 240,010 226,136 180,996
Accumulated deficit (43,349 ) (44,355 ) (39,411 )
Total
Shareholders' Equity 196,795 181,905 141,677
Total Liabilities and Shareholders' Equity $
1,934,277 $ 1,972,190 $ 1,429,134
PER SHARE
INFORMATION Common shares, par value $0.01 per share $ 14.76 $
14.71 $ 15.52 (1) Derived from audited financial statements
as of December 31, 2016.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171102006623/en/
Investors:Maria Cozine,Vice President of Investor Relations,
orLisa Mumford, Chief Financial OfficerEllington Residential
Mortgage REIT203-409-3773info@earnreit.comorMedia:Amanda Klein or
Kevin FitzgeraldGasthalter & Co., for Ellington Residential
Mortgage REIT212-257-4170Ellington@gasthalter.com
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