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Ellington Residential Mortgage REIT Reports Third Quarter 2019 Results

November 4, 2019

OLD GREENWICH, Conn.--(BUSINESS WIRE)--Nov 4, 2019--

Ellington Residential Mortgage REIT (NYSE: EARN) (the “Company”) today reported financial results for the quarter ended September 30, 2019.

Highlights

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 Laurence Penn, Chief Executive Officer and President.

“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 and June 30, 2019:

 

September 30, 2019

 

June 30, 2019

(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

$

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 $1.395 billion as of September 30, 2019, as compared to $1.459 billion as of June 30, 2019. The Company’s Agency RMBS portfolio turnover was 15% for the both the current and prior quarter.

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 September 30, 2019, as compared to 1.56% as of June 30, 2019, 0.99% as of March 31, 2019, 0.58% as of December 31, 2018, and 0.56% as of September 30, 2018.

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 September 30, 2019 and June 30, 2019, the Company’s Core Earnings and Adjusted Core Earnings on a consolidated basis to the line on the Company’s Consolidated Statement of Operations entitled Net Income (Loss), which the Company believes is the most directly comparable GAAP measure on its Consolidated Statement of Operations to Core Earnings:

(In thousands except share amounts)

 

Three-Month
Period Ended
September 30, 2019

 

Three-Month
Period Ended
June 30, 2019 (1)

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 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 Tuesday, November 5, 2019, to discuss its financial results for the quarter ended September 30, 2019. 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 8082416. 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 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 Tuesday, November 5, 2019, at approximately 2:00 p.m. Eastern Time through Tuesday, November 19, 2019 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 585-8367 and enter the conference ID number 8082416. 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 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 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 December 31, 2018 filed on March 8, 2019 which can be accessed through the link to the Company’s SEC filings under “For Our Shareholders” on the Company’s 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-Month

Period Ended

 

Nine-Month
Period Ended

 

 

September 30,
2019

 

June 30,
2019

 

September 30,
2019

(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,
2019

 

June 30,
2019

 

December 31,
2018 (1)

(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
authorized; (0 shares issued and outstanding, respectively)

 

 

 

 

 

 

Common shares, par value $0.01 per share, 500,000,000 shares
authorized; (12,448,421, 12,467,103, and 12,507,213 shares issued
and outstanding, respectively)

 

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/

CONTACT: 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

KEYWORD: CONNECTICUT UNITED STATES NORTH AMERICA

INDUSTRY KEYWORD: PROFESSIONAL SERVICES RESIDENTIAL BUILDING & REAL ESTATE COMMERCIAL BUILDING & REAL ESTATE FINANCE CONSTRUCTION & PROPERTY REIT BANKING

SOURCE: Ellington Residential Mortgage REIT

Copyright Business Wire 2019.

PUB: 11/04/2019 04:10 PM/DISC: 11/04/2019 04:10 PM

http://www.businesswire.com/news/home/20191104005975/en