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Ellington Residential Mortgage REIT Reports Second Quarter 2023 Results

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

 

 

Contacts

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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