Ellington Residential Mortgage REIT Reports Second Quarter 2016 Results
Summary of Financial Results
- Net income for the quarter was
$3.5 million , or$0.38 per share, as compared to net loss of$(0.2) million , or$(0.03) per share, in the first quarter. - Core Earnings1 for the quarter was
$2.9 million , or$0.32 per share, as compared to$4.9 million , or$0.53 per share, in the first quarter. Excluding "Catch-up Premium Amortization Adjustment," Core Earnings for the second quarter was$4.4 million , or$0.48 per share, as compared to$4.6 million , or$0.50 per share, in the first quarter. - Book value decreased slightly to
$15.38 per share as ofJune 30, 2016 from$15.39 per share as ofMarch 31, 2016 , after giving effect to a second quarter dividend of$0.40 per share. - Net interest margin was 1.28%, as compared to 1.92% for the first quarter. Excluding Catch-up Premium Amortization Adjustment, net interest margin was 1.76% for the second quarter of 2016 as compared to 1.83% for the first quarter.
- Weighted average prepayment speed for fixed rate Agency specified pools was 10.1% CPR for the quarter, as compared to 7.1% in the first quarter.
- Dividend yield of 11.1% based on
August 1, 2016 closing stock price of$14.43 . - Debt-to-equity ratio was 8.6:1 as of
June 30, 2016 , as compared to 8.1:1 as ofMarch 31, 2016 . Adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.1:1 and 7.7:1 as ofJune 30, 2016 andMarch 31, 2016 , respectively.
1 Core Earnings is a non-GAAP financial measure. See "Reconciliation of Core Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Core Earnings.
Second Quarter 2016 Results
"For the second quarter of 2016, EARN had net income of
"With the significant decline in interest rates that occurred towards the end of the second quarter, our expectation is that prepayment activity will pick up in the coming months, and we believe that our portfolio is well positioned for such activity. We also believe that the Agency RMBS market remains an attractive alternative for investors seeking high credit-quality assets that still offer meaningfully positive yields. Still, the strength of the U.S. economy may lead the Federal Reserve to resume increasing interest rates, although both the timing and pace of any such increases have become more uncertain given the global macroeconomic environment. As always, we continue to actively hedge our portfolio against the risk of rising interest rates.
"During the second quarter, we also had strong results from our small non-Agency RMBS portfolio, which produced not only strong carry, but also had solid contributions from asset appreciation and trading."
As of June 30, 2016, our mortgage-backed securities portfolio consisted of
Market Overview
Over the first two months of the second quarter, interest rates generally trended slightly higher and volatility declined. However, during the month of June, as a result of the
Since its
The yield curve flattened significantly over the course of the second quarter, as the 10-year U.S. Treasury yield fell 30 basis points to 1.47%, while the 2-year U.S. Treasury yield fell 14 basis points to 0.58%. All of the yield declines, and most of the yield curve flattening, were concentrated in last week of June following the Brexit vote. The average rate for a fixed rate 30-year conventional mortgage fell 23 basis points over the course of the quarter, and ended the quarter at 3.48%, its lowest level since
Agency RMBS
Prices of Agency RMBS increased over the course of the second quarter, and yield spreads on Agency RMBS relative to interest rate swaps and U.S. Treasury securities were relatively stable. While the 10-year interest rate swap spread to U.S. Treasury securities continued to be negative at the end of the second quarter, it was negative 11 basis points, or 2 basis points less negative than at
For the quarter ended
During the second quarter, we continued to use short positions in TBAs to hedge interest rate risk, and these positions generated net losses as interest rates fell. TBA dollar rolls materially weakened in response to both the increase in prepayment speeds and the slowly shrinking presence of the Federal Reserve in the market. In addition, TBAs materially underperformed specified pools as many investors sought out pools with better prepayment protection. Because we hold a net short position in TBAs against our long position in specified pools, this underperformance of TBAs relative to specified pools benefited our results for the quarter. As trading volumes for specified pools expand, and to the extent prepayments remain elevated, we believe that the underperformance of generic pools relative to specified pools will persist. During the quarter, we increased our net short TBAs and reduced our interest rate swaps.
We actively traded our Agency RMBS portfolio during the quarter in order to take advantage of volatility and to harvest modest gains. Our portfolio turnover for the quarter was 31% (as measured by sales and excluding paydowns), and we captured net realized gains of
During the second quarter, we continued to focus our Agency RMBS purchasing activity primarily on specified pools, especially those with higher coupons. As of
We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections: (1) should generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) should have less prepayment sensitivity to government policy shocks, and/or (3) should create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.
Our net Agency premium as a percentage of our long Agency RMBS holdings is one metric that we use to measure our overall prepayment risk.
We believe that with the recent drop in interest rates, prepayment concerns should continue to benefit the relative performance of specified pools, and could create more attractive opportunities in the IO markets. We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which continues to be shaped by shifting central bank policies, regulatory changes, and developing technologies.
Non-Agency RMBS
Non-Agency RMBS performed well during the second quarter, despite uncertainty and credit spread volatility brought on by the Brexit vote. As the case has been for some time, the fundamentals underlying non-Agency RMBS, led by a stable housing market, continue to be strong. Included in the quarter's return were strong carry, appreciation from our held positions, and net realized gains from positions sold. On a quarter-over-quarter basis, our non-Agency RMBS portfolio declined in size. As of June 30, 2016, our investment in non-Agency RMBS was
Financial Results
For the quarter ended June 30, 2016, the weighted average yield of our portfolio of Agency and non-Agency RMBS was 2.45%, while our average cost of funds including interest rate swaps and U.S. Treasuries was 1.17%, resulting in a net interest margin for the quarter of 1.28%. In comparison, for the quarter ended March 31, 2016, the annualized weighted average yield of our Agency and non-Agency RMBS was 3.13%, while the average cost of funds including interest rate swaps and U.S. Treasuries was 1.21%, resulting in a net interest margin of 1.92%. Our interest income is subject to fluctuations based on adjustments to premium amortization as a result of changes in prepayments of our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). We refer to this adjustment as a "Catch-up Premium Amortization Adjustment." The amount of this adjustment can vary significantly from quarter to quarter. During the second quarter, we had a negative Catch-up Premium Amortization Adjustment in the amount of approximately
On a quarter-over-quarter basis our annualized cost of funds, including interest rate swaps and short positions in U.S. Treasury securities, decreased to 1.17% from 1.21%. This net decrease was the result of largely offsetting factors. First, the average cost of our repo, which represents the largest component of our cost of funds, increased 8 basis points to 0.70%. However, the impact of this increase was offset by a combined decline in the average cost of our interest rate swaps and U.S. Treasury hedges, which decreased 12 basis points to 0.47%. While Agency repo rates declined slightly in the early part of the quarter, they reversed course and rose slightly as dealer balance sheets came under pressure as quarter end approached. In the final week of the quarter, uncertainty following the Brexit vote caused a spike in repo rates, although following quarter end repo rates have generally settled back to where they had been at the beginning of the second quarter. We have continued to find repo readily available. Over the course of the quarter, we reduced our interest rate swaps in favor of short TBAs, leading to a decline in our cost of funds. The relative make up of our interest rate hedging portfolio can change materially from quarter to quarter.
After giving effect to a second quarter dividend of
For the quarter ended June 30, 2016, Core Earnings was
Securities Portfolio
The following table summarizes our portfolio of securities as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
March 31, 2016 |
||||||||||||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average |
Cost |
Average |
Current |
Fair Value |
Average |
Cost |
Average |
|||||||||||||||||||||||||||||
Agency RMBS(2) |
|||||||||||||||||||||||||||||||||||||||
15-year fixed rate mortgages |
$ |
133,590 |
$ |
142,365 |
$ |
106.57 |
$ |
140,303 |
$ |
105.03 |
$ |
143,705 |
$ |
152,536 |
$ |
106.15 |
$ |
150,945 |
$ |
105.04 |
|||||||||||||||||||
20-year fixed rate mortgages |
11,061 |
12,014 |
108.62 |
11,920 |
107.77 |
17,991 |
19,488 |
108.32 |
19,226 |
106.86 |
|||||||||||||||||||||||||||||
30-year fixed rate mortgages |
851,353 |
924,824 |
108.63 |
908,300 |
106.69 |
788,135 |
852,326 |
108.14 |
840,998 |
106.71 |
|||||||||||||||||||||||||||||
ARMs |
41,005 |
43,337 |
105.69 |
43,143 |
105.21 |
35,122 |
37,133 |
105.73 |
37,232 |
106.01 |
|||||||||||||||||||||||||||||
Reverse mortgages |
68,858 |
76,056 |
110.45 |
74,869 |
108.73 |
70,867 |
77,548 |
109.43 |
77,179 |
108.91 |
|||||||||||||||||||||||||||||
Total Agency RMBS |
1,105,867 |
1,198,596 |
108.39 |
1,178,535 |
106.57 |
1,055,820 |
1,139,031 |
107.88 |
1,125,580 |
106.61 |
|||||||||||||||||||||||||||||
Non-Agency RMBS |
33,934 |
22,788 |
67.15 |
21,063 |
62.07 |
42,649 |
27,631 |
64.79 |
26,175 |
61.37 |
|||||||||||||||||||||||||||||
Total RMBS(2) |
1,139,801 |
1,221,384 |
107.16 |
1,199,598 |
105.25 |
1,098,469 |
1,166,662 |
106.21 |
1,151,755 |
104.85 |
|||||||||||||||||||||||||||||
Agency IOs |
n/a |
7,631 |
n/a |
9,807 |
n/a |
n/a |
6,931 |
n/a |
8,660 |
n/a |
|||||||||||||||||||||||||||||
Total mortgage-backed securities |
1,229,015 |
1,209,405 |
1,173,593 |
1,160,415 |
|||||||||||||||||||||||||||||||||||
U.S. Treasury securities sold short |
(67,105) |
(68,528) |
102.12 |
(67,037) |
99.90 |
(68,781) |
(69,607) |
101.20 |
(68,669) |
99.84 |
|||||||||||||||||||||||||||||
Reverse repurchase agreements |
68,862 |
68,862 |
100.00 |
68,862 |
100.00 |
69,575 |
69,575 |
100.00 |
69,575 |
100.00 |
|||||||||||||||||||||||||||||
Total |
$ |
1,229,349 |
$ |
1,211,230 |
$ |
1,173,561 |
$ |
1,161,321 |
(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
Financial Derivatives Portfolio
The following table summarizes fair value of our financial derivatives as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
March 31, 2016 |
|||||||
Financial derivatives–assets, at fair value: |
(In thousands) |
|||||||
TBA securities purchase contracts |
$ |
353 |
$ |
365 |
||||
TBA securities sale contracts |
22 |
— |
||||||
Fixed payer interest rate swaps |
— |
4 |
||||||
Fixed receiver interest rate swaps |
1,545 |
1,265 |
||||||
Futures |
— |
1 |
||||||
Total financial derivatives–assets, at fair value |
1,920 |
1,635 |
||||||
Financial derivatives–liabilities, at fair value: |
||||||||
TBA securities purchase contracts |
(1) |
— |
||||||
TBA securities sale contracts |
(1,328) |
(1,157) |
||||||
Fixed payer interest rate swaps |
(12,039) |
(17,122) |
||||||
Futures |
(11) |
(5) |
||||||
Total financial derivatives–liabilities, at fair value |
(13,379) |
(18,284) |
||||||
Total |
$ |
(11,459) |
$ |
(16,649) |
Interest Rate Swaps
The following tables provide details about our fixed payer interest rate swaps as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted Pay Rate |
Weighted |
Weighted Average |
|||||||||||
(In thousands) |
||||||||||||||||
2016 |
$ |
48,000 |
$ |
(71) |
0.80 |
% |
0.63 |
% |
0.27 |
|||||||
2017 |
74,750 |
(646) |
1.21 |
0.63 |
1.09 |
|||||||||||
2018 |
65,990 |
(446) |
0.97 |
0.63 |
1.93 |
|||||||||||
2020 |
79,500 |
(1,924) |
1.48 |
0.63 |
3.82 |
|||||||||||
2022 |
13,044 |
(550) |
1.75 |
0.63 |
6.19 |
|||||||||||
2023 |
65,000 |
(3,511) |
1.93 |
0.63 |
6.85 |
|||||||||||
2024 |
8,900 |
(539) |
1.99 |
0.63 |
7.76 |
|||||||||||
2025 |
15,322 |
(1,058) |
2.04 |
0.64 |
8.63 |
|||||||||||
2043 |
12,380 |
(3,294) |
2.99 |
0.62 |
26.89 |
|||||||||||
Total |
$ |
382,886 |
$ |
(12,039) |
1.42 |
% |
0.63 |
% |
4.14 |
March 31, 2016 |
||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) |
||||||||||||||||
2016 |
$ |
48,000 |
$ |
(79) |
0.80 |
% |
0.62 |
% |
0.52 |
|||||||
2017 |
74,750 |
(546) |
1.21 |
0.63 |
1.34 |
|||||||||||
2018 |
71,529 |
(559) |
1.11 |
0.62 |
2.03 |
|||||||||||
2020 |
107,461 |
(2,371) |
1.50 |
0.62 |
4.08 |
|||||||||||
2021 |
10,400 |
1 |
1.15 |
0.62 |
4.87 |
|||||||||||
2022 |
19,444 |
(587) |
1.76 |
0.62 |
6.26 |
|||||||||||
2023 |
131,400 |
(7,080) |
2.10 |
0.63 |
7.14 |
|||||||||||
2024 |
9,200 |
(428) |
1.99 |
0.61 |
8.01 |
|||||||||||
2025 |
34,022 |
(1,503) |
2.05 |
0.62 |
8.86 |
|||||||||||
2043 |
19,047 |
(3,966) |
3.02 |
0.62 |
27.14 |
|||||||||||
Total |
$ |
525,253 |
$ |
(17,118) |
1.59 |
% |
0.62 |
% |
5.16 |
The following tables provide details about our fixed receiver interest rate swaps as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) |
||||||||||||||||
2025 |
$ |
9,700 |
$ |
1,545 |
0.63 |
% |
3.00 |
% |
9.05 |
|||||||
Total |
$ |
9,700 |
$ |
1,545 |
0.63 |
% |
3.00 |
% |
9.05 |
March 31, 2016 |
||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) |
||||||||||||||||
2025 |
$ |
9,700 |
$ |
1,255 |
0.62 |
% |
3.00 |
% |
9.30 |
|||||||
2026 |
3,000 |
10 |
0.63 |
1.68 |
10.01 |
|||||||||||
Total |
$ |
12,700 |
$ |
1,265 |
0.62 |
% |
2.69 |
% |
9.46 |
Eurodollar Futures
The following table provides information about our short positions in Eurodollar futures as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
||||||||||
Remaining Maturity |
Notional Amount |
Fair Value |
Remaining Months to |
|||||||
($ in thousands) |
||||||||||
2016 |
$ |
(6,000) |
$ |
(2) |
4.22 |
|||||
2017 |
(9,000) |
(9) |
11.72 |
|||||||
Total |
$ |
(15,000) |
$ |
(11) |
8.72 |
March 31, 2016 |
||||||||||
Remaining Maturity |
Notional Amount |
Fair Value |
Remaining Months to |
|||||||
($ in thousands) |
||||||||||
2016 |
$ |
(9,000) |
$ |
1 |
5.66 |
|||||
2017 |
(9,000) |
(5) |
14.76 |
|||||||
Total |
$ |
(18,000) |
$ |
(4) |
10.21 |
TBAs
The following table provides information about our TBAs as of June 30, 2016 and March 31, 2016:
June 30, 2016 |
March 31, 2016 |
|||||||||||||||||||||||||||||||
TBA Securities |
Notional |
Cost |
Market |
Net Carrying Value (4) |
Notional |
Cost |
Market |
Net Carrying Value (4) |
||||||||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||||||||||
Purchase contracts: |
||||||||||||||||||||||||||||||||
Assets |
$ |
61,493 |
$ |
64,299 |
$ |
64,652 |
$ |
353 |
$ |
76,904 |
$ |
79,928 |
$ |
80,293 |
$ |
365 |
||||||||||||||||
Liabilities |
2,300 |
2,510 |
2,509 |
(1) |
— |
— |
— |
— |
||||||||||||||||||||||||
63,793 |
66,809 |
67,161 |
352 |
76,904 |
79,928 |
80,293 |
365 |
|||||||||||||||||||||||||
Sale contracts: |
||||||||||||||||||||||||||||||||
Assets |
(65,849) |
(72,025) |
(72,003) |
22 |
— |
— |
— |
— |
||||||||||||||||||||||||
Liabilities |
(427,427) |
(454,191) |
(455,519) |
(1,328) |
(311,246) |
(332,743) |
(333,900) |
(1,157) |
||||||||||||||||||||||||
(493,276) |
(526,216) |
(527,522) |
(1,306) |
(311,246) |
(332,743) |
(333,900) |
(1,157) |
|||||||||||||||||||||||||
Total TBA securities, net |
$ |
(429,483) |
$ |
(459,407) |
$ |
(460,361) |
$ |
(954) |
$ |
(234,342) |
$ |
(252,815) |
$ |
(253,607) |
$ |
(792) |
(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 June 30, 2016 and March 31, 2016:
Three Month Period Ended June 30, 2016 |
||||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net |
||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||
Interest rate swaps |
$ |
(2,508) |
$ |
(7,725) |
$ |
(10,233) |
$ |
1,448 |
$ |
3,850 |
$ |
5,298 |
||||||||||||
TBAs |
(3,375) |
(3,375) |
(162) |
(162) |
||||||||||||||||||||
Futures |
1 |
1 |
(7) |
(7) |
||||||||||||||||||||
Total |
$ |
(2,508) |
$ |
(11,099) |
$ |
(13,607) |
$ |
1,448 |
$ |
3,681 |
$ |
5,129 |
Three Month Period Ended March 31, 2016 |
||||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net Unrealized Gains (Losses) on Financial Derivatives |
||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||
Interest rate swaps |
$ |
(672) |
$ |
(1,226) |
$ |
(1,898) |
$ |
(726) |
$ |
(12,543) |
$ |
(13,269) |
||||||||||||
TBAs |
(2,099) |
(2,099) |
(844) |
(844) |
||||||||||||||||||||
Futures |
1 |
1 |
(22) |
(22) |
||||||||||||||||||||
Total |
$ |
(672) |
$ |
(3,324) |
$ |
(3,996) |
$ |
(726) |
$ |
(13,409) |
$ |
(14,135) |
Interest Rate Sensitivity
The following table summarizes, as of June 30, 2016, 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 Decline in Interest Rates |
50 Basis Point Increase in Interest Rates |
||||||
Agency RMBS - ARM Pools |
$ |
158 |
$ |
(246) |
||||
Agency RMBS - Fixed Pools and IOs |
11,208 |
(17,359) |
||||||
TBAs |
(3,389) |
6,525 |
||||||
Non-Agency RMBS |
208 |
(202) |
||||||
Interest Rate Swaps |
(7,384) |
7,047 |
||||||
U.S. Treasury Securities |
(1,707) |
1,639 |
||||||
Eurodollar Futures |
(19) |
19 |
||||||
Repurchase and Reverse Repurchase Agreements |
(705) |
705 |
||||||
Total |
$ |
(1,630) |
$ |
(1,872) |
(1) |
Based on the market environment as of June 30, 2016. 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 June 30, 2016 and March 31, 2016:
June 30, 2016 |
March 31, 2016 |
|||||||||||||||||||
Weighted Average |
Weighted Average |
|||||||||||||||||||
Remaining Days to Maturity |
Borrowings Outstanding |
Interest Rate |
Remaining Days to Maturity |
Borrowings Outstanding |
Interest Rate |
Remaining Days to Maturity |
||||||||||||||
(In thousands) |
(In thousands) |
|||||||||||||||||||
30 days or less |
$ |
557,934 |
0.69 |
% |
18 |
$ |
537,508 |
0.63 |
% |
15 |
||||||||||
31-60 days |
305,648 |
0.67 |
44 |
268,670 |
0.67 |
43 |
||||||||||||||
61-90 days |
342,405 |
0.71 |
77 |
292,395 |
0.71 |
74 |
||||||||||||||
91-150 days |
— |
— |
— |
— |
— |
— |
||||||||||||||
151-180 days |
— |
— |
— |
35,268 |
0.82 |
167 |
||||||||||||||
Total |
$ |
1,205,987 |
0.69 |
% |
41 |
$ |
1,133,841 |
0.66 |
% |
42 |
As of June 30, 2016, we had no outstanding borrowings other than under repo agreements. Our repo borrowings were with twelve counterparties as of June 30, 2016. The above figures are as of the respective quarter ends; over the course of the quarters ended June 30, 2016 and March 31, 2016 our average cost of repo was 0.70% and 0.62%, 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 June 30, 2016, our expense ratio, defined as management fees and operating expenses as a percentage of average shareholders' equity, was 3.6% on an annualized basis as compared to 3.8% for the quarter ended
Dividends
On
Share Repurchase Program
On
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 payments and accruals of periodic payments on interest rate swaps. Core Earnings excluding Catch-up Premium Amortization Adjustment consists of Core Earnings but excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. Core Earnings and Core Earnings excluding Catch-up Premium Amortization Adjustment are supplemental non-GAAP financial measures. We believe that Core Earnings and Core Earnings excluding Catch-up Premium Amortization Adjustment 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 Core Earnings excluding Catch-up Premium Amortization Adjustment are used to help measure the extent to which this objective is being achieved. However, because Core Earnings and Core Earnings excluding Catch-up Premium Amortization Adjustment 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 June 30, 2016 and March 31, 2016, our Core Earnings and Core Earnings excluding Catch-up Premium Amortization Adjustment on a consolidated basis to the line on our Consolidated Statement of Operations entitled Net Income (Loss), 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 Month |
Three Month |
||||||
Net Income (Loss) |
$ |
3,507 |
$ |
(239) |
||||
Less: |
||||||||
Net realized gains (losses) on securities |
2,100 |
3,010 |
||||||
Net realized gains (losses) on financial derivatives, excluding periodic payments(1) |
(11,099) |
(3,324) |
||||||
Change in net unrealized gains (losses) on securities |
5,879 |
8,633 |
||||||
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) |
3,681 |
(13,409) |
||||||
Subtotal |
561 |
(5,090) |
||||||
Core Earnings |
$ |
2,946 |
$ |
4,851 |
||||
Catch-up Premium Amortization Adjustment |
(1,457) |
258 |
||||||
Core Earnings excluding Catch-up Premium Amortization Adjustment |
$ |
4,403 |
$ |
4,593 |
||||
Weighted Average Shares Outstanding |
9,117,183 |
9,121,198 |
||||||
Core Earnings Per Share |
$ |
0.32 |
$ |
0.53 |
||||
Core Earnings Per Share excluding Catch-up Premium Amortization Adjustment |
$ |
0.48 |
$ |
0.50 |
(1) |
For the three month period ended June 30, 2016, represents Net realized gains (losses) on financial derivatives of $(13,607) less Net realized gains (losses) on periodic settlements of interest rate swaps of $(2,508). For the three month period ended March 31, 2016, represents Net realized gains (losses) on financial derivatives of $(3,996) less Net realized gains (losses) on periodic settlements of interest rate swaps of $(672). |
(2) |
For the three month period ended June 30, 2016, represents Change in net unrealized gains (losses) on financial derivatives of $5,129 less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $1,448. For the three month period ended March 31, 2016, represents Change in net unrealized gains (losses) on financial derivatives of $(14,135) less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $(726). |
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Wednesday, August 3, 2016, at approximately
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
ELLINGTON RESIDENTIAL MORTGAGE REIT |
||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS |
||||||||||||
(UNAUDITED) |
||||||||||||
Three Month Period Ended |
Six Month |
|||||||||||
June 30, 2016 |
March 31, 2016 |
June 30, 2016 |
||||||||||
(In thousands except share amounts) |
||||||||||||
INTEREST INCOME (EXPENSE) |
||||||||||||
Interest income |
$ |
7,538 |
$ |
9,651 |
$ |
17,188 |
||||||
Interest expense |
(2,260) |
(2,051) |
(4,310) |
|||||||||
Total net interest income |
5,278 |
7,600 |
12,878 |
|||||||||
EXPENSES |
||||||||||||
Management fees |
528 |
528 |
1,056 |
|||||||||
Professional fees |
161 |
218 |
378 |
|||||||||
Compensation expense |
169 |
151 |
321 |
|||||||||
Other operating expenses |
414 |
454 |
867 |
|||||||||
Total expenses |
1,272 |
1,351 |
2,622 |
|||||||||
OTHER INCOME (LOSS) |
||||||||||||
Net realized gains (losses) on securities |
2,100 |
3,010 |
5,111 |
|||||||||
Net realized gains (losses) on financial derivatives |
(13,607) |
(3,996) |
(17,603) |
|||||||||
Change in net unrealized gains (losses) on securities |
5,879 |
8,633 |
14,512 |
|||||||||
Change in net unrealized gains (losses) on financial derivatives |
5,129 |
(14,135) |
(9,007) |
|||||||||
Total other income (loss) |
(499) |
(6,488) |
(6,987) |
|||||||||
NET INCOME (LOSS) |
$ |
3,507 |
$ |
(239) |
$ |
3,269 |
||||||
NET INCOME (LOSS) PER COMMON SHARE: |
||||||||||||
Basic and Diluted |
$ |
0.38 |
$ |
(0.03) |
$ |
0.36 |
||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
9,117,183 |
9,121,198 |
9,119,190 |
|||||||||
CASH DIVIDENDS PER SHARE: |
||||||||||||
Dividends declared |
$ |
0.40 |
$ |
0.45 |
$ |
0.85 |
ELLINGTON RESIDENTIAL MORTGAGE REIT |
||||||||||||
CONSOLIDATED BALANCE SHEET |
||||||||||||
(UNAUDITED) |
||||||||||||
As of |
||||||||||||
June 30, 2016 |
March 31, |
December 31, 2015(1) |
||||||||||
(In thousands except share amounts) |
||||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ |
36,200 |
$ |
41,242 |
$ |
40,166 |
||||||
Mortgage-backed securities, at fair value |
1,229,015 |
1,173,593 |
1,242,266 |
|||||||||
Due from brokers |
34,380 |
30,206 |
33,297 |
|||||||||
Financial derivatives–assets, at fair value |
1,920 |
1,635 |
2,183 |
|||||||||
Reverse repurchase agreements |
68,862 |
69,575 |
78,632 |
|||||||||
Receivable for securities sold |
98,328 |
64,243 |
155,526 |
|||||||||
Interest receivable |
4,427 |
4,092 |
4,325 |
|||||||||
Other assets |
454 |
523 |
289 |
|||||||||
Total Assets |
$ |
1,473,586 |
$ |
1,385,109 |
$ |
1,556,684 |
||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||
LIABILITIES |
||||||||||||
Repurchase agreements |
$ |
1,205,987 |
$ |
1,133,841 |
$ |
1,222,719 |
||||||
Payable for securities purchased |
33,457 |
16,433 |
98,949 |
|||||||||
Due to brokers |
5,877 |
127 |
439 |
|||||||||
Financial derivatives–liabilities, at fair value |
13,379 |
18,284 |
4,725 |
|||||||||
U.S. Treasury securities sold short, at fair value |
68,528 |
69,607 |
78,447 |
|||||||||
Dividend payable |
3,647 |
4,103 |
4,111 |
|||||||||
Accrued expenses |
615 |
447 |
533 |
|||||||||
Management fee payable |
528 |
528 |
545 |
|||||||||
Interest payable |
1,310 |
1,382 |
1,361 |
|||||||||
Total Liabilities |
1,333,328 |
1,244,752 |
1,411,829 |
|||||||||
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; (9,117,183, 9,117,183, and 9,135,103 shares issued and outstanding, respectively) |
92 |
92 |
92 |
|||||||||
Additional paid-in-capital |
180,911 |
180,871 |
181,027 |
|||||||||
Accumulated deficit |
(40,745) |
(40,606) |
(36,264) |
|||||||||
Total Shareholders' Equity |
140,258 |
140,357 |
144,855 |
|||||||||
Total Liabilities and Shareholders' Equity |
$ |
1,473,586 |
$ |
1,385,109 |
$ |
1,556,684 |
||||||
PER SHARE INFORMATION |
||||||||||||
Common shares, par value $0.01 per share |
$ |
15.38 |
$ |
15.39 |
$ |
15.86 |
(1) |
Derived from audited financial statements as of December 31, 2015. |
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