Ellington Residential Mortgage REIT Reports Fourth Quarter 2017 Results
Highlights
-
Net income of
$0.8 million , or$0.06 per share. -
Core Earnings1 of
$4.9 million , or$0.37 per share, and Adjusted Core Earnings1 of$5.3 million , or$0.40 per share. -
Book value of
$14.45 per share as of December 31, 2017, after giving effect to a fourth quarter dividend of$0.37 per share. - Net interest margin of 1.32%, and adjusted net interest margin2 of 1.41%.
- Weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio of 9.6%.
-
Dividend yield of 14.2% based on
February 7, 2017 closing stock price of$10.44 . - Debt-to-equity ratio of 8.3:1 as of December 31, 2017.
-
Net Agency pool assets-to-equity ratio of 5.5:13 as ofDecember 31, 2017 . - Board of Directors authorized the repurchase of up to 1.2 million common shares.
Fourth Quarter 2017 Results
"In the fourth quarter, Ellington Residential had net income of
"Although we finished the quarter with an overall debt-to-equity ratio of 8.3:1, after taking into account our TBA hedges, our net Agency pool assets-to-equity ratio, which we view as another important measure of our effective overall leverage, was only 5.5:1. Our use of short positions in TBAs to hedge a significant portion of our interest rate risk is a distinguishing factor in our strategy in a few ways. First, we believe the strategy reduces our risk and book value volatility, by keeping our effective overall leverage at the low end of the Agency mortgage REIT peer group. Second, it enables us to take advantage of dislocations in specified pool pay-ups without increasing our overall net exposure to Agency yield spreads. And third, during times of increased volatility such as we've seen so far in 2018, we avoid the high rebalancing costs associated with interest rate swap hedges.
"Reflecting on 2017, we saw a period of historically low volatility that rewarded risk takers and penalized risk managers. Coming into 2018, we did not expect this low-volatility environment to persist indefinitely, and we thought that it was exactly the wrong time to abandon our prudent and disciplined interest rate hedging strategy. With many central banks around the globe likely withdrawing stimulus for the first time in a decade, and with the Federal Reserve tapering set to accelerate during 2018, we wouldn't be surprised by a continuation of the higher volatility we've seen recently. Thanks to our hedging strategy, we believe that we are well positioned to take advantage of the investment opportunities that could emerge from increased volatility.
"With our recent dividend announcement, we adjusted our annualized dividend back to an approximate 10% yield on book value. Finally, with our share price now trading at a significant discount to book value, we see a very attractive opportunity to repurchase our shares."
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. | |
3 |
We define our net Agency pool assets-to-equity ratio as the difference in aggregate market value between our Agency pools owned of $1.656 billion and our net short TBA position of $(596.1) million, divided by our total shareholders' equity of $192.7 million. |
|
Market Overview
- In October, the Federal Reserve initiated its long-awaited balance sheet normalization program, whereby its asset purchases of U.S. Treasury securities and Agency RMBS will continue to taper, and its securities portfolio will run off according to a well-defined schedule until reaching a level no larger "than necessary to implement monetary policy efficiently and effectively." In December, the Federal Reserve raised the target range for the federal funds rate by 0.25%, to 1.25%–1.50%; the market is currently expecting three additional interest rate hikes in 2018.
- For the fourth consecutive quarter, the yield curve flattened. The 2-year U.S. Treasury yield rose 40 basis points to end the quarter at 1.88%, while the 10-year U.S. Treasury yield increased only 7 basis points to 2.41%. At year-end, the spread between the 2-year and 10-year was just 52 basis points, compared to 126 basis points at the end of 2016.
-
Mortgage rates increased over the course of the fourth quarter, with
the
Freddie Mac survey 30-year mortgage rate rising 16 basis points to end the quarter at 3.99%. -
Overall Agency RMBS prepayment rates moved slightly lower during the
quarter.
The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, decreased 20% quarter over quarter to its lowest point in a year, and substantially below the multi-year high reached in mid-2016. - The Tax Cuts and Jobs Act, or "TCJA," was enacted in December, resulting in significant changes to the U.S. tax code.
While short-term interest rates rose sharply and steadily over the
course of the quarter, long-term interest rates trended only slightly
higher, and the 10-year U.S. Treasury traded within a tight 22-basis
point range. Meanwhile, the Merrill Lynch Option Volatility Estimate
Index, or MOVE Index, and the
Continuing on a theme that persisted throughout 2017, yield spreads across most credit products remained close to the tightest points of their trailing three-year ranges. Corporate credit spreads fluctuated briefly mid-quarter but finished the quarter tighter. CMBS spreads also tightened during the quarter, and over the course of 2017 the sector appears to have successfully navigated—without much adverse impact—both the new risk retention regulations and the large volume of commercial mortgages that matured from pre-crisis CMBS. Demand remained strong for floating-rate debt instruments, including CLOs and leveraged loans, as a particularly large, year-end rise in LIBOR rates boosted coupons. Legacy non-Agency RMBS also performed well in the quarter, although a large number of these bonds received reduced NAIC ratings in December that caused price declines. The reduced NAIC ratings removed a strong technical factor that had been supporting the market for these bonds.
Despite some intra-quarter widening that was most pronounced on higher coupon MBS, Agency RMBS spreads generally held firm over the quarter, continuing to benefit from the decline in implied volatility and a muted prepayment environment. The market seemingly absorbed the initiation of the Federal Reserve's balance sheet runoff without issue. 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 22 basis points for the quarter.
Financial Results
Holdings
As of December 31, 2017, our mortgage-backed securities portfolio
consisted of
Our overall RMBS portfolio decreased by 3.3% to
Although yields on current coupon 30-year Agency RMBS held firm, many shorter-duration RMBS (including higher-coupon pools and 15-year pools) underperformed longer-duration RMBS. Average pay-ups on our specified pools decreased to 0.68% as of December 31, 2017, as compared to 0.71% September 30, 2017. Pay-ups are price premiums for specified pools relative to their TBA counterparts.
Our non-Agency RMBS performed well in the fourth quarter, driven by
strong carry and net realized and unrealized gains. Fundamentals
underlying non-Agency RMBS remain strong, led by a stable housing
market. During the quarter we net sold assets at gains. Our total
investment in non-Agency RMBS decreased to
Earnings and Net Interest Margin
We had net income of
For the quarter ended December 31, 2017, the weighted average yield of our portfolio of Agency and non-Agency RMBS was 2.95%, while our average cost of funds, including interest rate swaps and U.S. Treasury securities, was 1.63%, resulting in a net interest margin for the quarter of 1.32%. In comparison, for the quarter ended September 30, 2017, the weighted average yield of our 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 of 1.30%. Excluding the impact of the Catch-up Premium Amortization Adjustment, the weighted average yield of our portfolio increased to 3.04% for the fourth quarter as compared to 3.01% for the third quarter and our adjusted net interest margin was 1.41% and 1.45%, 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 1.63% from 1.56%. This quarter-over-quarter increase resulted primarily from an increase in our repo borrowing rates, which increased as LIBOR rose. Our average repo borrowing rate increased 9 basis points quarter over quarter to 1.40%, and the cost related to our short positions in U.S. Treasury securities increased by 1 basis point from the prior quarter. These increases were partially offset by lower costs related to our interest rate swaps, which decreased 4 basis points from the prior quarter. The relative make up of our interest rate hedging portfolio can change materially from quarter to quarter.
For the quarter ended December 31, 2017, we had total net realized and
unrealized losses of
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 gains of
After giving effect to a fourth quarter dividend of
4 | "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 December 31, 2017 and September 30, 2017:
December 31, 2017 | September 30, 2017 | |||||||||||||||||||||||||||||||||||
(In thousands) |
Current |
Fair Value |
Average |
Cost |
Average |
Current |
Fair Value |
Average |
Cost |
Average |
||||||||||||||||||||||||||
Agency RMBS(2) | ||||||||||||||||||||||||||||||||||||
15-year fixed-rate mortgages | $ | 170,998 | $ | 176,774 | $ | 103.38 | $ | 178,551 | $ | 104.42 | $ | 177,485 | $ | 185,268 | $ | 104.39 | $ | 185,456 | $ | 104.49 | ||||||||||||||||
20-year fixed-rate mortgages | 8,712 | 9,230 | 105.95 | 9,394 | 107.83 | 9,280 | 9,901 | 106.69 | 9,990 | 107.65 | ||||||||||||||||||||||||||
30-year fixed-rate mortgages | 1,303,584 | 1,369,589 | 105.06 | 1,380,265 | 105.88 | 1,342,918 | 1,420,139 | 105.75 | 1,422,196 | 105.90 | ||||||||||||||||||||||||||
ARMs | 28,087 | 29,558 | 105.24 | 29,949 | 106.63 | 25,967 | 27,058 | 104.20 | 27,485 | 105.85 | ||||||||||||||||||||||||||
Reverse mortgages | 64,608 | 70,617 | 109.30 | 70,901 | 109.74 | 62,055 | 68,050 | 109.66 | 68,228 | 109.95 | ||||||||||||||||||||||||||
Total Agency RMBS | 1,575,989 | 1,655,768 | 105.06 | 1,669,060 | 105.91 | 1,617,705 | 1,710,416 | 105.73 | 1,713,355 | 105.91 | ||||||||||||||||||||||||||
Non-Agency RMBS | 21,995 | 18,025 | 81.95 | 15,278 | 69.46 | 25,013 | 20,600 | 82.36 | 17,808 | 71.19 | ||||||||||||||||||||||||||
Total RMBS(2) | 1,597,984 | 1,673,793 | 104.74 | 1,684,338 | 105.40 | 1,642,718 | 1,731,016 | 105.38 | 1,731,163 | 105.38 | ||||||||||||||||||||||||||
Agency IOs | n/a | 12,205 | n/a | 13,197 | n/a | n/a | 12,051 | n/a | 12,965 | n/a | ||||||||||||||||||||||||||
Total mortgage-backed securities | 1,685,998 | 1,697,535 | 1,743,067 | 1,744,128 | ||||||||||||||||||||||||||||||||
U.S. Treasury securities sold short | (82,492) | (81,289 | ) | 98.54 | (81,836 | ) | 99.20 | (56,876) | (56,524 | ) | 99.38 | (56,879 | ) | 100.01 | ||||||||||||||||||||||
Reverse repurchase agreements | 81,461 | 81,461 | 100.00 | 81,461 | 100.00 | 56,875 | 56,875 | 100.00 | 56,875 | 100.00 | ||||||||||||||||||||||||||
Total | $ | 1,686,170 | $ | 1,697,160 | $ | 1,743,418 | $ | 1,744,124 |
(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 December 31, 2017 and September 30, 2017:
December 31, 2017 | September 30, 2017 | |||||||||
Financial derivatives–assets, at fair value: | (In thousands) | |||||||||
TBA securities purchase contracts | $ | 26 | $ | 29 | ||||||
TBA securities sale contracts | 376 | 1,633 | ||||||||
Fixed payer interest rate swaps | 7,475 | 3,121 | ||||||||
Fixed receiver interest rate swaps | 563 | 613 | ||||||||
Swaptions | 181 | 212 | ||||||||
Futures | 171 | 542 | ||||||||
Total financial derivatives–assets, at fair value | 8,792 | 6,150 | ||||||||
Financial derivatives–liabilities, at fair value: | ||||||||||
TBA securities purchase contracts | (266 | ) | (204 | ) | ||||||
TBA securities sale contracts | (469 | ) | (30 | ) | ||||||
Fixed payer interest rate swaps | (1,128 | ) | (2,934 | ) | ||||||
Total financial derivatives–liabilities, at fair value | (1,863 | ) | (3,168 | ) | ||||||
Total | $ | 6,929 | $ | 2,982 | ||||||
Interest Rate Swaps
The following tables provide details about our fixed payer interest rate swaps as of December 31, 2017 and September 30, 2017:
December 31, 2017 | |||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
||||||||||||
(In thousands) | |||||||||||||||||
2018 | $ | 65,990 | $ | 187 | 0.97 | % | 1.38 | % | 0.43 | ||||||||
2019 | 19,540 | 165 | 1.41 | 1.60 | 1.51 | ||||||||||||
2020 | 131,900 | 1,514 | 1.60 | 1.41 | 2.39 | ||||||||||||
2021 | 131,400 | 1,194 | 1.88 | 1.40 | 3.41 | ||||||||||||
2022 | 79,044 | 736 | 1.97 | 1.39 | 4.48 | ||||||||||||
2023 | 54,200 | 873 | 1.93 | 1.37 | 5.47 | ||||||||||||
2024 | 8,900 | 142 | 1.99 | 1.34 | 6.26 | ||||||||||||
2025 | 15,322 | 196 | 2.04 | 1.37 | 7.13 | ||||||||||||
2026 | 40,885 | 2,230 | 1.63 | 1.36 | 8.71 | ||||||||||||
2027 | 48,010 | 235 | 2.30 | 1.40 | 9.38 | ||||||||||||
2043 | 12,380 | (1,125 | ) | 2.99 | 1.41 | 25.38 | |||||||||||
Total | $ | 607,571 | $ | 6,347 | 1.77 | % | 1.40 | % | 4.54 | ||||||||
September 30, 2017 | |||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
||||||||||||
(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 | ||||||||
The following tables provide details about our fixed receiver interest rate swaps as of December 31, 2017 and September 30, 2017:
December 31, 2017 | ||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) | ||||||||||||||||
2025 | $ | 9,700 | $ | 563 | 1.36 | % | 3.00 | % | 7.54 | |||||||
Total | $ | 9,700 | $ | 563 | 1.36 | % | 3.00 | % | 7.54 | |||||||
September 30, 2017 | ||||||||||||||||
Maturity |
Notional |
Fair Value |
Weighted |
Weighted |
Weighted Average |
|||||||||||
(In thousands) | ||||||||||||||||
2025 | $ | 9,700 | $ | 613 | 1.30 | % | 3.00 | % | 7.79 | |||||||
Total | $ | 9,700 | $ | 613 | 1.30 | % | 3.00 | % | 7.79 | |||||||
Interest Rate Swaptions
The following tables provide information about our swaptions as of
December 31, 2017 | ||||||||||||||
Option | Underlying Swap | |||||||||||||
Type | Fair Value |
Months to |
Notional |
Term (Years) |
Fixed Rate |
|||||||||
($ in thousands) | ||||||||||||||
Fixed Payer | $ | 181 | 7.0 | $ | 10,000 | 10 | 2.40% | |||||||
September 30, 2017 | ||||||||||||||
Option | Underlying Swap | |||||||||||||
Type | Fair Value |
Months to |
Notional |
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 December 31, 2017 and September 30, 2017:
December 31, 2017 | |||||||||||
Description | Notional Amount | Fair Value |
Remaining Months to |
||||||||
($ in thousands) | |||||||||||
U.S. Treasury Futures | $ | (25,800 | ) | $ | 171 | 2.63 | |||||
September 30, 2017 | |||||||||||
Description | Notional Amount | Fair Value |
Remaining Months to |
||||||||
($ in thousands) | |||||||||||
U.S. Treasury Futures | $ | (25,800 | ) | $ | 542 | 2.67 | |||||
TBAs
The following table provides information about our TBAs as of December 31, 2017 and September 30, 2017:
December 31, 2017 | September 30, 2017 | |||||||||||||||||||||||||||||||||
TBA Securities |
Notional |
Cost |
Market |
Net |
Notional |
Cost |
Market |
Net |
||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Purchase contracts: | ||||||||||||||||||||||||||||||||||
Assets |
$ | 37,355 | $ | 38,065 | $ | 38,091 | $ | 26 | $ | 23,549 | $ | 25,153 | $ | 25,182 | $ | 29 | ||||||||||||||||||
Liabilities | 75,789 | 79,570 | 79,304 | (266 | ) | 82,255 | 85,698 | 85,494 | (204 | ) | ||||||||||||||||||||||||
113,144 | 117,635 | 117,395 | (240 | ) | 105,804 | 110,851 | 110,676 | (175 | ) | |||||||||||||||||||||||||
Sale contracts: | ||||||||||||||||||||||||||||||||||
Assets | (358,279 | ) | (372,219 | ) | (371,843 | ) | 376 | (607,775 | ) | (634,557 | ) | (632,924 | ) | 1,633 | ||||||||||||||||||||
Liabilities | (328,576 | ) | (341,134 | ) | (341,603 | ) | (469 | ) | (93,430 | ) | (99,947 | ) | (99,977 | ) | (30 | ) | ||||||||||||||||||
(686,855 | ) | (713,353 | ) | (713,446 | ) | (93 | ) | (701,205 | ) | (734,504 | ) | (732,901 | ) | 1,603 | ||||||||||||||||||||
Total TBA securities, net | $ | (573,711 | ) | $ | (595,718 | ) | $ | (596,051 | ) | $ | (333 | ) | $ | (595,401 | ) | $ | (623,653 | ) | $ | (622,225 | ) | $ | 1,428 |
(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 December 31, 2017 and September 30, 2017:
Three Month Period Ended December 31, 2017 | ||||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net |
||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest rate swaps | $ | (2,497 | ) | $ | 299 | $ | (2,198 | ) | $ | 1,967 | $ | 4,103 | $ | 6,070 | ||||||||||
Swaptions | — | — | (31 | ) | (31 | ) | ||||||||||||||||||
TBAs | 2,940 | 2,940 | (1,760 | ) | (1,760 | ) | ||||||||||||||||||
Futures | 630 | 630 | (371 | ) | (371 | ) | ||||||||||||||||||
Total | $ | (2,497 | ) | $ | 3,869 | $ | 1,372 | $ | 1,967 | $ | 1,941 | $ | 3,908 | |||||||||||
Three Month Period Ended September 30, 2017 | |||||||||||||||||||||||||
Derivative Type |
Net Realized |
Net Realized |
Net Realized |
Change in Net |
Change in Net |
Change in Net |
|||||||||||||||||||
(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 | ) |
Interest Rate Sensitivity
The following table summarizes, as of December 31, 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 Decline
in Interest Rates |
50 Basis Point Increase
in Interest Rates |
||||||||||||||
Market Value | % of Total Equity | Market Value | % of Total Equity | |||||||||||||
Agency RMBS—ARM Pools | $ | 223 | 0.11 | % | $ | (254 | ) | (0.13 | )% | |||||||
Agency RMBS—Fixed Pools and IOs | 22,237 | 11.54 | % | (32,716 | ) | (16.98 | )% | |||||||||
TBAs | (8,621 | ) | (4.47 | )% | 13,174 | 6.84 | % | |||||||||
Non-Agency RMBS | 381 | 0.20 | % | (397 | ) | (0.21 | )% | |||||||||
Interest Rate Swaps | (137 | ) | (0.07 | )% | 342 | 0.18 | % | |||||||||
U.S. Treasury Securities | (2,926 | ) | (1.52 | )% | 2,801 | 1.45 | % | |||||||||
U.S. Treasury Futures | (13,311 | ) | (6.91 | )% | 12,826 | 6.66 | % | |||||||||
Repurchase and Reverse Repurchase Agreements | (952 | ) | (0.49 | )% | 952 | 0.49 | % | |||||||||
Total | $ | (3,106 | ) | (1.61 | )% | $ | (3,272 | ) | (1.70 | )% |
(1) | Based on the market environment as of December 31, 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 December 31, 2017 and September 30, 2017:
December 31, 2017 | September 30, 2017 | |||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||
Remaining Days to Maturity |
Borrowings |
Interest Rate |
Remaining |
Borrowings |
Interest Rate |
Remaining |
||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||
30 days or less | $ | 410,628 | 1.41 | % | 15 | $ | 475,779 | 1.33 | % | 17 | ||||||||
31-60 days | 906,602 | 1.46 | 46 | 950,188 | 1.31 | 45 | ||||||||||||
61-90 days | 273,665 | 1.60 | 74 | 212,389 | 1.36 | 75 | ||||||||||||
91-120 days | 6,311 | 1.61 | 120 | 2,051 | 1.40 | 104 | ||||||||||||
151-180 days | — | — | — | 1,906 | 1.45 | 166 | ||||||||||||
Total | $ | 1,597,206 | 1.47 | % | 43 | $ | 1,642,313 | 1.32 | % | 41 | ||||||||
As of December 31, 2017, we had no outstanding borrowings other than under repo agreements. Our repo borrowings were with fifteen counterparties as of December 31, 2017. The above figures are as of the respective quarter ends; over the course of the quarters ended December 31, 2017 and September 30, 2017 our average cost of repo was 1.40% and 1.31%, 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 December 31, 2017, our expense ratio, defined as management fees and operating expenses as a percentage of average shareholders' equity, was 3.1% on an annualized basis for the quarter ended December 31, 2017, as compared to 3.0% as of September 30, 2017. The slight increase in our annualized expense ratio resulted primarily from an increase in professional fees for the quarter.
Dividends
On
Share Repurchase Program
On
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 December 31, 2017 and September 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 Month Period Ended December 31, 2017 |
Three Month Period Ended September 30, 2017 |
||||||||
Net Income | $ | 793 | $ | 6,340 | ||||||
Less: | ||||||||||
Net realized gains (losses) on securities | 327 | 349 | ||||||||
Net realized gains (losses) on financial derivatives, excluding periodic payments(1) | 3,869 | (3,938 | ) | |||||||
Change in net unrealized gains (losses) on securities | (10,284 | ) | 3,994 | |||||||
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) | 1,941 | 968 | ||||||||
Subtotal | (4,147 | ) | 1,373 | |||||||
Core Earnings | $ | 4,940 | $ | 4,967 | ||||||
Catch-up Premium Amortization Adjustment | (401 | ) | (667 | ) | ||||||
Adjusted Core Earnings | $ | 5,341 | $ | 5,634 | ||||||
Weighted Average Shares Outstanding | 13,336,763 | 13,136,106 | ||||||||
Core Earnings Per Share | $ | 0.37 | $ | 0.38 | ||||||
Adjusted Core Earnings Per Share | $ | 0.40 | $ | 0.43 |
(1) | For the three month period ended December 31, 2017, represents Net realized gains (losses) on financial derivatives of $1,372 less Net realized gains (losses) on periodic settlements of interest rate swaps of $(2,497). 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. | |
(2) | For the three month period ended December 31, 2017, represents Change in net unrealized gains (losses) on financial derivatives of $3,908 less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $1,967. 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). | |
About
Conference Call
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A dial-in replay of the conference call will be available on Friday,
February 9, 2018, 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 |
Year
Ended |
|||||||||||||
December 31, |
September 30, |
December 31, |
||||||||||||
(In thousands except share amounts) | ||||||||||||||
INTEREST INCOME (EXPENSE) | ||||||||||||||
Interest income | $ | 13,111 | $ | 12,867 | $ | 49,190 | ||||||||
Interest expense | (6,129 | ) | (5,719 | ) | (19,047 | ) | ||||||||
Total net interest income | 6,982 | 7,148 | 30,143 | |||||||||||
EXPENSES | ||||||||||||||
Management fees to affiliate | 725 | 741 | 2,678 | |||||||||||
Professional fees | 227 | 157 | 737 | |||||||||||
Compensation expense | 178 | 222 | 775 | |||||||||||
Insurance expense(1) | 74 | 74 | 304 | |||||||||||
Other operating expenses(1) | 308 | 287 | 1,208 | |||||||||||
Total expenses | 1,512 | 1,481 | 5,702 | |||||||||||
OTHER INCOME (LOSS) | ||||||||||||||
Net realized gains (losses) on securities | 327 | 349 | (2,674 | ) | ||||||||||
Net realized gains (losses) on financial derivatives | 1,372 | (2,981 | ) | (9,083 | ) | |||||||||
Change in net unrealized gains (losses) on securities | (10,284 | ) | 3,994 | (4,501 | ) | |||||||||
Change in net unrealized gains (losses) on financial derivatives | 3,908 | (689 | ) | 2,605 | ||||||||||
Total other income (loss) | (4,677 | ) | 673 | (13,653 | ) | |||||||||
NET INCOME | $ | 793 | $ | 6,340 | $ | 10,788 | ||||||||
NET INCOME PER COMMON SHARE: | ||||||||||||||
Basic and Diluted | $ | 0.06 | $ | 0.48 | $ | 0.93 | ||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING | 13,336,763 | 13,136,106 | 11,601,979 | |||||||||||
CASH DIVIDENDS PER SHARE: | ||||||||||||||
Dividends declared | $ | 0.37 | $ | 0.40 | $ | 1.57 |
(1) | Conformed to current period presentation. | |
ELLINGTON RESIDENTIAL MORTGAGE REIT | ||||||||||||||
CONSOLIDATED BALANCE SHEET | ||||||||||||||
(UNAUDITED) | ||||||||||||||
As of | ||||||||||||||
December
31, 2017 |
September |
December |
||||||||||||
(In thousands except share amounts) | ||||||||||||||
ASSETS | ||||||||||||||
Cash and cash equivalents | $ | 56,117 | $ | 50,271 | $ | 33,504 | ||||||||
Mortgage-backed securities, at fair value | 1,685,998 | 1,743,067 | 1,226,994 | |||||||||||
Due from brokers | 26,754 | 41,821 | 49,518 | |||||||||||
Financial derivatives–assets, at fair value | 8,792 | 6,150 | 6,008 | |||||||||||
Reverse repurchase agreements | 81,461 | 56,875 | 75,012 | |||||||||||
Receivable for securities sold | 21,606 | 29,825 | 33,199 | |||||||||||
Interest receivable | 5,784 | 5,720 | 4,633 | |||||||||||
Other assets | 575 | 548 | 266 | |||||||||||
Total Assets | $ | 1,887,087 | $ | 1,934,277 | $ | 1,429,134 | ||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
LIABILITIES | ||||||||||||||
Repurchase agreements | $ | 1,597,206 | $ | 1,642,313 | $ | 1,197,973 | ||||||||
Payable for securities purchased | 3,830 | 24,845 | 5,516 | |||||||||||
Due to brokers | 489 | 787 | 1,055 | |||||||||||
Financial derivatives–liabilities, at fair value | 1,863 | 3,168 | 1,975 | |||||||||||
U.S. Treasury securities sold short, at fair value | 81,289 | 56,524 | 74,194 | |||||||||||
Dividend payable | 4,936 | 5,334 | 3,652 | |||||||||||
Accrued expenses | 728 | 980 | 647 | |||||||||||
Management fee payable to affiliate | 725 | 741 | 533 | |||||||||||
Interest payable | 3,318 | 2,790 | 1,912 | |||||||||||
Total Liabilities | 1,694,384 | 1,737,482 | 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;
(13,340,217, 13,335,804, and 9,130,897 shares issued and outstanding, respectively) |
134 | 134 | 92 | |||||||||||
Additional paid-in-capital | 240,062 | 240,010 | 180,996 | |||||||||||
Accumulated deficit | (47,493 | ) | (43,349 | ) | (39,411 | ) | ||||||||
Total Shareholders' Equity | 192,703 | 196,795 | 141,677 | |||||||||||
Total Liabilities and Shareholders' Equity | $ | 1,887,087 | $ | 1,934,277 | $ | 1,429,134 | ||||||||
PER SHARE INFORMATION | ||||||||||||||
Common shares, par value $0.01 per share | $ | 14.45 | $ | 14.76 | $ | 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/20180208006478/en/
Source:
Investor: Maria Cozine, Vice President of Investor Relations, Ellington
Residential Mortgage REIT, (203) 409-3773 or info@earnreit.com;
or
Media:
Amanda Klein or Kevin Fitzgerald, Gasthalter & Co., for Ellington
Residential Mortgage REIT, (212) 257-4170 or Ellington@gasthalter.com.