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Ellington Residential Mortgage REIT Reports Third Quarter 2018 Results

OLD GREENWICH, Conn.--(BUSINESS WIRE)--Nov. 5, 2018-- Ellington Residential Mortgage REIT (NYSE: EARN) (the "Company") today reported financial results for the quarter ended September 30, 2018.

Highlights

  • Net income of $0.9 million, or $0.07 per share.
  • Core Earnings1 of $3.7 million, or $0.29 per share, and Adjusted Core Earnings1 of $4.1 million, or $0.32 per share.
  • Book value of $13.40 per share as of September 30, 2018, after giving effect to a third quarter dividend of $0.37 per share.
  • Net interest margin of 1.02%, and adjusted net interest margin2 of 1.12%.
  • Weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio of 8.36%.
  • Dividend yield of 14.1% based on the November 2, 2018 closing stock price of $10.48.
  • Debt-to-equity ratio of 8.8:1 as of September 30, 2018; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.7:1.
  • Net mortgage assets-to-equity ratio of 7.9:13 as of September 30, 2018.

Third Quarter 2018 Results

"Our third quarter results again demonstrated the effectiveness of our hedging and portfolio management to protect book value and bolster net income in a rising interest rate environment," stated Laurence Penn, Chief Executive Officer and President. "As interest rates rose and Agency RMBS prices declined in yet another quarter, the gains from our hedges along with positive carry from our investments more than offset the markdowns in our portfolio. Our hedging strategy continues to be a meaningful differentiator for EARN.

"We continue to believe that Agency RMBS offers attractive value today, with favorable prepayment fundamentals and yield spreads that remain near their widest levels in the past two years. We took advantage of the yield spread widening during the quarter to cover a portion of our TBA short positions and increase our net mortgage assets-to-equity ratio.

"During the first weeks of the fourth quarter, we have seen more opportunities to add assets at both higher yields and wider spreads, and expand our net interest margin and grow core earnings. At the same time, the return of volatility to the markets is underscoring the importance of our hedges to preserve book value."

1   Core Earnings and Adjusted Core Earnings are non-GAAP financial measures. Adjusted Core Earnings represents Core Earnings excluding the effect of the Catch-up Premium Amortization Adjustment on interest income. See "Reconciliation of Core Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Core Earnings, Adjusted Core Earnings, and the Catch-up Premium Amortization Adjustment.
2 Adjusted net interest margin represents net interest margin excluding the effect of the Catch-up Premium Amortization Adjustment on interest income.
3 The Company defines its net mortgage assets-to-equity ratio as the net aggregate market value of its mortgage-backed securities (including the underlying market values of its long and short TBA positions) divided by total shareholders' equity. As of September 30, 2018 the market value of the Company's mortgage-backed securities and its net short TBA position was $1.576 billion and $(223.8) million, respectively, and total shareholders' equity was $170.2 million.
 

Financial Results

The following table summarizes the Company's portfolio of RMBS as of September 30, 2018 and June 30, 2018:

       
September 30, 2018 June 30, 2018
(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 $ 145,249 $ 145,769 $ 100.36 $ 151,319 $ 104.18 $ 147,080 $ 148,499 $ 100.96 $ 153,512 $ 104.37
20-year fixed-rate mortgages 7,687 7,866 102.33 8,287 107.81 8,143 8,421 103.41 8,767 107.66
30-year fixed-rate mortgages 1,273,788 1,297,612 101.87 1,335,573 104.85 1,263,388 1,294,483 102.46 1,329,912 105.27
ARMs 18,513 19,051 102.91 19,735 106.60 20,124 20,730 103.01 21,521 106.94
Reverse mortgages 70,938   75,049   105.80   77,510   109.26   71,781   76,831   107.04   78,603   109.50
Total Agency RMBS 1,516,175   1,545,347   101.92   1,592,424   105.03   1,510,516   1,548,964   102.55   1,592,315   105.42
Non-Agency RMBS 14,418   11,952   82.90   9,908   68.72   14,839   12,024   81.03   10,278   69.26
Total RMBS(2) 1,530,593   1,557,299   101.74   1,602,332   104.69   1,525,355   1,560,988   102.34   1,602,593   105.06
Agency IOs n/a 18,684   n/a 17,601   n/a n/a 19,115   n/a 18,583   n/a
Total mortgage-backed securities $ 1,575,983   $ 1,619,933   $ 1,580,103   $ 1,621,176  
 

(1)

  Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.
(2) Excludes Agency IOs.
 

The Company's overall RMBS portfolio decreased by 0.3% to $1.576 billion as of September 30, 2018, as compared to $1.580 billion as of June 30, 2018. The Company's Agency RMBS portfolio turnover was 18% for the quarter, which was modestly higher than the prior quarter. The Company's total investment in non-Agency RMBS was $12.0 million as of both September 30, 2018 and June 30, 2018.

The primary drivers of net income for the quarter were strong net interest income on the Company's Agency RMBS investments and net realized and unrealized gains from its interest rate hedges. A portion of this income was offset by net realized and unrealized losses on the Company's Agency RMBS investments that occurred as Agency RMBS prices declined again during the third quarter. During the quarter the Company continued to hedge interest rate risk, primarily through the use of interest rate swaps, short positions in TBAs, U.S. Treasury securities, and futures.

The Company's non-Agency RMBS performed well during the quarter, driven by strong net interest income and net realized and unrealized gains. Fundamentals underlying non-Agency RMBS continue to remain strong, led by a stable housing market. To the extent that more attractive entry points develop in non-Agency RMBS, the Company may increase its capital allocation to this sector.

In the third quarter, Core Earnings and Adjusted Core Earnings were modestly lower than in the second quarter due to lower adjusted net interest margin, where higher asset yields quarter-over-quarter were more than offset by increases in repo borrowing rates.

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. Adjusted Core Earnings represents Core Earnings excluding the effect of the Catch-up Premium Amortization Adjustment on interest income. The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on the Company's Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on the Company's then assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

Core Earnings and Adjusted Core Earnings are supplemental non-GAAP financial measures. The Company believes that Core Earnings and Adjusted Core Earnings provide information useful to investors because they are metrics that it uses to assess its performance and to evaluate the effective net yield provided by the portfolio. Moreover, one of the Company's objectives is to generate income from the net interest margin on the portfolio, and Core Earnings and Adjusted Core Earnings are used to help measure the extent to which this objective is being achieved. However, because Core Earnings and Adjusted Core Earnings are incomplete measures of the Company's financial results and differ from net income (loss) computed in accordance with GAAP, they should be considered as supplementary to, and not as substitutes for, net income (loss) computed in accordance with GAAP.

The following table reconciles, for the three-month periods ended September 30, 2018 and June 30, 2018, the Company's Core Earnings and Adjusted Core Earnings on a consolidated basis to the line on the Company's Consolidated Statement of Operations entitled Net Income (Loss), which the Company believes is the most directly comparable GAAP measure on its Consolidated Statement of Operations to Core Earnings:

       
(In thousands except share amounts) Three-Month
Period Ended

September 30, 2018

Three-Month
Period Ended
June 30, 2018
Net Income (Loss) $ 946 $ 1,786
Less:
Net realized gains (losses) on securities (8,402 ) (7,114 )
Net realized gains (losses) on financial derivatives, excluding periodic payments(1) 2,777 (2,361 )
Change in net unrealized gains (losses) on securities (2,636 ) (3,218 )
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) 5,499   9,362  
Subtotal (2,762 ) (3,331 )
Core Earnings $ 3,708   $ 5,117  
Less: Catch-up Premium Amortization Adjustment (398 ) 480  
Adjusted Core Earnings $ 4,106   $ 4,637  
Weighted Average Shares Outstanding 12,693,989 12,715,277
Core Earnings Per Share $ 0.29 $ 0.40
Adjusted Core Earnings Per Share $ 0.32 $ 0.36
 
(1)   For the three-month period ended September 30, 2018, represents Net realized gains (losses) on financial derivatives of $4.1 million less Net realized gains (losses) on periodic settlements of interest rate swaps of $1.3 million. For the three-month period ended June 30, 2018, represents Net realized gains (losses) on financial derivatives of $(3.7) million less Net realized gains (losses) on periodic settlements of interest rate swaps of $(1.3) million.
(2) For the three-month period ended September 30, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $4.6 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $(0.9) million. For the three-month period ended June 30, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $10.8 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $1.5 million.
 

About Ellington Residential Mortgage REIT

Ellington Residential Mortgage REIT is a mortgage real estate investment trust that specializes in acquiring, investing in and managing residential mortgage- and real estate-related assets, with a primary focus on residential mortgage-backed securities, for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored enterprise. Ellington Residential Mortgage REIT is externally managed and advised by Ellington Residential Mortgage Management LLC, an affiliate of Ellington Management Group, L.L.C.

Conference Call

The Company will host a conference call at 11:00 a.m. Eastern Time on Tuesday, November 6, 2018, to discuss its financial results for the quarter ended September 30, 2018. To participate in the event by telephone, please dial (877) 437-3698 at least 10 minutes prior to the start time and reference the conference ID number 8816549. International callers should dial (810) 740-4679 and reference the same conference ID number. The conference call will also be webcast live over the Internet and can be accessed via the "For Our Shareholders" section of the Company's web site at www.earnreit.com. To listen to the live webcast, please visit www.earnreit.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software. In connection with the release of these financial results, the Company also posted an investor presentation, that will accompany the conference call, on the Company's website at www.earnreit.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Tuesday, November 6, 2018, at approximately 2:00 p.m. Eastern Time through Tuesday, November 20, 2018 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 585-8367 and enter the conference ID number 8816549. International callers should dial (404) 537-3406 and enter the same conference ID number. A replay of the conference call will also be archived on the Company's web site at www.earnreit.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from the Company's beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Examples of forward-looking statements in this press release include, without limitation, the Company's beliefs regarding the current economic and investment environment, the Company's ability to implement its investment and hedging strategies, the Company's future prospects and the protection of the Company's net interest margin from prepayments, volatility and its impact on the Company, the performance of the Company's investment and hedging strategies, the Company's exposure to prepayment risk in the Company's Agency portfolio, estimated effects on the fair value of the Company's RMBS and interest rate derivative holdings of a hypothetical change in interest rates, statements regarding the Company's share repurchase program, and statements regarding the drivers of the Company's returns. The Company's results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond the Company's control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of the Company's securities, changes in mortgage default rates and prepayment rates, the Company's ability to borrow to finance its assets, changes in government regulations affecting the Company's business, the Company's ability to maintain its exclusion from registration under the Investment Company Act of 1940 and other changes in market conditions and economic trends. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed on March 14, 2018 which can be accessed through the link to the Company's SEC filings under "For Our Shareholders" on the Company's website (www.earnreit.com) or at the SEC's website (www.sec.gov). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected or implied may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q, 10-K and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

       

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 
Three-Month

Period Ended

Nine-Month
Period Ended

September 30,

2018

    June 30,

2018

September 30,
2018

(In thousands except share amounts)
INTEREST INCOME (EXPENSE)
Interest income $ 13,171 $ 14,081 $ 40,677
Interest expense (8,519 ) (7,668 ) (23,434 )
Total net interest income 4,652   6,413   17,243  
EXPENSES
Management fees to affiliate 641 656 1,968
Professional fees 198 217 651
Compensation expense 136 187 511
Insurance expense 74 74 221
Other operating expenses 283   293   924  
Total expenses 1,332   1,427   4,275  
OTHER INCOME (LOSS)
Net realized gains (losses) on securities (8,402 ) (7,114 ) (13,590 )
Net realized gains (losses) on financial derivatives 4,058 (3,702 ) 16,311
Change in net unrealized gains (losses) on securities (2,636 ) (3,218 ) (32,915 )
Change in net unrealized gains (losses) on financial derivatives 4,606   10,834   16,005  
Total other income (loss) (2,374 ) (3,200 ) (14,189 )
NET INCOME (LOSS) $ 946   $ 1,786   $ (1,221 )
NET INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted $ 0.07 $ 0.14 $ (0.09 )
WEIGHTED AVERAGE SHARES OUTSTANDING 12,693,989 12,715,277 12,875,884
CASH DIVIDENDS PER SHARE:
Dividends declared $ 0.37 $ 0.37 $ 1.11
 
   

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
As of
September 30, 2018     June 30, 2018     December 31, 2017(1)
(In thousands except share amounts)
ASSETS
Cash and cash equivalents $ 41,016 $ 41,402 $ 56,117
Mortgage-backed securities, at fair value 1,575,983 1,580,103 1,685,998
Due from brokers 27,044 26,946 26,754
Financial derivatives–assets, at fair value 23,049 20,095 8,792
Reverse repurchase agreements 26,769 21,373 81,461
Receivable for securities sold 52,531 51,614 21,606
Interest receivable 5,675 5,988 5,784
Other assets 717   748   575  
Total Assets $ 1,752,784   $ 1,748,269   $ 1,887,087  
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Repurchase agreements $ 1,500,632 $ 1,537,216 $ 1,597,206
Payable for securities purchased 36,539 1,387 3,830
Due to brokers 8,298 7,312 489
Financial derivatives–liabilities, at fair value 333 1,655 1,863
U.S. Treasury securities sold short, at fair value 26,367 16,195 81,289
Dividend payable 4,700 4,703 4,936
Accrued expenses 704 849 728
Management fee payable to affiliate 641 656 725
Interest payable 4,340   4,127   3,318  
Total Liabilities 1,582,554   1,574,100   1,694,384  
SHAREHOLDERS' EQUITY
Preferred shares, par value $0.01 per share, 100,000,000 shares authorized;

(0 shares issued and outstanding, respectively)

Common shares, par value $0.01 per share, 500,000,000 shares authorized;

(12,703,474, 12,712,050, and 13,340,217 shares issued and outstanding, respectively)

127 127 134
Additional paid-in-capital 232,967 233,152 240,062
Accumulated deficit (62,864 ) (59,110 ) (47,493 )
Total Shareholders' Equity 170,230   174,169   192,703  
Total Liabilities and Shareholders' Equity $ 1,752,784   $ 1,748,269   $ 1,887,087  
PER SHARE INFORMATION
Common shares, par value $0.01 per share $ 13.40 $ 13.70 $ 14.45
 
(1)   Derived from audited financial statements as of December 31, 2017.

Source: Ellington Residential Mortgage REIT

Investors: 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