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News Release

Ellington Residential Mortgage REIT Reports Second Quarter 2018 Results

OLD GREENWICH, Conn.--(BUSINESS WIRE)--Aug. 2, 2018-- Ellington Residential Mortgage REIT (NYSE: EARN) today reported financial results for the quarter ended June 30, 2018.

Highlights

  • Net income of $1.8 million, or $0.14 per share.
  • Core Earnings1 of $5.1 million, or $0.40 per share, and Adjusted Core Earnings1 of $4.6 million, or $0.36 per share.
  • Book value of $13.70 per share as of June 30, 2018, after giving effect to a second quarter dividend of $0.37 per share.
  • Net interest margin of 1.28%, and adjusted net interest margin2 of 1.17%.
  • Weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio of 8.2%.
  • Dividend yield of 13.4% based on the August 1, 2018 closing stock price of $11.07.
  • Debt-to-equity ratio of 8.8:1 as of June 30, 2018; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.6:1.
  • Net mortgage assets-to-equity ratio of 7.4:13 as of June 30, 2018.
  • Repurchased 115,800 shares during the quarter, or approximately 1% of our outstanding shares as of the beginning of the quarter, at an average price of $11.01 per share.

Second Quarter 2018 Results

"In the second quarter, Ellington Residential had net income of $0.14 per share and Adjusted Core Earnings of $0.36 per share," said Laurence Penn, Chief Executive Officer and President. "During the quarter, higher interest rates caused Agency RMBS asset prices to decline modestly, but EARN's book value was stable as solid net carry on our portfolio and gains on our interest rate hedges more than offset these price declines. Share repurchases provided a tailwind, and altogether our economic return for the quarter was 1.2%, or 5.0% annualized.

"The bear market flattening of the yield curve over the past 18 months has put downward pressure on our net interest margin, but we continue to take advantage of the asset opportunities and higher yields by turning over meaningful portions of our portfolio, in order to recharge our net interest margin and boost core earnings. We expect this activity to continue throughout the third quarter.

"Despite the ongoing technical drag from Fed tapering, we believe that Agency RMBS offer attractive relative value today, with favorable prepayment fundamentals and yield spreads that remain near their two-year widest levels, in contrast to many credit sectors where spreads remain near their two-year tightest levels. As a result, after having covered a significant portion of our TBA short position in March in response to the market selloff, we continue to keep our net mortgage exposure relatively high.

"Looking forward, as quantitative easing around the globe continues to give way to quantitative tightening, the market will continue to lose an important stabilizing force. The market is pricing in continued record low volatility, but if volatility returns, we would expect more investment opportunities and chances to differentiate ourselves. We believe that our hedging strategy and our highly liquid portfolio will allow us to take advantage of such opportunities while also preserving book value."

Market Overview

  • In June, the Federal Reserve raised the target range for the federal funds rate by 0.25%, to 1.75%–2.00%, its seventh rate increase since December 1, 2015 and its second rate increase so far in 2018. LIBOR rates, which drive many of our financing costs, increased in sympathy, with one-month LIBOR increasing 21 basis points to end the second quarter at 2.09%.
  • In April and July, the Federal Reserve continued to increase the amount of the tapering of its reinvestments in line with the schedule it had laid out in September 2017. The tapering of Agency RMBS purchases increased to $12 billion per month in April and to $16 billion per month in July. The tapering of U.S. Treasury purchases increased to $18 billion per month in April and to $24 billion per month in July.
  • The yield curve flattened for the sixth consecutive quarter: the 2-year U.S. Treasury yield rose 26 basis points to end the second quarter at 2.53%, while the 10-year U.S. Treasury yield rose 12 basis points to 2.86%. The spread between the 2-year and 10-year tightened to just 33 basis points, as compared to 47 basis points at the end of the first quarter.
  • Mortgage rates increased in the second quarter, with the Freddie Mac survey 30-year mortgage rate rising 11 basis points to end the quarter at 4.55%.
  • Overall Agency RMBS prepayment rates continued to be muted during the quarter. The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, fell 11.9% quarter over quarter, dropping intra-quarter to its lowest seasonally-adjusted level in more than 17 years.

The second quarter of 2018 saw the extreme equity volatility of the first quarter subside, but interest rate choppiness and yield curve flattening continue. During the first part of the quarter, interest rates continued their recent upward trend, with the 10-year U.S. Treasury yield rising 37 basis points to an almost seven-year high of 3.11% on May 17th. Over the next two weeks, this trend reversed, as investors reacted to a possible trade war and political uncertainty in Italy; by May 29th, the 10-year U.S. Treasury had rallied nearly back to where it started the quarter. The flight to quality was short-lived, however, and the 10-year U.S. Treasury yield finished the quarter 12 basis points higher overall. The yield curve has lately been the flattest it has been since 2007, when it actually inverted during the early part of the year.

Performance was mixed for the quarter across the various credit-sensitive sectors. Investment grade and high yield corporate credit spreads tightened during April but then widened in May and June, and finished the quarter approximately flat. Meanwhile, CMBS credit spreads generally tightened during the quarter (with especially strong demand for higher-yielding, non-investment grade CMBS securities), and the legacy non-Agency RMBS market continued to be well supported. The continued increase in LIBOR boosted coupons of floating-rate debt instruments, benefiting CLOs, leveraged loans, and other structured credit products.

Despite higher rates and the continued increase of Fed tapering, Agency RMBS spreads generally held firm over the quarter, continuing to benefit from a muted prepayment environment. As measured by the Bloomberg Barclays U.S. MBS Agency Fixed Rate Index, Agency RMBS generated a total return of 24 basis points for the quarter, and an excess return (on a duration-adjusted basis) over the Bloomberg Barclays U.S. Treasury Index of 15 basis points.

Financial Results

Holdings

As of June 30, 2018, our mortgage-backed securities portfolio consisted of $1.451 billion of fixed-rate Agency "specified pools," $20.7 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $76.8 million of Agency reverse mortgage pools, $19.1 million of Agency interest only securities, or "Agency IOs," and $12.0 million of non-Agency RMBS. Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics.

Our overall RMBS portfolio decreased by 3.1% to $1.580 billion as of June 30, 2018, as compared to $1.631 billion as of March 31, 2018. Even though our portfolio was slightly smaller by quarter end, our equity base was also slightly smaller and our overall debt-to-equity ratio, adjusted for unsettled purchases and sales, was unchanged at 8.6:1 as of June 30, 2018, as compared to March 31, 2018. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

With Agency RMBS yield spreads remaining near their two-year widest levels in the second quarter, we continued to maintain a smaller short TBA position that we use for hedging purposes, as well as a larger long TBA portfolio held for investment purposes, compared to how we were positioned in previous years. As of June 30, 2018, we had short TBAs of $448.6 million, as compared to $386.2 million as of March 31, 2018. Also as of June 30, 2018, we had $153.7 million of long TBAs held for investment purposes, as compared to $142.9 million as of March 31, 2018. As a result, our net mortgage assets-to-equity ratio decreased slightly quarter over quarter to 7.4:1 from 7.8:1, but was still meaningfully higher than as of December 31, 2017, when this ratio was 5.7:1, as well as compared to the quarter-end average over the past three years ended December 31, 2017 of 5.7:1. TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced."

With Agency RMBS prices declining again during the second quarter, our portfolio had significant realized and unrealized losses. While these losses were partially offset by significant gains on our interest rate swaps, futures, and TBA short positions, strong TBA dollar rolls and muted prepayments caused TBAs to outperform specified pools, which further dampened our results. Short positions in TBAs continue to represent a significant portion of our interest rate hedging portfolio.

Average pay-ups on our specified pools were essentially unchanged at 0.58% as of June 30, 2018, as compared to 0.59% as of March 31, 2018. Pay-ups are price premiums for specified pools relative to their TBA counterparts. Additionally, our GNMA portfolio benefited from a significant drop in GNMA prepayment speeds during the quarter, which reflected the impact of a new law inhibiting "churning" of VA loans, as well as certain disciplinary actions taken by GNMA against several originators whose loans have exhibited abnormally high prepayment speeds.

Our non-Agency RMBS performed well during the quarter, driven by strong net interest income, which was slightly offset by net realized and unrealized losses as prices declined marginally in the sector during the quarter. Fundamentals underlying non-Agency RMBS continue to remain strong, led by a stable housing market. Our total investment in non-Agency RMBS was relatively unchanged at $12.0 million as of June 30, 2018, as compared to $12.4 million as of March 31, 2018. To the extent that more attractive entry points develop in non-Agency RMBS, we may increase our capital allocation to this sector.

Earnings and Net Interest Margin

We had net income of $1.8 million, or $0.14 per share, for the quarter ended June 30, 2018, as compared to a net loss of $(4.0) million, or $(0.30) per share, for the quarter ended March 31, 2018. The net income for the quarter was primarily driven by strong net interest income on our Agency RMBS investments and net gains from our interest rate hedges, partially offset by realized and unrealized losses on our Agency RMBS investments. For the quarter ended June 30, 2018, Core Earnings was $5.1 million, or $0.40 per share, as compared to $4.3 million, or $0.32 per share, for the quarter ended March 31, 2018. Adjusted Core Earnings for the quarter ended June 30, 2018 was $4.6 million, or $0.36 per share, as compared to $4.4 million, or $0.34 per share, for the quarter ended March 31, 2018. The higher Core Earnings and Adjusted Core Earnings in the current quarter resulted from the increase in our quarter-over-quarter adjusted net interest margin, reflecting the higher asset yields following portfolio turnover, partially offset by increases in repo borrowing rates. Core Earnings and Adjusted Core Earnings are non-GAAP financial measures. 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.

For the quarter ended June 30, 2018, the weighted average yield of our portfolio of Agency and non-Agency RMBS was 3.26%, while our average cost of funds, including interest rate swaps and U.S. Treasury securities, was 1.98%, resulting in a net interest margin for the quarter of 1.28%. By comparison, for the quarter ended March 31, 2018, the weighted average yield of our Agency and non-Agency RMBS was 2.99%, while our average cost of funds, including interest rate swaps and U.S. Treasury securities, was 1.93%, resulting in a net interest margin of 1.06%. Excluding the impact of the Catch-up Premium Amortization Adjustment, the weighted average yield of our portfolio increased to 3.15% for the second quarter as compared to 3.02% for the first quarter, and our adjusted net interest margin was 1.17% and 1.09%, 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 1.98% from 1.93%. This quarter-over-quarter increase resulted mainly from an increase in our repo borrowing rates, which increased as LIBOR rose. Our average repo borrowing rate increased 33 basis points quarter over quarter to 1.96%. This increase was partially offset by lower costs related to our short positions in U.S. Treasury securities and interest rate swaps, which decreased 28 basis points from the prior quarter.

For the quarter ended June 30, 2018, prices on our Agency RMBS portfolio declined, and we had total net realized and unrealized losses of $(10.1) million, or $(0.79) per share. Our Agency RMBS portfolio turnover was 17% for the quarter, which was modestly higher than the prior quarter. In addition, we had total net realized and unrealized losses of $(0.1) million, or $(0.01) per share, on our non-Agency RMBS portfolio as prices declined slightly during the quarter.

During the quarter we continued to hedge interest rate risk, primarily through the use of interest rate swaps, short positions in TBAs, U.S. Treasury securities, and futures. For the quarter, we had total net realized and unrealized gains of $7.0 million, or $0.55 per share, on our interest rate hedging portfolio, as interest rates increased. In our hedging portfolio, the relative proportion (based on 10-year equivalents4) of short positions in TBAs increased slightly quarter over quarter relative to our other interest rate hedges, as we marginally decreased our exposure to Agency RMBS. The relative makeup of our interest rate hedging portfolio can change materially from quarter to quarter.

After giving effect to a second quarter dividend of $0.37 per share, our book value per share decreased to $13.70 as of June 30, 2018, from $13.90 as of March 31, 2018, and we had an economic return of 1.2% for the quarter. Economic return is computed by adding back dividends declared to ending book value per share, and comparing that amount to book value per share as of the beginning of the quarter.

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 We define our net mortgage assets-to-equity ratio as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity. As of June 30, 2018 the market value of our mortgage-backed securities and our net short TBA position was $1.580 billion and $(294.8) million, respectively, and total shareholders' equity was $174.2 million.
4 "10-year equivalents" for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to 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 June 30, 2018 and March 31, 2018:

June 30, 2018   March 31, 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 $ 147,080 $ 148,499 $ 100.96 $ 153,512 $ 104.37 $ 151,969 $ 154,850 $ 101.90 $ 158,690 $ 104.42
20-year fixed-rate mortgages 8,143 8,421 103.41 8,767 107.66 8,432 8,773 104.04 9,078 107.66
30-year fixed-rate mortgages 1,263,388 1,294,483 102.46 1,329,912 105.27 1,304,988 1,341,220 102.78 1,375,171 105.38
ARMs 20,124 20,730 103.01 21,521 106.94 22,613 23,382 103.40 24,010 106.18
Reverse mortgages 71,781   76,831   107.04   78,603   109.50   69,813   75,382   107.98   76,536   109.63
Total Agency RMBS 1,510,516   1,548,964   102.55   1,592,315   105.42   1,557,815   1,603,607   102.94   1,643,485   105.50
Non-Agency RMBS 14,839   12,024   81.03   10,278   69.26   15,258   12,442   81.54   10,503   68.84
Total RMBS(2) 1,525,355   1,560,988   102.34   1,602,593   105.06   1,573,073   1,616,049   102.73   1,653,988   105.14
Agency IOs n/a 19,115   n/a 18,583   n/a n/a 14,526   n/a 14,264   n/a
Total mortgage-backed securities 1,580,103   1,621,176   1,630,575   1,668,252  
U.S. Treasury securities sold short (16,300 ) (16,195 ) 99.36 (15,999 ) 98.15 (44,350 ) (44,377 ) 100.06 (44,002 ) 99.22
Reverse repurchase agreements 21,373 21,373   100.00 21,373   100.00 44,617 44,617   100.00 44,617   100.00
Total $ 1,585,281   $ 1,626,550   $ 1,630,815   $ 1,668,867  
(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 $1.689 billion and $1.728 billion for the three-month periods ended June 30, 2018 and March 31, 2018, respectively.

Financial Derivatives Portfolio

The following table summarizes fair value of our financial derivatives as of June 30, 2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
(In thousands)
Financial derivatives–assets, at fair value:
TBA securities purchase contracts $ 422 $ 295
TBA securities sale contracts 1
Fixed payer interest rate swaps 17,026 12,652
Fixed receiver interest rate swaps 194
Swaptions 470 386
Futures 2,177    
Total financial derivatives–assets, at fair value 20,095   13,528  
Financial derivatives–liabilities, at fair value:
TBA securities purchase contracts (1 ) (122 )
TBA securities sale contracts (1,394 ) (2,450 )
Fixed payer interest rate swaps (260 ) (1,191 )
Fixed receiver interest rate swaps (1 )
Futures   (2,112 )
Total financial derivatives–liabilities, at fair value (1,655 ) (5,876 )
Total $ 18,440   $ 7,652  
 

Interest Rate Swaps

The following tables provide details about our fixed payer interest rate swaps as of June 30, 2018 and March 31, 2018:

  June 30, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to Maturity

(In thousands)
2020 $ 86,000 $ 1,916 1.60 % 2.35 % 1.82
2021 133,400 3,677 1.89 2.35 2.91
2022 68,480 2,206 2.00 2.36 3.94
2023 119,466 2,786 2.30 2.36 4.77
2024 8,900 436 1.99 2.31 5.76
2025 47,722 650 2.57 2.33 6.67
2026 40,885 3,761 1.63 2.35 8.21
2027 30,000 1,458 2.29 2.35 8.85
2028 7,923 (13 ) 2.85 2.36 9.61
2043 12,380   (111 ) 2.99   2.35   24.89
Total $ 555,156   $ 16,766   2.05 % 2.35 % 4.93
 
  March 31, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to Maturity

(In thousands)
2020 $ 86,000 $ 1,372 1.60 % 1.76 % 2.07
2021 161,400 2,428 2.03 1.90 3.14
2022 68,480 1,511 2.00 1.80 4.19
2023 150,466 1,984 2.38 1.82 4.99
2024 8,900 316 1.99 1.69 6.01
2025 57,822 361 2.62 1.97 6.93
2026 40,885 3,423 1.63 1.87 8.46
2027 30,000 934 2.29 1.79 9.10
2028 36,663 (397 ) 2.89 2.01 9.93
2043 12,380   (471 ) 2.99   1.83   25.13
Total $ 652,996   $ 11,461   2.15 % 1.86 % 5.31
 

The following table provides details about our fixed receiver interest rate swaps as of March 31, 2018. As of June 30, 2018 we did not hold any fixed receiver interest rate swaps:

  March 31, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to Maturity

(In thousands)
2021 $ 13,000 $ (1 ) 2.31 % 2.66 % 3.01
2025 9,700   194   1.72   3.00   7.30
Total $ 22,700   $ 193   2.06 % 2.80 % 4.84
 

Interest Rate Swaptions

The following tables provide information about our swaptions as of June 30, 2018 and March 31, 2018:

  June 30, 2018
Option   Underlying Swap
Type Fair Value  

Months to
Expiration

Notional
Amount

 

Term (Years)

 

Fixed Rate

($ in thousands)
Fixed Payer $ 470 1.0 $ 10,000 10 2.40%
 
  March 31, 2018
Option   Underlying Swap
Type Fair Value  

Months to
Expiration

Notional
Amount

  Term (Years)  

Fixed Rate

($ in thousands)
Fixed Payer $ 386 4.0 $ 10,000 10 2.40%
 

Futures

The following tables provide information about our short positions in futures as of June 30, 2018 and March 31, 2018:

  June 30, 2018
Description Notional Amount   Fair Value  

Remaining Months to
Expiration

($ in thousands)
U.S. Treasury Futures $ (296,100 ) $ 2,177 2.84
 
  March 31, 2018
Description Notional Amount   Fair Value  

Remaining Months to
Expiration

($ in thousands)
U.S. Treasury Futures $ (296,100 ) $ (2,112 ) 2.84
 

TBAs

The following table provides information about our TBAs as of June 30, 2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
TBA Securities

Notional
Amount (1)

 

Cost
Basis (2)

 

Market
Value (3)

 

Net
Carrying
Value (4)

Notional
Amount (1)

 

Cost
Basis (2)

 

Market
Value (3)

 

Net
Carrying
Value (4)

(In thousands)
Purchase contracts:
Assets $ 136,754 $ 139,946 $ 140,368 $ 422 $ 98,555 $ 99,949 $ 100,244 $ 295
Liabilities 12,710   13,343   13,342   (1 ) 41,149   42,763   42,641   (122 )
149,464   153,289   153,710   421   139,704   142,712   142,885   173  
Sale contracts:
Assets (3,600 ) (3,770 ) (3,769 ) 1
Liabilities (441,893 ) (447,161 ) (448,555 ) (1,394 ) (378,653 ) (379,954 ) (382,404 ) (2,450 )
(441,893 ) (447,161 ) (448,555 ) (1,394 ) (382,253 ) (383,724 ) (386,173 ) (2,449 )
Total TBA securities, net $ (292,429 ) $ (293,872 ) $ (294,845 ) $ (973 ) $ (242,549 ) $ (241,012 ) $ (243,288 ) $ (2,276 )
(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, 2018 and March 31, 2018:

  Three-Month Period Ended June 30, 2018
Derivative Type

Net Realized
Gains (Losses) on
Periodic
Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
Other Than
Periodic
Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
on Financial
Derivatives

 

Change in Net
Unrealized
Gains (Losses)
on Accrued
Periodic
Settlements of
Interest Rate
Swaps

 

Change in Net
Unrealized Gains
(Losses) Other
Than on Accrued
Periodic
Settlements of
Interest Rate
Swaps

 

Change in Net
Unrealized
Gains (Losses)
on Financial
Derivatives

(In thousands)
Interest rate swaps $ (1,341 ) $ 528 $ (813 ) $ 1,472 $ 3,686 $ 5,158
Swaptions 84 84
TBAs (460 ) (460 ) 1,304 1,304
Futures   (2,429 ) (2,429 )   4,288   4,288
Total $ (1,341 ) $ (2,361 ) $ (3,702 ) $ 1,472   $ 9,362   $ 10,834
 
  Three-Month Period Ended March 31, 2018
Derivative Type

Net Realized
Gains (Losses) on
Periodic
Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
Other Than
Periodic
Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
on Financial
Derivatives

 

Change in Net
Unrealized
Gains (Losses)
on Accrued
Periodic
Settlements of
Interest Rate
Swaps

 

Change in Net
Unrealized Gains
(Losses) Other
Than on Accrued
Periodic
Settlements of
Interest Rate
Swaps

 

Change in Net
Unrealized
Gains (Losses)
on Financial
Derivatives

(In thousands)
Interest rate swaps $ 1,132 $ 2,441 $ 3,573 $ (1,511 ) $ 6,098 $ 4,587
Swaptions 205 205
TBAs 11,303 11,303 (1,944 ) (1,944 )
Futures   1,079   1,079     (2,283 ) (2,283 )
Total $ 1,132   $ 14,823   $ 15,955   $ (1,511 ) $ 2,076   $ 565  
 

Interest Rate Sensitivity

The following table summarizes, as of June 30, 2018, 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 $ 197 0.11 % $ (213 ) (0.12 )%
Agency RMBS—Fixed Pools and IOs 26,767 15.37 % (34,693 ) (19.92 )%
TBAs (6,746 ) (3.87 )% 8,077 4.63 %
Non-Agency RMBS 288 0.17 % (283 ) (0.16 )%
Interest Rate Swaps (12,271 ) (7.05 )% 11,843 6.80 %
Swaptions (432 ) (0.25 )% 424 0.24 %
U.S. Treasury Securities (817 ) (0.47 )% 763 0.44 %
U.S. Treasury Futures (9,011 ) (5.17 )% 8,742 5.02 %
Repurchase and Reverse Repurchase Agreements (919 ) (0.53 )% 919   0.53 %
Total $ (2,944 ) (1.69 )% $ (4,421 ) (2.54 )%
 
(1)   Based on the market environment as of June 30, 2018. 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, 2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
  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 $ 481,649 2.00 % 16 $ 468,222 1.67 % 16
31-60 days 732,797 2.10 45 818,835 1.76 45
61-90 days 322,770   2.18   76 302,262   1.90   75
Total $ 1,537,216   2.09 % 42 $ 1,589,319   1.76 % 42
 

As of June 30, 2018, we had no outstanding borrowings other than under repo agreements. Our repo borrowings were with 16 counterparties as of June 30, 2018. The above figures are as of the respective quarter ends; over the course of the quarters ended June 30, 2018 and March 31, 2018 our average cost of repo was 1.96% and 1.63%, 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, 2018, our expense ratio, defined as management fees and operating expenses as a percentage of average shareholders' equity, was 3.2% on an annualized basis for the quarter ended June 30, 2018, as compared to 3.3% as of March 31, 2018. The decrease in our annualized expense ratio resulted primarily from lower professional fees and other operating expenses during the quarter.

Dividends

On June 13, 2018, our Board of Trustees declared a second quarter dividend of $0.37 per share, or $4.7 million, which was paid on July 25, 2018 to shareholders of record on June 29, 2018.

Share Repurchase Program

On June 13, 2018, our Board of Trustees approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.2 million common shares. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions, including through Rule 10b5-1 plans. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. This program superseded the program that was previously adopted on February 6, 2018, which also authorized us to repurchase up to 1.2 million of common shares. During the three-month period ended June 30, 2018, we repurchased 115,800 common shares under the prior repurchase program at an average price per share of $11.01 and a total cost of $1.3 million. From inception of the current repurchase program through August 1, 2018 we have repurchased 21,720 common shares for an aggregate cost of approximately $0.2 million.

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 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 June 30, 2018 and March 31, 2018, our Core Earnings and Adjusted Core Earnings 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
Period Ended

June 30, 2018

  Three-Month
Period Ended
March 31, 2018
Net Income (Loss) $ 1,786 $ (3,953 )
Less:
Net realized gains (losses) on securities (7,114 ) 1,927
Net realized gains (losses) on financial derivatives, excluding periodic payments(1) (2,361 ) 14,823
Change in net unrealized gains (losses) on securities (3,218 ) (27,061 )
Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments(2) 9,362   2,076  
Subtotal (3,331 ) (8,235 )
Core Earnings $ 5,117   $ 4,282  
Less: Catch-up Premium Amortization Adjustment 480   (150 )
Adjusted Core Earnings $ 4,637   $ 4,432  
Weighted Average Shares Outstanding 12,715,277 13,224,214
Core Earnings Per Share $ 0.40 $ 0.32
Adjusted Core Earnings Per Share $ 0.36 $ 0.34
 
(1)   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. For the three-month period ended March 31, 2018, represents Net realized gains (losses) on financial derivatives of $16.0 million less Net realized gains (losses) on periodic settlements of interest rate swaps of $1.1 million.
(2) 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. For the three-month period ended March 31, 2018, represents Change in net unrealized gains (losses) on financial derivatives of $0.6 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

We will host a conference call at 11:00 a.m. Eastern Time on Friday, August 3, 2018, to discuss our financial results for the quarter ended June 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 5233149. 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 our 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, we also posted an investor presentation, that will accompany the conference call, on our website at www.earnreit.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Friday, August 3, 2018, at approximately 2:00 p.m. Eastern Time through Friday, August 17, 2018 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 585-8367 and enter the conference ID number 5233149. 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 our 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 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 December 31, 2017 filed on March 14, 2018 which can be accessed through the link to our SEC filings under "For Our Shareholders" on our 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

Six-Month
Period Ended

June 30,

2018

  March 31,

2018

June 30,

2018

(In thousands except share amounts)
INTEREST INCOME (EXPENSE)
Interest income $ 14,081 $ 13,426 $ 27,506
Interest expense (7,668 ) (7,248 ) (14,915 )
Total net interest income 6,413   6,178   12,591  
EXPENSES
Management fees to affiliate 656 671 1,327
Professional fees 217 234 452
Compensation expense 187 189 375
Insurance expense 74 74 148
Other operating expenses 293   349   641  
Total expenses 1,427   1,517   2,943  
OTHER INCOME (LOSS)
Net realized gains (losses) on securities (7,114 ) 1,927 (5,188 )
Net realized gains (losses) on financial derivatives (3,702 ) 15,955 12,253
Change in net unrealized gains (losses) on securities (3,218 ) (27,061 ) (30,279 )
Change in net unrealized gains (losses) on financial derivatives 10,834   565   11,399  
Total other income (loss) (3,200 ) (8,614 ) (11,815 )
NET INCOME (LOSS) $ 1,786   $ (3,953 ) $ (2,167 )
NET INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted $ 0.14 $ (0.30 ) $ (0.17 )
WEIGHTED AVERAGE SHARES OUTSTANDING 12,715,277 13,224,214 12,968,340
CASH DIVIDENDS PER SHARE:

Dividends declared

$ 0.37 $ 0.37 $ 0.74
 
 

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
As of

June 30,
2018

 

March 31,
2018

 

December 31,
2017(1)

(In thousands except share amounts)
ASSETS
Cash and cash equivalents $ 41,402 $ 46,025 $ 56,117
Mortgage-backed securities, at fair value 1,580,103 1,630,575 1,685,998
Due from brokers 26,946 32,061 26,754
Financial derivatives–assets, at fair value 20,095 13,528 8,792
Reverse repurchase agreements 21,373 44,617 81,461
Receivable for securities sold 51,614 73,560 21,606
Interest receivable 5,988 5,645 5,784
Other assets 748   523   575  
Total Assets $ 1,748,269   $ 1,846,534   $ 1,887,087  
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Repurchase agreements $ 1,537,216 $ 1,589,319 $ 1,597,206
Payable for securities purchased 1,387 17,612 3,830
Due to brokers 7,312 1,025 489
Financial derivatives–liabilities, at fair value 1,655 5,876 1,863
U.S. Treasury securities sold short, at fair value 16,195 44,377 81,289

Dividend payable

4,703 4,746 4,936
Accrued expenses 849 911 728
Management fee payable to affiliate 656 671 725
Interest payable 4,127   3,685   3,318  
Total Liabilities 1,574,100   1,668,222   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;

(12,712,050, 12,827,850, and 13,340,217 shares issued and outstanding, respectively)

127 128 134
Additional paid-in-capital 233,152 234,376 240,062
Accumulated deficit (59,110 ) (56,192 ) (47,493 )
Total Shareholders' Equity 174,169   178,312   192,703  
Total Liabilities and Shareholders' Equity $ 1,748,269   $ 1,846,534   $ 1,887,087  
PER SHARE INFORMATION

Common shares, par value $0.01 per share

$ 13.70 $ 13.90 $ 14.45
 
    (1) Derived from audited financial statements as of December 31, 2017.
 

Source: Ellington Residential Mortgage REIT

Investors: JR Herlihy, Chief Operating Officer, 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