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Ellington Residential Mortgage REIT Reports Third Quarter 2019 Results

November 4, 2019 4:10 PM

OLD GREENWICH, Conn.--(BUSINESS WIRE)-- Ellington Residential Mortgage REIT (NYSE: EARN) (the "Company") today reported financial results for the quarter ended September 30, 2019.

Highlights

Third Quarter 2019 Results

"Our disciplined hedging strategy and portfolio of high-quality specified pools helped Ellington Residential deliver strong earnings for the quarter, despite wide swings in long-term interest rates, increasing prepayment rates, and an inverted yield curve," said Laurence Penn, Chief Executive Officer and President.

"For the quarter, our net income exceeded our dividend, opportunistic share repurchases helped boost book value, and altogether our economic return for the quarter was a solid 2.4%, or 10.0% annualized. While adjusted core earnings declined quarter over quarter, we believe that the prospects to expand our net interest margin and grow core earnings are improving, as we benefit from lower repo borrowing rates and wider yield spreads on new investments following the spread widening we saw in August.

"If the prepayment wave continues to intensify from here, we would expect to see further divergence of performance between different subsectors of the Agency RMBS market, and we would expect to capitalize on the opportunities created by that divergence. We believe that the current market environment highly favors our core strengths of prepayment modeling, asset selection and dynamic interest rate hedging, while also creating meaningful short-term trading opportunities. We also believe that our smaller size is an advantage in this market environment, as it enables us to be nimble and react quickly to reposition our portfolio in response to market distress."

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, 2019 the market value of the Company's mortgage-backed securities and its net short TBA position was $1.395 billion and $(202.0) million, respectively, and total shareholders' equity was $154.6 million.

Financial Results

The following table summarizes the Company's portfolio of RMBS as of September 30, 2019 and June 30, 2019:

September 30, 2019

June 30, 2019

(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

$

153,142

$

160,012

$

104.49

$

155,913

$

101.81

$

159,586

$

165,605

$

103.77

$

162,516

$

101.84

20-year fixed-rate mortgages

17,251

18,348

106.36

17,993

104.30

29,891

31,402

105.06

30,972

103.62

30-year fixed-rate mortgages

996,703

1,058,919

106.24

1,044,699

104.82

1,049,509

1,106,247

105.41

1,098,108

104.63

ARMs

36,681

38,112

103.90

37,874

103.25

39,196

40,422

103.13

40,652

103.71

Reverse mortgages

89,444

98,436

110.05

96,524

107.92

86,722

94,690

109.19

93,831

108.20

Total Agency RMBS

1,293,221

1,373,827

106.23

1,353,003

104.62

1,364,904

1,438,366

105.38

1,426,079

104.48

Non-Agency RMBS

11,128

9,176

82.46

7,044

63.30

11,491

9,285

80.80

7,231

62.93

Total RMBS(2)

1,304,349

1,383,003

106.03

1,360,047

104.27

1,376,395

1,447,651

105.18

1,433,310

104.14

Agency IOs

n/a

11,565

n/a

12,144

n/a

n/a

11,801

n/a

12,244

n/a

Total mortgage-backed securities

$

1,394,568

$

1,372,191

$

1,459,452

$

1,445,554

(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 4.4% to $1.395 billion as of September 30, 2019, as compared to $1.459 billion as of June 30, 2019. The Company's Agency RMBS portfolio turnover was 15% for the both the current and prior quarter.

Despite large fluctuations in long-term interest rates, increasing prepayment rates, and an inverted yield curve, the Company benefited from strong performance in its Agency RMBS portfolio during the quarter. Pay-ups on the Company's specified pools increased for the fourth consecutive quarter, and along with declining interest rates, helped generate net realized and unrealized gains on its portfolio. Pay-ups are price premiums for specified pools relative to their TBA counterparts. Similar to previous quarters, the decline in mortgage rates and associated increase in actual and projected prepayments drove the expansion of pay-ups. Average pay-ups on the Company's specified pools increased to 1.86% as of September 30, 2019, as compared to 1.56% as of June 30, 2019, 0.99% as of March 31, 2019, 0.58% as of December 31, 2018, and 0.56% as of September 30, 2018.

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 decline in medium-term and long-term interest rates during the quarter generated net realized and unrealized losses on the Company's interest rate hedges.

The Company's non-Agency RMBS performed well during the quarter, driven by strong net interest income and unrealized gains. Fundamentals underlying non-Agency RMBS 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.

Core Earnings and Adjusted Core Earnings were lower quarter over quarter, primarily as a result of lower asset yields.

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 periodic settlements 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-current 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 the Company 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. In addition, the Company believes that presenting Core Earnings and Adjusted Core Earnings enables its investors to measure, evaluate and compare its operating performance to that of its peer companies. 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, 2019 and June 30, 2019, 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, 2019

Three-Month
Period Ended
June 30, 2019(1)

Net Income (Loss)

$

3,729

$

(107

)

Adjustments:

Net realized (gains) losses on securities

(1,564

)

(1,418

)

Change in net unrealized (gains) losses on securities

(9,058

)

(14,511

)

Net realized (gains) losses on financial derivatives

1,862

8,771

Change in net unrealized (gains) losses on financial derivatives

5,351

8,442

Net realized gains (losses) on periodic settlements of interest rate swaps

2,347

(383

)

Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps

(1,815

)

1,045

Subtotal

(2,877

)

1,946

Core Earnings

$

852

$

1,839

Less: Catch-up Premium Amortization Adjustment

(1,564

)

(904

)

Adjusted Core Earnings

$

2,416

$

2,743

Weighted Average Shares Outstanding

12,459,478

12,467,103

Core Earnings Per Share

$

0.07

$

0.15

Adjusted Core Earnings Per Share

$

0.19

$

0.22

(1)

Conformed to current period presentation.

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 5, 2019, to discuss its financial results for the quarter ended September 30, 2019. 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 8082416. 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 5, 2019, at approximately 2:00 p.m. Eastern Time through Tuesday, November 19, 2019 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 585-8367 and enter the conference ID number 8082416. 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, 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, 2018 filed on March 8, 2019 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,
2019

June 30,
2019

September 30,
2019

(In thousands except share amounts)

INTEREST INCOME (EXPENSE)

Interest income

$

10,485

$

12,139

$

35,237

Interest expense

(8,820

)

(9,662

)

(28,038

)

Total net interest income

1,665

2,477

7,199

EXPENSES

Management fees to affiliate

582

582

1,759

Professional fees

216

207

652

Compensation expense

132

112

394

Insurance expense

74

74

221

Other operating expenses

341

325

987

Total expenses

1,345

1,300

4,013

OTHER INCOME (LOSS)

Net realized gains (losses) on securities

1,564

1,418

1,308

Net realized gains (losses) on financial derivatives

(1,862

)

(8,771

)

(22,723

)

Change in net unrealized gains (losses) on securities

9,058

14,511

45,540

Change in net unrealized gains (losses) on financial derivatives

(5,351

)

(8,442

)

(14,761

)

Total other income (loss)

3,409

(1,284

)

9,364

NET INCOME (LOSS)

$

3,729

$

(107

)

$

12,550

NET INCOME (LOSS) PER COMMON SHARE:

Basic and Diluted

$

0.30

$

(0.01

)

$

1.01

WEIGHTED AVERAGE SHARES OUTSTANDING

12,459,478

12,467,103

12,464,800

CASH DIVIDENDS PER SHARE:

Dividends declared

$

0.28

$

0.28

$

0.90

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

As of

September 30,
2019

June 30,
2019

December 31,
2018(1)

(In thousands except share amounts)

ASSETS

Cash and cash equivalents

$

50,188

$

41,473

$

18,585

Mortgage-backed securities, at fair value

1,394,568

1,459,452

1,540,296

Due from brokers

56,734

41,838

24,051

Financial derivatives–assets, at fair value

475

1,831

11,839

Reverse repurchase agreements

43,008

40,097

379

Receivable for securities sold

123,594

106,376

74,197

Interest receivable

5,127

5,204

5,607

Other assets

708

771

612

Total Assets

$

1,674,402

$

1,697,042

$

1,675,566

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Repurchase agreements

$

1,337,984

$

1,442,043

$

1,481,561

Payable for securities purchased

114,684

39,528

11,275

Due to brokers

294

751

1,325

Financial derivatives–liabilities, at fair value

19,886

15,891

16,559

U.S. Treasury securities sold short, at fair value

37,835

34,522

374

Dividend payable

3,485

3,491

4,252

Accrued expenses

681

664

838

Management fee payable to affiliate

582

582

579

Interest payable

4,400

4,965

4,981

Total Liabilities

1,519,831

1,542,437

1,521,744

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; (12,448,421, 12,467,103, and 12,507,213 shares issued
and outstanding, respectively)

124

125

125

Additional paid-in-capital

230,303

230,580

230,888

Accumulated deficit

(75,856

)

(76,100

)

(77,191

)

Total Shareholders' Equity

154,571

154,605

153,822

Total Liabilities and Shareholders' Equity

$

1,674,402

$

1,697,042

$

1,675,566

PER SHARE INFORMATION

Common shares, par value $0.01 per share

$

12.42

$

12.40

$

12.30

(1)

Derived from audited financial statements as of December 31, 2018.

Investors:

Ellington Residential Mortgage REIT

Investor Relations

(203) 409-3773

[email protected]

or

Media:

Amanda Klein or Kevin FitzGerald

Gasthalter & Co.

for Ellington Residential Mortgage REIT

(212) 257-4170

[email protected]

Source: Ellington Residential Mortgage REIT

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