Ellington Residential Mortgage REIT (NYSE: EARN) reported Q2 EPS of $0.26, $0.01 better than the analyst estimate of $0.25.

Highlights

• Net income of $21.3 million, or $1.73 per share; year-to-date net income of $4.6 million, or $0.37 per share.
• Core Earnings1 of $3.2 million, or $0.26 per share.
• Book value of $12.80 per share as of June 30, 2020, which includes the effect of a second quarter dividend of $0.28 per share. Economic return of 15.3% for the quarter, and year-to-date economic return of 3.5%.
• Net interest margin2 of 1.86%.
• Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 18.0%.
• Dividend yield of 10.1% based on the August 3, 2020 closing stock price of $11.09.
• Debt-to-equity ratio of 5.8:1 as of June 30, 2020; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 6.8:1.
• Net mortgage assets-to-equity ratio of 5.9:13 as of June 30, 2020.
• Cash and cash equivalents of $50.9 million as of June 30, 2020, in addition to other unencumbered assets of $45.1 million.

Second Quarter 2020 Results

"During the second quarter, Ellington Residential generated net income of $1.73 per share and a quarterly economic return of 15.3%, as book value increased by nearly 13% sequentially," said Laurence Penn, Chief Executive Officer and President. "Notably, our total economic return was positive 3.5% for the first half of the year, despite the extreme market events of the first quarter. This was of course only possible because of our adherence to our risk and liquidity management principles, including the careful steps we had taken in the first quarter to enhance our liquidity and avoid forced asset sales.

"Coming into the second quarter, pay-ups on specified pools were extremely depressed, and represented compelling value in our view. Indeed, our specified pools performed exceptionally well during the second quarter, as investors sought prepayment protection amidst record-low mortgage rates and a spike in CPRs. In addition, we saw a highly attractive entry point in non-Agency RMBS, and grew those holdings substantially at heavily discounted prices; this decision also paid off handsomely, as prices recovered sharply as the quarter progressed. Finally, our results benefited from the strong performance of reverse mortgage pools, which have rebounded significantly from the distress in March, and which we believe will attract even greater investor demand in this low interest rate environment.

"I am extremely pleased with our performance so far in 2020. Throughout the severe market distress of March and early April, our risk and liquidity management protected book value and preserved liquidity, putting us in excellent position to play offense in the second quarter. We took advantage of some very attractive investment opportunities, in both Agency and non-Agency RMBS, and as a result, we benefited from the rebound in the second quarter, more than earning back the first quarter loss. Our strong performance also enabled us to maintain our dividend, despite historically low interest rates and high volatility.

"Looking forward, we believe that our smaller size will continue to be an advantage, as it enables us to be nimble and react quickly to reposition our portfolio in response to changing market conditions. With mortgage rates near all-time lows and prepayment rates again on the rise, we see a market environment that we believe will continue to play to our strengths, where pool selection, hedging choices, and risk management will continue to drive performance. And as always, our disciplined interest rate hedging and active portfolio management should continue to be critical in both protecting book value and enabling us to benefit from upside, in these uncertain times."

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