Ellington Residential Mortgage REIT (NYSE: EARN) reported Q1 EPS of $0.31, $0.02 worse than the analyst estimate of $0.33. Revenue for the quarter came in at $5.75 million versus the consensus estimate of $5.49 million.

Highlights

• Net income of $0.1 million, or $0.01 per share.
• Core Earnings1 of $3.8 million, or $0.31 per share.
• Book value of $13.22 per share as of March 31, 2021, which includes the effect of a first quarter dividend of $0.28 per share. Economic return of 0.1% for the quarter.
• Net interest margin2 of 1.96%.
• Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 23.6%.
• Dividend yield of 9% based on the April 30, 2021 closing stock price of $12.44.
• Debt-to-equity ratio of 6.8:1 as of March 31, 2021; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 7.0:1.
• Net mortgage assets-to-equity ratio of 6.2:1 3as of March 31, 2021.
• Cash and cash equivalents of $52.5 million as of March 31, 2021, in addition to other unencumbered assets of $48.2 million.

First Quarter 2021 Results

"Despite rising long-term interest rates, a steepening yield curve, and increased interest rate volatility during the first quarter, EARN's book value was stable, and Core Earnings remained strong. Although most Agency RMBS prices declined during the quarter, performance across subsectors diverged sharply. The increase in interest rates led to reduced expectations for prepayment rates, which boosted performance of higher-coupon RMBS, put downward pressure on pay-ups for prepayment-protected specified pools, and caused significant price declines for lower coupon RMBS in the face of heightened extension risk," said Laurence Penn, Chief Executive Officer and President.

"Gains on our interest rate hedges and interest-only securities, together with net interest income, more than offset net realized and unrealized losses in the portfolio. Given the opportunities presented by wider yield spreads during the quarter, we used our strong balance sheet to add some attractively priced pools, which increased our leverage incrementally.

"Looking forward, while prepayment speeds remain elevated, we are seeing signs that the prepayment wave may be abating. In this environment, it's critical to be mindful of both the prepayment risks and the extension risks that are present in the market. We believe that such a rapidly shifting market plays to our strengths, where asset selection and risk management will continue to drive performance. Finally, we will continue to deploy a dynamic and adaptive hedging strategy to protect book value."

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