Ellington Residential Mortgage REIT Reports First Quarter 2022 Results
Ellington Residential Mortgage REIT (NYSE: EARN) reported a net loss of $(17.5) million or $(1.33) per share for Q1 2022, despite core earnings of $3.9 million, equating to $0.30 per share. The company’s book value stood at $10.14 per share and a dividend yield of 10.9% was noted. The first quarter faced significant volatility from rising interest rates and geopolitical issues, leading to substantial mark-to-market losses. Adjustments made for dividend yield aim at a 10% yield on book value. The company maintains a debt-to-equity ratio of 9.1:1 and cash liquidity of $29.9 million.
- Core earnings increased to $3.9 million ($0.30 per share) from $3.7 million ($0.28 per share) in the previous quarter.
- The company maintains a high dividend yield of 10.9% based on recent stock prices.
- Cash and cash equivalents, along with other liquidity, totaled $29.9 million, indicating a strong liquidity position.
- Reported a net loss of $(17.5) million, significantly impacting shareholder value.
- Marked a decline in Agency RMBS holdings by 17% to $1.068 billion compared to the previous quarter.
- Debt-to-equity ratio rose to 9.1:1, indicating increased leverage and potential risk for shareholders.
Highlights
-
Net loss of
$(17.5) million $(1.33)
-
Core Earnings1 of
$3.9 million $0.30
-
Book value of
$10.14 March 31, 2022 , which includes the effects of dividends of$0.30
-
Net interest margin2 of
1.76% .
-
Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of
17.0% 3.
-
Dividend yield of
10.9% based on theApril 29, 2022 closing stock price of$8.78
-
Debt-to-equity ratio of 9.1:1 as of
March 31, 2022 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 8.3:1.
-
Net mortgage assets-to-equity ratio of 6.9:14 as of
March 31, 2022 .
-
Cash, cash equivalents, and other liquidity5 of
$29.9 million March 31, 2022 , in addition to other unencumbered assets of$11.3 million
First Quarter 2022 Results
"The first quarter was characterized by heightened volatility not seen since the COVID liquidity crisis, as the market reacted to revised expectations for the
"For EARN, the violent surge in interest rates and widening Agency yield spreads generated significant net mark-to-market losses that exceeded the net gains on our interest rate hedges and net carry from the portfolio. While our net loss was significant on a mark-to-market basis, our disciplined and dynamic hedging strategy, which included aggressive duration rebalancing throughout the quarter and positive contribution from our meaningful short TBA position, helped prevent further losses and helped limit our book value decline. With our recent dividend announcement, we adjusted our annualized dividend back to an approximately
"Moving forward, we believe that our earnings power is strong given the significant repricing of Agency RMBS, marked by significantly wider yield spreads and inexpensive call protection. In addition, Agency RMBS supply is expected to decline significantly in the face of sharply higher mortgage rates. Nevertheless, significant uncertainty remains as to the ultimate path of
| ___________________________ | ||
| 1 | Core Earnings is a non-GAAP financial measure. See "Reconciliation of Core Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Core Earnings. |
|
| 2 | Net interest margin excludes the effect of the Catch-up Premium Amortization Adjustment. |
|
| 3 | Excludes recent purchases of fixed rate Agency specified pools with no prepayment history. |
|
| 4 |
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 |
|
| 5 |
Other liquidity represents |
|
Financial Results
The following table summarizes the Company's portfolio of RMBS as of
|
|
|
|
|||||||||||||||||||||||||||
(In thousands) |
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
|
Current
|
|
Fair Value |
|
Average
|
|
Cost |
|
Average
|
|||||||||||
Agency RMBS(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
15-year fixed-rate mortgages |
$ |
102,119 |
|
$ |
102,089 |
|
$ |
99.97 |
|
$ |
105,707 |
|
$ |
103.51 |
|
$ |
125,033 |
|
$ |
130,710 |
|
$ |
104.54 |
|
$ |
130,099 |
|
$ |
104.05 |
|
20-year fixed-rate mortgages |
|
34,244 |
|
|
32,539 |
|
|
95.02 |
|
|
35,665 |
|
|
104.15 |
|
|
35,732 |
|
|
36,347 |
|
|
101.72 |
|
|
37,211 |
|
|
104.14 |
|
30-year fixed-rate mortgages |
|
890,736 |
|
|
888,007 |
|
|
99.69 |
|
|
925,998 |
|
|
103.96 |
|
|
1,027,843 |
|
|
1,072,904 |
|
|
104.38 |
|
|
1,066,347 |
|
|
103.75 |
|
ARMs |
|
10,307 |
|
|
10,579 |
|
|
102.64 |
|
|
10,856 |
|
|
105.33 |
|
|
11,491 |
|
|
11,960 |
|
|
104.08 |
|
|
12,034 |
|
|
104.73 |
|
Reverse mortgages |
|
33,238 |
|
|
34,437 |
|
|
103.61 |
|
|
35,500 |
|
|
106.81 |
|
|
35,313 |
|
|
37,297 |
|
|
105.62 |
|
|
37,652 |
|
|
106.62 |
|
Total Agency RMBS |
|
1,070,644 |
|
|
1,067,651 |
|
|
99.72 |
|
|
1,113,726 |
|
|
104.02 |
|
|
1,235,412 |
|
|
1,289,218 |
|
|
104.36 |
|
|
1,283,343 |
|
|
103.88 |
|
Non-Agency RMBS(2) |
|
10,654 |
|
|
8,650 |
|
|
81.19 |
|
|
7,307 |
|
|
68.58 |
|
|
10,672 |
|
|
9,056 |
|
|
84.86 |
|
|
7,234 |
|
|
67.78 |
|
Total RMBS(2) |
|
1,081,298 |
|
|
1,076,301 |
|
|
99.54 |
|
|
1,121,033 |
|
|
103.67 |
|
|
1,246,084 |
|
|
1,298,274 |
|
|
104.19 |
|
|
1,290,577 |
|
|
103.57 |
|
Agency IOs |
|
n/a |
|
|
9,694 |
|
|
n/a |
|
|
11,804 |
|
|
n/a |
|
|
n/a |
|
|
10,289 |
|
|
n/a |
|
|
12,983 |
|
|
n/a |
|
Non-Agency IOs |
|
n/a |
|
|
8,188 |
|
|
n/a |
|
|
6,722 |
|
|
n/a |
|
|
n/a |
|
|
2,798 |
|
|
n/a |
|
|
2,684 |
|
|
n/a |
|
Total mortgage-backed securities |
|
|
$ |
1,094,183 |
|
|
|
$ |
1,139,559 |
|
|
|
|
|
$ |
1,311,361 |
|
|
|
$ |
1,306,244 |
|
|
|||||||
| (1) |
Represents the dollar amount (not shown in thousands) per |
|
| (2) | Excludes IOs. |
The Company's Agency RMBS holdings, measured on a trade-date basis per GAAP, decreased by
The Company’s net mortgage assets-to-equity ratio, which is measured on a trade-date basis, decreased to 6.9:1 from 7.1:1. The decrease was due to lower Agency RMBS holdings, partially offset by a smaller net short TBA position, on a fair value basis, and lower shareholders’ equity.
The Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 8.3:1 as of
During the first quarter, volatility increased, interest rates rose sharply, and the yield curve flattened significantly, as the market reacted to revised expectations for the
Agency RMBS experienced significant duration extension with interest rates materially higher, while the volatility drove significant widening in yield spreads. Agency RMBS prices declined sharply during the quarter, and Agency RMBS significantly underperformed
Since the Company's specified pools are relatively seasoned overall, they offer both prepayment protection and extension protection relative to their TBA counterparts, which are now beginning to include newer issue, more prepayment-sensitive pools. While the surge in mortgage rates during the quarter caused the value of prepayment protection to fall substantially, it also enhanced the value of extension protection. After taking into account these partially offsetting factors, pay-ups for the Company’s existing specified pool portfolio declined over the course of the quarter. However, the Company net sold pools during the quarter, and these net sales generally consisted of pools with much lower payups. Overall, average pay-ups for the Company's specified pool portfolio declined only slightly quarter-over-quarter, to
During the quarter, the Company continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs,
The Company's non-Agency RMBS portfolio, including non-Agency interest-only securities, generated positive results during the quarter, driven by net interest income and net unrealized gains. The Company expects to vary its allocation to non-Agency RMBS and IOs as market opportunities change over time.
Core Earnings increased in the first quarter of 2022 due to higher average settlement date holdings. The Company’s net interest margin decreased slightly as a higher cost of funds was partially offset by higher 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 excluding, if applicable, any non-recurring items of income or loss. Core Earnings also excludes 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 includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.
Core Earnings is a supplemental non-GAAP financial measure. The Company believes that Core Earnings provides information useful to investors because it is a metric 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 is used to help measure the extent to which this objective is being achieved. In addition, the Company believes that presenting Core Earnings enables its investors to measure, evaluate and compare its operating performance to that of its peer companies. However, because Core Earnings is an incomplete measure of the Company's financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP.
The following table reconciles, for the three-month periods ended
|
|
Three-Month Period Ended |
||||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
Net Income (Loss) |
|
$ |
(17,467 |
) |
|
$ |
(2,759 |
) |
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
|
14,170 |
|
|
|
1,540 |
|
Change in net unrealized (gains) losses on securities |
|
|
50,515 |
|
|
|
10,428 |
|
Net realized (gains) losses on financial derivatives |
|
|
(15,353 |
) |
|
|
(3,444 |
) |
Change in net unrealized (gains) losses on financial derivatives |
|
|
(27,754 |
) |
|
|
(1,315 |
) |
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
|
(616 |
) |
|
|
(424 |
) |
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
|
(43 |
) |
|
|
(181 |
) |
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
|
488 |
|
|
|
(169 |
) |
Subtotal |
|
|
21,407 |
|
|
|
6,435 |
|
Core Earnings |
|
$ |
3,940 |
|
|
$ |
3,676 |
|
Weighted Average Shares Outstanding |
|
|
13,109,926 |
|
|
|
13,027,717 |
|
Core Earnings Per Share |
|
$ |
0.30 |
|
|
$ |
0.28 |
|
About
Conference Call
The Company will host a conference call at
A dial-in replay of the conference call will be available on
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, including changes resulting from the economic effects related to the COVID-19 pandemic, and associated responses to the pandemic. 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
|
||||||||
CONSOLIDATED STATEMENT OF OPERATIONS |
||||||||
(UNAUDITED) |
||||||||
|
|
Three-Month Period Ended |
||||||
|
|
|
|
|
||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
||||
Interest income |
|
$ |
6,535 |
|
|
$ |
6,491 |
|
Interest expense |
|
|
(1,103 |
) |
|
|
(729 |
) |
Total net interest income |
|
|
5,432 |
|
|
|
5,762 |
|
EXPENSES |
|
|
|
|
||||
Management fees to affiliate |
|
|
500 |
|
|
|
581 |
|
Professional fees |
|
|
206 |
|
|
|
169 |
|
Compensation expense |
|
|
162 |
|
|
|
129 |
|
Insurance expense |
|
|
98 |
|
|
|
97 |
|
Other operating expenses |
|
|
355 |
|
|
|
336 |
|
Total expenses |
|
|
1,321 |
|
|
|
1,312 |
|
OTHER INCOME (LOSS) |
|
|
|
|
||||
Net realized gains (losses) on securities |
|
|
(14,170 |
) |
|
|
(1,540 |
) |
Net realized gains (losses) on financial derivatives |
|
|
15,353 |
|
|
|
3,444 |
|
Change in net unrealized gains (losses) on securities |
|
|
(50,515 |
) |
|
|
(10,428 |
) |
Change in net unrealized gains (losses) on financial derivatives |
|
|
27,754 |
|
|
|
1,315 |
|
Total other income (loss) |
|
|
(21,578 |
) |
|
|
(7,209 |
) |
NET INCOME (LOSS) |
|
$ |
(17,467 |
) |
|
$ |
(2,759 |
) |
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
||||
Basic and Diluted |
|
$ |
(1.33 |
) |
|
$ |
(0.21 |
) |
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
|
13,109,926 |
|
|
|
13,027,717 |
|
CASH DIVIDENDS PER SHARE: |
|
|
|
|
||||
Dividends declared |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
||||||||
CONSOLIDATED BALANCE SHEET |
||||||||
(UNAUDITED) |
||||||||
|
|
As of |
||||||
|
|
|
|
|
||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
||||
ASSETS |
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
16,206 |
|
|
$ |
69,028 |
|
Mortgage-backed securities, at fair value |
|
|
1,094,183 |
|
|
|
1,311,361 |
|
Other investments, at fair value |
|
|
21,277 |
|
|
|
309 |
|
Due from brokers |
|
|
88,441 |
|
|
|
88,662 |
|
Financial derivatives–assets, at fair value |
|
|
36,566 |
|
|
|
6,638 |
|
Reverse repurchase agreements |
|
|
27,348 |
|
|
|
117,505 |
|
Receivable for securities sold |
|
|
218,812 |
|
|
|
— |
|
Interest receivable |
|
|
3,530 |
|
|
|
4,504 |
|
Other assets |
|
|
782 |
|
|
|
459 |
|
Total Assets |
|
$ |
1,507,145 |
|
|
$ |
1,598,466 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
||||
LIABILITIES |
|
|
|
|
||||
Repurchase agreements |
|
$ |
1,211,163 |
|
|
$ |
1,064,835 |
|
Payable for securities purchased |
|
|
119,792 |
|
|
|
255,136 |
|
Due to brokers |
|
|
23,052 |
|
|
|
1,959 |
|
Financial derivatives–liabilities, at fair value |
|
|
3,277 |
|
|
|
1,103 |
|
|
|
|
13,461 |
|
|
|
117,195 |
|
Dividend payable |
|
|
1,311 |
|
|
|
1,311 |
|
Accrued expenses |
|
|
976 |
|
|
|
1,236 |
|
Management fee payable to affiliate |
|
|
500 |
|
|
|
581 |
|
Interest payable |
|
|
712 |
|
|
|
885 |
|
Total Liabilities |
|
|
1,374,244 |
|
|
|
1,444,241 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
||||
Preferred shares, par value |
|
|
— |
|
|
|
— |
|
Common shares, par value |
|
|
131 |
|
|
|
131 |
|
Additional paid-in-capital |
|
|
238,941 |
|
|
|
238,865 |
|
Accumulated deficit |
|
|
(106,171 |
) |
|
|
(84,771 |
) |
Total Shareholders' Equity |
|
|
132,901 |
|
|
|
154,225 |
|
Total Liabilities and Shareholders' Equity |
|
$ |
1,507,145 |
|
|
$ |
1,598,466 |
|
SUPPLEMENTAL PER SHARE INFORMATION |
|
|
|
|
||||
Book Value Per Share |
|
$ |
10.14 |
|
|
$ |
11.76 |
|
| (1) |
Derived from audited financial statements as of |
View source version on businesswire.com: https://www.businesswire.com/news/home/20220502005653/en/
Investors:
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
for
(212) 257-4170
Ellington@gasthalter.com
Source:
FAQ
What were Ellington Residential Mortgage REIT's (EARN) core earnings for Q1 2022?
What was the net loss reported by EARN for the first quarter of 2022?
How much was the book value of EARN shares as of March 31, 2022?
What is the dividend yield for EARN based on the April 2022 closing stock price?
What is the debt-to-equity ratio for EARN as of March 31, 2022?
