Ellington Residential Mortgage REIT Reports Second Quarter 2022 Results
Ellington Residential Mortgage REIT (NYSE: EARN) reported a net loss of $(10.7) million for Q2 2022, translating to $(0.82) per share. However, its adjusted distributable earnings were $3.7 million, or $0.28 per share, covering the quarterly dividend of $0.08 per share. Despite market challenges, the company maintained a net interest margin of 1.66% and a book value of $9.07 per share. The debt-to-equity ratio stood at 8.0:1. Following a quarter of significant declines in Agency RMBS prices, the CEO emphasized the potential for Agency RMBS amidst rising yields and low prepayment risks.
- Adjusted Distributable Earnings of $3.7 million covered the $0.08 quarterly dividend.
- Book value per share improved to $9.07.
- Net interest margin was stable at 1.66% despite higher financing costs.
- Agency RMBS are considered to offer excellent value due to high yield spreads.
- Net loss of $(10.7) million, or $(0.82) per share.
- Significant declines in Agency RMBS prices, particularly in lower coupon securities.
- Increased interest rate volatility negatively impacted performance.
- Adjusted Distributable Earnings declined from $3.94 million in the previous quarter.
Highlights
-
Net loss of
$(10.7) million $(0.82)
-
Adjusted Distributable Earnings1 of
$3.7 million $0.28
-
Book value of
$9.07 June 30, 2022 , which includes the effects of dividends of$0.26
-
Net interest margin2 of
1.66% .
-
Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of
13.9% 3.
-
Dividend yield of
11% based on theAugust 9, 2022 closing stock price of$8.73 $0.08 August 4, 2022 .
-
Debt-to-equity ratio of 8.0:1 as of
June 30, 2022 ; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 7.9:1.
-
Net mortgage assets-to-equity ratio of 6.8:14 as of
June 30, 2022 .
-
Cash and cash equivalents of
$37.5 million June 30, 2022 , in addition to other unencumbered assets of$3.4 million
-
Repurchased 30,532 shares during the quarter at an average price of
$6.57
Second Quarter 2022 Results
“The challenges of the previous quarter intensified during the second quarter. The
“Prices on Agency RMBS declined significantly, with the largest declines in lower coupon RMBS, which face heightened extension risk. For Ellington Residential, net losses on our specified pools, concentrated in low coupons, exceeded net gains on our interest rate hedges and net carry from the portfolio, which resulted in a significant overall net loss for the quarter. As with the preceding quarter, our interest rate hedging strategy, which included aggressive duration rebalancing throughout the quarter and a positive contribution from our short TBA positions, helped prevent further losses and limit our book value decline.
“On the positive side, wider yield spreads, while a drag on book value, have been a tailwind for Adjusted Distributable Earnings.1 Our ADE covered our dividend for the quarter, as our net interest margin held up relatively well despite a rising cost of funds. While we expect to experience some near-term net interest margin compression as we deal with higher financing costs, we forecast that once we complete the portfolio rotation into the higher reinvestment yields available today, our ADE will again comfortably cover our dividend.
“Ellington Residential had a strong July, as interest rate volatility subsided somewhat and Agency yield spreads retraced a portion of their second quarter widening. Looking forward, we believe that with yield spreads high and prepayment risk low by historical standards, Agency RMBS continue to offer excellent value."
_____________________________
1 Adjusted Distributable Earnings (previously referred to as Core Earnings) is a non-GAAP financial measure. See "Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)" below for an explanation regarding the renaming and calculation of Adjusted Distributable 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
Financial Results
The following table summarizes the Company's portfolio of RMBS as of
|
|
|
|
||||||||||||||||||||||||||
(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 |
$ |
104,064 |
|
$ |
100,513 |
|
$ |
96.59 |
|
$ |
106,445 |
|
$ |
102.29 |
|
$ |
102,119 |
|
$ |
102,089 |
|
$ |
99.97 |
|
$ |
105,707 |
|
$ |
103.51 |
20-year fixed-rate mortgages |
|
33,430 |
|
|
30,409 |
|
|
90.96 |
|
|
34,840 |
|
|
104.22 |
|
|
34,244 |
|
|
32,539 |
|
|
95.02 |
|
|
35,665 |
|
|
104.15 |
30-year fixed-rate mortgages |
|
795,468 |
|
|
762,304 |
|
|
95.83 |
|
|
824,015 |
|
|
103.59 |
|
|
890,736 |
|
|
888,007 |
|
|
99.69 |
|
|
925,998 |
|
|
103.96 |
ARMs |
|
9,266 |
|
|
9,416 |
|
|
101.62 |
|
|
9,964 |
|
|
107.53 |
|
|
10,307 |
|
|
10,579 |
|
|
102.64 |
|
|
10,856 |
|
|
105.33 |
Reverse mortgages |
|
18,781 |
|
|
19,381 |
|
|
103.19 |
|
|
20,665 |
|
|
110.03 |
|
|
33,238 |
|
|
34,437 |
|
|
103.61 |
|
|
35,500 |
|
|
106.81 |
Total Agency RMBS |
|
961,009 |
|
|
922,023 |
|
|
95.94 |
|
|
995,929 |
|
|
103.63 |
|
|
1,070,644 |
|
|
1,067,651 |
|
|
99.72 |
|
|
1,113,726 |
|
|
104.02 |
Non-Agency RMBS(2) |
|
10,622 |
|
|
7,969 |
|
|
75.02 |
|
|
7,369 |
|
|
69.37 |
|
|
10,654 |
|
|
8,650 |
|
|
81.19 |
|
|
7,307 |
|
|
68.58 |
Total RMBS(2) |
|
971,631 |
|
|
929,992 |
|
|
95.71 |
|
|
1,003,298 |
|
|
103.26 |
|
|
1,081,298 |
|
|
1,076,301 |
|
|
99.54 |
|
|
1,121,033 |
|
|
103.67 |
Agency IOs |
|
n/a |
|
|
9,450 |
|
|
n/a |
|
|
11,096 |
|
|
n/a |
|
|
n/a |
|
|
9,694 |
|
|
n/a |
|
|
11,804 |
|
|
n/a |
Non-Agency IOs |
|
n/a |
|
|
8,205 |
|
|
n/a |
|
|
6,570 |
|
|
n/a |
|
|
n/a |
|
|
8,188 |
|
|
n/a |
|
|
6,722 |
|
|
n/a |
Total mortgage-backed securities |
|
|
$ |
947,647 |
|
|
|
$ |
1,020,964 |
|
|
|
|
|
$ |
1,094,183 |
|
|
|
$ |
1,139,559 |
|
|
||||||
(1) Represents the dollar amount (not shown in thousands) per
(2) Excludes IOs.
The Company's Agency RMBS holdings decreased by approximately
The Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 7.9:1 as of
Agency RMBS continued to face headwinds in the second quarter, as the Federal Reserve’s aggressive response to persistently high inflation continued to roil markets. During the quarter, the
Agency RMBS durations extended in response to the higher interest rates, while the elevated volatility contributed to yield spread widening during the quarter. Agency RMBS prices declined sharply, with the largest declines on lower coupon RMBS, and Agency RMBS significantly underperformed
In the current higher interest rate environment, the specified pool market has become less focused on prepayment protection, and more focused on extension protection. Many of the Company's specified pools are considered to offer significant extension protection relative to their TBA counterparts. Thus despite the surge in mortgage rates, average pay-ups on the Company's specified pool portfolio actually increased quarter over quarter, as the increase in the value of the extension protection provided by this portfolio, relative to TBA counterparts, more than offset the reduction in the value of its prepayment protection. Additionally, the Company net sold pools during the quarter, and these net sales generally consisted of pools with much lower pay-ups. Pay-ups on the Company's specified pools increased modestly to
During the quarter, the Company continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs,
In the Company's non-Agency RMBS portfolio, wider yield spreads drove negative results for the quarter. The Company expects to vary its allocation to non-Agency RMBS as market opportunities change over time.
During the quarter, the Company's cost of funds increased significantly, driven by higher interest rates. The Company's asset yields also increased, though by a lesser amount, and as a result, the Company's net interest margin declined quarter over quarter. Driven by the lower net interest margin, as well as by a smaller Agency RMBS portfolio, Adjusted Distributable Earnings (formerly referred to as Core Earnings) also declined sequentially.
Finally, the Company repurchased 30,532 shares during the quarter at an average price of
Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)
Beginning with the financial results for the quarter ended
Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. The Company believes that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) the Company believes that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that the Company believes are less useful in forecasting long-term performance and dividend-paying ability; (ii) the Company uses it to evaluate the effective net yield provided by its portfolio, after the effects of financial leverage; and (iii), the Company believes that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating its operating performance, and comparing its operating performance to that of its residential mortgage REIT peers. Please note, however, that: (I) the Company's calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by its peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution.
In addition, because Adjusted Distributable Earnings is an incomplete measure of the Company's financial results and differs from net income (loss) computed in accordance with
Furthermore, Adjusted Distributable Earnings is different than REIT taxable income. As a result, the determination of whether the Company has met the requirement to distribute at least
In setting the Company’s dividends, the Company’s
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) |
|
$ |
(10,740 |
) |
|
$ |
(17,467 |
) |
Adjustments: |
|
|
|
|
||||
Net realized (gains) losses on securities |
|
|
15,464 |
|
|
|
14,170 |
|
Change in net unrealized (gains) losses on securities |
|
|
28,134 |
|
|
|
50,515 |
|
Net realized (gains) losses on financial derivatives |
|
|
(30,477 |
) |
|
|
(15,353 |
) |
Change in net unrealized (gains) losses on financial derivatives |
|
|
3,428 |
|
|
|
(27,754 |
) |
Net realized gains (losses) on periodic settlements of interest rate swaps |
|
|
(232 |
) |
|
|
(616 |
) |
Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps |
|
|
(328 |
) |
|
|
(43 |
) |
Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment |
|
|
(1,595 |
) |
|
|
488 |
|
Subtotal |
|
|
14,394 |
|
|
|
21,407 |
|
Adjusted Distributable Earnings |
|
$ |
3,654 |
|
|
$ |
3,940 |
|
Weighted Average Shares Outstanding |
|
|
13,106,585 |
|
|
|
13,109,926 |
|
Adjusted Distributable Earnings Per Share |
|
$ |
0.28 |
|
|
$ |
0.30 |
|
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 |
|
Six-Month Period Ended |
||||||||
|
|
|
|
|
|
|
||||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
|
|
||||||
INTEREST INCOME (EXPENSE) |
|
|
|
|
|
|
||||||
Interest income |
|
$ |
9,087 |
|
|
$ |
6,535 |
|
|
$ |
15,622 |
|
Interest expense |
|
|
(1,972 |
) |
|
|
(1,103 |
) |
|
|
(3,075 |
) |
Total net interest income |
|
|
7,115 |
|
|
|
5,432 |
|
|
|
12,547 |
|
EXPENSES |
|
|
|
|
|
|
||||||
Management fees to affiliate |
|
|
447 |
|
|
|
500 |
|
|
|
947 |
|
Professional fees |
|
|
211 |
|
|
|
206 |
|
|
|
417 |
|
Compensation expense |
|
|
191 |
|
|
|
162 |
|
|
|
353 |
|
Insurance expense |
|
|
101 |
|
|
|
98 |
|
|
|
200 |
|
Other operating expenses |
|
|
356 |
|
|
|
355 |
|
|
|
710 |
|
Total expenses |
|
|
1,306 |
|
|
|
1,321 |
|
|
|
2,627 |
|
OTHER INCOME (LOSS) |
|
|
|
|
|
|
||||||
Net realized gains (losses) on securities |
|
|
(15,464 |
) |
|
|
(14,170 |
) |
|
|
(29,634 |
) |
Net realized gains (losses) on financial derivatives |
|
|
30,477 |
|
|
|
15,353 |
|
|
|
45,830 |
|
Change in net unrealized gains (losses) on securities |
|
|
(28,134 |
) |
|
|
(50,515 |
) |
|
|
(78,649 |
) |
Change in net unrealized gains (losses) on financial derivatives |
|
|
(3,428 |
) |
|
|
27,754 |
|
|
|
24,326 |
|
Total other income (loss) |
|
|
(16,549 |
) |
|
|
(21,578 |
) |
|
|
(38,127 |
) |
NET INCOME (LOSS) |
|
$ |
(10,740 |
) |
|
$ |
(17,467 |
) |
|
$ |
(28,207 |
) |
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
||||||
Basic and Diluted |
|
$ |
(0.82 |
) |
|
$ |
(1.33 |
) |
|
$ |
(2.15 |
) |
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
|
13,106,585 |
|
|
|
13,109,926 |
|
|
|
13,108,246 |
|
CASH DIVIDENDS PER SHARE: |
|
|
|
|
|
|
||||||
Dividends declared |
|
$ |
0.26 |
|
|
$ |
0.30 |
|
|
$ |
0.56 |
|
CONSOLIDATED BALANCE SHEET (UNAUDITED)
|
||||||||||||
|
|
As of |
||||||||||
|
|
|
|
|
|
2021(1) |
||||||
(In thousands except share amounts and per share amounts) |
|
|
|
|
|
|
||||||
ASSETS |
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
37,472 |
|
|
$ |
16,206 |
|
|
$ |
69,028 |
|
Mortgage-backed securities, at fair value |
|
|
947,647 |
|
|
|
1,094,183 |
|
|
|
1,311,361 |
|
Other investments, at fair value |
|
|
7,648 |
|
|
|
21,277 |
|
|
|
309 |
|
Due from brokers |
|
|
45,643 |
|
|
|
88,441 |
|
|
|
88,662 |
|
Financial derivatives–assets, at fair value |
|
|
34,527 |
|
|
|
36,566 |
|
|
|
6,638 |
|
Reverse repurchase agreements |
|
|
11,005 |
|
|
|
27,348 |
|
|
|
117,505 |
|
Receivable for securities sold |
|
|
34,217 |
|
|
|
218,812 |
|
|
|
— |
|
Interest receivable |
|
|
3,009 |
|
|
|
3,530 |
|
|
|
4,504 |
|
Other assets |
|
|
650 |
|
|
|
782 |
|
|
|
459 |
|
Total Assets |
|
$ |
1,121,818 |
|
|
$ |
1,507,145 |
|
|
$ |
1,598,466 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
LIABILITIES |
|
|
|
|
|
|
||||||
Repurchase agreements |
|
$ |
950,339 |
|
|
$ |
1,211,163 |
|
|
$ |
1,064,835 |
|
Payable for securities purchased |
|
|
15,579 |
|
|
|
119,792 |
|
|
|
255,136 |
|
Due to brokers |
|
|
19,320 |
|
|
|
23,052 |
|
|
|
1,959 |
|
Financial derivatives–liabilities, at fair value |
|
|
2,938 |
|
|
|
3,277 |
|
|
|
1,103 |
|
|
|
|
10,989 |
|
|
|
13,461 |
|
|
|
117,195 |
|
Dividend payable |
|
|
1,046 |
|
|
|
1,311 |
|
|
|
1,311 |
|
Accrued expenses |
|
|
1,216 |
|
|
|
976 |
|
|
|
1,236 |
|
Management fee payable to affiliate |
|
|
447 |
|
|
|
500 |
|
|
|
581 |
|
Interest payable |
|
|
1,314 |
|
|
|
712 |
|
|
|
885 |
|
Total Liabilities |
|
|
1,003,188 |
|
|
|
1,374,244 |
|
|
|
1,444,241 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
||||||
Preferred shares, par value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common shares, par value |
|
|
131 |
|
|
|
131 |
|
|
|
131 |
|
Additional paid-in-capital |
|
|
238,816 |
|
|
|
238,941 |
|
|
|
238,865 |
|
Accumulated deficit |
|
|
(120,317 |
) |
|
|
(106,171 |
) |
|
|
(84,771 |
) |
Total Shareholders' Equity |
|
|
118,630 |
|
|
|
132,901 |
|
|
|
154,225 |
|
Total Liabilities and Shareholders' Equity |
|
$ |
1,121,818 |
|
|
$ |
1,507,145 |
|
|
$ |
1,598,466 |
|
SUPPLEMENTAL PER SHARE INFORMATION |
|
|
|
|
|
|
||||||
Book Value Per Share |
|
$ |
9.07 |
|
|
$ |
10.14 |
|
|
$ |
11.76 |
|
(1) Derived from audited financial statements as of
View source version on businesswire.com: https://www.businesswire.com/news/home/20220810005623/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 financial results for Q2 2022?
What is the book value per share for EARN as of June 30, 2022?
How much was the dividend declared by EARN in August 2022?
What is the debt-to-equity ratio for EARN as of June 30, 2022?
How did interest rate volatility affect EARN's performance in Q2 2022?
