EARN Ellington Credit Company

Ellington Residential Mortgage REIT (NYSE: EARN) ("we", "us," or "our") today reported financial results for the quarter ended September 30, 2023.

Highlights

• Net income (loss) of $(11.4) million, or $(0.75) per share.
• Adjusted Distributable Earnings1 of $3.2 million, or $0.21 per share.
• Book value of $7.02 per share as of September 30, 2023, which includes the effects of dividends of $0.24 per share for the quarter.
• Net interest margin2 of 1.24%.
• Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 7.33.
• Dividend yield of 17.1% based on the November 10, 2023 closing stock price of $5.61, and monthly dividend of $0.08 per common share declared on November 7, 2023.
• Debt-to-equity ratio of 7.3:1 as of September 30, 2023.
• Net mortgage assets-to-equity ratio of 7.1:14 as of September 30, 2023.
• Cash and cash equivalents of $40.0 million as of September 30, 2023, in addition to other unencumbered assets of $2.7 million.

Third Quarter 2023 Results

“The third quarter was again characterized by sharply rising interest rates and elevated volatility, which drove yield spreads wider in many fixed income markets, including Agency RMBS. Conditions worsened as the quarter progressed, with the market pricing in a ‘higher-for-longer’ interest rate environment and the uncertainty related to a possible government shutdown,” said Laurence Penn, Chief Executive Officer and President.

“Against this backdrop, Agency RMBS, particularly low coupon MBS, significantly underperformed comparable U.S. Treasuries and interest rate swaps during the quarter. Meanwhile, our delta-hedging costs, which are tied to interest rate volatility, remained high. As a result, Ellington Residential experienced a significant net loss for the quarter, with net declines on our specified pools exceeding net gains on our interest rate hedges.

“That said, a significant portion of our losses for the quarter resulted from yield spread widening that we believe is likely recoverable. We also increased our Adjusted Distributable Earnings quarter over quarter, driven by further progress on portfolio turnover to capture higher market yields, while our cost of funds remained relatively stable. We continued to hold a strong liquidity position, with cash and unencumbered assets representing 38% of our total equity at quarter end, and our leverage was roughly unchanged quarter over quarter.

“During the quarter, we began rotating a portion of our capital to the corporate CLO space, which we believe offers compelling investment opportunities, both near-term and long-term. Yield spreads on certain CLO mezzanine debt and equity tranches available in the secondary market are now back to levels we last saw in mid-2020. Additionally, credit fundamentals have remained relatively strong while corporate balance sheet net leverage has remained relatively low, and we believe that dispersion in CLO collateral performance going forward will create ample ongoing trading opportunities in the sector. EARN is well situated to capitalize on these opportunities, as Ellington has extensive CLO expertise and a strong track record investing in CLOs in the secondary market. We are off to a good start, as in the past six weeks EARN has acquired several CLO mezzanine debt and equity tranches where we project ROEs well in excess of 20%.

“Of course, with Agency yield spreads still very wide even after the recent rally, the Agency RMBS investment opportunity is also quite attractive right now. Furthermore, on a technical basis, late fall and winter seasonal effects should bring a drop in Agency RMBS supply, while the fourth quarter is typically a strong quarter for bank deposit growth and resulting security purchases. I believe that CLO mezzanine debt and equity pair very well with Agency RMBS as complementary strategies that will diversify and help drive EARN’s earnings growth going forward. The investment environment is rich with opportunities, and we are excited to deploy our dry powder.”

______________________________

1 Adjusted Distributable Earnings is a non-GAAP financial measure. See "Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Adjusted Distributable Earnings.

2 Net interest margin represents the weighted average asset yield less the weighted average secured financing cost of funds (including the effect of actual and accrued payments on interest rate swaps used to hedge such financings). Net interest margin excludes the effect of the Catch-up Amortization Adjustment.

3 Excludes recent purchases of fixed rate Agency specified pools with no prepayment history.

4 We define our net mortgage assets-to-equity ratio as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity. As of September 30, 2023 the market value of our mortgage-backed securities and our net short TBA position was $822.7 million and $(36.1) million, respectively, and total shareholders' equity was $111.5 million.

Financial Results

The following table summarizes our portfolio of RMBS as of September 30, 2023 and June 30, 2023:

 

September 30, 2023

 

June 30, 2023

($ 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

$

34,975

 

$

32,600

 

93.21

 

$

34,800

 

99.50

 

$

32,920

 

$

31,529

 

95.77

 

$

33,107

 

100.57

20-year fixed-rate mortgages

 

10,441

 

 

9,074

 

86.91

 

 

11,083

 

106.15

 

 

11,040

 

 

10,021

 

90.77

 

 

11,707

 

106.04

30-year fixed-rate mortgages

 

800,500

 

 

726,345

 

90.74

 

 

786,592

 

98.26

 

 

880,519

 

 

824,370

 

93.62

 

 

869,023

 

98.69

ARMs

 

7,207

 

 

7,154

 

99.26

 

 

7,983

 

110.77

 

 

7,282

 

 

7,223

 

99.19

 

 

8,076

 

110.90

Reverse mortgages

 

15,023

 

 

15,335

 

102.08

 

 

17,049

 

113.49

 

 

15,521

 

 

15,885

 

102.35

 

 

17,510

 

112.81

Total Agency RMBS

 

868,146

 

 

790,508

 

91.06

 

 

857,507

 

98.77

 

 

947,282

 

 

889,028

 

93.85

 

 

939,423

 

99.17

Non-Agency RMBS(2)

 

14,752

 

 

12,825

 

86.94

 

 

12,316

 

83.49

 

 

15,276

 

 

13,013

 

85.19

 

 

12,602

 

82.50

Total RMBS(2)

 

882,898

 

 

803,333

 

90.99

 

 

869,823

 

98.52

 

 

962,558

 

 

902,041

 

93.71

 

 

952,025

 

98.91

Agency IOs

 

n/a

 

 

7,845

 

n/a

 

 

6,967

 

n/a

 

 

n/a

 

 

7,256

 

n/a

 

 

6,913

 

n/a

Non-Agency IOs

 

n/a

 

 

11,540

 

n/a

 

 

8,884

 

n/a

 

 

n/a

 

 

11,417

 

n/a

 

 

9,065

 

n/a

Total mortgage-backed securities

 

 

$

822,718

 

 

 

$

885,674

 

 

 

 

 

$

920,714

 

 

 

$

968,003

 

 

(1)

Expressed as a percentage of current principal balance.

(2)

Excludes IOs.

The size of our Agency RMBS holdings decreased by 11% to $790.5 million as of September 30, 2023, compared to $889.0 million as of June 30, 2023. The decline was driven by paydowns, net sales, and net losses. Over the same period, our aggregate holdings of non-Agency RMBS and interest-only securities increased slightly, and we also added $3.8 million of corporate CLOs during the final week of the quarter. Our Agency RMBS portfolio turnover was 19% for the quarter.

Our debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 7.3:1 as of September 30, 2023, as compared to 7.6:1 as of June 30, 2023. The decline was primarily due to a decrease in borrowings on our smaller Agency RMBS portfolio, partially offset by lower shareholders' equity. Our net mortgage assets-to-equity ratio increased slightly to 7.1:1 from 7.0:1 over the same time period, as a smaller net short TBA position and the decline in shareholders' equity more than offset a smaller RMBS portfolio.

In the third quarter, Agency RMBS faced the significant headwinds of elevated market volatility and rising long-term interest rates. Yield spreads widened and Agency RMBS significantly underperformed U.S. Treasury securities and interest rate swaps for the quarter, with lower-coupon RMBS exhibiting the most pronounced underperformance.

Net losses on our Agency RMBS and negative net interest income exceeded net gains on our interest rate hedges, while our delta-hedging costs remained high as a result of the elevated interest rate volatility. As a result, we had a net loss overall for the quarter.

Average pay-ups on our specified pool portfolio increased modestly to 1.02% as of September 30, 2023, as compared to 0.98% as of June 30, 2023. During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We again ended the quarter with a net short TBA position.

Our non-Agency RMBS portfolio and interest-only securities generated positive results for the quarter, driven by net interest income and net gains. We intend to increase our allocation to non-Agency RMBS and/or corporate CLOs based on market opportunities.

Our net interest margin and Adjusted Distributable Earnings increased quarter over quarter, as continued portfolio turnover boosted our average asset yield. During the quarter, we again benefited from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.

About Ellington Residential Mortgage REIT

Ellington Residential Mortgage REIT is a real estate investment trust that specializes in acquiring, investing in, and managing residential mortgage-related, real estate-related, and other 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

We will host a conference call at 11:00 a.m. Eastern Time on Monday, November 13, 2023, to discuss its financial results for the quarter ended September 30, 2023. To participate in the event by telephone, please dial (800) 245-3047 at least 10 minutes prior to the start time and reference the conference ID: EARNQ323. International callers should dial (203) 518-9765 and reference the same conference ID. The conference call will also be webcast live over the Internet and can be accessed via the "For Our Shareholders" section of our 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, we also posted an investor presentation, that will accompany the conference call, on our website at www.earnreit.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Monday, November 13, 2023, at approximately 2:00 p.m. Eastern Time through Monday, November 20, 2023 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (888) 562-2817. International callers should dial (402) 220-7354. A replay of the conference call will also be archived on our 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 our 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 based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements or from our 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, our beliefs regarding the current economic and investment environment, our ability to implement its investment and hedging strategies, our future prospects and the protection of our net interest margin from prepayments, volatility and its impact on us, the performance of our investment and hedging strategies, our exposure to prepayment risk in our Agency portfolio, and statements regarding the drivers of our returns. The following factors are examples of those that could cause actual results to vary from those stated or implied by our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in mortgage default rates and prepayment rates, our ability to borrow to finance its assets, changes in government regulations affecting our business, our ability to maintain its exclusion from registration under the Investment Company Act of 1940, our ability to maintain our qualification as a real estate investment trust, or "REIT," and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, as stated above, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K, which can be accessed through the link to our SEC filings under "For Our Shareholders" on our website (at 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,

2023

 

June 30,

2023

 

September 30,

2023

(In thousands except share amounts and per share amounts)

 

 

 

 

 

 

INTEREST INCOME (EXPENSE)

 

 

 

 

 

 

Interest income

 

$

11,253

 

 

$

10,070

 

 

$

30,661

 

Interest expense

 

 

(12,349

)

 

 

(11,686

)

 

 

(33,745

)

Total net interest income (expense)

 

 

(1,096

)

 

 

(1,616

)

 

 

(3,084

)

EXPENSES

 

 

 

 

 

 

Management fees to affiliate

 

 

420

 

 

 

439

 

 

 

1,292

 

Professional fees

 

 

290

 

 

 

407

 

 

 

939

 

Compensation expense

 

 

177

 

 

 

187

 

 

 

545

 

Insurance expense

 

 

95

 

 

 

95

 

 

 

289

 

Other operating expenses

 

 

374

 

 

 

372

 

 

 

1,096

 

Total expenses

 

 

1,356

 

 

 

1,500

 

 

 

4,161

 

OTHER INCOME (LOSS)

 

 

 

 

 

 

Net realized gains (losses) on securities

 

 

(19,572

)

 

 

(11,580

)

 

 

(46,278

)

Net realized gains (losses) on financial derivatives

 

 

1,152

 

 

 

24,227

 

 

 

27,122

 

Change in net unrealized gains (losses) on securities

 

 

(15,824

)

 

 

(1,780

)

 

 

10,344

 

Change in net unrealized gains (losses) on financial derivatives

 

 

25,276

 

 

 

(6,548

)

 

 

8,177

 

Total other income (loss)

 

 

(8,968

)

 

 

4,319

 

 

 

(635

)

NET INCOME (LOSS)

 

$

(11,420

)

 

$

1,203

 

 

$

(7,880

)

NET INCOME (LOSS) PER COMMON SHARE:

 

 

 

 

 

 

Basic and Diluted

 

$

(0.75

)

 

$

0.09

 

 

$

(0.55

)

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

15,199,837

 

 

 

13,935,821

 

 

 

14,273,071

 

CASH DIVIDENDS PER SHARE:

 

 

 

 

 

 

Dividends declared

 

$

0.24

 

 

$

0.24

 

 

$

0.72

 

 

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

As of

 

 

September 30,

2023

 

June 30,

2023(2)

 

December 31,

2022(1)(2)

(In thousands except share amounts and per share amounts)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,996

 

 

$

43,713

 

 

$

34,816

 

Securities, at fair value

 

 

836,275

 

 

 

921,224

 

 

 

893,509

 

Due from brokers

 

 

27,900

 

 

 

17,031

 

 

 

18,824

 

Financial derivatives–assets, at fair value

 

 

100,948

 

 

 

70,518

 

 

 

68,770

 

Reverse repurchase agreements

 

 

37,103

 

 

 

12,191

 

 

 

499

 

Receivable for securities sold

 

 

16,667

 

 

 

14,528

 

 

 

33,452

 

Interest receivable

 

 

4,995

 

 

 

4,138

 

 

 

3,326

 

Other assets

 

 

552

 

 

 

646

 

 

 

436

 

Total Assets

 

$

1,064,436

 

 

$

1,083,989

 

 

$

1,053,632

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Repurchase agreements

 

$

811,180

 

 

$

875,030

 

 

$

842,455

 

Payable for securities purchased

 

 

8,220

 

 

 

30,725

 

 

 

42,199

 

Due to brokers

 

 

71,202

 

 

 

49,787

 

 

 

45,666

 

Financial derivatives–liabilities, at fair value

 

 

8,840

 

 

 

2,481

 

 

 

3,119

 

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

 

 

46,326

 

 

 

1,957

 

 

 

498

 

Dividend payable

 

 

1,270

 

 

 

1,150

 

 

 

1,070

 

Accrued expenses

 

 

1,454

 

 

 

1,386

 

 

 

1,097

 

Management fee payable to affiliate

 

 

420

 

 

 

439

 

 

 

423

 

Interest payable

 

 

4,066

 

 

 

4,337

 

 

 

4,696

 

Total Liabilities

 

 

952,978

 

 

 

967,292

 

 

 

941,223

 

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; (15,870,141, 14,378,193 and 13,377,840 shares issued and outstanding, respectively)(3)

 

 

159

 

 

 

144

 

 

 

134

 

Additional paid-in-capital

 

 

258,258

 

 

 

248,355

 

 

 

240,940

 

Accumulated deficit

 

 

(146,959

)

 

 

(131,802

)

 

 

(128,665

)

Total Shareholders' Equity

 

 

111,458

 

 

 

116,697

 

 

 

112,409

 

Total Liabilities and Shareholders' Equity

 

$

1,064,436

 

 

$

1,083,989

 

 

$

1,053,632

 

SUPPLEMENTAL PER SHARE INFORMATION

 

 

 

 

 

 

Book Value Per Share

 

$

7.02

 

 

$

8.12

 

 

$

8.40

 

(1)

Derived from audited financial statements as of December 31, 2022.

(2)

Conformed to current period presentation.

(3)

Common shares issued and outstanding at September 30, 2023, includes 1,459,028 common shares issued during the third quarter under our at-the-market common share offering program.

Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)

We calculate Adjusted Distributable Earnings as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding other income or loss items that are of a non-recurring nature, if any. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps. Adjusted Distributable Earnings also excludes the effect of the Catch-up Amortization Adjustment on interest income. The Catch-up Amortization Adjustment is a quarterly adjustment to premium amortization or discount accretion triggered by changes in actual and projected prepayments on our 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 our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe 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 we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our portfolio, after the effects of financial leverage; and (iii), we believe that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our 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 our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.

Furthermore, Adjusted Distributable Earnings is different than REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our shareholders, in order to maintain qualification as a REIT, is not based on whether we have distributed 90% of our Adjusted Distributable Earnings.

In setting our dividends, our Board of Trustees considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Trustees may deem relevant from time to time.

The following table reconciles, for the three-month periods ended September 30, 2023 and June 30, 2023, our Adjusted Distributable Earnings to the line on our Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable U.S. GAAP measure:

 

 

Three-Month Period Ended

(In thousands except share amounts and per share amounts)

 

September 30, 2023

 

June 30, 2023

Net Income (Loss)

 

$

(11,420

)

 

$

1,203

 

Adjustments:

 

 

 

 

Net realized (gains) losses on securities

 

 

19,572

 

 

 

11,580

 

Change in net unrealized (gains) losses on securities

 

 

15,824

 

 

 

1,780

 

Net realized (gains) losses on financial derivatives

 

 

(1,152

)

 

 

(24,227

)

Change in net unrealized (gains) losses on financial derivatives

 

 

(25,276

)

 

 

6,548

 

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

 

 

796

 

 

 

3,942

 

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

 

 

4,913

 

 

 

1,118

 

Non-recurring expenses

 

 

28

 

 

 

60

 

Negative (positive) component of interest income represented by Catch-up Amortization Adjustment

 

 

(46

)

 

 

376

 

Subtotal

 

 

14,659

 

 

 

1,177

 

Adjusted Distributable Earnings

 

$

3,239

 

 

$

2,380

 

Weighted Average Shares Outstanding

 

 

15,199,837

 

 

 

13,935,821

 

Adjusted Distributable Earnings Per Share

 

$

0.21

 

 

$

0.17

 

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20231113700784/en/

Investors: Ellington Residential Mortgage REIT Investor Relations (203) 409-3773 info@earnreit.com

or

Media: Amanda Shpiner/Sara Widmann Gasthalter & Co. for Ellington Residential Mortgage REIT (212) 257-4170 Ellington@gasthalter.com