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Ellington Residential Mortgage REIT Reports Fourth Quarter 2022 Results

Ellington Residential Mortgage REIT (NYSE: EARN) (the "Company") today reported financial results for the quarter ended December 31, 2022.

Highlights

  • Net income of $11.7 million, or $0.88 per share.
  • Adjusted Distributable Earnings1 ("ADE") of $3.3 million, or $0.25 per share.
  • Book value of $8.40 per share as of December 31, 2022, which includes the effects of dividends of $0.24 per share for the quarter.
  • Net interest margin2 of 1.37%.
  • Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 6.1%3.
  • Dividend yield of 12.7% based on the March 3, 2023 closing stock price of $7.54, and monthly dividend of $0.08 per common share declared on February 7, 2023.
  • Debt-to-equity ratio of 7.5:1 as of December 31, 2022; adjusted for unsettled purchases and sales, the debt-to-equity ratio was 7.6:1.
  • Net mortgage assets-to-equity ratio of 6.6:14 as of December 31, 2022.
  • Cash and cash equivalents of $34.8 million as of December 31, 2022, in addition to other unencumbered assets of $2.9 million.

Fourth Quarter 2022 Results

"Ellington Residential had a very strong fourth quarter, generating a non-annualized economic return of 11.1% and net income of $0.88 per share, which easily covered the dividends for the quarter," said Laurence Penn, Chief Executive Officer and President. "Driven by a more benign outlook on inflation and Fed monetary policy, Agency RMBS rebounded sharply in the fourth quarter, following three consecutive quarters of underperformance. Incrementally lower volatility and greater investor demand drove yield spreads tighter, particularly in November, and the year ended on a more positive note.

"In recent quarters, we've highlighted the disciplined approach that we're taking with portfolio turnover. With reinvestment yields increasing steadily during 2022, higher portfolio turnover would have boosted ADE in the near term, but at the potential cost of a lower book value per share. Instead, we have chosen to be selective in turning over the portions of our portfolio that we view as offering superior relative value, particularly our lower coupon pools, and have prioritized total return over short-term ADE growth. In addition, our strong liquidity position has enabled us to add pools opportunistically during certain periods of acute volatility, such as in September.

"As a result of this approach, we entered the fourth quarter with an attractive portfolio that stood toward the upper ends of our historical ranges of debt-to-equity ratios and net mortgage basis exposure. We were thus well positioned to benefit from the RMBS spread tightening during the fourth quarter, and we recouped a portion of the unrealized losses from the prior quarter. Having just bought Agency RMBS on weakness in September, the spread tightening enabled us to sell into strength in the fourth quarter, including well-timed sales of certain of our discount pools.

"Moving into 2023, these opportunistic sales have reduced our leverage significantly, and in response we are working on rotating a portion of our capital into some attractive opportunities in the non-Agency mortgage markets."

____________________________

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 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 December 31, 2022 the market value of the Company's mortgage-backed securities and its net short TBA position was $893.3 million and $(150.0) million, respectively, and total shareholders' equity was $112.4 million.

Financial Results

The following table summarizes the Company's portfolio of RMBS as of December 31, 2022 and September 30, 2022:

 

December 31, 2022

 

September 30, 2022

(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

$

47,453

 

$

45,324

 

$

95.51

 

$

48,899

 

$

103.05

 

$

78,506

 

$

72,465

 

$

92.31

 

$

78,802

 

$

100.38

20-year fixed-rate mortgages

 

10,812

 

 

9,691

 

 

89.63

 

 

11,508

 

 

106.44

 

 

10,979

 

 

9,612

 

 

87.55

 

 

11,700

 

 

106.57

30-year fixed-rate mortgages

 

841,823

 

 

781,754

 

 

92.86

 

 

849,168

 

 

100.87

 

 

879,451

 

 

800,161

 

 

90.98

 

 

891,933

 

 

101.42

ARMs

 

8,696

 

 

8,663

 

 

99.62

 

 

9,595

 

 

110.34

 

 

8,808

 

 

8,748

 

 

99.32

 

 

9,579

 

 

108.75

Reverse mortgages

 

17,506

 

 

17,852

 

 

101.98

 

 

19,659

 

 

112.30

 

 

18,044

 

 

18,385

 

 

101.89

 

 

20,058

 

 

111.16

Total Agency RMBS

 

926,290

 

 

863,284

 

 

93.20

 

 

938,829

 

 

101.35

 

 

995,788

 

 

909,371

 

 

91.32

 

 

1,012,072

 

 

101.64

Non-Agency RMBS(2)

 

16,895

 

 

12,566

 

 

74.38

 

 

12,414

 

 

73.48

 

 

10,595

 

 

7,720

 

 

72.86

 

 

7,402

 

 

69.86

Total RMBS(2)

 

943,185

 

 

875,850

 

 

92.86

 

 

951,243

 

 

100.85

 

 

1,006,383

 

 

917,091

 

 

91.13

 

 

1,019,474

 

 

101.30

Agency IOs

 

n/a

 

 

9,313

 

 

n/a

 

 

9,212

 

 

n/a

 

 

n/a

 

 

9,396

 

 

n/a

 

 

9,928

 

 

n/a

Non-Agency IOs

 

n/a

 

 

8,138

 

 

n/a

 

 

6,289

 

 

n/a

 

 

n/a

 

 

8,181

 

 

n/a

 

 

6,428

 

 

n/a

Total mortgage-backed securities

 

 

$

893,301

 

 

 

$

966,744

 

 

 

 

 

$

934,668

 

 

 

$

1,035,830

 

 

(1)

Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.

(2)

Excludes IOs.

The Company's Agency RMBS holdings decreased by 5% to $863.3 million as of December 31, 2022, as compared to $909.4 million as of September 30, 2022. The decrease was driven by net sales and principal repayments of $57.9 million, which exceeded net realized and unrealized gains of $11.8 million for this portfolio during the quarter. The Company’s Agency RMBS portfolio turnover was 18% for the quarter. Over the same period, the Company increased its non-Agency RMBS portfolio by $4.8 million to $12.6 million, while its holdings of interest-only securities were roughly unchanged.

The Company's debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 7.6:1 as of December 31, 2022, as compared to 9.1:1 as of September 30, 2022, primarily due to a decline in borrowings on the Company's smaller Agency RMBS portfolio and higher shareholders’ equity quarter over quarter. Similarly, the Company’s net mortgage assets-to-equity ratio decreased to 6.6:1 from 7.5:1 over the same period.

During the quarter, tighter Agency RMBS yield spreads and increased pay-ups drove significant net realized and unrealized gains on the Company's specified pools which, combined with net interest income, exceeded net realized and unrealized losses on the Company's interest-rate hedges.

While mortgage rates declined modestly during the fourth quarter, they remained significantly higher than in recent years. As a result, prepayment speeds declined further during the fourth quarter, and the specified pool market has continued to be focused more on extension protection and less on prepayment protection. Many of the Company's specified pools are considered to offer significant extension protection relative to their TBA counterparts. Thus, despite declining prepayment speeds, average pay-ups on the Company's existing specified pool portfolio again increased quarter over quarter, as the increase in the value of the extension protection provided by these specified pools more than offset the reduction in the value of the prepayment protection. In addition, the pools that the Company sold in the fourth quarter had lower average pay-ups than the held population. Due to the combination of these factors, overall pay-ups on the Company's specified pools increased to 1.26% as of December 31, 2022, as compared to 1.02% as of September 30, 2022.

During the quarter, the Company continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. The Company again ended the quarter with a net short TBA position.

The Company's non-Agency RMBS portfolio and interest-only securities also generated positive results, driven by tighter yield spreads. As noted in the prior quarter, the Company expects to continue to increase its allocation to non-Agency RMBS, given current market opportunities.

The Company's net interest margin and Adjusted Distributable Earnings increased quarter over quarter, as higher asset yields were only partially offset by an increased cost of funds.

Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)

The Company calculates 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. Adjusted Distributable 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. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

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 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 the Company has met the requirement to distribute at least 90% of its annual REIT taxable income (subject to certain adjustments) to its shareholders, in order to maintain qualification as a REIT, is not based on whether it distributed 90% of its Adjusted Distributable Earnings.

In setting the Company’s dividends, the Company’s Board of Trustees considers the Company’s 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 December 31, 2022 and September 30, 2022, the Company's Adjusted Distributable Earnings to the line on the Company's Consolidated Statement of Operations entitled Net Income (Loss), which the Company believes is the most directly comparable U.S. GAAP measure:

 

 

Three-Month Period Ended

(In thousands except share amounts and per share amounts)

 

December 31, 2022

 

September 30, 2022

Net Income (Loss)

 

$

11,680

 

 

$

(13,671

)

Adjustments:

 

 

 

 

Net realized (gains) losses on securities

 

 

15,811

 

 

 

28,236

 

Change in net unrealized (gains) losses on securities

 

 

(27,120

)

 

 

27,574

 

Net realized (gains) losses on financial derivatives

 

 

(810

)

 

 

(2,355

)

Change in net unrealized (gains) losses on financial derivatives

 

 

1,618

 

 

 

(35,825

)

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

 

 

1,111

 

 

 

364

 

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

 

 

1,634

 

 

 

19

 

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

 

 

(658

)

 

 

(1,381

)

Subtotal

 

 

(8,414

)

 

 

16,632

 

Adjusted Distributable Earnings

 

$

3,266

 

 

$

2,961

 

Weighted Average Shares Outstanding

 

 

13,287,417

 

 

 

13,146,727

 

Adjusted Distributable Earnings Per Share

 

$

0.25

 

 

$

0.23

 

About Ellington Residential Mortgage REIT

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

The Company will host a conference call at 11:00 a.m. Eastern Time on Tuesday, March 7, 2023, to discuss its financial results for the quarter ended December 31, 2022. To participate in the event by telephone, please dial (800) 225-9448 at least 10 minutes prior to the start time and reference the conference ID: EARNQ422. International callers should dial (203) 518-9843 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 the Company's 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, the Company also posted an investor presentation, that will accompany the conference call, on the Company's website at www.earnreit.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Tuesday, March 7, 2023, at approximately 2:00 p.m. Eastern Time through Tuesday, March 14, 2023 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 839-7408. International callers should dial (402) 220-6066. A replay of the conference call will also be archived on the Company's 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 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 risks associated with investing in real estate assets, including changes in business conditions and the general economy such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. 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 December 31, 2021 which can be accessed through the link to the Company's SEC filings under "For Our Shareholders" on the Company's website (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

 

Year Ended

 

 

December 31,

2022

 

September 30,

2022

 

December 31,

2022

(In thousands except share amounts and per share amounts)

 

 

 

 

 

 

INTEREST INCOME (EXPENSE)

 

 

 

 

 

 

Interest income

 

$

9,927

 

 

$

9,457

 

 

$

35,006

 

Interest expense

 

 

(7,477

)

 

 

(4,268

)

 

 

(14,820

)

Total net interest income

 

 

2,450

 

 

 

5,189

 

 

 

20,186

 

EXPENSES

 

 

 

 

 

 

Management fees to affiliate

 

 

423

 

 

 

388

 

 

 

1,758

 

Professional fees

 

 

202

 

 

 

205

 

 

 

824

 

Compensation expense

 

 

174

 

 

 

183

 

 

 

710

 

Insurance expense

 

 

101

 

 

 

101

 

 

 

401

 

Other operating expenses

 

 

371

 

 

 

353

 

 

 

1,435

 

Total expenses

 

 

1,271

 

 

 

1,230

 

 

 

5,128

 

OTHER INCOME (LOSS)

 

 

 

 

 

 

Net realized gains (losses) on securities

 

 

(15,811

)

 

 

(28,236

)

 

 

(73,682

)

Net realized gains (losses) on financial derivatives

 

 

810

 

 

 

2,355

 

 

 

48,996

 

Change in net unrealized gains (losses) on securities

 

 

27,120

 

 

 

(27,574

)

 

 

(79,103

)

Change in net unrealized gains (losses) on financial derivatives

 

 

(1,618

)

 

 

35,825

 

 

 

58,533

 

Total other income (loss)

 

 

10,501

 

 

 

(17,630

)

 

 

(45,256

)

NET INCOME (LOSS)

 

$

11,680

 

 

$

(13,671

)

 

$

(30,198

)

NET INCOME (LOSS) PER COMMON SHARE:

 

 

 

 

 

 

Basic and Diluted

 

$

0.88

 

 

$

(1.04

)

 

$

(2.29

)

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

13,287,417

 

 

 

13,146,727

 

 

 

13,163,106

 

CASH DIVIDENDS PER SHARE:

 

 

 

 

 

 

Dividends declared

 

$

0.24

 

 

$

0.24

 

 

$

1.04

 

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

As of

 

 

December 31,

2022

 

September 30,

2022

 

December 31,

2021(1)

(In thousands except share amounts and per share amounts)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,816

 

 

$

25,408

 

 

$

69,028

 

Mortgage-backed securities, at fair value

 

 

893,301

 

 

 

934,668

 

 

 

1,311,361

 

Other investments, at fair value

 

 

208

 

 

 

8,498

 

 

 

309

 

Due from brokers

 

 

18,824

 

 

 

48,595

 

 

 

88,662

 

Financial derivatives–assets, at fair value

 

 

68,770

 

 

 

71,853

 

 

 

6,638

 

Reverse repurchase agreements

 

 

499

 

 

 

21,774

 

 

 

117,505

 

Receivable for securities sold

 

 

33,452

 

 

 

73,945

 

 

 

 

Interest receivable

 

 

3,326

 

 

 

3,855

 

 

 

4,504

 

Other assets

 

 

436

 

 

 

638

 

 

 

459

 

Total Assets

 

$

1,053,632

 

 

$

1,189,234

 

 

$

1,598,466

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Repurchase agreements

 

$

842,455

 

 

$

938,046

 

 

$

1,064,835

 

Payable for securities purchased

 

 

42,199

 

 

 

72,957

 

 

 

255,136

 

Due to brokers

 

 

45,666

 

 

 

44,115

 

 

 

1,959

 

Financial derivatives–liabilities, at fair value

 

 

3,119

 

 

 

4,440

 

 

 

1,103

 

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

 

 

498

 

 

 

21,577

 

 

 

117,195

 

Dividend payable

 

 

1,070

 

 

 

1,060

 

 

 

1,311

 

Accrued expenses

 

 

1,097

 

 

 

1,306

 

 

 

1,236

 

Management fee payable to affiliate

 

 

423

 

 

 

388

 

 

 

581

 

Interest payable

 

 

4,696

 

 

 

2,340

 

 

 

885

 

Total Liabilities

 

 

941,223

 

 

 

1,086,229

 

 

 

1,444,241

 

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;

(13,377,840, 13,245,298 and 13,109,926 shares issued and outstanding, respectively)(2)

 

 

134

 

 

 

132

 

 

 

131

 

Additional paid-in-capital

 

 

240,940

 

 

 

240,026

 

 

 

238,865

 

Accumulated deficit

 

 

(128,665

)

 

 

(137,153

)

 

 

(84,771

)

Total Shareholders' Equity

 

 

112,409

 

 

 

103,005

 

 

 

154,225

 

Total Liabilities and Shareholders' Equity

 

$

1,053,632

 

 

$

1,189,234

 

 

$

1,598,466

 

SUPPLEMENTAL PER SHARE INFORMATION

 

 

 

 

 

 

Book Value Per Share

 

$

8.40

 

 

$

7.78

 

 

$

11.76

 

(1)

Derived from audited financial statements as of December 31, 2021.

(2)

Common shares issued and outstanding at December 31, 2022, includes 120,431 common shares issued during the fourth quarter under the Company's at-the-market common share offering program.

 

Contacts

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

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