OLD GREENWICH, Conn.–(BUSINESS WIRE)–Ellington Residential Mortgage REIT (NYSE: EARN) 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.
