Ellington Residential Mortgage REIT (EARN) — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine-month period ended September 30, 2020. The registrant is Ellington Residential Mortgage REIT, a Maryland REIT externally managed by Ellington Residential Mortgage Management LLC. Its portfolio primarily consists of Agency residential mortgage-backed securities (RMBS), with smaller non-Agency RMBS and related hedges. The filing metadata identifies Ellington Credit Co, but the submitted filing names Ellington Residential Mortgage REIT as the registrant.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2020 | Three months ended Sept. 30, 2019 | Nine months ended Sept. 30, 2020 | Nine months ended Sept. 30, 2019 |
|---|---|---|---|---|
| Interest income | $7.8 million | $10.5 million | $21.1 million | $35.2 million |
| Net interest income | $7.0 million | $1.7 million | $11.9 million | $7.2 million |
| Net income | $8.1 million | $3.7 million | $12.7 million | $12.6 million |
| Basic and diluted EPS | $0.66 | $0.30 | $1.03 | $1.01 |
| Core earnings per share | $0.39 | $0.19 | $0.92 | $0.68 |
- Third-quarter net interest margin, excluding the catch-up premium amortization adjustment, was 2.21%, compared with 0.38% in the prior-year quarter. The nine-month margin was 1.71%, compared with 0.53% in the prior-year period.
- Net realized and unrealized gains and losses were volatile. Third-quarter other income was $2.6 million, including $2.2 million of net gains on derivatives and approximately $1.4 million of gains on non-Agency RMBS, partly offset by approximately $1.0 million of losses on Agency RMBS.
- For the nine-month period, other income was $5.2 million, including $29.1 million of gains on Agency RMBS and $2.7 million on non-Agency RMBS, offset by $23.9 million of derivative losses and $2.8 million of losses on short U.S. Treasury securities.
- Cash and cash equivalents were $61.2 million at September 30, 2020, versus $35.4 million at December 31, 2019. Other unencumbered assets were approximately $28.1 million.
- Operating activities provided $16.7 million of cash during the first nine months; investing activities provided $261.6 million; financing activities used $252.4 million. Cash increased by $25.8 million.
- Shareholders’ equity was $162.4 million, versus $160.8 million at year-end 2019. Book value per share was $13.17, versus $12.91 at December 31, 2019 and $12.80 at June 30, 2020.
- The company declared quarterly dividends of $0.28 per share, totaling $0.84 per share for the first nine months of 2020.
Portfolio, Debt, and Liquidity
- Mortgage-backed securities at fair value totaled $1.114 billion at September 30, 2020, consisting of $1.089 billion of Agency RMBS and $24.6 million of non-Agency RMBS. The total declined from $1.402 billion at December 31, 2019.
- Agency RMBS included $978.6 million of fixed-rate specified pools, $23.6 million of Agency adjustable-rate securities, $74.2 million of reverse mortgage pools, and $12.6 million of Agency interest-only securities.
- Repurchase-agreement borrowings were $1.062 billion, down from $1.296 billion at year-end 2019. The weighted-average repo rate was 0.27%, compared with 2.00% at year-end, with 15 counterparties and 57 weighted-average remaining days to maturity.
- Total debt-to-equity was 6.5:1 at September 30, 2020, compared with 8.1:1 at December 31, 2019. The adjusted debt-to-equity ratio was also 6.5:1.
- The company posted $31.3 million of net cash collateral to repo counterparties and had $55.4 million of aggregate repo amount at risk. Management stated that available capital resources were sufficient for anticipated liquidity needs.
Material Changes Versus Comparable Periods
- Net interest income increased substantially despite lower interest income because repo funding costs declined sharply and average borrowings were lower.
- Interest income declined because the Agency RMBS portfolio and overall average holdings were smaller. The portfolio yield excluding catch-up amortization also declined to 2.68% in the quarter from 3.21% in the prior-year quarter.
- Derivative results improved significantly in the third quarter, producing a $2.2 million net gain versus a $7.2 million net loss in the prior-year quarter. However, derivatives remained a $23.9 million net loss for the first nine months, primarily due to losses during the first-quarter COVID-19 market dislocation.
- Non-Agency RMBS declined 41% during the quarter to $24.6 million as the company monetized gains. Agency RMBS declined 2% from June 30, 2020, and total RMBS declined 3.5%.
- The company repurchased 136,142 common shares for $1.0 million during the first nine months at an average price of $7.24 per share. No shares were repurchased during the third quarter.
Outlook, Commentary, Risks, and Unusual Items
- Management reported that it reduced portfolio size and leverage during the first quarter in response to COVID-19 market volatility, margin calls, and liquidity risk. All margin calls were satisfied, and margin calls subsequently returned to more typical levels.
- Management expected to continue actively managing Agency specified pools and to vary non-Agency RMBS exposure based on market opportunities. No quantitative earnings or dividend guidance was provided.
- Refinancing activity and mortgage prepayments remained elevated. Portfolio prepayment rates increased, creating risk to premium amortization and interest-only securities, although specified-pool pay-ups benefited from prepayment protection.
- Key risks include interest-rate movements, prepayment speeds, repo refinancing and margin-call risk, leverage, derivative valuation and collateral requirements, non-Agency credit losses, COVID-19-related economic weakness, changing Federal Reserve and government policies, LIBOR transition, and potential regulatory or legal proceedings.
- Fair values for certain non-Agency RMBS and Agency interest-only securities use Level 3 inputs, including projected prepayments, collateral losses, recoveries, and option-adjusted spreads. Changes in these assumptions could materially affect reported earnings and book value.
- The company stated that no material legal proceedings or significant contingencies were known at September 30, 2020. Disclosure controls were evaluated as effective, and no material changes in internal control over financial reporting were reported.
Investor Verification Items
- Verify the registrant identity and ticker because the filing names Ellington Residential Mortgage REIT (EARN), while the request metadata references Ellington Credit Co.
- Reconcile GAAP net income with core earnings and determine how much reported performance depends on realized and unrealized fair-value changes.
- Assess sustainability of the 2.21% quarterly net interest margin given low interest rates, prepayment speeds, repo refinancing, and hedging costs.
- Review repo collateral, haircuts, counterparty concentrations, margin-call exposure, and the $55.4 million aggregate repo amount at risk.
- Evaluate the effect of COVID-19, elevated prepayments, non-Agency credit performance, and Level 3 valuation assumptions on book value and dividends.
- Confirm future dividend declarations, REIT distribution requirements, and the company’s continuing qualification as a REIT.