Ellington Residential Mortgage REIT — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing identifies the registrant as Ellington Residential Mortgage REIT, a Maryland REIT externally managed by Ellington Residential Mortgage Management LLC. The company invests primarily in Agency residential mortgage-backed securities (RMBS), with smaller non-Agency RMBS and related hedging instruments. The filing text does not identify the registrant as “Ellington Credit Co.”
Financial condition and key metrics
| Metric | Q3 2018 / September 30, 2018 | Comparable period or prior year-end |
|---|
| Total assets | $1.753 billion | $1.887 billion at December 31, 2017 |
| Mortgage-backed securities at fair value | $1.576 billion | $1.686 billion at December 31, 2017 |
| Shareholders’ equity | $170.2 million | $192.7 million at December 31, 2017 |
| Cash and cash equivalents | $41.0 million | $56.1 million at December 31, 2017 |
| Repurchase-agreement borrowings | $1.501 billion | $1.597 billion at December 31, 2017 |
| Book value per share | $13.40 | $13.70 at June 30, 2018; $14.45 at December 31, 2017 |
| Debt-to-equity ratio | 8.8:1; 8.7:1 adjusted for unsettled trades | 8.3:1; 8.2:1 adjusted at December 31, 2017 |
Operating results
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|
| Interest income | $13.2 million | $12.9 million | $40.7 million | $36.1 million |
| Interest expense | $(8.5) million | $(5.7) million | $(23.4) million | $(12.9) million |
| Net interest income | $4.7 million | $7.1 million | $17.2 million | $23.2 million |
| Total expenses | $1.3 million | $1.5 million | $4.3 million | $4.2 million |
| Total other income/(loss) | $(2.4) million | $0.7 million | $(14.2) million | $(9.0) million |
| Net income/(loss) | $0.9 million | $6.3 million | $(1.2) million | $10.0 million |
| GAAP EPS | $0.07 | $0.48 | $(0.09) | $0.91 |
| Core earnings per share | $0.29 | $0.38 | $1.02 | $1.56 |
- Third-quarter weighted-average portfolio yield was 3.16%, versus 2.86% in the prior-year quarter. Including swaps and short Treasury securities, total average cost of funds was 2.14%, producing a 1.02% net interest margin, down from 1.30%.
- Nine-month portfolio yield was 3.14%, versus 3.15% in the prior-year period. Total average cost of funds increased to 2.02% from 1.41%, reducing net interest margin to 1.12% from 1.74%.
- Adjusted core earnings were $4.1 million, or $0.32 per share, in Q3 2018 and $13.2 million, or $1.02 per share, for the first nine months.
Cash flow, dividends, and capital activity
- For the nine months, operating activities provided $22.2 million and investing activities provided $87.6 million.
- Financing activities used $124.8 million, including $7.3 million for common-share repurchases and $14.4 million of dividends paid.
- Cash decreased by $15.1 million, from $56.1 million at December 31, 2017 to $41.0 million at September 30, 2018.
- The company declared quarterly dividends of $0.37 per share, or $1.11 per share for the first nine months, compared with $0.40 and $1.20, respectively, in the prior-year periods.
- Under its current authorization to repurchase up to 1.2 million shares, the company repurchased 21,720 shares in the quarter and 115,357 shares through November 2, 2018. Total 2018 repurchases through September 30, including the prior program, were 649,887 shares at an average price of $11.16.
Material changes and management commentary
- Rising short-term interest rates increased repo funding costs. The Federal Reserve raised the federal funds target range to 2.00%–2.25% in September 2018, and one-month LIBOR ended the quarter at 2.26%.
- Higher rates contributed to declines in Agency RMBS prices. Securities generated net realized and unrealized losses of $11.0 million in Q3 and $46.5 million for the nine-month period, while financial derivatives generated gains of $8.7 million and $32.3 million, respectively.
- The overall RMBS portfolio was $1.576 billion at quarter-end. Agency RMBS represented the vast majority of holdings; non-Agency RMBS were $12.0 million at fair value.
- Short TBA positions declined to $353.1 million from $448.6 million at June 30 and $713.4 million at December 31, 2017. Long TBA positions were $129.3 million.
- Management reported a 0.5% third-quarter economic return after the $0.37 dividend, despite the decline in book value per share.
- The company expects current cash, investment cash flows, repo financing, and available credit to satisfy anticipated liquidity needs. No formal earnings or dividend guidance was provided.
Risks, contingencies, and unusual items
- The business is highly leveraged and dependent on short-term repurchase-agreement financing. Repo borrowings had a weighted-average interest rate of 2.27% and 49 remaining days to maturity at September 30, 2018.
- Collateral and margin-call exposure is material. The company posted $25.3 million of net cash collateral to repo counterparties, and one counterparty exposure was approximately 10% of shareholders’ equity.
- A modeled immediate 100-basis-point rise in rates was estimated to reduce portfolio value by $17.8 million, or 10.44% of shareholders’ equity; the filing cautions that actual results may differ materially.
- Key risks include interest-rate changes, yield-curve shifts, prepayments, Agency RMBS policy changes, non-Agency credit losses, collateral and counterparty risk, refinancing risk, valuation uncertainty, and regulatory changes affecting Fannie Mae, Freddie Mac, REIT status, or Investment Company Act exemptions.
- Level 3 assets totaled approximately $11.7 million and rely partly on non-binding third-party valuations and model-based assumptions regarding yields, prepayments, losses, recoveries, and amortization.
- No material legal proceedings were reported. An SEC subpoena issued in January 2017 to an Ellington affiliate remains a disclosed regulatory matter; management reported no current knowledge of a contemplated material proceeding involving the company or Ellington.
- The management agreement provides for a 1.50% annual fee based on shareholders’ equity, expense reimbursement without a dollar limitation, and a potential termination fee equal to 5% of defined shareholders’ equity.
Most important facts for investors to verify
- Confirm the issuer identity and ticker because the provided request names Ellington Credit Co., while the filing identifies Ellington Residential Mortgage REIT.
- Reconcile GAAP net income with core earnings and dividend coverage; Q3 GAAP EPS was $0.07 versus a $0.37 dividend per share.
- Monitor repo refinancing, margin-call requirements, collateral haircuts, counterparty concentration, and the 8.8:1 leverage ratio.
- Assess whether hedging gains can continue to offset losses on Agency RMBS if interest rates, spreads, or the yield curve change direction.
- Review valuation assumptions for Level 3 assets and the sensitivity of interest-only securities to prepayment speeds.
- Verify the sustainability of the $0.37 quarterly dividend against taxable income, core earnings, liquidity, and REIT distribution requirements.
