Business Context and Reporting Period
The filing is Ellington Residential Mortgage REIT’s unaudited Form 10-Q for the quarter ended September 30, 2013. The company acquires and manages Agency and non-Agency residential mortgage-backed securities, uses repurchase-agreement financing, and is externally managed by Ellington Residential Mortgage Management LLC. The company commenced operations on September 25, 2012 and completed its initial public offering and concurrent private placement in May 2013, raising $150.0 million gross.
The request metadata identifies Ellington Credit Co., but the filing text identifies the registrant as Ellington Residential Mortgage REIT.
Financial Metrics
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 |
|---|---|---|
| Interest income | $11.2 million | $15.8 million |
| Net interest income | $10.0 million | $14.0 million |
| Total expenses | $1.4 million | $2.9 million |
| Net realized and unrealized gains/(losses) | $(1.8) million | $(12.9) million |
| Net income/(loss) | $6.8 million | $(1.8) million |
| Basic earnings/(loss) per share | $0.74 | $(0.31) |
| Core earnings | $5.6 million, or $0.61 per share | $7.0 million, or $1.22 per share |
- Weighted-average portfolio yield based on amortized cost was 3.09% for the third quarter. Net interest margin, including interest-rate swap costs, was 1.77%.
- At September 30, 2013, total assets were $1.614 billion, including $1.473 billion of real estate securities and $23.2 million of derivative assets.
- The portfolio was predominantly Agency RMBS: $1.438 billion of fair value versus $34.5 million of non-Agency RMBS. Agency RMBS represented approximately 98% of total real estate securities fair value.
- Cash and cash equivalents were $44.3 million, compared with $18.2 million at December 31, 2012.
- Repurchase-agreement borrowings were $1.293 billion at a weighted-average interest rate of 0.38%, with 52 weighted-average remaining days to maturity. Total debt-to-equity was 7.5 to 1.
- Shareholders’ equity was $171.8 million, and book value per share was $18.80 after the third-quarter dividend, compared with $18.96 at December 31, 2012.
- Operating activities provided $18.6 million of cash. Investing activities used $1.433 billion, while financing activities provided $1.440 billion. Cash increased by $26.2 million during the nine months.
Material Changes Versus Prior Comparable Period
- The company expanded substantially from its limited September 2012 startup period. Total assets increased from $32.2 million at December 31, 2012 to $1.614 billion at September 30, 2013, and equity increased from $31.0 million to $171.8 million.
- The company had no borrowings or derivative positions at December 31, 2012. By September 30, 2013, it had $1.293 billion of repo borrowings and derivatives with a net fair value of $16.1 million.
- The May 2013 public offering and concurrent private placement increased common shares outstanding to 9.14 million from 1.63 million at December 31, 2012 and generated $148.5 million of net proceeds.
- Nine-month results were adversely affected by $26.3 million of realized losses and $15.4 million of net unrealized losses on real estate securities. Derivative gains of $28.8 million partially offset those losses.
- Third-quarter results improved to net income of $6.8 million, primarily because RMBS values recovered after the Federal Reserve postponed tapering its asset purchases. This improvement was partly offset by a $12.2 million decline in net unrealized derivative gains.
- The company declared dividends of $0.14 per share for the second quarter and $0.50 per share for the third quarter. Total dividends declared for the nine-month period were $0.64 per share.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide numerical earnings or dividend guidance. Management expects continued volatility in Agency RMBS markets as investors assess the timing of Federal Reserve policy changes. Management intends to emphasize higher-coupon specified pools, Agency adjustable-rate mortgages, and securities with favorable prepayment characteristics, while continuing to use interest-rate swaps and TBAs to hedge financing and interest-rate exposure.
- Key risks include rising interest rates, changes in prepayment speeds, extension risk, mortgage credit losses, valuation uncertainty, market volatility, leverage, margin calls, and the availability and cost of repo financing.
- Proposed bank-capital rules could reduce the willingness of large banks to provide repo financing, although management reported that financing remained readily available at September 30, 2013.
- Level 3 assets totaled $47.2 million, consisting principally of non-Agency RMBS and Agency interest-only securities. Their valuations depend on non-binding dealer prices and assumptions concerning yields, prepayments, losses, and recoveries.
- The company relies on short-term repo financing against longer-lived mortgage assets, creating refinancing and maturity-mismatch risk. Outstanding repos were with seven counterparties, while master agreements were in place with nine.
- The company intends to qualify as a REIT for the short taxable period beginning May 1, 2013 and generally expects to distribute at least 100% of taxable income. Failure to qualify could result in adverse tax consequences.
- A $10 million share-repurchase program was approved in August 2013; no repurchases had occurred by September 30, 2013.
- The company reported no material legal proceedings, no material off-balance-sheet arrangements, and no significant contingencies. Disclosure controls were determined to be effective.
Important Facts for Investors to Verify
- Confirm the registrant identity, because the supplied metadata says Ellington Credit Co. while the filing names Ellington Residential Mortgage REIT.
- Reconcile reported book value per share, dividends, and the effect of the May 2013 equity offering and April 2013 stock dividend.
- Assess the sustainability of core earnings of $0.61 per share for the quarter against the 1.77% net interest margin and 7.5-to-1 debt-to-equity ratio.
- Review sensitivity to interest-rate movements: management estimated a $13.1 million decline in portfolio value for an immediate 100-basis-point rate increase under its stated assumptions.
- Evaluate repo maturity, haircut, counterparty, and margin-call exposure, including the 4.3% weighted-average contractual haircut.
- Review Level 3 valuation assumptions and the substantial realized and unrealized losses incurred during the nine-month period.