Market Overview

Ellington Residential Mortgage REIT Reports Second Quarter 2018 Results

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Ellington Residential Mortgage REIT (NYSE:EARN) today reported
financial results for the quarter ended June 30, 2018.

Highlights

  • Net income of $1.8 million, or $0.14 per share.
  • Core Earnings1 of $5.1 million, or $0.40 per share, and
    Adjusted Core Earnings1 of $4.6 million, or $0.36 per share.
  • Book value of $13.70 per share as of June 30, 2018, after giving
    effect to a second quarter dividend of $0.37 per share.
  • Net interest margin of 1.28%, and adjusted net interest margin2
    of 1.17%.
  • Weighted average constant prepayment rate for the fixed-rate Agency
    specified pool portfolio of 8.2%.
  • Dividend yield of 13.4% based on the August 1, 2018 closing stock
    price of $11.07.
  • Debt-to-equity ratio of 8.8:1 as of June 30, 2018; adjusted for
    unsettled purchases and sales, the debt-to-equity ratio was 8.6:1.
  • Net mortgage assets-to-equity ratio of 7.4:13 as of
    June 30, 2018.
  • Repurchased 115,800 shares during the quarter, or approximately 1% of
    our outstanding shares as of the beginning of the quarter, at an
    average price of $11.01 per share.

Second Quarter 2018 Results

"In the second quarter, Ellington Residential had net income of $0.14
per share and Adjusted Core Earnings of $0.36 per share," said Laurence
Penn, Chief Executive Officer and President. "During the quarter, higher
interest rates caused Agency RMBS asset prices to decline modestly, but
EARN's book value was stable as solid net carry on our portfolio and
gains on our interest rate hedges more than offset these price declines.
Share repurchases provided a tailwind, and altogether our economic
return for the quarter was 1.2%, or 5.0% annualized.

"The bear market flattening of the yield curve over the past 18 months
has put downward pressure on our net interest margin, but we continue to
take advantage of the asset opportunities and higher yields by turning
over meaningful portions of our portfolio, in order to recharge our net
interest margin and boost core earnings. We expect this activity to
continue throughout the third quarter.

"Despite the ongoing technical drag from Fed tapering, we believe that
Agency RMBS offer attractive relative value today, with favorable
prepayment fundamentals and yield spreads that remain near their
two-year widest levels, in contrast to many credit sectors where spreads
remain near their two-year tightest levels. As a result, after having
covered a significant portion of our TBA short position in March in
response to the market selloff, we continue to keep our net mortgage
exposure relatively high.

"Looking forward, as quantitative easing around the globe continues to
give way to quantitative tightening, the market will continue to lose an
important stabilizing force. The market is pricing in continued record
low volatility, but if volatility returns, we would expect more
investment opportunities and chances to differentiate ourselves. We
believe that our hedging strategy and our highly liquid portfolio will
allow us to take advantage of such opportunities while also preserving
book value."

Market Overview

  • In June, the Federal Reserve raised the target range for the federal
    funds rate by 0.25%, to 1.75%–2.00%, its seventh rate increase since
    December 1, 2015 and its second rate increase so far in 2018. LIBOR
    rates, which drive many of our financing costs, increased in sympathy,
    with one-month LIBOR increasing 21 basis points to end the second
    quarter at 2.09%.
  • In April and July, the Federal Reserve continued to increase the
    amount of the tapering of its reinvestments in line with the schedule
    it had laid out in September 2017. The tapering of Agency RMBS
    purchases increased to $12 billion per month in April and to $16
    billion per month in July. The tapering of U.S. Treasury purchases
    increased to $18 billion per month in April and to $24 billion per
    month in July.
  • The yield curve flattened for the sixth consecutive quarter: the
    2-year U.S. Treasury yield rose 26 basis points to end the second
    quarter at 2.53%, while the 10-year U.S. Treasury yield rose 12 basis
    points to 2.86%. The spread between the 2-year and 10-year tightened
    to just 33 basis points, as compared to 47 basis points at the end of
    the first quarter.
  • Mortgage rates increased in the second quarter, with the Freddie Mac
    survey 30-year mortgage rate rising 11 basis points to end the quarter
    at 4.55%.
  • Overall Agency RMBS prepayment rates continued to be muted during the
    quarter. The Mortgage Bankers Association's Refinance Index, which
    measures refinancing application volumes, fell 11.9% quarter over
    quarter, dropping intra-quarter to its lowest seasonally-adjusted
    level in more than 17 years.

The second quarter of 2018 saw the extreme equity volatility of the
first quarter subside, but interest rate choppiness and yield curve
flattening continue. During the first part of the quarter, interest
rates continued their recent upward trend, with the 10-year U.S.
Treasury yield rising 37 basis points to an almost seven-year high of
3.11% on May 17th. Over the next two weeks, this trend
reversed, as investors reacted to a possible trade war and political
uncertainty in Italy; by May 29th, the 10-year U.S. Treasury
had rallied nearly back to where it started the quarter. The flight to
quality was short-lived, however, and the 10-year U.S. Treasury yield
finished the quarter 12 basis points higher overall. The yield curve has
lately been the flattest it has been since 2007, when it actually
inverted during the early part of the year.

Performance was mixed for the quarter across the various
credit-sensitive sectors. Investment grade and high yield corporate
credit spreads tightened during April but then widened in May and June,
and finished the quarter approximately flat. Meanwhile, CMBS credit
spreads generally tightened during the quarter (with especially strong
demand for higher-yielding, non-investment grade CMBS securities), and
the legacy non-Agency RMBS market continued to be well supported. The
continued increase in LIBOR boosted coupons of floating-rate debt
instruments, benefiting CLOs, leveraged loans, and other structured
credit products.

Despite higher rates and the continued increase of Fed tapering, Agency
RMBS spreads generally held firm over the quarter, continuing to benefit
from a muted prepayment environment. As measured by the Bloomberg
Barclays U.S. MBS Agency Fixed Rate Index, Agency RMBS generated a total
return of 24 basis points for the quarter, and an excess return (on a
duration-adjusted basis) over the Bloomberg Barclays U.S. Treasury Index
of 15 basis points.

Financial Results

Holdings

As of June 30, 2018, our mortgage-backed securities portfolio consisted
of $1.451 billion of fixed-rate Agency "specified pools," $20.7 million
of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs,"
$76.8 million of Agency reverse mortgage pools, $19.1 million of Agency
interest only securities, or "Agency IOs," and $12.0 million of
non-Agency RMBS. Specified pools are fixed-rate Agency pools consisting
of mortgages with special characteristics, such as mortgages with low
loan balances, mortgages backed by investor properties, mortgages
originated through the government-sponsored "Making Homes Affordable"
refinancing programs, and mortgages with various other characteristics.

Our overall RMBS portfolio decreased by 3.1% to $1.580 billion as of
June 30, 2018, as compared to $1.631 billion as of March 31, 2018. Even
though our portfolio was slightly smaller by quarter end, our equity
base was also slightly smaller and our overall debt-to-equity ratio,
adjusted for unsettled purchases and sales, was unchanged at 8.6:1 as of
June 30, 2018, as compared to March 31, 2018. Our debt-to-equity ratio
may fluctuate period over period based on portfolio management
decisions, market conditions, capital markets activities, and the timing
of security purchase and sale transactions.

With Agency RMBS yield spreads remaining near their two-year widest
levels in the second quarter, we continued to maintain a smaller short
TBA position that we use for hedging purposes, as well as a larger long
TBA portfolio held for investment purposes, compared to how we were
positioned in previous years. As of June 30, 2018, we had short TBAs of
$448.6 million, as compared to $386.2 million as of March 31, 2018. Also
as of June 30, 2018, we had $153.7 million of long TBAs held for
investment purposes, as compared to $142.9 million as of March 31, 2018.
As a result, our net mortgage assets-to-equity ratio decreased slightly
quarter over quarter to 7.4:1 from 7.8:1, but was still meaningfully
higher than as of December 31, 2017, when this ratio was 5.7:1, as well
as compared to the quarter-end average over the past three years ended
December 31, 2017 of 5.7:1. TBAs are forward-settling Agency RMBS where
the mortgage pass-through certificates to be delivered are
"To-Be-Announced."

With Agency RMBS prices declining again during the second quarter, our
portfolio had significant realized and unrealized losses. While these
losses were partially offset by significant gains on our interest rate
swaps, futures, and TBA short positions, strong TBA dollar rolls and
muted prepayments caused TBAs to outperform specified pools, which
further dampened our results. Short positions in TBAs continue to
represent a significant portion of our interest rate hedging portfolio.

Average pay-ups on our specified pools were essentially unchanged at
0.58% as of June 30, 2018, as compared to 0.59% as of March 31, 2018.
Pay-ups are price premiums for specified pools relative to their TBA
counterparts. Additionally, our GNMA portfolio benefited from a
significant drop in GNMA prepayment speeds during the quarter, which
reflected the impact of a new law inhibiting "churning" of VA loans, as
well as certain disciplinary actions taken by GNMA against several
originators whose loans have exhibited abnormally high prepayment speeds.

Our non-Agency RMBS performed well during the quarter, driven by strong
net interest income, which was slightly offset by net realized and
unrealized losses as prices declined marginally in the sector during the
quarter. Fundamentals underlying non-Agency RMBS continue to remain
strong, led by a stable housing market. Our total investment in
non-Agency RMBS was relatively unchanged at $12.0 million as of June 30,
2018, as compared to $12.4 million as of March 31, 2018. To the extent
that more attractive entry points develop in non-Agency RMBS, we may
increase our capital allocation to this sector.

Earnings and Net Interest Margin

We had net income of $1.8 million, or $0.14 per share, for the quarter
ended June 30, 2018, as compared to a net loss of $(4.0) million, or
$(0.30) per share, for the quarter ended March 31, 2018. The net income
for the quarter was primarily driven by strong net interest income on
our Agency RMBS investments and net gains from our interest rate hedges,
partially offset by realized and unrealized losses on our Agency RMBS
investments. For the quarter ended June 30, 2018, Core Earnings was $5.1
million, or $0.40 per share, as compared to $4.3 million, or $0.32 per
share, for the quarter ended March 31, 2018. Adjusted Core Earnings for
the quarter ended June 30, 2018 was $4.6 million, or $0.36 per share, as
compared to $4.4 million, or $0.34 per share, for the quarter ended
March 31, 2018. The higher Core Earnings and Adjusted Core Earnings in
the current quarter resulted from the increase in our
quarter-over-quarter adjusted net interest margin, reflecting the higher
asset yields following portfolio turnover, partially offset by increases
in repo borrowing rates. Core Earnings and Adjusted Core Earnings are
non-GAAP financial measures. See "Reconciliation of Core Earnings to Net
Income (Loss)" below for an explanation regarding the calculation of
Core Earnings, Adjusted Core Earnings, and the Catch-up Premium
Amortization Adjustment.

For the quarter ended June 30, 2018, the weighted average yield of our
portfolio of Agency and non-Agency RMBS was 3.26%, while our average
cost of funds, including interest rate swaps and U.S. Treasury
securities, was 1.98%, resulting in a net interest margin for the
quarter of 1.28%. By comparison, for the quarter ended March 31, 2018,
the weighted average yield of our Agency and non-Agency RMBS was 2.99%,
while our average cost of funds, including interest rate swaps and U.S.
Treasury securities, was 1.93%, resulting in a net interest margin of
1.06%. Excluding the impact of the Catch-up Premium Amortization
Adjustment, the weighted average yield of our portfolio increased to
3.15% for the second quarter as compared to 3.02% for the first quarter,
and our adjusted net interest margin was 1.17% and 1.09%, respectively.

On a quarter-over-quarter basis, our cost of funds, including the cost
of repo, interest rate swaps, and short positions in U.S. Treasury
securities, increased to 1.98% from 1.93%. This quarter-over-quarter
increase resulted mainly from an increase in our repo borrowing rates,
which increased as LIBOR rose. Our average repo borrowing rate increased
33 basis points quarter over quarter to 1.96%. This increase was
partially offset by lower costs related to our short positions in U.S.
Treasury securities and interest rate swaps, which decreased 28 basis
points from the prior quarter.

For the quarter ended June 30, 2018, prices on our Agency RMBS portfolio
declined, and we had total net realized and unrealized losses of $(10.1)
million, or $(0.79) per share. Our Agency RMBS portfolio turnover was
17% for the quarter, which was modestly higher than the prior quarter.
In addition, we had total net realized and unrealized losses of $(0.1)
million, or $(0.01) per share, on our non-Agency RMBS portfolio as
prices declined slightly during the quarter.

During the quarter we continued to hedge interest rate risk, primarily
through the use of interest rate swaps, short positions in TBAs, U.S.
Treasury securities, and futures. For the quarter, we had total net
realized and unrealized gains of $7.0 million, or $0.55 per share, on
our interest rate hedging portfolio, as interest rates increased. In our
hedging portfolio, the relative proportion (based on 10-year equivalents4)
of short positions in TBAs increased slightly quarter over quarter
relative to our other interest rate hedges, as we marginally decreased
our exposure to Agency RMBS. The relative makeup of our interest rate
hedging portfolio can change materially from quarter to quarter.

After giving effect to a second quarter dividend of $0.37 per share, our
book value per share decreased to $13.70 as of June 30, 2018, from
$13.90 as of March 31, 2018, and we had an economic return of 1.2% for
the quarter. Economic return is computed by adding back dividends
declared to ending book value per share, and comparing that amount to
book value per share as of the beginning of the quarter.

1

  Core Earnings and Adjusted Core Earnings are non-GAAP financial
measures. Adjusted Core Earnings represents Core Earnings excluding
the effect of the Catch-up Premium Amortization Adjustment on
interest income. See "Reconciliation of Core Earnings to Net Income
(Loss)" below for an explanation regarding the calculation of Core
Earnings, Adjusted Core Earnings, and the Catch-up Premium
Amortization Adjustment.
2 Adjusted net interest margin represents net interest margin
excluding the effect of the Catch-up Premium Amortization Adjustment
on interest income.
3 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 June 30, 2018 the
market value of our mortgage-backed securities and our net short TBA
position was $1.580 billion and $(294.8) million, respectively, and
total shareholders' equity was $174.2 million.
4 "10-year equivalents" for a group of positions represent the amount
of 10-year U.S. Treasury securities that would be expected to
experience a similar change in market value under a standard
parallel move in interest rates.
 

Securities Portfolio

The following table summarizes our portfolio of securities as of
June 30, 2018 and March 31, 2018:

June 30, 2018   March 31, 2018
(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 $ 147,080 $ 148,499 $ 100.96 $ 153,512 $ 104.37 $ 151,969 $ 154,850 $ 101.90 $ 158,690 $ 104.42
20-year fixed-rate mortgages 8,143 8,421 103.41 8,767 107.66 8,432 8,773 104.04 9,078 107.66
30-year fixed-rate mortgages 1,263,388 1,294,483 102.46 1,329,912 105.27 1,304,988 1,341,220 102.78 1,375,171 105.38
ARMs 20,124 20,730 103.01 21,521 106.94 22,613 23,382 103.40 24,010 106.18
Reverse mortgages 71,781   76,831   107.04   78,603   109.50   69,813   75,382   107.98   76,536   109.63
Total Agency RMBS 1,510,516   1,548,964   102.55   1,592,315   105.42   1,557,815   1,603,607   102.94   1,643,485   105.50
Non-Agency RMBS 14,839   12,024   81.03   10,278   69.26   15,258   12,442   81.54   10,503   68.84
Total RMBS(2) 1,525,355   1,560,988   102.34   1,602,593   105.06   1,573,073   1,616,049   102.73   1,653,988   105.14
Agency IOs n/a 19,115   n/a 18,583   n/a n/a 14,526   n/a 14,264   n/a
Total mortgage-backed securities 1,580,103   1,621,176   1,630,575   1,668,252  
U.S. Treasury securities sold short (16,300 ) (16,195 ) 99.36 (15,999 ) 98.15 (44,350 ) (44,377 ) 100.06 (44,002 ) 99.22
Reverse repurchase agreements 21,373 21,373   100.00 21,373   100.00 44,617 44,617   100.00 44,617   100.00
Total $ 1,585,281   $ 1,626,550   $ 1,630,815   $ 1,668,867  
(1)   Represents the dollar amount (not shown in thousands) per $100 of
current principal of the price or cost for the security.
(2) Excludes Agency IOs.
 

Our weighted average holdings of RMBS based on amortized cost was $1.689
billion and $1.728 billion for the three-month periods ended June 30,
2018 and March 31, 2018, respectively.

Financial Derivatives Portfolio

The following table summarizes fair value of our financial derivatives
as of June 30, 2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
(In thousands)
Financial derivatives–assets, at fair value:
TBA securities purchase contracts $ 422 $ 295
TBA securities sale contracts 1
Fixed payer interest rate swaps 17,026 12,652
Fixed receiver interest rate swaps 194
Swaptions 470 386
Futures 2,177    
Total financial derivatives–assets, at fair value 20,095   13,528  
Financial derivatives–liabilities, at fair value:
TBA securities purchase contracts (1 ) (122 )
TBA securities sale contracts (1,394 ) (2,450 )
Fixed payer interest rate swaps (260 ) (1,191 )
Fixed receiver interest rate swaps (1 )
Futures   (2,112 )
Total financial derivatives–liabilities, at fair value (1,655 ) (5,876 )
Total $ 18,440   $ 7,652  
 

Interest Rate Swaps

The following tables provide details about our fixed payer interest rate
swaps as of June 30, 2018 and March 31, 2018:

  June 30, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to
Maturity

(In thousands)
2020 $ 86,000 $ 1,916 1.60 % 2.35 % 1.82
2021 133,400 3,677 1.89 2.35 2.91
2022 68,480 2,206 2.00 2.36 3.94
2023 119,466 2,786 2.30 2.36 4.77
2024 8,900 436 1.99 2.31 5.76
2025 47,722 650 2.57 2.33 6.67
2026 40,885 3,761 1.63 2.35 8.21
2027 30,000 1,458 2.29 2.35 8.85
2028 7,923 (13 ) 2.85 2.36 9.61
2043 12,380   (111 ) 2.99   2.35   24.89
Total $ 555,156   $ 16,766   2.05 % 2.35 % 4.93
 
  March 31, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to
Maturity

(In thousands)
2020 $ 86,000 $ 1,372 1.60 % 1.76 % 2.07
2021 161,400 2,428 2.03 1.90 3.14
2022 68,480 1,511 2.00 1.80 4.19
2023 150,466 1,984 2.38 1.82 4.99
2024 8,900 316 1.99 1.69 6.01
2025 57,822 361 2.62 1.97 6.93
2026 40,885 3,423 1.63 1.87 8.46
2027 30,000 934 2.29 1.79 9.10
2028 36,663 (397 ) 2.89 2.01 9.93
2043 12,380   (471 ) 2.99   1.83   25.13
Total $ 652,996   $ 11,461   2.15 % 1.86 % 5.31
 

The following table provides details about our fixed receiver interest
rate swaps as of March 31, 2018. As of June 30, 2018 we did not hold any
fixed receiver interest rate swaps:

  March 31, 2018
Maturity

Notional
Amount

  Fair Value  

Weighted
Average
Pay Rate

 

Weighted
Average
Receive Rate

 

Weighted Average
Remaining Years
to
Maturity

(In thousands)
2021 $ 13,000 $ (1 ) 2.31 % 2.66 % 3.01
2025 9,700   194   1.72   3.00   7.30
Total $ 22,700   $ 193   2.06 % 2.80 % 4.84
 

Interest Rate Swaptions

The following tables provide information about our swaptions as of
June 30, 2018 and March 31, 2018:

  June 30, 2018
Option   Underlying Swap
Type Fair Value  

Months to
Expiration

Notional
Amount

 

Term (Years)

 

Fixed Rate

($ in thousands)
Fixed Payer $ 470 1.0 $ 10,000 10 2.40%
 
  March 31, 2018
Option   Underlying Swap
Type Fair Value  

Months to
Expiration

Notional
Amount

  Term (Years)  

Fixed Rate

($ in thousands)
Fixed Payer $ 386 4.0 $ 10,000 10 2.40%
 

Futures

The following tables provide information about our short positions in
futures as of June 30, 2018 and March 31, 2018:

  June 30, 2018
Description Notional Amount   Fair Value  

Remaining Months to
Expiration

($ in thousands)
U.S. Treasury Futures $ (296,100 ) $ 2,177 2.84
 
  March 31, 2018
Description Notional Amount   Fair Value  

Remaining Months to
Expiration

($ in thousands)
U.S. Treasury Futures $ (296,100 ) $ (2,112 ) 2.84
 

TBAs

The following table provides information about our TBAs as of June 30,
2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
TBA Securities

Notional
Amount (1)

 

Cost
Basis (2)

 

Market
Value (3)

 

Net
Carrying
Value (4)

Notional
Amount (1)

 

Cost
Basis (2)

 

Market
Value (3)

 

Net
Carrying
Value (4)

(In thousands)
Purchase contracts:
Assets $ 136,754 $ 139,946 $ 140,368 $ 422 $ 98,555 $ 99,949 $ 100,244 $ 295
Liabilities 12,710   13,343   13,342   (1 ) 41,149   42,763   42,641   (122 )
149,464   153,289   153,710   421   139,704   142,712   142,885   173  
Sale contracts:
Assets (3,600 ) (3,770 ) (3,769 ) 1
Liabilities (441,893 ) (447,161 ) (448,555 ) (1,394 ) (378,653 ) (379,954 ) (382,404 ) (2,450 )
(441,893 ) (447,161 ) (448,555 ) (1,394 ) (382,253 ) (383,724 ) (386,173 ) (2,449 )
Total TBA securities, net $ (292,429 ) $ (293,872 ) $ (294,845 ) $ (973 ) $ (242,549 ) $ (241,012 ) $ (243,288 ) $ (2,276 )
(1)   Notional amount represents the principal balance of the underlying
Agency RMBS.
(2) Cost basis represents the forward price to be paid for the
underlying Agency RMBS.
(3) Market value represents the current market value of the underlying
Agency RMBS (on a forward delivery basis) as of the respective
period end.
(4) Net carrying value represents the difference between the market
value of the TBA contract as of the respective period end and the
cost basis, and is reported in Financial derivatives-assets, at fair
value and Financial derivatives-liabilities, at fair value on the
Consolidated Balance Sheet, for each respective period end.
 

We primarily use TBAs to hedge interest rate risk, typically in the form
of short positions. However, from time to time we also invest in TBAs as
a means of acquiring exposure to Agency RMBS, or for speculative
purposes, including holding long positions. Overall, we typically hold a
net short position.

The following tables detail gains and losses on our financial
derivatives for the three-month periods ended June 30, 2018 and
March 31, 2018:

  Three-Month Period Ended June 30, 2018
Derivative Type

Net Realized
Gains (Losses) on
Periodic

Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
Other
Than

Periodic
Settlements of
Interest
Rate

Swaps

 

Net Realized
Gains (Losses)
on
Financial

Derivatives

 

Change in Net
Unrealized
Gains
(Losses)

on Accrued
Periodic
Settlements
of

Interest Rate
Swaps

 

Change in Net
Unrealized Gains
(Losses)
Other

Than on Accrued
Periodic
Settlements
of

Interest Rate
Swaps

 

Change in Net
Unrealized
Gains
(Losses)

on Financial
Derivatives

(In thousands)
Interest rate swaps $ (1,341 ) $ 528 $ (813 ) $ 1,472 $ 3,686 $ 5,158
Swaptions 84 84
TBAs (460 ) (460 ) 1,304 1,304
Futures   (2,429 ) (2,429 )   4,288   4,288
Total $ (1,341 ) $ (2,361 ) $ (3,702 ) $ 1,472   $ 9,362   $ 10,834
 
  Three-Month Period Ended March 31, 2018
Derivative Type

Net Realized
Gains (Losses) on
Periodic

Settlements of
Interest Rate
Swaps

 

Net Realized
Gains (Losses)
Other
Than

Periodic
Settlements of
Interest
Rate

Swaps

 

Net Realized
Gains (Losses)
on
Financial

Derivatives

 

Change in Net
Unrealized
Gains
(Losses)

on Accrued
Periodic
Settlements
of

Interest Rate
Swaps

 

Change in Net
Unrealized Gains
(Losses)
Other

Than on Accrued
Periodic
Settlements
of

Interest Rate
Swaps

 

Change in Net
Unrealized
Gains
(Losses)

on Financial
Derivatives

(In thousands)
Interest rate swaps $ 1,132 $ 2,441 $ 3,573 $ (1,511 ) $ 6,098 $ 4,587
Swaptions 205 205
TBAs 11,303 11,303 (1,944 ) (1,944 )
Futures   1,079   1,079     (2,283 ) (2,283 )
Total $ 1,132   $ 14,823   $ 15,955   $ (1,511 ) $ 2,076   $ 565  
 

Interest Rate Sensitivity

The following table summarizes, as of June 30, 2018, the estimated
effects on the value of our portfolio, both overall and by category, of
immediate downward and upward parallel shifts of 50 basis points in
interest rates.

  Estimated Change in Fair Value(1)
(In thousands) 50 Basis Point Decline

in Interest Rates

  50 Basis Point Increase

in Interest Rates

Market Value  

% of Total
Equity

Market Value  

% of Total
Equity

Agency RMBS—ARM Pools $ 197 0.11 % $ (213 ) (0.12 )%
Agency RMBS—Fixed Pools and IOs 26,767 15.37 % (34,693 ) (19.92 )%
TBAs (6,746 ) (3.87 )% 8,077 4.63 %
Non-Agency RMBS 288 0.17 % (283 ) (0.16 )%
Interest Rate Swaps (12,271 ) (7.05 )% 11,843 6.80 %
Swaptions (432 ) (0.25 )% 424 0.24 %
U.S. Treasury Securities (817 ) (0.47 )% 763 0.44 %
U.S. Treasury Futures (9,011 ) (5.17 )% 8,742 5.02 %
Repurchase and Reverse Repurchase Agreements (919 ) (0.53 )% 919   0.53 %
Total $ (2,944 ) (1.69 )% $ (4,421 ) (2.54 )%
 
(1)   Based on the market environment as of June 30, 2018. Results are
based on forward-looking models, which are inherently imperfect, and
incorporate various simplifying assumptions. Therefore, the table
above is for illustrative purposes only and actual changes in
interest rates would likely cause changes in the actual value of the
overall portfolio that would differ from those presented above and
such differences might be significant and adverse.
 

Repo Borrowings

The following table details our outstanding borrowings under repo
agreements as of June 30, 2018 and March 31, 2018:

  June 30, 2018   March 31, 2018
  Weighted Average   Weighted Average
Remaining Days to Maturity

Borrowings
Outstanding

Interest Rate  

Remaining
Days to
Maturity

Borrowings
Outstanding

Interest Rate  

Remaining
Days to
Maturity

(In thousands) (In thousands)
30 days or less $ 481,649 2.00 % 16 $ 468,222 1.67 % 16
31-60 days 732,797 2.10 45 818,835 1.76 45
61-90 days 322,770   2.18   76 302,262   1.90   75
Total $ 1,537,216   2.09 % 42 $ 1,589,319   1.76 % 42
 

As of June 30, 2018, we had no outstanding borrowings other than under
repo agreements. Our repo borrowings were with 16 counterparties as of
June 30, 2018. The above figures are as of the respective quarter ends;
over the course of the quarters ended June 30, 2018 and March 31, 2018
our average cost of repo was 1.96% and 1.63%, respectively.

Other

We incur an annual base management fee, payable quarterly in arrears, in
an amount equal to 1.50% of shareholders' equity (as defined in our
management agreement). For the quarter ended June 30, 2018, our expense
ratio, defined as management fees and operating expenses as a percentage
of average shareholders' equity, was 3.2% on an annualized basis for the
quarter ended June 30, 2018, as compared to 3.3% as of March 31, 2018.
The decrease in our annualized expense ratio resulted primarily from
lower professional fees and other operating expenses during the quarter.

Dividends

On June 13, 2018, our Board of Trustees declared a second quarter
dividend of $0.37 per share, or $4.7 million, which was paid on July 25,
2018 to shareholders of record on June 29, 2018.

Share Repurchase Program

On June 13, 2018, our Board of Trustees approved the adoption of a share
repurchase program under which we are authorized to repurchase up to 1.2
million common shares. The program, which is open-ended in duration,
allows us to make repurchases from time to time on the open market or in
negotiated transactions, including through Rule 10b5-1 plans.
Repurchases are at our discretion, subject to applicable law, share
availability, price and our financial performance, among other
considerations. This program superseded the program that was previously
adopted on February 6, 2018, which also authorized us to repurchase up
to 1.2 million of common shares. During the three-month period ended
June 30, 2018, we repurchased 115,800 common shares under the prior
repurchase program at an average price per share of $11.01 and a total
cost of $1.3 million. From inception of the current repurchase program
through August 1, 2018 we have repurchased 21,720 common shares for an
aggregate cost of approximately $0.2 million.

Reconciliation of Core Earnings to Net Income (Loss)

Core Earnings consists of net income (loss), excluding realized and
change in net unrealized gains and (losses) on securities and financial
derivatives, and, if applicable, items of income or loss that are of a
non-recurring nature. Core Earnings includes net realized and change in
net unrealized gains (losses) associated with payments and accruals of
periodic payments on interest rate swaps. Adjusted Core Earnings
represents Core Earnings excluding 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
our 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 our then assumptions about
cashflows and prepayments, and can vary significantly from quarter to
quarter.

Core Earnings and Adjusted Core Earnings are supplemental non-GAAP
financial measures. We believe that Core Earnings and Adjusted Core
Earnings provide information useful to investors because they are
metrics that we use to assess our performance and to evaluate the
effective net yield provided by the portfolio. Moreover, one of our
objectives is to generate income from the net interest margin on the
portfolio, and Core Earnings and Adjusted Core Earnings are used to help
measure the extent to which this objective is being achieved. However,
because Core Earnings and Adjusted Core Earnings are incomplete measures
of our financial results and differ from net income (loss) computed in
accordance with GAAP, they should be considered as supplementary to, and
not as substitutes for, net income (loss) computed in accordance with
GAAP.

The following table reconciles, for the three-month periods ended
June 30, 2018 and March 31, 2018, our Core Earnings and Adjusted Core
Earnings on a consolidated basis to the line on our Consolidated
Statement of Operations entitled Net Income (Loss), which we believe is
the most directly comparable GAAP measure on our Consolidated Statement
of Operations to Core Earnings:

(In thousands except share amounts)   Three-Month
Period Ended

June 30, 2018

  Three-Month
Period Ended
March 31, 2018
Net Income (Loss) $ 1,786 $ (3,953 )
Less:
Net realized gains (losses) on securities (7,114 ) 1,927
Net realized gains (losses) on financial derivatives, excluding
periodic payments(1)
(2,361 ) 14,823
Change in net unrealized gains (losses) on securities (3,218 ) (27,061 )
Change in net unrealized gains (losses) on financial derivatives,
excluding accrued periodic payments(2)
9,362   2,076  
Subtotal (3,331 ) (8,235 )
Core Earnings $ 5,117   $ 4,282  
Less: Catch-up Premium Amortization Adjustment 480   (150 )
Adjusted Core Earnings $ 4,637   $ 4,432  
Weighted Average Shares Outstanding 12,715,277 13,224,214
Core Earnings Per Share $ 0.40 $ 0.32
Adjusted Core Earnings Per Share $ 0.36 $ 0.34
 
(1)   For the three-month period ended June 30, 2018, represents Net
realized gains (losses) on financial derivatives of $(3.7) million
less Net realized gains (losses) on periodic settlements of interest
rate swaps of $(1.3) million. For the three-month period ended March
31, 2018, represents Net realized gains (losses) on financial
derivatives of $16.0 million less Net realized gains (losses) on
periodic settlements of interest rate swaps of $1.1 million.
(2) For the three-month period ended June 30, 2018, represents Change in
net unrealized gains (losses) on financial derivatives of $10.8
million less Change in net unrealized gains (losses) on accrued
periodic settlements of interest rate swaps of $1.5 million. For the
three-month period ended March 31, 2018, represents Change in net
unrealized gains (losses) on financial derivatives of $0.6 million
less Change in net unrealized gains (losses) on accrued periodic
settlements of interest rate swaps of $(1.5) million.
 

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

We will host a conference call at 11:00 a.m. Eastern Time on Friday,
August 3, 2018, to discuss our financial results for the quarter ended
June 30, 2018. To participate in the event by telephone, please dial
(877) 437-3698 at least 10 minutes prior to the start time and reference
the conference ID number 5233149. International callers should dial
(810) 740-4679 and reference the same conference ID number. The
conference call will also be webcast live over the Internet and can be
accessed via the "For Our Shareholders" section of our 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, we also posted an investor
presentation, that will accompany the conference call, on our website at www.earnreit.com
under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Friday,
August 3, 2018, at approximately 2:00 p.m. Eastern Time through Friday,
August 17, 2018 at approximately 11:59 p.m. Eastern Time. To access this
replay, please dial (800) 585-8367 and enter the conference ID number
5233149. International callers should dial (404) 537-3406 and enter the
same conference ID number. A replay of the conference call will also be
archived on our 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 our
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, our beliefs regarding
the current economic and investment environment, our ability to
implement our investment and hedging strategies, our future prospects
and the protection of our net interest margin from prepayments,
volatility and its impact on us, the performance of our investment and
hedging strategies, our exposure to prepayment risk in our Agency
portfolio, estimated effects on the fair value of our RMBS and interest
rate derivative holdings of a hypothetical change in interest rates,
statements regarding our share repurchase program, and statements
regarding the drivers of our returns. Our results can fluctuate from
month to month and from quarter to quarter depending on a variety of
factors, some of which are beyond our control and/or are difficult to
predict, including, without limitation, changes in interest rates and
the market value of our securities, changes in mortgage default rates
and prepayment rates, our ability to borrow to finance our assets,
changes in government regulations affecting our business, our ability to
maintain our exclusion from registration under the Investment Company
Act of 1940 and other changes in market conditions and economic trends.
Furthermore, forward-looking statements are subject to risks and
uncertainties, including, among other things, those described in Item 1A
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2017 filed on March 14, 2018 which can be accessed through the link to
our SEC filings under "For Our Shareholders" on our 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

Six-Month
Period Ended

June 30,

2018

  March 31,

2018

June 30,

2018

(In thousands except share amounts)
INTEREST INCOME (EXPENSE)
Interest income $ 14,081 $ 13,426 $ 27,506
Interest expense (7,668 ) (7,248 ) (14,915 )
Total net interest income 6,413   6,178   12,591  
EXPENSES
Management fees to affiliate 656 671 1,327
Professional fees 217 234 452
Compensation expense 187 189 375
Insurance expense 74 74 148
Other operating expenses 293   349   641  
Total expenses 1,427   1,517   2,943  
OTHER INCOME (LOSS)
Net realized gains (losses) on securities (7,114 ) 1,927 (5,188 )
Net realized gains (losses) on financial derivatives (3,702 ) 15,955 12,253
Change in net unrealized gains (losses) on securities (3,218 ) (27,061 ) (30,279 )
Change in net unrealized gains (losses) on financial derivatives 10,834   565   11,399  
Total other income (loss) (3,200 ) (8,614 ) (11,815 )
NET INCOME (LOSS) $ 1,786   $ (3,953 ) $ (2,167 )
NET INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted $ 0.14 $ (0.30 ) $ (0.17 )
WEIGHTED AVERAGE SHARES OUTSTANDING 12,715,277 13,224,214 12,968,340
CASH DIVIDENDS PER SHARE:

Dividends declared

$ 0.37 $ 0.37 $ 0.74
 
 

ELLINGTON RESIDENTIAL MORTGAGE REIT

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 
As of

June 30,
2018

 

March 31,
2018

 

December 31,
2017(1)

(In thousands except share amounts)
ASSETS
Cash and cash equivalents $ 41,402 $ 46,025 $ 56,117
Mortgage-backed securities, at fair value 1,580,103 1,630,575 1,685,998
Due from brokers 26,946 32,061 26,754
Financial derivatives–assets, at fair value 20,095 13,528 8,792
Reverse repurchase agreements 21,373 44,617 81,461
Receivable for securities sold 51,614 73,560 21,606
Interest receivable 5,988 5,645 5,784
Other assets 748   523   575  
Total Assets $ 1,748,269   $ 1,846,534   $ 1,887,087  
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Repurchase agreements $ 1,537,216 $ 1,589,319 $ 1,597,206
Payable for securities purchased 1,387 17,612 3,830
Due to brokers 7,312 1,025 489
Financial derivatives–liabilities, at fair value 1,655 5,876 1,863
U.S. Treasury securities sold short, at fair value 16,195 44,377 81,289

Dividend payable

4,703 4,746 4,936
Accrued expenses 849 911 728
Management fee payable to affiliate 656 671 725
Interest payable 4,127   3,685   3,318  
Total Liabilities 1,574,100   1,668,222   1,694,384  
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;

(12,712,050, 12,827,850, and 13,340,217 shares issued and
outstanding, respectively)

127 128 134
Additional paid-in-capital 233,152 234,376 240,062
Accumulated deficit (59,110 ) (56,192 ) (47,493 )
Total Shareholders' Equity 174,169   178,312   192,703  
Total Liabilities and Shareholders' Equity $ 1,748,269   $ 1,846,534   $ 1,887,087  
PER SHARE INFORMATION

Common shares, par value $0.01 per share

$ 13.70 $ 13.90 $ 14.45
 
    (1) Derived from audited financial statements as of December 31,
2017.
 

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