Ellington Residential Mortgage REIT(EARN) - 2024 Q2 - Quarterly Results

Ellington Credit Company Q2 2024 Earnings Report Highlights The company reported a Q2 net loss of $0.8 million but generated positive Adjusted Distributable Earnings of $7.3 million while accelerating its strategic shift to CLOs Q2 2024 Key Financial Metrics | Metric | Value | | :--- | :--- | | Net Income (Loss) | $(0.8) million | | Net Income (Loss) per Share | $(0.04) | | Adjusted Distributable Earnings | $7.3 million | | Adjusted Distributable Earnings per Share | $0.36 | | Book Value per Share (June 30, 2024) | $6.91 | | Quarterly Dividends per Share | $0.24 | | Net Mortgage Assets-to-Equity Ratio | 4.0:1 | | Debt-to-Equity Ratio | 4.0:1 | - The company significantly increased its focus on corporate CLOs, with the portfolio size growing from $45.1 million in Q1 to $85.1 million in Q2 2024[2] - Capital allocation to corporate CLOs rose to 45% as of June 30, 2024, up from 25% at the end of the previous quarter[2] Strategic Transformation Update The company is shifting its focus to corporate CLOs, revoking its REIT status, and planning a conversion to a closed-end fund and RIC - On March 29, 2024, the Board approved a strategic transformation to focus on corporate CLOs, particularly mezzanine debt and equity tranches[3] - The company revoked its REIT election effective January 1, 2024, and intends to convert to a closed-end fund and be treated as a regulated investment company (RIC)[3][4] - The CLO portfolio grew from $45.1 million at the end of Q1 to $85.1 million at the end of Q2, and further to $108 million by August 9, 2024, representing about 50% of capital allocation[5][6] Second Quarter 2024 Results A growing CLO portfolio drove Adjusted Distributable Earnings, while a modest loss in the MBS portfolio resulted in a slight overall net loss - The CLO portfolio generated positive net income and contributed significantly to adjusted distributable earnings, which comfortably covered the dividend[6] - The MBS portfolio generated a modest net loss due to intra-quarter interest rate and spread volatility, leading to an overall slight net loss for the company[7] - The CEO expects Q3 adjusted distributable earnings to decline from Q2's $0.36 per share level but remain above Q1's $0.27 per share, as the company terminates interest rate swaps associated with selling Agency MBS[8][13] Financial Results and Portfolio Composition The portfolio shifted towards CLOs, which grew 55%, while the Agency portfolio decreased by 28%, leading to reduced overall leverage Portfolio Composition (Fair Value, $ in thousands) | Portfolio | June 30, 2024 | March 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Credit | $102,911 | $66,280 | +55.3% | | - CLOs | $85,088 | $45,088 | +88.7% | | Total Agency | $533,457 | $745,762 | -28.5% | | Total Investments | $636,368 | $812,042 | -21.6% | - The CLO portfolio consists of $45.1 million in mezzanine debt notes and $40.0 million in equity tranches as of June 30, 2024[10] - The debt-to-equity ratio, adjusted for unsettled trades, decreased to 3.7:1 from 4.9:1 in the prior quarter, driven by higher equity and lower leverage on the growing CLO portfolio[11] Performance by Asset Class The Credit portfolio generated a $1.8 million profit driven by CLOs, while the Agency RMBS portfolio recorded a $0.9 million net loss Profit (Loss) by Strategy ($ in thousands) | Strategy | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Total Credit | $1,768 | $3,499 | | - CLOs | $1,046 | $2,250 | | - Non-Agency RMBS | $722 | $1,249 | | Total Agency RMBS | $(935) | $2,027 | - The CLO strategy had positive performance led by strong interest income and net gains on mezzanine positions, partially offset by mark-to-market losses on certain CLO equity positions due to rapid loan prepayments[18] - The Agency portfolio generated a small net loss as losses on Agency RMBS exceeded gains on interest rate hedges, against a backdrop of a negative excess return for the U.S. Agency MBS Index[20] General and Administrative Expenses General and administrative expenses increased quarter-over-quarter due to higher professional fees and compensation related to the strategic transformation - General and administrative expenses were higher quarter over quarter due to increased professional fees and compensation expense related to the strategic transformation[20] Financial Statements The company reported a Q2 net loss of $0.8 million, with total assets decreasing to $933.5 million and book value per share declining to $6.91 Consolidated Statement of Operations For Q2 2024, the company reported total net interest income of $3.9 million and a net loss of $815,000, or $(0.04) per share Q2 2024 Statement of Operations Highlights ($ in thousands) | Line Item | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Total Net Interest Income | $3,897 | $279 | | Total Expenses | $2,164 | $1,627 | | Total Other Income (Loss) | $(2,623) | $5,612 | | Net Income (Loss) | $(815) | $3,961 | | Net Income (Loss) Per Share | $(0.04) | $0.20 | Consolidated Balance Sheet As of June 30, 2024, total assets were $933.5 million, total liabilities were $787.3 million, and shareholders' equity was $146.1 million Balance Sheet Summary ($ in thousands) | Account | June 30, 2024 | March 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $118,763 | $22,442 | | Securities, at fair value | $636,368 | $812,042 | | Total Assets | $933,457 | $963,956 | | Repurchase agreements | $578,503 | $683,171 | | Total Liabilities | $787,328 | $821,039 | | Total Shareholders' Equity | $146,129 | $142,917 | | Book Value Per Share | $6.91 | $7.21 | Reconciliation of Adjusted Distributable Earnings to Net Income (Loss) The company reconciled a GAAP net loss of $0.8 million to non-GAAP Adjusted Distributable Earnings of $7.3 million, or $0.36 per share - Adjusted Distributable Earnings is a non-GAAP measure calculated by adjusting net income for unrealized gains/losses, certain non-recurring items, and other adjustments to better reflect long-term performance and dividend-paying ability[30][31] Adjusted Distributable Earnings Reconciliation ($ in thousands) | Line Item | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Net Income (Loss) | $(815) | $3,961 | | Total Adjustments | $8,088 | $1,351 | | Adjusted Distributable Earnings | $7,273 | $5,312 |