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Ellington Credit Company Reports First Quarter 2024 Results

Ellington Credit Company, formerly known as Ellington Residential Mortgage REIT (NYSE: EARN) ("we", "us," or "our"), today reported financial results for the quarter ended March 31, 2024.

Highlights

  • Net income (loss) of $4.0 million, or $0.20 per share.
  • Adjusted Distributable Earnings1 of $5.3 million, or $0.27 per share.
  • Book value of $7.21 per share as of March 31, 2024, which includes the effects of dividends of $0.24 per share for the quarter.
  • Net interest margin2 of 2.46% on Agency, 9.65% on credit, and 3.03% overall.
  • Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 5.23.
  • Net mortgage assets-to-equity ratio of 5.4:14 as of March 31, 2024.
  • CLO portfolio grew to $45.1 million as of March 31, 2024.
  • Capital allocation5 as of March 31, 2024: 75% mortgage-related securities, 25% corporate CLOs.
  • Maintained $0.08 per common share regular monthly dividend. Dividend yield of 13.4% based on the May 13, 2024 closing stock price of $7.14, and monthly dividend of $0.08 per common share declared on May 7, 2024.
  • Debt-to-equity ratio of 4.8:1 as of March 31, 2024; adjusted for unsettled purchases and sales, debt-to-equity ratio of 4.9:1 as of March 31, 2024.
  • Cash and cash equivalents of $22.4 million as of March 31, 2024, in addition to other unencumbered assets of $57.1 million.

Strategic Transformation

On March 29, 2024, our Board of Trustees approved a strategic transformation of our investment strategy to focus on corporate CLOs, with an emphasis on mezzanine debt and equity tranches. In connection with this transformation, we revoked our election to be taxed as a REIT effective January 1, 2024.

Later in 2024, we intend, subject to shareholder approval of certain matters, to convert to a closed-end fund registered under the Investment Company Act of 1940, as amended (the "1940 Act") that would be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended, and complete our transition from an MBS-focused company to a CLO-focused company. In the meantime, we will operate as a taxable C-Corp and plan to take advantage of our significant existing net operating loss carryforwards to offset the majority of our U.S. federal taxable income we may generate while operating as a taxable C-Corp.

As part of the strategic transformation, we rebranded as Ellington Credit Company and updated our web address to www.ellingtoncredit.com. We will continue to be listed on the New York Stock Exchange under our ticker symbol EARN.

First Quarter 2024 Results

"Driven in large part by excellent performance from our CLO portfolio, in the first quarter Ellington Credit Company generated net income of $0.20 per share and adjusted distributable earnings of $0.27 per share, which again more than covered our dividend," said Laurence Penn, Chief Executive Officer and President. "Similar to the prior quarter, our ongoing rotation into CLOs expanded our net interest margin and reduced our overall leverage. In addition, we reduced the size of our interest rate hedging portfolio in the first quarter, given that our CLOs are predominantly backed by floating-rate loans and, as such, have much more limited interest rate duration risk.

"We more than doubled our CLO portfolio to $45 million in the first quarter. Including investment activity through May 13th, our CLO portfolio now stands at approximately $60 million. Meanwhile, our Agency MBS pool investments are concentrated in liquid sectors. As a result, the cost of liquidating these pools to free up capital for CLOs has been very modest so far, and we expect this to continue.

"While we continue our transition to a closed-end fund, we expect to grow the CLO portfolio above $100 million, while maintaining a core portfolio of liquid Agency MBS pools to maintain our exemption from the 1940 Act during this interim period. We are operating as a taxable C-Corp during this transitional period, but we entered 2024 with significant net operating loss carryforwards, and we plan to utilize those NOLs to offset the majority of our U.S. federal taxable income until our conversion to a closed-end fund/RIC is completed. We remain on track to complete our conversion later this year.

"I am extremely excited about this new chapter for EARN. Ellington Management Group has a longstanding and successful track record of investing in CLOs, and I strongly believe that this shift will generate higher risk-adjusted returns, with less volatility, for Ellington Credit shareholders. Once our conversion to a closed-end fund/RIC is completed, our new structure should also enable us to access a more favorable cost of capital to support future growth. I believe that these factors will help drive ADE and dividend growth from here."

___________________________________

1

Adjusted Distributable Earnings is a non-GAAP financial measure. See "Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)" below for an explanation regarding the calculation of Adjusted Distributable Earnings.

2

Net interest margin of a group of assets represents the weighted average asset yield less the weighted average cost of borrowings secured by those assets (including the effect of net interest income (expense) related to U.S. Treasury securities and actual and accrued payments on interest rate swaps used to hedge such borrowings); net interest margin excludes the effect of the Catch-up Amortization Adjustment.

3

Excludes recent purchases of fixed rate Agency specified pools with no prepayment history.

4

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 shareholder's equity. As of March 31, 2024 the market value of our mortgage-backed securities and our net short TBA position was $767.0 million and $(3) thousand, respectively, and total shareholders' equity was $142.9 million.

5

Percentages shown are of net assets, as opposed to gross assets, deployed in each strategy.

Financial Results

The following table summarizes our portfolio of long investments as of March 31, 2024 and December 31, 2023:

 

March 31, 2024

 

December 31, 2023

($ in thousands)

Current

Principal

 

Fair Value

 

Average

Price(1)

 

Cost

 

Average

Cost(1)

 

Current

Principal

 

Fair Value

 

Average

Price(1)

 

Cost

 

Average

Cost(1)

Credit Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLOs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO Notes

$

39,096

 

$

33,761

 

86.35

 

$

32,413

 

82.91

 

$

16,876

 

$

14,491

 

85.87

 

$

14,441

 

85.57

CLO Equity

 

n/a

 

 

11,327

 

n/a

 

 

11,602

 

n/a

 

 

n/a

 

 

2,926

 

n/a

 

 

2,947

 

n/a

Total CLO

 

 

 

45,088

 

 

 

 

44,015

 

 

 

 

 

 

17,417

 

 

 

 

17,388

 

 

Non-Agency RMBS(2)

 

9,942

 

 

9,647

 

97.03

 

 

8,134

 

81.81

 

 

9,953

 

 

9,409

 

94.53

 

 

8,189

 

82.28

Non-Agency IOs

 

n/a

 

 

11,545

 

n/a

 

 

8,432

 

n/a

 

 

n/a

 

 

11,310

 

n/a

 

 

8,700

 

n/a

Total Credit

 

 

 

66,280

 

 

 

 

60,581

 

 

 

 

 

 

38,136

 

 

 

 

34,277

 

 

Agency Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency RMBS(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15-year fixed-rate mortgages

 

28,173

 

 

27,373

 

97.16

 

 

28,366

 

100.69

 

 

28,647

 

 

27,847

 

97.21

 

 

28,765

 

100.41

20-year fixed-rate mortgages

 

4,387

 

 

4,234

 

96.51

 

 

4,734

 

107.91

 

 

8,524

 

 

7,863

 

92.25

 

 

9,033

 

105.97

30-year fixed-rate mortgages

 

720,307

 

 

686,406

 

95.29

 

 

700,100

 

97.19

 

 

697,510

 

 

670,294

 

96.10

 

 

682,379

 

97.83

ARMs

 

7,043

 

 

7,039

 

99.94

 

 

7,831

 

111.19

 

 

7,127

 

 

7,119

 

99.89

 

 

8,060

 

113.09

Reverse mortgages

 

13,565

 

 

14,209

 

104.75

 

 

15,342

 

113.10

 

 

14,406

 

 

14,874

 

103.25

 

 

16,589

 

115.15

Total Agency RMBS

 

773,475

 

 

739,261

 

95.58

 

 

756,373

 

97.79

 

 

756,214

 

 

727,997

 

96.27

 

 

744,826

 

98.49

Agency IOs

 

n/a

 

 

6,501

 

n/a

 

 

5,454

 

n/a

 

 

n/a

 

 

7,415

 

n/a

 

 

6,607

 

n/a

Total Agency

 

 

 

745,762

 

 

 

 

761,827

 

 

 

 

 

 

735,412

 

 

 

 

751,433

 

 

Total

 

 

$

812,042

 

 

 

$

822,408

 

 

 

 

 

$

773,548

 

 

 

$

785,710

 

 

(1)

Expressed as a percentage of current principal balance.

(2)

Excludes IOs.

During the first quarter, the size of our CLO holdings increased to $45.1 million as of March 31, 2024, compared to $17.4 million as of December 31, 2023. Over the same period, the size of our Agency RMBS holdings increased slightly to $739.3 million as of March 31, 2024, compared to $728.0 million as of December 31, 2023, and our aggregate holdings of interest-only securities and non-Agency RMBS decreased modestly.

Our debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 4.9:1 as of March 31, 2024, as compared to 5.3:1 as of December 31, 2023, driven by higher shareholders' equity and less leverage on our CLO investments, which now constitute a larger proportion of our overall portfolio, compared to Agency RMBS. Our net mortgage assets-to-equity ratio also decreased over the same period, to 5.4:1 from 5.8:1, driven by the increase in shareholders' equity and a net short TBA position as of March 31, 2024, compared to a net long TBA position as of December 31, 2023, partially offset by a larger Agency RMBS portfolio.

During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We ended the quarter with a small net short TBA position. We also selectively hedge our corporate CLO and non-Agency RMBS investments; as of March 31, 2024, our credit hedge portfolio was relatively small.

The net interest margins on our Agency and credit portfolios both increased quarter over quarter, driven by incrementally higher average asset yields and, for our Agency portfolio, a lower cost of funds. In the first quarter, the net interest margins (excluding the Catch-up Amortization Adjustment) on our Agency and credit portfolios increased to 2.46% and 9.65%, respectively, as compared to 2.02% and 6.28% in the prior quarter. Our cost of funds and net interest margin continue to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate.

The following table summarizes our operating results by strategy for the three-month periods ended March 31, 2024 and December 31, 2023:

 

 

Three-Month

Period Ended

March 31, 2024

 

Per Share

 

Three-Month

Period Ended

December 31, 2023

 

Per Share

(In thousands, except share amounts and per share amounts)

 

 

 

 

 

 

 

 

Credit:

 

 

 

 

 

 

 

 

CLOs

 

 

 

 

 

 

 

 

Interest income

 

$

1,244

 

 

$

0.06

 

 

$

329

 

 

$

0.02

 

Interest expense

 

 

(67

)

 

 

 

 

 

(39

)

 

 

 

Realized gain (loss), net

 

 

142

 

 

 

0.01

 

 

 

32

 

 

 

 

Unrealized gain (loss), net

 

 

1,008

 

 

 

0.05

 

 

 

28

 

 

 

 

Credit hedges and other activities, net(1)

 

 

(77

)

 

 

 

 

 

(37

)

 

 

 

Total CLO profit (loss)

 

$

2,250

 

 

$

0.12

 

 

$

313

 

 

$

0.02

 

Non-Agency RMBS(2)

 

 

 

 

 

 

 

 

Interest income

 

$

564

 

 

$

0.03

 

 

$

531

 

 

$

0.03

 

Interest expense

 

 

(178

)

 

 

(0.01

)

 

 

(271

)

 

 

(0.02

)

Realized gain (loss), net

 

 

42

 

 

 

 

 

 

(396

)

 

 

(0.02

)

Unrealized gain (loss), net

 

 

795

 

 

 

0.04

 

 

 

665

 

 

 

0.04

 

Interest rate hedges

 

 

26

 

 

 

 

 

 

(70

)

 

 

 

Total Non-Agency RMBS profit (loss)

 

$

1,249

 

 

$

0.06

 

 

$

459

 

 

$

0.03

 

Total Credit profit (loss)

 

$

3,499

 

 

$

0.18

 

 

$

772

 

 

$

0.05

 

Agency RMBS(2):

 

 

 

 

 

 

 

 

Interest income

 

$

7,403

 

 

$

0.38

 

 

$

9,464

 

 

$

0.57

 

Interest expense

 

 

(9,091

)

 

 

(0.47

)

 

 

(10,253

)

 

 

(0.62

)

Realized gain (loss), net

 

 

(10,709

)

 

 

(0.55

)

 

 

(12,685

)

 

 

(0.76

)

Unrealized gain (loss), net

 

 

(43

)

 

 

 

 

 

50,099

 

 

 

3.01

 

Interest rate hedges and other activities, net(3)

 

 

14,467

 

 

 

0.74

 

 

 

(24,206

)

 

 

(1.45

)

Total Agency RMBS profit (loss)

 

$

2,027

 

 

$

0.10

 

 

$

12,419

 

 

$

0.75

 

Total Credit and Agency RMBS profit (loss)

 

$

5,526

 

 

$

0.28

 

 

$

13,191

 

 

$

0.80

 

Other interest income (expense), net

 

$

365

 

 

$

0.02

 

 

$

622

 

 

$

0.04

 

Income tax (expense) benefit

 

 

(303

)

 

 

(0.02

)

 

 

 

 

 

 

Other expenses

 

 

(1,627

)

 

 

(0.08

)

 

 

(1,374

)

 

 

(0.09

)

Net income (loss)

 

$

3,961

 

 

$

0.20

 

 

$

12,439

 

 

$

0.75

 

Weighted average shares outstanding

 

 

19,548,408

 

 

 

 

 

16,662,407

 

 

 

(1)

Other activities includes currency hedges as well as net realized and unrealized gains (losses) on foreign currency.

(2)

Includes IOs.

(3)

Includes U.S. Treasury securities.

CLO Performance

Following strong performance in the final months of 2023, corporate credit spreads tightened further in the first quarter, driven by continued capital inflows to the sector, strengthening fundamentals, and declining interest rate volatility. Net demand for leveraged loans remained strong as a result of significant primary CLO issuance volumes and rapid repayments of existing leveraged loan facilities, as borrowers continued to lower their financing costs.

Our CLO strategy had excellent performance for the quarter, led by strong interest income as well as net realized and unrealized gains on our seasoned CLO mezzanine investments, mostly owned at discounts to par, driven by elevated loan prepayments.

Non-Agency Performance

Our non-Agency RMBS portfolio and interest-only securities also generated strong results for the quarter, driven by net interest income and mark-to-market gains attributable to spread tightening.

Agency Performance

Despite lower interest rate volatility during the quarter, performance of Agency MBS lagged the broader rally in credit as market consensus for the timing of the first Federal Reserve rate cut was pushed back. This drove interest rates higher across the yield curve and pressured yield spreads on Agency MBS, particularly in February and particularly for lower-coupon MBS. While Agency MBS yield spreads did recover meaningfully in March, driven by lower volatility and capital inflows, overall for the quarter Agency MBS generated a modestly negative excess return to Treasuries. Despite the negative excess return, EARN’s agency portfolio was profitable for the quarter, as net gains on our interest-rate hedges exceeded net losses on our pools and negative net interest income.

Average pay-ups on our specified pool portfolio decreased to 0.85% as of March 31, 2024, as compared to 1.01% as of December 31, 2023.

About Ellington Credit Company

Ellington Credit Company (the "Company"), formerly known as Ellington Residential Mortgage REIT, was initially formed as a real estate investment trust ("REIT") that invested primarily in residential mortgage-backed securities ("MBS"). On March 29, 2024, the Company's Board of Trustees approved a strategic transformation of the Company's investment strategy to focus on corporate CLOs, with an emphasis on mezzanine debt and equity tranches. In connection with this transformation, the Company revoked its election to be taxed as a REIT effective January 1, 2024, and rebranded as Ellington Credit Company. Later in 2024, the Company intends, subject to shareholder approval of certain matters, to convert to a closed-end fund and complete its transition from an MBS-focused company to a CLO-focused company.

Conference Call

We will host a conference call at 11:00 a.m. Eastern Time on Wednesday, May 15, 2024, to discuss its financial results for the quarter ended March 31, 2024. To participate in the event by telephone, please dial (800) 343-5419 at least 10 minutes prior to the start time and reference the conference ID: EARNQ124. International callers should dial (203) 518-9731 and reference the same conference ID. The conference call will also be webcast live over the Internet and can be accessed via the "For Investors" section of our web site at www.ellingtoncredit.com. To listen to the live webcast, please visit www.ellingtoncredit.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.ellingtoncredit.com under "For Investors—Presentations."

A dial-in replay of the conference call will be available on Wednesday, May 15, 2024, at approximately 2:00 p.m. Eastern Time through Wednesday, May 22, 2024 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 934-8233. International callers should dial (402) 220-6991. A replay of the conference call will also be archived on our web site at www.ellingtoncredit.com.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release constitute 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 based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements or 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. The following factors are examples of those that could cause actual results to vary from those stated or implied by our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in mortgage default rates and prepayment rates, our ability to borrow to finance our assets, our ability to pivot our investment strategy to focus on CLOs, a deterioration in the CLO market, our ability to utilize our NOLs, our ability to convert to a closed end fund/RIC, including our ability to obtain shareholder approval of our conversion to a closed end fund/RIC, 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, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, as stated above, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K and in the Current Report on Form 8-K filed with the SEC on April 1, 2024, which can be accessed through the link to our SEC filings under "For Investors" on our website (at www.ellingtoncredit.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. New risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause our actual results to differ from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

ELLINGTON CREDIT COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

 

 

Three-Month Period Ended

 

 

March 31, 2024

 

December 31, 2023

(In thousands except share amounts and per share amounts)

 

 

 

 

INTEREST INCOME (EXPENSE)

 

 

 

 

Interest income

 

$

10,379

 

 

$

11,888

 

Interest expense

 

 

(10,100

)

 

 

(11,511

)

Total net interest income (expense)

 

 

279

 

 

 

377

 

EXPENSES

 

 

 

 

Management fees to affiliate

 

 

538

 

 

 

512

 

Professional fees

 

 

339

 

 

 

193

 

Compensation expense

 

 

270

 

 

 

190

 

Insurance expense

 

 

94

 

 

 

93

 

Other operating expenses

 

 

386

 

 

 

386

 

Total expenses

 

 

1,627

 

 

 

1,374

 

OTHER INCOME (LOSS)

 

 

 

 

Net realized gains (losses) on securities

 

 

(9,823

)

 

 

(11,825

)

Net realized gains (losses) on financial derivatives

 

 

3,459

 

 

 

1,440

 

Change in net unrealized gains (losses) on securities

 

 

1,760

 

 

 

50,930

 

Change in net unrealized gains (losses) on financial derivatives

 

 

10,216

 

 

 

(27,109

)

Total other income (loss)

 

 

5,612

 

 

 

13,436

 

Net income (loss) before income taxes

 

 

4,264

 

 

 

12,439

 

Income tax expense (benefit)

 

 

303

 

 

 

 

NET INCOME (LOSS)

 

$

3,961

 

 

$

12,439

 

NET INCOME (LOSS) PER COMMON SHARE:

 

 

 

 

Basic and Diluted

 

$

0.20

 

 

$

0.75

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

19,548,408

 

 

 

16,662,407

 

CASH DIVIDENDS PER SHARE:

 

 

 

 

Dividends declared

 

$

0.24

 

 

$

0.24

 

 

ELLINGTON CREDIT COMPANY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

As of

 

 

March 31,

2024

 

December 31,

2023(1)

(In thousands except share amounts and per share amounts)

 

 

 

 

ASSETS

 

 

 

 

Cash and cash equivalents

 

$

22,442

 

 

$

38,533

 

Securities, at fair value

 

 

812,042

 

 

 

773,548

 

Due from brokers

 

 

5,261

 

 

 

3,245

 

Financial derivatives–assets, at fair value

 

 

82,330

 

 

 

74,279

 

Receivable for securities sold

 

 

36,474

 

 

 

51,132

 

Interest receivable

 

 

4,642

 

 

 

4,522

 

Other assets

 

 

765

 

 

 

431

 

Total Assets

 

$

963,956

 

 

$

945,690

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

LIABILITIES

 

 

 

 

Repurchase agreements

 

$

683,171

 

 

$

729,543

 

Payable for securities purchased

 

 

68,179

 

 

 

12,139

 

Due to brokers

 

 

58,238

 

 

 

54,476

 

Financial derivatives–liabilities, at fair value

 

 

5,746

 

 

 

7,329

 

Dividend payable

 

 

1,586

 

 

 

1,488

 

Accrued expenses

 

 

1,702

 

 

 

1,153

 

Management fee payable to affiliate

 

 

538

 

 

 

513

 

Interest payable

 

 

1,879

 

 

 

2,811

 

Total Liabilities

 

 

821,039

 

 

 

809,452

 

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; (19,819,610 and 18,601,464 shares issued and outstanding, respectively)(2)

 

 

198

 

 

 

186

 

Additional paid-in-capital

 

 

282,161

 

 

 

274,698

 

Accumulated deficit

 

 

(139,442

)

 

 

(138,646

)

Total Shareholders' Equity

 

 

142,917

 

 

 

136,238

 

Total Liabilities and Shareholders' Equity

 

$

963,956

 

 

$

945,690

 

SUPPLEMENTAL PER SHARE INFORMATION

 

 

 

 

Book Value Per Share

 

$

7.21

 

 

$

7.32

 

(1)

Derived from audited financial statements as of December 31, 2023.

(2)

Common shares issued and outstanding at March 31, 2024, includes 1,218,146 common shares issued during the first quarter under our at-the-market common share offering program.

Reconciliation of Adjusted Distributable Earnings to Net Income (Loss)

We calculate Adjusted Distributable Earnings as net income (loss) adjusted for: (i) net realized and change in net unrealized gains and (losses) on securities, financial derivatives, and foreign currency transactions; (ii) net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps; (iii) other income or loss items that are of a non-recurring nature, if any; (iv) Catch-up Amortization Adjustment (as defined below); and (v) provision for income taxes. The Catch-up Amortization Adjustment is a quarterly adjustment to premium amortization or discount accretion 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-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our portfolio, after the effects of financial leverage; and (iii), we believe that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our peers. Our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution.

In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.

In setting our dividends, our Board of Trustees considers our earnings, liquidity, financial condition, distribution requirements, and financial covenants, along with other factors that the Board of Trustees may deem relevant from time to time.

The following table reconciles, for the three-month periods ended March 31, 2024 and December 31, 2023, our Adjusted Distributable Earnings to the line on our Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable U.S. GAAP measure:

 

 

Three-Month Period Ended

(In thousands except share amounts and per share amounts)

 

March 31, 2024

 

December 31, 2023

Net Income (Loss)

 

$

3,961

 

 

$

12,439

 

Income tax expense (benefit)

 

 

303

 

 

 

 

Net Income (Loss) before income taxes

 

 

4,264

 

 

 

12,439

 

Adjustments:

 

 

 

 

Net realized (gains) losses on securities

 

 

9,823

 

 

 

11,825

 

Change in net unrealized (gains) losses on securities

 

 

(1,760

)

 

 

(50,930

)

Net realized (gains) losses on financial derivatives

 

 

(3,459

)

 

 

(1,440

)

Change in net unrealized (gains) losses on financial derivatives

 

 

(10,216

)

 

 

27,109

 

Net realized gains (losses) on periodic settlements of interest rate swaps

 

 

5,812

 

 

 

880

 

Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps

 

 

(111

)

 

 

5,228

 

Non-recurring expenses

 

 

75

 

 

 

13

 

Negative (positive) component of interest income represented by Catch-up Amortization Adjustment

 

 

884

 

 

 

(566

)

Subtotal

 

 

1,048

 

 

 

(7,881

)

Adjusted Distributable Earnings

 

$

5,312

 

 

$

4,558

 

Weighted Average Shares Outstanding

 

 

19,548,408

 

 

 

16,662,407

 

Adjusted Distributable Earnings Per Share

 

$

0.27

 

 

$

0.27

 

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