Ellington Residential Mortgage REIT(NYSE: EARN) First Quarter 2014 Earnings Conference Call May 13, 2014
Important Notice Forward-Looking Statements This presentation 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 the Company’s 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 Company's results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond the Company's control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of the Company's securities, changes in mortgage default rates and prepayment rates, the Company's ability to borrow to finance its assets, changes in government regulations affecting the Company's business, the Company's ability to maintain its exemption 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 under Item 1A of our Annual Report on Form 10-K filed on March 21, 2014 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 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. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Modeling Some statements in this presentation may be derived from proprietary models developed by Ellington Management Group, L.L.C. (“Ellington”). Some examples provided may be based upon the hypothetical performance of such models. Models, however, are inherently imperfect and subject to a number of risks, including that the underlying data used by the models is incorrect, inaccurate, or incomplete, or that the models rely upon assumptions that may prove to be incorrect. The utility of model-based information is highly limited. The information is designed to illustrate Ellington’s current view and expectations and is based on a number of assumptions and limitations, including those specified herein. Certain models make use of discretionary settings or parameters which can have a material effect on the output of the model. Ellington exercises discretion as to which settings or parameters to use in different situations, including using different settings or parameters to model different securities. Actual results and events may differ materially from those described by such models. Projected Yields and Spreads Projected yields and spreads discussed herein are based upon Ellington models and rely on a number of assumptions, including as to prepayment, default and interest rates and changes in home prices. Such models are inherently imperfect and there is no assurance that any particular investment will perform as predicted by the models, or that any such investment will be profitable. Projected yields are presented for the purposes of (i) providing insight into the strategy’s objectives, (ii) detailing anticipated risk and reward characteristics in order to facilitate comparisons with other investments, (iii) illustrating Ellington’s current views and expectations, and (iv) aiding future evaluations of performance. They are not a guarantee of future performance. They are based upon assumptions regarding current and future events and conditions, which may not prove to be accurate. There can be no assurance that the projected yields will be achieved. Investments involve risk of loss. Financial Information All financial information included in this presentation is as of March 31, 2014 unless otherwise indicated. We undertake no duty or obligation to update this presentation to reflect subsequent events or developments. 2
First Quarter 2014
Ellington Residential: First Quarter Highlights First quarter net income of $2.8 million or $0.30 per share Book value decrease of 1.3% to $18.05 per share as of March 31, 2014 from $18.29 per share as of Overall Results December 31, 2013, after giving effect to $0.55 first quarter dividend which was paid in April 2014 Economic return on book value of 1.7% Core Earnings of $7.0 million or $0.77 per share 17 bps increase in Net Interest Margin to 2.34% Core Earnings (1) “Catch-up” positive premium amortization adjustment of $0.3 million or $0.03 per share Excluding “catch-up amortization adjustment,” net interest margin increased 0.21% to 2.27% Shareholders’ Shareholders’ equity of $165.0 million as of March 31, 2014 Equity Agency RMBS Portfolio: $1.296 billion as of March 31, 2014 $1.200 billion fixed rate “specified” pools $49.8 million ARM pools Portfolio $29.5 million in reverse mortgage pools $15.9 million IOs Non-Agency RMBS Portfolio: $32.0 million as of March 31, 2014 Debt to equity ratio: approximately 7.8:1 as of March 31, 2014 and December 31, 2013 Leverage Average cost of funds 0.37% for the quarter or 1.14% including interest rate swaps Declared first quarter dividend of $0.55 per share (paid in April 2014) Dividend Annualized dividend yield of 12.9% based on closing price of $17.04 on May 9, 2014 4 (1) Core Earnings is a non-GAAP financial measure. See slide 23 for a reconciliation of Core Earnings to Net Income (Loss).
Ellington Residential: Agency RMBS Agency RMBS rallied in the first quarter, recovering much of their losses from the fourth quarter of 2013 The Federal Reserve continues to taper its monthly bond purchases on a steady and measured pace, and it is expected that by late 2014 the Federal Reserve's net monthly purchases of Agency RMBS will come to an end Overall Market The reduction in Federal Reserve purchase activity was easily absorbed by other Conditions market participants Significantly lower interest rate volatility in the first few months of 2014 compared to the second half of 2013 New mortgage origination and refinancing activity were low given the absolute level of mortgage rates We expect to continue to find opportunities to acquire specified pools at attractive prices While pay-ups increased during the first quarter, they are still well below their previous highs Average pay-up of 0.32% as of March 31 st , and 0.20% as of December 31 st Portfolio Remain active in fixed rate reverse mortgage pools, IOs, and ARMs Trends and Turned over approximately 44% of the portfolio as measured by sales, excluding principal Outlook paydowns 5
Ellington Residential: Non-Agency Non-Agency RMBS rallied in the first quarter, benefiting from the market perception of less uncertainty around future actions of the Federal Reserve with respect to its asset purchase program Overall Market Home prices continue to provide support to asset valuations Conditions Investor appetite for fixed income assets, especially higher yielding assets, has increased; bond funds experienced net inflows in the first quarter of 2014, in contrast to the outflows they experienced in the latter half of 2013 Slightly increased size of portfolio Turned over approximately 17% of the portfolio as measured by sales, excluding principal paydowns Portfolio As the sector has rallied, security selection has become increasingly important Trends and We expect that home prices will continue to appreciate in 2014, although not at the double-digit Outlook pace of 2013 As Wall Street balance sheets and risk-taking appetites decline as a result of Basel III and Dodd Frank, we expect continued trading opportunities 6
Implied Volatility Implied Annual Basis Point Change of the USD 10-Year Swap, 1-Year Forward 115 110 105 100 Change (In bps) 95 90 85 80 75 70 Market expectations of interest rate volatility have changed dramatically Last fall, market participants expected taper to cause substantial volatility Now market participants expect very low levels of volatility There is little room for actual levels of volatility to be below expectations Source: Barclays 7
New & Existing Home Sales are Below Levels from 15 Years Ago New Home Sales, Existing Home Sales, and the Mortgage Bankers Association Refinance Index, Normalized 600 500 400 300 200 100 0 New Home Sales Existing Home Sales MBA Refinance Index Refinance indices are at similarly depressed levels All three factors depress mortgage origination volumes Resulting low volumes are pressuring originators to relax lending standards We expect some increase in mortgage volumes Source: Bloomberg 8
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