Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by and a welcome to the Ellington Residential Mortgage REIT 2020 First Quarter Financial Results Conference Call. Today's call is being recorded. At this time, our participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any time your question has been answered, you may remove yourself from the question queue by pressing the pound key. Lastly, if you should require any further assistance, please press star zero. It is now my pleasure to turn the floor over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you, and welcome to Ellington Residential's first quarter 2020 earnings conference call. Before we begin, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under item 1A of our annual report on Form 10-K filed on March 12, 2020, Forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellingson Residential, Mark Takotsky, our Co-Chief Investment Officer, and Chris Smirnoff, our Chief Financial Officer. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, EarnREIT.com. Our comments this morning will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. We appreciate your time and interest in Ellington Residential. The month of March will be remembered as one of the most challenging environments ever for leveraged mortgage portfolios. The COVID-19 pandemic and the associated measures to contain the pandemic led to extreme volatility and severe dislocations in virtually all financial markets. Economic activity plunged as countries around the world implemented social distancing restrictions. Unemployment claims surged, consumer spending plummeted, and GDP growth rates turned negative. In March, equity sold off across the globe. Yield spreads on most fixed income assets widened sharply, and a flight to safety drove record low yields on long-term U.S. Treasuries. Portions of the yield curve inverted, and interest rate volatility surged. On slide three, you can see the extraordinary quarter-over-quarter declines in Treasury yields. Repo financing stresses alongside a drop in asset prices severely reduced liquidity and prompted forced selling across virtually all credit-sensitive fixed-income asset classes, and the residential mortgage market was not spared. The selling pressure was severe, even in perceived safe havens like agency RMBS. By mid-March, between the heightened interest rate volatility and the ongoing flight to the safe haven of U.S. Treasuries, Yield spreads on agency RMBS had skyrocketed to levels not seen since the 2008-2009 financial crisis. In response, the Federal Reserve slashed short-term interest rates nearly to zero, injected liquidity into the repo markets, launched several credit facilities similar to what it had implemented during the financial crisis, and stepped in with unprecedented levels of quantitative easing, all of which provided meaningful support, especially to the more liquid sectors of the market. The U.S. Congress passed three rounds of stimulus packages during March, culminating in the $2 trillion CARES Act on March 27th, the largest emergency spending bill in history. These actions were mirrored by central banks and governments around the globe, and the rollout of stimulus programs continued into April. As the Federal Reserve deployed its full crisis playbook, we saw what was in effect almost a full market cycle compressed into just a few weeks. U.S. equities bounced back sharply from their March 23rd lows, as what had been a 34% drop in the S&P 500 in less than five weeks was immediately followed by an 18% rise in just three days. The Federal Reserve's injections of capital eased liquidity stresses, and yield spreads in the sectors targeted by the Federal Reserve's asset purchase programs tightened sharply, particularly in agency RMBS, which recovered strongly during the last two weeks of the month. Take 30-year Fannie Mae 4s, for example. By some measures, LIBOR option-adjusted spreads on Fannie Mae 4s, after reaching their widest level since the financial crisis, tightened at an astounding 140 basis points between March 19th and March 31st. In fact, given the persistent high levels of interest rate volatility, which factor greatly into the calculation of option-adjusted spreads, Fannie Mae 4 LIBOR option-adjusted spreads were by some measures actually tighter at quarter end than they were on December 31st. In the credit space, yield spreads in some sectors, such as investment-grade corporate bonds, also tightened significantly following the Fed's actions, while other sectors, including non-investment-grade CMBS, noticeably lagged. Many measures of market volatility subsided from their highs, but still remained greatly elevated at quarter end. For Ellington Residential, the precipitous decline in interest rates and high levels of interest rate volatility generated net losses on our hedges. And while our agency RMVS assets did appreciate in price during the quarter, they significantly underperformed our hedges. As a result, we experienced a significant net loss for the quarter, as you can see on slide four. As we discussed on the last earnings call, we entered the year with an extremely liquid portfolio and strong balance sheet. which positioned us well to weather the volatility, especially compared to many other market participants who became forced sellers at distressed prices later in March. As March progressed, with the asset markets and financing markets looking more and more fragile, we proactively reduced the size of our agency portfolio in an orderly and measured way, which bolstered our liquidity and lowered our leverage. We entirely avoided any forced asset sales, which would have exacerbated losses. The vast majority of the agency assets that we sold in March were sold either earlier in the month before yield spreads hit their wides or later in the month after yield spreads had already recovered strongly, especially after the Fed removed any explicit limits on its asset purchase programs. As we reported in early April, we met all margin calls during the quarter. A significant portion of the loss that we experienced during the quarter was related to the markets pricing in lower pay-ups on high-quality specified pools. This pay-up compression was largely attributable to market-wide liquidity problems exacerbated by quarter-end balance sheet pressures, as well as to the implementation of the Federal Reserve's Amplified Asset Purchase Program during the quarter, which was generally limited to TBAs as opposed to specified pools with pay-ups. Given that the Fed's purchase program dominated the agency RMBS market, fundamental valuation factors were overwhelmed by technical valuation factors. So even as mortgage rates hit all-time lows, the market decidedly preferred the liquidity of TVAs and the lower capital required to hold them, as opposed to paying up for the value of prepayment protection in the form of specified pools. Going into April, we thought the payoffs on specified pools were artificially low and represented excellent value and upside to earnings. And indeed, specified pools outperformed in April. While losses are always disappointing, I believe, given that leveraged mortgage portfolios were in the crosshairs of the distress in the financial markets this past quarter, that it is a testament to our portfolio management, risk management, and liquidity management capabilities that we were able to limit those losses and preserve book value to the extent that we did. I will now pass it over to Chris to review our financial results for the quarter. Chris?