Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Edmonton Residential Mortgage REIT 2020 Third Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all 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. At any time, if your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Jason Frank, Deputy General Counsel and Secretary. Please go ahead, sir.

Thank you, and welcome to Ellington Residential's third 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, and Part 2, Item 1A of our quarterly report on Form 10-Q, filed on May 11, 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 Ellington Residential, Mark Takotsky, our Co-Chief Investment Officer, and Chris Smirnoff, our Chief Financial Officer. As described in our earnings press release, our third quarter earnings conference call presentation is available on our website, earnread.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. During the third quarter, the Federal Reserve continued its accommodative monetary policy, maintaining its target rate for the federal funds rate near zero, and continuing to buy heavy volumes of treasuries and agency RMBS. Turning to slide three, you can see that the Fed's actions had their exact desired effect on the agency RMBS market. Agency RMBS yield spreads have been stable, treasury yields have stayed low, and interest rate volatility has remained muted. In fact, the move index, which measures the implied volatility of interest rates, hit an all-time low at the end of September. As you can see on this slide, Treasury yield and swap rates were uncannily unchanged quarter over quarter. And moreover, they've barely moved at all since March 31st. And you can also see that for the interest rates that most affect private borrowers, such as mortgage rates and LIBOR rates, while there was a slightly lag reaction, these rates have caught up to the decline in Treasury rates, having declined significantly over the past six months. Meanwhile, agency yield spreads have remained stable after bouncing back from their March spikes, despite the continued rise in prepayment speeds, with Fannie Mae 30-year CPRs hitting a nearly eight-year high in September. Turning now to slide four, Ellington Residential had another quarter of strong performance, generating net income of $0.66 per share and growing core earnings to $0.39 per share in the third quarter, which exceeded our $0.28 dividend by a wide margin. Our 28-cent dividend is a dividend that we have maintained in full, by the way, without interruption or cut throughout all of 2020. Similar to prior quarters, our long agency RMBS portfolio continued to be concentrated in prepayment-protected specified pools, and these assets performed extremely well relative to their hedges, which provided a big boost to our results. Additionally, the non-agency RMBS sector continued to recover during the quarter, And so we were able to monetize significant gains on many non-agency RMBS assets that we had opportunistically acquired in the second quarter when prices had been extremely depressed. And keep in mind, it was only because we were able to navigate the March-April distress so well that we were able to play offense and take advantage of that distress in non-agency RMBS. In fact, during the second quarter, we were buying non-agency RMBS at distressed prices when many other mortgage REITs were forced to sell them. In the third quarter, we maintained our long position in current coupon TBAs, and by doing so, we benefited from the strong dollar rolls that were driven by Fed purchasing activity. At certain times in our history, we've been short current coupon TBAs, and at other times, like recently, we've been long current coupon TBAs. Current coupon TBAs are incredibly liquid, and sometimes we view them as a great hedging instrument, and other times we view them as a great investment. This particular sector, where with relative ease, we can go either long or short but are actually quite complex instruments, is yet another reason why the agency RMBS market is such a rich opportunity set for us. Notably, this past quarter, we were able to deliver strong results while maintaining our leverage well below our historical averages. We felt that this was prudent positioning, given the significant macroeconomic uncertainty and given that there was a presidential election looming. Our debt-to-equity ratio as of September 30th was only 6.5 to 1, as compared to our historical debt-to-equity ratios, which have typically been in the eights or nines to one. Finally, I'm pleased to report that our net interest margin widened by 35 basis points to 2.21 percent quarter over quarter, which is the highest our NIM has been in more than five years. Turning to slide five, in the lower part of the table, you can see that the main driver of our NIM expansion was a significant drop in our cost of funds. Another driver of our NIM was our larger non-agency RMBS portfolio with its higher asset yields. Now, I expect our NIM to come down a bit from here for a couple of reasons. First, asset yields are down on agency RMBS generally, and we will feel that impact as we naturally rotate our portfolio and reinvest paydowns. And second, now that we've downsized our non-agency portfolio, a portion of that outsized NIM support is going away. All that said, There's no question that Earn and the entire mortgage sector has benefited from the significant external tailwinds provided by record low borrowing rates and low, low levels of interest rate volatility. However, as we have repeatedly demonstrated over past market cycles, including, of course, the big ups and downs of 2020, our success at Earn does not necessarily depend on the absolute level of interest rates or volatility, on the shape of the yield curve, or on where NIMS happened to be. And that's because of our portfolio management strategy. We trade actively, we shift our capital where we think the best opportunities are, we hedge along the entire yield curve, often using significant TVA short positions. I'll now pass it over to Chris to review our financial results for the third quarter in more detail. Chris?