Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2020 Fourth 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. Sir, you may begin.

Thank you and welcome to Eslington Residential's fourth 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 two, 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 fourth quarter earnings conference call presentation is available on our website at 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, please turn to slide three of the presentation. 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 fourth quarter, federal reserve purchasing activity remained elevated, dollar rolls continued to be strong, and yield spreads on agency RMBS tightened very significantly. In addition, as you can see on slide three, long-term interest rates started to increase, with the 10-year Treasury rising 23 basis points during the quarter, while the U.S. Treasury yield curve steepened, with the two-year 10-year spread increasing to 79 basis points. It's been over three years since we've been in a yield curve environment that's this steep. Despite these movements, actual and implied interest rate volatility remained low, and agency RMBS outperformed dramatically. As you can see here on this slide, even with the sizable increase in long-term interest rates, the price of Fannie Mae 2.5s increased by more than half a point, which equates to a spread tightening of nearly 30 basis points. So far in 2021, we have seen long-term interest rates continue to rise, and the yield curve continue to steepen. as the market is anticipating a significant stimulus package from Congress and a modest increase in inflation expectations. Turning to slide four, you can see that Ellington Residential had another excellent quarter. We generated net income of $0.60 per share and an economic return of 4.5% for the fourth quarter, which brought our full year 2020 net income to $1.63 per share and our full year 2020 economic return to 13.1%. Core earnings for the fourth quarter was $0.34 per share, again comfortably in excess of our $0.28 quarterly dividend, a dividend which I'm proud to say we maintained throughout all of 2020 without interruption or cut. You can also see on this slide that our net interest margin again exceeded 200 basis points this past quarter, despite lower asset yields. Notably, we were again able to deliver strong results this past quarter, even while maintaining leverage that's well below our historical averages. Our debt-to-equity ratio as of December 31st was just 6.1 to 1, down from 6.5 to 1 at the end of the prior quarter, and well below our historical debt-to-equity ratio, which has typically been in the 8s or 9s to 1. During the fourth quarter, we continued to maintain a long position in current coupon TVAs, and as a result, we again benefited from attractive dollar rolls, driven by Federal Reserve purchasing activity. Our non-agency RMBS portfolio also had another excellent quarter, as yield spreads in that sector continued to revert toward pre-COVID levels. At the same time, the rise in long-term interest rates generated significant net gains on our interest rate hedges. Meanwhile, along with our net long positions in current coupon TVAs, we also held net short positions in high coupon TVAs. This long-short portfolio positioning was similar to our positioning in the third quarter, and this positioning again paid off as lower-coupon TVAs significantly outperformed higher-coupon TVAs. One wonderful thing about the agency mortgage market is that it's not only a deep and liquid market on the long side, but it's also easy and efficient to take short positions via TVA contracts. This simple fact increases the investment opportunity set for us dramatically. but it also allows us to manage our risk and returns much better. Adding or reducing our TBA short positions and thereby dialing down or up our overall net mortgage exposure has been an effective tool for us, whether to protect our book value when yield spreads look tight to us or to take a more aggressive posture when yield spreads look attractive. The strategic use of significant short TBA positions has been a major differentiator for Earn in the agency mortgage REIT space. Finally, despite the increase in interest rates this past quarter, we had another solid quarter of performance from our specified pools, which comprised the vast majority of our assets. This capped off an incredibly strong year for the specified pool sector. Over the past few years, we have regularly highlighted some larger themes in the mortgage market as the underlying rationale for our continued focus on prepayment-protected specified pools. Many of these themes kicked into hyperdrive as a result of the COVID-19 pandemic. One example is the dramatic effect that technological advances and automation have had on lowering the hurdle on refinancing. Combined with all-time low mortgage rates, these technological advancements led to a surge in prepayment rates in 2020, which resulted in significant increases in pay-ups across many specified pool sectors. The performance of low loan balance Fannie Mae threes is a great example. Over the course of 2020, as investors flock to prepayment protection, Payups for this specified pool sector tripled from around two points to around six points, a remarkable increase of around four points. The outperformance of specified pools is even more remarkable given that on certain days during the liquidity crunch of March and April, payups on most specified pool sectors had utterly collapsed. Later on this call, Mark will elaborate further on the impact of technology on the agency MBS markets. And I'll now pass it over to Chris to review our financial results for the fourth quarter in more detail. Chris?