Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage 2021 First Quarter Financial Results Conference Call. Today's call is being recorded, and 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. 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 one. 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 2021 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 16, 2021, 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 Takati, 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. During the first few months of 2021, we saw a decidedly different market environment in the latter part of 2020. The yield on the 10-year U.S. Treasury, which had been historically low and range-bound during the months following the outbreak of COVID-19, broke above 1% at the beginning of January and continued to rise throughout the first quarter of 2021, increasing 83 basis points in total, as you can see on slide three. At the same time, short-term interest rates remain anchored near 0%, thanks to the continued accommodative policies of the Federal Reserve, and what had been a relatively flat yield curve suddenly steepened, with the 2-year, 10-year spread increasing to its widest level since 2015. Meanwhile, interest rate volatility increased, and mortgage rates rose off of their all-time lows, particularly during the latter half of the quarter. The spike in long-term interest rates and surge in implied volatility was not a constructive scenario for agency RMBS, and most agency RMBS prices declined during the quarter. though performance across subsectors diverged meaningfully. Higher coupon RMBS fared reasonably well, boosted by lower expected prepayments ushered in by the higher mortgage rates. However, extension risk really took its toll on lower coupon RMBS. For example, the effective duration of Fannie Mae IIs roughly doubled over the course of the quarter, from around three years to around six years, and as a result, Fannie Mae II prices plummeted by over four points. As usual, we had a highly diversified portfolio, so we were not overly exposed to lower coupons, but our largest long TBA position was, in fact, in Fannie Mae twos, and not surprisingly, that position was the greatest drag on our results. Despite these headwinds, Ellington Residential's book value was stable, and core earnings remained strong during the quarter, as you can see on slide four. The rising long-term interest rates generated gains on our interest rate hedges and interest-only securities, which, Combined with our net interest income, more than offset net realized and unrealized losses in the portfolio, and we finished with a slightly positive economic return. Thanks to a healthy net interest margin of 1.96%, we generated core earnings of 31 cents per share, which continued to cover our 28 cents per share dividend. Given the opportunities presented by wider yield spreads, we used our strong balance sheet to add some attractively priced pools during the quarter. these purchases increased the size of our agency portfolio by 12%. And while our debt-to-equity ratio rose incrementally to 7 to 1, that leverage is still well below our historical levels. So we still have ample room to increase our portfolio further and thereby grow core earnings, especially should we see continued weakness. Finally, in response to continued tightening yield spreads in non-agency RMVs, We continue to monetize gains in that portfolio, which we had opportunistically ramped up during the market distress last spring. I'll now pass it over to Chris to review our financial results for the first quarter in more detail. Chris?