Ellington Credit Company

We appreciate your patience and ask that you please continue to stand by. We are still checking in participants for today's program, and your program will begin in approximately one minute. Thank you. © transcript Emily Beynon Please stand by, your program is about to begin. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2021 Second 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 questions following the presentation. If you would like to ask a question at any time, please press the star and one 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 Ellington Residential's second 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 Ducati, our Co-Chief Investment Officer, and Chris Smirnoff, our Chief Financial Officer. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, EarnReach.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. Please turn to slide four. Ellington Residential's core earnings increased a robust 19% sequentially to 37 cents per share, driven by an incrementally larger portfolio and a further reduction in our cost of funds. With our core earnings continuing to exceed our quarterly dividend run rate, on June 9th, our board increased our quarterly dividend by 7% to its current level of 30 cents per share. I was very pleased with this increase especially since we had kept our dividend level constant throughout the COVID-19-related volatility of 2020. Now please turn back to slide three. As you can see on this slide, after long-term interest rates increased sharply during the first quarter, interest rates reversed course and fell during the second quarter. The yield curve flattened, mortgage rates declined, and MBS investors' hope for prepayment burnout fell far short. Meanwhile, sentiment began to shift towards the increased likelihood that in the coming months, the Federal Reserve would commence tapering of its asset purchases. In light of all these factors, agency yield spreads widened across the board, and most agency RMBS significantly underperformed comparable interest rate swaps and U.S. Treasury hedges on a total return basis. As a result, from a book value perspective, the second quarter was a challenging one for leveraged, hedged agency RMBS portfolios such as ours. During the second quarter, we again saw a meaningful divergence of performance across the various subsectors of agency RMBS. In contrast to the first quarter, it was higher coupons that fared the worst during the second quarter, while lower coupons held up relatively well. For example, prices on Fannie 4.5 declined by more than a point, which represented a substantial widening during the quarter, or prices on Fannie 2.5 increased by a little less than a point, which represented only a modest widening, given the 27 basis point decline in 10-year Treasury yields during the quarter. For Ellington Residential, losses on our interest rate hedges, together with agency RMVS yield spread widening, combined to generate an overall gap net loss for the quarter. That said, we were actually relatively well positioned for the divergence of performance across agency RMBS subsectors. In recent quarters, we have been shifting more and more of our specified pool portfolio out of higher coupons and into lower coupons. And we had accelerated this trend in the first quarter of this year, having added more lower coupon pools after yield spreads on lower coupons widened dramatically. And at TBAs, we've recently been concentrating our long TBA holdings in lower coupons, which the Fed has been buying, while maintaining short TBA positions and higher coupons as an important component of our interest rate hedging portfolio. Our hedging portfolio benefited from this positioning, as net gains on our higher coupon TBA short positions were able to offset a portion of the losses on our interest rate swaps in U.S. Treasuries. Meanwhile, on the liability side of our balance sheet, our repo lenders have been offering aggressive financing terms for longer-dated repos. and we continue to take advantage of that in the second quarter. In fact, since year end, we have extended the average term of our repo from 48 days to 134 days, even while lowering our average borrowing rate from 0.25% to 0.17%. You can see our latest repo details on slide 18. Finally, in our first common share issuance in over four years, we completed a follow-on offering in June. The offering was split between primary shares and secondary shares, with Earn's co-founding shareholder, Blackstone, selling 2,675,000 secondary shares, and with the company selling 575,000 primary shares. Back on April 26, Blackstone, which had owned around 27% of our outstanding shares, had registered all of their unregistered shares for sale. When we were preparing for this June share offering, we concluded that it was in the best interest of the company and its shareholders to address the obvious overhang from Blackstone shares sooner rather than later. The offering increased the public float for earned stock by a full 38%, which should provide a lasting boost in liquidity for all earned shareholders. I will now pass it over to Chris to review our financial results for the second quarter in more detail. Chris?