Ellington Credit Company

All locations on hold. Please stand by. We'll begin in approximately one minute. Thank you. Please stand by. Your program is about to begin. If you need assistance on today's call, please press star zero. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2021 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 1, star 0 actually, star 0. 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 third 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 Takosky, 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 presentations. 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. To begin, please turn to slide four. In the third quarter, Ellington Residential generated core earnings of 31 cents per share, which continued to cover our dividend, and we had a modestly positive economic return during the quarter, in which performance of agency RMBS was mixed. Turning back to slide three, In the first shaded green column, you can see that interest rates ended the third quarter not far from where they started, but that comparison masks what were significant intra-quarter movements. In July, interest rates continued to decline, as they had done during the second quarter, as investor concerns increased around the Delta variant, economic growth outlook, and potential Fed tapering. Between June 30th and August 3rd, the yield on the 10-year U.S. Treasury declined by 30 basis points to 1.17%, and interest rate volatility picked up. In response, agency MBS yield spreads widened during July, particularly for lower coupon MBS. Moving into the latter half of the quarter, interest rates began to rise while volatility declined, and agency yield spreads tightened as the market got more clarity on the Federal Reserve's tapering plan. Following its September meeting, the Fed signaled that it could begin asset tapering late this year, with new purchases decreasing incrementally through mid-year 2022. Even though this timeline was a bit more accelerated than some market participants had previously anticipated, this was mitigated by the lack of signaling of any change to the Fed's policy of reinvesting all paydowns on its existing portfolio. Overall, the market welcomed the update, and most agency MBS yield spreads tightened in response. Clearly, the Federal Reserve is trying hard to avoid another market taper tantrum such as was seen in 2013. The late quarter agency MBS spread tightening was not uniform across all coupons and was most pronounced for higher coupon MBS, which also benefited from reduced prepayment expectations driven by incrementally higher mortgage rates. Meanwhile, lower coupon MBS lagged around concerns that the anticipated withdrawal of Federal Reserve purchases would disproportionately impact the current coupon agency MBS that the Fed exclusively buys. All in all, higher coupons significantly outperformed lower coupons over the course of the third quarter in a sharp reversal of second quarter performance. This is illustrated in multiple ways on slide three. Fannie Mae 3.5 and 4.5 prices increased nicely, in contrast to the modest price declines of Fannie Mae 2.5s. And you can see that OASs and Z spreads of Fannie Mae 3.5s and 4.5s tightened far more than those of Fannie Mae 2.5s. For Ellington Residential, net interest income on our portfolio more than offset net realized and unrealized losses, which came mostly from our lower coupon holdings. On the hedging side, net gains on interest rate swaps and U.S. Treasury hedges roughly offset net losses on our TBA short positions, which were concentrated in higher coupons. Meanwhile, our debt-to-equity ratio declined slightly to 6.7 times from 7.0 times at the end of the prior quarter. Finally, in October, we announced our shift from a quarterly dividend to a monthly dividend. We believe that this shift will further enhance our appeal to income-oriented investors and increase the breadth of our investor base. I'll now pass it over to Chris to review our financial results for the third quarter in more detail.