Ellington Credit Company

To all sites on hold, we do appreciate your patience and ask that you please continue to stand by. Your conference will begin momentarily. Thank you. Thank you. Thank you. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2022 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. 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 star 2. Lastly, if you should require operator assistance, please press star 0. It is now my pleasure to turn the floor over to Aladin Chalet with Associate General Counsel. Sir, you may begin.

Thank you. 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 non-historical in nature and 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. We strongly encourage you to review the information that we have filed with the SEC, including the earnings released in the Form 10-K, for more information regarding these forward-looking statements and any related risks and uncertainties. Unless otherwise noted, 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 Muranoff, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, earnrete.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 notes at the back of the presentation. And with that, I will turn the call over to Larry.

Thanks, Eladain, and good morning, everyone. We appreciate your time and interest in Ellington Residential. During the fourth quarter, inflation continued to moderate. and the Federal Reserve ratcheted back the pace of its interest rate hikes. The market welcomed these developments, and agency RMBS rebounded sharply following three consecutive quarters of dismal performance. Volatility declined incrementally, and investor demand for RMBS increased. Together, this drove nominal and option-adjusted yield spreads tighter, especially in November, and so the year ended on a more positive note. Turning to the investor presentation, In the bottom sections of slide three, you can see the significant yield spread tightening that occurred across agency MBS coupons in the fourth quarter, which caused MBS prices to rise, even though long-term interest rates were actually moderately higher. Meanwhile, short-term interest rates spiked for yet another quarter. You can see on this slide just how much short-term interest rates moved, not just during the fourth quarter, but also over the course of 2022. in absolute terms as well as relative to long-term rates. This trend has continued into 2023, and the yield curve is now the most inverted it's been since the early 1980s, with the two-year, 10-year yield spread now more than 90 basis points negative. The inverted yield curve has pressured net interest margins industry-wide, and coupled with the extreme interest rate volatility that we've experienced since the beginning of 2022, It's really put the effectiveness of interest rate hedging programs under a microscope. For Earn, we've hedged along the entire yield curve and rebalanced our hedges frequently, both of which can be more expensive at times, but also more effective across a wider variety of market environments. As interest rates surged last year, we were continuously rebalancing our hedges. The delta hedging costs associated with this rebalancing were high, but they were essential in preventing deeper book value declines. With the yield curve currently converted, we're at least getting the benefit of positive carry on our interest rate swap hedges, where we are receiving the higher SOFR rate while paying lower fixed rates. In the fourth quarter, these swaps serve the dual function of offsetting some of the impact of the higher long-term interest rates while also boosting our net interest margin and adjusted distributable earnings. Let's turn next to slide four for an overview of earned strong results for the fourth quarter. MBS had weakened significantly in September of last year, and we had responded by buying MBS aggressively into that weakness. As a result, we entered the fourth quarter with a net mortgage exposure of 7.5 to 1, which stood toward the upper end of our historical range. That positioned us incredibly well for the spread tightening that occurred during the fourth quarter, and so we were able to recoup a good chunk of unrealized losses from the prior quarter. For the fourth quarter, we generated a non-annualized economic return of 11.1%, a net income of 88 cents per share, which easily covered our dividends for the quarter. We were able to be positioned this way because we have been patient about portfolio turnover and we have been opportunistic about adding new investments. Throughout 2022, reinvestment yields were surging, but yield spreads were widening as well, especially on the lower coupon pools where we saw the best relative value. Larger portfolio sales of our discount pools might have boosted ADE in the near term, but at the potential longer-term cost to book value per share. Instead, we were selective in turning over those portions of our portfolio that we viewed as offering superior relative value, particularly those lower coupon pools. And we continue to prioritize total return over short-term ADE growth. Meanwhile, our strong liquidity position enabled us to add pools opportunistically in September when spreads gapped out. Over the course of the fourth quarter, we continued to be opportunistic, in this case, by opportunistically selling when we felt that the mid-quarter rally had run its course. As a result, by year end, our net mortgage exposure had declined by a full turn to 6.6 to 1, which brought it closer to our historical norms. I'll now pass it over to Chris to review our financial results for the fourth quarter in more detail.