Ellington Residential Mortgage REIT Common Shares of Beneficial Interest

Q4 2022 Earnings Conference Call
3/7/2023

spk_0: to all i phone hold we do appreciate your patience and as that you please continue to stand by your conference will begin momentarily

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spk_0: the moon

spk_4: good morning ladies and gentlemen

spk_0: thank you for standing by welcome to the ellington residential mortgage rate twenty twenty two fourth quarter financial results conference call that a 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 one on your telephone keep it at any time if your question has been answered you may remove yourself from the queue by pressing started

spk_5: lastly if you should require operator assistance please press stars the rep it is now my pleasure to turn the floor over to our team silly with associates general counsel sorry you may begin thank you for again i would like to remind everyone that certain statements made during a conference call may constitute forward looking statements within the meaning of the safe harbor provisions of the private securities litigation reform act ninety ninety five for that these demons are not circle nature and are subject to a variety of risk and uncertainty that could cause the company actors of to differ from beliefs expectation as mit and projections consequently we should not rely on these for looking statements as predictions of future events we strongly encourage you to review the information that we have five with the as he see including the earnings release in the form ten k for more information regarding this for looking statements and any related risks and uncertainties unless otherwise noted statements made during the conference call made out of the day of the cough the company undertake no obligation update or revise any for that these payments well as a result of new information future events or otherwise join me on the corner they are larry pan chief executive officer ellington residential mark cause the art though chief investment officer and christmas of our chief financial officer as described in earnings press release our fourth quarter earnings auburn call presentation is available on our website

spk_6: and read dot com

spk_5: our comics this morning will track the presentation please note that any references the figures in his presentation or qualified in their entirety by the know that the back of the presentation and without turn the called over larry thanks how are they any good morning everyone we appreciate your time and interest analogy residential

spk_6: during the fourth quarter and place you continue to moderate the federal reserve ratcheted back the pace of pets interest rate hikes the market welcome these developments in agency rmbs written down sharply following three consecutive quarters of dismal performance

spk_5: volatility decline incrementally and invest you demand for rbs be as increase together this drug nominal and option adjusted yield spread tighter especially november and so the year ended on a more positive note

spk_6: turning to the investor presentation the bottom sections of slides three you can see the significant yield spread tightening that occurred across agency and be as coupons in the fourth quarter which caused and the as prices to rise even though long term interest rates were actually moderately higher

spk_5: meanwhile short term interest rates spite for yet another core you can see and a slide just how much short term interest rates moved not just during the fourth quarter but also over the course of twenty twenty two in absolute terms as well as relative to long term rates this trend has continued into twenty twenty three and yield curve is now the most inverted it's been since the early nineteen eighties with the to your tenure yields read now more than ninety basis points negative the inverted yoke of has pressured net interest margins injury industry wide and coupled with the extreme extreme volatility that we've experienced since the beginning of twenty twenty two it's really put the effectiveness of interest rate housing programs under a microscope for earn with hedged along the entire yield curve and we balanced our had just frequently both of which can be more expensive at times but also more effective across a wider variety of market environments as interest rates surge last year we were continuously rebalancing or hedges the delta heads and costs associated with the is for balancing are high but they were essential in preventing deeper look value declines with the yoke of currently subverted release getting the benefit of positive territory on our it's a straight swap edges where we are receiving the higher so for a while paying lower fixed rates

spk_6: in the fourth quarter these swaps served the dual function of offsetting some of the impact of a higher long term interest rates are also boosting our net interest margin and adjusted distributable arts

spk_5: let's turn next to slide for for an overview of armstrong results for the fourth quarter

spk_6: mbs had we can significantly in september of last year and we responded by buying and the aggressively into that weakness

spk_5: as a result we enter the fourth quarter with a net mortgage exposure of seven point five to one which to toward the upper end of a historical range

spk_6: deposition thus incredibly well for the spread tightening that occurred during the fourth quarter and so we were able to recoup a good chunk of fucking realize losses from the prior for

spk_7: for the fourth quarter regenerated and nine annualized economic return of eleven point one percent a net income of eighty eight cents per share which easily covered are dividends for the core who are able to be position this way because we have been patient about portfolio turnover and we have an opportunistic about adding new investments

spk_6: throughout twenty twenty two reinvestment yells were surging but yes press were winding 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 eighty in the near term but as potential longer term cost to the value per share

spk_5: instead we were selective in turning over those portions of a portfolio that we viewed as offering superior relative value particularly those lower carbon pools and we continue to prioritize total return over short term a growth meanwhile are strong acquitted a position naval as to add pools opportunistically in september when spreads gap down over the course of the fourth quarter we continue to be opportunistic and this case by opportunistically selling when we felt that the mid a rally had run its course

spk_0: as a result by year end or that mortgage exposure had declined by a full turn to six point six to one with what a closer to our a stark alarms on now pass it over to crests to review our financial results for the fourth quarter more detail dress thank you larry think morning everyone

spk_8: please turn to slide five where you can see summary of earned fourth quarter financial results

spk_5: for the quarter ended december thirty first we report and net income of eighty cents per share and adjusted distributable earnings of twenty five cents per share

spk_0: these results compared to a net loss of a dollar and four cents per share and eighty of twenty three cents per share in the third quarter

spk_8: eighty excludes the catch a premium of meditation adjustment which was positive six hundred fifty thousand in the fourth quarter as compared to a positive one point four million dollars in the prior quarter

spk_0: during the fourth quarter tighter either the or feel spread and increased by up drove significant net realized and unrealized games on are specified pools which combined with net an interesting come exceeded net realized and unreal i thought is on our interest rate it

spk_8: or net interest margin increased slightly quarter of a quarter to one point three seven percent from one point to a percent at higher as it yells exceeded the increase in our cost the funds and that included the positive carry that larry mentioned on our interest rate swap position

spk_0: or higher named drove this to quit sequential increase and eighty even as our average holding decline quarter of a quarter

spk_8: meanwhile pants on are less of a pool of increased to one point two six percent as of december thirty first from one point zero two percent as at september thirtieth

spk_0: as became and rates continued to decline market wide that specified cool investors are increasingly focused on extension protection rather than prepayment protection this has been a tell when for the pay ups on are such by cause because the market is recognizing that significant extension protection they offer relative to their tv i can apart

spk_8: in addition the pool that we did sell during the quarter had lower pay a relative to our overall for folio the combination of the factors led to the sequential increase in pants he turn now to our balance it outside sex

spk_0: but i was a thousand and forty cents per share at december thirty first as compared to seven dollars and seventy cents per share at september thirtieth

spk_8: including the twenty four sense of the event in the quarter or economic return was eleven point one percent

spk_0: we ended the quarter with cash and cash equivalents of thirty four point eight million dollars up from twenty five point four million dollars at september thirtieth

spk_8: next please try to slide seven which shows a summary of of her folio holdings in the fourth quarter our agency rmbs holdings be creeped by five percent to be hundred sixty three point three million dollars

spk_0: the duke decrease was driven by net sales and principal payments or fifty seven point nine million dollars which exceeded net realized an unrealized games of eleven point eight million dollars

spk_8: agency rmbs for fully a turnover in the for the bottom of eighteen percent

spk_0: over the same period are not agency armed yes or folly of speech by for twenty million dollars to twelve point six million dollars while our holdings of interest only securities were roughly unchanged

spk_5: additionally er that the equity ratio adjusted for and settle purchases in sales decreased to seven point six times as of december thirty first compared to nine point one time at september thirtieth

spk_0: the decrease was primal are due to a decline in borrowings on are smaller agency rvs portfolio and hired shareholders' equity quarter over quarter

spk_7: similarly er net mortgage assets equity of equity ratio decrease to six point six times from some point five times over the same period

spk_0: on spidey didn't see details of our interest rate hedging for foleo

spk_8: during the quarter we can seem to hedge interest rate risk through the use of interest rate swaps and short positions and tv a us treasury securities and future

spk_9: the size of our net short tv a position based on tenure equivalence increase quarter over quarter

spk_0: i will naturally our presentation over to mark

spk_10: thanks chris after a challenging nine months faded cmbs it's nice to be able to report a strong supporter and to make back some of the prior quarter losses

spk_7: unlike most part of securitize products were invested take on credit risk and the possibility of principle lot in exchange for exit field

spk_10: jaden cmbs market is unique and it's ability to offer high yields without credit risk most agency mortgage rates hedge a good deal director straight with it to the primary driver of quarter quarterback quarter economic returns for a hedge agency mortgage rate is a relative total return of aden cmbs compared to hedging instruments which are usually treasury an interest rate swaps the total return of aden cmbs starts with the carry and mbs assets compared to the carry on hedging instruments but as interest rates meal spreads move around you also have to factor in doubt that in costs and the relative price performance of mbs assets both pools and tb eight compared to edges inquiries were yields by a very volatile as we've seen for the past four quarters economic return hensley driven primarily by the relative mbs price performance where they outperform it around or of underperformance for the first recorded of twenty twenty two the relative price performance of aden cmbs the negative aden cmbs drop them price a whole lot more than a basket of similar duration treasury's in the face of heavy investor liquidations and soaring rates in volatility bring queue for that reverse dramatically so what happened in queue for we finally saw some evidence that inflation is responding to the federal of tears heightened cycle and a higher interest rate environment these green shoots but a potential end of this heightened cycling site and that change the direction of fixed income capital flows from outflows to inflows and when considered against the backdrop of greatly diminished new mbs production those inflows lead to significant mbs outperformance you can see that in the price changes or flight three across the board aden cmbs prices significantly outperform their hedges financial markets generally normalize whatever current pricing levels are what i mean by that is it the bond market participants and researchers especially in spread sectors like mbs typically stop the it's thompson the current yield that current yield levels and spread relationships are fair i think it's worth reminding every one of the magnitude of the repricing twenty twenty two and what was considered fair vs where we are vs today we started twenty twenty two with fannie to the dollar price of ninety nine point eight and we ended the year with them at eighty one point six down over eighteen points said the started the year danny twos and they are more than one and a half trillion of them with a bellwether coupon and they yielded about two percent now whereby

spk_11: fannie five minutes at a discount and anomalous bed under par cooper mortgage is significantly why didn't the twenty year historical average that's almost a four hundred base point move in a little more than a year and doing a fifteen year bull market and bring mbs yield back to their two thousand and seven levels

spk_10: the mortgage rates are higher than before the fed began it's mortgage bond buying program and the just sitting on a large portion of the market which has reduced what's available to private investors to where we now the mark is currently pricing and a terminal funds rate of almost five and a half percent and that means more hike from here but the biggest moves are clearly behind us from the markets perspective

spk_12: and what's this inverted guild curved thing about the future it's is lower rates are common the to you know now you're almost five percent and to your note two years in the future is respect is expected to be over one hundred basis points lower

spk_10: you put all this together and you can see why fixed income flows turned positive in queue for there are some signs that inflation while high is starting to slow some fed watchers expect a heightened cycle to pause as soon as next quarter and the risk of recession has set market expectations of significantly lower rates some time next year whether all that actually happens nobody knows but that set of expectations put fixed income in a pretty good place to attract capital capital flowing into fixed income as opposed to out of it very significant for mbs fixed income investors have not seen the old decide since two thousand and seven and they are voting with their wallet you can see funds flowing into eat yes and mutual funds but there are two headwinds first banks which are normally huge aden cmbs invested have been quiet they're struggling with diminished capital from help for sale losses and from week deposit growth in a competition for money market funds commercial banks so your be your deposits shrink for the first time and seventy years and second of course is the absence of fed buying we get a lot of questions about wouldn't inverted yield curve means means for eighty e and return expectations going forward a sharp rise in the fed funds rate is typically not only issue is is typically only a short term headwind spreads of wide the longer term repo and in response with shorten the average ten of over ten tenor of our repo and you can see a flight seventeen as a result are we report spence now goes up almost in lockstep with the fed funds rate but it takes at least a quarter longer for our a d to normalize for a few reasons floating leg leg we receive on our swaps will also be sit higher but those only reset every three months and the extent that are fixed pair swap portfolio is small know asset portfolio we need to raise as it yields you turn over to make up the difference but once the hike stop and a portfolio turn over continues or se yield should catch up and fully reflect the wider spread currently in the market those wider yield spreads relative to financing costs and hedging instruments hedging costs should should drive eighty moving forward but what will it mean for aden cmbs if the forward curve is correct and we get a mild recession and lower interest rates that's probably the best case braden cmbs nomura has put out some great respect for this dynamic seventy five bases point drop in the mortgage rate does very little forgetting coupons and the money to to not material for rifai supply but in a recession bank typically to favor securities overloads to in a mild recession we were expecting in incremental increase in bank demand also within fixed income aden cmbs tend to corporate in a recession to finally slightly lower rates are also probably support of further fixed income flows right now housing is relatively unaffordable looking at monthly mortgage expense of current rate levels relative to median income so your see existing home sales really drop like a stone the other powerful force to the slowing existing home sales is that mortgage researchers referred to as the lock in effect the luck can affect his when a homeowner has a mortgage rate that a separate hundred basis points below the current rate they're locked in low payments significantly to deter them from moving lots of moves a local a going family what's next your bedroom or empty nesters want to downsize these lose your discretionary and a three hundred base point jump in a new mortgage versus an existing one will dramatically changed their monthly mortgage payment this dynamic also helped keep new mbs supply a check the all in all a mild recession probably up a shoes and a decent pick up in aden cmbs demand with only a very modest uptick in the supply so what did we do for the quarter and how we currently positioned and what is our future outlook you conceive on slide fourteen that we shrug our agency cmbs portfolio during the fourth quarter given their strong performance in the quarter it made sense to reduce mbs holdings on a relative as the relative value is not as compelling but it was are disciplined head the process and cash management that allowed us to hold our portfolio intact do some very volatile times and twenty twenty two that allows us to capture returns in queue for to offset some prior losses you can see and the slide that we reduced or holding the fifteen year mortgage is given the inverted yield curve that sector seen almost no new origination so it's shrinking from pay downs the net negative supply has driven prices to much tighter spreads relative lip relative to treasury's and thirty you mbs that medieval country new but we're just fighting better relative value in the thirty or market right now

spk_6: january was another month of strong performance february reverse some of those gains for we are still solidly up for the year and be a spreads are currently attractive and a consensus path of a few more hikes followed by some better inflation news and week or economic numbers should be a very good backdrop for mbs performance experience has taught us that the forward curves often wrong to remain disciplined about hedges and are prepared for range scenarios we see lots of relative value opportunities in the market so we'll that we look to exploit to drive incremental returns now back to larry

spk_5: thanks mark two thousand twenty two was by many measures the worst year for mbs in at least forty years and perhaps ever in ellington residences longstanding sector a focus the agency mbs after it was truly nowhere to hide as a bloomberg mbs index at it's worst yearly performance on record on absolute basis and it's second worst year ever relative to treasures route twenty twenty two we had to navigate periods of extreme volatility and market dysfunction with interest rates rising rapidly and yelled spreads widening along the way

spk_6: despite these challenges or risk liquidity management enabled us to have like realizing even larger losses

spk_5: as a result we were able to buy into extreme weakness late in the third quarter and then sell it to strengthen the fourth quarter by doing so we entered twenty twenty three with reduce leverage and strong liquidity which is now allowing us to play off and once again a last quarter's earnings call we discuss that we are planning to selectively rotate a portion of our capital from agency or be as to other residential mortgage sectors and that still very much on our radar screen as he pointed out before on smaller size and they lost be nimble as market conditions of off and as usual opposite a big yield spread wanting a band well one pounds we plan to be patient and opportunistic picking are spots so far this year january started europe and a positive note with agency rbs enjoying an excellent much as agency yield spreads titan further the tightest heart a bit since then with interest rates and volatility up both in february and so far march especially with pals comments this morning

spk_0: your to date through the end of february we estimate that earns book value per share was up close to four percent with that one hour in the call the questions operator please go ahead thank you sir at this time if you would like to ask a question please press the star and one on your touchstone phone

spk_13: you may remove yourself from the queue by pressing start to once again please press star one to ask a question

spk_14: our first question comes from eric hagan would be to id i've asked my has

spk_15: we got a couple here i'm in a hurry think about volatility in the market assess a catheter recession

spk_14: and the impact that it has on the flexibility from banks to support reaper financing like are there good way as you think the hedge against the kind of credit risk banks because of the transition to suffer from live or over the last couple years and then as a smaller cat mortgage rate are you concerned about the after the you have the repo and banks has the happened sir as

spk_5: and then i know how how do you think mortgages would respond of any further back at and rates along and the the curve as well as the sword and then mean we all know that most of the sensitivity is concentrated at along and but how sense do you think the bases

spk_16: fr if last fed funds or or meaningfully far higher than with ford curve currently projects us

spk_5: a mark one a one or i take the reaper portion of that and annual address the up you know how the mortgage this react to and what's going on the car for sure yeah so i'm you know we're not we're not really concerned about rebel are repo and especially in agency pauses just been incredibly resilient or including most notably through the financial global financial crisis we have allotted differ different a very large diverse set of rebel counterparties on we explicitly limit our exposure to smaller counterparties arm and you know we are most of our ego is through the very large bags that are again since the global financial crisis extremely well capitalized

spk_10: on it some it's something that we watch i mean they're spend a couple of bags that have been no in the news and you've seen their they are the credit spreads in their own dat you know be a little bit of out of but again on we limit our exposure bear down to residential to those counterparties in it's just not something that we're worried about our web three a from a counterparty credit risk of are equal counterparts or from a rebel availability our perspective a move just seen absolutely no blips you know in terms of back in terms of that availability mark do i handle the yam the second part sure so think the first person eric was about volatility know volatility has been pretty high this year but the act but realized volatility is certainly down from last year and like to me i think that sort of to two types of volatility one is what's the volatility in treasury yields right so how many basis point today are they realizing vs what's it kind of a built in the market expectations you've been sort of realizing about with built on my book bout market at but market expectations are priced in which it sort of means that if you think about things and oas termed dead you're you're dealt the hedging costs are about what what email on the away as you thought you were buying gum is pet located upon so that has been definitely manageable it felt more manageable last year at the other the other part of volatility that i think a lot about is what the volatility of mortgage spreads relative to treasury's and that's where you really think seen things come down that the amount by which mortgages outperform up to perform treasury's on sort of a given day this year versus last year it's a lot less safe have kind of mortgages they've had his modest outperformance this year but the oscillations been stuck between sort of you know their best performing days no worst performing days are a lot the lot closer than what they were last year and i attribute that to the flows in mortgage are a lot more bounce so sort of like anyone who needed shed a lot of duration in response to i'm fed hikes last year or outflows they have with a mutual fund or on yeah with pension fund raising cash i think you've seen those those big outflows occur and if you look good on e p f day that in mutual fund data you've seen kind of modest inflows it fixed income and some in flows into more to specifically spicy to somebody tf

spk_9: so the flows have been more bounce now the second question had about how mortgages perform if

spk_10: rates go higher then we're are currently built in the forward curve so mention that that sort of like mild recession which probably the best case for mortgages and so i would say that the case where i think right now said of terminal fed funds rate is expected to be rad around five and a half percent i think cases where it's materially higher than that and and scenarios where you have a ten tenure yields go go materially through the highs of last year the glass the we got to for thirty five or four forty we sit a little bit below four percent now setting scenarios where yields go up through last year's highs and long end and fed funds rate is a lot higher with currently built into expectations i think those are hardest narrows for more it is because i think in ensnares like that you're more likely to see fixed income outflows so it's sort of of little bit of the opposite of what made sorted but matrix i think kind of mild recession an area which is which currently built into the forward curve submit bill is to your that model session snared those technicals i said the best from mortgages and i think materially higher rates

spk_14: bingo market seemed like inflation dark coming down as much

spk_0: that i think it's more challenging scenario

spk_17: yup appreciate the color from you guys as a as always thank him thanks her

spk_18: thank you are next question comes from chris in love with piper sandler

spk_10: thanks i appreciate you guys take my question says some first the on looking at potential buyers and agency he mbs over the near term marquee talked about this a bad by them with bank stepping back from the second sector and twenty twenty two you still view that there's an opportunity there per banks to be a meaningful byron agency and

spk_19: twenty twenty three if a bank loan growth pulls back or could that be delayed i'm in their kind of twenty twenty four and then just any other potential tail and for agency and were calling out

spk_10: sure so i think what what really turn the dial on hm do have a mbs performance in queue for as posts that you know quarters one two and three was really money manager buying in response to i'm inflows right like investors like long term pool the kappa your pension funds insurance companies arsene yields they haven't seen since two thousand and seven right so that has been enough to get people when they see some modicum of the building and rates to commit a couple of fixed income stating that was it was really money managers are the the type of buyers that really have given your performance in queue for and so far this year banks so far has still been on the sidelines you've seen him basically sell some the family freddy's the by they're doing is mostly and jenny's because it's a different capital waiting and they've also been performing loans over securities for arm oh you know lower mark to market on impact on the balance sheet so i you know you did see some bank buying banks typically by

spk_20: after they've seen i'm a little bit of a rally so they ten only like they're not the kind of catch a falling knife type buyer they're sort of like they'd rather by the bounce type buyer she did see a little bit a bag buying in arm

spk_10: earlier this year when we had rallied some but i think has dissipated a lot so i don't think you're gonna see material a bank buying unless i'm rates sort of stabilize start gone back down and i'm if concerns about credit performance or significant you credit performance in loan portfolio is a significant enough to cause them to favor securities overload for credit reasons new typically see that happening recession and right now the economic numbers have been strong the other thing on which can also drives in the bank babies now everyone's under this cecil he right if you do have some

spk_17: weaker credit performance in the consumer or had performance in a mortgage loans than that can drive a revision to the capital you need to hold against loan portfolio for cecil and if that start happening that's certainly something that would cause them to favor on security's overloads the events har gum and then just one other for me it's more of a numbers question for from the quarterback i'm looking at core other income after making all the adjustments for eighty was was pretty sizable in the quarter first the previous quarter and upper upper back and out the adjustments i still got checked core other and about two point seven million litres of you can comment on on the key driver in the change their and kind of what's in there that to roll back in nothing and increase fan

spk_8: versus the previous quarter

spk_17: that psyche repeat the question this is craft beer so the looking at clear other income after making all the adjustments for eighty he was about two point seven million which was kind of significant increase over the the previous quarter after make me a gun for different kind of realized and unrelated games

spk_21: i'm just the series you can comment on kind of the key driver in what drove a higher core other income in the corner and a week enough i think about why that bad if a with your habit handy

spk_0: yes yes cause it's it's the as to swap payments that's what benefit their we're talking about before

spk_22: our at the perfect pairing thank you very much

spk_17: that

spk_10: that's because been they get thank you are next question comes from mchale government with jmp security mega morning gentlemen law grads on a solid quarter and appreciate the book value of the are just a quick were a question for me i'm kind of opportunities are you guys seen in the not agency space and he is for mentioning here number two on your list of the annual objectives this to continued rotator a portion of capital and to that space i'm just curious about that thanks yes so the two sectors in non agencies that look to us most attractive right now

spk_18: or some of the i'm more seasoned credit with transfer bonds and the other woman is so the legacy non agency market so that's sort of the pre crisis bonds

spk_10: you know two thousand and seven and earlier people have been their home fifteen sixteen years it's kind of a fragmented market is lot of smaller pieces there's a lot of securities were yeah you back by maybe fifteen twenty loan so cashflows and lumpy but or analytics or very strong in that area and because you really need tick granular approach to looking at the individual loans it's a deterrent to people that sort of just wanna buy bader so we see that sector is it as attractive now it's now it's you have to counter punch a little bit there you have to wait for sellers because it's not like i'm like you are market or ya another new issue market where did you new issue deals you can just put new order and to issue and get invested that way this you need to respond primarily to bid list but those are the two sectors that we see the best relative value and we're not looking too that portfolio is not

spk_17: designed to it's not sort of contemplated taken a lot of credit risk so what we're going to put to work there are security that we think the you can shock home prices like it you know great financial crisis shock and you're going to get your capital back so it's not gonna be weighed down the capital stack and things that are subject where we're were small changes loss expectations really change you expected returns things hired than the capital structure it's not it's very similar to what we did in i'm twenty twenty at a covert right tweet when twenty had a covert

spk_10: we raise cash or did the feds started buying a end on ios eight cm be have tightened and eighty cmbs they're tightening cycle preceded the tightening cycle in on

spk_23: great sense of assets so

spk_9: after the cmbs wooster to form well you will post march twenty twenty we rotated in to us some nine agencies and it worked out really well

spk_10: right thanks with mark under just kind of curious obviously it's not an issue at the moment but canada looking forward at what point could on prepay speeds start to spike a look at what kind of environment would would we have to get to his rage keep on rising like i said obviously not an issue at moment but become what what could have done the rates a great question it's a great question we actually does got the new or may get the monthly payment reports said business day the months so we got the prepayment report last night a and yeah which had a very modest up kick maybe ten percent from extremely low levels so i think about it two ways there's some very small portion of the mortgage market where people have note rates you know several a half seven a quarter percent bigger loans weeping those borrowers are going to be very responsive to refinance opportunities if the food current borne out with the mortgage rates drop and you have still your there's been layoffs industrywide among mortgage originators but you still have excess capacity so you saw you owe twenty thirty forty basically drop in mortgage rates you're gonna see that very small portion of the market that has high note wait to people that took note weights you know q for last year those are going to be response within this actual this this recent prepayment report yesterday you saw little bit of addict a behavior because this prepayment report referenced a mortgage rates a little bit lower than where we are now but now if you think of it the market an aggregate the

spk_17: get a real prepayment wave you need to get big portions of the market refinance ago and i don't think you see that until you get you know well below five percent you'll even you move think seventy five one hundred basis points here the percentage of loans that have a refinance and sunset of

spk_0: is very low the first thing i think you'd see is that if you got mortgage rates would say five and a quarter

spk_24: now of a sudden people with guilt for and a quarter for have fourth quarter note rates they're going to be more willing to do cash out refinance so

spk_25: so that can happen that be sort of incremental but to get a real you know a big portion of the market refinance well with straight rate revise your nap to be well under five percent particular you'll see who have you got a little pockets of faster speeds along the way and if you hold though

spk_10: those pools you can get hurt on those pools but it doesn't change the supply done it demand the namic for mortgages until you get significantly lower rates gotta thank you for that thank you very much guys us like offered thank you thank you are next question comes from jason stewart with jones trading i have thanks has just wanted to know a little bit further on your thoughts on investing across the agency coupon stack piece of either yeah to dividend i guess you know what kind of where we see the most value now is like sweet spot like it's coupons that are high enough where you getting enough coupon that you're sort of like

spk_5: going to be close are getting close to your a financing costs but aren't so high that a little bit a drop in mortgage rates you can see a big pick up in speed so yeah i would say you know force for to have five even five and a half that us looks

spk_26: yeah i think that's where you want to be i think you want to

spk_5: be positioned such that if you have on a job and rate of the ford cooked for that we will bite you have at least you know a few points of room before you get the parm before you really have to start worrying about prepayments sides i'd say that those coupons kind of fits that bill but they also the also the nice property that not see in new production say in forty and for now so each month email fuel pools really feel pbs it sort of your your pool's everything seen the month by month but even if you have to be a exposure their the substance to a deliverable is getting older each month you get and kind of the

spk_6: benefit the seasoning there and i think that it served the very high coupons we have really blown bells that i'm small drop and rates you gonna have an army of people trying to revive those loans that that to me as a big an area that will will have challenging performance if the forward curve is born on you do have

spk_5: have a lower rates you know second half of this year and next year and if i could just add know if you look at our interest margin

spk_24: and you leverage that

spk_0: now given them look at our that equity can look at our watch exposure which yeah we dial up or down on you can see that

spk_27: the day he had a dividend should be well covered from that perspective

spk_0: ah especially given were starting rates are arc is that i have talent as well but it's really i just spreads have been so volatile lately i mean you know we talked about how they kept at it september heightened in november now are you know obviously this year i'm sauce that have a similar thing january ah tightening and and february march widening so it's it's definitely a market where we feel that by dialing down up and down that and march exposure we can nab your generated from an artist and so i thank god you know with that as well which odyssey i came into play in a big way in the fourth quarter ah we can numb yeah absolutely cover the dividend gotcha great thanks has thank you that with our final question for today we thank you for for traffic camera i have them and the ellington residential mortgage read fourth quarter twenty twenty two earnings conference call you made this connect your line at this time and have a wonderful day no

spk_5: good morning ladies and gentlemen thank you for standing by welcome to the ellington residential mortgage read twenty twenty two fourth quarter financial results conference call that a 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 one on your telephone keep it at any time if your question has been answered you may remove yourself from the queue by pressing started

spk_6: lastly if you should require operator assistance please press stars the zero

spk_5: it is now my pleasure to turn the floor over to our team silly with associates in a row council sorry maybe get thank you for again i would like to remind everyone that certain statements made during the conference call may constitute forward looking statements within the meaning of the safe harbor provisions of the private securities litigation reform act ninety ninety five for that these statements are not circle nature and are subject to a variety of risk and uncertainty that could cause the company actors have to differ from beliefs expectations as mit and projections consequently we should not rely on these are looking statements as predictions of future events we strongly encourage you to review the information that we have five of the as he see including the earnings release in the form ten k for more information regarding this for looking statements and any related risks and uncertainties

spk_6: unless otherwise noted statements made during the conference call made out of the day of the cough the company undertake no obligation of day or of have any for that these payments well as a result of new information future events or otherwise join me on the corner they are larry pan chief executive officer ellington residential mark to copy the art though cheap and

spk_5: doesn't an officer and chris smirnoff our chief financial officer as described in earnings press release our fourth quarter earnings conference call presentation is available on our website and read dot com our comics this morning will track the presentation

spk_6: please note that any references the figures in this presentation qualified in their entirety by the know that the back of the presentation and without turn the called over to larry

spk_5: thanks holiday allegheny good morning everyone we appreciate your time in interest analogy residential during the fourth quarter and place she continued to moderate the federal reserve ratcheted back the pace of pets interest rate hikes the market welcome these developments in agency rbs recounted sharply following three consecutive quarters of dismal performance volatility decline incrementally and invested a man be as increase together this drug nominal and option adjusted yield spreads tighter especially november and so the year ended on a more positive note turning to the investor presentation 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 and the as prices to rise even though long term interest rates were actually moderately high meanwhile short term interest rates spite for yet another corner

spk_6: you can see on the slide just how much short term interest rates moved not just during the fourth quarter but also over the course of twenty twenty two in absolute terms as well as relative to long term rates this trend has continued into twenty twenty three and yield curve is now the most inverted it's been since the early nineteen eighties with a two year tenure yields read now more than ninety basis points negative the inverted yoke of has pressured net interest margins injury industry wide and coupled with the extreme extreme volatility that we've experienced since the beginning of twenty twenty two it's really put the effectiveness of interest rate hedging programs under a microscope

spk_5: for earn with hedged along the entire yield curve and we balanced or hedges frequently both of which can be more expensive at times but also more effective across a wider variety of market environments

spk_7: as interest rates surge last year we were continuously rebalancing are hedges the delta hedging costs associated with the is rebalancing are high but they were essential in preventing deeper of value declines with the yoga currently subverted were at least getting the benefit of positive territory on our it's a straight swap edges where we are receiving the higher so for a while paying lower fixed rates in the fourth quarter these swaps served the dual function of offsetting some of the impact of a higher long term interest rates are also boost your net interest margin and adjusted distributable arts

spk_6: let's turn next to slide thor for an overview of armstrong results for the fourth quarter mbs had we can significantly in september of last year and we responded by buying and the as aggressively into that weakness

spk_5: as a result we enter the fourth quarter with a net mortgage exposure of seven point five to one which to toward the upper end of a historical range deposition does incredibly well for the spread tightening that occurred during the fourth quarter and so we were able to recoup a good chunk of fucking realize losses from the prior quarter for the fourth quarter regenerate and nine annualized economic return of eleven point one percent and net income of eighty eight cents per share which easily covered are dividends for the core

spk_0: who are able to be position this way because we have been patient about portfolio turnover and we have an opportunistic about adding new investments throughout twenty twenty two reinvestment yells were surging but yes press were winding as well especially on the lower coupon pools where we saw the best relative value

spk_8: larger portfolio sales of our discount pools might have boosted eighty in the near term but as potential longer term cost to the value per share

spk_7: instead we were selective in turning over those portions of a portfolio that we viewed as offering superior relative value particularly those lower coupon pools and we continue to prioritize total return over short term eighty growth

spk_0: meanwhile are strong liquidity position naval us to add pools opportunistically in september when spreads gap down over the course of the fourth quarter we continue to be opportunistic in this case by opportunistically selling when we felt that the mid court a rally had run its course as a result by year end or that mortgage exposure had declined by a full fulltime to six point six to one which one it closer to our stark alarms

spk_8: on now pass it over to crests to review our finance results for the fourth quarter more detail press thank you marry a good morning everyone

spk_0: please turn to slide five where you can see summary of earned fourth quarter financial results

spk_8: for the quarter ended december thirty first we reported a net income of eighty cents per share and adjusted distributable earning of twenty five cents per share

spk_0: these results compared to a net loss of a dollar and four cents per share and eighty of twenty three cents per share in the third quarter eighty excludes the catch a premium of meditation attachment which was positive six hundred fifty thousand in the fourth quarter as compared to a positive one point four million dollars in the prior quarter

spk_8: during the fourth quarter tighter either the rmbs feel spread and increased a up drove significant net realize and unrealized games on are specified schools which combined with net an interesting come exceeded net realized and unrealized losses on our interest rate hedges or net interest margin increased slightly quarter over quarter to one point three seven percent from one point to a percent as higher as it yields exceeded the increase in our cost the funds and that included the positive carry that larry mentioned on our interest rates while position or higher named drove this to quit sequential increase and eighty even as our average holding decline quarter over quarter

spk_0: meanwhile pants on or less of a pool of increased to one point two six percent as of december thirty first from one point zero two percent as at september thirtieth

spk_8: as became and continued to decline market wide that specified cool investors are increasingly focused on extension protection rather than prepayment protection

spk_0: this has been a tell when for the pay of on are such by cause because the market is recognizing that significant extension protect and they offer relative to their tv i can apart

spk_8: in addition the pool that we did sell during the quarter had lower pants relative to our overall for folio the combination of the factors led to the sequential increase in pants he turn now to are bound bouncy outside sex look value was a thousand and forty cents per share at december thirty first as compared to seven dollars and seventy cents per share at september thirtieth

spk_0: including the twenty four sense of the event in the quarter or economic return was eleven point one percent

spk_5: we ended the quarter with cash and cash equivalent of thirty four point eight million dollars up from twenty five point four million dollars at september thirtieth

spk_0: next please try to slide seven which shows a summary of of her folio holdings

spk_7: in the fourth quarter our agency rmbs holdings be creeped by five percent to be hundred and sixty three point three million dollars

spk_0: the duke decrease was driven by net sales and principal payments of fifty seven point nine million dollars which exceeded net realized and unrealized games of eleven point eight million dollars

spk_8: agency rmbs for fully a turnover in the for the border of eighteen percent

spk_9: over the same period are non agency armed are fully of speech by for twenty million dollars to twelve point six million dollars while our holdings of interest only securities were roughly unchanged

spk_0: additionally er det the equity ratio adjusted for and settle purchases in sales decreased to seven point six times as of december thirty first compared to nine point one time at september thirtieth

spk_10: the decrease was primal are due to a decline in borrowings on are smaller each of the rbs for foleo and hired shareholders' equity put over quarter similarly er net mortgage assets equity you equity ratio decrease to six point six times from some point five times over the same period

spk_7: on friday didn't see details of our interest rate hedging for folio

spk_10: during the quarter we can seem to hedge interest rate risk through the use of interest rate swaps and short positions and tv eight us treasury securities and future the size of our net short tv a position based on tenure equivalents increased quarter over quarter i will naturally our presentation over to mark thanks chris after a challenging nine months faded cmbs it's nice to be able to report a strong supporter and to make back some of the prior quarter losses unlike most part of securitized products were invested take on credit risk and the possibility of principle lot in exchange for exit field jaden cmbs market is unique and it's ability to offer high yields without credit risk most latency mortgage rates hedge a good deal their into straight with it to the primary driver of quarterback quarter economic returns for a hedge agency see mortgage rate is a relative total return of aden cmbs compared to hedging instruments which are usually treasury than interest rate swaps the total return of aden cmbs starts with the carry and mbs assets compared to the carry on hedging instruments but as interest rates kneeled spreads move around you also have to factor in doubt that in costs and the relative price performance of mbs assets both pools and pbs compared to edges inquiries were yields by a very volatile as we've seen for the past four quarters economic return hensley be driven primarily by the relative mbs price performance where the outperform it around or of underperformance

spk_11: for the first recorded of twenty twenty two the relative price performance of aden cmbs be negative eighty cmbs drop them price a whole lot more than a basket of similar duration treasury's in the face of heavy investor liquidations and soaring rates in volatility bring queue for that reverse dramatically

spk_10: so what happened in queue for we finally saw some evidence that inflation is responding to the federal a third heightened cycle and a higher interest rate environment these green shoots but a potential end of this heightened cycling site and that change the direction of fixed income capital flows from outflows the inflows and when considered against the backdrop of greatly diminished new mbs production those inflows lead to significant mbs outperformance you can see that in the price changes or flight three across the board aden cmbs prices significantly outperform their hedges financial markets generally normalize whatever current pricing levels are what i mean by that is it the bond market participants in researchers especially in spread sectors like mbs typically stop the it's

spk_12: thompson the current yield that current yield levels and spread relationships are fair i think it's worth reminding every one of the magnitude of the repricing twenty twenty two and what was considered fair vs where we are vs today

spk_10: we started twenty twenty two with fannie to the dollar price of ninety nine point eight and we ended the year with them at eighty one point six down over eighteen points said the started the year danny twos and they are more than one and a half trillion of them with a bellwether coupon and they yielded about two percent now where by a fanny five an at a discount and anomalous spread under par cooper mortgage is significantly why didn't the twenty year historical average that's almost a four hundred base point move in a little more than a year and doing a fifteen year bull market and bring mbs yields back to the two thousand and seven levels now mortgage rates are higher than before the fed began it's mortgage bond buying program and the fetishists sitting on a large portion of the market which has reduced what's available to private investors the where we now the mark is currently pricing and a terminal funds rate of almost five and a half percent and that means more hike from here but the biggest moves are clearly behind us from the markets perspective and what's this inverted guilt curved thing about the future it's is lower rates are common the to you know now you're almost five percent and to your note two years in the future is expected is expected to be over one hundred basis points lower you put all this together and you can see why fixed income flows turned positive in queue for there are some signs that inflation while high is starting to slow some fed watchers expect a heightened cycle to pause as soon as next quarter and the risk of recession has set market expectations of significantly lower rates some time now next year whether all that actually happens nobody knows but that set of expectations put fixed income in a pretty good place to attract capital capital flowing into fixed income is a post out of it very significant for mbs fixed income investors have not seen the old decide since two thousand and seven and they are voting with their wallet you can see funds flowing into eat yes and mutual funds but there are two headwinds first banks which are normally huge aden cbs investors have been quiet they're struggling with diminished capital from help for sale losses and from week deposit growth in a competition for money market funds commercial banks start your over your deposits shrink for the first time and seventy years and second of course is the absence of fed buying get a lot of questions about wouldn't inverted yield curve means mean for a d e and return expectations going forward a sharp rise in the fed funds rate is typically not only issue is is typically only a short term headwind spreads of wide the longer term repo and in response with shorten the average ten of over ten tenor of our repo and you can see a flight seventeen as a result or reports pence now goes up almost in lockstep with the fed funds rate but it takes at least a quarter longer for our a d to normalize for a few reasons floating greg leg we receive on our swaps will also be sit higher but those only reset every three months and the extent that are fixed pair swap portfolio is smaller than their ass it portfolio we need to raise as it yields you turn over to make up the difference but once the hike stop and up folio turn over continues or rafield should catch up and fully reflect the wider spread currently in the market those wider yield spreads relative to financing costs and hedging instruments hedging costs should should drive eighty moving forward but what will it mean for aden cmbs if the forward curve is correct and we get a mild recession and lower interest rates that's probably the best case rate and cmbs demora has put out some great research supporting this dynamic seventy five bases point drop in the mortgage rate does very little forgetting coupons in the money to not material for rifai supply but in a recession banks typically favor securities overloads to in a mild recession we were expecting an incremental increase in bank demand also within fixed income aden cmbs tend to outperform corporate in a recession to finally slightly or rates are also probably support of further fixed income flows right now housing is relatively unaffordable looking at monthly mortgage expense at current rate levels relative to median income so your see existing home sales really drop like a stone the other powerful force that the slowing existing home sales is that mortgage researchers referred to as the lock in effect the luck can affect his when a homeowner has a mortgage rate that is several hundred basis points below the current rate their luck been low payments significantly to deter them from moving lots of moves a local a going family wants an extra bedroom or empty nesters want to downsize these loser discretionary and a three hundred base

spk_6: point jump in a new mortgage versus an existing one will dramatically changed their monthly mortgage payment this dynamic also helped keep new mbs supply in check so all in all a mild recession probably up a shoes and a decent pick up in aden cmbs demand with only a very modest uptick in the supply

spk_5: so what did we do for the quarter and how we currently positioned and what is our future outlook you conceive on slide fourteen that we shrug our agency and cmbs portfolio during the fourth quarter given their strong performance in the quarter it made sense to reduce mbs holdings on a relative as the relative value is not as compelling but it was are disciplined hedge the process and cash management that allowed us to hold our portfolio intact do some very volatile times and twenty twenty two that us to capture returns and queue for to offset some prior losses you can see and the slide that we reduced or holding the fifteen year mortgage is given the inverted yield curve that sector sing almost no new origination so it's shrinking from pay downs the net negative supply has driven prices to much tighter spreads relative to let relative to treasury's than thirty you mbs that medieval and

spk_6: new but we're just fighting better relative value in the thirty a market right now

spk_5: january was another month of strong performance february reverse some of those gains for we are still solidly up for the year and be a spreads are currently attractive and a consensus path of a few more hikes followed by some better inflation news and week or economic them breeze should be a very good backdrop for mbs performance but experience has taught us that the forward curves often wrong to remain disciplined about hedges and are prepared for range scenarios we see lots of relative value opportunities in the market so we'll that we look to exploit to drive incremental returns now back to larry thanks mark two thousand and twenty two was by many measures the worst year for mbs in at least forty years and perhaps ever and ellington residences longstanding sector of focus the agency mbs after it was truly nowhere to hide as a bloomberg mbs index at it's worst yearly performance on record on absolute basis and it's second worst year ever relative to treasures throughout twenty twenty two we had to navigate periods of extreme volatility the market dysfunction with interest rates rising rapidly and yelled spreads widening along the way despite these challenges are risk liquidity management enabled us to have like realizing even larger losses

spk_0: as a result we were able to buy into extreme weakness late in the third quarter and then sell it to strengthen the fourth quarter by doing so we entered twenty twenty three with reduce leverage and strong liquidity which is now allowing us to play off and once again a last quarter's earnings call we discuss the we are planning to selectively rotate a portion of our capital from agency mbs to other residential mortgage sectors and that still very much on our radar screen

spk_13: as he pointed out before on smaller size and they to be nimble as market conditions of off

spk_14: and as usual apps and a big deal spread wanting a band well one pounds we plan to be patient and opportunistic picking are spots so far this year january started your often a positive note with agency rbs enjoying an excellent months as agency yield spreads titan further the to start a bit since then with interest rates and volatility up both in february and so far march especially with pals comments this morning

spk_15: year to date through the end of february we estimate that earns book value per share was up close to four percent

spk_14: with that will now and the call the questions operator please go ahead thank you sir at this time as you would like to ask a question please press the star and one on your touchstone phone

spk_5: you may remove yourself from the queue by pressing star to once again please press star one to ask a question our first question comes from eric hagan with bt id i've asked my head we got a couple here i'm in a hurry think about volatility in the market as as a competitor recession and the impact that it has on the flexibility from banks to support reaper nothing like are there good way to hedge against the kind of credit risk at banks because of the transition to suffer from live or over the last couple years and then as a smaller cat mortgage rate are you concerned about the after as you have the rebel and banks as the second

spk_10: sir as and then i know how have you think mortgages would respond of you any further back up and rates along and that the curve as well as the sword and them and we all know that most of the sensitivity is to say that along and but how sensitive do think the bases fire if five said funds are or meaningfully a higher than with ford curve currently projects thanking us a mark lot of done or i take the reaper portion of that and then you'll address the up you know how the mortgage this react to and what's going on the car for sure yeah so um you know we're not we're not really concerned about rebel repo and especially an agency pauses just been incredibly resilient or including most notably through the financial global financial crisis are we have allotted differ have a very large diverse set of rebel counterparties on we explicitly limit our exposure to smaller counterparties arm and you now we are most of our ego is through the very large banks that are again since the global financial crisis extremely well capitalized on it some it's something that we watch i mean there's spend a couple of bags at have been knowing in the news and you've seen their they are the credit spreads on their own dat you know be a little bit about of but again we limit our exposure bear down to residential to those counterparties in it's just not something that worried about our whether it be from a counterparty credit risk of article counterparties or from a rebel of a ability our perspective a move just seen absolutely no blips you know in terms of back in terms of that availability mark do i handle the yam the second part sure so think the first person eric was about volatility know volatility has been pretty high this year but the act but realized volatility is certainly down from last year and like to me i think that sort of to two types of volatility one is

spk_9: what's the volatility in treasury yields right so how many basis points today are they realizing vs what's it kind of a built in to market expectations you've been sort of

spk_10: realizing about that was built on my book bout market it but market expectations are priced in which it sort of means that if you think about things and oas termed that you're you're dealt the hedging costs are about what what either the away as you thought you were buying gum is predicated upon so that has been definitely manageable it felt more manageable last year at the other the other part of volatility that i think a lot about is what the volatility of mortgage spreads relative to treasury's and that's where you really think seen things calm down that the amount by which mortgages outperform are up to perform treasury's on sort of a given day this year versus last year it's a lot less safe have kind of mortgages they've had his modest outperformance this year but the oscillations been stuck between sort of you know their best performing days the worst performing days are a lot of the lot closer than what they were last year and i attribute that to the flows in mortgages are a lot more bouncer so sort of like anyone who needed shed a lot of duration

spk_14: in response to i'm fed hikes last year or outflows they have with a mutual fund or a girl with pension fund raising cash i think you've seen those those big outflows occur and if you look good on be day that in mutual fund data you've seen kind of modest inflows

spk_0: it fixed income and some in flows into more to specifically spicy to somebody tf so the flows have been more bounce now the second question had about how mortgages perform if

spk_17: rates go higher then we'll what's currently built in the forward curve so mention that that sort of like mild recession which probably the best case for mortgages and so i would say that the case where i a great now sort of terminal fed funds rate is expected to be read around five and a half percent i think cases where it's materially higher than that and and scenarios where you have a tenure yields go go materially through the highs of last year the last year we get to for thirty five or four forty we sit a little bit below four percent now setting scenarios where yields go up through last year's highs and long and and

spk_18: fed funds rate is lot higher what's currently belt and expectations i think those are hardest narrows for more it is because i think in ensnares like that you're more likely to see fixed income outflows so it's sort of of little bit of the opposite of what made sort of but matrix i'd think kind of mild recession

spk_10: an area which is which currently built into the forward curve make goal is to your that mild recession snared those technicals i said the best for mortgages and i think materially higher rates

spk_19: yo market seems like inflation's aren't coming down as much

spk_10: that i think is more challenging scenario yup appreciate the color from you guys as a as always like him you think they're

spk_19: thank you are next question comes from crispin in love with piper sandler

spk_28: thanks i appreciate gothic my question says some first the on looking at potential buyers agent agency mbs over the near term marquee talked about this a bad by them with bank stepping back from the second sector and twenty twenty two you still view that on there is an opportunity there per banks to be a meaningful byron agency and to

spk_10: wait twenty three if a bank loan growth pulls back or could that be delayed an in and of twenty twenty four and then just any other because of tail and for agency and were calling out

spk_20: sure so i think

spk_10: what what really turn the dial on agency and have a mbs performance in queue for as opposed that you know quarters one two and three was really money manager buying in response to i'm inflows right like investors like long term pool the kappa your pension funds insurance companies arsene yields they haven't seen since two thousand and seven or eight so that has been enough to get people when they see some modicum of stability and rates to commit a couple of fixed income stating that was it was really money managers are the

spk_17: the type of buyers that really have driven your performance in queue for and so far this year banks so far has still been on the sidelines you've seen and basically sell some the family freddy's the by they're doing is mostly and jenny's because it to depict capital waiting and they've also been on preferring loans over securities for arm yo yo lo marked market on impact on the balance sheet so i you know you did see some bank buying banks typically by after they've seen i'm a little bit of a rally for the only like they're not the kind of catch a falling they've typed by buyer they're sort of like they'd rather by the balance type buyer see did see a little bit a bag buying in on earlier this year when you know we had rallied some but i think that's dissipated a lot so i don't think you're gonna see material a bank buying unless i'm rates so destabilize start gone back down and i'm if concerns about credit performance or significant you credit performance and loan portfolio is significant enough to cause them to favor securities overload for credit reasons you typically see that happening in a recession and right now the economic numbers have been strong the other thing on which can also drives and the bank babe ruth now everyone's and this on cecil

spk_29: izzy right stuff you do have some

spk_8: weaker credit performance in the consumer or credit performance in a mortgage loans than that can drive a revision to

spk_17: the capital you need to hold against loan portfolio for cecil and if that starts happening that's certainly something that would cause them to favor on

spk_21: security's overloads

spk_0: the events har gum and then just one other for me it's more of a numbers question for from the quarterback

spk_22: looking at core other income after making all the adjustments for eighty he was was pretty sizable in the quarter first the previous quarter effort at the back and up the adjustments i forgot that corps other in combat two point seven million matures of you can comment on on the key driver in the change their and kind of what's in there that to roll back in the fuck

spk_17: and increase fan

spk_10: versus the previous quarter psyche repeat the question this is chris the has hope and looking at clear other income after making all the adjustments for eighty he was about two point seven million which was can have significant increase over the the previous quarter after make me a and for different kind of realized and unrelated games i'm get the series begin comment on kind of the key driver in what drove a higher core other income in the corner and a week it up i think about why that bad if a with your habit and it yes yes cause it's it's the as the swap payments that swap out of that they were talking about before or at the harvick parrot thank you very much that's that's has been that peggy thank you are next question comes from mchale government with jmp security a good morning gentlemen law grads on a solid quarter and appreciate the book value of god just a quick were a question for me i'm kind of opportunities you guys seen in the non agencies a sub is for mentioning here number two on your list of the annual objectives this to continued rotator a portion of capital and that space i'm just curious about that thanks

spk_17: yes so the two sectors in nine agencies that look to us most attractive right now are some of the i'm more seasoned credit with transfer bonds and the other woman is so the legacy non agency market so that's sort of the pre crisis bonds

spk_10: you know two thousand and seven and earlier people have been their home fifteen sixteen years

spk_23: it's kind of a fragmented market it's lot of smaller pieces there's a lot of

spk_9: security's where yeah your back by maybe fifteen twenty loan so cashflows and lumpy but our analytics or very strong in that area and

spk_10: because you really need take granular approach to looking at the individual loans it's a deterrent to people that sort of just wanna buy beta so we see that sector is it as attractive now it's thou it's you have to counter punch a little bit there you have to wait for sellers because it's not like i'm like you are market or yo another new issue market where did you wish you deals you can just put new order and to issue and get invested that way this you need to respond primarily to be list but those are the two sectors that we see the best relative value and we're not looking too that portfolio is not designed to it's not sort of contemplated taken a lot of credit risk so what we're going to put to work there are security that we think the you can shock home prices like you know great financial crisis shock and you going to get your capital back so it's not gonna be way down the capital stack and things that are subject where we aware small to take his loss expectations really change you expected returns things hired than the capital structure is not it's very similar to what we did in i'm twenty twenty at a covert right tweet when twenty at a coven we raise cash or the feds started buying a end on ios eight cm of tightened in aden cmbs they're tightening cycle preceded the tightening cycle in on credit sense of assets so after being cmbs wooster to form well you will post march twenty twenty we rotated in to us some nine agencies and it worked out really well right thanks with a mark the just got a curious obviously it's not an issue at the moment but canada looking forward at what point could on prepay speeds start to spike a walk what kind of environment what would we have to get to the rage keep on rising like i said obviously not an issue at moment but become what what could have done the raid the great question it's a great question we actually does

spk_17: got the new or may get the monthly payment reports said business day the month so we got the prepayment report last night

spk_0: end

spk_24: yeah which had a very modest up pick maybe ten percent from extremely low levels so i think about it two ways there's some very small portion of the mortgage market

spk_25: where people have note rates you know several a half seven a quarter percent bigger loans we think those borrowers

spk_10: are going to be very responsive to refinance opportunities if the for current borne out with the mortgage rates drop and you have still your there's been layoffs up industrywide among mortgage originators but you still have excess capacity so you saw you owe twenty thirty forty base point drop in mortgage rates you're gonna see that very small portion of the market that has high note wait to people that took note weights you know q for a last year those are going to be responsive in this actual this this recent prepayment report yesterday you saw little bit of addict a behavior because this prepayment report referenced a mortgage rates a little bit lower than where we are now but now if you think of it the market an aggregate

spk_20: to get a real prepayment wave you need to get big portions of the market refinance ago and i don't think you see that until you get you know well below five percent you'll even you move think seventy five one hundred basis points here the percentage of loans that have a refinance and set of

spk_10: is very low the first thing i think you'd see is that if you got mortgage rates would say five and a quarter now the sudden people with guilt for and a quarter for the have fourth quarter note rates they're going to be more willing to do cash out refinance so so that can happen that be sort of incremental but to get a real you know a big portion of the market refinance well with straight rate revise your nap to be well under five percent particular you'll see have you got a little pockets of faster speeds along the way and if you hold those the pools you can get hurt on those pools but it doesn't change the supplied done it demand the namic for mortgages until you get significantly lower rates

spk_5: gotta thank you for that thank you very much guys best like offered thank you

spk_26: thank you are next question comes from jason stewart with jones trading

spk_5: i have thanks has just wanted to know a little bit further on your thoughts on investing across the agency coupon stack piece of either yeah to dividend i guess

spk_6: you know of kind of where we see the most value now is

spk_5: like sweet spot like it's coupons that are high enough where you're getting enough coupon that you're sort of like going to be close are getting close to your a financing costs but aren't so high that a little bit a drop in mortgage rates you can see a big pick up in speed so yeah i would say you know force for to have five even five and a half that us looks i think that's where you want to

spk_24: be i think you want to

spk_0: be positioned such that if you have on a drop and rate of the ford curved or that we will bite you have at least you know a few points of room before you get the parm before you really have to start worrying about prepayments sides i'd say that those coupons kind of fits that bill but they also

spk_27: the also the nice property that not see in new production say and forty and for now so each month email fuel pools really feel tbs it sort of your your pool's everything seen the month by month but even if you have to be a exposure their the substance to a deliverable is getting older each month you get and kind of the

spk_0: benefit the seasoning there and i think that it served the very high coupons we have really blown balance that i'm small drop and rates you gonna have an army of people trying to revive of those loans that that to me as a big an area that will will have challenging performance if the forward curve is born on for you do have have a lower rates you know second half of this year and next year

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Q4EARN 2022

Ellington Residential Mortgage REIT Common Shares of Beneficial Interest

Q4 2022 Earnings Conference Call3/7/2023

Q4 2022 Earnings Conference Call
3/7/2023