Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2023 Second Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. If you would like to ask a question at 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 zero. It is now my pleasure to turn the floor over to Aladin Shillay, 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 not 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 this information, review information that we have filed with the SEC, including the earnings release, the Form 10-K, and the Form 10-Q for more information regarding these forward-looking statements and any risks 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 Smirnoff, our Chief Financial Officer. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, earnrete.com. Our comments this morning will track to the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the notes in the back of the presentation. With that, please turn to slide four of the presentation. I will now turn the call over to Larry.

Thanks, Elodine, and good morning, everyone. We appreciate your time and interest in Ellington Residential. Following the first quarter turmoil in the regional banking system, the second quarter began with investors bracing for the impact of FDIC-directed sales of MBS. The Federal Reserve was no longer buying MBS, and demand even from healthy banks seemed unlikely. As a result, early April saw agency MBS yield spreads widening even further. However, when the FDIC-directed sales finally got started later in April, the wider yield spreads attracted strong investor interest from money managers, and the sales ended up being well absorbed by the market. With support levels established, the month of May saw even stronger demand for MBS, even while interest rate volatility remained elevated. While this rally was temporarily interrupted by the debt ceiling dispute, once that was resolved, volatility declined, and MBS yield spreads tightened further, all the way into quarter end. Accordingly, We experienced moderate portfolio losses in April, but these were reversed in May and June. On balance, Ellington Residential generated net income of $0.09 per share and adjusted distributable earnings of $0.17 per share for the second quarter. Over the course of the quarter, we maintained a relatively stable overall portfolio composition and size. We continued to hold mostly discount-specified pools, and we continue to believe in the value of our portfolio going forward. In recent quarters, we have highlighted how our research and asset selection efforts have focused on finding pools with the lowest pay-ups that will get the fastest prepayments. Indeed, as you can see on slide four, prepayment rates on our portfolio increased nicely quarter over quarter from 4.3 CPR to 7.4 CPR. If you now flip to slide eight, you can see that we continue to be underweighted, low coupon MVS in the second quarter. Keep in mind that over half of the universe of conventional MBS pools have pass-through rates of 2.5% or less. This low-coupon cohort comprised a big portion of the holdings of the failed regional banks. And so, not surprisingly, this cohort severely underperformed in the first quarter due to the anticipation of FDIC asset sales. Since we've been underweighted in this cohort, our results benefited in the first quarter from that positioning. As I mentioned, the FDIC asset sales ended up being well absorbed by the market, which caused this cohort to outperform in the second quarter. So Earn did not benefit from that outperformance in the second quarter. Nevertheless, we continue to strongly favor the middle of the coupon stack. Avoiding high coupons shields us from some of the technical pressures of new production, especially with the Fed no longer a buyer. This also reduces our negative convexity. and thus reduces our delta hedging costs in what have recently been very volatile periods. And with rates this low, we don't think the extra call protection compensates you enough for the lower yield spreads in the low coupons. By contrast, we continue to see both meaningfully higher yield spreads and better technicals in the middle of the coupon stack, namely MBS with pass-through rates between 3% and 5%. Elsewhere, Our non-agency and IO portfolios again contributed nicely to our quarterly results, driven by net gains and strong net interest income. Although the total size of our overall non-agency portfolio was roughly unchanged quarter over quarter, we did rotate some capital into credit risk transfer assets at some very wide spreads before the spread tightening in that sector in June and July. The loans backing the 2019 and 2020 CRT issues that we bought recently had both significant home price appreciation and fast prepayment speeds until mid-last year, both of which have helped to substantially de-risk these bonds. Additionally, these borrowers have locked in 30 years of very low fixed rate payments, and now wage gains are driving their debt-to-income ratios even lower. Combine this with the bond tendering programs this year by Fannie and Freddie, and you have a combination of great fundamentals and great technicals, driving strong total returns. This is a good example of how the breadth of Ellington's platform, combined with the flexibility of EARN's mandate, helps drive EARN's total return. Moving to the liability side of the balance sheet, both our debt-to-equity and net mortgage assets-to-equity ratios were roughly unchanged quarter over quarter. I will note, however, that the second metric, which reflects our net mortgage exposure, did fluctuate a lot intra-quarter. With markets chomping and spreads wider in May, We covered the majority of our net TBA short position, and then with the market rally in June, we put most of that net short TBA position back on. Similar to last quarter, we ended the second quarter still well below the high end of where we're comfortable adding leverage or net mortgage exposure. Finally, we continue to turn over our lower-yielding MBS with the aim to improve our net interest margin and adjusted distributable earnings. I'll now pass it over to Chris to review our financial results for the second quarter in more detail. Chris?