Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2023 Third Quarter Financial Results Conference Call. Today's call is being recorded. At this time, our participants have been placed on listen-only mode, and the floor will be open for your questions following the presentation. If you'd 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 Chalet, 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 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 provide or revise any forward-looking statement, 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 third quarter earnings conference call presentation is available on our website, earnreit.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. With that, please turn to slide three of the presentation, and I will now turn the call over to Larry.

Thanks, Aladin, and good morning, everyone. We appreciate your time and interest in Ellington Residential. The third quarter actually began on a constructive note. In July, inflation fell to its lowest year-over-year pace in two years, GDP growth beat expectations, and U.S. equities and most credit fixed income sectors posted gains for the month. For agency MBS, FDIC selling of specified pools continued to be well-digested by the market, and the U.S. agency MBS index generated a positive excess return for the month over treasuries. Earn had a positive economic return in July as well. The quarter got considerably more challenging from there, however. Realized volatility remained high, and long-term interest rates continued their upward march, which put significant pressure on agency yield spreads. In particular, the Federal Reserve's hawkish messaging at its September meeting triggered a sell-off in most fixed-income sectors, agency MBS included, while a possible government shutdown added to the uncertainty. The yield on the 10-year Treasury rose 82 basis points between mid-July and September 30th, and the move index, which tracks expected short-term interest rate volatility, remained elevated. Against this backdrop, agency MBS very significantly underperformed comparable U.S. Treasuries and interest rate swaps during the quarter, with lower-coupon MBS exhibiting the most pronounced underperformance. On slide three of the presentation, you can see that the dollar prices on Fannie 2.5s through 3.5s declined by more than five points sequentially. Earn generated an overall net loss of 75 cents per share for the quarter, with net losses on our specified pools exceeding net gains in our interest rate hedges, and delta hedging costs, which are tied to interest rate volatility, remaining high. On the positive side, our adjusted distributive learnings increased quarter over quarter, driven by further portfolio turnover capturing higher market yields, while cost of funds remained relatively stable. In addition, a significant portion of the losses on our agency MBS for the quarter were unrealized and resulted from yield spread widening that could be largely recoverable if market volatility subsides. We sold some pools incrementally, and we were able to avoid the forced selling that we saw from others in September and October. We continued to hold a strong liquidity position at quarter end, with cash and unencumbered assets representing 38% of our total equity, and with our leverage ratios roughly unchanged quarter over quarter. We continue to maintain additional borrowing capacity. Looking to the balance of the year, it's great to have dry powder available in a market rich with opportunities. Despite the rally of the past couple of weeks, agency yield spreads remain very wide, and the mortgage basis looks very attractive right now, with the impact of elevated volatility and higher for longer interest rate environments seemingly fully priced in. Furthermore, on a technical basis, late fall and winter seasonal effects should bring a drop in agency RMBS supply, and the fourth quarter is typically a strong quarter for bank deposit growth and resulting security purchases. The main thing keeping money managers and banks from returning to the sector in a meaningful way has been elevated volatility. If volatility finally subsides somewhat, Incremental institutional demand for agency MBS could be a significant driver of total returns for this sector in the coming months. I'm particularly excited to report that towards the end of the third quarter, we started to allocate a portion of Earns Capital to corporate CLOs, specifically CLO mezzanine debt and CLO equity. While this has been a small allocation so far, I expect the allocation to grow significantly and I'm very optimistic about what this could mean for Earn going forward. Yield spreads on certain CLO mezzanine and equity tranches available in the secondary market are near levels we saw last in the summer of 2020, when the credit markets were still very much recovering from their COVID lows. Furthermore, no two CLOs are alike, which, given Ellington's extensive CLO expertise, should create lots of trading opportunities and relative value opportunities for Earn to capture. Ellington's strong and long-standing track record in investing in CLOs in the secondary market should position EarnWell to capitalize on both the near-term and the long-term opportunities we see in this sector. We are off to a good start, as in the past six weeks, Earn has acquired several CLO mezzanine debt and CLO equity tranches where we project returns on equity well in excess of 20%. I believe that CLO mezzanine debt and equity pair very well with agency RMBS as a complementary strategy that will diversify and help drive earns earnings growth going forward. Mark will elaborate that later in the presentation. And I'll now pass it over to Chris to review our financial results for the third quarter in more detail. Chris?