Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Residential Mortgage REIT 2023 Fourth Quarter Financial Results Comfort Call. Today's call is being recorded, and at this time, all participants have been placed in a listen-only mode. The floor will be open for questions following the presentation, and 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, should you require operator assistance, please press star zero. It is now my pleasure to turn the conference over to Aladin Chalet, Associate General Counsel, so 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 release in the Form 10-K, for more information regarding these forward-looking statements and any related risks and uncertainties. Unless otherwise noted, statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Allenton Residential, Mark Sikorski, our Co-Chief Investment Officer, and Chris Marinoff, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, EarnReit.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 at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Eladine, and good morning, everyone. We appreciate your time and interest in Ellington Residential. As with much of 2023, In the fourth quarter, markets gyrated between a sell-off and a rally, with tumultuous October giving way to a market rally in November and December. In October, interest rate volatility spiked as U.S. Treasury yields rose to 15-year highs, and that drove yield spreads sharply wider on most fixed-income products. Markets then reversed course in anticipation of the conclusion of the Federal Reserve's hiking cycle, with interest rates and volatility both declining into year-end. With rates lower and trading in a more stable range, demand for spread products picked up and capital flowed into fixed income funds. With the notable exception of CMBS, which has its own unique challenges, virtually all fixed income spreads tightened for the fourth quarter, including in the markets where Earn invests, namely agency and non-agency RMBS and now corporate CLOs, where we've been investing to an ever-increasing extent after our recent pivot. Turning to the investor presentation, on slide three, you can see that medium and long-term interest rates, despite spiking to multi-year highs in October, actually declined overall for the quarter. And the 30-year Freddie mortgage survey rate, despite reaching a 23-year high mid-quarter, also finished lower on the quarter. Incredibly, despite all of the fluctuations during the year, both the 10-year treasury yield and the 30-year mortgage survey rate finished 2023 within one basis point of where they started the year, as you can see here on this slide as well. As the backdrop for our mortgage-backed securities portfolio, you can also see on slide three that option-adjusted yield spreads tightened across agency coupons during the fourth quarter, and that the most pronounced price increases were on lower and intermediate coupons. Dollar prices on Fannie 2.5s through 4.5s were up more than five points sequentially. The outperformance of those coupons benefited Earn's agency MBS portfolio specifically, because coming into the quarter, roughly two-thirds of our agency MBS had coupons of 4.5% or less. Meanwhile, as the backdrop for our CLO portfolio, corporate credit spreads followed a similar pattern, first widening in October and then tightening in November and December, and tightening overall for the quarter. as an economic soft landing narrative permeated the market. You can see on the bottom of slide three that credit spreads on both high yield and investment grade tightened significantly over the quarter, while prices on the Morningstar LSTA leveraged loan index rose. Turning now to earns results. In the fourth quarter, we generated net income of 75 cents per share and a non-annualized economic return of 7.7%. while our adjusted distributable earnings grew to $0.27 per share and more than covered our dividend. As with other market disruptions we've seen before, the key in the fourth quarter was to avoid forced selling when the market sold off in October in order to preserve equity and earnings power and be in a position to participate in the subsequent market recovery. In the fourth quarter, we again relied on earnings risk management and strong liquidity position to accomplish this. That said, we did sell pools in the fourth quarter to free up capital from MBS to CLOs, and the majority of our sales took place in November as yield spreads were tightening. We ended up increasing the size of our CLO portfolio by $13.6 million during the quarter. On slide 12 of the earnings presentation, you can see some of the underlying characteristics of our CLO portfolio as of year end. The corporate loans underlying our CLO investments span a diverse array of industries, and the overwhelming majority are floating rate, first lien, senior secured loans. Our rotation into CLOs has continued into the new year, with our agency portfolio now incrementally smaller and the size of our CLO portfolio now up an additional 70% from year end to approximately $30 million. Even after the recent credit spread tightening in the sector, we still see returns on equity for new CLO investments in high teens to low 20s. Besides contributing to and diversifying EARN's gap results, our high-yielding CLO investments have also helped drive the substantial growth of our net interest margin, and thereby have supported our ADE as well. In addition, because we employ less leverage on our CLOs compared to agency, the portfolio rotation has also driven down our leverage ratios. At year-end, our debt-to-equity ratio, adjusted for unsettled trades, declined to 5.3 to 1, down from 7.3 to one at September 30th. I'll now pass it over to Chris to review our financial results for the fourth quarter in more detail.