Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for questions following the presentation. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require assistance, please press star zero. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, 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. As described under Item 1A of our annual report on Form 10-K filed on March 13, 2020, forward-looking statements 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. 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. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Takotsky, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. After a quiet start to the year, the COVID-19 pandemic and the associated measures to contain the pandemic brought the global economy to a virtual standstill in March, which resulted in extreme volatility and and widespread market dislocations, including a collapse of asset values and liquidity. Economic activity plunged as countries around the world implemented social distancing restrictions. Unemployment claims surged, consumer spending plummeted, and GDP growth rates turned negative. In March, equities sold off across the globe as the 11-year bull market ended in spectacular fashion. Yield spreads on most fixed income assets widened sharply, and a flight to safety drove record low yields on long-term U.S. Treasuries. Portions of the yield curve inverted, and the interest rate volatility surged. On slide three, you can see the extraordinary quarter-over-quarter declines in Treasury yields. Repo financing stresses alongside a drop in asset prices severely reduced liquidity and prompted forced selling across virtually all credit-sensitive fixed-income asset classes. Many leveraged mortgage investors in response to margin calls from their lenders, had to unwind portfolios quickly at inopportune times and at fire sale prices, while at the same time, many mutual funds and ETFs that offer daily liquidity also had to sell urgently, in their case, to meet mounting investor redemption requests. A vicious cycle ensued as these forced sales put additional pressure on prices, which prompted further stress and liquidations, and so on. The selling pressure extended even to perceived safe havens, like agency RMBS, where yield spreads skyrocketed to levels not seen since the 2008-2009 financial crisis. The downward spiral finally started to subside, though it didn't end right away, when the Federal Reserve stepped in to restore some stability. The Fed slashed short-term interest rates nearly to zero, injected liquidity into the repo markets, launched several credit facilities similar to what it had implemented during the financial crisis, and stepped in with unprecedented levels of quantitative easing, all of which provided meaningful support, especially to more liquid sectors of the market. The U.S. Congress passed three rounds of stimulus packages during March, culminating in the $2 trillion CARES Act on March 27th, the largest emergency spending bill in history. These actions were mirrored by central banks and governments around the globe, and the rollout of stimulus programs continued into April. As the Federal Reserve deployed its full crisis playbook, we saw it was in effect almost a full market cycle compressed into just a few weeks. U.S. equities bounced back sharply from their March 23rd lows, as what had been a 34% drop in the S&P 500 in less than five weeks was immediately followed by an 18% rise in just three days. The Federal Reserve's injections of capital eased liquidity stresses and yield spreads in the sectors targeted by the Federal Reserve's asset purchase programs tightened sharply. particularly in agency RMBS, which recovered strongly during the last two weeks of the month. In the credit space, yield spreads in some sectors, such as investment-grade corporate bonds, also tightened significantly following the Fed's actions, while other sectors, including non-investment-grade CMBS and CLOs, noticeably lagged. Many measures of market volatility subsided from their highs, but still remained greatly elevated at quarter end. What made March uniquely challenging was the magnitude and speed of the risk-off moves, and during the peak of the frenzy, the high degree of correlation across virtually all asset classes, irrespective of their actual underlying risks. As March progressed with the asset markets and financing markets looking more and more fragile, we proactively reduced the size of our agency portfolio in an orderly and measured way, which bolstered our liquidity and lowered our leverage. Most of the agency assets that we sold in March were sold either early in the month before yield spreads hit their wides or later in the month after yield spreads had already recovered strongly. In this way, we were able to avoid forced asset sales entirely, which would have exacerbated losses. During periods of acute distress, like what we saw in March, the performance of a leveraged portfolio can vary widely based not just on what you own, but also how you financed it and how you adjust to the quickly changing market environment. So the crisis in March put a spotlight on our risk management, our liquidity, and the structure of our liabilities and our leverage. Ellington Financial entered March with a strong balance sheet and prudent leverage ratios. On the asset side, we had lots of liquid agency RMBLs to help provide liquidity. And in credit, we had deliberately built a relatively short duration, highly diversified portfolio with an emphasis on first liens. In times of distress, Whether it be distress in the financial markets or broader macroeconomic distress, maintaining a shorter asset duration can help a fixed income portfolio in two very important ways. First, asset prices tend to be less volatile. And second, principal paydowns can come in faster, thereby de-risking your position faster. In fact, during March alone, we received proceeds from principal repayments of about $55 million on our small balance commercial mortgage loan, consumer loan, and residential transition loan portfolios, which represented about 8.5% of the aggregate size coming into the month of those portfolios. On the liability side, lessons learned from past market crises have taught us to limit our leverage, to diversify our sources of funding, and to structure our financing arrangements to help us better withstand shocks in times of financial distress. Over the past few years, we have issued investment-grade rated senior unsecured notes and have completed several securitizations, all of which provide locked-in, term, non-mark-to-market financing. Several of our secured financing facilities are committed and non-mark-to-market and have repayment schedules that more closely match the repayment schedules of the financed assets as compared to typical repo. Also, our objective has always been to stagger the roll dates of our repo financings and to roll these financings in advance of maturity dates as a standard practice. Our disciplined interest rate hedging and opportunistic credit hedging has also provided additional book value protection in volatile markets. All of these measures, combined with our strong liquidity management practices, helped lessen the impact of the March distress in our portfolios, granting us sufficient time to stay ahead of the curve. unlike many other market participants who became forced sellers at distressed prices in March. With that, I'll turn the call over to JR to go through our first quarter financial results in more detail.