Ellington Residential Mortgage REIT (EARN) 13 Nov 242024 Q3 Earnings call transcript

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company 2024 Third Quarter Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. begin. may you Sir,

you. Thank

provisions begin, certain I constitute remind we safe like statements Reform Securities Act of would made during that XXXX. harbor the statements of may the everyone the this Private within Litigation Before meaning to of conference forward-looking call

are not nature. in statements Forward-looking historical

a XA and our forward-looking report XA report projections. that Form XX-Q, on our described the results of XX-K and As company's quarterly risks of its to under Form are variety subject could cause differ to statements Item and uncertainties beliefs, Item annual of Part X, actual estimates expectations, on from

you Consequently, information, any of forward-looking of to result this noted, rely otherwise statements revise statements forward-looking made undertakes a of update new call. during or or The the as date company events call these no as predictions should this obligation statements, future made Unless not of as otherwise. events. conference future whether on are

the Financial Larry our Co-Chief today on Tecotzky, and Smernoff, Chris Joining are Officer; Mark Executive Chief our Penn, Officer Ellington Company; Investment me call Officer. of Credit Chief

are joined by Greg at Ellington Borenstein, We Management Group. also of Corporate Head again Credit

Founder, CLO be managers. Following our of conversion with to will designated Vranos, fund, the Greg, along a Ellington's as EARN's completion portfolio Mike officially closed-end X

third earnings presentation conference is call available Our quarter ellingtoncredit.com. on our website,

morning. the qualified are that the Any are current note as references at of shareholder made any the presentation presentation. that their on the morning this Please to made to this figures presentation. comments call figures that vote the of of Our in follow will entirety status back this relating notes in by

change prior report. factors, they on time based the Such its at ability shareholders annual figures to and votes, which of to their of revoke of to tabulator variety finalizing are including any or do subject the meeting our are entitled a change to

short. its EARN ticker, a As Ellington E-A-R-N, Credit call, by to for we'll during refer Company NYSE this reminder, or sometimes

With I to will Larry. that, call the over now turn

Company. good with time We update to the Alaael-Deen, Credit on appreciate start I'll morning, Ellington transformation. related in Thanks, an your strategic vote and everyone. our and interest shareholder

the EARN As as Delaware approve of a has to Annual Shareholders' closed-end Shareholder you've conversion to accumulate have for the fund. we required overwhelmingly the work to conversion votes been the seen, we postponed positive. Meeting support

morning, on of Based if over voting XX% XX% conversion-related have don't abstentions. results above include as approval X this rates proposals the you and

in morning, And order that not all we However, majority we pass votes this of need outstanding, to from as still proposals, shares of are short X cast. votes of of a X of the for just threshold.

On their vote those on benefits services, they Lewis, any Glass prior conversion. the the votes leading the more as still at for these for them X advisory of a Both to unofficial approval and are have to and currently we proxy little the we recognize to shareholders unanimously change recommended should for than time about ISS proposals have EARN's the million annual note but votes for in need independent conversion-related additional all meeting. preliminary, rates shareholders proposals, and I million can that order XX.X pass. votes,

protections and affording On shareholders better capital XXXX Slide include over the Act. projected which provided risk-adjusted the some the of the the anticipated long transformation, the while also X, benefits markets, by to we shareholders highlight term returns access of with enhanced additional to

full and subject our be until CLOs. portfolio our RIC, to Agency hold corporate after we thus, XXXX pools continue a small C-Corp, us of to With portfolio to registered that corporate also we level we not a to as Also, maintain tax. are but level as status tax investment corporate generally Act, keeps subject would to a Furthermore, corporate subject completing investment a income we MBS our income current be the tax, we company, NOLs full of of our taxable transition from to a burn will to off. convert to need from the exemption the

have as those to those submit your who And proxies, voted thank unvoted already, vote as possible. with please you. To soon

Please the to presentation demand quarter the for for quarter. loans. to CLO from now and robust backdrop loan early benefit volatility the the for turn market Slide third market of in X Despite the in spiking fundamentals strengthening third earnings leveraged August, continued

loan decline to leveraged and continue to in you U.S. in see default the elevated, rates both U.S. prepayment rates on can As this Europe, slide, while be continue particularly

spreads the lower of U.S. quarter result corporate and and the supported CLO CLO overall as an of high in tightening while markets, actually was issuance, X, and were fundamentals pace IG issuance, impact both credit well. European market new loan while and of combination many strong and negative seasoned indices Also, net as interest called. CLOs as a tighter refinancings positive loan of spreads depicted resets combined rates terms elevated overall the credit in U.S. yield on mezzanine In supply tightened during as strong Slide of the quarter CLO the further for and drove technicals

MBS for the return equity falling mixed, Agency and anticipation was market, Agency an to the with quarter. the U.S. of steepening which performance MBS MBS the U.S. Similar generated somewhat basis XX on cut into the September, call. in get in Fed's spreads tightened, points Greg in CLO excess of index Meanwhile, quarter, the and interest this for later yield will prior curve Agency rates

triggering junior robust our mezz seasoned to boosting which tranches, default portfolio, now We for demand spreads had loan Slide and CLO rates EARN's quarter tighter. X. credit prepayments on another drove results performance positions with excellent low in mezzanine turn I'll deleveraging of debt quarter our further third with from

CLO's successful portfolio the CLO liquidation upon own also had were a we the also of debt. returns have We driving we as enhanced by the our our by positive where exceeded of debt enhanced the a liquidation that our trading, X in mezzanine far case, Meanwhile, further we returns of enhanced deal and opportunistic by completion performance debt also CLO as well in mezz equity CLO through portfolio, refinancings. proceeds our discount In position value some remained redemption CLO we tranche. trading as it opportunistic received to

Finally, EARN's return investments, remaining overall annualized we positive quarter RMBS our had the and XX.X%. economic results third for from was

As with prior from continue MBS into quarters, CLOs our Agency to ratios. our ongoing leverage shift lower

end. see on a which quarter plus You finished quarter represented that very our declined of ratio nearly at total cash healthy assets to $XXX.X at can our the X/X Slide our debt-to-equity equity. X X.X:X unencumbered Meanwhile, million,

rate to CLOs hedging significantly terminated our during had continue pools lower margins despite third with our our net interest enabled our swap cover also and quarter, even conjunction supporting in been The dividends as that several wide on leverage the to distributable Agency ADE. positions adjusted earnings selling interest we

as third we in terminated But had on quarter's exceeded our our forecast, as for $X.XX these first of had covered share As quarter forecast still our last swaps. dividends. third and per level the our quarter tick quarter the ADE did we also call, down we ADE third quarter

to third more that, results With Chris now over Chris? I'll for pass the to review detail. quarter in financial our it

third good and quarter for X Please morning, Larry, Credit's summary you, Slide Ellington of a Thank turn financial to results. everyone.

catch-up per and income are the of $XXX,XXX For amortization distributable per which third net the $X.XX quarter. earnings quarter in adjusted positive September ended reporting adjustment, share XX, excludes $X.XX share. of we was the ADE

at to at trades, driven on leverage to decline the shareholders' our compared adjusted June Our employ compared The portfolio the we growing less equity debt-to-equity unsettled by the CLO investment ratio, decreased mortgage on XX. period same XX from net for was X.Xx September our higher and employ Similarly, we decreased Xx to as over Xx. legacy ratio leverage to MBS portfolio. our Agency asset-to-equity X.Xx

the quarter, cost yields reflects on to margin line in of by finishing interest the a margin Despite funds. the actually higher portfolio the increased our net from increase, declined quarter agency strategy higher prior higher first asset our portfolio net NIM overall the more credit which NIM. capital sequentially, allocation X.XX% overall lower credit in Our interest our driven on and and X.XX% with a to of

Prepayment which NIM higher second has we underlying and the high in prepayments CLO loans been positions. activity portfolio, positions, quarter the in which payoff yields As quarter credit our the asset quarter, NIM quarter first on our drove yields in mezz line and third several resulted in results. discounted of the result CLO less last the CLO in highlighted was accelerated those asset for significant with portfolio the activity high more in

the a In and floating higher on associated down the rate Larry the pay as some Agency impact of as receive a and these off QX in declined from the expired But sold this third took rate positive benefit to where portfolio as quarter, we lower swaps hedges. benefit rate. swaps, we and fixed our mentioned, of we carry continue interest

of Agency While wide and rotation combination terminations third the are to finish The drove adjusted as MBS the CLOs, and a in the our our continued Despite the themselves decline, NIMs the lower into CLOs we to paid off continue of benefit swap ADE. the in earnings decline our of our counterbalance. leverage should quarter. distributable sequential dividends exceed burn the out swap

tighter strategy Slide X per by and CLO portfolio shows larger the increased on portfolios supported interest European with credit on income, share net In positions. generated gains the income, were the by by our CLO of opportunistic quarter, the spreads Further, driven which and sales portfolio. $X.XX third net strategy. sequentially strong attribution both CLO of income U.S. held debt

price opportunistic in and benefited interest deal underlying unrealized unrealized from Larry partially that our primarily and the net losses net portfolios, also and net from European realized realized U.S. NIM CLO positive refinancings the X income losses. We positive were The equity corporate loan exceeded the on where the performance of and compression impact dollar and of offset equity CLO result CLOs, mentioned. by trading assets our

the spreads fell, quarter, yield cycle. and of steepened strategy cutting the our the market Reserve's In as generating beginning anticipated third Federal interest the the curve $X.XX Agency in rates tightened interest portfolio Agency MBS per performed Meanwhile, at of rate well income. quarter, share the

Reserve also range basis implied basis points XXXX, market. In another interest rate by that cuts federal although that reduced XX XX released economic updated longer rate expectation later by and for target is the the of the projections funds in shared September, Federal no the points

declining net net interest exceeded drove on Agency rate our Tighter RMBS, on which yield gains by rates. losses spreads hedges, driven interest our

quarter driven and income as for generated positive gains sales. profitable well portfolio the by non-Agency several net interest net associated results with Our

we election effective As a year substantial operating We year, are this we net came with our a REIT loss third we to continue to operate the as do of our taxable so taxable connection federal And our of intend X the as and carryforwards. so currently a portion and operating strategic with reminder, in we into transformation, January used revoked those of quarter, a in for majority to long offset the C-Corp. we as income, C-Corp.

the on to NOL the on and quarter, XXX% accrued tax third after of income we taxable which offset. $XXX,XXX, expense our federal NOL liability our state taxable Due restrictions an accrued For tax the represents we of income. utilization, cannot offset net income

XX% sheet NOLs, our on our about from quarter. for After to tangible. Our not fully utilization corporate what income the be subject fund/RIC, would to closed-end we related tax to a reduced remains the note our been so of generally a asset value tax. balance about will have conversion not we reported to that are X.X% NOLs booking deferred rate effective tax Please the book

XX. share Please Including with quarter, on per XX XX. or the Book was $XXX.X turn economic for sheet assets. was September ended now $X.XX of value and compared quarter cash unencumbered June at to X.X% annualized in with quarter per Slide the our million We return share the dividends $X.XX to XX.X% the of $X.XX our at compounding. balance

XX a please Next, Slide summary holdings. for our to turn portfolio of

million up at holdings, portfolio total XX. increased CLO equity CLO at quarter. from at CLO our as comprised $XX to prior holdings At CLO to XX XX% with our XX% September compared June XX% Our the of XX, June XX. consistent Meanwhile, $XXX.X European of September September XX, total million comprised investments CLO at

to And on as continue XX, liquid. we to million our Agency RMBS XX. CLOs XX% see $XXX June remaining to low, out at to Meanwhile, our be you to RMBS portfolio our and XX-year the of September at million pools. decreased Agency are can size June increased allocation to compared is Slide $XXX Cost RMBS capital of XX. very from entirely portfolio liquidate XX XX% Our at Agency

aggregate non-Agency and RMBS than to decreased $XX well as Our of holdings securities million. interest-only less

details provide hedging we of portfolio. Slide On interest rate XX, our

interest quarter, the rate During hedge use to rate swaps. we of risk through primarily continue interest the

XX-year a long both As notional equivalents. basis on measured with shown the on we position, and Slide as again XX, by ended a quarter net TBA

XX, as you interest see has the much CLO Slide and rate duration. On portfolio, can floating such, that underlying loans lower our our all nearly rate

CLO RMBS risk investments. hedged our We and corporate credit the of also selectively non-Agency

of As XXXX, September portfolio relatively hedge credit was our small. XX,

expenses to administrative due were higher transformation. higher strategic quarter end. to quarter-over-quarter quarter-over-quarter, Finally, related also higher general fees by Management driven at and were expenses incurred shareholders' the equity

the turn now will presentation over Greg. I to

to Thanks, speaking Chris. It's everyone pleasure again a today.

As tightening price gains performance in mezz foremost to our was assets and where by also on action mentioned, portfolio, of drove opportunities QX our to continue we monetize debt Larry CLOs positive spreads offered that hold. led

debt As has to out. total positions looked the to of return continued where have is the upside we largely market we think trade tighten, out played

risks. reaching avoiding opportunities undue yield And but selectively is very we are We focused in taking of paper, gone. by finding risk-adjusted are on mezz on still and fruit appropriate some low-hanging for returns the

the in equity our more produce Overall, of spreads ROE bag, side loans credit the performance albeit portfolio. and in the asset market, results. We also performance tranches the positive portfolio the CLO liability a more with CLO side as of equity CLO on mezz on a on lower had debt tightening in quarter, leveraged nuanced our some both than mixed was

their some strong hand, allowed in debt, drove many debt higher their with to tightening extending or that reset deals one spreads profiles and costs. deals from periods. equity CLO refinance debt And including portfolios better-performing returns On reinvestment

refinanced of higher CLO asset and at as mark-to-market values market both both replaced loans the CLO with profiles the declines loan the On volumes triggered premiums to in were effects led rate for in and due These prepayment at in trading hand, and losses other payments in declined to spreads speeds as loans. trading loan above large equity to lower floating par par loans par interest lower-spread interest some tandem. their compression underlying in excess price

dynamic with similar play speeds, pronounced. out was prepayment a impact negative slower although loans of less Europe, prepayment saw premium We the in the of

the currently are where remainder improving spreads As equity, ample we for relative to new existing better year, and value look and deals. see debt CLO we of opportunities in economics the tighter both

demand accompanied Early tightening signs post to liabilities. spread showing the general markets, rate credit improve for higher have continued in with rates, are election floating which, CLO

heavy continued CLO opportunities in market creating relative value debt addition, both In in equity. and the is CLO inefficiencies issuance and

markets, to deep and experience primary these our in secondary inefficiencies. positioned on is Given well both strong systems and EARN capitalize

to With Mark. that, I turn the presentation over

Thanks, Greg. CLO strong September. generally in benchmarks debt cycle for a interest Both quarter and its rate QX spread off well MBS products. performed as Agency was to relative the Fed cutting kicked

Looking Mae north that in at prepayments, We prepayment that CPRs could the for pools have elevated when happened we Agency get if that -- quarter exactly in predicting money, WACC. been is fell. with they have predicting mid-Xs saw certain what non-call-protected issued the and rates of rates XX are Fannie third we newly pools

we protected of portfolio have EARN, type Agency Fortunately, for largely from exposure. our that

our that portfolio, holdings levels. put purchases. wider so money were free happy invested I allocated needed, MBS, really while than over third By core at stayed In for quarter also selling as am able additional we we end, the CLO quarter, that work nearly of spreads of CLO to CLOs. in Agency much the XX% up to months, our market cash capital to was current XX in down Looking back the past to

requires our Act, by to EARN's that above I'll exempt capital maintain of requirement pools. core to conversion XXXX to complete Agency us is to much which note we XX% However, our CLO stay that from until a ability level the increase RIC, the that allocation portfolio limited

invested available selling NIM, will Agency only net we'll conversion the be current to So to CLOs occurs, in portfolio really the the have MBS from we add extent and capturing until the largely MBS stay here, we room.

including for long-term effect a mortgage seen we That poised which continued We've MBS quarter slowdowns. approvals chilling seasonal Agency make rise CLOs. the volumes, portfolio once sell the since typical rates, our the are conversion, for on origination our more we've to Agency had complete we incrementally substantially has Meanwhile, And portfolio MBS requisite will and to rotation liquid. interest end. obtain the down rates, remaining also

cut the we just year-end. should All first In curve while. Fed CMO so third increase create rate we our supply-demand addition, week, years, into cut noninverted and favorable a demand for in quarter yield MBS these for X last in the MBS brought first another should soon and going had a factors from and banks see arbitrageurs Agency technical

back Now to Larry.

strong portfolio performance the the in pleased returns. market active the taken the I'm particularly our pleased continued CLO our pivoted opportunity strategy Thanks, and ramp-up EARN with as with CLO approach how has Mark. and enhance we've composition of we've evolved. to I'm

not is invested have approach beneficial the but steps trading also our achievable. liquidation a active in refinancing core driving added philosophy, we're that only portfolio of deals to includes when the Our All include our and/or management results. of opportunistic can tenet it and alpha these

and So fourth Those the in they've October, as interest benefits far returning returns retightened see with continued away of November wider portfolio election. from to positive quite bit post quarter, rotation rates movements towards in somewhat October and market CLOs, Agency a the MBS we've but volatility the CLOs rose. Agency drove in even spreads in

We strongly believe transformation completing generate our strategic superior conversion. for risk-adjusted Credit look returns to RIC very our much shareholders. that will I forward Ellington

investors to year. answer the yet, voted please transformation do with our always, so. haven't how by the encouraged of you any we and as announcement questions. are been positive this If have analysts following And I continue happy be to conversations earlier

we'll please call questions. Operator, to the And now open go with ahead. that,

will Sandler. And from Love question Crispin our Instructions] [Operator first take we Piper with

Vescio This on Crispin. is Brian for

the in what expect are and risk-adjusted quality well how credit over CLO time? the returns? delinquency on speak you can as expectations your to trend as level, book of loss that high of you Kind kind and Just

Sure.

corporate -- some for and if scenario-dependent, very long to to a companies' these longer rates their ability a will rate term, environment time, service high think, of we I go if debt. stress example, overall, that for through, clearly it's able be credit

think, below north above that. I see it X%. default in X XX-month is trailing current you Historically, rate may sit the general,

you over peak, If little at COVID, take a the got a this X%. look to, at

And crystal we higher the that that from the in don't credit them documentation, we you we things stay environment. where benign perhaps a we've which quality, say see how overall, in look traditional more think now would if a stressed We rate think, more and into we of certainly you environments. looser gives something is have I have average seen the see some could and market I things sense tighter it And of ball, you to are are about in but financing allows so both elevate companies if that and access to get a at. tighter, spreads that

buyer-friendly If you're market things language, to going be covenants perhaps with start get more see to little better-quality tighter a more companies coming to the more bit and market. only stressed,

a so if answers in And it's that that of balance how little it. progressing, we terms bit of see

appreciate especially commentary. dividend, think down? guys for last you as do about Yes, leverage the the me. then continues capital you tick the to And How just CLOs on the question I rotate more and

Sure.

. I Yes. Well, take as -- we can rotate it that.

Go ahead.

but the mean, is our CLOs, we're up I quickly. rotating as ticking yes, interest leverage net yes, quite going margin into down, is

higher, So they line, in maybe the our were third earnings our fourth in $.X.XX as were the I -- back than quarter. adjusted and for even quarter mentioned, distributable

capital for now see if go we So rotated we've to year a now, the risk a -- is dividend adjusted our you little think, from through -- over before, gone as earnings, in see this of CLO. back mentioned support half and CLOs at is X% good distributable over -- basically we capital I of don't we already our point,

seem interest but So margin, and to be X greater balancing less well. leverage, the out pretty net

dividend our supported is rotation. So continue this well still as we

And we next Douglas from UBS. question our will take Harter with

of raising do continued the about capital You that? ATM appetite to your during Can talk active you guys in were quarter. kind the through

execution in do there Chris, mean, about I dilution? of any talk of Yes. want there was our you terms to kind

Yes. Sure.

the dilution. $X.XX During quarter, was there of

reflect better will that, expect forward. ratios in slight dilution going G&A that also We

Right.

levels, those So it's raised we accretive very fair that will to earnings capital. be a amount because of -- at

But say, would in of not were I it. tap is stock trading when our we higher took ATM. third much So we price we would place in advantage look, now the quarter, the a where

expenses, raising to price it's so And at a very that -- that dependent it's we're very do a we and this small And as is think I close did, no-brainer. capital company that -- fixed mean, to I going be we're net it's book, we point. given if have

Jason will And our with from we JonesTrading. take question Weaver next

visibility. X just the Greg, for Maybe on

or that touched this in I to supportive? on few you remains your of you issuance Would over think suss the pricing place trend prepared next the you sort nuance Any if in quarters expect remarks. implications remain can strong ahead cadence out?

the what large on think -- and market the this we're now, in I year. right issuance I very heading see trend was we So a

a saw of lot You resets.

types. I get think in. post-financial a levels to Taking you close the starting will continue step to They're were crisis see come have AAAs that close back, to that. to

I That, putting products, the very think capital the as rate duration wait liabilities. space the the floating should traditional didn't keep of of with top I with see XXXX, this perhaps headed. to some that CLO much, with demand at places think where maybe what structure, especially demand you is places on in happened addition for from CLO on ETF in focused CLOs rate growth pressure that

continue deals to come investors, as option, exit non-call, to happens, control that the As which their equity the see will market. you will

to -- source you year. lot why will. a turning or was was it resetting, loan loans. issuance to of simply of a That's And sort pick That back what's slowed you down the with last actual recycling of deals also on. also for hard a that's may was new up see if It people continue things creation bit

additive 'XX getting of to of time that lot they with come banks levels, will everyone actually find like seems work a the ahead. And that liabilities. of in these bank a 'XX, transactions, it which to have still frame, deals talking these and years we just not to reset have since their pipeline seen a couple lot But before COVID in and a we busy

And it. capital you what But it, into Got today, the new like assuming does equity? line if to portfolios liquidate to supportive, seems the then being straightforward. to maybe certainty shareholder look the time CLO about that Agency had exactly, relatively vote move related

Sure.

I we're think carefully. it watching obviously So

so as of that there, the probability in into And keep want bit. of a terms we we much in see will we increase behave little dry powder how accordingly terms leaning to

realistic. tighter about think overall, and selective the I are that, be The market is, the we more investments. patient our

dislocated, right If quickly. a is real a obviously pretty opportunity, present would secondary into I and diversified and CUSIPs -- think go left said, we very things were that place purchase could in now. with That EARN

so And be not concentration risk. about worried fortunate too we're to

I as start that prepared noted new so issue. see we forward, think really move see the that the to And value if in in remarks, we

and those of so up And new issue see busy. on rest of I we portfolio be of going that sort very in very, more the think coming simply with to setting opportunity, And with said, we types the it's where we that. as rotate get would active transactions and

deals that opportunity all the more. just coming out, the would lean And think all so with working banks on we I volumes into and

Excellent. That's helpful. very

the $XXX sort follow of reinvest. push $XX vote quarter, Right ready, Yes. of you mean, end as a liquidate the done think, without million to at having and CLO to on from had of investments, we I the up up quarter sorry said, already of before, and shareholder I the remaining and pools just the that's million that.

that's $XXX capital, So quarter, X to our can -- is without so metal. -- and see, -- under as and you that's pedal million, million. our that's the equity $XX in And

less total be could certainly, our base, equity or equal base. in capital quarter our we total invested, a to So

And I even it faster. do we think could

we course, want in of leverage Now to the some have portfolio.

not is very need of think reasonable the So course, We XX we're I target. votes. there yet. But days a

was final Ellington thank participating Results you today. Third you. the in Thank We Call. Conference Company That Quarter for XXXX our Credit Financial for question

have day. this a at wonderful now line and You disconnect your may time,