Ellington Residential Mortgage REIT(EARN) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a net loss of $0.04 per share for Q2 2024, with adjusted distributable earnings (ADE) of$0.36 per share, reflecting a sequential increase of $0.09 per share [13][14] - The net interest margin expanded to 4.24$108 million as of August 9, 2024, up from $85 million at June 30 [19] - The agency MBS portfolio decreased significantly from$791 million last September to $531 million at June 30, and further to$518 million by August 9 [7][19] - The capital allocation to CLOs increased to 45% at June 30 from 25% at March 31 [19] Market Data and Key Metrics Changes - The CLO market benefited from strengthening fundamentals and robust demand for leveraged loans, with corporate loan prepayment rates reaching their highest level since February 2022 [8][9] - Credit spreads on BB and B CLO tranches tightened overall, although there was significant dispersion among deals [9][10] - The U.S. MBS Index generated a slightly negative excess return relative to U.S. treasuries, reflecting the impact of intra-quarter interest rate volatility [11][16] Company Strategy and Development Direction - The company is in the process of transforming into a CLO-focused closed-end fund, with a targeted conversion date later this year [6][7] - The anticipated benefits of this transformation include better projected risk-adjusted returns and enhanced access to capital markets [7] - The company plans to maintain a core portfolio of liquid agency MBS until the conversion is complete, while continuing to grow its CLO portfolio [8][19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining the dividend through the conversion to a CLO-focused fund, citing the positive impact of the rotation into CLOs on net interest margin and ADE [37] - The recent market volatility is seen as an opportunity for attractive trading, with management prepared to deploy capital at favorable spreads [25][29] - The company expects to continue to see strong returns from both CLO and agency MBS portfolios, with a favorable backdrop for agency MBS due to a steeper yield curve and potential rate cuts [29][32] Other Important Information - The company revoked its REIT election effective January 1, 2024, and is currently operating as a taxable C-Corp [17] - Book value per share was reported at $6.91 at June 30, down from$7.21 at March 31, with an economic return of negative 0.8% for the quarter [18] Q&A Session Summary Question: What is driving the dispersion in CLO performance? - Management noted that dispersion is influenced by asset quality and credit sensitivity, with equity being more exposed to tail risks [34] Question: Can you provide an update on liquidity and leverage? - As of July 31, the debt to equity ratio was down to around 3 times, indicating improved leverage [35] Question: How is the dividend outlook as capital rotates into CLOs? - Management indicated confidence in maintaining the dividend, with expectations for potential increases post-conversion based on CLO returns [37][41]