Ellington Residential Mortgage REIT(EARN) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q4 2022, the company reported net income of $0.88 per share and adjusted distributable earnings (ADE) of $0.25 per share, compared to a net loss of $1.04 per share and ADE of $0.23 per share in Q3 2022 [42][35][56] - The net interest margin (NIM) increased slightly to 1.37% from 1.28% quarter-over-quarter, driven by higher asset yields exceeding the increase in cost of funds [37][56] - Book value per share rose to $8.40 at December 31 from $7.78 at September 30, reflecting an economic return of 11.1% for the quarter [56][72] Business Line Data and Key Metrics Changes - Agency RMBS holdings decreased by 5% to $163.3 million, driven by net sales and principal payments of $57.9 million, which exceeded net realized and unrealized gains of $11.8 million [47] - The non-Agency RMBS portfolio increased by $4.8 million to $12.6 million, while interest-only securities remained roughly unchanged [38] Market Data and Key Metrics Changes - The yield curve is currently the most inverted since the early 1980s, with a two-year tenure yield spread now more than 90 basis points negative, impacting net interest margins industry-wide [39] - Agency RMBS prices significantly outperformed their hedges in Q4, reversing a trend of underperformance seen in the first three quarters of 2022 [51][52] Company Strategy and Development Direction - The company plans to selectively rotate capital from Agency MBS to other residential mortgage sectors, maintaining a nimble approach to adapt to market conditions [80] - The focus remains on total return over short-term ADE growth, with a disciplined hedging process and cash management allowing for opportunistic buying and selling [36][70] Management's Comments on Operating Environment and Future Outlook - Management noted that inflation is moderating and the Federal Reserve is slowing the pace of interest rate hikes, which has positively impacted investor demand for RMBS [5][6] - The company anticipates that a mild recession could lead to increased bank demand for Agency MBS, as banks typically favor securities over loans during such periods [66][68] Other Important Information - The company hedged interest rate risk through swaps and short positions, with the size of the net short TBA position increasing quarter-over-quarter [48] - The economic return for the fourth quarter was supported by tighter Agency RMBS yield spreads and increased pay-ups, which drove significant net realized and unrealized gains [43][44] Q&A Session Summary Question: How is the company thinking about volatility in the market, especially connected to a recession? - Management expressed confidence in the resilience of repo financing and noted that they have a diverse set of repo counterparties, primarily large, well-capitalized banks [86][93] Question: What are the potential buyers of Agency MBS over the near-term? - Management indicated that money managers have driven performance in Q4 and early 2023, with banks typically buying after observing a rally [104][105] Question: What opportunities are being seen in the non-Agency space? - Management highlighted seasoned credit risk transfer bonds and legacy non-Agency market securities as attractive sectors, emphasizing a granular approach to investment [111][112]