Ellington Residential Mortgage REIT(US:EARN)2022-11-10 20:53Financial Data and Key Metrics Changes - The company reported a net loss of $1.04 per share for Q3 2022, compared to a net loss of $0.82 per share in Q2 2022 [19] - Adjusted distributable earnings (ADE) were $0.23 per share, up from $0.20 per share in the previous quarter [19] - The net interest margin (NIM) decreased to 1.28% from 1.66% quarter-over-quarter due to rising costs of funds outpacing increases in asset yields [20] - Book value per share declined to $7.78 from $9.07 in the previous quarter, resulting in a negative economic return of 11.6% [22] Business Line Data and Key Metrics Changes - Agency RMBS holdings decreased modestly during the quarter, with a portfolio turnover of 19% [23] - Average pay-ups on specified pools decreased to 1.02% from 1.09% [21] - The debt-to-equity ratio increased to 9.1 times from 7.9 times, primarily due to lower shareholders' equity [23] Market Data and Key Metrics Changes - The Freddie Mac 30-year survey rate ended the quarter at 6.7%, the highest level in 15 years, with peaks reaching 7.08% [14] - The MOVE Index, measuring yield volatility, reached its highest level since March 2020 [10] - Significant yield spread widening occurred across the Agency RMBS market, with Fannie 5.5s dropping over 4 points in price [12][13] Company Strategy and Development Direction - The company plans to increase its capital allocation to the non-Agency mortgage market to 25% or more, citing compelling value opportunities [45] - The focus remains on preserving book value in a volatile market, with a methodical rotation into higher coupons expected to boost future ADE [39][40] - The company is cautious about increasing leverage, maintaining a strong liquidity position with cash and unencumbered assets representing 27% of total equity [18] Management's Comments on Operating Environment and Future Outlook - Management noted that the market environment in August and September was extremely challenging, leading to significant net losses [15] - There are signs of improving demand for spread products, which could support book value recovery [41] - The company remains optimistic about the potential for recouping losses as spreads normalize [19] Other Important Information - The company experienced significant volatility in fixed income metrics, with the five-year treasury trading in a range of 2.64% to 4.19% during the quarter [27] - The company issued approximately 148,300 shares at an average price of $8.43 and repurchased about 9,500 shares at an average price of $6.53 [26] Q&A Session Summary Question: Can you provide more detail on increasing non-Agency exposure? - Management indicated that the increase could happen relatively quickly, potentially by year-end, due to the company's nimbleness [48] Question: What is the outlook on widening versus tightening of yield spreads? - Management believes it is more likely that spreads will tighten from current levels, supported by reduced supply and potential incremental buying from banks [51][54] Question: How does the company view leverage in the current market? - Management stated that they are at the upper end of their leverage range and do not expect it to increase significantly unless spreads widen further [58] Question: How do you see dollar roll financing evolving? - Management noted that dollar rolls for lower coupons have been relatively uninteresting, while higher coupons may experience volatility if banks return to the market [66] Question: What would an ideal portfolio look like if the Fed stops hiking? - Management suggested that a stable environment with reduced inflation risks would lead to increased interest in fixed income and credit markets, supporting both Agency and non-Agency MBS [80][84]