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Ellington Residential Mortgage REIT(EARN) - 2021 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Ellington Residential's core earnings increased by 19% sequentially to $0.37 per share, driven by a larger portfolio and reduced cost of funds [7] - The company reported a net loss of $4.5 million or negative $0.36 per share for Q2 2021, compared to a net income of $127,000 or $0.01 per share in Q1 2021 [14] - Book value per share decreased to $12.53 as of June 30 from $13.22 as of March 31, resulting in a negative economic return of 3% for the quarter [17] Business Line Data and Key Metrics Changes - Agency RMBS holdings increased by approximately 1% to $1.19 billion, while non-Agency RMBS holdings decreased by 10% to $9.3 million [18] - The net interest margin increased to 2.04% from 1.96%, driven by slightly higher average asset yields and lower cost of funds [16] Market Data and Key Metrics Changes - The yield curve flattened with long-term interest rates decreasing and short-term rates increasing modestly, leading to wider yield spreads on most Agency RMBS [15] - Prices on higher coupon Fannie Mae securities declined significantly, while lower coupon securities held up relatively well [9] Company Strategy and Development Direction - The company has shifted its portfolio towards lower coupon Agency RMBS, which has helped mitigate losses from interest rate hedges [10] - The management emphasized the importance of dynamic hedging strategies to protect book value and capitalize on pricing dislocations as the Fed's market presence diminishes [31][32] Management's Comments on Operating Environment and Future Outlook - Management noted that the market is digesting existing news regarding prepayment speeds and interest rate expectations, which has led to volatility in MBS valuations [23] - The Fed's tapering is expected to be gradual, and the company anticipates continued support for Agency MBS prices despite potential tapering [25] - The leadership change at FHFA is seen as a positive development for government support of housing, which may benefit Agency MBS prices [27] Other Important Information - The company completed a follow-on offering of 3,250,000 common shares, increasing the public float by 38%, which is expected to enhance liquidity for shareholders [12][20] - The average term of repo financing was extended from 48 days to 134 days, while the average borrowing rate decreased from 0.25% to 0.17% [11] Q&A Session Summary Question: Expectations for MBS spreads and pricing - Management expects that the market has priced in a gradual tapering by the Fed, which should stabilize spreads [33] Question: Thoughts on leverage in the current environment - Management indicated that they would not significantly increase leverage until there is more clarity on tapering and wider mortgage spreads [34] Question: Outlook for specified pools and market pricing - Management noted that there has been a cheapening of MBS, and they are focused on finding fairly priced prepayment protection [36] Question: Long-term prepayment assumptions and expense management - Prepayment expectations are pool-specific, and the expense ratio is expected to remain stable around 3.5% [38][42] Question: Impact of the follow-on offering on liquidity - The follow-on offering has increased liquidity and is seen as a positive step to address the overhang from Blackstone's shares [46]