Ellington Residential Mortgage REIT(EARN) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q2 2020, the company reported net income of $21.3 million or $1.73 per share, compared to a net loss of $16.7 million or $1.35 per share in Q1 2020 [10] - Core earnings were $3.2 million or $0.26 per share, slightly down from $3.4 million or $0.27 per share in the previous quarter [10] - The net interest margin improved by 66 basis points to 1.86%, driven by significantly lower borrowing costs [11] - Book value per share increased by 12.9% to $12.80 at June 30 from $11.34 at March 31 [12] Business Line Data and Key Metrics Changes - The company increased its non-Agency RMBS portfolio by 458% quarter-over-quarter, while Agency RMBS holdings grew by 6.8% [13] - Average pay-ups on specified pools rose to 2.69% as of June 30, compared to 1.67% as of March 31 [11] Market Data and Key Metrics Changes - The MOVE Index, which measures interest rate volatility, returned to pre-crisis levels in mid-April after reaching its highest point since the 2008 financial crisis in March [6] - The 10-year treasury traded in a tight 33 basis point range in Q2, compared to a 134 basis point range in Q1 [6] Company Strategy and Development Direction - The company capitalized on market recovery by enhancing liquidity and avoiding forced asset sales during market stresses [9][30] - The management emphasized the importance of risk and liquidity management principles to navigate through market volatility [9][30] - The company plans to continue focusing on both Agency and non-Agency MBS to drive returns [30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the second half of the year, citing strong performance and attractive investment opportunities [29][30] - The company acknowledged challenges such as record high levels of prepayments and an ultra-low interest rate environment but believes these conditions play to its strengths [31][32] Other Important Information - The company maintained its dividend throughout the period despite low interest rates and high volatility [30] - The management highlighted the impact of technological changes due to COVID-19, which are expected to lead to faster prepayment speeds [25][26] Q&A Session Summary Question: How does the risk profile look different with current production TBAs? - Management noted that TBAs improve liquidity but may introduce some negative convexity due to their sensitivity to prepayments [35][36] Question: How have pay-ups trended in July and early August? - Pay-ups have been well supported, with stability returning to the market due to aggressive Fed actions [38][39] Question: Update on book value performance in Q3? - Management refrained from providing specific updates but indicated that pay-ups and low volatility are supportive of book value [41] Question: Clarification on opportunistic investments in CMBS? - Management clarified that they added non-Agency RMBS during Q2, not CMBS, taking advantage of market conditions [42] Question: Explanation for the spike in professional fees? - The spike was due to expensing deferred offering costs related to the expiration of the current S-3 shelf registration and ATM program [43]