Ellington Residential Mortgage REIT(EARN) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported net income of $0.21 per share and adjusted distributable earnings (ADE) of$ 0.28 per share for Q3 2024, with ADE exceeding the first quarter level of $0.27 per share [21][22] - The debt-to-equity ratio decreased to 2.5:1 at quarter end from 3.7:1 at June 30, driven by higher shareholders' equity and reduced leverage on the growing CLO investment portfolio [19][22] - The overall net interest margin increased to 5.22% from 4.24% in the prior quarter, reflecting a higher allocation of capital to the credit strategy [22][23] Business Line Data and Key Metrics Changes - The CLO strategy generated$ 0.12 per share of portfolio income, supported by strong net interest income and net gains from opportunistic sales [27] - The Agency strategy performed well, generating $0.18 per share of portfolio income, driven by falling interest rates and tightening agency MBS spreads [29][30] - The CLO portfolio increased to$ 144.5 million at September 30 from $85 million at June 30, with CLO equity comprising 52% of total CLO holdings [36] Market Data and Key Metrics Changes - The CLO market benefited from strengthening loan fundamentals and robust demand for leveraged loans, with declining default rates in both the U.S. and Europe [13][14] - Agency MBS spreads tightened, and the U.S. Agency MBS Index generated an excess return of 76 basis points for the quarter [15] - The Federal Reserve reduced the target range for the federal funds rate by 50 basis points in September, with expectations for further cuts later in 2024 [30] Company Strategy and Development Direction - The company is in the process of converting to a Delaware closed-end fund, with shareholder support for the conversion being overwhelmingly positive [9][11] - The strategic transformation aims to enhance risk-adjusted returns and provide better access to capital markets while reducing corporate income tax exposure [11][34] - The company plans to continue shifting its portfolio from Agency MBS to CLOs, with nearly 60% of capital allocated to CLOs by quarter end [36][52] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the continued ramp-up and strong performance of the CLO strategy, highlighting the active approach taken to enhance returns [55] - The company anticipates that the strategic transformation will generate superior risk-adjusted returns for shareholders [57] - Management noted that the current market conditions, including rising long-term interest rates, may impact origination volumes but could also create favorable supply-demand dynamics for Agency MBS [53] Other Important Information - The company accrued an income tax expense of$ 463,000 for the third quarter, resulting in an effective tax rate of about 7.8% due to the utilization of net operating losses [33][34] - The company is currently operating as a taxable C-Corp after revoking its REIT election effective January 1 of the year [32] Q&A Session Summary Question: Can you speak on the credit quality and the CLL book and how you expect that to trend over time? - Management indicated that the current trailing 12-month default rate is below 1%, with potential elevation in a high-rate environment, but overall credit quality remains stable [59][60] Question: How do you think about the dividend as you rotate more capital into CLOs? - Management stated that despite lower leverage, the increasing net interest margin supports the dividend, which remains well covered by adjusted distributable earnings [62] Question: Can you talk about your continued appetite to raise capital through the ATM? - Management confirmed that slight dilution occurred during the quarter, but raising capital at favorable prices is seen as accretive to earnings [64][65] Question: Would you expect the strong issuance trend to remain in place if pricing remains supportive? - Management expects continued strong issuance in the CLO market, driven by demand for floating-rate products and a busy pipeline ahead [67][68] Question: What does the timeline look like to move capital into new CLO equity? - Management indicated that they are prepared to act quickly to reinvest capital into new CLO equity once the shareholder vote is supportive, with a realistic target of 90 days for full rotation [70][75]