Ellington Residential Mortgage REIT(EARN) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a net loss of $0.75 per share for Q3 2023, compared to a net income of $0.09 per share in the previous quarter [30] - Adjusted distributable earnings (ADE) increased to $0.21 per share from $0.17 per share in Q2 2023, despite lower average holdings [18][30] - Book value decreased to $7.02 per share from $8.12 per share at the end of Q2 2023, resulting in an economic return of negative 10.6% including dividends [32] Business Line Data and Key Metrics Changes - Agency RMBS holdings declined by 11% to $791 million as of September 30, 2023, driven by principal pay downs and net losses [19] - The net interest margin (NIM) increased to 1.24% from 0.93% quarter-over-quarter due to higher asset yields from portfolio turnover [18] - The company added $3.8 million of CLOs during the final week of the quarter, with expectations for significant growth in CLO allocation [19][29] Market Data and Key Metrics Changes - The yield on the 10-year treasury rose 82 basis points between mid-July and September 30, 2023, contributing to significant pressure on Agency yield spreads [6] - The MOVE Index, which tracks expected short-term interest rate volatility, remained elevated, impacting the performance of Agency MBS [6] - The company noted that the fourth quarter typically sees a drop in Agency RMBS supply, which could enhance market conditions [8] Company Strategy and Development Direction - The company is diversifying its portfolio by allocating capital to corporate CLOs, specifically mezzanine debt and equity, to enhance returns and reduce volatility [16][25] - The management believes that CLOs will complement the Agency MBS strategy and provide higher expected returns on equity [25][37] - The company aims to maintain a strong liquidity position and additional borrowing capacity while navigating a challenging market environment [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the potential for capital flows back into Agency MBS as interest rate volatility normalizes [41] - The company is focused on preserving value and avoiding forced selling during periods of market distress [34] - Management anticipates that the introduction of CLOs will help stabilize book value swings during times of increased interest rate volatility [25] Other Important Information - The company maintained a strong liquidity position at quarter-end, with cash and unencumbered assets representing 38% of total equity [28] - The debt to equity ratio adjusted for unsettled purchases decreased to 7.3x from 7.6x, indicating a reduction in borrowings [20] Q&A Session Summary Question: Are you putting on any leverage with CLO investments? - Management indicated that no explicit leverage has been put on CLOs yet, but modest leverage is intended to finance incremental CLO purchases [54] Question: What are the expected returns in the CLO sector? - Management projected returns on CLO investments to be over 20%, with expectations for significant returns as the allocation increases [63] Question: Can you discuss the strategy behind issuing shares at a discount to book value? - The company aims to maintain $100 million of equity and views the share issuance as a way to replace equity lost during a tough quarter [57]