Ellington Residential Mortgage REIT(EARN) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company generated net income of $0.09 per share and adjusted distributable earnings (ADE) of $0.17 per share for the second quarter, compared to net income of $0.17 per share and ADE of $0.21 per share in the first quarter [7][36] - Book value per share decreased to $8.12 at June 30 from $8.31 at March 31, resulting in an economic return of 60 basis points including dividends [13][36] - The net interest margin (NIM) decreased to 0.93% from 1.16% due to asset yields increasing less than borrowing rates [12] Business Line Data and Key Metrics Changes - The non-Agency and interest-only (IO) portfolios contributed positively to quarterly results, driven by net gains and strong net interest income [9] - The Agency RMBS holdings remained essentially unchanged at $889 million, with portfolio turnover at 19% for the quarter [38] Market Data and Key Metrics Changes - The MBS sector performed better than expected, with strong investor interest absorbing FDIC-directed sales [18][31] - The company raised its weighted average coupon slightly by about 15 basis points to nearly 4%, which is still below new production [20] Company Strategy and Development Direction - The company plans to maintain excess liquidity and additional borrowing capacity to capitalize on attractive investment opportunities and manage volatility [46] - The strategy includes rotating the portfolio to drive NIM and ADE while relying on dynamic hedging to protect book value [46] Management's Comments on Operating Environment and Future Outlook - Management expressed a positive outlook for Agency MBS, citing wide nominal yield spreads and encouraging inflation data [65] - The company anticipates that bank demand for MBS will return, stabilizing spreads as deposit stability improves [80] Other Important Information - The company maintained a stable overall portfolio composition and focused on finding pools with the lowest payoffs for faster prepayments [32][33] - The company highlighted the importance of demand from other pools of capital to support the mortgage market [26][48] Q&A Session All Questions and Answers Question: Potential to add more mortgage leverage - Management indicated that a reduction in interest rate volatility would be a catalyst for increasing leverage, with bank participation expected to materialize in Q4 [66][68] Question: Trade-off of issuing stock versus share buybacks - The company plans to maintain a stable capital base, with potential moderate issuance to keep capital levels stable while considering share buybacks if the stock price approaches 80% of book value [50] Question: Opportunities in the non-Agency portfolio - Management expressed interest in credit risk transfer (CRT) assets due to significant home price appreciation and low loan-to-value ratios [52] Question: Thoughts on TBA positions - The company uses TBA shorts to manage negative convexity and will adjust exposure based on the attractiveness of mortgage basis [99]