Ellington Residential Mortgage REIT(EARN) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2023, the company reported net income of $0.75 per share and adjusted distributable earnings (ADE) of $0.27 per share, with a non-annualized economic return of 7.7% [19][25][28] - The overall net interest margin expanded to 2.19% from 1.34% quarter-over-quarter, driven by higher asset yields and a lower cost of funds [27] - Book value per share increased to $7.32 at year-end from $7.02 at September 30 [28] Business Line Data and Key Metrics Changes - The Agency RMBS holdings decreased by 8% sequentially to $728 million as of December 31, with a portfolio turnover of 25% for the quarter [29] - The CLO portfolio increased by $13.6 million during the quarter, with a total size of approximately $30 million by year-end, reflecting a 70% increase from the previous year [22][30] - The credit net interest margin, including CLOs and non-agency RMBS, increased to 6.28% from 4.55% [27] Market Data and Key Metrics Changes - Medium and long-term interest rates declined overall for the quarter despite earlier spikes, with the 30-year Freddie mortgage survey rate finishing lower [9][10] - Credit spreads on both high yield and investment-grade tightened significantly over the quarter, with prices on the Morningstar LSTA Leveraged Loan Index rising [11][15] Company Strategy and Development Direction - The company is focusing on diversifying its portfolio by increasing investments in CLOs, which now represent 17% of total equity, while reducing its Agency MBS holdings [68] - The management believes that the CLO strategy will stabilize and enhance returns over time, as it is expected to generate attractive returns across market cycles [74][68] - The company anticipates that the Federal Reserve's shift from a tightening to a supportive stance will benefit the Agency MBS market [63][50] Management's Comments on Operating Environment and Future Outlook - Management noted that the fourth quarter was characterized by significant market volatility, but they successfully navigated these fluctuations to maintain portfolio integrity [13][36] - The company expects continued strength in the CLO market due to declining credit market risks and anticipates further inflows into high-yield and leveraged loans [61][52] - Management expressed optimism about future performance, citing factors such as low supply relative to Treasury supply and lower volatility [65][66] Other Important Information - The company ended the quarter with $61 million in cash plus unencumbered assets, approximately 45% of total equity [28] - The debt-to-equity ratio adjusted for unsettled trades decreased to 5.3:1 from 7.3:1, primarily due to an increase in shareholders' equity [30] Q&A Session Summary Question: How do you see the equity allocation to CLOs playing out? - Management expressed enthusiasm for the CLO strategy, indicating that they would like to see it grow as much as possible, while acknowledging constraints related to REIT regulations [74][75] Question: What are your thoughts on the leverage ratio going forward? - Management indicated that leverage will be blended based on the appropriate levels for each asset class, with potential for increasing leverage in CLOs as conditions allow [89][90] Question: What interest rate environment is needed for a meaningful pickup in prepay speeds? - Management noted that while prepayment speeds have been benign, significant moves in rates would be necessary for many of the coupons held to become refinanceable [92][93]