EARN - Earnings call transcript Q2 2024 | Ellington Residential Mortgage REIT

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Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ellington Credit Company 2024 Second Quarter Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Alaael-Deen Shilleh

you. Thank

safe I this remind forward-looking Act conference the of begin, statements that statements of like the meaning during of made call the XXXX. would we Litigation everyone to certain within Private Before Securities provisions Reform harbor may constitute

Forward-looking are in nature. statements historical not

and As variety the not future forward-looking Report statements undertakes statements, beliefs, that predictions update of made Report Form date on differ uncertainties XX-Q, XA of call, any forward-looking rely XX-K of of and and company's noted, Annual no Item to as projections. Consequently, described new XA result or Quarterly information, our call statements Part subject revise otherwise. forward-looking expectations, during otherwise you on our or a to statements are risks future this under obligation events. of of the are results to cause of whether on X the these Item this and company a Unless could conference events as estimates Form should actual its from as made

me Company; Joining Co-Chief Tecotzky, today the Officer. Officer; Chief Larry Chief Investment our Chris Financial Mark and Smernoff, our Ellington of on Executive Officer Penn, call Credit are

Head also at are of by We Greg Ellington joined Borenstein, Credit Corporate Management Group.

earnings available quarter on changed our conference is second call presentation recently Our ellingtoncredit.com. website, which to we've

that follow notes a in statement any as of SEC that the with Any note morning such presentation. Furthermore, materials back proxy references solicitation a the construed or made proxies. other today such. Please entirety the this solicitation pursuant or are presentation call appropriate that be that the figures the nor presentation. be labeled qualified call votes as the presentation should on will conference and proxy to will in only to filed Our at of neither by made their

I will call, Larry. E-A-R-N we'll over call EARN now to that, to during sometimes NYSE Ticker, turn Ellington reminder, or by for Company As its the short. With refer a this Credit

Laurence Penn

more in previous Ellington call be by calls. We Thanks, do. good financial of Agency our as everyone. EARN's quarter typically and Credit, will Chris our The Alaael-Deen, Greg after a CLO in the Company. join results quarterly detail. morning, that, from will provide will CLO then MBS. Credit Ellington's the Borenstein, rotation time of interest the Co-Chief describe update of But our Mark little and Officer, that outlook I different composition I'll to Investment call of Tecotzky, on from Head a start And format and highlights out for here. Then discuss discussing portfolio of portfolio Corporate appreciate the your the will today brief

Finally, will officially its Ellington's included managers. sector and and wide as accounts. Ellington has portfolio open a a array bio I'll Borenstein joining of Head wide in management Mike Founder Ellington's wrap of portfolio running variety the be up activities since for completes short Greg floor two fund, investing across designated closed-end and to Ellington's of corporate We've activities and been Greg on the X. Once to conversion CLO conditions EARN XXXX in a slide Vranos, Greg CLO-focused all market EARN's things Q&A. for funds and a

investors We these leading to are veteran going have two forward. all very credit investment excited EARN's strategy

intact. the on CLO-focus of update an As I'll begin of the team closed-end Please X on now and rest EARN's X, strategic transformation presentation, slide you slide management also remain fund. to can into turn see EARN's will a with

ramp-up chart CLO March end CLO first And earned for at you order from continue we roughly Everything a transformation million an fund. We to CLOs to some anticipated we as focused the complete planned, XX, to that $XXX our Subject go later to our our June half to projected July, REIT we that process, core reiterate we at acquired as up million. allocation. filed steps Annual of EARN's complete of shareholder RIC, grown is and our we last the anticipation exemption CLOs Friday. September XXXX remain slide X, acquire mortgage markets. of our at thus we investing on purposes, was track $XX that from closed-end Company, of of enhanced vote tax continues benefits said, actually this must portfolio that year-end, returns to the this by SEC as EARN statement to earned September. By last the a early vote, about in liquid targeted prior date last downsize see XXXX, Act. include Meanwhile, summarize size, account in year-end. access that of CLO our long-standing Regulated a towards as as million second MBS doubled shareholders it which experience of and convert to quarter On portfolio since its completing hold And million. agency this of risk-adjusted now preliminary proxy the EARN's that slide, to portfolio CLOs portfolio purposes, from XX, in capital $XX capital or of into growing Investment to that to capital to conversion slide the we've last we portfolio on we all X, Meeting shrunk had can reminder, year. a began number $XX we total of Agency continue we've over been As as approach to to then, portfolio the CLOs. And At stood $XXX now these portfolio. significantly and it until we maintain closed-end shareholder for million On nearly the rotating better steadily fund and In to we million. conversion a our $XXX year. MBS And in and will Agency planned. transformation, September later a Ellington's long-term for CLOs. With

Fortunately, has so modest since agency liquid concentrated capital far. agency investments our to in cost very pools for up of been sectors, free liquidating the we've our CLOs

to expect be some to of Mark on from benefit tranches. basis benefit holdings for and highest of turn That fundamentals, of demand leveraged will continued their second X seasoned inflows. rates drove the February discount trailing market prepayment XXXX. of to has earnings market mezzanine slide increased market further price dollar quarter. Despite since reaching CLOs, that later call. elaborate deleveraging loans the We robust EARN's on presentation Please on the for Corporate backdrop loan continue case. to the continued for now that capital level XX-month continued to periods a and the the volatility, further, which CLO CLO strengthening

Loan market significant lower with as further second spreads In and illustrate tighten, However, the higher-quality saw quarters market, those there high corporate yield here you prepaid tightening tranches as many as particularly the and Credit corporate among quality in quality overall single deals loan BB credit tranches. tranches Index slide, ticked depicted towards tightened in can following Meanwhile, CLO tightened well. of six Morningstar higher CLO that also CLO consecutive premium-priced dispersion but see spreads B IG LSTA actually widening. The were well, European Indices the this as generally increases. tranches here rates we on Leveraged down result of and prepayment This was quarter quarter-over-quarter, the high loans simply of middle par. the since at mezzanine

issue CLO sword. For spreads were equity, tightening a debt mezzanine new double-edged

at reflected equity many yield equity and both by at volatility We those spreads interest minor tandem. coupon treasuries. But These led REIT net their in CLO from the at quarter-over-quarter due on deals our portfolios refinancing interest. These and spreads slightly CLO asset for U.S. Meanwhile, compressions overall Index debt changed one a of the sales Agency generated declined called debt on weak deals, Agency interest declines tighter tranches CLO X, of particular quarter. GAAP to lower those performing triggered and I'll deals discount in par. example, refinancing at deals. activity or our MBS quarter. delta belie dynamics the performance which, U.S. strong the and losses the earned par other interest to many on little European second by rate you've resetting volume the with and a and the equity hand, hedging of led, were those On in loan strong better investments, impact in MBS positions negative lower able U.S. debt as costs mortgage were effects CLO CLO relative quarterly the mezzanine intra-quarter with But both market, changes now Agency had in I'll drove seen values excess the negative some results both to return significant equity some losses, positive in to for and this in during This sector cheaper excess the values mark-to-market underlying of hand, continued for EARN's spreads priced higher on asset turn the losses payments begin and in in on driven slide performance CLO returns of earnings. past to opportunistic overall being excess generating mark-to-market premium high to in collateral capitalize levels.

net CLOs investments earlier. contributed quarter. the overall that caused our mark-to-market CLO CLO loan remaining investments But rate actually heightened income On slight per that primarily mentioned for refinancing CLO had for activity the for net I our contrast, volatility. This positively the to quite by our $X.XX share loss MBS European our U.S. portfolio well. driven the intra-quarter interest quarter, modest performed a In losses, side, equity quarter. Overall, equity equity that our loss contributed net drove by

ratio's from adjusted wider, rotation higher. lower our our continue into ongoing our leverage drive net interest Agency Our to margin earnings and CLOs distributable MBS

see X.XX% margin slide our that expanded on can X to net overall. interest You

the per agency of near-term however, to Our of X.X:X to interest our quarter the drove that, to Chris? the with that anticipate sequentially wide our adjusted distributable for review will off. the $X.XX pools financial over or growth that portfolio initiated debt-to-equity share. in the note, detail. ADE our as for grew growth down ADE in do cover the I'll more sequential net I'll we sell end. That and ADE we we second we quarter. With that hedges The in are margins continue per interest it pass rate terminated third results ratio CLO at as tick quarter. Ellington said to declined our to burn Chris Credit's to swap interest $X.XX lower in dividend expect share earnings to those the quarter our now continue associated rate environments much

Christopher Smernoff

and results. financial a for to Please Larry, morning, you, turn Credit's summary quarter good slide second Ellington X Thank everyone. of

per $X.XX share. ended per quarter excludes positive amortization share reporting the was XX, adjusted are the the earnings June catch-up For ADE $X.XX which in we of $XXX,XXX loss second and of adjustment, quarter. net distributable a

offset interest portfolio CLO to income, the certain lower discount overall Our of well and the gains on supported X.XX% X.XX% on discount of partially carry floating per shows quarter, rate as this growth we impact mark-to-market reduced accelerated second and net the and portfolio rate Agency sales as fixed higher interest down by sell we Larry some quarter, the where discount were of rate which and being on second was Slide quarters in drove we opportunistic ADE. In driven from expanded mezzanine CLO losses positions CLOs, future to the quarter-over-quarter, spreads increased swaps on sequential by in where income, as pay loan the rapid floating a $X.XX rate. benefit increase off a the losses hedges. XX sequentially portfolio underlying In and driven income collateral. drove as to the mentioned, from due positive This of swaps, the of associated amortization prepayments interest the both continued our on these strategy. margin market decline take several benefit CLO strategy called. net positions. Further, attribution equity by expect mark-to-market positions we as But income share expire our to of receive strong by by generated that the

on about a strategy their share volatility wider. In generally reversed Reserve, for In of inflation the net the loss meanwhile Index April, hawkish on and hedges, interest loss agency the and Agency for RMBS of generated this widening. an Overall, portfolio drove rates yield more per net second generated quarter. net net interest and spreads Our and points of however, to overall and May loss the for Agency June, yield a concerns pushed gains rates EARN's small volatility a X excess negative and that Agency return as quarter, declined interest Federal MBS second agency portfolio generated which losses the most our quarter treasures. basis spreads backdrop, U.S. RMBS for exceeded renewed increased quarter. Against EARN's RMBS rate our $X.XX April over

our booking portfolio the that $XX any substantial tax remains cash not of to was tax overall operating non-Agency quarter, January $X.XX million NOLs. quarter, share are at of federal income quarter, net regulated second currently and the performed majority profitable loss Our turn margin. company, our U.S. tangible. After subject to asset assets, was the be to income our balance quarter, with taxable of XX. closed-end $X.XX and benefit the interest the sheet included related transformation, those X.X%. year We we held this per first effective unencumbered our and the year a into the a offset the a investment Book XX. so which used of our reported with carryforwards. the the sheet XX X portion $X.XX return deferred came per note on loss per book will fully share generating a In several net dividends of net compared are the revoked And not now corporate the $X.XX did ended utilization in sales. In fund value connection to We Please Please to well tax. to of taxable during C-Corp. in share generally our our NOLs of with our on Treasury slide on at generated balance million for operating require negative a election our June we conversion gains quarter a by Including of modest bills quarter economic driven strategic REIT in as associated not we $XXX with and March value we net income.

turn please our of for to summary slide Next, holdings. a XX portfolio

Meanwhile, million of of During increased Also from to XX, from XX% XX% XX, million. Agency X, of as June XX. total to investments and decreased March to of holdings the XX compared portfolio of second CLO CLO and CLO portfolio $XXX as well. Including while approximately CLO RMBS holdings million of equity the up holdings of at Agency March March $XXX now grown quarter, size the declined second comprised our our million comprised during holdings, quarter, aggregate August XX. our through of $XX CLO CLO total million, XX as securities At our at $XXX $XXX our our RMBS portfolio up compared decreased million as June to to XX% March at has XX. as our have European RMBS to interest-only and activity $XX June XX% non-Agency

and capital at from March As XX XX% assets, June measured at our to increased at allocation XX% to as to by allocated gross XX equity XX% opposed CLOs year-end.

for X.Xx decreased net XX. CLO of of decline to over was less as to X.Xx Our the Xx as well on debt-to-equity leverage shareholders' trades as driven equity. Similarly, March June our assets-to-equity period XX decreased unsettled as compared investments by from same to mortgage X.Xx. ratio The ratio higher our adjusted

Finally, on provide we of interest XX, rate hedging our slide details portfolio.

as size risk of hedging we use share portfolio interest and the of the declined increased. interest rate rate swaps. portfolio overall our to continued quarter, During primarily rate interest The CLOs through the hedge of our quarter-over-quarter

and position underlying XX-year we a a with prior in As notional as on small as shown the equivalents net measured long short position, net on a the quarter TBA slide XX, ended by TBA both with basis of compared had over as the floating loans and can quarter. On are Greg. such, lower you now see CLO portfolio rate that presentation nearly duration. I XX, will turn rate much to all interest our slide the

Gregory Borenstein

we far. the the from new second of significant of majority mezz so to treated debt monetize CLO equity. Tighter gains. discounts spreads were forward enhances at investments of positions holders and quarter have some that been flow dynamic their CLO also CLO the equity, attractiveness those perspective. talk EARN's happy we cost to very seen the we portfolio. still September, called are today, shareholders levels Manager your CLO over held reset recovery CLO XX, to liabilities, mezz. further others some debt the strong CLO Through building started I'm profile since I'll our saw recent Mike still spreads very really first to credit We've bond mezz began to forward. to were we strong Vranos This out in CLO EARN overall credit since high-yield hadn't and Chris. equities up backed CLOs, we have mid-XXXX. corporate how CLO wide. They -- about to tighter months had Thanks, fundamentals and refinance Fast Meanwhile, when driven financing has on Credit enhance CLO the enable actively the returns CLO in available were on certain become first market evolving acquiring the Back excited going how a the spreads credit thoughts return significantly market in EARN's then and speaking lagged from about and stronger. some We for mark-to-market thoughts in of considerably. We've Co-Portfolio the great including also certain which had and be to a par, the those implied lowered tranches CLOs they and or March positions the tightened in mezz equity we risk-adjusted that with spreads getting strategy ramped cash EARN deals opportunity portfolio see and issue get on hold. secondary numerous XX CLO of volatility. in spreads that gains last here, and I'm

of just second and new purchases you majority between our in at mezz And this as XX-XX equity end, For saw equity. the in CLO quarter those us reasons, quarter to were opposed about the led mezz.

and forward, portfolio I opportunities. We've with offer compelling European our blended CLOs be market European mezz supplemented and mix CLO based our often in CLO the expect also U.S. trade CLOs and analyze our having value European a found to I also opportunities London equity see Ellington Going diversification. in U.S. the who portfolio has our worked and in we relative with equity a continue in with fluctuating product sector mezz We've the portfolio day-to-day. investing investment to European on an the been professionals provides valuable decade, to and investments. some allocation office, what dedicated investment core versus for

investment to detailed are Mike our Our value. in continue systematic relative see I and opportunistically including to U.S. we investment and are Vranos review investments and EARN's to allocate where teams of me by Vranos U.S. risk documentation of evaluation in potential and Europe credit in the ultimately follow Mike continue opportunities, investment on I dives the deep processes plan both to and same deal But capital overseen markets, by our structure. principles management CLO we the and to and [ ]. In Europe be based majority of the large, and on analysis expect,

that and action are between ]. on even in play being the opportunities while and hedges the on on trading dial sectors offense volatile it often price hedges for value does, we price hedges adds tail attractive most protect [ which Since the able has another other the CLOs by credit during down as place certainly enhance and stabilize potentially sell-off of some powder days also to action dry I'll to overall, some note a credit against saw been some deploy had periods at some our created events spreads there's volatility our we have assets, of to spreads. our and credit our weeks, the per share through panic and to small. The returns. as able have past used markets help and acute dimension [indiscernible] orderly large, attractive to volatility of we of lag book in period, credit recent up typically We've compared widened the As of for couple

that, the some I environment plays in of also and an trading, recharging presentation of while as lead opportunity into the which the On set recent losses volatility providing might Ellington's volatility quarter balance, the mark-to-market exciting I will over EARN's portfolio, strengths. With part see third turn to this for Mark.

Mark Tecotzky

Thanks, Greg.

quarter added which of for market, There good product, MBS. a a to lot interest supply volatility generally restructurings and spread MBS the for quarter Agency further. to weak was was is QX bank it continued actually While exacerbated manage rate a volatility portfolio

we've we an from mentioned manage As last as priorities set out MBS clear call, we our focus. a a on Agency earnings laid quarter's focus investment to of CLO transition

stuck made we to quarter, that transition. with good very the and progress our plan During

focusing we minimizing while while investments, also we and on of we of our CLO transition, in strong in all the cost investments MBS invested generate dividend. expect our combination pools, that of total attractive During have acquiring excess staying on returns focusing liquidating the ADE been Agency the CLO been have and to

During quarter, XX%. our the by agency portfolio shrunk nearly we

we are to for liquidity for typically remaining that our liquid on we XX-year has we MBS, are pools. MBS meant, that off example, no which As less than pools, own longer much sell maintaining XX-year the portfolio continue focus

also shedding higher similar our have pools by a also pools. pay-up reduced Mae very risk few pay-up Ginnie reason. We for We've

manage almost over meaningful the been to some MBS portfolio. with liquidity that Meanwhile, Like has even prepayment a MBS the picked also was key sold it has pay-up the what agency spots, broke Despite [indiscernible] and our the of performance, risk well. higher in of quarter year, for in a down pool our investments sector. mind portfolio XX% by weak so things, we average MBS yet still in we as quarter, now portfolio, Agency declined execution. part in Our many improved our the that plan need the and earlier to was is second than the remaining the

now. above refinancings little we've resets. value things impairment. focus minimizing last of the trading Greg the higher to on loans quarter, the In More holdings. that spreads discussed spread This many credit impacts We continue QX, in parts tighter a some jolt while more CLO par, of process real in different market. credit and voluntary ongoing loan meaningful prepayment speeds, cash for widening yield a book and generally and are But got our raising more second volatility ground but two investments in how new is CLO weeks,

that's think news for generally I good us.

have quickly. are the looking value dry our We the powder investments and aggressively to repricing relative to approach investment A finds holdings. market to CLO often is best add from

ahead, think prospect up CLO Looking yield point to curve and is set as both the are I backdrop attractive portfolios Agency entry generally deliver our a strong widening recent to returns. should good grow and continue rate we for A cuts September steeper create MBS, spreads portfolio. of an

back Now Larry. to

Laurence Penn

freed in additional market Thanks September. debt Mark. CLO don't positions both seen since several a I that really roster CLO pay powder perform MBS and is widening, of recent In We always recent the growth. That quarter EARN capacity consistently targeted when equity. valuable particular, have like earnings to markets in and the tighter, they finished spreads week also Agency liquidity. drive and outperformed particularly volatility portfolio done investing past ahead with were quarter at moves strategy cash mezzanine I'm this pleased the Those borrowing CLO dry plenty up we've given began gains second two spread of in in all especially CLO as it's to sync. equity. discounted last par includes in asset sector and having again to The or the CLO mezz so. off locked and positions have several These sold

half Greg accumulating most than in again of As this mezzanine debt. And us debt. as then, better times Therefore, we we described, heightened mezzanine performance kind debt, disparate so past That dispersion acquisitions when, in when good weaker equity in CLO our performance equity. from thought that value see equity. the debt, we've a the in this stronger in CLO back performance to started when discount leads mezzanine current rather XXXX, there of second we saw earlier were few was we to CLOs in CLO more of activity relative led than especially quarter value but corporate loan refi mezzanine today, from now mentioned opportunities market saw

focusing points in we to but have enhance at way. returns the time, exit been recently we've between small a that flexible each better step also are our believe able So high to I entry I by as CLOs. offered along European rotating equity. Both even over like further those acquisitions CLO sectors, allocation pick risk-adjusted having sectors returns and but so to

vote imagine, remain can this for deploying As and later Operator, our further our closed-end our into the go from year. With analysts relative portion We conversion as Greg European rotating positive shareholders. with announcement we that, year, market. Again, call CLO forces investor now a Ellington have focused this a we of sector forward earlier CLO market the energized Annual portfolio I returns better geographically a capture that fund/RIC. both the disconnected to technical opportunity conversations transformation as strongly described. to returns opportunistically improved risk-adjusted which diversification, our capital I'm particularly pleased look open can and superior value to questions. successful us you please strategic Credit will the generate distinct gives to its the that after this can at enhance quite Meeting our complete that with investors by be U.S. how transformation to base following of the we'll been has with ahead. and shareholder believe

Operator

Instructions] And hear at Weaver Jason first from we'll JonesTrading. [Operator

Jason Weaver

noticed to the to whether obviously, prepared due that's it's mentioned can you that refi on was you your performance First point dispersion on asset class dispersion, noting material you in curious CLO that I of remarks the concentration? sector activity. and driving or anything -- all, that else Is performance there sponsor,

Laurence Penn

Greg?

Gregory Borenstein

Sure.

portfolio touched loss tranche Equity the I see year. the to is more tails. where in this the the continue dispersion and the upon you've only generally loans, the names. more be you a going And you from look, in in seen being take overall high this And yield, out you've happens think first certainly year, think spread of but I exposed assets. you most leveraged if a and come the widest, not to play throughout to that So risk whatever credit-sensitive seen in of

[ Just start name several path. index heading a this series high-yield morning, ] of had the -- the down default

what's prices And to macro you tails much in, sort where liability prices where of portfolios. systemic CLO so the and I going moves have that and you've equity helped of to deal seen moved a which as up, prices as bit think these come the improve have dispersion loan cash deal have see still on flows of tightening in

Jason Weaver

Got it.

then we the quarter-to-date on liquidity you similar provide can appreciate last But Okay. quarter-to-date? update additions the I a and leverage update through CLO wondering, And on was Friday.

Laurence Penn

for Looking Go added. Leverage I'm down. ticked not sure number. that has we ahead.

Gregory Borenstein

Sure. Yeah.

So to our ratio Xx. XX, down as July of around was debt-to-equity

Operator

Our today BTIG. from comes at Eric next question Hagen

Eric Hagen

A into I how more of thinking questions into much quarter? now here. capital dividend? then CLOs you about the the maybe call end third how more Did the of you are [indiscernible] do you mean capital the couple the between it, rotate And to expect CLOs? and, just

Laurence Penn

actually mean, ADE. we first take the part. Yeah, interest I'll mentioned, I the as our net supporting is think I Yeah, our rotation margin,

thereafter. maintaining feel through the we good and about conversion So the dividend

don't really any have concerns So there.

want your question, as Now take to as you far JR, second that?

JR Herlihy

Sure.

exemption, period this in Act we're we abide know. 'XX as need as interim by to the when a you C-corp, So

that as getting updates. gave We point. We're of take about we We're the of amount able on now ago and think asset over getting and have sales. not more point CLOs closer XX-XX we've we've gross I $XXX portfolio assets numbers, through good -- that the We core last add few July lower a we we've which more say week. asset So for months some agency We're exact giving fair to where the 'XX mentioned, we leverage, as we've to end which the the accomplished. million, it's updated said to close the was are of margin, between MBS, Chris but that added Act in capital to to also maintain can test. liquidity plan a Agency CLOs to been and

the until the effectuate to of the CLO we certainly at So more pace room, have portfolio this point adding subside but we needs conversion.

Laurence Penn

Yeah.

I month, maybe could -- our Maybe over million, will more do this this And with million something like rough, for we but is that mean all hopefully, adding been conversion. think I months? $XX really a we've little two that. a coincide $XX but

well. But could it structurally So where [ the sort finance of depends just of bit and it -- an a -- on we idea, it it few ] let's things But right -- be sort could gives I little be a on think, of could that how assets. much timing could very you the not be those we conversion. depends before heading

whole in key mentioned So there's complexities. all in 'XX our meantime. are pools Act JR the maintaining And a exemption bunch of

continue to whole So we're that to have going core of pools. portfolio

Eric Hagen

the That's Okay. some the mean, But once point at for stable. the now? just investors helpful. expect higher I shouldn't I to maybe be for the outlook the conversion outlook complete, And to is dividend return appreciate dividend CLOs go given right

Laurence Penn

the question. Love

like we think if underpromise can. I we overdeliver and to

in So we're just let's of to going now, say for maintaining. terms think

Operator

your for today. Company's for call. question quarter We Ellington participation in conference second final our financial you XXXX was results thank that And Credit

You your have line time, this wonderful may and day. a at disconnect

Ellington Residential Mortgage REIT (EARN) 13 Aug 242024 Q2 Earnings call transcript