Q4 2023 Ellington Residential Mortgage REIT Earnings Call
Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Residential Mortgage REIT 2023 Fourth Quarter Financial Results Conference Call. The call is being recorded, and at this time, all participants have been placed in a listen-only mode. The floor will be open for questions following the presentation, and if you would like to ask a question at that time, please press star 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing star 2.
Good morning, ladies and gentlemen.
Thank you for standing by and welcome to the Ellington residential mortgage REIT 2023 first quarter financial results Conference call.
This call is being recorded and at this time all participants have been placed in a listen only mode.
The floor will be opened for questions. Following the presentation and if you would like to ask a question at that time. Please press star one on your telephone keypad.
At any time if your question has been answered you may remove yourself from the queue by pressing star. Two lastly, you should you require operator assistance. Please press star zero.
Operator: Lastly, should you require operator assistance, please press star 0. It is now my pleasure to turn the conference over to Aladdin Shaleh, Associate General Counsel. Sir, you may begin.
It is now my pleasure to turn the conference over to all of the initially associate General Counsel you may begin.
Aladdin Shaleh: Before we begin, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events.
Thank you before we begin I would like to remind everyone that certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements are not historical in nature are subject to a variety of risks.
And on uncertainties that could cause the company's actual results to differ from its beliefs expectations estimates and projections. Consequently, you should not rely on these forward looking statements as predictions of future events.
Aladdin Shaleh: We strongly encourage you to review the information that we have filed with the SEC, including the earnings release in the Form 10-K, for more information regarding these forward-looking statements and any related risks and uncertainties. Unless otherwise noted, statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellington Residential, Mark Tecotzky, our Co-Chief Investment Officer, and Chris Smernoff, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, earnreit.com. Our comments this morning will relate to the present. Please note that any references to figures in this presentation are qualified in their entirety by the notes at the back of the presentation. With that, I will now turn the call over to Eladine. Thanks, Eladine, and good morning everyone.
We strongly encourage you to review the information that we have filed with the SEC, including the earnings release and the Form 10-K for more information regarding these forward looking statements and the related risks and uncertainties.
Unless otherwise noted statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
Joining me on the call today are Larry Penn Chief Executive Officer of Ellington residential Mark Cosby, Our co Chief investment Officer, and Chris <unk>, Our Chief Financial Officer as described in our earnings press release, our fourth quarter earnings Conference call presentation is available on our website <unk> Dot com.
Our comments this morning will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the notes at the back of the presentation with that I will now turn the call over to Larry.
Thanks, Alan and good morning, everyone. We appreciate your time and interest in Ellington residential.
Laurence Eric Penn: We appreciate your time and interest in Ellington Residential. As with much of 2023, in the fourth quarter, markets gyrated between a sell-off and a rally, tumultuous October giving way to a market rally in November and December. In October, interest rate volatility spiked as U.S. Treasury yields rose to 15-year highs, and that drove yield spreads sharply wider on most fixed income products. However, market spend reversed course in anticipation of the conclusion of the Federal Reserve's hiking cycle, interest rates and volatility both declining into year end. With rates lower and trading in a more stable range, demand for spread products picked up, and capital flowed into fixed income funds. With the notable exception of CMBS, which has its own unique challenges, virtually all fixed income spreads tightened for the fourth quarter, including in the markets where EARN invests, namely agency and non-agency RMBS and now corporate CLOs, where we've been investing to an ever-increas Turning to the investor presentation, on slide three, you can see that medium and long-term interest rates, despite spiking to multi-year highs in October, actually declined overall for the quarter. And the 30-year Freddie Mortgage Survey rate, despite reaching a 23-year high mid-quarter, also finished lower for the quarter.
As with much of 2023 in the fourth quarter markets Gyrated between a selloff in a rally, but tumultuous October giving way to a market rally in November and December.
In October interest rate volatility spiked as U S. Treasury yields rose to 15 year highs and that drove yield spreads sharply wider on most fixed income products.
<unk> can reverse course in anticipation of the conclusion of the federal reserve's hiking cycle with interest rates and volatility both declining into year end with.
With rates lower and trading in a more stable range demand for spread product products picked up and capital flows into fixed income funds with the notable exception of see MBS, which has its own unique challenges virtually all fixed income spreads tightened for the fourth quarter, including in the markets. We're in inverse.
Lee Agency and non agency RBS and now corporate Clo's, where we've been investing to an ever increasing extent after our recent pivot.
Turning to the Investor presentation on slide three you can see that medium and long term interest rates. Despite spiking to multiyear highs in October actually declined overall for the quarter and a 30 year Freddie mortgage survey rate, despite reaching a 23 year high mid quarter also finished lower on the quarter.
Laurence Eric Penn: Incredibly, despite all the fluctuations during the year, both the 10-year treasury yield and the 30-year mortgage survey rate finished 2023 within one basis point of where they started the year, as you can see on this slide as well. As the backdrop for our mortgage-backed securities portfolio, you can also see on slide three that option-adjusted yield spreads tightened across agency coupons during the fourth quarter and that the most pronounced price increases were on lower and intermediate coupons. Dollar prices on Fannie 2 12 through 4 12 were up more than 5 points sequentially; the outperformance of those coupons benefited Earns Agency MBS portfolio specifically because, coming into the quarter, roughly two-thirds of our agency MBS had coupons of four and a half percent or less. Meanwhile, as the backdrop for our CLO portfolio, corporate credit spreads followed a similar pattern, first widening in October and then tightening in You can see on the bottom of slide 3 that credit spreads on both high yield and investment grade tightened significantly over the quarter, while prices on the Morningstar LFTA Leveraged Loan Index rose. Turning now to Earns Results.
Incredibly despite all of the fluctuations during the year, both the 10 year Treasury yield and the 30 year mortgage survey rate finished 20 twenty-three within one basis point, where they started the year as you can see here on this slide as well.
As the backdrop for our mortgage backed securities portfolio. You can also see on slide three that option adjusted yield spreads tightened across agency coupons during the fourth quarter and that the most pronounced price increases one lower any intermediate coupons dollar prices on Fannie two and a half to four and a half were up.
More than five points sequentially.
The outperformance of those coupons.
Benefited Orange agency MBS portfolio, specifically, because coming into the quarter roughly two thirds of our agency MBS had coupons of 4.5% or less.
Meanwhile, as the backdrop for our CLO portfolio corporate credit spreads followed a similar pattern first widening in October and then tightening in November and December and tightening overall for the quarter as an economic soft landing narrative permeated the market.
You can see on the bottom of slide three that credit spreads on both high yield and investment grade tightened significantly over the quarter, while prices on the Morningstar L. S. T. A leveraged loan index rose.
Turning now to earnings results in the fourth quarter, we generated net income of 75 per share and a non annualized economic return of seven 7%, while our adjusted distributable earnings grew to 27 cents per share and more than covered our dividend.
Laurence Eric Penn: In the fourth quarter, we generated net income of $0.75 per share and a non-annualized economic return of 7.7%, while our adjusted distributable earnings grew to $0.27 per share and more than covered our dividends. As with other market disruptions we've seen before, the key in the fourth quarter was to avoid forced selling when the market sold off in October in order to preserve equity and earnings power and be in a position to participate in the subsequent market recovery. In the fourth quarter, we again relied on Ernst's risk management and strong liquidity position to accomplish this.
As with other market disruptions, we've seen before the key in the fourth quarter was to avoid forced selling when the markets sold off in October in order to preserve equity in earnings power and be in a position to participate in the subsequent market recovery.
In the fourth quarter, we again relied on earns risk management and strong liquidity position to accomplish this.
Christopher M. Smernoff: That said, we did sell pools in the fourth quarter to free up capital from MBS to CLOs, and the majority of our sales took place in November as yield spreads were tightened. We ended up increasing the size of our CLO portfolio by $13.6 million during the quarter. On slide 12 of the earnings presentation, you can see some of the underlying characteristics of our CLO portfolio as of year end. The corporate loans underlying our CLO investments span a diverse array of industries, and the overwhelming majority are floating rate, first lien, senior secured. Our rotation into CLOs has continued into the new year, with our agency portfolio now incrementally smaller, and the size of our CLO portfolio now up an additional 70% from year-end to approximately $30 million.
That said, we did sell pools in the fourth quarter to free up capital from MBS to Clo's and the majority of our sales took place in November as yield spreads were tightening.
We ended up increasing the size of our CLO portfolio by $13 $6 million during the quarter.
On slide 12 of the earnings presentation, you can see some of the underlying characteristics of our CLO portfolio as of year end.
Corporate loans underlying our CLO investments span a diverse array of industries and the overwhelming majority are floating rate first lien senior secured loans.
A rotation into CLO has continued into the new year with our agency portfolio now incrementally smaller in the size of our CLO portfolio now up an additional 70% from year end to approximately $30 million.
Christopher M. Smernoff: Even after the recent credit spread tightening in the sector, we still see returns on equity for new CLO investments in the high teens to the low 20s. Besides contributing to and diversifying EARNS GAAP results, our high-yielding CLO investments have also helped drive the substantial growth of our net interest margin and thereby have supported our ADE as well. In addition, because we employ less leverage on our CLOs compared to agency, the portfolio rotation has also driven down our leverage ratio. At year-end, our debt-to-equity ratio, adjusted for unsettled trades, declined to 5.3 to 1, down from 7.3 to 1 at September 30. I'll now pass it over to Chris to review our financial results for the fourth quarter. Thank you. Thank you. Thank you. Thank you, Larry. And good morning, everyone.
Even after the recent credit spread tightening in the sector, we still see returns on equity for new CLO investments and high teens to low twenties.
Besides contributing to and diversifying earns GAAP results are high yielding CRE CLO investments have also helped drive the substantial growth of our net interest margin and thereby have supported our a D as well.
In addition, because we employ less leverage on our CLO as compared to agency. The portfolio rotation is also driven down our leverage ratios at year end, our debt to equity ratio adjusted for unsettled trades declined to $5 three to one down from $7 three to one at September 30th.
I'll now pass it over to Chris to review, our financial results for the fourth quarter in more detail.
Thank you Larry and good morning, everyone.
Christopher M. Smernoff: Please turn to slide 5 for a summary of Ellington Residential's fourth quarter financial results. For the quarter ended December 31st, we reported net income of $0.75 per share and adjusted distributable earnings of $0.27 per share. AD excludes the catch-up amortization adjustment, which was positive 566,000 in the fourth quarter.
Please turn to slide five for a summary of Ellington residential fourth quarter financial results.
For the quarter ended December 31, we reported net income of 75 cents per share and adjusted distributable earnings of 27 per share.
<unk> excludes the catch up amortization adjustment, which was positive 566000 in the fourth quarter during.
Christopher M. Smernoff: During the quarter, positive net interest income and net gains on our agency MBS significantly exceeded net losses on our hedge fund, driving strong performance from our agency. Our CLO portfolio also generated strong returns, driven by net interest income and net gains, as did our non-agency RMBS and interest-only portfolio. On slide five, you can see that our overall net interest margin expanded to 2.19% from 1.34%, quarter over quarter, which drove the increase in ADE. Broken out by product, our agency NIM increased to 2.02% from 1.26%, driven by higher asset yields and a lower cost of funds.
During the quarter positive net interest income and net gains on our agency MBS significantly exceeded net losses on our hedges.
Driving strong performance from our agency portfolio.
Our CLO portfolio also generated strong return driven by net interest income and net gain.
As did our non agency MBS and interest only portfolio.
On slide five you can see that our overall net interest margin expanded to $2, one 9% from $1 three 4% quarter over quarter, which drove the increase in <unk>.
Broken out by product our agency NIM increased to 2.0% to 2% from $1, two 6% driven by higher asset yields and a lower cost of funds.
Christopher M. Smernoff: Meanwhile, our credit NIM, which includes CLOs and non-agency RMBS, increased to 6.28% from 4.55%, boosted by high asset yields on our larger CLO portfolio. Please turn now to our balance sheet on slide two. Book value per share was $7.32 at year-end, compared to $7.02 per share at September 30.
Meanwhile, our credit NIM, which includes CLO and non agency MBS increased to $6 two 8% from $4 five 5% boosted by high asset yields on our larger CLO portfolio.
Please turn now to our balance sheet on slide six.
<unk> per share was $7 32 at year end compared to $7 <unk> per share at September 30.
Christopher M. Smernoff: Including the $0.24 per share in dividends in the quarter, our economic return for the quarter was 7.7%. We ended the quarter with $61 million in cash plus unencumbered assets, which was approximately 45% of total activity. Next, please turn to slide 7 for a summary of our portfolio holdings. Our agency RMVF holdings decreased by 8% sequentially to $728 million as of December 31st as net sales and paydowns exceeded net
Including the 24 per share and dividend in the quarter, our economic return for the quarter was seven 7%.
We ended the quarter with $61 million in cash plus unencumbered assets, which was approximately 45% of total equity.
Next please turn to slide seven for a summary of our portfolio holdings.
Our agency MBS holdings decreased by 8% sequentially to $728 million as of December 31 is that sales and paydowns exceeded nicotine.
Christopher M. Smernoff: Our agency MBS portfolio turnover was 25% for the quarter. Our aggregate holdings of non-agency RMBS and interest-only securities also shrunk in size by 13% quarter over quarter. Over the same period, we increased our CLO holdings more than fourfold to $17.4 million as of December 31st, compared to $3.8 million as of September 30th. At year end, our deployed equity was allocated 89% to mortgage-related securities and 11% to CLOs. Our debt-to-equity ratio adjusted for unsettled trades decreased 5.3 times as of Dec. 31 as compared to 7.3 times as of Sept. 30. The decline was primarily due to an increase in shareholders' equity and a significantly lower leverage on the CLO portfolio relative to our agency holders. Similarly, our net mortgage assets to equity ratio decreased to six and a half times from 7.2 times over the same period.
Our agency MBS portfolio turnover was 25% for the quarter.
Our aggregate holdings of non agency MBS and interest only securities also shrunk in size by 13% quarter over quarter.
Over the same period, we increased our CLO holdings more than fourfold to $17 4 million.
As of December 31, compared to $3 $8 million as of September 30th.
At year end, our deployed equity was allocated 89% to mortgage related securities and 11% for Clo's.
Our debt to equity ratio adjusted for unsettled trades decreased to five three times as of December 31, as compared to seven three times as of September 30th.
Decline was primarily due to an increase in shareholders' equity and a significantly lower leverage on the CLO portfolio relative to our agency holdings.
Similarly, our net mortgage assets to equity ratio decreased to six five times from seven two times over the same period.
Christopher M. Smernoff: Despite our holdings holding a net long TBA position at December 31st as compared to a net short TBA position at September 30th. On slide nine, you can see the details of our interest rate hedging portfolio. During the quarter, we continue to hedge interest rate risk, primarily through the use of interest rate tariffs.
Our holdings clothing, a net long TBA position at December 31.
As compared to a net short TBA position at September 30.
On slide nine you can see the details of our interest rate hedging portfolio.
During the quarter, we continued to hedge interest rate risk primarily through the use of interest rate swaps.
Mark Ira Tecotzky: We ended the fourth quarter with a net long TBA position on a notional basis but a small net short position as measured by 10-year equipment. Lastly, on slide 12, you can see that nearly all of the loans underlying our CLL portfolio are floating rate and, as such, carry a minimal interest rate. I will now turn our presentation over to... Thanks, Chris. The fourth quarter was really a tale of two marks.
We ended the fourth quarter with a net long TBA position on a notional basis, but a small net short position as measured by 10 10 year equivalents.
Lastly on slide 12, you can see that nearly.
All of the loans underlying our CLO portfolio are floating rate and as such carry minimal interest rate risk.
I'll now turn our presentation over to Mark.
Thanks, Chris.
The fourth quarter was really a tale of two markets. The first part of the quarter was characterized by continued rate selloff wider spreads fund outflows and market uncertainty about how high the fed would meet the higher short rates before achieving a noticeable improvement uninflated.
Mark Ira Tecotzky: The first part of the quarter was characterized by a continued rate sell-off, wider spreads, fund outflows, and market uncertainty about how high the Fed would need to hike short rates before achieving a noticeable improvement in inflation. However, starting in late October and early November, with economic indicators and comments from Chairman Powell pointing to a possible end to the rate hike cycle, markets started to make a U-turn. Rates dropped, spreads tightened, and there was a significant fund and bank buying of agency MBS and other spread products. In agency mortgages, sector outperformance in the second part of the quarter exceeded underperformance in the first part.
But then starting in late October and early November.
With economic indicators and comments from chairman Powell, pointing to a possible end to the rate hike cycle.
<unk> started to make a U turn rates dropped spreads tightened and there was a significant funding bank buying of agency MBS and other spread products in.
In the agency sector outperformance in the second part of the quarter exceeded under performance in the first part and overall for the quarter agency MBS significantly outperformed hedging instruments.
Mark Ira Tecotzky: And overall, for the quarter, agency MBS significantly outperformed hedging interest. I'm happy to report that ERN was well positioned to capture this agency outperformance, posting a total economic return of almost 8% for the quarter. During the market selloff in the first part of the quarter, we were able to manage the interest rate volatility and keep our agency MBS portfolio largely intact. We were confident that it was just a matter of when, not if, spreads would recover.
I'm happy to report that earn is well positioned to capture this agency outperformance posted a total economic return of almost 8% for the quarter.
During the market sell off in the first part of the quarter, we were able to manage the interest rate volatility and keep our agency MBS portfolio largely intact. We were confident that it was just a matter of when not if spreads would recover and maintaining our portfolio allowed us to capitalize on the spread tightening when it did eventually occur.
Mark Ira Tecotzky: And maintaining our portfolio allowed us to capitalize on the spread tightening when it did eventually occur. During Q4, the market pivot in Fed expectations was the catalyst that led to lower implied and realized volatility, which lowered actual and expected hedging costs and prompted capital inflows from banks and investments. If and when the first rate cut occurs later this year, we think that could be another catalyst for continued outperformance for agency MBS. We were able to take advantage of the market strength to shrink our agency MBS portfolio incrementally and redeploy that capital into CLOs. That rotation not only enhanced our diversification, but it also took our leverage down significantly, and yet we were still able to grow ADE. In Q4, our earned CLO portfolio grew by $13.6 million as we predominantly added seasoned CLO mezzanine tranches, but also longer duration CLO equity, shorter duration CLO equity, and newer vintage CLO mezzanine. Seasoned mezzanine investments outperformed throughout Q4 as prepayment speeds accelerated and CLO cash balances grew, driving expectations of a deal deleveraging in January, and that strong performance has continued into 2024. CLO credit spreads tightened across the board in Q4, with triple B's generally rallying around 30-50 beeps, and double B's rallying even more, albeit with significant dispersion.
During Q4, the market pivot in fed expectations was the catalyst that led to lower implied and realized volatility, which lowered actual and expected hedging costs and prompted capital inflows from banks and investment funds.
If and when the first rate cut occurs later this year, we think that could be another catalyst for continued outperformance for agency MBS.
We were able to take advantage of the market strength to shrink our agency MBS portfolio incrementally and redeploy that capital into CLO.
That location not only enhanced our diversification, but it also took our leverage down significantly and yet we were still able to grow a D E.
In Q4 on CLO portfolio grew by $13 6 million as we predominantly added seasoned CLO mezzanine tranches, but also longer duration CLO equity shorter duration, CLO equity and newer vintage CLO meds.
Since isn't seasons mezzanine investments outperformed throughout Q4 as prepayment speeds accelerated CLO cash balances grew driving expectations of a deal deleveraging in January and that strong performance has continued into 2024.
CLO credit spreads tightened across the board in Q4 with Triple B generally rallying around 30 to 50 bps and double B's rallying even more albeit with significant dispersion. However, these sectors lagged the high yield corporate bond market, whereby some measures spreads tightened almost 100 basis points for the quarter.
Mark Ira Tecotzky: However, these sectors lag the high-yield corporate bond market, whereby some measures spread tight into almost 100 basis points for the quarter. Q3 earnings were better than expected for many high-yield borrowers, with JP Morgan estimating that 86% of high-yield companies generated Q3 earnings that were either neutral or positive for their credit profile. And investors generally grew more comfortable with non-investment grade credits in Q4 as fundamentals improved. Furthermore, improvements in the leveraged loan market drove strength in junior CLO tranches, given that they are more levered to credit performance than senior tranches. This said, the most credit-sensitive CLO profiles, that is, those with the lowest credit enhancement and or most distressed portfolios, continued to lag as investors anticipated further credit losses.
Q3 earnings were better than expected for many high yield borrowers with J P. Morgan estimating that 86% of high yield companies generated Q3 earnings that were either neutral or positive for their credit profiles.
And investors generally grew more comfortable with non investment grade credits in Q4 as fundamentals improved.
Improvements in the leveraged loan market drove strength in junior CLO tranches, given that they are more levered to credit performance didn't senior tranches are.
This said the Moe.
Credit sensitive CLO profiles.
Is that it goes with the lowest credit enhancement indoor most distressed portfolios continued to lag as investors anticipated further credit losses.
Mark Ira Tecotzky: In Q1 of 2024, we anticipate further strength in our CLO portfolio due to declining credit market stress and continued pull to par in seasoned CLO managers. Approximately 40% of the leveraged loan index traded above par at the end of Q4, which has incentivized lots of borrowers to refinance their debt so far in 2024. This is benefiting both seasoned CLO MES with faster deal paydowns and CLO equity to lower near-term default risk as underlying corporate borrowers raise incremental liquidity. We also expect the technical backdrop for the leveraged loan market to remain attractive as many new CLOs are expected to ramp up portfolios in Q1, driving demand for loans with a forward calendar of loan supply that remains light. Looking ahead, we see lots of reasons to be optimistic about EARN's future performance. The most aggressive Fed hiking campaign ever is now behind us.
In Q1 of 2024, we anticipate further strengths our CLO portfolio due to declining credit markets, Jeff and continued pull to par and seasoned CLO mezz.
Approximately 40% of the leveraged loan index traded above par at the end of Q4, which has incentivize lots of borrowers to refinance their debt so far in 'twenty 'twenty four.
This is benefiting both seasoned CLO mezz to faster deal pay downs and CLO equity to lower near term default risk is the underlying corporate borrowers raised incremental liquidity.
We expect the technical backdrop for the leverage loan market to remain attractive as many new CLO as you expect it to ramp up portfolios in Q1 driving demand for loans with a forward calendar of loan supply that remains light.
Looking ahead, we see lots of reasons to be optimistic about earn future performance. The most aggressive fed hiking campaign ever is now behind us. So if we went from zero to over 5% and 14 months the fed balance sheet has shrunk by well over one trillion since its peak post COVID-19 sides.
Mark Ira Tecotzky: SOFA went from 0 to over 5% in 14 months. The Fed balance sheet has shrunk by well over $1 trillion since its peak post-COVID size. Couple that with large bank failures, putting almost $100 billion of agency MBS and CMOs into the market, and you have the recipe for substantial spread widening, which we've seen over the past couple of years. But now the Fed should soon become a tailwind as opposed to a headwind, and looking ahead, in addition to this expected support from the Fed, we see five major factors supporting future MBS performance. First, the spreads are wide, not as wide as October but still much wider than historical averages. And they should be.
Couple that with large bank failures, putting almost 100 billion of agency MBS and CMO always into the market and you had the recipe for substantial spread widening which we've seen over the past couple of years, but now the fed should soon become a tailwind as opposed to a headwind and looking ahead. In addition to this expected support from the fed.
We see five major factor supporting future MBS performance first spreads are wide not as wide as October but still much wider than historical averages and they should be the fed as a seller not a buyer and banks, while buying or a shadow of their former south but being widen staying wide works out just fine for earn.
Mark Ira Tecotzky: The Fed is a seller, not a buyer, and banks, while buying, are a shadow of their former selves. But being wide and staying wide works out just fine for EARN. We have a big levered NIMH to capture. Second, supply is low, and it's especially low relative to the mountain of treasury supply. So relative performance versus hedging instruments is supported by this technical analysis. Third, the prepayment risk for most coupons is benign, and the cost of prepayment protection is reasonable.
We have a big Levered NIM to capture.
Second supply is low and it's especially low relative to the mountain of Treasury supply so relative performance versus hedging instruments are supported by this tactical third prepayment was for most coupons as benign and the cost of prepayment protection is reasonable.
Fourth flows into mutual funds to buy agency MBS, both active and passive had been quite strong.
How does that fixed income annuity sales have also started to buy in Q4.
Laurence Eric Penn: Fourth, flows into mutual funds that invest in agency MBS, both active and passive, have been quite strong, as have fixed-income annuity sales. Banks have also started to buy in Q4. And fifth, volatility is a lot lower, both actual and implied, so delta hedging costs are lower, and that makes option-adjusted spreads wider. We have room to add leverage at EARN, we have tools to further grow ADE, and CLOs are helping to deliver diversified returns. Now, back to Larry.
Fifth volatility is a lot lower both actual and implied so delta hedging costs are lower and that makes option adjusted spreads wider.
We have room to add leverage at earn we have tools to further grow a D E and yellows are helping to deliberate diversified return stream now back to Larry.
Thanks Mark.
I was pleased with how we navigated the market gyrations throughout 2023 and finished the year on a high note.
Laurence Eric Penn: Thanks, Mark. I was pleased with how we navigated the market gyrations throughout 2023 and finished the year on a high note. Now, with the yield spread still wide on a historical basis, with markets expecting cuts instead of hikes, and with volatility normalizing, agency MBS are attracting incremental demand from investors, albeit tempered by uncertainty around the timing of cuts. When those rate cuts eventually come and we ultimately see a steep yield curve again, that should be a further challenge for the sector. I'm excited about our growing corporate CLO portfolio. EARN's small size and liquid portfolio has been an advantage here as we've been able to ramp up quickly in a terrific strategy where we see a big opportunity for EARN. While Ellington has longstanding and deep experience managing CLO portfolios, Earn began investing in that product just this past September, and that pivot is already contributing nicely to earnings, including investments through today. CLO investments are now a full 17% allocation of Earn's total equity.
Now with yield spreads still wide on historical basis, with market's expecting cuts instead of hikes and with volatility normalizing.
<unk> MBS are attracting incremental demand from investors, albeit tempered by uncertainty around the timing of cuts when those rate cuts eventually come and we ultimately see a steep yield curve again that should be a further tailwind to the sector.
Okay.
I am excited about our growing corporate CLO portfolio.
Earn small size and liquid portfolio has been an advantage here as we've been able to ramp up quickly and a terrific strategy, where we see a big opportunity for earn.
While Ellington has longstanding and deep experience managing CLO portfolios earned began investing in that product. Just this past September and that pivot is already contributing nicely to earnings.
Including investments through today CLO investments are now fell 17% allocation of earnings total equity I expect them to be a significant driver of earnings and <unk> moving forward.
The CLO market has proven its ability to generate attractive returns over market cycles and over a long term horizon.
In the short term and as Mark mentioned credit spread tightening and some segments of the CLO market has continued to lag a larger rally in corporate bond credit spreads and we expect that money manager inflows into high yield and leverage loans will help narrow that gap.
Laurence Eric Penn: I expect them to be a significant driver of earnings and ADE moving forward. The CLO market has proven its ability to generate attractive returns over market cycles and over a long-term horizon. In the short term, and as Mark mentioned, credit spread tightening in some segments of the CLO market has continued to lag a larger rally in corporate bond credit spreads, and we expect that money manager inflows into high-yield and leveraged loans will help narrow that gap. As Mark also mentioned, we expect faster leverage loan prepayment speeds to drive faster prepayments on many of our seasoned CLO mezzanine positions, which we hold We've grown our earned CLO portfolio by another 70% so far in 2024, and these discounted season CLO mezzanine positions have continued to be a focus of ours given their total return potential in an environment with this potential for higher loan prepayments. The CLO market suits Earn extremely well.
As Mark also mentioned, we expect faster leveraged loan prepayment speeds to drive faster prepayments on many of our seasoned CLO mezzanine positions, which we hold at significant discounts to par.
We've grown our CLO portfolio by another 70% so far in 2024, and these discounted seasoned CLO mezzanine positions have continued to be a focus of ours given their children return potential and in an environment with this potential for higher loan prepayment speeds.
The CLO market suits are in extremely well and not only offers high current interest income, but it has always been a fertile ground for both relative value and absolute value opportunities as well as for trading opportunities given this dispersion in collateral credit performance from deal to deal.
Going forward Ellington's extensive expertise and track record in the CLO market should be a big benefit for us.
Laurence Eric Penn: It not only offers high current interest income, but it has always been a fertile ground for both relative value and absolute value opportunities, as well as for trading opportunities, given the dispersion in collateral credit performance from deal to deal. Going forward, Ellington's extensive expertise and track record in the CLO market should be a big benefit for ERM. Our CLO portfolio has continued to contribute nicely to our results so far in 2024, but net losses in agency MBS have led to an overall economic return for EARN that we currently estimate at negative 1.9 percent year-to-date through February. The agency MBS market has underperformed many other fixed income sectors so far in 2024, driven by higher rates and uncertainty around the timing of Federal Reserve rate cuts.
Our CLO portfolio is to continue to contribute nicely to our results so far in 2024, but.
But net losses in agency MBS have led to an overall economic return for earn that we currently estimate at negative one 9% year to date through February.
The agency MBS market has underperformed many other fixed income sectors. So far in 2024, driven by higher rates and uncertainty around the timing of federal reserve rate cuts.
This of course follows a strong fourth quarter for agency MBS, which led to the positive seven 7% non annualized economic return that we generated last quarter.
For the past few years, it's undeniable that agency MBS has been a volatile strategy for all the agency mortgage Reits, including art.
But I firmly believe that our CLO strategy will prove to be a less volatile strategy and thereby stabilizing and enhance earns returns overtime.
Laurence Eric Penn: This, of course, follows a strong fourth quarter for H&C MBS, which led to the positive 7.7% non-annualized economic return that we generated last quarter. For the past few years, it's undeniable that Agency MBS has been a volatile strategy for all the Agency Mortgage REITs, including EARN. But I firmly believe that our CLO strategy will prove to be a less volatile strategy and thereby stabilize and enhance EARN's returns over time. And with that, we'll now open the call to questions. Operator, please go ahead.
And with that we'll now open the call to questions. Operator. Please go ahead.
Thank you and at this time, if you would like to ask a question. Please press star one on your telephone keypad.
You may remove yourself from the queue by pressing star Q and again that is star one to ask a question. Our first question will come from Doug Harter with UBS. Please go ahead.
Yeah.
Thanks can you talk a little bit more about how you see the equity allocation to cielo is playing out you know kind of how much how much of equity could this could this be.
Hi, Hey, Doug How're you doing.
Good morning.
Operator: Thank you. And at this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing star two.
Morning.
Yeah, So I guess.
It's.
Im not going to answer that question.
Directly I'm just going to say.
That.
I love the strategy.
Douglas Michael Harter: And again, that is star number one to ask a question. Our first question will come from Doug Harter with UBS. Please go ahead, http://TheBusinessProfessor.com, Thanks. Can you talk a little bit more about how you see the equity allocation to CLOs playing out, you know, kind of how much, how much equity could this be? Hi, hey Doug, how are you doing?
We have a great team here and a great track record.
The more you know the more the better as far as I'm concerned.
As you know we have constraints that we operate under.
As a REIT you have it.
The REIT tests, which are effectively mostly income based.
And at 40 Act, we have tests, which are mostly more sort of capital allocation base, but it also depends on financing strategy and your subsidiary structure. So.
Laurence Eric Penn: Morning. Yeah, so I guess it's, I'm not going to answer that question, you know, directly. I'm just going to say that, you know, I love this strategy. We have a great team here and a great track record. The more, you know, the better as far as I'm concerned. We, you know, as you know, we have constraints that we operate under, you know, as a REIT. We have the REIT tests, which are, you know, effectively mostly income-based.
We continue to grow and and I don't want to try to forecast where it's going.
Yeah.
Okay, and then I guess, just as you would think about.
Risk adjusted returns kind of comparing agency and Clo's, how do you think about kind of the upside downside and each to kind of the base case and.
You know kind of how that factors into kind of where you want to be.
Sure well first of all from a NIM perspective.
You can see that.
Laurence Eric Penn: And at 40 Act, we have tests that are mostly more sort of capital allocation-based, but it also depends on your sort of financing strategy, your subsidiary structure. So. You know, we continue to grow, and I don't want to try to forecast where we're going. Okay, and then I guess just as you think about risk-adjusted returns, kind of comparing agency and CLOs, you know, how do you think about kind of the upside and downside in each to kind of the base case and, you know, kind of how that factors into kind of where you want to be. Sure.
I think Chris mentioned our.
The NIM on our agency portfolio was probably in the low 200, something like that in the credit portfolio, including Cielo has I think 600, yes, so even with a small bit of leverage.
The CLO portfolio generates a greater leverage now.
Dollar for dollar.
Spreads have tightened you can sort of see go back to slide three you can sort of see it differs based on coupon, but if you're looking for and has for example in the <unk> spread and just looking at year end something around the 9100 level, even if you leverage that a fair bit youre still not quite there.
Versus.
Laurence Eric Penn: Well, first of all, from a NIMH perspective, you can see that, I think Chris mentioned, the NIM on our agency portfolio was probably in the low 200s, something like that. On the credit portfolio, including CLOs, I think 600, so even with a small bit of leverage. The CLO portfolio generates greater leverage now, dollar for dollar, you know, spread of Titan, you can sort of see, go back to slide three, you can sort of see it differs based on coupon. But if you look at four and a half, for example, in the ZV spread, I'm just looking at year end, you know, something around the 9100 level, even if you leverage that a fair bit, you're So now the CLO portfolio obviously has kind of tail credit risk in it, you know, especially in a deep recession or something like that. So that's a factor for sure.
Where you are on the CLO portfolio on a leveraged basis. So.
Now the CLO portfolio, obviously has kind of tail credit risk.
A especially in a deep recession or something like that so that's a factor for sure.
It also has much fewer delta hedging costs right I mean, the thing that's been really tough for agency Reits, including us for the last few years as these big moves in the market big gyrations in rates.
Cause.
And for US, we like to stay hedged on interest rates and Thats frankly over long period of time, that's been key to our success, but.
It really cuts into book value overtime, those delta hedging costs, and ultimately that's going to cut into your dividend as well right. So.
So yes so.
Laurence Eric Penn: It also has much fewer Delta hedging costs, right? I mean, the thing that's been really tough for agency REITs, including us, for the last few years is these big moves in the market, big gyrations and raises, cause, you know, and for us, we like to stay hedged on interest rates. And that's, you know, Frankly, over a long period of time, that's been key to our success.
The other thing, though I would say is from a trading perspective, Mike given the liquidity of agency the.
The opportunity for trading profits, including dialing up and down to what extent, we hedge with TBA.
Is probably that opportunity is probably greater than agencies. Because you know if you can make you can make a point just this is a hypothetical if you can make a point on your assets by being timely in terms of when you add when you when you take off how you hedge that leveraging that.
Laurence Eric Penn: But, you know, it really cuts into book value over time, those delta hedging costs, and ultimately, that's going to cut into your dividend as well, right? So, so yeah, so the other thing I would say is, from a trading perspective, giving the liquidity of the agency the opportunity for trading profits, including dialing up and down to what extent we hedge with TVA, is probably that opportunity is probably greater in agencies because, you know, if you can make a point, just this is a hypothetical, if you can make a point on your assets by being timely in terms of when you add, when you take So, you know, there are a lot of pros and cons, right? For each sector, and there are opportunities for trading gains as well in CLOs, but, you know, it's not, I wouldn't say that the assets that we're buying there are. So they're not the same.
Seven or eight times I mean, that's a massive amount of a boost to earnings.
So there's a lot of pros and cons right for each sector and there are opportunities for trading gains as well and close.
But it's not I wouldn't say that the assets that we're buying there are super liquid so it's.
They are different and like.
Like I said we.
I Love the strategy and I would love to continue to see this grow as much as possible and CLO.
I appreciate that thank you.
And our next question from Nick.
Government business JMP. Please go ahead.
Hey, good morning, everybody I hope everyone's doing well.
First question I guess is did I hear correctly that you said our book value was down about 1.9%. Thus far this year was that total economic return total economic return.
Laurence Eric Penn: And like I said, I love the strategy, and I'd love to continue to see this grow as much as possible. I appreciate that. Thank you. And our next question will come from Mikhail Goberman of Citizens J&P. Please go ahead. Hey, good morning, everybody.
Okay cool. Thank you and I think that was through the end of February.
So including the two dividends.
Are you guys targeting a sort of a leverage ratio range going forward given the sort of dip there pretty dramatic dip that the leverage ratio took in the fourth quarter.
Mikhail Goberman: Hope everyone's doing well. The first question, I guess, is did I hear correctly that you said book value was down about 1.9% thus far this year? Was that total economic? Total economics. Okay, cool. Thank you. Yeah, I think that was through the end of February.
Is there an area that you're sort of.
Sort of trying to get to.
It's just a blend of really the appropriate leverage for each asset class right. So for agencies, we've taken it up into the nines before in terms of leverage.
Laurence Eric Penn: Right, so including the two dividends. What, are you guys targeting a sort of a leverage ratio range going forward given the sort of dip, the pretty dramatic dip that the leverage ratio took in the fourth quarter? Is there an area that you're sort of..., sort of trying to get into? It's just a blend of really the appropriate leverage for each asset class, right. So for agencies, you know, we've taken it up into the nines before in terms of leverage. And in, you know, in non-agency loans, and now in, you know, CLOs. We've had almost no leverage, but we'll start to add leverage to the CLO portfolio at some point. And as I... Well, maybe I didn't mention it exactly in answering the first question, but you can comfortably have half a turn a turn of leverage on CLOs.
And in.
In non agencies and now in CLO, we've had almost no leverage but it will start to add leverage the CLO portfolio at some point.
And as I.
Well, maybe I didn't mentioned it exactly in answering the first question, but you know you.
You can.
Comfortably have half a turn to turn of leverage on CLO.
So, it's just going to be a blend of.
Where the capital allocation is.
And.
Of course in agencies, we also depending upon the opportunity that kind of upper limit of something in the nine to one leverage area. Yes, we can always go lower than that.
Laurence Eric Penn: So, you know, it's just going to be a blend of where the capital allocation is. And of course, in agencies, we also, depending on the opportunity, that kind of upper limit of something in the nine to one leverage area, we can always go lower than that. And as I said a few seconds ago, sometimes we do that because we do want to take advantage of it.
And as I said, a few seconds ago, the sometimes we do that because we do want to take advantage of.
The spread volatility to sort of buy low and sell high if you will throughout the year.
Laurence Eric Penn: You know, the spread volatility to sort of buy low and sell high, if you will, throughout the year. Gotcha. Thank you for that. And one more, if I could, this is sort of a longer-term question. What are your guys' thoughts on what kind of interest rate environment it would take to see a meaningful pickup in prepay, sort of back towards, I guess, historical levels of a few years ago? Mark.
Got you. Thank you for that and one more if I could just sort of a longer term question. What are your guys thoughts on what kind of interest rate environment. It would take for it to see a meaningful pickup in prepay speeds sort of back towards I guess historical levels of a few years ago.
Mark.
Mark Ira Tecotzky: Yeah, so. It's sort of interesting; we get the prepayment reports monthly, and we got one last night. And what I would say is that while prepayment speed, Servant Aggregate, has been benign, technological improvements, including AI, are definitely something that is being embraced by some of the big non-bank lenders. And so there are pockets of the market, if you look at sort of, there are Ginnie pools out there now that pay over 80 CPR, some of these real high-coupon ones with a lot of VA. What we were getting at, or what I was getting at in the prepared remarks is that, You know, the vast majority of what's out there is still a couple hundred basis points away from being refinanceable.
Yeah. So it's sort of interesting we got a we get the prepayment reports monthly.
And we got one last night.
And what I would say is that well prepayment speeds.
In aggregate have been benign.
You know technological improvements improved including AI is definitely something that is being embraced by some of the big nonbank lenders and so.
There are pockets of the market. If you look at sort of their ginnie pools out there now that pay over a D. C. P. R somebody's real high coupon ones with a lot of V. A what we were getting at or what I was getting at in the prepared remarks is that.
If you there was you know the <unk>.
Vast majority of what's out there is still couple of hundred basis points away from being re financeable. Yeah. There's a there's you have you know a lot of runway in rates for many of the coupons that we own that.
Mark Ira Tecotzky: You have a lot of runway in REIT for many of the coupons that we own, and so you have to worry about prepayments. And the other thing I would say is that it's not real expensive to buy prepayment protection, so it's not as though prepayments don't exist and mortgage bankers aren't going to be aggressive about trying to solicit refis when they can. They certainly will be. It's just...
So you have to worry about prepayments and the other thing I would say is that.
It's not real expensive to buy prepayment protection. So it's not as though prepayments don't exist and mortgage bankers aren't going to be aggressive about trying to solicit refis when they can they certainly will be it's just.
Mark Ira Tecotzky: The vast majority of the market and the vast majority of what we own still have a lot of, it would still take a significant move in rates to get it refinanceable. But you know, rates are unpredictable, implied volatility is high, so even though the forward curve predicts rates are coming down, there's a lot of dispersion around it. So you know, still for most coupons and some of the higher coupons, we're still choosing to buy pools with prepayment protection. We think it's relatively affordable. And one thing that was a big part of last year was looking for pools.
The vast majority of the market and the vast majority of what we own.
You still have a lot of a lot of it would take still a significant move in rates to get it refinanced and so but you know still look great too unpredictable implied volatility is high so even though the forward curve predicts rates are coming down there's a lot of dispersion around it. So you know it was still for most coupons.
Yeah.
Well you know some of the higher coupons are still choosing to buy pools with prepayment protection, we think it's relatively affordable.
And one thing that was a big part of last year was I'm looking for pools and I think we mentioned it a few calls ago looking for specified pools.
Mark Ira Tecotzky: I think we mentioned it a few calls ago, looking for specified pools that have faster than market projected prepayments. And that certainly helped us when you get into things like 2 12s and 3s and 3 12s; we have big discounts, even finding pools where you're one or two CPR faster makes a huge difference in yield. Prepayment Modeling, Prepayment Speeds, Prepayment Risk, it's still out there; it's just right now, given the current distribution of coupons in the market, the real scary prepayments are only affecting a very small subset of what's out there.
They'd have faster than market projected prepayment speeds and that certainly helped us when you get into things like two and a half in threes and three and as we have big discounts, even finding pools, you one or two CPR faster. It makes a huge difference in yield so prep.
Prepayment modeling prepayment speeds prepayment risk is still out there. It's just right now given the current distribution of coupons.
In the market.
The real scary prepayments are only affecting a very small subset about what's out there and it's a sector that we have.
Mark Ira Tecotzky: And that's the sector that we have avoided. But I'm not surprised to see some of these very fast. Because there's still a lot of capacity within the mortgage banking community, and the technology's gotten better. And so, we look for them to be aggressive whenever they have opportunities to be aggressive.
Avoided, but I'm not surprised to see some of these very fast prepayment speeds because.
There's still a lot of capacity within the mortgage banking community and the technology has gotten better and so we look for them to be aggressive whenever they have opportunities to be aggressive on refis.
Mikhail Goberman: Gotcha. Thank you, Mark. And, as always, best of luck, guys, going forward. Thanks. Thank you. Thank you. And our next question will come from Matthew Erdner with Jones Trading. Please go ahead.
Got you. Thank you Mark and as always best of luck guys going forward. Thanks.
Thank you. Thank you.
And our next question will come from Matthew <unk> with Jones trading. Please go ahead.
Hey, guys. Thanks for taking the question kind of following up on that CPR you guys took off some of the lower coupons.
Matthew Erdner: Yeah, thanks for taking the question. Kind of following up on that CPR, you guys took off some of the lower coupons during the quarter, you know, could you kind of talk through the thoughts there? Yeah, we just saw opportunities during the quarter to reach the customer. The Big Bond didn't cease, right?
During the quarter, you know could you kind of talked to the thoughts there.
Yeah.
Yeah, we just saw opportunities during the quarter.
To rotate up in coupon and you know I think our portfolio went up about 10 basis points or so.
Coupon.
The the relative performance of lower coupons versus current coupons is really impacted by flows into the.
Mark Ira Tecotzky: So if you look at the... Mortgage Index, you look at the distribution of mortgage coupons in something like the Barclays Ag, it's heavily weighted to twos and two-and-a-halfs, and so the relative performance of those coupons is very much impacted by flows into the ag. And there are a couple of real big, you know, $100 billion plus ETFs that track the ag. We saw opportunities where a lot of flows came in to ag-type.
Big Bond didn't see threat. So if you look at the.
Mortgage index, you look at the distributions mortgage coupons in something like the Barclays Agg, it's heavily weighted to twos in two and a half and so the relative performance of those coupons is very much impacted by flows into the egg and Theres a couple of real big $100 billion plus Etfs.
Yeah. So.
We saw opportunities where a lot of flows came in to AG type.
Mark Ira Tecotzky: In portfolios where lower coupons outperformed, we saw an opportunity to go up in coupon. We thought it would add, you know, it certainly adds ADE, but we thought it would also add total return. So we'll continue to be opportunistic about that. That's helpful there.
Portfolios were out were lower coupons outperformed we saw an opportunity to go up in coupon and we thought it would add you know it certainly adds a D. E. We thought it was also had total return. So we will continue to be opportunistic about that.
That's helpful. There and then you know.
Matthew Erdner: And then, you know, allocating capital to CLOs, you know, continuing that strategy. Are there any other places where you feel like you guys could opportunistically deploy additional capital for total return? That's where we're focusing on now. Okay, thank you. And our next question will come from Eric Hagen with BTIG. Please go ahead. Hey, thanks. Good morning.
Allocated capital the Clo's continuing.
Continuing that strategy are there any other places where you feel like you guys could opportunistically deploy.
<unk> capital for total return.
That's why we're focusing on now now.
Okay. Thank you.
And our next question will come from Eric Hagen with BTG.
Please go ahead, hey, thanks.
Hey, Thanks, Good morning, Hope all is well.
Eric J. Hagen: Hope all is well. Here is one more on just kind of the market dynamics. I mean, what do you feel would support more dollar roll specialness in the market? Do you feel like it's reasonable to expect that that could come back if there are any changes to Fed policy? You know, I would say that for some of these higher coupons, I think the dollar rolls have predictably gotten weaker because you've sort of built up now an array of kind of, you know, faster paying pools. If you look at things like Fanny Sixnath, now that they've been in production for a few months, you have some pools that have come up the seasoning ramp.
One more on just kind of the market dynamics I mean, what do you feel that could support more dollar roll specialness in the market do you feel like there it's reasonable to expect that that could come back if there's any changes to fed policy.
You know I would say that for some of these higher coupons I think the dollar rolls.
<unk> gotten weaker because you've sort of built up now an array of kind of you know fast paying pools. If you look at things like Fannie six and a half now that they've been production for a few months you have some pools that have call. It the seasoning ramp.
Mark Ira Tecotzky: So, I don't look for specialness to be there. In the lower coupons, you can get specialness if you get... A lot of flows, like I was talking about earlier, into these ag indices because, you know, when money comes into an ag index, and whoever's managing it wants to buy a bunch of Fannie 2s and 2.5s to get there to minimize tracking error. You really need to get that from other investors, right? They will initially buy it from the primary dealers, but the primary dealers are then going to want to buy it from other portfolios. And a lot of those bonds are locked up in the Fed and in banks.
So I don't look for Specialness to be there in the lower coupons you can get Specialness if you get.
A lot of flows that I was talking before about into these egg indices because.
You know when when when money comes into an egg index and whoever's managing it wants to buy a bunch of Fannie twos in two and a half to get there to minimize tracking error.
You really need to get that from other investors right. Initially will buy from the primary dealers. The primary dealers and then going to want to buy back from other portfolios and a lot of those bonds are locked up and the fed and locked up in banks. There's obviously you know news on truest, a week or so ago.
Mark Ira Tecotzky: There was obviously, you know, news on Truist a week or so ago, and when that news came out, it caused lower coupons to underperform. So I think in the lower coupon stuff, you can see some more volatility in the rolls. But still, we tend to find that if you're thoughtful about fast-paying pools, you can find pools that pick up carry versus the roll. So, I don't.
And when that news came out it caused lower coupons to underperform. So I think in the lower coupon stuff you can see some more volatility in the roles, but still there we tend to find if you're thoughtful about fast paying pools, you can find pools that pick up carry versus the role so.
I don't I.
Mark Ira Tecotzky: I don't see a lot of specialness going forward for the higher end production coupons, where you're starting to see a float that's faster. And I think for the lower coupon stuff, you can see it, but it's kind of month to month. Like there was a month ago, I think the Ginny 2.3 roll was special.
I don't see.
A lot of Specialness going forward for the for the higher end production coupons, where you're starting to see a float that's faster and I think for the lower coupon stuff you can see it but it's kind of month to month like there was you know a month ago. I think did you need two three did you need two three role with special So you get sort of these one off things but.
Mark Ira Tecotzky: So you get sort of these one-off things, but where most of the production is centered, I don't think you're going to have a lot of specialness, which is really a big difference from the 2021 period, when production was Fanny 2s and 2-and-a-halfs, and they were routinely special, and everyone spoke about that, and they were special because the Fed and banks were buying so much, and they weren't We don't have that dynamic right now, so the way the rules work out, favors, you know, in aggregate, have more specified pools and less TBA, and I think broadly that's sort of how the industry has moved, you know, the REIT industry. Yep. Hey, that's a good perspective.
Where most of the production is centered you know I don't think you're going to have a lot of specialness, which is really a big difference from the 2021 period, where production with Fannie twos in two and a half and they are routinely special and everyone spoke about that and they were special because the fed and banks are buying so much and they werent rollers that.
We don't have that dynamic right now so the way the rules work out I think it favors.
In aggregate have been more specified pools and less T. B, a and I think broadly that's sort of how the industry has moved either the REIT industry.
Yep, Hey, that's good perspective.
Eric J. Hagen: As far as running the portfolio, I mean, what do you guys feel is the minimum level of liquidity? You feel comfortable with having it at these spread levels? Like how much do you feel comfortable with ahead of the Fed cut? versus, you know, a cut actually taking place.
As far as running the portfolio I mean, what do you guys feel that because of the minimum level of liquidity you would feel comfortable with having it at these spread levels like how much do you feel comfortable with ahead of the fed cut.
Versus you know like a cut actually taking place do you feel like that would be a catalyst to carry more leverage or is it.
Mark Ira Tecotzky: Do you feel like that would be a catalyst to carry more leverage, or is it potentially conditional on other factors? You know, we mentioned in the prepared remarks that, You know, if you look at work on Bloomberg or whatever else, people are predicting cuts this year, I think. When they, you know, if and when they actually happen, I do think that will be a catalyst for some incremental buying. So I do think that will be supportive.
Essentially conditional on other factors.
We mentioned in the prepared remarks that.
You know if you look at where palm Bloomberg or whatever else people are predicting cuts this year.
I think.
When they.
If and when they actually happened I do think that will be a catalyst.
For some incremental buying so I do think that will be supportive in terms of how we manage our cash.
Mark Ira Tecotzky: In terms of how we manage our cash, We don't, that is sort of sacrosanct in that we're going to manage our cash according to market stresses and according to, you know, the repo roll calendar, and we won't change that. The guardrails we have around minimum levels of cash, as a function of, you know, what the Fed is going to do that we just That's how we run, you know, that's how we run earn, that's how we run EFC, how we run private funds that There's a certain amount of cash we're going to keep on hand. And the way we determine that is, you know, it's sort of a, you know, it's a, it looks at the portfolio and looks at the leverage and looks at where things can go in a shock.
We don't have that is sort of sacrosanct and that we're going to manage our cash.
According to market stresses and according to.
So the repo role calendar and we won't change sort of the.
Yeah.
The guardrails, we have around minimum levels of cash.
As a function of you know what the fed is going to do that we just.
That's how we run you know that's how we wouldn't earn deterrent E F C cardio and private funds that.
There's a certain amount of cash we're going to keep on hand.
And the way we determined that as you know it's sort of a yo.
It looks at the portfolio and look at the leverage and looks at where things can go into shock.
Mark Ira Tecotzky: And then with the agency stuff, you have to look at it. There's a calendar to it, so you get new factors. When the prepayments come out, we've got new factors. Yes, so repo lenders did a margin call on you versus a lower balance, but you don't actually get that cash on the 25th. So there's a calendar component to it, but We have room to add leverage, we mentioned that in a couple of remarks, but it's not because we're going to change the way we manage the cash. I'd say the way we manage the cash is something that we've been doing for a long time, and I think it's served us very well, certainly served us extremely well in stresses like during COVID. Away from that, EARN has plenty of liquidity to, you know, it's been putting in more capital than the CLOs we've spoken about, but it still has more room to leverage just the general pool strategy as well.
And then with the agency stuff you have to look at Theres a calendar to it. So you get new factors wherein the prepayments come out we got new factors yes.
Repo lenders did margin call U verse, the lower balance, but you don't actually get that cash the 25th so there's a calendar component to it but.
We have room to add leverage mentioned it in the prepared remarks, but it's not because we're going to change the way.
Way, we manage the cash, but I'd say sort of the way you manage the cash is something that we've been doing for a long time I think that served us very well certainly served us extremely well in stresses like during COVID-19, but.
Away from that earn has plenty of liquidity to you know its been putting.
More cap them to cielo as we've spoken about but it still has more room to leverage just the general pool strategy as well.
Mark Ira Tecotzky: Yeah. Hey, thank you guys so much. Thank you. Thank you. Thank you. Thank you, Eric. And that was our final question for today. Thank you for participating in the Ellington Residential Mortgage REIT Fourth Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day. Thanks for watching! The Ultimate Parody Site! Please read the reviews and re-subscribe! BF-WATCH TV 2021, The Ultimate Parody Site!
Yeah, Hi, Thank you guys so much.
Yeah.
Thank you Eric.
Thanks.
And that was our final question for today. Thank you for participating in the Ellington residential mortgage REIT fourth quarter 2023 earnings Conference call. You may disconnect. Your line at this time and have a wonderful day.
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