Ellington Credit Company (EARN) Earnings Call Transcript & Summary

Good morning, and welcome to Ellington Residential Mortgage REIT's 2020 Annual Shareholders Meeting. At this time, I would like to turn the conference over to Tom Robards, Chairman of the Board of Trustees at EARN. Please go ahead.

Thank you, and good morning, everyone. On behalf of the entire Board, I would like to thank you for attending our Annual Meeting of Shareholders. Last year, we had our first Virtual Annual Meeting. Given the health and safety considerations due to COVID, we are pleased to conduct our annual meeting virtually again this year. By hosting the meeting virtually, all of our shareholders are able to attend and vote without incurring cost to travel to an in-person meeting. At today's meeting, following the introduction of the members of our Board of Trustees, we will conduct the formal portion of our annual meeting. Our President and Chief Executive Officer, Laurence Penn, will then make a few remarks. At that point, there will be an opportunity to ask questions -- for a question-and-answer session. If you submit a question, please identify yourself when you do so. I would now like to introduce the other members of our Board of Trustees, all of whom are virtually attending today's meeting. In addition to myself, our trustees are Laurence Penn; Michael Vranos; Ronald Simon; Barry Allardice; David Miller and Menes Chee. In addition, [ David Dursley ] from PricewaterhouseCoopers, our registered independent public accounting firm, is on the line today. [ Mr. Dursley ] will be available to answer any appropriate questions you may have after the formal meeting. With that, I will now call our 2020 Annual Shareholders Meeting to order. We will now conduct the formal business as set forth in the notice of the meeting and proxy statement, which was mailed to all shareholders of record as of March 20, 2020 and the agenda shown on the website. EARN shareholders as of the record date were sent notice of the annual meeting on or about March 30, 2020, along with a proxy statement and requests for a proxy by the Board of Trustees. The notice of annual meeting also stated the date, time and meeting purpose, along with the web address for participating in today's virtual meeting. I am pleased to announce that they are presented by proxy, a sufficient number of the voting shares of the company to constitute a quorum. Accordingly, this meeting is duly called to order. A copy of the notice, proxy statement and the form of proxies as well as an affidavit of distribution of Broadridge Financial Solutions shall be made a part of the record of this meeting. At this time, any shareholders that are logged in and who have not already submitted a proxy and wish to vote their shares may do so by clicking on the Vote Here button on your screen. While we allow time for shareholders who haven't already done so to complete their voting, I'd like to remind you that some of the statements made at this meeting may be considered forward-looking. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the cautionary statements and other information contained in the company's filings with the SEC, including our annual report on Form 10-K for fiscal 2019, which identifies certain factors that could cause actual results to differ materially from those projected in any forward-looking statements made during the meeting. Copies of the 10-K and other filings are available through the company or online. At this point, the polls are closed, and I will now report the preliminary results of the voting. There are 3 proposals to be considered during this meeting, all of which were described in detail in the proxy statement furnished to the shareholders. The company has not received notice from any of its shareholders of any other matter to be considered at today's meeting. The first item of business is the election of trustees. The Board has selected myself, Tom Robards, Laurence Penn, Michael Vranos, Barry Allardice, David Miller, Menes Chee and Ron Simon as its nominees for election as trustees. I am pleased to report that each of the trustees standing for election at today's annual meeting have received the affirmative vote of plurality of the votes cast, and are hereby elected. Second item of business relates to the nonbinding advisory vote on the company's executive compensation program. A majority of the votes cast at this meeting have voted in favor of this proposal. Consequently, the proposal has received the advisory approval of shareholders. The third proposal relates to the ratification of the appointment of PricewaterhouseCoopers to serve as the company's independent registered public accounting firm for the company's 2020 fiscal year. A majority of the votes cast at this meeting have voted in favor of this proposal. Consequently, the proposal has been approved. The final tabulation of these votes will appear in our required 8-K Form to be filed with the SEC. This concludes the formal portion of our 2020 Annual Shareholders Meeting. At this time, Larry Penn, Chief Executive Officer of the company, will make a short presentation regarding the company and then we will have a short question-and-answer period for our investors. Again, please identify yourself when submitting questions. Larry?

Thank you, Tom. Welcome again to Ellington Residential's Seventh Annual Shareholders Meeting. As always, we appreciate the support of our shareholders, and we hope that everyone with us in the meeting today is healthy and safe during this difficult time. Given the extraordinary circumstances of the past couple of months, I will only briefly touch on the highlights of 2019 for EARN before discussing the new market environment we're currently faced with. I'm extremely pleased with Ellington Residential's performance in 2019. Thanks to our disciplined interest rate hedging and our active portfolio management, we successfully navigated a surge in prepayment rates and several periods of volatility during the year and delivered an economic return for 2019 of 14.6%. The total return on our common stock for 2019 was nearly 18%. We did this while keeping our interest rate duration very low throughout the entire year. So we believe that this was not only a high return but an extremely high-quality return. Of course, in recent months, the spread of COVID-19 and associated responses to contain the pandemic have led to extreme volatility and severe dislocations in virtually all financial markets. For EARN, the same highly liquid portfolio and strong balance sheet that allowed us to create shareholder value in 2019 served to protect that shareholder value in 2020. We witnessed many other market participants becoming force sellers at distressed prices, while we were able to avoid any forced asset sales entirely. Instead, with the asset markets and financing markets looking more and more fragile as March progressed, we proactively reduced the size of our agency portfolio in an orderly and measured fashion, which bolstered our liquidity and lowered our leverage. We did end up with a significant book value decline in March. But as we disclosed last night, in April, we were able to recover a majority of that book value loss. I am extremely pleased that we emerged from the volatility of these past 2 months with our book value largely intact. We just announced our estimated book value per share of $12.44 as of April 30, which is actually slightly higher than it was on September 30, 2019. Given that leverage mortgage portfolios were in the crosshairs of the distress in the financial markets this past quarter, it is a testament to our portfolio management, risk management and liquidity management capabilities that we're able to limit our losses and preserve book value per share to the extent we did. Our risk and liquidity management practices did what they're designed to do. They protected book value and they protected our shareholders, and we were able to end the quarter with a lot of cash on hand that should enable us to play offense going forward. The current investment opportunities look exceptional given the continued dislocations in most sectors of the residential mortgage market. Net interest margins in many RMBS sectors are the widest that we've seen in years. And I believe that we are in an excellent position to take advantage of these opportunities. Along those lines, we are currently considering increasing our capital allocation to our non-agency RMBS portfolio. All that said, while the global government and central bank responses have provided a boost to liquidity and meaningfully improved market performance in the short term, the path forward for the economy generally and the residential mortgage market, in particular, remains unclear. In light of this uncertainty, our disciplined approach to liquidity management, interest rate hedging and asset selection will continue to be critical. We will continue to strive to balance defense, that is building in a margin of safety to absorb additional market shocks, with offense, that is the ability to capture some incredible relative value opportunities. These principles will continue to guide us moving forward. Now I'd like to take a moment to express my sincere gratitude to the distinguished independent members of our Board of Trustees with whom I serve. Thank you to Tom Robards, Barry Allardice, Ron Simon, David Miller and Menes Chee and Michael Vranos. As we enter our seventh year as a public company, our shareholders have benefited greatly from the thoughtful support and guidance that you provide the company. And to all of our shareholders, thank you, again, for your continued support and confidence, and we look forward to a successful 2020. For all of those listening on the call today and to all of those around the world who are suffering through this pandemic, we hope that you and your family stay healthy and safe. And with that, we will open the floor to questions. And again, please identify yourself with your question. Okay. Well, seeing no questions, this concludes our question-and-answer session. Tom?

Okay. I would like to thank all of you for attending this annual meeting virtually. I would like to express my appreciation to all of the shareholders who submitted their proxies, and I'd like to express my sincere best wishes to all of our stakeholders affected by this pandemic. I'd also like to express the Board's sincere appreciation to our manager for their clear-eyed and consistent adherence to their long-standing principles of risk management, liquidity management and resilience. We wouldn't be here without you. And I think that it's an honest and heartfelt appreciation. With that, I would say, operator, please end the meeting.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.