Ellington Credit Company (EARN) Earnings Call Transcript & Summary

Good morning, and welcome to Ellington Residential Mortgage REIT's 2021 Annual Shareholders' Meeting. At this time, I would like to turn the conference over to Barry Allardice, Chairman of the Board of Trustees at EARN. Please go ahead.

Thank you. And good morning, everybody. On behalf of the entire Board, I would like to thank you for virtually attending our annual meeting of shareholders. By hosting the meeting virtually, all of our shareholders, including those that reside outside of the local area and those unable to attend for health and safety reasons, are able to attend and vote with the same ease as listening to a quarterly earnings call rather than incurring the costs 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. I would now like to introduce the other members of our Board of Trustees who are virtually attending today's meeting. In addition to myself, our trustees attending today's meeting are: Laurence Penn, Michael Vranos, Ronald Simon, Mary McBride, David Miller and Melvin Ike. In addition, David Gerstley from PricewaterhouseCoopers, LLP, our registered independent public accounting firm, is on the line today. Mr. Gerstley will be available to answer any appropriate questions you may have after the formal meeting. With that, I will now call our 2021 Annual Shareholders' Meeting to order. We will now conduct the formal business as set forth in the notice of meeting and proxy statement, which was mailed to all shareholders of record as of March 22, 2021, and the agenda shown on the website. EARN shareholders as of the record date were sent notice of the annual meeting on or about April 1, 2021, 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 there are present by proxy a sufficient number of 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 now 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 would 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 2020, which identifies certain factors that could cause actual results to differ materially from those projected in any forward-looking statements made during this meeting. Copies of the 10-K and other filings are available through the company or online. [Voting]

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 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, Robert Allardice, Laurence Penn, Michael Vranos, Mary McBride, David Miller, Melvin Ike and Ron Simon as 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 a plurality of the votes cast and are hereby elected. The 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. Finally, 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 2021 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 Form 10-K to be filed with the Securities and Exchange Commission. This concludes the formal portion of our 2021 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.

Thanks, Barry. And hello, fellow shareholders. As always, we appreciate your support at this, Ellington Residential's Eighth Annual Shareholders meeting. I am extremely pleased with Ellington Residential's performance in 2020 in what was a very challenging year for so many. Ellington Residential generated an economic return of 13%, and the stock market appropriately rewarded us for that performance, as EARN stock generated a total return for shareholders of 36% for the full year 2020. Importantly, our net income and core earnings significantly exceeded our dividends, allowing us to maintain our distribution rate throughout the year, uninterrupted and unchanged. I think it is also important to recognize that our outstanding 2020 followed an outstanding 2019 with a 15% economic return in that year. And this has led to a 2-year total return for EARN shareholders of over 60%, even though the opportunities and challenges we faced were vastly different in each of those 2 years. Looking back on the past year. 2020 began with a strong economy and healthy financial markets. Then as everyone remembers, the escalation in March of the COVID-19 pandemic created market-wide panic of the likes not seen since the 2007, 2008 financial crisis. Fortunately, our disciplined risk and liquidity management practices positioned us, as usual, with high levels of liquidity and a strong balance sheet. This allowed us to weather severe liquidity and market stresses on the worst days of the crisis and most importantly, it allowed us to avoid any forced asset sales. Meanwhile, on days of relative calm last March and early April, we acted proactively to lighten up on the more commoditized segments of our Agency portfolio, strategically bolstering liquidity and lowering leverage, so that we would be well positioned to capitalize on the extraordinary opportunities that we anticipated lay ahead. After the markets have sufficiently stabilized, we shifted opportunistically to offense, buying not only deep value Agency RMBS that have been battered so badly, but also non-Agency RMBS, which were trading at extremely distressed prices after having just been discouraged by overleveraged investors. As the months passed following the March-April lows, the Federal Reserve maintained its accommodative monetary policy by continuing its heavy buying of treasuries and Agency RMBS and maintaining short-term interest rates near 0. Volatility dropped near all-time lows, and Agency and non-Agency yield spreads tightened. Even though mortgage prepayments remained elevated, our Agency portfolio performed extremely well, thanks to our focus on prepayment-protected specified pools. Also, our non-Agency portfolio, most of which we acquired during the early part of the COVID crisis, provided significant gains to our book value as the year progressed as we saw non-Agency yield spreads compress almost to pre-COVID levels. Finally, even as interest rates began to rise towards the end of the year, our performance continued to benefit from our disciplined interest rate hedging. In summary, 2020 was a year like no other. But we stay true to our core principles. And as a result, EARN actually thrived. Through it all, we maintained our dividend rate, and we ended the year with a book value of $13.48 per share, up 4.4% from the start of the year. Thank you to the entire Ellington team for your hard work and dedication in 2020 in what was truly a most challenging work environment. Turning to this year. We began 2021 on a strong footing, primed to face new and different opportunities and challenges. And so far, we have seen a decidedly different market environment. The yield on the 10-year U.S. treasury began to rise in early January and continued to rise throughout the first quarter, and it has recently been hovering between 1.5% and 1.75%. At the same time, short-term interest rates have remained anchored near 0%, thanks to the continued accommodative policies of the Federal Reserve. As a result, the 2-year, 10-year yield curve steepened to its widest level since 2015, and interest rate volatility returned to the fixed income markets after several months of relative stability. And while the first few months of 2021 were not the most favorable environment for Agency RMBS, Ellington Residential again provided stability to shareholders, as we still generated a positive economic return for the quarter and as our core earnings continue to cover our dividend. Further, we have not sat still nor been complacent as the shifting environment and higher volatility gave us another opportunity to pivot. We sold non-Agency assets at significant gains in the first quarter, and we shifted to offense in our Agency portfolio as we added some very attractively priced Agency pools during the quarter. The Agency mortgage market is a deep and liquid market with ample opportunities, especially during times of volatility, providing Ellington Residential with a consistent ability to generate strong returns. And importantly, these opportunities are not just present in the long side of the market, but on the short side of the market as well. In fact, our willingness to take substantial short positions in TBA mortgages was and continues to be a major differentiator for EARN in the mortgage REIT space. Looking forward, interest rates have been on the rise, and the prepayment wave appears to be passed its peak. In light of the continued strength of the economic recovery, surge in commodity prices and rising asset values, the Federal Reserve is giving more serious consideration to potential inflation risks down the road. However, our record over the last 8 years has shown that our principles of disciplined asset selection, strong liquidity and dynamic interest rate hedging can help us navigate through virtually any environment. And we expect to continue to produce steady income for shareholders while also protecting against the downside. Finally, I'd like to recap some recent changes to our Board of Trustees. Earlier this year, we announced that Barry Allardice was appointed as our new Chairman of the Board of Trustees replacing Tom Robards. Barry has been an invaluable contributor to EARN since its IPO and, of course, has deep knowledge of the company as long time Chair of the Audit Committee. And I know I speak for the entire Board when I express my deepest gratitude to Tom Robards for his many years of invaluable service and dedication as the Chairman of the Board of EARN. We also recently announced the appointment of 2 new independent trustees, namely Mel Ike Blackstone and Mary McBride. Both Mel and Mary bring deep financial, investment and market experience to the Board. And we are excited to add their perspectives and contributions as we move forward. And I would like to thank Blackstone's Menes Chee, who stepped down from the Board in connection with Mel's appointment for his guidance and support as a trustee of EARN since its inception. Menes was the driving force behind the very creation of EARN and behind its vision. As I close, I'd like to take this opportunity to express my sincere gratitude to all of the distinguished trustees, who will help to guide the company as we move forward and with whom I proudly serve. Thank you to Barry Allardice, Ron Simon, David Miller, Mary McBride, Mel Ike and Michael Vranos. As we enter our ninth year as a public company, our shareholders have benefited and will benefit greatly from the thoughtful support and guidance that you all provide the company.

With that is the next order of business to turn to the question of -- questions from any of our shareholders' attention, virtually, operator?

There are currently no questions in the queue.

Okay. As there are no questions in the queue, let me make a final concluding remark. Number one, Larry, thank you for your report, and thank you for your kind remarks. Number two, I would like to thank all of the shareholders who are attending this virtually. And I would also like to express my appreciation to all of the shareholders who submitted proxies but were not able to be present. Finally, the trustees and officers of EARN appreciate the loyalty and confidence of all our shareholders. Operator, if there's no other business, could you please end the meeting?