Ellington Residential Mortgage REIT (NYSE:EARN) Q3 2023 Earnings Call Transcript

They’re sort of like the 2 things are sort of like parallel universes, the risks that drive them, the leverage acquired, the interest rate risk they have, so I think it’s a good complement.

Larry Penn: And I just wanted to add, Chris, I think, I didn’t answer your question about expected returns in that sector. So, one thing that I think with — in Agency MBS, the way we typically manage portfolio and many others as well is that you lever up net interest margin and we hedge interest rate risk. And then depending upon the level of volatility, you give some of that levered NIM back in the form of, you call it, delta hedging costs or other types of volatility related frictions, right? So, one nice thing about CLOs is that the durations don’t move around a lot. So the returns that we’re seeing, which are with just a modest bit of leverage in the high-teens, if not higher, I think. Now, there could be some erosion there, but we really think that those — that’s what we’re hoping for in the sector.

And that can make a very significant difference obviously as that allocation increases in that sector. So — and I think we mentioned that the bit of money that we put to work already. We are projecting that it’s going to achieve that, those types of returns as well. Currently, projecting over 20% on a lot of the investments we’ve made so far. And it’s small, it’s nimble. It can buy — accumulate smaller pieces. So I think I’m very optimistic.

Crispin Love : And just one last question for me. Just looking at the end of period and average share count in the quarter, you issued some shares here. So can you speak to the strategy there just with the stock trading at a discount to book, and just kind of…

Larry Penn: Right. We’re trying to maintain $100 million of equity. And this was a really tough quarter, and we gave some of that back. So think of that as kind of replacing the equity that we lost and if, I think as long as we can maintain — have some quarters going forward, including this quarter, they aren’t as brutal as the last quarter, I don’t think you’ll necessarily see as much of that. Keep in mind also though that with our expense ratios, which are not — they’re certainly not high for the sector, but — and given our size, but given those expense ratios, it does make a lot of sense to raise capital through ATM modestly with some degree of dilution. Because when you look at it in terms of the accretive effect it has on earnings per share through reduction of your G&A expense ratios, it’s a relatively short payback period.

Crispin Love : Thanks, Larry and Mark, I appreciate you taking my questions.

Operator: That was our final question for today. We thank you for participating in the Ellington Residential Mortgage REIT Third Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.