Ellington Credit Company - Q1 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2023 first quarter financial results conference call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. 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, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Alaael-Deen Shilleh (Associate General Counsel and Secretary)

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 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. We strongly encourage you to review all 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 day 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, our Chief Executive Officer, Mark Tecotzky, our Co-chief Investment Officer, and Chris Smernoff, our Chief Financial Officer. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, ellingtoncredit.com. Our comments this morning will track to the presentation. Please note that any references to figures in the presentation are qualified in their entirety by notes at the back of the presentation. With that, I will now turn the call over to Larry.

Laurence Penn (CEO and President)

Thanks, Alaael-Deen. Good morning, everyone. We appreciate your time and interest in Ellington Residential. Last year was just about the worst year on record for agency RMBS. The year actually ended on a constructive note, and that positive momentum continued into January. In anticipation of a slower pace of interest rate hikes by the Federal Reserve, interest rates and interest rate volatility continued to decline precipitously in January, and yield spreads tightened further. Capital flowed into agency MBS while new mortgage supply remained low. For the month, agency MBS significantly outperformed Treasuries. Ellington Residential itself has had a positive economic return of over 6% in January. Markets reversed course in mid-February, however, triggered by renewed concerns over inflation and what the Fed's response would be. Volatility and spreads increased while interest rates, especially short-term interest rates, surged.

By early March, the two-year Treasury yield rose 97 basis points in less than 1 month and surpassed 5% for the first time since 2007. Turmoil in the regional banking system roiled markets, causing volatility to spike and pressuring spreads further. Treasury yields plummeted, many fixed income sectors sharply underperformed in March, including Agency MBS. Overall, the negative MBS performance in February and March exceeded the positive returns in January, and for the full first quarter, Agency MBS ended up with a negative 50 basis point return versus Treasuries. Despite these challenges, however, Ellington Residential generated positive net income of $0.17 per share and Adjusted Distributable Earnings of $0.21 per share for the quarter. The first key to our outperformance was our portfolio construction. Over the past several quarters, we have been opportunistically but steadily rotating out of our lowest coupon MBS.

We entered the year with only about 15% of our long agency portfolio in coupons under 3%. We also carried a meaningful TBA net short position in those coupons. It was sub 3% coupon MBS that were hardest hit in March because they comprised a significant portion of the portfolios of those troubled regional banks. The ever-increasing prospects of asset sales hitting the market weighed heavily on those low coupons. We were rewarded for both paring down our long exposure and maintaining a net short position in this low coupon cohort. We also limited our investments in the highest coupon MBS, namely coupons above 5.5%. This had two benefits. First, it shielded us from some of the technical pressures on new production, especially with the Fed no longer a buyer.

Second, it had the benefit of reducing our negative convexity and thus reducing our delta hedging costs, especially during that extreme bond market volatility in the last half of the quarter. In mid-March, implied short-term volatility on Treasuries was the highest seen since the global financial crisis. The second benefit was actually quite significant during the quarter. As you might infer, we found the best relative value during the quarter in the intermediate coupons of the stack. In specified pools, we continue to focus on lower payoff stories where we saw better risk-reward trade-offs.

During the first quarter, we made positive carry on our long specified pools versus short TBA, and especially versus SOFR hedges, with the floating rate we receive much higher than the fixed rate that we pay. As Mark will discuss, with all the volatility during the quarter, we took advantage of tactical trading opportunities to add excess returns, and our Agency portfolio turnover rate was 23%. Our larger non-Agency and IO portfolios also contributed nicely to our first quarter results, driven by strong Net Interest Income in portfolios. We expect to continue to add to these portfolios in the coming months. As we discussed on last quarter's earnings call, our pivot away from low coupon pools also enabled us to enter the first quarter with reduced leverage and excess liquidity.

Given the prospect of continued bank portfolio asset sales and continued volatility, we have been judicious about adding back leverage. We closed the first quarter with only slightly larger Agency and non-Agency MBS portfolios. Our leverage ratios ticked up just slightly quarter-over-quarter. We are still far from the high end of where we're comfortable adding leverage. We're also far from the high end of where you could see our net mortgage assets to equity ratio going. Spreads are wide. There's the potential for them to go wider. We have room to lean into wider spreads. Finally, we continue to methodically turn over our portfolio to improve our Net Interest Margin and Adjusted Distributable Earnings. As you can tell, we still have plenty of dry powder to take advantage of investment opportunities as the year unfolds.

I'll now pass it over to Chris to review our financial results for the quarter in more detail. Chris?

Chris Smernoff (CFO)

Thank you, Larry. Good morning, everyone. Please turn to slide five for a summary of Ellington Residential's first quarter financial results. For the quarter ended March 31st, we are reporting net income of $0.17 per share and Adjusted Distributable Earnings of $0.21 per share. These results compare to net income of $0.88 per share and ADE of $0.25 per share in the fourth quarter. ADE excludes the Catch-up Premium Amortization Adjustment, which was -$299,000 in the first quarter as compared to +$658,000 in the prior quarter. We had a net gain on our Agency RMBS portfolio for the quarter as net realized and unrealized gains on our specified pools exceeded net losses on our interest rate hedges and slightly negative net interest income.

The quarter-over-quarter decline in our net interest income was a result of sharply higher financing costs, which were driven by increasing short-term interest rates as certain older and low rate repos matured and were replaced with repos reflective of the current higher rate environment. Our asset yields also increased during the quarter, but by a lesser extent. As a result, our net interest margin decreased to 1.16% from 1.37%. Additionally, we continue to benefit from positive carry on our interest rate swap hedges, where we receive a higher floating rate and pay a lower fixed rate during the quarter. Our lower NIM drove the sequential decrease in ADE. Meanwhile, payoffs on our specified pools decreased to 1.09% as of March 31st from 1.26% at year-end.

First, because the average payoffs on our existing specified pools decreased quarter-over-quarter, and second, because new purchases during the quarter consisted of pools with lower payoffs. Please turn now to our balance sheet on slide 6. Book value was $8.31 per share as of March 31st, as compared to $8.40 per share at year-end. Including $0.24 per share of dividends in the quarter, our economic return was a positive 1.8%. We ended the quarter with cash and cash equivalents of $36.7 million, which increased quarter-over-quarter. Next, please turn to slide seven, which shows a summary of our portfolio holdings. Our Agency MBS holdings increased by 3% to $891 million as of March 31st as compared to year-end, as net purchases and net gains exceeded principal paydowns.

As Larry mentioned, our Agency RMBS portfolio turnover was 23% for the quarter, which was an increase over the prior quarter. Over the same period, our holdings of interest-only securities and non-Agency RMBS increased by $4.6 million in total. Our debt-to-equity ratio adjusted for unsettled purchases and sales decreased slightly to 7.5x as of March 31st from 7.6x at year-end. The decrease was primarily due to a larger shareholders' equity quarter-over-quarter, partially offset by an increase in borrowings on our larger Agency RMBS portfolio. Our net short TBA position declined during the quarter, which, combined with our larger MBS portfolio, more than offset the impact of the increase in shareholders' equity.

As a result, our net mortgage assets to equity ratio increased to 6.9 times from 6.6 times at year-end. Finally, on slide eight, you can see details of our interest rate hedging portfolio. During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We again ended the quarter with a net short TBA position. I will now turn the presentation over to Mark.

Mark Tecotzky (Vice Chairman)

Thanks, Chris. I'm pleased with earned results for the quarter. We had a total return of 1.8%. That was in the face of some pretty extraordinary interest rate volatility and a banking crisis resulting in a sizable supply shock for Agency MBS. I'm very excited about the opportunity set going forward. Today, Agency MBS yield spreads are historically very wide relative to hedging instruments, prepayment risk is limited, and we see little or no competition for assets from what have historically been the two largest pools of low-cost capital for the Agency MBS.

The Fed and U.S. banks. Meanwhile, organic supply from new origination is down hundreds of billions of dollars from years past. The FDIC has seized a significant amount of Agency MBS recently from failed regional banks, and they've been in the process of divesting those assets. We've seen a significant supply of Agency MBS hit the market in recent weeks. Over $7 billion current phase have already been sold. At that pace, and assuming no more asset seizures occur, we should see the sales finished by October. So far, those lists have been trading at or above primary dealer talk. While MBS spreads are wide, they have not widened further since these sales have started. Our conclusion is that widespread levels have attracted new capital to the sector, and so there may be significant support at these wider levels. Don't get me wrong, Agency spreads should stay high.

There's not going to be any bank buying in the short term, only bank selling. The Fed isn't buying. They're just letting their portfolio run off. We think these wider spread levels may be with us for a while. The Fed's balance sheet has been contracting, and banks have bought almost no security since the run-up in rates last year. We expect looming future regulation and balance sheet pressures will mean that banks with under $250 billion in assets won't buy much this year either. Putting it all together, we think it's a great time to be an Agency mortgage investor. None of the other regional banks recently in the news have sizable Agency MBS holdings, so it may be that the worst is behind us.

The recent capital flows into both diversified fixed income bond funds and ETFs and into mortgage-focused funds have been a significant stabilizing force for spreads. Meanwhile, repo financing continues to be plentiful and stable. Yield spreads are so wide that you don't need spread tightening to drive returns. Just the capture of Net Interest Margin alone can do the job. With the banks and the Fed shrinking, Agency MBS market requires much higher expected returns on capital. In today's prepayment environment, NIM capture is much more certain. This is a very different dynamic from 2022, because now the Fed has signaled that they are nearing the end of their hiking cycle, and the yield curve has started to reverse a lot of the inversion we had seen. That guidance has led to a much more positive investor view of fixed income in recent weeks.

Going back to our portfolio activity for the quarter, we leaned into the wider yield spreads by growing our portfolio slightly during the quarter. We think the wide spreads today adequately compensate us for the supply shock from the FDIC sales. We added 30-year MBS, shrunk 15-year, and went up in coupon a little bit. We have generally favored intermediate coupons, specifically 3-4.5, which we are calling the Goldilocks coupons. They're high enough in coupons so that banks and the FDIC don't own much because they weren't being produced in significant size in 2020 and 2021, but they are low enough in coupon that they don't require a lot of delta hedging, and there is limited current production. In addition, Ginnie Mae's have gotten cheaper relative to UMBS, so we have been adding exposure there as well.

We believe future banking regulations will favor Ginnies over conventionals because of their lower capital charge. This volatility has created some good relative value opportunities to add incremental returns to the portfolio as well. For example, on January 5th, we bought a bunch of Fannie four and a halves hedged with Fannie fours in a duration-weighted basis. The very next day, the market rallied around 20 basis points, the four and a halves basically kept pace with the fours in that huge move, we were able to reverse our trade in 1 day at a significant profit. If you believe the forward curve, which is calling for lower rates a year from now based on the expectation of a recession, that may be a very good backdrop for Agency MBS.

Agency MBS tend to do quite well in recessions when fears of rating downgrades on corporates attract capital away from corporate bonds towards Agency MBS, which are not exposed to credit risk. Despite a Fed that seems likely to be on the sidelines in the coming months, we remain diligent about our interest rate hedges, and we remain focused on harvesting the many opportunities this market has created to help drive incremental returns. Now back to Larry.

Laurence Penn (CEO and President)

Thanks, Mark. I'm pleased with Ellington Residential's performance to start the year. In a quarter of extreme interest rate volatility and widening Agency spreads, Earn was able to generate an annualized economic return of 7.3% while keeping leverage low and liquidity high. Far in the second quarter, volatility has eased from its mid-March highs, and the FDIC sales have been orderly and their impact on the market less than feared. Overall, the mortgage basis and Option-Adjusted Spreads widened in April, but May has been quite stable. Looking ahead, continued volatility and forced selling, especially from banks, could generate some exciting investment opportunities for us as they have in the past. Agency spreads are currently very wide and payoffs on specified pools in many sectors low, and much of our portfolio requires little delta hedging. Despite the volatility, funding markets remain healthy.

Relative value opportunities in the non-agency sector are plentiful. It's a great time to have dry powder, and we look forward to deploying it as we see opportunities. We will continue to pursue Ellington's dual mandate to preserve book value when markets are volatile, as we did this past quarter when we were solidly profitable, no less, and to capture the upside when markets recover. With that, we'll now open the call to questions. Operator?

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad.If at any time your question is addressed, you may remove yourself from the queue by pressing star two. Once again, that is star one to ask a question. Our first question will come from Douglas Harter with Credit Suisse. Your line is open.

Douglas Harter (Director and Senior Equity Research Analyst)

Thanks. You mentioned, you know, you would have the ability to take up leverage and net mortgage exposure. Can you just talk about, you know, one, how you see the capacity to do that, and two, what might the conditions be that would lead you to take that leverage up?

Mark Tecotzky (Vice Chairman)

Sure.

Laurence Penn (CEO and President)

Sure. You go ahead, Mark.

Mark Tecotzky (Vice Chairman)

Yeah. I was gonna say, in terms of capacity, you know, repo financing has been very stable. You know, the haircuts are relatively low. So in terms of cash on hand to be able to add more exposure, that's not an issue at all. I think the conditions are that, you know, you still are having a lot of daily volatility in some of the other bank stocks. Even though we mentioned that the ones that have been in the news most recently, PacWest and Western Alliance, don't have significant mortgage holdings, you know, they do still news about them and concerns about how banks are gonna compete with money market funds, what you're doing to bank Net Interest Margins with, you know, with higher deposit costs still is causing, you know, a fair bit of volatility.

I think until that subsides, I think, you know, we have a decent amount of exposure. The spreads are so wide now that exposure can drive, you know, a very healthy dividend. Like I said, you know, there's also a lot of, sort of, you know, daily and weekly sort of, dislocations that are going on. I think a little bit more clarity on the Fed being further along with the bank liquidation process, some sense of, if, you know, if you do see more banks. Look, I mean, we've been having bank consolidation for the last, you know, decade, right? It'll still probably continues.

It's just a question of does the consolidation occur in an orderly way where banks merge to, you know, to achieve cost efficiencies, or are you getting fewer banks from FDIC seizure, right? I think, you know, just having a longer period of time where you see less volatility, and it seems like deposit bases are more stable, to me, that's an important marker of, you know, going forward spread stability.

Laurence Penn (CEO and President)

Just to add to that, Mark, in terms of, you know, where we could go if we really do think that the time is right. I mean, we've gone over 9 to 1 leverage before, and we're comfortable in that range. Remember, we've got an interest rate hedge portfolio. You know, compare that to the where we are now in the mid 7s, right, as of quarter end. We definitely have room to add leverage as we said. Then in terms of our net mortgage, you know, assets to equity ratio, a related concept, we've, I don't know if we've ever gone above 8 to 1, but we certainly could if we thought that the, you know, the opportunity was compelling.

I think in terms of, you know, just putting, obviously the conditions for us to go there depend on exactly what Mark just talked about, but we could even, you know, we could even get there.

Douglas Harter (Director and Senior Equity Research Analyst)

Great. Appreciate it. Thank you.

Operator (participant)

Thank you. Our next question will come from Eric Hagen with BTIG. Your line is open.

Eric Hagen (Managing Director)

Hey, thanks. How we doing? Maybe a couple of questions about your perspectives on mortgage spreads, starting with whether you think spreads are maybe more likely to widen or tighten in response to a rally in interest rates. Then I think you just mentioned, you know, haircuts for Agency MBS have been low and stable, which is good to see. If spreads are already at these levels and haircuts remain stable, is there anything else, like anything related to bank liquidity or any other extraneous factors which would lead to advance rates really changing at this point?

Mark Tecotzky (Vice Chairman)

In regards to repo, I don't think so. You know, the market's been through more stressful periods than that in the last few years with, you know, with COVID and all the price volatility last year and repo financing spreads and initial and haircuts have been pretty constant. You know, one month repo spreads have been, you know, somewhere 5-10 basis points over one month SOFR, and it's sort of been holding there. I can't think of what's gonna change that. I'm sorry, Eric, what was the first question?

Eric Hagen (Managing Director)

Yeah.

Laurence Penn (CEO and President)

Spreads.

Eric Hagen (Managing Director)

Yes, whether spreads are more likely to widen or tighten in response to a rally in rates. Thanks, guys.

Mark Tecotzky (Vice Chairman)

Yeah. I think it depends on the magnitude. I think, you know, a rally on rates where you get maybe, you know, the five-year note down to 3.10% or 3%, which would be like 30 odd basis points from here, I think they're more likely to tighten. You know, tighten, you know, assuming you're using sort of appropriate hedge ratios, right? Some of the higher coupons say 5.5s and above, those hedge ratios would certainly adjust lower as they kind of, you know, get, you know, materially enough above par to cause prepayment risk. Yeah, I think they're more likely to tighten. The reason I think that is, I think that kind of move is going to be probably accompanied by some weakness in equities and sort of an embrace of fixed income.

If you've been looking at some of the fixed income, the fund flows, it's been significantly positive this year. I think that a slight rally like that is more of a tailwind to those flows. I think that's important for mortgages this year, that it's flows into sort of investment-grade fixed income funds. If you look at, like, some of the ETFs like MBB, that's now $26 billion. Those flows are significant, and those flows in my opinion, are what's stabilized spreads. It's caused the FDIC liquidations you've seen since the middle of April to be met with fairly robust demand.

You know, if, you know, if you're a person who's taking in fixed income flows and you wanna buy Fannie Twos and 20-year Twos and 15-year 1.5, you welcome this FDIC supply, because without it's hard to get exposure to those coupons because a lot of it is sort of locked away and isn't trading. I think a mild recession, I think I mentioned it in the prepared comments, we think that's a good scenario for mortgages. I would say like, you know, a really sharp rally, like a 100 basis point rally over, like, three weeks with that kind of volatility and that kind of negative convexity, then at that kind of move I think you'd see spreads widen.

sort of yields kind of grinding down, sort of like what you've seen this month, I think that's generally supportive of mortgage spreads.

Laurence Penn (CEO and President)

Yeah. I think when you're seeing-

Mark Tecotzky (Vice Chairman)

Great.

Laurence Penn (CEO and President)

Sorry. When you're seeing stuff widen in a rally, it's generally been tied to, you know, in recent years, right, to some shock to the health of the financial system. You know, we saw that with the banking, regional banks, right? If some liquidity crisis, you know, then you're gonna have all sectors widen, right? You know, agencies will be no exception. Just sort of recessionary fears without kind of a threat to the health of the financial system, you know, we see spreads, you know, doing well.

Eric Hagen (Managing Director)

Always appreciate your perspectives, guys. Thank you very much.

Laurence Penn (CEO and President)

Thanks, Eric.

Operator (participant)

Our next question will come from Crispin Love with Piper Sandler. Your line is open.

Crispin Love (Director and Senior Research Analyst)

Thanks. Good morning, everyone. I just have a question on views on the Net Interest Margin trajectory. You got higher reinvestment yields, but higher cost of funds, which you definitely saw in the first quarter. I'm just curious what your confidence is in expanding NIMs over the next several quarters?

Laurence Penn (CEO and President)

It's, you know, a lot of it is depending upon our portfolio turnover, which I mentioned, you know, we sort of been methodically, turning over the portfolio, to sort of recharge the NIM, if you will. You've got that. You know, you saw obviously a lot of the NIM went down because of, you know, just the fact that our repo, kind of older repo rolling off and being replaced with newer repo. You got sort of those things, counteracting each other in a way. I think, you know, where the NIM is right now, I think it's not a bad indication of where it could be going forward. You know, and we.

If you sort of leverage that up, which obviously we do, and you add, all of the, you know, income that we, for example, generated in the first quarter and we think we continue to generate through active trading. Obviously, you know, just looking at the fact that the curve is inverted is not per se a problem for us because, you know, we've got all that swap, you know, income coming from receiving floating and paying fixed. I think, you know, I don't see huge expansion from here in the NIM, but I also don't see, you know, if we can continue to sort of do the portfolio rotation.

We still do own, you know, some pools that we're hanging on to for more total return, you know, reasons as opposed to NIM reasons. As we, you know, see opportunities to sell those, you know, we want to respect book value as well, and try to time things properly. You know, that should, you know, continue to improve. You know, some of those, we do still have some low yielding assets on the Agency side in the deep discounts.

Crispin Love (Director and Senior Research Analyst)

Great. Thanks, Larry. Then just one on coupons. You talked about how you've been rotating out of some of the lower coupons. Kind of over the near term, do you expect to kind of stay in the intermediate coupon range, call it like 3.5s-4.5s, rather than adding much exposure in the 5s and 6s, just where rates could go in the back half of the year in prepay risk? Just curious on your views on coupons.

Mark Tecotzky (Vice Chairman)

Yeah. We've added some exposure to fives as they looked attractive to us. You know, one thing that one dynamic we think a lot about is that when the Fed was buying, they weren't buying specified, they weren't buying specified pools. They weren't going in and saying, "I wanna buy LLB Fannie Twos." They were just buying TBA, they were getting what the market thought was sort of the worst pools at that time. For the coupons where they have sizable holdings, they've locked up a lot of the worst bonds, right? Now you know that they're not buying and they're not reinvesting, right? They're not net buying, nor are they reinvesting. They're just letting the portfolio run off.

For the coupons like 5.5s and 6s, you creating some pools, which we think can have very unfavorable prepayment patterns in a rally. If you look at the forward curve, you look sort of like where, you know, the 1-year rate is expected to be 1 year forward. It's a lot lower, right? Things like 5.5s and 6s, they get in the money. There are a lot of pools there where, you know, the average loan size is $450,000. Those coupons, we think to have significant holdings there, you need to have some form of prepayment protection. In those coupons, you know, those payups are still, you know, pretty significant.

I kind of feel like this sort of 3.5, 4.5 coupons, you get wide enough spreads, and it's sort of insulated from two things. It's, you know, sort of saying a little bit differently than what I said in the prepared remarks, right? The banks don't hold them. Either, you know, if a bank is seized by the FDIC, and the FDIC is liquidating, that's one thing. You may just see banks, you know, choosing to, you know, sell some securities holdings at a loss and, you know, buy other things. I think they're immune from sort of these higher coupons, say, you know, 3.5s and above, 3.5s-4.5s, they're immune. You know, banks don't hold that much of them.

You're not going to have banks selling. They're not high enough in coupon that you're getting new production there. You're not creating these sort of pools with these really bad negative convexity. Those coupons have served us well. They served us well in this quarter. They've outperformed. From a relative value basis, you know, they're not as cheap relative to our other options as they were before, but we still like them. We've been adding some five. You know, we tend to be fairly dynamic. You've seen a big move in rates, right? You've seen the five-year note rally over 100 basis points from where it was, I guess beginning of March. You know, we're dynamic on the hedges. The relative value changes, so we change what we like.

We are concerned that in 5.5s and above, you can get significant prepayment activity if rates drop any more from here. I think so those coupons, we wouldn't want to have material exposure without having, you know, sort of what I would consider, like, pretty robust prepayment protection.

Crispin Love (Director and Senior Research Analyst)

Thanks, Mark. That all makes sense.

Laurence Penn (CEO and President)

And I guess-

Crispin Love (Director and Senior Research Analyst)

Go ahead.

Laurence Penn (CEO and President)

Also just add one thing. I mean, you know, we have an $0.08 dividend, right? It's $0.96 a year. I mean, you know, it's a mid-11% dividend yield on book value. I think, you know, we feel like we're in a good place there, right? Like I said, if you look at the leveraged NIM, if you will, and now, you know, short rates are much higher. I mean, you know, we feel good about our ADE relative to our dividend in terms of how that looks going forward. We want to focus on, you know, when we sort of decide whether we're going to be in current coupons or discounts or whatever, it moves around a lot.

As Mark mentioned, you know, in his prepared remarks, you know, we, you know, had some one-day trades, for example, you know, where we can make a lot of money just being nimble. You know, we really want to focus to some extent on supplementing through total return, and, you know, dialing up and down our mortgage basis. I mean, all those things that wouldn't, you know, if we just wanted to maximize NIM, we would, right, we would buy the current coupon, right? That's what we would always do. You know, that's not necessarily our focus right now.

Crispin Love (Director and Senior Research Analyst)

Makes sense. Thanks, Larry. Just, I don't know if I missed this during the prepared remarks, but did you offer any update on book value through the end of April or early May?

Laurence Penn (CEO and President)

We did not. You know, I would say, like, that, we're, you know, I did just mention that sort of what spreads, you know, spreads widened a bit in April, and they've stabilized in May, just in general in the mortgage market.

Operator (participant)

All right. Thank you. Our next question will come from Mikhail Goberman with JMP Securities. Your line is open.

Mikhail Goberman (Analyst)

Hey, good morning, guys. Thank you for the-

Laurence Penn (CEO and President)

Morning.

Mikhail Goberman (Analyst)

Commentary as always. Hope you're all well. Most of my questions have been answered. Just wanted to get your thoughts on, you mentioned some opportunities in non-agency space, so maybe a little more color on that. Thank you.

Laurence Penn (CEO and President)

Mark?

Mark Tecotzky (Vice Chairman)

Yeah. The second half of 2022, you saw a lot of redemptions from mutual funds and also just, you know, just private accounts and some of the big money managers. We saw significant supply of non-agency mortgages and significant supply from the GSEs, the Credit Risk Transfer bonds. They started looking really attractive to us. We think housing is starting to stabilize. You know, the last two CoreLogic prints, HPA action went up a little bit, which is sort of consistent with sort of our in-house team had been modeling it. We think sort of housing, while still expensive, is in pretty good shape, especially given the LTVs of some of these bonds. We've added a little bit. You know, both opportunities look good.

The credit opportunity looks good to us. The agency opportunity looks good to us. You know, historically. Done really well when we've added credit exposure to earn. We did some in 2020. That worked out really well. I think Larry meant... I think, not sure if we mentioned it. Yeah, I think Larry mentioned in his prepared remarks how the credit side of the portfolio did well for us this quarter. You know, those bonds have repriced a little bit higher in price, so spreads aren't still quite as wide. It's the kinda thing where for the size we're buying, there's enough sort of volatility one bond to the next that I think we're gonna continue to add exposure there.

Mikhail Goberman (Analyst)

Great. Thank you, guys. Appreciate it.

Operator (participant)

Thank you. Our next question will come from Matthew Erdner with JonesTrading. Your line is open.

Matthew Erdner (Director and Equity Research Analyst)

Hey, guys. Thanks for taking the question, one for Jason this morning. The other analysts touched on most everything that I had. Could you give your thoughts on a buyback, and just kinda your thinking around that versus new investments?

Laurence Penn (CEO and President)

Sure. Yeah, I think, if you know, sort of, look at where our stock price is now, you know, we're still well into the 80% of book, which is obviously not where anybody wants to be. Just given our small size, and we do have a lot of fixed costs, we obviously have shares authorized to buy back. you know, we're not, you know, sort of in that in the mid-80s, not, you know, probably not buying back stock here. mostly for the reasons of, you know, just what that would do to some of our expense ratios.

You know, just wanna focus on, you know, making money and finding, you know, good investments, adding to the non-agency portfolio, all the things that we sort of mentioned earlier. You know, should we get down into the 70s, then I think that's where historically things have gotten a little more interesting. You know, we have to be mindful of the fact that, you know, it's a small company, and we just have to be mindful of our keeping our capital base, you know, at a reasonable level.

Matthew Erdner (Director and Equity Research Analyst)

Gotcha. Thank you.

Operator (participant)

All right. Thank you. That was our final question for today. We thank you for participating in the Ellington Residential Mortgage REIT first quarter 2023 earnings conference call. You may disconnect your line at this time, and have a wonderful day.