Lindsay Tragler - VP, IR Laurence Penn - CEO and President Lisa Mumford - CFO and Treasurer Mark Tecotzky – Co-Chief Investment Officer.

Steven DeLaney - JMP Securities.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT First Quarter 2015 Financial Results Conference Call. Today’s call is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

[Operator Instructions]. It is now my pleasure to turn the floor over to Lindsay Tragler, Vice President of Investor Relations. You may begin..

Thank you. Before we start 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.

As described under item 1A of our annual report on Form 10-K filed on March 21, 2014, forward-looking statements 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. 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.

I have with me today on the call Larry Penn, our Chief Executive Officer; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. With that, I will now turn the call over to Larry..

Thanks Lindsay. It’s our pleasure to speak with our shareholders this morning as we release our first quarter results. As always we appreciate your taking the time to participate on the call today. First an overview; it was a good quarter for EARN, particularly given the high levels of interest rate volatility that impacted the market.

And we earned $3.7 million or $0.40 per share on a fully mark-to-market basis. Our core earnings of $0.66 per share comfortably covered our $0.55 dividend which equates to a 0.12% yield based on our March 31st book value and a yield of more than 0.13% based on our May 4 closing price.

In our Agency portfolio we benefited from the strong performance of our holdings of specified pools, which we still believe offer substantial prepayment protection.

The surge in refinancing activity in the first half of the quarter served as a reminder that prepayment risk is still significant and enhance the value of our specified pools relative to our short TBA hedging portfolio. The first quarter’s volatility also created trading opportunities for us.

We returned over 25% of our agency portfolio to further enhance its composition and capitalize on inefficiencies.

Meanwhile our non-agency portfolio again contributed positively to our results, as the non-agency market continued to benefit from a lack of new issuance, as well as supportive fundamentals, such as improving delinquency and foreclosure trends.

Looking forward as you will hear from Mark we expect specified pools to continue to outperform in the near to medium term and we remain positioned accordingly. We will follow the same format as we have on previous calls. First Lisa will run through our financial results.

Then Mark will discuss how the residential mortgage backed securities market performed over the course of the quarter, how we positioned our RMBS portfolio and what our market outlook is. Finally I’ll follow with some additional remarks before opening the floor to questions.

As described in our earnings press release we posted a first quarter earnings conference call presentation to our website, www.earnreit.com. You can find it in three different places on the website; on the home page, on the for our shareholders page or on the presentations page. Lisa and Mark’s prepared remarks will track the presentation.

So it will be helpful if you have this presentation in front of you and turn to slide four to follow along. As a reminder during this call we’ll sometimes refer to Ellington Residential, by its New York stock exchange ticker E-A-R-N or EARN for short.

Hopefully you now have the presentation in front of you and open to page four and with that I’m going to turn it over to Lisa..

Thank you, Larry and good morning everyone. In the first quarter we generated net income of $3.7 million or $0.40 per share.

The components of our net income were as follows; our core earnings totaled approximately $6 million or $0.66 per share, net realized and unrealized gains from our mortgage-backed securities portfolio were $11.9 million or $1.30 per share.

And we had net realized and unrealized losses from derivatives of $14.3 million or $1.56 per share, excluding the net periodic cost associated with our interest rate swaps. This is a significant improvement over the fourth quarter one short losses in our interest rate hedging portfolio and driven a net loss of $1.2 million or $0.13 per share.

Our fourth quarter net income had been comprised of core earnings of $7 million or $0.76 per share, net realized and unrealized gains on mortgage-backed securities of $14.1 million or $1.54 per share and net realized and unrealized losses on our interest rate hedging derivatives of $22.2 million or $2.43 per share.

Our first quarter core earnings declined by approximately $1 million or $0.10 per share. This drop resulted from a decrease in our net interest income of $1.6 million or $0.18 per share, which was partially offset by a decline in our swap costs of $360,000 or $0.04 per share and a decrease in our operating expenses of $331,000, or $0.04 per share.

Our first quarter net interest margin decreased to 2.21%, down 28 basis points from 2.49% in the fourth quarter. The decline was driven by a 29 basis point drop in our average asset yield which was only slightly offset by a one basis point decline in our quarterly cost of funds.

With respect to our average asset yield in the first quarter our overall yield was 3.14%, including a reduction resulting from a premium amortization catch up of adjustments of $440,000 or approximately 13 basis points. Conversely last quarter our catch amortization adjustment was a positive $186,000 or six basis points.

The remaining 16 basis point decrease in our first quarter average yield was principally related to declining yields of [indiscernible] agency RMBS assets.

As I mentioned our cost of funds decreased slightly in the first quarter to 0.93% as compared to 0.94% in the fourth quarter essentially our cost of repo increased by two points but the cost of our interest rate swaps declined by three basis points.

Our swaps were impacted by a decline in interest rates as well as the fact that the weighted average remaining term dropped by about 1.2 years to 7.3 years. I also mentioned that our first quarter expenses were about $0.04 per share lower than they had been in the prior quarter. The decline resulted from lower professional fees.

While our core earnings decreased by $0.10 during the first quarter our estimated taxable income for the quarter was in the low $0.16 [ph] per share and as you know our first quarter dividend was $0.55 per share. So our core earnings comfortably covers both our taxable income and the dividends.

The size of our portfolio was relatively unchanged at $1.39 billion although we did actively trade our agency RMBS portfolio generating net realized gains of $6.7 million. Agency portfolio turnover, which represents sales excluding pay downs were 25% for the quarter.

Our outstanding borrowings decreased slightly to $1.2 billion at the end of the first quarter from $1.3 billion at the end of the fourth quarter and as a result our leverage ratio declined to 7.5 to 1 from 8.1 to 1.

However if we adjust each period for unsettled security purchases and sales our leverage portfolio actually increased ever so slightly to 8.0 to 1 at the end of March from 7.9 to 1 at the end of December. With that, I turn the presentation over to Mark..

Thank you Lisa. With the significant increase interest rate volatility that we saw during the first quarter the period had the potential to be a very challenging for agency REIT managers. Volatility was as high as it has been for quite some time and the chart of 10 years course over the quarter looks a bit like a roller coaster ride.

For many it was, even though the change between the quarters beginning and ending yields wasn’t enormous, the distance travelled was large. The 10 year yield peaked at 224 and fell to a low of 164. That’s a total swing of 60 basis points during the first quarter.

That is a challenge for mortgage REIT managers who typically earn spread income by owning higher yielding RMBS, negative convexity and hedging them with lower yielding swaps with positive convexity.

To produce returns in this environment which is not a particularly hospitable one for Agency RMBS investors, we don’t just aim to capture mortgage spread or market data.

We seek to earn to generate significant alpha, first and foremost through smart portfolio construction and second through opportunistic trading to capture efficiencies and improve portfolio composition.

It’s challenging to manage agency RMBS portfolios to credit when interest rates move dramatically because the portfolio constructions that captures a big net interest margin with market share improving also can expose you to greater book value declines in times of turbulence.

We tried to design our portfolios with simultaneously capturing healthy NIM without taking undue interest rate risk. A big part of this is accomplished on the hedging side of the portfolio by our significant use of TBA shorts where we essentially buyback a significant chunk of a negative convexity of our agency pools.

This portfolio construction helps in two ways during the first quarter. First in January we benefited from a rallying market when the duration of our TBS shorts declined faster than the duration of our long pool portfolio.

Second, in early February when the 10 year note made a U turn and surged after bottoming at 164 at the end of January the duration of our portfolio shorts increased faster than the duration of our long portfolio reducing the needs for costly delta hedging.

Our ability to select not only attractive assets but also effective hedges for those assets has always been an important driver of our return. We benefited greatly from our asset hedge pairing during the first quarter.

For example if you look at 5-7 label since the beginning of the year pay-ups have increased, net interest rates have retraced, this slide shows the relative performance from start of the year through the end of April of a typical specified format portfolio, mainly Fannie Mae 3rd year medium loan balance pools or Fannie Mae MLB pools.

MLB pools are pools where all the underlying loans had an original balance of 110,000 or less so they tend to be less reactive to re-financing opportunities than pools of larger loans, since both borrowers and lenders are less motivated in absolute dollar terms to refinance smaller loans.

On the graph the blue line shows the pay ups and ticks for Fannie MEA MLB 4 over Fannie MEA TBA 4s. The scale for that dark blue line is shown on the Y axis on the right. The maroon line shows the yield on the 10 year note with an inverted scale.

Lower yield is shown on the Y axis on the left, I am sorry lower yield is on the top, higher yields on the bottom. The scale of that maroon line is shown on the Y axis on the left. So yields are currently well above the lows they reached earlier this year but in fact you can see they are very close to where they started the year.

But you can see pay-ups are much higher than they are started the year. Now why is that? It’s because not only the pre-payments spike in the middle of the quarter but even as interest rates have risen since then pre-payments remain significantly higher than they were towards the end of last year.

So understandably the perceived value of pre-payment protection has increased relative to late last year and you can see that clearly on the graph and the way that pay-ups have performed this year.

Now what is the interesting is that it isn’t though the absolute price medium loan balance of Fannie 4s has increased much but their price is up relative to TBAs. Look at slide eight this shows the same contours in blue and the Pay-up for Fannie MLBs 4 relative to TBA but the maroon lines now is just the price of TBA Fannie 4s.

What is interesting is you had a big move up in the payout but the TBA 4s actually selling price over this time period. What that means is that to capture this movement to generate returns from the pre-pricing you couldn’t own medium loan balance 4s and hedge 4s - hedge them by paying fixed on swaps.

Instead you had to own medium loan balance 4s and hedge them with TBA. The actual prices of these pools didn’t move significantly compared to interest rate since the start of the year.

So to capture this return it wasn’t just simply a matter of owning the right asset it was also a matter of owning the right asset and putting the correct hedge in place.

TBA hedges on Fannie 4s drove the profitability and were the key to capturing the increase in the value of pre-pay protections, because the fed is no longer a net buyer of mortgage they are just reinvesting principal payments in their existing portfolio we think we will see more opportunity for relative value trading of this kind.

Our first quarter results were driven by strong performance in many sectors of our special priced Pool Portfolio. As the value of prepayment protection increase in response to the overall rise in prepayment fees.

The drop in mortgage rates combined with government policy actions intending to encourage refinancing had a tipping point from mortgage refinance ability in January and the refinancing index increased sharply which also weighed on TBA performance.

This was in mark contrast to the fourth quarter when the interest drop substantially but refinancing activity didn’t change.

The increase in prepayments in early 2015 coupled with the lack of fed purchasing of some higher coupons like 30 year 4s in particular caused TBAs of these coupons to underperform their rate hedge, specified pool outperform as the higher realized prepayment and lower role levels in many coupons led investors to seek a better carry and better convexity of many sectors of the specified pool market.

Our prepayment trends that we addressed in our fourth quarter continued in the first quarter. Depending on which company originated the services alone certain mortgage loans are showing very significant more refinanceability than market averages.

There has been a lot written about how tight mortgage credit is and how hard is to qualify for a mortgage and that is largely true.

But there have also been some very successful initiatives on the part of some mortgage originators, especially some of the non-bank originators to bring down the cost of the entire refinancing process and reaching out to borrowers eligible for refinancing all the way to closing the new loans. Technological innovation is a major driver here.

While the mortgage fees burden by a tremendous amount of regulation and for many it is still document intensive with forms faxed from borrowers to lender there are more and more lenders that are trying to improve technology, improve their workflow and we have seen evidence of this when we dissect prepayment reports.

This trend has been in place for at least a year now and it seems to be gathering steam. For us it means we have to be even more careful about what we buy and we have constantly pore over data to spot trends early on.

In addition to variation by servicer or originator increases in payments were not uniformly distributed among coupon and issue year vintages. Many of the newer vintages showed a very sharp increase in prepayment fees while some season vintages were less reactive. At result the relative price movement of specified pools are not uniform.

Some forms of prepayment protection appreciated in price material in the quarter while price of certain other forms were largely unchanged. We are well positioned for these moves at the start in the quarter and were able to monetize many of these changes.

Market volatility also presented us with trading opportunity and we turned over about 25% of our portfolio. Agency MBS didn’t perform particularly well in the first quarter but volatility and dislocation gave rise to opportunities for us to capitalize on trading inefficiencies and capture that opportunity to enhance our return.

There were movements in pay-ups and intra quarter spikes to take advantage of. Nevertheless on slide 11, you can see that based on quarter end snapshots our loan portfolio composition didn’t change that much quarter-over-quarter. Going forward we expect volatility. The market is schizophrenic and for good reasons. The U.S.

economy is improving and so the federal reserve has put the market on note that they could raise rates as early as June that meanwhile quantitative easing in Europe and Japan is as keeping yields incredibly low on high quality foreign sovereign bonds. In fact much lower than the U.S. in fact much lower than U.S. treasury yields.

In the phases of uncertainty, our strategy is to try to construct portfolios that don’t have a lot of directional interest rate risk and that can generate alpha by taking advantage of the reliable interest spread supported by high quality payment protected pool that are carefully selected and then augmenting our spread income through active opportunistic trading.

We think that the volatility we’re seeing and the potential for dislocation that comes along with it will bring many opportunities for us to acquire attractive assets and generate trading gains in the coming quarters. With that I’ll turn the call over to Larry..

Thanks Mark. I am sure that you can appreciate that Mark just scratched the surface in terms the richness of the opportunity set in agency pools.

The agency pool market is one of those ideal market combinations of high liquidity, agency pools trade with a bid offer spread of just a few 30 seconds but at the same time they have high complexity just to look at all the different types of specified pools, each one with the unique and highly complex characteristics, not only involving interest rates but servicer specific and originator specific behavior, geography, loan to value ratios, FICO credit scores and others including of course loan balances which was the characteristic that Mark happened to be discussing.

This makes it an exciting market for us.

The liquidity of this market allows us to very activity manage the portfolio, the depth and breadth of this market allows us to be disciplined about what kind of pools we choose to be invested in at any given time and the complexity, the wide availability of data and the rich history of this market allows us to really drill down and try to tease out the value of all these different pool characteristics including applying Ellington’s extensive expertise in pre-payment and interest rate modeling and analysis.

We delivered a totaled economic return of 2.2% for the first quarter which equates to 9.3% on an annualized basis.

And this week marks the two year anniversary of our IPO and over that period which includes the steep rise in interest rates known as the taper tantrum we’ve generated 10% total economic return with low volatility, compare that combination the performance of our peer group over the same period.

Our disciplined risk management has enabled us to generate strong returns since our inception, despite hidden volatility and hidden interest rate pre-payment and policy risks.

Our objective is to manage our portfolio for total return over cycles and we don’t try to make that on the future path of interest rates which we believe are virtually impossible to accurately predict. In the first quarter, as usual there was a significant cost to maintaining our interest rate hedges.

However, by seeking to control our risk, we believe, we can maximize returns and minimize book value volatility overtime. We’ve certainly been rewarded for that philosophy so far in the second quarter with ten year swap rates having risen over 25 basis points already. We remain keenly aware of potential policy risks.

And so we weren’t heavily impacted by the FHA’s 50 basis point reduction in mortgage insurance premiums in early January.

Ginnie Mae is comprised only a small portion of our portfolio coming into 2015 and so the acceleration of Ginnie Mae prepayment which follow the announcement causing those bonds to significantly underperform didn’t weigh on our results. We actually view this is the buying opportunity for us or be at a relatively small one.

In the IO market we did see some widening of high LTV, lower credit quality paper in the first quarter, driven by the drop in interest rates and the FHFA’s mortgage insurance premium reduction. The mortgage market initially expected the FHFA to follow suit with its own refinancing friendly policy changes.

But the April FHFA announcement that Fannie Mae and Freddie Mac guarantee fees would not be lowered largely eliminated these concerns. The FHFA’s announcement and the recent increases in interest rates have led to a relatively quick recovery in IOs.

Looking forward to the remainder over the year, we continue to believe that interest rate volatility and pre-payment volatility will present challenges but also numerous dislocations and thereby lots of opportunity for us.

When dislocations do arise, we believe that our nimble size will enable us to reposition the portfolio quickly to take advantage of the opportunities whether in the IO sector or otherwise. This concludes our prepared remarks and we’re now pleased to take your questions.

Operator?.

The floor is now open for questions. [Operator Instruction]. Your first question is from Steven DeLaney, with JMP Securities..

Good morning everyone.

May be I would like to start with Lisa’s comments about the premium adjustment, you reported core EPS of $0.66 but shouldn’t we view that as $0.70 if we add back the $0.04 one-time premium catch?.

Yeah, you could view it that way and also last quarter we had a positive adjustment and that would add back $0.02..

Yes, so you had $0.76 reported, what was the per share positive benefit last quarter, Lisa?.

$0.02..

$0.02, okay so that would normalize if we want an apples on apples that would be $0.74, so $0.70 versus $0.74. Okay, thank you very much. And looking at the compression on yield I mean that looks like that was really the story, especially since you had a good quarter from a trading standpoint.

So $0.28 basis points decline in the NIM to 221 and I believe that you said that 13 bps was associated with the catch up premium is that correct?.

That’s correct..

I guess Mark or Larry should we attribute the remaining decline of what 15 basis points or so, is that just related pretty much to the CPR picking up to 6.3 versus 4.6 in the fourth quarter?.

Well it’s not just that, this is Larry Steve..

Hello.

Hi, how are you?.

Good, thank you..

Good, that’s part of it but we turn over the portfolio a lot, so especially on the asset side.

So you are going to see as yields decline, let’s say from one quarter to next you are going to just naturally see a decline in yields just because we are replacing higher yielding assets that were purchased in the higher rate environment with lower yielding assets that were purchased more recently.

So as we turnover especially the assets out of the portfolio and Mark mentioned how when you saw the volatility and pay ups and just the overall volatility that’s going to lead to that kind of turnover. You are going to see a natural decline when rates decline and then conversely this quarter I would expect the reverse to happen..

So coupon roll down, roll down and roll up just based on which you are getting into and out of in the market place on your trading?.

Yeah..

Okay, okay got it.

Obviously we have got a pretty big back up in rates I guess over the 220 on the 10 year so as you look at the second quarter can you comment on what your expectations for CPR would be in the second quarter versus that the 6.3 average in 1Q?.

Hey Steve its Mark. Tonight I believe tonight the night we get the monthly prepayment report. So I think in aggregate expectations the prepayments should drop somewhere in the order of 8% to 10%..

Quarter to quarter?.

Yeah quarter-to-quarter, that’s for the market as a whole when you have prepayment protected pools, may be you might see the same thing on a percentage basis but on an absolute basis the actual prepayment change is not that large. So for most of what we own I don’t think it’s going to be a big issue.

We have not, we have been trying not to expose ourselves to things that we thought had a lot of potential prepayment volatility to them like lot of the jumbo pools and things like that..

Okay, great and just one final thing, obviously we have heard about the impact of rate volatility on just about every earnings call and the book values have certainly been challenged - and you did not have a significant drop of less than 1% but nevertheless you have a home market stability there.

I guess if you look at to quarter, the second quarter the market would you say generally that since March 31 that conditions in the market have generally been more supportive of book value stability than they were in the first quarter.

And I don’t know if you can comment on the trend in your book value post March 31, but anything you can say would be appreciated?.

Yeah, I think mortgages have traded well so far in the second quarter but the interest rate volatility has really been with us in earnest the last really since third or fourth week of April where you had several days in a row where yields have climbed. So then when that happens right there is pretty significant changes in duration of your portfolio.

So something we look at every day, something we manage through. So I would say it’s really cross trends. Mortgages have done very well, relative to swaps and this moving rate is going to reduce some of the refi generated supply, sort of take those supply pressures off the market.

But this also requires some delta hedging and that can manifest itself as buying high and selling low, if it reversed its course. But I just think right now rates are very unpredictable. So it’s important to try to stay on top of these moves and make sure you have them contained as best you can..

Appreciate your candor. I mean what I am hearing you say is maintaining a stable book value is a very challenging job in this type of market and it sounds like that’s something that you focus on every day..

And part of it I would say if you are not - if you don’t have a big portfolio of either swap changes or short TBA positions then it’s going to be very, very difficult, when you got a quick upswing like this to not have a significant deterioration of book value. So as you got a big portfolio of fixed rate pools.

So I think we have tended to focus on the TBA short side of that, because that accomplishes other things for us as well and it also allows us to express our view of TBA so it’s for us you can see as a percentage of the time we generally have had a pretty healthy share of our interest rate hedges in the form of TBAs.

That really comes in incredibly handy when you got a big rate move..

Guys appreciate the color and congrats on another solid quarter and covering the dividend very well. Thank you..

Thank you..

[Operator Instructions]. There are no further questions at this time. Ladies and gentlemen this concludes Ellington Residential Mortgage REITs first quarter 2015 financial results conference call. Please disconnect your lines at this time and have a wonderful day..