Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the Ellington Residential Mortgage REIT 2018 Second Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Jason Frank, Corporate Council and Security. Sir, you may begin.

Thanks. 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 14, 2018, 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 on the call with me today, Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Chris Smernoff, our Chief Financial Officer. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, earnreit.com. Management's prepared remarks will track the presentation. Please turn to Slide 3 to follow along. As a reminder, during this call, we'll sometimes refer to Ellington Residential by its ticker, E-A-R-N or EARN for short. With that, I will now turn the call over to Larry.

Thanks, Jay. It's our pleasure to speak with our shareholders this morning, as we release our second quarter results. As always, we appreciate you are taking the time to participate on the call today. Our prepared marks today will follow the earnings presentation that we posted on our website last night. Please turn to slide three. The second quarter of 2018 saw the extreme equity volatility of the first quarter subside, but the yield curve flattening continued. During the first part of the quarter, interest rates continued their recent upward trend with the 10-year U.S. Treasury yield rising 37 basis points to an almost seven-year high of 3.11% on May 17th. This trend reversed over the next two weeks as investors reacted to a possible trade war and political uncertainty in Italy. And by May 29th, the 10-year treasury had rally back almost to where that started the quarter. This flight to quality was short lived however, with the 10-year treasury finishing the quarter 12 basis points higher overall. The spread between the two-year treasury yield and the 10-year treasury yield tightened another 14 basis points over the course of the quarter. The yield curve has lately been the flattest expense since 2007, when it actually inverted during the early part of that year. On slide three, you can see the persistent quarter-over-quarter flattening. Yield curve is flattened for six consecutive quarters now, five of which are shown on this page. It’s been a bear market flattening with a two year up 127 basis points over these five quarters and the 10-year up 47 basis points. Well, bear market flattening may put downward pressure on our net interest margin. We believe that our success is not so dependent on the shape of the yield curve or the absolute level of…

Thank you, Larry and good morning everyone. Please turn to slide six for a summary of EARN’s financial results. For the quarter-ended June 30, 2018, we generated core earnings of $5.1 million or $0.40 per share broken down as follows. Total net interest income of $6.4 million plus total other gains of a $131,000 that’s total expenses of $1.4 million. By comparison we generated core earnings of $4.3 million or $0.32 per share for the quarter ended March 31, 2018. Our core earnings include the impact of a catch-up premium amortization adjustment which in the second quarter increased core earnings by approximately $480,000 or $0.04 per share. Excluding the catch-up amortization adjustments, we generated adjusted core earnings of $0.36 per share and $0.34 per share in the current and prior quarters respectively. With agency RMBS prices continue to decline during the quarter we had net realized and unrealized losses on our RMBS assets of $10.2 million. These losses were partially offset by net realized and unrealized gains on our interest rate hedges of $6.8 million and EARN had net income of $1.8 million or $0.14 per share as compared to a net loss of $4 million for the quarter ended March 31, 2018. Note that net realized and unrealized gains from our interest rate hedges exclude the net periodic cost associated with our interest rate swaps since they are included as a component of core earnings. Our results this quarter were dampened somewhat by strong TBA dollar rolls and muted prepayments, which caused TBA to outperform specified pools. Overall, the agency strategy generated gross income of $3 million or $0.24 per share. Meanwhile, our non-agency RMBS portfolio continue to perform well, generating gross income of approximately $200,000 or $0.02 per share. Despite further flattening of the yield curve, our net…

Thank you, Chris. Compared to Q1, the second quarter was fairly an eventful. We posted a solid economic return, largely supported by the relatively high yield of Agency MBS, compared to swaps and treasuries. A few important headwinds and tailwinds defined the Agency MBS investment landscape for the quarter, and we think these dynamics will continue to frame the opportunity set through the end of the year. On balance, we think it is a favorable environment. First the tailwinds. A big one is shown on slide 10. The financing market is very favorable, much more favorable than spending the past five years. Three-month repo rates have settled in 10 to 20 basis points below three-month LIBOR, here we show the time series. This spread is so important, because we reduce our hedging costs by the difference and it directly adds to our net interest margin. Remember, on our interest rate swaps, which are our primary hedging instrument, we’ve received three-month LIBOR on the floating leg and payout of fixed leg. Then returned right around and payout our repo borrowing expense to our lenders. Historically, we were lucky if the difference between three months, between the three months repo rate and three months LIBOR netted out to zero. Now, we’re pocketing 10 to 20 basis points. This dynamic means that for leveraged investors, mortgages are effectively 10 to 20 basis points widening spreads. There has been a lot of concerned about how the flatter yield curve effects core earnings. For earned on the portion of our portfolio that hedge was swaps, changes in the LIBOR leg we receive on our swaps, largely cancels out changes in our repo costs and that dynamic neutralizes much of the impact of a flatter yield curve. Generally speaking, the biggest impact of our flatter yield…

Thanks, Mark. As we move into the second half of the year. I like how Ellington Residential is positioned. We have used the sell off an agency RMBS to cover a good portion of our TBA. As we turn over the portfolio and add assets at the current higher yields. We are recharging our net interest margin. We continue to benefit this year from the consistently wider gap between the lower rates that repay repo borrowings and the higher LIBOR rates that we receive on the floating legs of interest rate swaps. We’ve also dialed up our mortgage exposure as RMBS prices have declined. We still believe that the outlook is strong for the specified pool sector or most of our assets are concentrated. We continue to unearth new pockets of mortgage pools that we believe are undervalued and underappreciated. The Fed exclusively purchases agency pools via TBA contracts not specified pools. So, as the Fed tapering continues to ramp on schedule. The most important technical support for TBAs will continue to dwindle, making specified pools a better and better choice for most MBS investors. That said, we also see plenty of reasons for caution. There are the more modest challenges represented by a flattening yield curve and rising interest rates. But the possibility of big shocks still out there, whether from the prospects of trade wars, slowing growth in China, or political turmoil in Europe. Additionally, as quantitative easing around the globe continues to give away to quantitative tightening. The market will continue to lose an important stabilizing force. So, in light of those risks, we believe that having a highly liquid portfolio and being disciplined about hedging or as important as ever. We want to be able to stay on the offensive from a portfolio management perspective, especially in choppy periods. As volatility typically generates investment opportunities. We’re always ready to rotate the portfolio actively when trading opportunities emerge, including to dial up and down our mortgage basis exposure as we see prudent. We like to think of ourselves as an all-weather we able to thrive in a diversity of market environment and we look forward to the challenges ahead. With that our prepared remarks or concluded. I’ll now turn the call to the operator for questions. Operator, please go ahead.

Thank you. [Operator Instructions] Our first question comes from the line of Trevor Cranston of JMP securities.

So, you guys talked a little bit about some of the tailwinds and headwinds you’re facing and obviously you’ve increased your net mortgage exposure a little bit this year. Can you talk a little bit more about how you guys are currently thinking about the balance between increasing your NIM today versus having maybe more attractive investment opportunities later this year as quantitative using is reduced? I am particularly thinking about how you’ve taken down the size of the TBA position, the short TBA position this year, which would obviously protect against incremental spread wide when you get that does occur between so increases in NIM obviously in near term?

Sure. Hi, Trevor, its Mark. I guess the way we think about it is, seeing how the market responds to set balance sheet reduction when it gets to its peaks and now we’re near the peak, now we’re at $16 billion and the market absorb that well in July, mortgages performed very well in July. So that’ll be the same case in August and September. And then October we’ll see how things respond to $20 billion. So, we’re going to get on the answer as to how aggressively new capital comes into the mortgage market to take the fed out of balance sheet in just a couple of months right, in two months we’ll be at maximum Fed reductions. So, I don’t see a big incentive to add a lot of leverage now at these spreads given that we’re going to clear up some of the certainty relatively shortly. But I do think pull backs, 5 or 10 basis points pull back are significant enough that we want to capture I mean that would enough if as long as rates aren’t at sort of a boundary point where you typically see with mortgages is when interest rates get to a level, the market hasn’t seen for a while. Mortgages tend to perform poorly. If interest rates are sort of testing the high rent of where they’ve been for a while there which you've got 3.10 or 3.15 the market gets worried about extension risk. And if you saw say rally back below 2.75, the market gets worried about call risks. So, I think if you had a widening and the mortgage and 10-year note is sort of in the range where it’s been that would enough for us absent that I think it paves the way a little bit and see how things are in Q4, early in Q4.

Got you. That makes sense. And then second question on the slide 10, the spread between the three-month LIBOR and repo. Two questions on that. One, I was wondering if you guys could share your thoughts on whether or not you think it’s likely to sort of stabilize at the current levels, it's obviously coming a lot from where it peaked I guess in April, but sort of where you guys think that will stabilize. And then the second part of the question, if you’re able to quantify how much that spread benefited earnings in the second quarter that would be helpful? Thanks.

Yeah, so I would say, I think it’s likely to stabilize somewhere in the 10 to 20 bases where few months repo costs are 10 to 20 basis points below three months LIBOR. I think it’s likely that we’ll stabilize there. and if I had to quantify it, how much of a benefit that is versus what it was like say if you go back to 2014-2015 regime when the three months repo costs were consistently 10 basis points over LIBOR right. Let’s say, the average 15 basis points below, three months LIBOR and they used to be 10 basis points above three months LIBOR, that’s the swing of 25 basis points per annum and then times the leverage…

Seven times, that’s it.

Yeah, it’s seven times. So, 175 basis points over the course of the year.

Yeah, of course some of that, but not all of that is priced into where MBS are trading, right. So, there is some section in the market, segment of the market uses leverage and that increases demand from that sector, so it’s a portion of that is priced in to mortgages, but since there is a huge segment of the market that does not use leverage certainly not all but it’s priced and so chunk of that is absolutely flowing above line.

Yeah, and the reason why I think it’s likely to persist where repo is below few months LIBOR as we've also seen material shift in the composition of our repo counterparties and the individual appetite for repo it’s more coming from the big banks now than it used to. So, I think another metric, where I think the funding is more stable.

All right. Got it. That make sense. You guys have always had or often had some treasury positions as part of your hedging. Does this new relationship between LIBOR and repo alter how you think about using treasury shorts versus swaps as a headroom strength?

Yeah, it does. If you think back to and most of the year and year and half ago when tenure swaps -- for negative 17 basis points. Of course, they were going to get much more negative. A lot of people shifted their hedges into primarily treasury based. We chose to stay with a lot of swaps space, we thought there were reasons that swaps -- right now they have. No, we definitely -- the big move in three months LIBOR relative to repo is definitely a factor for us that gives us a preference towards the swap-based hedge as opposed to treasury-based hedges. We like to diversify, but incrementally that does push more swaps.

Okay, great. Thanks for the comments.

Thanks, Trevor.

Our next question comes from the line of Doug Harter of Credit Suisse.

Hey guys this is actually Josh [ph] on for Doug. Mark, you've talked about how you are able to be dynamic with the portfolio dialing up and down. Mortgage exposure with the when the market looks attractive. What level of leverage are you guys comfortable with running the portfolio going forward? Thanks.

I think we could add two terms of leverage definitely, we only just to be shift in hedges right. It could be further reduction of TBA, further increase of swaps to treasury to treasury future.

So, it doesn't mean more repo borrowing. I'd only have to do is buyback or more now we've already done obviously a chunk of that, but if you look at slide eight, if we wanted to dial down for example, you can see we had a lot of room to dial down by increasing that dark blue, the net short TBA positions which you've already dug out quite a bit hence dialing our mortgage exposure. If we wanted to all of a sudden, we were cautious on the mortgage base let's just say that mortgages had a really good month latter part of this month. And we wanted to then sort of lock that in a little bit, we could go sale a lot of TBAs. And we've been at times around 50% hedged with TBAs as opposed to now where it's been lately more in the 20, 25-ish area. So, we have a lot of room at this point to dial down our mortgage exposure. If we wanted to, we can do that extremely quickly, I mean it's probably one of the most liquid markets and where I'll drive the TBA market, current coupon TBAs.

Great. Thanks for the comments guys.

And we have reached the allotted time for questions-and-answers today. I would now like to turn the floor back over to Larry for any additional or closing remarks.

No, I think that do it, operator. Thank you. Thanks everyone.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.