Q4 2023 Ellington Residential Mortgage REIT Earnings Call
Participants
Alaael-Deen Shilleh; Associate General Counsel and Secretary; Ellington Residential Mortgage REIT
Larry Penn; CEO & President, Trustee; Ellington Residential Mortgage REIT
Chris Smernoff; CFO; Ellington Residential Mortgage REIT
Mark Tecotzky; Co-Chief Investment Officer; Ellington Financial Inc
Doug Harter; Analyst; UBS Securities LLC
Matthew Erdner; Analyst; JonesTrading Institutional Services, LLC
Eric Hagen; Analyst; BTIG, LLC
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Residential Mortgage re 2023 fourth-quarter financial results conference call. Today's is being recorded and at this time, all participants have been placed in a listen only mode. (Operator Instructions)
It is now my pleasure to turn the conference over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.
Alaael-Deen Shilleh
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 the information that we have filed with the SEC, including the earnings release and 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 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.
Joining me on the call today are 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 fourth quarter earnings conference call presentation is available on our website at earnri.com. Our comments this morning will track to the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the note at the back of the presentation.
With that, I will now turn the call over to Larry.
Larry Penn
Thanks, Alaael-Deen, and good morning, everyone. We appreciate your time and interest in Ellington Residential as with much of 2023 in the fourth quarter markets, gyrate it between a selloff in a rally with tumultuous October, giving way to a market rally in November and December in October, interest rate volatility spiked as US Treasury yields rose to 15-year highs and natural yield spreads sharply wider on most fixed income products markets then reversed course in anticipation of the conclusion of the Federal Reserve's hiking cycle with interest rates and volatility both declining into year end with rates lower and trading in a more stable range.
Demand for spread product products picked up and capital flowed into fixed income funds with the notable exception of CMBS, which has its own unique challenges. Virtually all fixed income spreads tightened for the fourth quarter, including in the markets where EARN invests, namely Agency and non-Agency RMBS and now corporate CLOs. But we've been investing to an ever increasing extent after our recent pivot.
Turning to the investor presentation on slide 3, you can see that medium and long-term interest rates, despite spiking to multiyear highs in October actually declined overall for the quarter and the 30-year Freddie mortgage survey rate despite reaching a 23 year high mid quarter also finished lower on the quarter, incredibly despite all of the fluctuations during the year, both the 10-year treasury yield and the 30-year mortgage survey rate finished 2023 within 1 basis point of where they started the year, as you can see here on this slide as well.
As the backdrop for our mortgage-backed securities portfolio, you can also see on slide three, that option adjusted yield spreads tightened across agency coupons during the fourth quarter and that the most pronounced price increases were on lower any intermediate coupons. Dollar prices on Fannie 2.5 to 4.5 were up more than five points sequentially.
The outperformance of those coupons benefited earned agency MBS portfolio, specifically because coming into the quarter, roughly two thirds of our agency MBS had coupons of 4.5% or less. Meanwhile, as the backdrop for our CLO portfolio, corporate credit spreads followed a similar pattern. First widening up in October and then tightening in November and December and tightening overall for the quarter as an economic soft landing narrative permeated the market you can see on the bottom of slide 3 that credit spreads on both high-yield and investment grade tightened significantly over the quarter or prices on the Morningstar LSTA Leveraged Loan Index rose.
Turning now to Earns results. In the fourth quarter, we generated net income of $0.75 per share and a non-annualized economic return of 7.7%. While our adjusted distributable earnings grew to $0.27 per share and more than covered our dividend. As with other market disruptions we've seen before the key in the fourth quarter was to avoid forced selling when the market sold off in October in order to preserve equity and earnings power and be in a position to participate in the subsequent market recovery.
In the fourth quarter, we again relied on our risk management and strong liquidity position to accomplish this. That said, we did sell pools in the fourth quarter to free up capital from MBS to CLOs and the majority of our sales took place in November as yield spreads were tightening. We ended up increasing the size of our CLO portfolio by $13.6 million during the quarter.
On slide 12 of the earnings presentation, you can see some of the underlying characteristics of our CLO portfolio as of year end. the corporate loans underlying our CLO investments span a diverse array of industries and the overwhelming majority are floating rate first-lien senior secured loans. Our rotation into CLOs has continued into the new year with our agency portfolio now incrementally smaller and the size of our CLO portfolio now up an additional 70% from year end to approximately $30 million.
Even after the recent credit spread tightening in the sector, we still see returns on equity for new CLO investments in the high 10s, low 20s. Besides contributing to and diversifying earned GAAP results. Our higher-yielding CRE CLO investments have also helped drive the substantial growth of our net interest margin and thereby have supported our ADE as well. In addition, because we employ less leverage on our CLO as compared to agency the portfolio rotation has also driven down our leverage ratios. At year end, our debt to equity ratio adjusted for unsettled trades declined to 5.3 to 1, down from 7.3 to 1 at September 30.
I'll now pass it over to Chris, to review our financial results for the fourth quarter to more detail.
Chris Smernoff
Thank you, Larry, and good morning, everyone. Please turn to slide 5 for a summary of Ellington Residential's fourth quarter financial results. For the quarter ended December 31, we reported net income of $0.75 per share and adjusted distributable earnings of $0.27 per share. ADE excludes the catch-up amortization adjustment, which was positive $566,000 in the fourth quarter.
During the quarter, positive net interest income and net gains on our Agency MBS significantly exceeded net losses on our hedges, driving strong performance from our agency portfolio. Our CLO portfolio also generated strong return driven by net interest income and net gains, as did our non-Agency RMBS and interest-only portfolios.
On slide 5, you can see that our overall net interest margin expanded to 2.19% from 1.34% quarter over quarter, which drove the increase in ADE. Broken out by product our agency then increased to 2.02% from 1.26%, driven by higher asset yields and a lower cost of funds. Meanwhile, our credit NIM, which includes CLOs and non-agency RMBS, increased to 6.28% from 4.55%, boosted by high asset yields on our larger CLO portfolio.
Please turn now to our balance sheet on Slide 6. Book value per share was $7.32 at year end compared to $7.02 per share at September 30, including the $0.24 per share in dividends in the quarter. Our economic return for the quarter was 7.7%. We ended the quarter with $61 million in cash plus unencumbered assets, which was approximately 45% of total equity.
Next, please turn to slide 7 for a summary of our portfolio holdings. Our Agency RMBS holdings decreased by 8% sequentially to $728 million as of December 31, as net sales and paydowns exceeded net gains. Our agency MBS portfolio turnover was 25% for the quarter.
Our aggregate holdings of non-agency RMBS and interest-only securities also shrunk in size by 13% quarter over quarter. Over the same period, we increased our CLO holdings more than fourfold to $17.4 million as of December 31 compared to $3.8 million as of September 30th. At year end, our deployed equity was allocated 89% to mortgage related securities and 11% to CLOs.
Our debt-to-equity ratio adjusted for unsettled trades decreased to 5.3 times as of December 31 as compared to 7.3 times as of September 30. The decline was primarily due to an increase in shareholders' equity and a significantly lower leverage on the CLO portfolio relative to our agency holdings. Similarly, our net mortgage assets to equity ratio decreased to 6.5 times from 7.2 times over the same period despite our holdings holding a net long TBA position at December 31 as compared to a net short TBA position at September 30.
On slide 9, you can see the details of our interest rate hedging portfolio. During the quarter, we continued to hedge interest rate risk, primarily through the use of interest rate swaps. We ended the fourth quarter with a net long TBA position on a notional basis, but a small net short position as measured by 10-year equivalents. Lastly, on Slide 12, you can see that nearly all of the loans underlying our CLO portfolio are floating rate and as such carry minimal interest rate risk.
I will now turn our presentation over to Mark.
Mark Tecotzky
Thanks, Chris. The fourth quarter was really a tale of two markets. The first part of the quarter was characterized by continued rate selloff, wider spreads, fund outflows and market uncertainty about how high the Fed would need to hike short rates before achieving a noticeable improvement on inflation. But then starting in late October and early November with economic indicators and comments from Chairman Powell pointing to a possible end to the rate hike cycle market starting to make a U-turn rates dropped, spreads tightened and there was a significant funding bank buying of agency MBS and other spread product in agency sector.
Outperformance in the second part of the quarter exceeded underperformance in the first part. And overall for the quarter, agency MBS significantly outperformed hedging instruments. I'm happy to report that EARN was well positioned to capture this agency outperformance, posting a total economic return of almost 8% for the quarter during the market sell-off. In the first part of the quarter, we were able to manage the interest rate volatility and keep our agency MBS portfolio largely intact.
We were confident that it was just a matter of when not if spreads would recover and maintaining our portfolio allowed us to capitalize on the spread tightening when it did eventually occur during Q4. The market pivot and Fed expectations was the catalyst that led to lower implied and realized volatility, which lowered actual and expected hedging costs and prompted capital inflows from banks and investment funds. If and when the first rate cut occurs later this year, we think that could be another catalyst for continued outperformance for agency MBS. We were able to take advantage of the market strength to shrink our agency MBS portfolio incrementally and redeploy that capital into CLOs. That rotation not only enhanced our diversification, but it also took our leverage down significantly and yet we were still able to grow ADY. In Q4.
Our CLO portfolio grew by $13.6 million as we predominantly added seasoned CLO mezzanine tranches, but also longer duration, CLO equity, shorter-duration CLO equity and newer vintage CLO manager, seasoned seasoned mezzanine investments outperformed throughout Q4 as prepayment speeds accelerated and CLO cash balances grew, driving expectations of a deal deleveraging in January, and that strong performance has continued into 2024. CLO credit spreads tightened across the board in Q4, with triple-B generally rallying around 30 to 50 bps and double B's rally even more, albeit with significant dispersion.
However, these sectors lagged the high-yield corporate bond market where by some measures, spreads tightened almost 100 basis points for the quarter, Q3 earnings were better than expected from many high-yield borrowers with JPMorgan estimating that 86% of high-yield companies generated Q3 earnings that were either neutral or positive for their credit profiles and investors generally grew more comfortable with non-investment grade credits in Q4 as fundamentals improved improvements in the leveraged loan market drove strength in junior CLO tranches. Given that they are more levered to credit performance than senior tranches are.
This said, the most credit sensitive CLO profiles it is that is does with the lowest credit enhancement and our most stressed portfolios continued to lag as investors anticipated further credit losses in Q1 of 2024, we anticipate further strength in our CLO portfolio due to declining credit markets just and continued pull-to-par and seasoned CLO managers.
Approximately 40% of the leveraged loan index traded above par at the end of Q4, which has incentivized lots of borrowers to refinance their debt so far in 2024. This is benefiting both seasoned CLO mez to faster deal paydowns and CLO equity to lower near term default risk as underlying corporate borrowers raise incremental liquidity. We also expect the technical backdrop for the leveraged loan market to remain attractive as many new CLOs are expected to ramp up portfolios in Q1, driving demand for loans with a forward calendar of loan supply that remains low.
Looking ahead, we see lots of reasons to be optimistic about earned future performance. The most aggressive Fed hiking campaign ever is now behind us. So from went from zero to over 5% in 14 months. The Fed balance sheet has shrunk by well over $1 trillion since its peak post-COVID size. Couple that with large bank failures, putting almost $100 billion of agency MBS and CMOs into the market. And you had the recipe for substantial spread widening, which we've seen over the past couple of years, but now the Fed should soon become a tailwind as opposed to a headwind.
And looking ahead, in addition to this expected support from the Fed, we see five major factors supporting future MBS performance. First, spreads are wide, not as wide as October, but still much wider than historical averages. And this should be fed as a seller, not a buyer and banks while buying or shadow of their former cells being widened staying wide, works out just fine for EARN, we have a big lever them to capture. Second supply is low, and it's especially low relative to the mountain of treasury supply. So relative performance versus hedging instruments are supported by this technicals.
Third, prepayment risk for most coupons is benign and the cost of prepayment protection is reasonable. Fourth flows into mutual funds to buy agency MBS. Both active and passive has been quite strong as our Fixed Income Annuity sales banks have also started to buy in Q4. And fifth, volatility is a lot lower, both actual and implied. So delta hedging costs are lower and that makes option-adjusted spreads wider. We have room to add leverage at EARN, we have tools to further grow. ADE and CLOs are helping to deliver a diversified return stream.
Now back to Larry.
Larry Penn
Thanks, Mark. I was pleased with how we navigated the market gyrations throughout 2023 and finished the year on a high note now with yield spreads still wide on a historical basis with markets expecting constant set of hikes and with volatility, normalizing agency MBS are attracting incremental demand from investors, albeit tempered by uncertainty around the timing of cuts when those rate cuts eventually come and we ultimately see a steep yield curve. Again, that should be a further tailwind to the sector.
I am excited about our growing corporate CLO portfolio, earned small size and liquid portfolio has been an advantage here as we've been able to ramp up quickly and a terrific strategy where we see a big opportunity for EARN. While Ellington has long-standing and deep experience managing CLO portfolios. EARN began investing in that product just this past September, and that pivot is already contributing nicely to earnings, including investments through today, CLO investments are now a full 17% allocation of EARN's total equity.
I expect them to be a significant driver of earnings and ADE. Moving forward, CLO market has proven its ability to generate attractive returns over market cycles and over a long-term horizon in the short term. And as Mark mentioned, credit spread tightening in some segments of the CLO market has continued to lag a larger rally in corporate bond credit spreads, and we expect that money manager inflows into high yield and leverage loans will help narrow that gap.
As Mark also mentioned, we expect faster leveraged loan prepayment speeds to drive faster prepayments on many of our seasoned CLO mezzanine positions, which we hold at significant discounts to par. We've grown our CLO portfolio by another 70% so far in 2024. And these discounted seasoned CLO mezzanine positions have continued to be a focus of ours given their total return potential in an environment with this potential for higher loan prepayment speeds.
The CLO market suits EARN extremely well. It not only offers high current interest income, but it has always been a fertile ground for both relative value and absolute value opportunities as well as for trading opportunities, given the dispersion in collateral credit performance from deal to deal going forward, Ellington has extensive expertise and track record in the CLO market should be a big benefit for ARM.
Our CLO portfolio has continued to contribute nicely to our results so far in 2024. But net losses in agency MBS have led to an overall economic return for EARN that we currently estimate at negative 1.9% year to date through February, the agency MBS market has underperformed many other fixed income sectors so far in 2024, driven by higher rates and uncertainty around the timing of Federal Reserve rate cuts.
This, of course, follows a strong fourth quarter for agency MBS, which led to the positive 7.7% non-annualized economic return that we generated last quarter for the past three years, it's undeniable that agency MBS has been a volatile strategy for all the agency mortgage rates, including or But I firmly believe that our CLO strategy will prove to be a less volatile strategy and thereby stabilize and enhance earns returns over time.
And with that, we'll now open the call to questions. Operator, please go ahead.
Question and Answer Session
Operator
(Operator Instructions)
Doug Harter, UBS.
Doug Harter
Thanks. Can you talk a little bit more about how you see the equity allocation to CLOs playing out kind of how much how much of equity could this could?
Larry Penn
Hey, Doug. How are you doing?
Doug Harter
Morning.
Larry Penn
Morning, um.
Yeah. So I guess some it's a I'm not going to answer that question directly. I'm just going to say that I love the strategy. We have a great team here and a great track record. Are the more the more the better as far as I'm concerned on, we as you know, we have constraints that we operate under some veto as I read the retest, which are now effectively mostly income-based and at 40 Act, we have tests which are mostly more sort of capital allocation base, but it also depends on your sort of financing strategy, your subsidiary structure. So yes, we can continue to grow and I don't want to trying to forecast.
Doug Harter
Okay. And then I guess just as you think about risk-adjusted returns, kind of comparing agency and CLOs, you how do you think about kind of the upside downside in each to kind of the base case and kind of how that factors into kind of where you want to be?
Larry Penn
Sure. Well, first of all, from a NIM perspective, you can see that I think Chris mentioned our and then on our Agency portfolio was probably in the low two hundreds, something like that in the credit portfolio, including CLOs, I think 600.
Chris Smernoff
Yes.
Larry Penn
So even with a small bit of leverage on the CLO portfolio generates a greater leverage on dollar for dollar, you know, as spreads have tightened, you can sort of see go back to slide 3, you can sort of see difference based on coupon. But if you look at 4.5 for example, on the ZB. spread, I'm just looking at year end, you know, something around the 91 hundred level, even if you leverage that a fair bit, you're still not quite there versus where you are on the CLO portfolio on a leveraged basis.
So now the CLO portfolio obviously has kind of tail credit risks in a especially in a deep recession or something like that. So that's a factor for sure. It also has much fewer delta hedging costs, right? I mean the thing that's been really tough for agency rates including us for the last few years as these big moves in the market, big gyrations in rates, of course, for us, we'd like to stay hedged on interest rates, and that's frankly, over a long period of time, that's been key to our success, but dumb it really cuts into book value over time, those delta hedging costs, and ultimately, that's going to cut into your dividend as well?
Right. So on So yes. So the other thing, though, I would say is from a trading perspective, given the liquidity of agency, the opportunity for trading profits, including dialing up and down. To what extent we hedge with TBAs is probably that opportunity is probably greater in agencies because, you know, if you can make if you can make a point just this is a hypothetical if you can make a point on your assets by being timely in terms of when you add when you separate when you take off how you hedge that's leveraging that seven or eight times.
I mean, that's a massive amount of a boost to earnings. So there's a lot of pros and cons, right on for each sector and there are opportunities for trading gains as well in CLOs, um, but it's not I wouldn't say that the assets that we're buying there are super liquid So it's some they're different. And like I said, we love the strategy, and I'd love to continue to see this grow as much as possible and CLOs.
Doug Harter
Appreciate that. Thank you.
Operator
[Mikhail Goberman, JMP]. (Technical Difficulty)
Hey, good morning, everybody. Hope everyone's doing well. First question, I guess is on did I hear correctly that you said book value was down about 1.9% thus far this year was that total economic return?
Larry Penn
Total economic return.
Okay, thank you.
Chris Smernoff
And I think that was that through the end of February.
Including the two dividends. What are you guys targeting a sort of leverage ratio range going forward given the sort of dip the pretty dramatic dip that the leverage ratio took in the fourth quarter. Is there an area that you're sort of I'm sort of trying to get to?
Larry Penn
It's just a blend of really the appropriate leverage for each asset class, right? So for agencies, you know, we've taken it up into the nines before in terms of leverage and in, yes, in non-agencies and now in CLOs, we've had almost no leverage, we, but we'll start to add leverage to CLO portfolio at some point.
And as I well, maybe I didn't mentioned exactly in answering the first question, but you know, you can comfortably have half a turn a turn of leverage on CLOs. So, you know, it's just going to be a blend of where the capital allocation is and of course, in agencies, we also and if I had the opportunity that kind of upper limit of something in the nine to one leverage area, yes, we can always go lower than that. And as I said a few seconds ago, the sometimes we do that because we do want to take advantage of. So the spread volatility to sort of buy low and sell high, if you will, throughout the year.
Got you. Thank you for that. And one more if I could on sort of a longer-term question -- what are you guys' thoughts on what kind of interest rate environment are it would take for to see a meaningful pickup in prepay speeds sort of back towards, I guess, historical levels of a few years ago.
Larry Penn
Mark?
Mark Tecotzky
So it's sort of interesting. We got a we get the prepayment reports monthly, and we got one last night. And what I would say is that while prepayment speeds. So in aggregate have been benign. Some technological improvements improved, including AI is definitely something that is on being embraced by some of the big non-bank lenders. And so there are pockets of the market. If you look at sort of there, Jenny pools out there now that pay over 80 CPR from Israel, high coupon ones, but a lot of VA, what we were getting at there. What I was getting at in the prepared remarks is that if you there is no the vast majority of what's out there is still couple of hundred basis points away from being refinanceable either.
There's you have, you know, a lot of runway in rates for many of the coupons that we own that and three have to worry about prepayments. And the other thing I would say is that it's not real expensive to buy prepayment protection. So it's not as though prepayments don't exist and mortgage bankers aren't going to be aggressive about trying to solicit refis when they can. They certainly will be. It's just the vast majority of the market and the vast majority of what we own you still have a lot of a lot of it would take still significant move in rates to get it refinanceable.
And so but still, look, rates are unpredictable, implied volatility is high season of the forward curve. Predict rates are coming down. There's wide dispersion around it. So still for most coupons, we're seeing some of the higher coupons. We still choosing to buy pools with prepayment protection, we think it's relatively affordable. And one thing that was a big part of last year was I'm looking for pools. I think we mentioned it a few calls ago, looking for specified pools that have faster than market projected prepayment speeds, and that certainly helped us we get into things like 2.5 and threes and three and as we have big discounts, even finding pools you one or two CPR faster makes a huge difference in yields.
So prepayment modeling, prepayment speeds, prepayment risk. It's still out there it's just right now given the current distribution of coupons in the market, the real scary prepayments are only affecting a very small subset of it out what's out there, and that's the sectors that we have avoid it. But we I'm not surprised to see some of these very fast prepayment speeds because there's still a lot of capacity within the mortgage banking community and the technology has gotten better. And so we look for them to be aggressive whenever they have opportunities be aggressive on refis.
Yes, sure. Thank you, Mark. And as always, best of luck guys going forward.
Larry Penn
Thanks.
Mark Tecotzky
Thank you.
Operator
Matthew Erdner, JonesTrading.
Matthew Erdner
Thanks for taking the question. Kind of following up on that CPR. You guys took off some of the lower coupons during the quarter. You know, could you kind of talk to the thoughts there?
Chris Smernoff
eah. We just saw opportunities during the quarter to rotate up and coupon, I think our portfolio went up about 10 basis points or so in coupon on the relative performance of lower coupons versus current coupons is really impacted by flows into the ARM, the big bond indices, right? So if you look at the mortgage index, you look at the distribution of mortgage coupons in something like the Barclays Agg.
It's heavily weighted to twos and two and S. And so the relative performance of those coupons is very much impacted by them flows into the ag. And there's a couple of real big meal, $100 billion plus ETFs that track the ag. So we saw opportunities where a lot of flows came in to ag type portfolios where out were lower coupons outperformed. We saw an opportunity to go up in coupon. We thought it would add certainly adds ADE. We thought it was also a total return. So we'll continue to be opportunistic about that.
Matthew Erdner
Yeah, that's helpful there. And then allocated capital to CLOs and continuing that strategy. Are there any other places where you feel like you guys could opportunistically deploy additional capital for total return.
Larry Penn
That's where we're focusing on now.
Matthew Erdner
Okay. Thank you.
Operator
Eric Hagen, BTIG.
Eric Hagen
Good morning. Hope all is well, one more on just kind of the market dynamics and what do you feel that could support more dollar roll specialness in the market. Do you feel like it's reasonable to expect that that could come back if there's any changes to Fed policy?
Chris Smernoff
You know, I would say that for some of these higher coupons. I think the dollar rolls have predictably gotten weaker because you've sort of built up now on a ray of kind of, you know, faster paying pools. If you look at things like Fannie snapped out. They've been production for a few months. You have some pools of comp, the seasoning ramp. And so I don't look for specialists to be there in the lower coupons, you can get specialness if you get on a lot of flows like I was talking before about into these ag indices because you know when when when money comes into an ag index and the leverage managing it wants to buy a bunch of Fannie twos and 2.5 to get there to minimize tracking where you really need to get that from other investors, right? The initially will buy from the primary dealers, the primary dealers and then going to want to buy that from other portfolios and a lot of those bonds are locked up in the Fed and locked up in on banks.
There's obviously no news on Truist a week or so ago. And when that news came out it may cause lower coupons to underperform. So I think in the lower coupon stuff, you can see some more volatility in the rolls. But still there, we tend to find if you're thoughtful about fast paying pools, you can find pools that pick-up carryovers the role. So I don't I don't see a lot of specialness going forward for the for the higher end production coupons where you're starting to see a float that's faster.
And I think for lower coupon stuff, you can see it, but kind of month to month like there was a month ago, I think the Genie two three, the Genie to three-year-old special. So you get sort of these one-off things. But um, where most of the production is centered deal I don't think you're going to have a lot of specialists, which is really a big difference from the 2021 period where production was Fannie twos and 2.5 and they are routinely special and everyone spoke about that and they were special because the Fed and banks were buying so much and they weren't rollers that we don't have that dynamic right now. So the way the rules work out, I think it favors in aggregate haven't more specified pools, less TBA. And I think broadly, that's sort of how the industry has moved the other the read industry.
Eric Hagen
Yes, hey, that's a good perspective on as far as running the portfolio, I mean, what do you guys feel like is the minimum level of liquidity, you feel comfortable having it at these spread levels. Like how much do you feel comfortable with ahead of the Fed cut versus like a cut actually taking place, do you feel like that would be a catalyst to carry more leverage or is it potentially conditional on other factors?
Chris Smernoff
We mentioned in the prepared remarks that, you know, if you look at work from Bloomberg or whatever else people are predicting cuts this year. I think when they if and when they actually happen, I do think that will be a catalyst for some incremental buying. So I do think that will be supportive in terms of how we manage our cash. We don't that is sort of sacrosanct in that we're going to manage our cash according to market stresses and according to on, you know, the repo roll calendar and we won't change sort of on the guardrails. We have around minimum levels of cash as a function of what the Fed is going to do that.
We just that's how we run how we won't earn the Terra and EFC co and private funds that there is a certain amount of cash we're going to keep on hand. And the way we determine that is what sort of yields I mean looks at the portfolio and look at the leverage and looks at where things can go into shock. And then with the agency stuff you have to look at, there's a calendar to it. So you get new factors on when the prepayments come out. So we've got new factors. So repo lenders did margin call you versus a lower balance, but you don't actually get that cash to the 25th of this calendar component to it.
But we have room to add leverage mentioned in paired remarks, but it's not because we're going to change the way we manage the cash that's I'd say sort of we manage the cash is something that we've been doing for a long time. I think served us very well. Certainly served us extremely well in stresses like during COVID. But away from that, EARN has plenty of liquidity to spend, putting a more cap on the CLOs we've spoken about, but it still has more room to leverage just a general pull strategy as well.
Eric Hagen
Thank you, guys, so much.
Chris Smernoff
Thank you, Eric.
Operator
And that was our final question for today. Thank you for participating in the Ellington Residential Mortgage rate Fourth Quarter 2023 earnings conference call. You may disconnect your line at this time and have a wonderful day.
