Q2 2021 Ellington Financial Inc Earnings Call

August 6, 2021

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Good morning, ladies and gentlemen, thank you for standing by and welcome to the Ellington Financial second quarter 2021 earnings Conference call.

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It is now my pleasure to turn the call over to Jason Frank Deputy General Counsel and Secretary, Sir 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 the 1995.

Forward looking statements are not historical in nature.

As described under item 1 a up our annual report on form 10-K filed on March 16, 2021. The amended 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 am joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark The coffee co Chief investment officer of the FC and Jr. Herlihy, Chief Financial Officer of the FC.

As described in our earnings press release, our second quarter earnings Conference call presentation is available on our website Ellington financial dotcom.

Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation of our qualified in their entirety by the endnotes at the back of the presentation with that I will now turn the call over to Larry.

Thanks, Jay and good morning, everyone as always thank you for your time and interest and Alex and financial.

Ellington financial continued its strong performance during the second quarter of 2021.

As you can see on slide 3 we generated net income of 75 per share.

Good for an annualized economic return of nearly 18% and we generated core earnings of 51 per share, which was 19% higher at 38% higher and our core earnings in Q1 and Q4, respectively.

Driven by the strong performance and earnings growth the.

<unk> raised our monthly dividend twice during the second quarter to its current level of <unk> 15 per share, which is now of 450% higher than it was in March.

Our loan origination businesses again drove both GAAP earnings and core earnings in the quarter.

Beginning with our non QM business lend shore had its second consecutive record quarter for origination volume and the loan flow from line sure helped us execute our second non QM securitization of the year.

In connection with that non QM securitization, we exercise the call option on 1 of our 2019 securitization.

And included the vast majority of those called loans in our new deal.

By calling and re securitizing the law.

Lowered our borrowing costs by over 200 basis points on those $110 million of mortgage loan assets.

In addition, we were able to get a higher advance rate on the securitization as compared to the 2019 securitization so by calling and re securitizing. We also freed up additional capital for us to reinvest.

This was the third time that we've called 1 of our non QM deals and each time. It has created a nice boost to earnings.

We currently have 5 more non QM, securitizations, where we retain the call option.

None of these options are currently exercisable, but our non QM call option portfolio continues to represent nice potential upside for the future earnings.

Meanwhile, in the reverse mortgage space Longbridge delivered yet another quarter of excellent results.

Longbridge is earnings for the first 6 months of 2021 are now nearly equal to those from all of 2020, which was itself a record year for Longbridge.

While there has been some recent yield spread widening in the heck of a market that has caused some margin compression that could easily reverse itself and either way I'm still very bullish on longbridge is growth in earnings prospects.

Elsewhere in the credit portfolio, we continue to see excellent performance in our short duration of loan portfolios, particularly residential transition mortgage loans consumer loans and small balance commercial mortgage loans.

And in Securities, we generated significant significant gains in our CLO see MBS and non agency strategies.

And the agency portfolio was a very challenging quarter for agency MBS by our agency strategy managed to generate just a modest loss. Thanks to the concentration of our long investments in lower coupons and assisted by our significant TBA short positions in higher coupons.

Higher coupons for the weakest performers in the agency MBS sector during the quarter.

Now please turn to slide 11.

This is a new slide that we've added this quarter to our earnings presentation, where we're including some additional detail on our proprietary loan pipelines.

On this slide we highlight the 5 primary sectors, where we're involved in loan origination.

Non QM loans small balance commercial mortgage loans residential transition loans.

<unk> loans and reverse mortgage loans.

And all of these businesses, we leverage off of the Ellington strong analytics and we capitalize on the lending void left by banks, which if the.

Much stricter regulations since the global financial crisis of 2007.2008.

On the first of all of the chart you can see that in 4 of these 5 verticals, we've established strategic equity investments at the origination level.

And just in the last couple of months, we've increased the number of our originator of investments for a total of 5 strategic investments. Following the acquisition of 2 new small, but strategic investments in the residential mortgage origination space.

These 2 additional strategic investments should further expand and diversify our loan sourcing channels.

Furthermore, we are currently engaged in several other active dialogues and we expect to add a couple of more originator of investments to our roster by year end.

Moving down the chart you can see that in addition to the strategic originator Stakes. We also source loans, the numerous joint ventures and flow agreements with third party originators.

And then on the extra we highlight our in house origination teams specifically in the small balanced commercial mortgage space and in the residential transition loan space.

Putting it all together you can see that we have the very diverse.

<unk>, an expanding array of channels that feed our proprietary loan pipelines.

At the bottom of this chart you can see that we acquired $445 million of loans during the second quarter across these 5 business lines and that the combined size of these loan portfolios was nearly $900 million at June 30.

The largest growth in acquisitions last quarter came from non QM small balanced commercial mortgage and residential transition loans.

In fact, we had record quarters for loan originations in non QM small balance commercial and RTL in the second quarter funding 259 million 87 million of $68 million respectively.

By the way residential transition loans in column 3 is the sector. We are particularly excited about given the strength of the housing market the supply demand imbalance for housing and the chronic under investment in housing in many areas of the country.

The performance of our RTL loans has been tremendous including through Covid and the strategy continues to offer very attractive risk adjusted returns and improving financing options.

The column for you can see that we acquired about $30 million of consumer loans during the second quarter, but these new originations just kept pace with repayments and the size of our consumer portfolio was actually roughly unchanged at quarter end.

Finally in column 5 you can see that our our activity in reverse mortgage loans has so far been limited to our investment of Longbridge itself, we have not purchased any assets from longbridge at least not yet.

Also when you look at the loan titles totals on this slide keep in mind that we are not showing any loans that we've securitized, which in many cases are consolidated onto our balance sheet of.

Of course, if we weren't of includes include those loans in this chart. The total would be much much larger.

And in many ways those retained tranches from loan Securitizations epitomize, what it means to the vertically integrated.

Instead of just buying loan backed security charges in the secondary market, where we'd have to pay full retail prices were involved from the outset and at all of the most important stages in the lifecycle of these loans are.

For our involvement starts of the crafting of the underwriting and pricing guidelines, which enables us to acquire the kinds of loans, we want to acquire and the wholesale prices to boot.

Then we warehouse these loans pending securitization and finally, we securitize.

And when we securitize, we think it's useful to look at things 2 different ways.

We do securitizations as providing long term locked in financing of our loans out of low cost of funds.

We view Securitizations as a way to manufacture of highly attractive retained tranches at prices, we could never find in the secondary market.

With that I'll pass it to Jr to discuss our second quarter financial results in more detail.

Thanks, Larry and good morning, everyone. Please turn back to slide 3 of the presentation.

For the quarter ended June 30th Ellington Financial reported net income of <unk> 75 per share and core earnings of 51 per share.

These results compare to net income of 86 per share and core earnings of 43 per share for the prior quarter.

In April we increased our monthly dividend by 40% to 14 cents per share and in May we increased the dividend by another penny to <unk> 15 per share, which we have maintained since then.

Our higher core earnings quarter over quarter was primarily driven by larger small balance commercial mortgage residential transition and non QM loan portfolios as well as by lower financing costs.

For earnings also increased due to several of small balance commercial mortgage loan resolution, which included the payment of past due interest and the recovery of previously paid expenses.

If you remove the effect of those asset resolutions. Our current core earnings run rate was in line with our current dividend rate of 45 per share.

So for our core earnings run rate 45 per share is probably a better figure to use in the near term.

Moving to slide for you can see the we finished the second quarter with 80% of our deployed capital allocated the credit strategies and 20% for agency similar to how we were allocated last quarter.

As I'll discuss in more detail when we turn to slide 6 the credit portfolio grew while the mix between credit sectors continued recent trends.

Next please turn to slide 5 for the attribution of earnings between our credit and agency strategies.

During the second quarter, the credit strategy generated a total gross profit of $1.25 per share while the agency strategy generated a modest loss of minus <unk> <unk> per share the.

These results comparison of $1.14 per share in the credit strategy and roughly breakeven in the agency strategy in the prior quarter.

We benefited from strong performance in all of our primary credit strategies during the quarter loan growth and lower financing costs generated higher sequential net interest income. While we also had substantial net realized and unrealized gains in our sand the CLO non agency MBS.

Non QM strategies.

And from our equity investments and loan originators.

Credit hedges contributed negatively to results as credit yield spreads continued to tightened during the quarter.

In agency yield spreads widened during the quarter driven by declining interest rates continued elevated prepayment rates and concerns around fed tapering.

Most agency RBS significantly underperformed comparable U S treasuries.

And the interest rate swaps on a total return basis.

And as a result, we had a small net net loss of the strategy.

However, with the agency underperformance more pronounced in higher coupons than lower coupons, our portfolio positioning positioning of being disproportionately long lower coupons and maintaining a portion of our TBA short positions in higher coupons helped to mitigate a portion of the MBS spread widening.

Turning next to slide 6 you can see that our total long credit portfolio increased by 5% in the second quarter to $1361.36 billion.

As of June 30.

The quarter over quarter increase was driven by non QM and residential transition loan acquisitions, which more than offset the impact of the non QM loan securitization.

And by the growth of our equity investments and loan originators.

And the <unk> and commercial mortgage loan bucket despite of record volume of commercial mortgage loan originations in the second quarter, you are not able to see the growth in this chart because several small balance commercial mortgage loans converted to equity method investments during the quarter, when we finance them and because of loan payoffs offset some of this growth.

Removing the effects of the loans converting the equity method investments the overall credit portfolio actually grew by 8% quarter over quarter not 5%.

Meanwhile, in CLO and non agency MBS.

Opportunistic sales caused those 2 portfolios to shrink quarter over quarter.

On slide 7 you can see that our total long agency <unk> portfolio declined slightly sequentially. However, we did both increased the size of our long TBA portfolio and reduced the size of our TBA short position during the quarter.

This caused our net agency pool exposure to increase of 4.2 times from 3.1 times, which you can see on slide 20.

Turning back to slide 8.

You can see that we finished the quarter with an overall debt to equity ratio of 3.2 times.

Unchanged from last quarter, and our recourse debt to equity ratio of 1.9 times down from 2 times last quarter.

A larger portion of our borrowings were non recourse as of June 30, mainly due to the completion of the non QM securitization.

Recourse leverage on the credit portfolio was less than 1 times at June 30.

As of June 30, our weighted average borrowing rate decreased to $1.2 4% as compared to 1 for 1% at March 31 due.

Due to narrower financing spreads on both of our an agency and credit borrowings.

We continue to extend and improve our sources of financing and leverage in the second quarter. In addition to the non QM loan securitization. We also added a new commercial mortgage loan financing facility.

For the second quarter total G&A expenses were <unk> 17 per share while other investment related expenses were <unk> 11 per share both unchanged from the prior quarter.

We also recorded an incentive fee of 716 million for the second quarter as we exceeded our net income hurdle for the rolling 4 quarter period.

We also recorded an income tax expense of $3, $1.4 million for the quarter, primarily due to an increase in current and deferred tax liabilities related to realized and unrealized gains on investments held in the domestic Trs.

Finally, our book value per common share was $18.47.

At June 30 of 1.7% from $18.16 per share at March 31.

Combining this book value per share appreciation with a 44 per share of common dividends that we declared during the second quarter. Our economic return for the second quarter was plus 4.1% now over to Mark. Thanks.

Thanks, Jr.

<unk> had a strong quarter.

Feel sometimes that the market's tendency is to analyze quarterly earnings each quarter in isolation on the short term basis disconnected from what came before and what will come after.

But thats not the way, we manage Ellington financial.

This quarter, we accomplished was in large parts of the product of initiatives, we've been working on for years and continuation of the themes that we think will continue to drive success in the future.

<unk> had a very strong quarter as measured by the metrics that I think are most important to investors, which are also some of the metrics that helped guide us for managing our investments first we are of high dividend yield almost 10%, which is covered by core earnings and which we raised twice this past quarter. Despite the drop in interest rates and a more.

Backdrop of tightening credit spreads.

We have been able to earn our dividend by building a portfolio of high yielding assets, both loans and securities with the yield suppressed this past year by the fed QE. We have continued to grow our network to source assets. We know the in the low yield world, it's crucial to our shareholders that we deliver a high dividend.

Second we care a lot about increasing book value over time.

That's the way, we as management can try to keep the stock price on an upward trajectory.

There are a few ways that work with the portfolio managers and getting US there first we want core earnings to exceed the dividend second we want assets that can deliver a total return in excess of their current yield either by realizing gains through sales and loan resolutions or through mark to market appreciation and third our.

Nick originator equity Stakes can help us grow book value as these investments should appreciate in value over time, thanks to the synergies of the partnership between capable experienced loan origination operators and Ellington has considerable resources.

So this past quarter, even with our higher dividend level core earnings still exceeded the dividend. We grew the portfolio all harvesting gains in monetizing loan resolutions and importantly, we avoided the material loss in our agency portfolio and what was the very tough quarter for agency MBS.

As measured by gross return on allocated capital go down less than 1% in agencies.

By design <unk> is diversified across 4 main sectors residential commercial consumer and agency MBS. We believe the diversification generates higher returns over time per unit of risk and Thats the higher quality earnings stream.

This quarter, we didn't technically hit on all cylinders because the agency strategy didn't contribute but what is important is that we controlled our downside net strategy. So we were able to have a great quarter.

Across the board our credit strategy had strong performance in both loans and Securities I was particularly pleased this quarter to see strong growth in our residential transition loan portfolio. This is the result of years of developing relationships with the RTL originators that are like minded with us and their credit decisions.

We've spoken a lot about loan strategies in the past 2 earnings calls the securities have also been great performers. This year you can see on slide 6 to be harvested gains in some of our security strategies, most notably CLO and non agency MBS.

We also had excellent performance of <unk> in the form of Mark to market gains.

This highlights another form of our diversification not just residential commercial consumer and agency, but within each credit sector, we of securities and loans and take advantage of opportunities in each that are often out of sync.

Then re diversify further look at slide 10, which shows our commercial loan portfolio you can see diversification by property type and geography, we don't like the all of the eggs in 1 basket strategy now small balanced commercial mortgage loan investments. This past year, we have seen some of the best real estate investors in the world gets back.

The hurting the retail and hotel sectors, which are the sectors hit the hardest by the pandemic.

Looking ahead, we see a market where the competition for high quality high yielding assets will only get tougher. This latest round of QE by the fed has chased the investors into high yielding credit strategies by lowering the yields on investment grade assets.

Since quarter end, despite the spread of the Delta variant real estate focused assets have performed well, but youre starting to see some weakness in high yield and a little bit of widening in the investment grade spreads.

Also we would expect to see more interest rate volatility going forward.

Unlike the start of the year. The fed has no long run auto pilot, they're now discussing how they will taper bond purchases and we expect news on that front by the end of the year.

We don't think that fed tapering will be a big deal for the balance of the year since the fed has gone out of their way to say they want to avoid another taper tantrum, but that doesn't mean, we won't see pockets of volatility.

I really like the way the Ellington financial is positioned right now with ample room to increase leverage of crushed capital to deploy and importantly, we need to keep working with our origination partners. Both the ones. We have worked with for years and the new ones with whom we have recently partnered to help them grow their platforms in a risk controlled way.

The can prove that can contribute both assets and continued book value growth for EMC now back to Larry.

Thanks, Mark I.

Im extremely pleased with our performance so far in 2021.

Our origination partners and affiliates have done a tremendous job growing their market share in earnings which for Ellington financial has translated into higher earnings and a larger flow of high yielding loans for our portfolio.

We have also generated significant profits in our credit securities portfolios.

Overall Ellington financial delivered or the economic return of 9.2% for the first half of the year or 19, 3% annualized and increased both core earnings and the dividend significantly. We've also delivered a total return to shareholders of 35% over this period.

I'm proud to say that as of June 30, our book value per share was $18.47.

Which is actually 20 higher than our $18, 27% book value per share as of February 22020, right before the 2020 Covid lows.

And that's without giving credit to the dollar 70 of dividends on our common stock over that time period.

With all the we've achieved I believe that it was no coincidence that Ellington financial was added to the S&P Smallcap 600 index in May.

This was a significant milestone for the company and has not only provided greater liquidity and visibility for the company, but has substantially broadened our shareholder base.

To support the continuing growth of our loan portfolios and our strategic initiatives, we access the capital markets. Shortly after quarter end, raising approximately $113 million of common equity right around book value.

This new capital will help drive additional growth of our portfolio and should be accretive to earnings per share.

We've been actively deploying that fresh capital and have so far grown our non QM and RTL portfolios meaningfully since quarter end.

I'd like to close by re emphasizing the importance to us of our vertically integrated loan businesses are.

Our goal in these businesses is for lock in a steady flow of high quality high yielding loan originations of leveraging off of Ellington's core strength of data analysis and modeling to help shape the underwriting of those loans.

For many of these loans the securitization markets provide us the superior long term financing, which enhances earnings and strengthening of our balance sheet.

These businesses of produce superior long term risk adjusted returns for us They continue drive driving our earnings growth and we believe they continue to represent underappreciated franchise value for Ellington financial.

And with that we'll open the call for questions operator.

At this time, if you would like to ask a question press Star 1 now on your Touchtone phone again that is the star 1 on your Touchtone phone.

The second question from Bose George of <unk>. Your line is open.

Hey, everyone. This is actually Mike Smith on for Bose.

So on the recent equity offering.

The 25, it looks like 10% of that capital is unemployed. So I'm just wondering if you could talk to provide a little bit of color on the timeline for completing some of the money was.

You saw your little Staticky there was the question.

Debt after the recent equity raise.

Said that 10% of catheter was unemployed, but that as of June.

Right right right.

Could you would you mind repeating the question.

Okay.

I was just eyeballing that based off of the slide 25.

So I'm just wondering if you could provide some guidance on the timeline for <unk>.

Putting that money the work.

Sure. So we closed on the deal.

In July for it's been about a month of time.

The rough estimate is that we've deployed about 35% to 40% of that capital so far.

Which is on track with I think that invest the proceeds of within a quarter of plan.

That number would be a little bit higher if we weren't.

Being opportunistic in securities and so we believe.

We turned over some other investments at the same time. So there are a few of your input.

Inputs into the.

The capital available to invest in.

Many of the 35% to 40% of as a rough estimate of where we are.

So far investing for us.

Okay. That's helpful and then on the agency side of things.

You provided some color on the table.

Just wondering what are your thoughts on the current level of spreads.

Waiting from gaming to be for you to increase allocation to the agency business.

So this is mark it's of Great question right when we think about.

The most optimal way the partition the capital in Ellington financial.

The.

For main strategies.

The expected return in the agency portfolio, which is better than what it was coming into the second quarter. Because you didn't have the underperformance, but so we look at that but then we also look at what's the opportunity set in the credit strategy right and what Youre seeing on the credit strategies.

As Youre seeing increased.

Increased.

The quality loan flow and you can get a sense of the magnitude of that on the new slide Slide 11, but in addition to that you are seeing.

We're seeing better financing terms so.

No.

I think the opportunity set in the agency space is a little better than what it was.

We are.

The mindful of that although the fed does not want to cause volatility when they do.

Give further details on tapering.

You can see volatility that can sort of be inadvertent on the part of the fed. So we think about that and we also look at the.

Loan flow opportunities, so I think debt.

In all 4 sectors, we're seeing an opportunity set.

No.

The consistent too.

There's nothing that can outpace the dividend. So I don't think right now we see of strong need or a strong desire to increase the capital allocation for the agency side I think sort of we're comfortable with how we haven't set right now and if I could just add to that mark.

So if you go back really to our inception in 2007, So we've got a 14 year history now.

Our allocation to agency versus credit has probably range between its never been lower than the low teens.

I don't believe and it's never been I don't think thats ever got in the 25% so.

That's kind of the range now, maybe we're slightly and we've been mostly between 15% and 20% over that time period Thats pretty typical for us occasionally a little higher.

So I think 20% allocation.

That's probably a pretty healthy allocation I think over time.

So 1 thing that the agency strategy also does in addition to diversifying obviously the portfolio. It provides liquidity at key times like it did.

In mid March of.

And at April of last year. It was a huge source of liquidity for us which was obviously very important.

And it also helps our 40 Act test our REIT tests and enables US for example on the retesting side to have.

A lot of the.

What are non qualifying assets in our Trs is like the investment in long Ridge and lend share for example, so.

I don't think youre going to see that that strategy certainly going away for a very long time, and I think thinking about it in that 15% to 20% range as I think of good a good range to think about where that is and is going to stay for a while.

Great. That's very helpful color and then just 1 more for me.

Can you provide an update on how book value has trended since quarter end.

No no.

We're sort of on a schedule for that.

We report book value of monthly tip.

Typically on the fifth business day.

Alright, well sorry mid months now how we used to be on the fifth business day now we're more mid month, yeah. So.

The way that'll come out edmar.

Sounds good thank you for taking the questions.

We will take our next question from Doug Harter of Credit Suisse. Your line is open.

Mr harder than a lot of it.

Yes for service for your question.

Looking at the the loan categories you have on slide 11 could you just walk through what the kind of expected duration of each of those 4 categories would be.

Sure well.

Mark Alex Theres together at <unk> loans of 30 year loans.

Typically, though I think of the effect.

The duration of we think about half of 2 years on the <unk>.

<unk>.

They tend to pay pretty quickly.

Come with the high coupon. So when you do a securitization you wind the pertaining the.

Not only of the credit risk, but also essentially an io so.

They are of a particular duration during the ramp up period, which is somewhere between 1 and 2 years, but then when you do the securitization.

The old debt duration shift changes and it becomes shorter.

The small balance commercial loans of those are higher coupons.

And their floating rate. So those really don't have interest rate risk by may typically.

The average life of those loans is about has been about 15 months historically.

Right now of the residential transition loans those loans are typically 6 months to a year Theyre also higher coupons. So we'd think about those of have an interest.

The state risk of maybe half of year.

On the consumer loans that can be a range of things right.

Most of the the.

Those loans are somewhere between 6 months from 3 years, they tend to come with a pretty high coupon. So I'd say on average, it's probably about a 1 year interest rate risk.

And then on the reverse mortgage loans.

Those arent.

What you see on the balance sheet of Ellington financial.

Our reverse mortgage securities that we bought in the open market they havent come directly.

From Longbridge and those can be either pools or.

IOS and <unk>.

Just get run with our normal.

The state processes no models on the agency MBS side and then the.

Loans that are the.

Are being originated by Longbridge the.

Company manages longbridge matches that interest rate risk.

We like the obviously you can tell a lot of these sectors the.

Sure.

Not just the interest rate.

Risk from a duration standpoint, but also the cash flow of duration is quite sure of right and residential transition loans, maybe 10 or 11 months consumer.

Consumer loans.

<unk>.

Between 1 and 2 years also so.

We like the fact that these are high cash flowing portfolios.

It enables us first of all of the pivot the portfolio reallocate capital a lot faster and helps us during <unk>.

Todd will stress life and Covid, when we got a tremendous amount of cash flow, which is obviously very valuable the time from the shorter duration of loan portfolios, enabling us to.

Redeploy the capital.

Into things like non agency, which was a tremendous opportunity to Todd of.

Enabling us to repay financing lines when appropriate so.

The.

We like the.

The non QM loans are not quite as much. Although they are still fairly short relative to for a lot of other sectors, but we like these short duration portfolios, especially for <unk>.

Spreads are historically of the tight end of the range right. So that's just another reason to keep the keep the portfolio of shorter.

Got it I guess, just the other side of that would be I guess.

1 is your thoughts as you know the ability to the kind of continue to meaningfully grow the portfolio of kind of given the.

How short the arm.

The kind of comps.

Or was it kind of needing to replace the the runoff of.

Of the portfolio, Yes look it's obviously it makes things makes more work for us, but we've been growing the portfolio will continue to grow the portfolio.

I think as Jr mentioned, right, we have basically 8%.

And the credit portfolio.

Over the course from from other.

The first quarter and the first part of the end of the second quarter.

So yes, I think we've got really really good pipeline.

I think of small balance commercial loans non QM continues to grow RTL, we mentioned as of now really taking off for us. So.

I don't think.

I am certainly optimistic that thats not going to be.

A problem and that's also why we're making these additional investments in strategic investments in originators.

And we have more of those dialogues as we mentioned that are that are active right now so.

So I think I think we're okay there.

Great and then did you say what the.

The types of the loans the.

The 2 new partners of rigidity.

Both residential mortgage loans, yes, we werent specific on that.

Okay. Thank you.

We'll move next to Trevor Cranston of JMP Securities.

Alright, Thanks, good morning, good morning.

I was curious.

You guys laid out the sort of <unk>.

<unk>.

The buckets you guys are really currently focused on slide 11.

We've heard some discussion about.

The opportunity the GSE eligible non owner occupied loans.

I was curious if you guys had any thoughts about.

That opportunity and if it's something that could potentially make sense per yesterday and the.

Near term thanks Mark.

Mark that's of Great question right, so as part of the PSP agreements.

Fannie put a 7% cap.

Non.

The investor loans that they will buy from.

Each originator in some of the originated in particular, the non banks are running in excess of that 7%. So we are looking at that.

Do think.

That can be an opportunity, it's a little bit different the non QM and that you have seen the investment banks.

Being aggressive and are working on that sector as well so the.

It's just a little bit different dynamic in terms of where the capital is coming from but that's something we're looking at and I definitely think that is.

It is a good chance that could make sense for our portfolio.

Got it okay. That's helpful.

And then.

Just looking through.

Your non QM securitizations.

On the.

The the WAC on the most recent deal look like it was.

The lowest it has been so far for the non QM deals.

Was curious if you could just kind of talk about where you guys are seeing wax on new originations relative to where they have been over the last year or so.

And how that.

The impacts the expected returns on the investments.

Somewhere compression was offset by improved execution or if youre actually seeing returns being somewhat compressed.

More originations and more competition from the non QM space.

So.

Mark I'll answer that also so note rates have come down.

Have come down.

The sort of consistent with what <unk> seen on the agency MBS side, which is a little bit different and how non QM behaved in say 2017.2018, when it was kind of of market into itself.

Right now it is.

It's showing a little bit more of a correlation to other parts of the mortgage market. If you look at sort of prime Jumbo for agency MBS.

So note rates have come down.

With that loan prices have come down as well.

And I also think debt with note rates coming down.

I think this.

The production on the non QM side of potential for.

From slower prepayment speeds, because some of the elevated speeds you've seen in the last 6 months.

Have been non QM borrowers refinancing into new non QM loans to take advantage of the lower the.

The lower non QM rates, so I would say if I look at expected return on equity for non QM now.

I think the peak was probably something like the second half of 2020.

Where non QM note rates were still very high they hadn't come down, but securitization spreads had come in a lot and there we saw sort of outsized returns and our expectation was that those outside returns with normalized by either.

The.

The coupons on the securities going up with new ways of non QM coming down a little bit of both what we've seen happen is it's been the note rates of non QM loans that have come down so I think the ROE there.

There is still very attractive debt probably.

The materially more attractive than what they were in 2018.

There was a period of time and I'd say the second half of 2020, maybe first few months of 2021, when they were outsized relative to what they are now so I would say that they've normalized but.

We have.

A lot of.

We get a big tailwind the fact that our origination volumes are up because what that means is.

More frequent more frequent securitizations, so youre not warehousing.

The loans on the higher price repo lines for as long of period of time. There is also a little bit of a virtuous cycle you get into with investors and that if you're a repeat issuer.

You tend to get rewarded with tighter securitization spreads, which we've certainly seen.

Our shelves of our last 2 deals of the benefited from so.

The yields have come in when they put it all together the ROE is not as good of second half of 2020, but certainly bear in 2018 and the benefits of our increased scale for certain net really do translate into the bottom line as well.

Got it okay. That's good color.

Thank you for the comments thanks drivers of it.

Our next question is from Eric Hagen of <unk>.

Okay.

Some good questions already on non QM and such but maybe 1 on the credit hedging the portfolio I think you guys added.

$30 million of options and so hoping you can share what was the options are tied to and if you can just.

Maybe address the way Youre looking for more generally to get aggressive with that portfolio.

Okay. The first question. Thanks.

Yeah, So Eric it's Marc so.

That's another good question.

We had very strong performance on our CLO portfolio in the past quarter and.

Would characterized a lot of that strong performance is the reversal of.

The big drawdown in price is many parts of the CLO sector experienced in 2020, so when we saw lower CLO prices in 2020.

And we got more comfortable with the efficacy of the vaccines.

We and when we thought a lot about what are the likely consequences of the really massive QE the fed started.

March 2020.

Our expectation was that you were going to see a strong rebound in bank loan prices.

And with a little bit of a lag the strong rebound in CLO prices right.

Now when we looked at the market due to the second quarter of 2020, we started to see some very high prices on some of the high yield indices. So the most liquid high yield indices serve the on the run is something called series 36, It got to a price of 110, that's about as high as that thing.

He is gone.

So it made sense in our minds to lock in some of the gains on the CLO portfolio in 2 ways..1 way was through secured with sales of securities and I mentioned that in my prepared remarks that you saw the.

The percentage of our portfolio in CLO investments dropped and that was through opportunistic security sales, but the other thing we did to sort of lock in some of these gains was to add some credit hedges the portfolio.

And these are these options are you can almost think of them as tail hedges right out of the money.

Yes.

So.

Which is.

I think 1 of our.

Hallmarks of the manager is to try to.

Do the best we can to manage tail risk.

Since then you have seen a little bit of weakness in high yield.

For Paul.

That's helpful.

Second 1 is maybe just more general I mean can offer a little perspective on how you think.

<unk> for spread widening brought on by the fed tapering.

Other things potentially could transmit onto areas of the non agency and credit markets and really just what you guys think that might mean for your industrial book.

Sure so.

Yes, it's interesting I think.

A lot of.

People.

Sort of their memory of the taper tantrum is really what happened in the first month of the taper tantrum and so what happened in the first month of the taper Tantrum is chairman Bernanke.

Talked about tapering fed purchases.

And at that time, the market didn't have any sort of playbook for how that might look so the initial expectation was that they might just start right selling securities right, what they wound up doing instead and the market didn't get clarification on this until later in 2013.

Was what tapering met was buying less so right. Now for example, if you look at the agency mortgage space. They are reinvesting all of their pay down each month and their pay downs. The substantial it can be 70 odd billion dollars or so and then they are buying in excess of another $40 billion. Each month, so when they start to taper what that mean.

This is bill stopped buying 40 billion of month and maybe it will start buying $35 billion of 30 billion of months and then they'll keep stepping that down if the market.

Is orderly.

Over on attenuate the period of time to the point, where they're just reinvesting pay downs right and so what happened in 2013, where the first started.

The tough the taper tantrum in May initially not only agency MBS, but the investment grade corporate bonds high yield bonds everything underperformed.

Treasuries by about 100 basis points right, but then by the end of the year agency mortgages had actually outperformed for the year. So once the market got clarity on what tapering mens meant.

And the pace at which the fed intended to do it.

Both credit assets and the agency assets wound up outperforming in 2013. So I think if you think about the market now.

<unk>.

We don't have a crystal ball on this.

Think the fed will go out of their way to keep the market's orderly I think there are a lot of people that are saying that the amount they're spending an asset purchase is the of.

Above and beyond what they need to do for orderly markets. So we certainly expect them to taper.

Zinc debt it might wind up being the bigger deal for.

Non of the non Fannie Freddie Ginnie part of their portfolio because.

What has worked so well in this round of QE from the Fed's perspective is this whole notion they have of imperfect substitution the by buying treasuries and agency MBS you Chase investors out of those assets given cash and then the investors find somewhere else to invest in high yield bonds or <unk>.

Yes or.

Non agency mortgages and so when the fed starts buying less agency mortgages, where you might see is some investors of sold agency mortgages for the fed and bought something else might sell that something else and go back into agency MBS. So.

Yes, we think tapering could be as big a deal for credit sectors as it will be for the agency sector sort of tie.

Ties into what Larry was saying before when we step to the.

Not only the interest rate duration, but the sort of cash flow duration of the loan sectors, our loan sectors of short right in the way you protect the portfolio in an environment, where there is potential for spread widening is is to keep your spread duration short and so.

That's sort of how we're set up right now.

I don't know what.

Of the likely path of spreads are going to be the wouldn't surprise me to see some volatility but.

I think the fed is going to be putting money into the system for at.

At least through the middle of 2022.

Okay.

And we'll move next to Brock Vandervliet of UBS. Your line is open.

Great. Thanks for the question.

I was just curious from net new slide which I liked.

Slide 11, where you kind of profile of each of the each of the the loan verticals.

Okay.

The.

Heck of observed kind of.

Speculatively absent as part of your portfolio.

What would and you mentioned spreads there have widened.

Are the yet attractive enough to to pull in.

From Longbridge or is there something.

That makes some kind of structurally not not suitable.

Hi, This is Larry Brock thanks.

No there's nothing structurally that makes them not suitable it's an agency asset it's typically been in agency assets that trades relatively cheap.

On an OAS spread basis versus other agency pools.

Had the mineral portfolio, we've had iOS in our portfolio as well.

Well they'll continue to be.

From time to time of portion of our agency portfolio.

There is no we wouldn't have to get them from Longbridge.

And the.

They are.

Available.

And the market.

Rarely available so so.

I think they'll just be a small segment of.

Of our agency portfolio.

And.

Varying from time to time based on spreads I think the interesting assets that.

Longbridge has so longbridge is largest tangible assets.

Is actually.

Its mortgage servicing rights on reverse mortgages, which is a really.

Interesting arcane.

Sector of the market.

When you've got a reverse mortgage.

You've got.

The typical sort of.

Fixed servicing strip.

That.

It goes along with that so that's an Io if you will similar to other mortgage servicing rights, but you also have the obligation and the right to fund any unfunded draws as they are drawn down by the borrower. So it makes it a very very interesting asset class.

<unk>.

I think that's something I get them really getting ahead of myself here, but I think in the future of its possible that we could acquire excess servicing rights for example.

From Longbridge.

<unk>.

Not there is no discussions around that right now.

But that's something that I think that could be really interesting.

Asset class for Ellington financial.

But in terms of just the the agency product that debt is their bread and butter on the origination side readily available in the market and.

So no plans to acquire anything on that front directly from long range.

Okay got it and just as a follow up there that sounds really interesting on the on the servicing I mean given the.

Yeah.

Third rail issues in the delicacy of servicing Grandma.

Do you think that debt servicing asset is priced in an interesting.

The way it sounded like it.

But I would think that's that's the very specialized of specialized skill.

Yeah. So.

So actually the.

The servicing is typically done by sub servicers.

So and you are right.

That's certainly a very delicate area.

But the mortgage servicing by itself not the sub servicing.

Is.

Thank you.

Where are the financial the.

Interesting financial assets.

Yeah, the subsurface sub servicing is something that we.

Wouldn't be interested in getting it.

Got it okay.

Just.

Comparing the yield profile of the RTL versus.

The non QM.

How do those out.

Of those line up or the Rtl's.

Pricing at a premium to the standard non QM of paper.

Sure Yeah go ahead.

The T cells.

So they differ from non QM pricing of 2 significant ways 1 is.

Just the actual note rate is higher.

The Rtl's and it is non QM.

And the other way in which they differ is that the purchase price of the price for those loans trade in the market.

Is lower than where non QM loans trade and so I think it's for 2 reasons 1 is that.

The financing rate.

Other than the repo market or more significantly in the securitization market are.

Lower for non QM right. So if we think about sort of what's the yield of the asset.

<unk>.

Debt you put on your balance sheet. If you find that if you buy of non QM loans into a securitization.

Then you are getting the benefit of the lower securitization yields on non QM than what people get in the RTL market. The other thing is that the.

The loans are shorter in the RTL market. So the you can't.

Just can't support.

Of the premium because of that premium you would have to amortize it maybe over the expected tenure of the loan which might be 8 months.

Okay. Thanks.

And the color and the RTL loans are also the whole process of the underwriting.

And the servicing processes.

Much much more involved.

Looking at.

What's effectively a business plan if you will on the part of the operator purchasing the property renovating whatever needs to be renovating and then ultimately selling the property.

That's a verifying that all of the.

Work has been done when the next stage of the draw typically.

For the money is put out not necessarily at all at once but of draws so it's a much more involved products. So I think justifiably.

Deserves.

Premium yields relative to non QM.

Okay. Thank you.

We'll take a question from Crispin Love of Piper Sandler Your line is open.

Thanks, Thanks for taking my questions can you speak to the credit quality of Youre seeing I saw on the release and also for you earlier that you had some SBC asset resolutions from.

Can you just talk about the overall health and credit quality and also would you expect to see some similar asset resolutions going forward or were those just more 1 offs.

Yes look I think.

The portfolio is in great shape.

And we.

We did have a.

Another very large resolution.

That's post quarter end in July.

So.

I think yeah.

Yes.

There is no significant problems in the portfolio right now.

And I think you'll just continue to see things. These loans are typically 1 or 2 year loans.

They get extension, sometimes we do have stuff thats turned into <unk> I think you can see we've had really.

Almost negligible credit losses.

Recently.

I think we're going to see more of the same we have seen.

Coupon compression just like we have in other sectors. While we also have seen financing.

Spread compression as well on our borrowing costs.

So we're still seeing row that vary from I would say.

Low to mid teens to high teens.

On the new money, we're putting out and the pipeline is very robust. So I think we'll see.

Our high velocity on the portfolio. Obviously this is the short term loans and they are resolving.

But we will also we're also seeing.

Greatly larger.

The inflow as well on the acquisition side.

Okay, great. Thank you that's helpful. And then 1 more just the earnings from unconsolidated entities was pretty elevated in the quarter was that driven by a single originator or is there anything else at play there.

Yes, that's primarily driven by.

Longbridge and lunch or where we fair value of those investments.

And neither of them make distributions. So I guess, 1 way to think about it as Dave and Larry highlighted that Longbridge earned through mid year almost as much as they earned all of last year.

And <unk> had a record quarter originations in Q2 after having a record quarter of originations in Q1. So earnings have been very strong at the originator level in both cases and our fair value.

Largely reflects GAAP earnings at the originators that arent necessarily being distributed.

Great. Thank you that's helpful.

That was our final question for today, we thank you for participating in the Ellington financials second quarter 2021 earnings Conference call.

You may disconnect. Your line at this time and have a wonderful day.

[music].

Okay.

[music].

Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington Financial second quarter 2021 earnings Conference call today's.

Today's call is being recorded.

At this time all participants have been placed in a listen only mode. The floor will be opened for your questions. Following the presentation.

If you'd like to ask a question during that time simply press Star then the number 1 on your telephone keypad.

If at any time. Your question has been answered you may remove yourself from the queue by pressing the pound key.

Lastly, if you should require operator assistance, please press star zero.

It is now my pleasure to turn the call over to Jason Frank Deputy General Counsel and Secretary, Sir you may begin.

Forward looking statements are not historical in nature.

Events statements.

I am joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark The coffee co Chief investment officer of the FC and Jr. Herlihy, Chief Financial Officer of the FC as described in our earnings press release, our second quarter earnings Conference call presentation is available on our website Ellington financial Dot com.

Thanks, Jay and good morning, everyone as always thank you for your time and interest in Ellington financial.

Ellington financial continued its strong performance during the second quarter of 2021.

As you can see on slide 3 we generated net income of 75 per share.

Good for an annualized economic return of nearly 18% and we generated core earnings of <unk> 51 per share, which was 19% higher than 38% higher and our core earnings in Q1 and Q4, respectively.

Driven by the strong performance and earnings growth the.

<unk> raised our monthly dividend twice during the second quarter to its current level of <unk> 15 per share, which is now a full 50% higher than it was in March.

Our loan origination businesses again drove both GAAP earnings and core earnings in the quarter.

Beginning with our non QM business line sure had its second consecutive record quarter for origination volume in the loan flow from line sure helped us execute our second non QM securitization of the year.

In connection with that non QM securitization, we exercise the call option on 1 of our 2019 securitization and included the vast majority of those called loans in our new deal.

By calling and re securitizing, the lowered our borrowing costs by over 200 basis points on those $110 million of mortgage loan assets.

In addition, we were able to get a higher advance rate on the securitization as compared to the 2019 securitization. So by calling of re securitizing. We also freed up additional capital for us to reinvest.

This was the third time that we've called 1 of our non QM deals and each time. It has created a nice boost to earnings.

We currently have 5 more non QM, securitizations, where we retain the call option.

None of these options are currently exercisable, but our non QM call option portfolio continues to represent a nice potential upside for the future earnings.

Meanwhile, in the reverse mortgage space Longbridge delivered yet another quarter of excellent results.

Longbridge is earnings for the first 6 months of 2021 are now nearly equal to those from all of 2020, which was itself a record year for Longbridge.

Elsewhere in the credit portfolio, we continued to see excellent performance in our short duration loan portfolios, particularly residential transition mortgage loans consumer loans and small balance commercial mortgage loans.

And in Securities, we generated significant gain significant gains in our CLO, the MBS and non agency strategies.

And the agency portfolio was a very challenging quarter for agency MBS, but our agency strategy managed to generate just a modest loss. Thanks to the concentration of our long investments in lower coupons and assisted by a significant TBA short positions in higher coupons.

Higher coupons for the weakest performers and the agency RBS sector during the quarter.

Now please turn to slide 11.

This is a new slide that we've added this quarter to our earnings presentation, where we're including some additional detail on our proprietary loan pipelines.

On this slide we highlight the 5 primary sectors, where we're involved in loan origination.

Non QM loans small balance commercial mortgage loans residential transition loans consumer loans and reverse mortgage loans.

And all of these businesses, we leverage off of the Ellington strong analytics and we capitalize on the lending void left by banks, which have faced much stricter regulations since the global financial crisis of 2007.2008.

On the first of all of the chart you can see that in 4 of these 5 verticals, we've established strategic equity investments at the origination level.

These 2 additional strategic investments should further expand and diversify our loan sourcing channels.

Furthermore, we are currently engaged in several other active dialogues and we expect to add a couple of more originator of investments to our roster by year end.

Moving down the chart you can see that in addition to the strategic originator Stakes. The also source loans, the numerous joint ventures and flow agreements with third party originators.

And then on the extra we highlight our in house origination teams specifically in the small balanced commercial mortgage space and in the residential transition loan space.

It all together you can see that we have the very diverse efficient and expanding array of channels that feed our proprietary loan pipelines.

The largest growth in acquisitions last quarter came from non QM small balanced commercial mortgage and residential transition loans.

The fact that we had record quarters for loan originations in non QM small balance commercial and RTL in the second quarter funding 259 million $87 million of $68 million respectively.

The performance of our RTL loans has been tremendous including through Covid and the strategy continues to offer very attractive risk adjusted returns and improving financing options.

In column for you can see that we acquired about $30 million of consumer loans during the second quarter, but these new originations just kept pace with repayments and the size of our consumer portfolio was actually roughly unchanged at quarter end.

Also when you look at the loan titles the totals on this slide keep in mind that we are not showing any loans that we've securitized, which in many cases are consolidated onto our balance sheet of.

Of course, if we weren't of includes include those loans in this chart. The total would be much much larger.

And in many ways those retained tranches from loan Securitizations epitomize, what it means to the vertically integrated.

Instead of just buying loan backed securities tranches in the secondary market, where we'd have to pay full retail prices were involved from the outset and at all of the most important stages in the lifecycle of these loans.

Our involvement starts of the crafting of the underwriting and pricing guidelines, which enables us to acquire the kinds of loans, we want to acquire and the wholesale prices to boot.

Then we warehouse of these loans pending securitization and finally, we securitize.

And when we securitize, we think it's useful to look at things 2 different ways.

First we do Securitizations as providing long term locked in financing of our loans out of low cost of funds.

We view Securitizations as a way to manufacture highly attractive retained tranches at prices, we could never find in the secondary market.

With that I'll pass the Jr to discuss our second quarter financial results in more detail.

Thanks, Larry and good morning, everyone. Please turn back to slide 3 of the presentation.

For the quarter ended June 30th Ellington Financial reported net income of <unk> 75 per share and core earnings of <unk> 51 per share.

These results compare to net income of 86 per share and core earnings of 43 per share for the prior quarter.

In April we increased our monthly dividend by 40% to 14th net per share and in May we increased the dividend by another penny to <unk> 15 cents per share, which we have maintained since then.

Our higher core earnings quarter over quarter was primarily driven by larger small balance commercial mortgage residential transition and non QM loan portfolios as well as by lower financing costs.

For earnings also increased due to several small balance commercial mortgage loan resolution, which included the payment of past due interest and the recovery of previously paid expenses.

If you remove the effect of those asset resolutions, our current core earnings run rate.

In line with our current dividend rate of 45 per share.

So for our core earnings run rate 45 per share is probably a better figure to use in the near term.

Moving to slide for you can see the we finished the second quarter with 80% of our deployed capital allocated the credit strategies and 20% to agency similar to how we were allocated last quarter.

I'll discuss in more detail when we turn to slide 6 the credit portfolio grew while the mix between credit sectors continued recent trends.

Next please turn to slide 5 for the attribution of earnings between our credit and agency strategies.

During the second quarter, the credit strategy generated a total gross profit of $1.25 per share while the agency strategy generated a modest loss of minus <unk> <unk> per share the.

These results comparison of $1.14 per share in the credit strategy and roughly breakeven in the agency strategy in the prior quarter.

Non QM strategies.

And from our equity investments and loan originators.

Credit hedges contributed negatively to results as credit yield spreads continued to tightened during the quarter.

In agency yield spreads widened during the quarter driven by declining interest rates continued elevated prepayment rates and concerns around fed tapering.

Most agency RBS significantly underperforms comparable U S treasuries.

And the interest rate swaps on a total return basis.

And as a result, we had a small net net loss in the strategy.

However, with agency underperformance more pronounced in higher coupons than lower coupons, our portfolio positioning positioning of being disproportionately long lower coupons and maintaining a portion of our TBA short positions in higher coupons helped to mitigate a portion of the MBS spread widening.

Turning next to slide 6 you can see that our total long credit portfolio increased by 5% in the second quarter to 13613.6 billion.

As of June 30.

The quarter over quarter increase was driven by non QM and residential transition loan acquisitions, which more than offset the impact of the non QM loan securitization.

And by the growth of our equity investments and loan originators.

And the <unk> and commercial mortgage loan bucket.

Fight of record volume of commercial mortgage loan originations in the second quarter, you are not able to see the growth in this chart because several of small balance commercial mortgage loans converted to equity method investments during the quarter when we finance them.

And because of loan payoffs the offset some of this growth.

Removing the effects of the loans converting the equity method investments the overall credit portfolio actually grew by 8% quarter over quarter not 5%.

Meanwhile, and close the non agency RBS opportunistic sales caused those 2 portfolios to shrink quarter over quarter.

On slide 7 you can see that our total long agency RMB as portfolio declined slightly sequentially. However, we did both increase the size of our long TBA portfolio and reduced the size of our TBA short position during the quarter.

This caused our net agency pool exposure to increase of 4.2 times from 3.1 times, which you can see on slide 20.

Turning back to slide 8.

You can see that we finished the quarter with an overall debt to equity ratio of 3.2 times.

Unchanged from last quarter, and our recourse debt to equity ratio of 1.9 times down from 2 times last quarter.

A larger portion of our borrowings were non recourse as of June 30, mainly due to the completion of the non QM securitization.

Recourse leverage on the credit portfolio with less than 1 times at June 30.

As of June 30, our weighted average borrowing rate decreased to $1.2 4% as compared to 1 for 1% at March 31.

Due to narrower financing spreads on both our non agency and credit borrowings.

For the.

Quarter total G&A expenses were <unk> 17 per share while other investment related expenses were <unk> 11 per share both unchanged from the prior quarter.

We also recorded an incentive fee of 716 million for the second quarter as we exceeded our net income hurdle for the rolling 4 quarter period.

Finally, our book value per common share was $18.47.

At June 30 of 1.7% from $18.16 per share at March 31.

Combining this book value per share appreciation with the 44 per share of common dividends that we declared during the second quarter, our economic return for the second quarter was plus 4.1%.

Now over to Mark Thanks.

Thanks, Jr.

The FC had a strong quarter.

Sometimes that the market the tendency is to analyze quarterly earnings each quarter in isolation on the short term basis disconnected from what came before and what will come after.

But thats not the way, we manage Ellington financial.

This quarter, we accomplished was in large parts of the product of initiatives. We have been working on for years and it's the continuation of themes that we think will continue to drive success in the future.

<unk> had a very strong quarter as measured by the metrics that I think are most important to investors, which are also some of the metrics that help guide us for managing our investments first we are of high dividend yield almost 10%, which is covered by core earnings and which we raised twice this past quarter. Despite the drop in interest rates and a more.

Backdrop of tightening credit spreads.

We have been able to earn our dividend by building a portfolio of high yielding assets, both loans and securities with the yield suppressed this past year by the fed QE. We have continued to grow our network to source assets. We know the in the low yield world. It is crucial to our shareholders that we deliver a high dividend.

Second we care a lot about increasing book value over time.

That's the way, we as management can try to keep the stock price on an upward trajectory.

Nick originator of equity Stakes can help us grow book value as these investments should appreciate in value over time, thanks to the synergies of the partnerships between capable experienced loan origination operators and Ellington has considerable resources.

So this past quarter, even with our higher dividend level core earnings still exceeded the dividend. We grew the portfolio all harvesting gains in monetizing loan resolutions and importantly, we avoided of material loss in our agency portfolio and what was the very tough quarter for agency MBS.

As measured by gross return on allocated capital go down less than 1% in agencies.

This quarter, we didn't technically hit on all cylinders because of the agency strategy didn't contribute but what is important is that we controlled our downside net strategy. So we were able to have a great quarter.

Across the board our credit strategies had strong performance in both loans and Securities I was particularly pleased this quarter to see strong growth in our residential transition loan portfolio. This is the result of the years of developing relationships with the RTL originators that are like minded with us and their credit decisions.

We've spoken a lot about loan strategies in the past 2 earnings calls the securities have also been great performers. This year you can see.

On slide 6 to be harvested gains in some of our security strategies, most notably CLO and non agency MBS. We also had excellent performance of <unk> in the form of Mark to market gains.

Then we diversify further look at slide 10, which shows our commercial loan portfolio you can see diversification by property type and geography, we don't like the all of the eggs in 1 basket strategy and our small balance commercial mortgage loan investments. This past year, we have seen some of the best real estate investors in the World gets <unk>.

The hurting the retail and hotel sectors, which are the sectors hit the hardest by the pandemic.

Looking ahead, we see a market where the competition for high quality high yielding assets will only get tougher.

<unk> round of QE by the fed has chased the investors into high yielding credit strategies by lowering the yields on investment grade assets.

Since quarter end, despite the spread of the Delta variant real estate focused assets have performed well, but you are starting to see some weakness in high yield and a little bit of widening in the investment grade spreads.

Also we would expect to see more interest rate volatility going forward.

Unlike the started the year the fed is no longer on auto pilot, they're now discussing how they will taper bond purchases and we expect news on that front by the end of the year.

I really like the way the Ellington Financial's positioned right now with ample room to increase leverage of <unk> capital to deploy and importantly, we need to keep working with our origination partners. Both the ones. We have worked with for years and the new ones with whom we have recently partnered to help them grow their platforms in a risk controlled way.

The can prove that can contribute both assets and continued book value growth for EMC now back to Larry.

Thanks, Mark I.

I am extremely pleased with our performance so far in 2021.

Our origination partners and affiliates have done a tremendous job growing their market share in the earnings which for Ellington financial has translated into higher earnings and the larger flow of high yielding loans for our portfolio.

<unk> also generated significant profits in our credit securities portfolios.

I'm proud to say that as of June 30, our book value per share was $18.47.

Which is actually 20 higher than our $18, 27% book value per share as of February 20th of 2020, right before the 2020 Covid lows.

And that's without giving credit to the dollar 70 of dividends on our common stock over that time period.

With all of that we've achieved I believe that it was no coincidence that Ellington financial was added to the S&P Smallcap 600 index in May.

This was a significant milestone for the company and has not only provided greater liquidity and visibility for the company, but has substantially broadened our shareholder base.

This new capital will help drive additional growth of our portfolio and should be accretive to earnings per share.

We've been actively deploying that fresh capital and if so far grown our non QM and RTL portfolios meaningfully since quarter end.

I'd like to close by re emphasizing the importance to us of our vertically integrated loan businesses are.

Our goal in these businesses is to lock in a steady flow of high quality high yielding loan originations of leveraging off of Ellington's core strength of data analysis and modeling to help shape the underwriting of those loans.

For many of these loans the securitization markets provide us with superior long term financing, which enhances earnings and strengthening of our balance sheet.

And with that we'll open the call for questions operator.

At this time of if you'd like to ask a question press Star 1 now on your Touchtone phone again that is the star 1 on your Touchtone phone.

I will take a question from Bose George of <unk>. Your line is open.

Hey, everyone. This is actually Mike Smith on for Bose.

So on the recent equity offering when I look at slide 25 of it looks like 10% of that capital is unemployed. So I'm. Just wondering if you could talk to provide a little bit of color on the timeline for complaints in the mining work.

You saw your little Staticky there was the question.

Is that after the recent equity raise.

Said that 10% of catheter was unemployed, but that was the June is the right right right.

Could you would you mind repeating the question.

Okay.

I was just eyeballing that based off of slide 25. So I'm just wondering if you could provide some guidance on the timeline for putting that money the work.

Hi.

Sure. So we closed on the deal.

In July for it's been about a month of time.

The rough estimate is that we've deployed about 35% to 40 per cent of that capital so far.

Which is on track with I think that invest the proceeds of within a quarter of plan.

That number would be a little bit higher if we weren't.

Being opportunistic in securities and so we believe.

We've turned over some other investments at the same types of their inputs into the.

The capital available to invest but.

Many of that 35% to 40% and the rough estimate of where we are.

So far investment for us.

Okay, Great. That's helpful and then on the agency side of things.

You provided some color on the table, but just wondering what are your thoughts on the current level of spreads.

Waiting for data will be for <unk> to increase allocation to the agency business.

This is mark it's of Great question right when we think about.

The most optimal way the partition the capital and the Ellington financial among the.

For main strategies.

The expected return in the agency portfolio, which is the better than what it was coming into the second quarter, because you didn't have the underperformance.

But so we look at that but then we also look at what's the opportunity set in the credit strategy right and what Youre seeing on the credit strategies as Youre seeing.

Increased.

Quality loan flow and you can get a sense of the magnitude of that on the new slide Slide 11, but in addition to that you are seeing.

We're seeing better financing terms so.

I think the opportunity set in the agency space is a little better than what it was.

<unk>.

Mindful of that although the fed does not want to cause volatility when they.

Give further details on tapering.

You can see volatility that can sort of be inadvertent on the part of the fed. So we think about that and we also look at the.

Loan flow opportunities, so I think debt.

In all 4 sectors, we're seeing an opportunity set.

Consistent.

So if you go back really to our inception in 2007, So we've got a 14 year history now.

Our allocation to agency versus credit has probably range between I've never been lower than the low teens I don't believe and it's never been I don't think its ever got in the 25%. So.

That's kind of the range now, maybe we're slightly and we've been mostly between 15% and 20% over that time period Thats pretty typical for us occasionally a little higher.

So I think our 20% allocation.

It's probably a pretty healthy allocation I think over time.

So 1 thing that the agency strategy also does in addition to diversifying obviously the portfolio. It provides the liquidity at key times like it did.

In mid March.

And in April of last year. It was a huge source of liquidity for us which was obviously very important.

And it also helps our 40 act tests, our REIT tests and enables US for example on the retesting side to have.

A lot of the.

What are non qualifying assets in our Trs is like the investment in long Ridge and lend share for example, so.

Great. That's very helpful color and then just 1 more for me.

Can you provide an update on how book value has trended since quarter end.

No no.

We're sort of on a schedule for that.

We report book value monthly <unk>.

Typically on the fifth business day.

Alright, well sorry mid months now how we used to be on the fifth business day now we're more mid month, yeah. So.

The way that will come out edmar.

That's good thank you for taking the questions.

We will take our next question from Doug Harter of Credit Suisse. Your line is open.

Mr harder than a lot of if you switch.

Yes per service of your question.

Sure looking at the the loan categories do you have on slide 11 could you just walk through what the kind of expected duration of each of those 4 categories would be.

Sure well.

Mark Alex Theres forget the right non QM loans of 30 year loans.

Typically, though I think of the effective duration of we think about half of 2 years on the.

Yes.

They tend to pay pretty quickly.

With the high coupon so when you do a securitization you wind the pertaining the other.

Only the credit risk, but also essentially nio so.

They are of particular duration during the ramp up period, which is somewhere between 1 and 2 years, but then when you do the securitization.

The debt duration shift changes and it becomes shorter.

The small balance commercial loans of those are higher coupons.

And they are floating rate. So those really don't have interest rate risk by may typically.

The average life of those loans as of that has been about 15 months historically.

Right now of the residential transition loans those loans are typically 6 months to a year. They are also higher coupons. So we'd think about those of having an interest rate risk of maybe half of year.

On the consumer loans that can be a range of things right.

Most of the.

Those loans are somewhere between 6 months from 3 years, they tend to come with a pretty high coupon. So I'd say on average is probably about a 1 year interest rate risk.

And then on the reverse mortgage loans.

Those arent.

What you see on the balance sheet of Ellington financial our reverse mortgage securities that we bought in the open market they havent come directly.

From Longbridge and those can be either pools or.

IOS and those just get run with our normal.

The state processes no models on the agency MBS side and then the.

Loans that are.

That are being originated by Longbridge the.

The company manages longbridge matches that interest rate risk.

And we like the obviously you can tell a lot of these sectors.

Im.

Not just the interest rate.

Risk from a duration standpoint, but also the cash flow of duration is quite short Ryan of residential transition loans, maybe 10 or 11 months.

Consumer loans.

<unk>.

Between 1 and 2 years also so.

We like the fact that these are high cash flowing portfolios.

It enables us first of all of the pivot the portfolio reallocate capital a lot faster and helps us during <unk>.

Positive stress ligand COVID-19 when we've got a tremendous amount of cash flow, which was obviously very valuable the time from the shorter duration loan portfolios, enabling us to.

Redeploy the capital.

Into things like non agency, which was a tremendous opportunity for Todd.

The enabling us to repay financing lines when appropriate so.

The.

We like the.

The non QM loans is not quite as much of those are still fairly short relative to for a lot of other sectors, but we like these short duration portfolios, especially the <unk>.

Spreads are historically of the tight end of the range right. So that's just another reason to keep the keep the portfolio of shorter.

Got it I guess, just the other side of that would be I guess.

What is your thoughts as you know the ability to the kind of continue to meaningfully grow the portfolio of kind of given.

How short they are in.

Kind of from.

Or was it kind of needing to replace the book.

Run off of the portfolio, Yes look it's obviously it makes things makes more work for us, but we've been growing the portfolio will continue to grow the portfolio.

I think as Jr mentioned, right, we had basically 8%.

Growth in the credit portfolio.

Over the course from from.

By the first quarter and the first part of the end of the second quarter.

Yeah, I think we've got.

Really really good pipeline.

Of small balance commercial loans non QM continues to grow RTL, we mentioned as of now really taking off for us. So.

I don't think.

I am certainly optimistic that that's not going to be.

A problem and that's also why we're making these additional investments in strategic investments in originators.

And we have more of those dialogues as we mentioned that are that are active right now so.

So I think I think we're okay there.

Great and then did you say what the.

Of the loans the.

The 2 new partners or JV.

Both residential mortgage loans, yes, we werent specific on that.

Okay. Thank you.

We'll move next to Trevor Cranston of JMP Securities.

Hey, Thanks, good morning.

Thanks.

I was curious you know you guys laid out the sort of buy.

Buckets you guys are really currently focused on slide 11.

We've heard some discussion about.

Opportunity the GSE eligible.

The non owner occupied loans.

I was curious if you guys had any thoughts about that.

Of that opportunity and if it's something that could potentially make sense for you.

Yes.

In the near term thanks, Mark that's of Great question right. So as part of the PSP agreements.

The Fannie put a 7% cap.

On.

Investor loans that they will buy from.

Each originator in some of the originated in particular, the non banks are running in excess of that 7%. So we are looking at that.

I do think.

That can be an opportunity, it's a little bit different the non QM and that you have seen the investment banks.

Being aggressive and are working on that sector as well so the.

<unk>.

It's just a little bit different dynamic in terms of where the capital is coming from but that's something we're looking at and I definitely think debt.

It is a good chance that could make sense for our portfolio.

Got it okay. That's helpful.

And then I was.

Just looking through.

Your non QM securitizations.

The.

The the WAC on the most recent deal look like.

The lowest it has been so for for the non QM deals.

Curious if you could just kind of talk about where you guys are seeing wax on new originations relative to where they have been over the last year or so.

And how that.

The impacts of the expected returns on the investment.

Somewhat pressured as offset by improved execution or youre actually seeing returns being somewhat compressed for it.

More originations and more competition from the non QM space.

So.

Mark I'll answer that also so note rates have come down.

Have come down.

The sort of consistent with what <unk> seen on the agency MBS side, which is a little bit different than how non QM behaved in say 2017.2018, when it was kind of of market into itself.

Right now it is.

It's showing a little bit more of a correlation to other parts of the mortgage market. If you look at sort of prime Jumbo for agency MBS.

So note rates have come down.

With that loan prices have come down as well.

And I also think debt with note rates coming down.

I think this.

The production on the non QM side of potential for.

From slower prepayment speeds, because some of the elevated speeds you've seen in the last 6 months.

Have been non QM borrowers refinancing into new non QM loans to take advantage of the lower the.

The lower non QM rates, so I would say if I look at expected return on equity for non QM now.

I think the peak was probably something like the second half of 2020.

The.

There is still very attractive debt probably.

Materially more attractive than what they were in 2018.

There was a period of time and I'd say the second half of 2020, maybe first few months of 2021, when they were outsized relative to what they are now so I would say that they've normalized but.

We have.

A lot of.

We get a big tailwind the fact that our origination volumes are up because what that means is <unk>.

More frequent more frequent securitizations, so youre not warehousing.

The loans on the higher priced repo lines for as long of period of time. There is also a little bit of a virtuous cycle you get into with investors and that if you're a repeat issuer.

You tend to get rewarded with tighter securitization spreads, which we've certainly seen.

Our shelves of our last 2 deals of the benefited from so.

The yields have come in when they put it all together the ROE is not as good of second half of 2020, but certainly better than 2018 and the.

Benefits of our increased scale for certain something that really do translate into the bottom line as well.

Got it okay. That's good color.

Thank you for the comments.

Drivers of it.

Our next question is from Eric Hagen of <unk>.

Okay.

Some good questions already on non QM and such but maybe 1 on the credit hedging portfolio I think you guys added.

$30 million of options and so hoping you can share what those options are tied to and if you can just maybe address the way youre looking for more generally to get aggressive of that portfolio.

Okay. The first question. Thanks.

Yeah, So Eric it's Marc so.

That's another good question.

We had very strong performance on our CLO portfolio in the past quarter and I would characterize a lot of that strong performance is the reversal of.

<unk>.

The big drawdown in price is many parts of the CLO sector experienced in 2020, so when we saw lower CLO prices in 2020.

And we got more comfortable with the efficacy of the vaccines.

We and when we thought a lot about what are the likely consequences of the really massive QE the fed started.

March 2020.

Our expectation was that you were going to see a strong rebound in bank loan prices.

And with a little bit of a lag the strong rebound in CLO prices right.

Now when we looked at the market through the second quarter of 2020, we started to see some very high prices on some of the high yield indices. So the most liquid high yield indices serve of the on the run is something called series 36, It got to a price of 110, that's about as high as that thing.

He is gone.

And these are these options are you can almost think of them as tail hedges right out of the money.

Yes.

So.

Which is.

I think 1 of our.

Hallmarks of the manager has to to try to.

Do the best we can to manage tail risk.

Since then you have seen a little bit of weakness in high yield.

So for Paul.

That's helpful.

Second 1 of the thing I can just more general I mean can you offer a little perspective on how you think.

<unk> for spread widening brought on by the fed tapering.

Other things potentially could transmit onto areas of the non agency and credit markets and really just what you guys think that might mean for your industrial book.

Sure so.

Yes, it's interesting I think.

A lot of.

People.

Sort of their memory of the taper tantrum is really what happened in the first month of the taper tantrum and so what happened in the first month of the taper Tantrum is chairman Bernanke.

Talked about tapering fed purchases.

And at that time, the market didn't have any sort of playbook for how that might look so the initial expectation was that they might just start right selling securities right what they were.

Wound up doing instead and the market didn't get clarification on this until later in 2013.

Was what tapering met was buying less so right. Now for example, if you look at the agency mortgage space. They are reinvesting all of their pay downs each month and they are paydowns. The substantial it can be 70 odd billion dollars or so and then they are buying in excess of another $40 billion. Each month, so when they start to taper what that mean.

Means is they will stop buying 40 billion of month and maybe it will start buying $35 billion of 30 billion of months and then they'll keep stepping that down if the market.

Is orderly.

Over the period of time to the point, where they're just reinvesting pay downs right and so what happened in 2013 when the first started.

Of the tough the taper tantrum in May initially not only agency MBS, but the investment grade corporate bonds high yield bonds everything underperformed.

Treasuries by about 100 basis points right, but then by the end of the year agency mortgages had actually outperformed for the year. So once the market got clarity on what tapering mens meant.

And the pace at which the fed intended to do it.

Both credit assets and the agency assets wound up outperforming in 2013. So I think if you think about the market now.

We don't have a crystal ball on this.

I think the fed will go out of their way to keep the market's orderly I think there are a lot of people that are saying that the amount they're spending an asset purchase is the.

Above and beyond what they need to do for orderly markets. So we certainly expect in the paper.

I think that it might wind up being the bigger deal for.

Non of the non Fannie Freddie Ginnie part of their portfolio because.

What has worked so well in this round of QE from the Fed's perspective is this whole notion they have of imperfect substitution the by buying treasuries and agency MBS you Chase investors out of those assets given the cash and then the investors find somewhere else to invest in high yield bonds or <unk>.

The MBS or.

Non agency mortgages and so when the fed starts buying less agency mortgages, what you might see some investors of sold agency mortgages for the fed and bought something else might sell that something else and go back into agency MBS. So.

Yes, we think tapering could be as big of deal for credit sectors as it will be for the agency sector sort of ties.

Ties into what Larry was saying before when we step to the.

Debt sort of how we're set up right now.

I don't know what.

The likely path of spreads are going to be it wouldn't surprise me to see some volatility but.

I think the fed is going to be putting money into the system for you now.

At least through the middle of 2022.

Okay.

And we'll move next to Brock Vandervliet of UBS. Your line is open.

Great. Thanks for the question.

I was just curious from net new slide, which I liked I guess, it's slide 11, where you kind of profile each of the each of the the loan verticals.

Yeah.

The.

Heck of observed kind of.

Speculatively absent as part of your portfolio of what.

What would and you mentioned the spreads widened.

Are the yet attractive enough to to pull in.

From Longbridge or is there something that.

It makes some kind of structurally not not suitable.

Hey, this is Larry Brock.

No there's nothing structurally that makes them not suitable it's an agency asset it's typically been in agency assets that trades relatively cheap.

On an OAS spread basis versus other agency pools.

Had the mineral portfolio, we've had iOS in our portfolio as well.

Well they'll continue to be.

From time to time of portion of our agency portfolio.

There is no we wouldn't have to get them from Longbridge.

And.

They are.

Available.

And the market.

Rarely available so so.

I think they'll just the small segment of.

Of our agency portfolio.

<unk>.

Varying from time to time based on spreads I think the interesting asset that.

Longbridge has so longbridge is largest tangible assets.

Is actually.

Its mortgage servicing rights on reverse mortgages, which is a really.

Interesting arcane.

Sector of the market.

When you've got a reverse mortgage.

You've got.

The typical sort of fixed servicing strip.

That.

<unk>.

I think that's something I got him really getting ahead of myself here, but I think in the future of its possible that we could acquire excess servicing rights for example.

From Longbridge.

Sure.

Not there is no discussions around that right now.

But that's something that I think that could be a really interesting.

Asset class for Ellington financial.

But in terms of just the the agency product that that is the bread and butter on the origination side readily available in the market and.

So no plans to acquire anything on that front directly from 1 range.

Got it and just as a follow up there that sounds really interesting on the on the servicing I mean given the.

Third rail issues and the delicacy of servicing Grandma do.

Do you think that debt servicing asset is priced in an interesting.

Wei said it sounded like it.

But I would think that that's a very specialized.

Specialized skill.

Yeah. So.

So actually the servicing is typically done by sub servicers.

And Youre right.

That's certainly a very delicate area.

But.

The mortgage servicing line itself not the sub servicing.

As I think we are.

The financial.

The interesting financial assets.

Yeah, the subsurface sub servicing is something that we.

Wouldn't be interested in getting into.

Got it okay.

And just.

Comparing the yield profile of the RTL versus.

The non QM.

How did those.

How do those lineup for the <unk>.

The pricing at a premium to standard non QM of paper.

Oh sure Yeah go ahead of the RTL.

So they differ from non QM pricing of 2 significant ways 1 is.

Just the actual note rate is higher.

In <unk> than it is non QM, but in the.

The other way in which they differ is that the purchase price of the price for those loans trade in the market.

Is lower than where non QM loans trade and so I think it's for 2 reasons 1 is that.

The financing rate.

Other than the repo market, where more significantly in the securitization market are.

Lower for non QM right. So when you think about sort of what's the yield of the asset.

<unk>.

Debt you put on your balance sheet. If you find that if you buy of non QM loans into securitization.

When you are getting the benefit of the lower securitization yields on non QM than what people get in the RTL market. The other thing is that the.

The loans are shorter in the RTL market. So the you can't.

Just can't support.

Of the premium because that premium you'd have to amortize it over maybe over the expected tenure of the loan which might be 8 months.

Okay. Thanks.

And the color and the RTI allowance of also the whole process of the underwriting.

The servicing processes.

Much much more involved.

Looking at.

That's effectively a business plan if you will on the part of the operator purchased.

<unk> the property.

Renovating whatever needs to be renovating and then ultimately selling the property.

That's a GAAP.

Our of filing that all of the.

Work has been done when the next stage of the draw of typically.

But the money is put out not necessarily at all at once but the draws so it's a much more involved products. So I think justifiably.

Deserves pre.

Premium yields relative to non QM.

Okay. Thank you.

We'll take a question from Crispin Love of Piper Sandler Your line is open.

Thanks, Thanks for taking my questions can you speak to the credit quality of Youre seeing I saw on the release and also for you earlier that you had some SBC asset resolutions.

Can you just talk about the overall health and credit quality and also would you expect to see some similar asset resolutions going forward or were those just more 1 offs.

Yes look I think.

The portfolio is in great shape.

And we.

We did have a.

Another very large resolution.

That's post quarter end in July.

So.

I think yeah.

Yeah.

There is no significant problems in the portfolio right now.

And I think Youll just continue to see things. These loans are typically 1 or 2 year loans.

They get extension, sometimes we do have stuff thats turned into <unk> I think you can see we've had really.

Almost negligible credit losses.

Recently.

I think we're going to see more of the same we have seen.

Coupon compression just like we have in other sectors. While we also have seen financing.

Spread compression as well on our borrowing costs.

So we're still seeing row that vary from I would say.

Low to mid teens to high teens.

On the new money, we're putting out and the pipeline is very robust. So I think we'll see.

Our high velocity on the portfolio. Obviously this is the short term loans and they are resolving.

But we'll also we're also seeing.

Greatly larger.

Inflow as well on the acquisition side.

Yes, that's primarily driven by.

Longbridge and lunch or where we fair value of those investments.

And neither of them makes distributions. So I guess, 1 way to think about it is Dave and Larry highlighted that Longbridge earned through mid year almost as much as they earned all of last year.

And <unk> had a record quarter of originations in Q2 after having a record quarter of originations in Q1. So earnings have been very strong at the originator level in both cases and our fair value.

Largely reflects GAAP earnings at the originators that arent necessarily being distributed.

Great. Thank you that's helpful.

That was our final question for today, we thank you for participating in the Ellington financials second quarter 2021 earnings Conference call.

You may disconnect. Your line at this time and have a wonderful day.

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