Q3 2021 Ellington Financial Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington financial third quarter 2021 earnings conference call.
Today's call is being recorded at this time all participants have been placed in a listen only mode. Before we will be open for your questions. Following the presentation.
If you would like to ask a question during that time simply press. The Star then the number one on your telephone keypad. If at any time. Your question has been answered you may remove yourself from the Keloid press the pound key.
Lastly, if you should require operator assistance. Please press star zero and it's now my pleasure to turn the call over to Jason Frank Deputy General Counsel and Secretary. Please begin.
Thank you before we start I would like to remind everyone that certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are not historical in nature as described under item one a of our annual report on Form 10-K filed on March 16, 2021 as amended.
The 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 to Kaki co Chief investment officer of Emt and Jr.
He chief financial Officer of UFC.
Described in our earnings press release, our second quarter earnings Conference call presentation is available on our website Ellington financial Dot Com management's prepared remarks will track. The presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes 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 in Ellington financial.
I'll begin on slide three.
During the third quarter.
Financial generated net income of 41 cents per share and core earnings of <unk> 46 per share. So core earnings continue to cover our dividend.
Through the first nine months of the year, we've now delivered an economic return of over 11% and a total return to stockholders of over 33%.
Next please turn to slide 11.
During the quarter, we significantly grew our proprietary loan portfolios as we deploy the capital from our common equity raise in July.
We had our second consecutive record quarter for originations in our non QM business funding $297 million in the third quarter and we also had a second consecutive record quarter for originations in our residential transition loans, where RTL business funding $106 million in the third quarter as you can see here on this slide.
Our RTL fundings actually grew more than 50% from the prior quarter.
Within Archie Els to fix and flip business is a seasonal one so I wouldn't expect us to see that kind of RTL growth for the next couple of quarters.
Hopeful that RTL this can be a big business for us in 2022.
Overall, we grew our proprietary loan portfolios by 41% quarter over quarter to 1.2 dollars $6 billion and keep in mind that the $368 million of growth was net of pay downs.
I was extremely pleased with the pace and quality of our capital deployment during the quarter.
Our proprietary loan pipelines continued to provide us with a robust supply of high yielding investments.
George that supply with relative ease.
The new capital was both raised and fully deployed all within the third quarter and so we were able to avoid any material drag on core earnings.
Looking ahead the prospects for continued growth in earnings from our proprietary loan pipelines continue to be excellent.
Thanks to its record origination volume during the quarter, our non QM affiliate lend sure posted record profitability as well for the quarter.
Thanks to our loan flow from then sure we were able to complete our third non QM securitization of the year shortly after quarter at.
This represented the ninth non QM securitization that we've completed and we've now passed the $2 billion Mark in total non QM loans acquired from <unk> to date.
This cycle of non QM acquisitions, followed by Securitizations has several important benefits for ESC.
We reap the benefits of our high yielding and we believe low risk asset class, we strengthened our balance sheet and enhance earnings. Thanks to the superior long term financing provided by the securitization market and ultimately we're able to manufacture highly attractive retained tranches at prices not available in the secondary market.
Meanwhile, in addition to all the growth we're seeing in our residential mortgage loan businesses.
Also recently seen substantially increased loan flow in our small balance commercial mortgage bridge loan business.
And last but certainly not least we have now closed on three additional strategic equity Stakes in loan originators and just the last six months.
We have several others in the works that we hope to complete before year end.
With these additional strategic stakes, we're continuing to fortify our vertically integrated loan origination business, which continues to supply a consistent flow of high quality high yielding assets underwritten to our specifications.
Our relationships with our originator affiliates are symbiotic as we not only provide them with a reliable outlet for their production but.
But we also help them enhance their underwriting guidelines, we help them improve the terms instability of their financing sources and we helped boost our overall visibility in the marketplace.
I'm excited about these new strategic equity investments and I believe that they will further expand and diversify our proprietary loan pipelines.
Now please turn to slide five.
While you can see the net interest income in our credit strategies again led the way in the third quarter.
This net interest income was driven by our growing loan portfolios, which by the way also continued to exhibit excellent credit performance.
Our credit strategies also delivered significant net gains during the quarter, which is a significant contributions from our C. MBS CLO and non agency MBS portfolios together with the gains driven by our share of <unk> record profits for the quarter.
As I mentioned <unk> third quarter was a record one both origination volume and earnings <unk>.
<unk> originated $456 million of loans, which was a 39% increase in their second quarters total of $326 million.
<unk> is on pace to exceed just in 2021, its origination volume for the prior two years combined.
Critically loan performance has continued to be excellent even as original origination volume scale.
Most of <unk> growth, so far has been in existing products and channels with the venture team is working on amplifying its momentum by rolling out new products and channels and are excited to see what 2022 will bring.
I'll turn next to Longbridge financial our reverse mortgage originator affiliate.
In the agency reverse mortgage market continued high levels of home price appreciation together with low interest rates have led to elevated prepayment speeds as borrowers seek to refinance.
In response to these higher speeds, we saw some acute downward repricing in the MBS market, which is the market for agency reverse mortgage pools.
While these market forces have boosted origination volumes from Longbridge. They also caused a decline in the value of longbridge its portfolio of mortgage servicing rights or msr's.
This drove an overall quarterly net loss of the company, but importantly, Longbridge is originations segment was still profitable during the quarter.
As a result, we see this quarterly net loss is an anomaly for longbridge.
The company had a monthly record for origination volume in September and year to date Longbridge is actually number three in the industry in total H MBS issuance.
Moving forward, we believe the long ridge's, earning earnings and growth prospects continue to be excellent and in fact, the company has bounced right back to profitability in October.
With that I'll pass it to Jr to discuss our third quarter financial results in more detail.
Thanks, Larry and good morning, everyone. Please turn back to slide three of the presentation.
For the quarter ended September 30th Ellington Financial reported net income of 41 per share and core earnings of <unk> 46 per share. These results compare to net income of <unk> 75 per share and core earnings of <unk> 51 per share for the prior quarter.
As a reminder, last quarters core earnings reflected several small balanced commercial mortgage loan resolutions, which included the payment of past due interest and recovery of previously paid expenses.
Removing the idiosyncratic effects of those asset resolutions our core earnings per share was roughly unchanged quarter over quarter and was actually slightly above the estimated core earnings run rate that we mentioned on last quarter's call.
During the third quarter, we issued six 3 million shares of common stock through a follow on common stock offering in July.
And we issued another 155 million shares of common stock through our at the Mark at the market program.
In total we increased our equity by $141 million or approximately 15%.
Importantly, the proceeds from these issuances were fully invested by the end of the third quarter.
Moving to slide four you can see that we finished the third quarter with just over 80% of our deployed capital allocated to credit strategies and 19% allocated to our agency strategy similar to how we reposition last quarter, our credit portfolio grew by 24% quarter over quarter, and I'll get into where that growth occurred shortly.
Next please turn back to slide five for the attribution of earnings between our credit and agency strategies.
During the third quarter the credit strategy generated total gross income of <unk> 66 per share while the agency strategy generated gross income of <unk> <unk> per share.
These results compare to $1 25 per share in the credit strategy and a loss of <unk> <unk> per share in the agency strategy in the prior quarter.
We benefited from strong performance in most of our primary credit strategies during the third quarter, our loan strategies, including non QM residential transition small balance commercial mortgage and consumer generated high returns on equity driven primarily by net interest income while performance in the CBS CLO and non.
Agency strategies non agency RBS strategies were also excellent driven primarily by net realized and unrealized gains.
We also had successful resolutions on a couple of larger commercial mortgage mpls and subsequent to quarter end, we closed on the sale of one of the largest commercial real estate oreos in the portfolio at a significant profit.
On the other hands as Larry noted Longbridge financial incurred a net loss for the quarter driven by Mark to market losses on its MSR portfolio, which negatively impacted Ellington financials results.
And agency RBS performance was mixed during the quarter in July and early August interest rates continued to fall and volatility increased causing agency MBS underperformed treasuries moving into the latter half of the quarter interest rates began to increase in volatility declines and towards the end of the quarter agency yield spreads.
<unk> tightened as the market got more clarity on the federal reserves tapering plan.
Incrementally higher mortgage rates, particularly in September led to reduced expectations for prepayment rates and boosted higher coupon RBS, while the anticipated withdraw a fed purchases negatively impacted lower coupon MBS.
Net interest income on our agency portfolio strong performance from our interest only securities and net gains on our higher coupon specified pools exceeded net losses on our lower coupon holdings and reverse mortgage portfolio.
On the hedging side net losses on TBA short positions, particularly on higher coupons.
Lately exceeded net gains on interest rate swaps and U S Treasury hedges.
Turning next to slide six during the third quarter, our total long credit portfolio grew by 24% to $1 six 9 billion.
As we deployed proceeds from our July equity issuance. The vast majority of the growth occurred in the non QM and residential transition loan strategies, which are both captured in the residential loan slice on this page.
Our small balance commercial mortgage portfolio also grew although opportunistic sales of CME CBS will regenerated some significant gains caused the overall commercial real estate slice to shrink sequentially.
On slide seven you can see there our long agency MBS portfolio also increased during the quarter by 4% to $1 4 billion as of September 30.
Turning to slide eight our debt to equity ratio adjusted for unsettled purchases and sales decreased to $2 91 as of September 30, as compared to $3. Two to one as of June 30, as borrowings related to new purchases were partially offset by paydowns of nonrecourse borrowings related to non QM securitization.
And as total equity increased.
Our recourse debt to equity ratio adjusted for unsettled purchases and sales was unchanged at $1 91 as of September 30th as borrowings related to new purchases increased roughly in proportion to total equity.
Finally.
Our weighted average borrowing rate was just slightly higher at one 7% as of September 30, as compared to $1 two 4% at June 30.
For the third quarter total G&A expenses declined by a penny to <unk> 16 per share while other investment related expenses were <unk> <unk> per share as compared to <unk> 11 per share in the prior quarter, mainly due to non QM securitization issuance costs that we incurred in the prior quarter, but not in the third quarter.
Also during the quarter, we recorded an incentive fee of $5 $3 million as we exceeded our net income hurdle for the trailing four quarter period.
And we recorded an income tax benefit of $2 million, primarily due to a decrease in current deferred tax liabilities related to the reduction in the unrealized gain on our investment and Longbridge financial.
Finally, our book value per common share was $18 35 per share at September 30 down slightly from $18 47 per share at June 30 <unk>.
Including the <unk> 45 per share of common dividends that we declared during the third quarter, our economic return for the quarter for the third quarter was positive one 8%.
Now over to Mark.
Thanks, Jr. Q3 was interesting and that we saw a lot of interest rate volatility as the treasury market seem to grapple with the tension between the spread the delta variant and high inflation and.
In contrast.
Spreads were relatively calm.
In the third quarter, we got a lot of clarity from the fed about the pace of taper and we now have further specifics on the plan base.
Based on the timeline discussed last week fed meeting.
Starting this month the markets, you're entering a new phase of diminished fed support.
The fed has gone out of its way to provide clarity about its plans, but that doesn't mean the papers a non event.
And the Fed's agency MBS and Treasury portfolios has provided support for all financial markets by putting cash in the system and.
And during the taper period, which is expected to end next June they will continue to put cash in the system, albeit at a slower pace.
We think that means over the course of 2022, we may see somewhat wider credit spreads and yields.
So for ESC those are welcome changes as wider spreads.
Higher core earnings plus we have dry powder to deploy from our capital raise in October.
Already in September and continuing into October.
Spread widening spreads on investment grade non QM <unk> in cielo as have all widened in an orderly fashion.
<unk> talked in previous calls about how loans had not compressed as much security yields in the past year.
It has partially reversed since quarter end spreads have widened so far into Q4.
This spread widening is not the result of any hiccups and credit performance rather it's the result of a market demanding wider spreads because of an influx of new issue.
The other thing, we're playing close attention to is supply and demand and affordability trends in the housing market since COVID-19. The housing market has been appreciating at an incredible pace, if mortgage rates drift higher without robust wage growth affordability may become an issue.
So for ESC, we cant get complacent about the strength of the housing market, we will be monitoring it quite closely.
Since quarter end, we have also seen lower loan prices in some sectors, which inevitably happens when securitization economics are squeezed by wider spreads and higher yields I like the balance we have at ESC.
<unk> by owning both the originators and securitization machines when loan prices are high like this quarter, you have see benefits to robust gains on sale as loan prices come off and loan sale margins compress that benefit accrues to the securitization business, we believe that by being more vertically integrated in the wall loan to security supply.
Jane UFC can thrive, whether the economics favor with the loan originator or the securitization sponsor in fact, we've already made three additional equity investments in originators. So far this year, we plan to use the same playbook with these new investments that we used successfully for land sure. We make small investments. So we don't have a lot.
Capital at risk, we secured loan volume for IFC, and we look for situations, where <unk> financial strength and Ellington data science and industry relationship can give our partners a competitive advantage over our peers that lack those resources.
We also give new partners the benefit of our experienced and growing origination platforms.
Turning to third quarter results overall credit performance for our portfolio was very strong consumer balance sheets remain in good shape HPA has surprised to the upside and a continued rebound in commercial real estate values and deal activity drove solid performance in our commercial loan portfolio.
Core earnings covered the dividend and I think thats, great given our increased capital base you can see on slide six that we had significant growth in our credit portfolio residential mortgage strategies, where most significantly this quarter driven by non QM and RTL the commercial real estate portfolio actually shrunk sequentially, but that was due to opportunistic.
<unk> sales nonetheless, our small balance commercial mortgage holdings actually increased quarter over quarter, and we continue to see a lot of attractive deals in that sector.
You can see on slide nine that we have 95% of our credit portfolio and our three primary sectors residential mortgage commercial mortgage and consumer.
We also had modest growth in our agency MBS portfolio during the quarter. We are positioned to increase our net agency mortgage exposure should diminishing fed support and yearend liquidity issues present us with opportunities.
On slide 10, you can see that all small that our small balance commercial mortgage loan portfolio.
We are well diversified across many dimensions and are in a first lien positions on every loan with the vast majority being floating rate loans that benefit from interest rate floors.
We issued stock in Q3, it's great that our portfolio companies and other loan sourcing relationships have grown and matured to the point, where it was relatively easy for us to deploy the additional capital I've also been really happy to see the greater liquidity in our stock.
Despite substantial portfolio growth this quarter with our growing capital base, we have a lot of room to take advantage of market opportunities. Because this consistent fed purchases have been a great source of stability in 2021 as the fed has grown its agency MBS portfolio by over 400 billion as that support wanes, we think that private capital.
The ABL baby, maybe able to demand even more attractive yields now back to Larry.
Thanks Mark.
I'm very pleased with Ellington Financial's performance, so far in 2021, and particularly with the progress that we've made growing our origination businesses and loan portfolios.
Following quarter end, we again access the capital markets to continue driving this growth.
In October we raised just over $100 million of common equity again at around book value. We've already invested the majority of this new capital, but in addition to fueling continued loan portfolio growth. The additional capital should provide us with additional economies of scale in our portfolio and the capital markets and operationally.
This additional capital also positions us to be opportunistic should we see any pockets of volatility around year end, whether they'd be related to macro concerns around inflation or COVID-19.
<unk> concerns.
Or even just typical year end balance sheet pressures.
So we're in a strong position to play offense as we move into the final weeks of the year.
Meanwhile, we will continue to work on cultivating expanding and expanding our proprietary loan pipelines are also being opportunistic with our security strategies and staying disciplined on risk and liquidity management to protect and preserve book value.
Finally, I'd like to point out that with our latest capital raise Ellington financial has now passed the $1 billion Mark in total common equity market capitalization.
That's a significant milestone for Esa and it's one that we believe will further increase our visibility in the market increase the liquidity of our stock for our stockholders and enable us to access both the debt and equity capital markets more efficiently.
In fact, if you look at our capital structure, you can see that at this point, we're especially well positioned to add debt or preferred equity to our balance sheet and.
In particular, our $86 million of senior unsecured notes will become freely refinance will on March one and.
And with the additional equity on our balance sheet. Following our recent stock issuances that could be a good time to both lower the cost of and increase the size of our outstanding unsecured debt, thereby leveraging up our balance sheet and helping drive core earnings higher still.
With that we'll now open the call to questions operator.
At this time, if you'd like to ask a question. Please press star one on your Touchstone felt you may maybe so open the queue at any time by pressing the pound key once again is star one to ask a question and we will take our first question is from Doug Harter with credit Suisse.
Hoping you could talk a little bit more about the three investments you've made and originators what type of products do they make.
I guess, how would you think about that adding to the pipeline of loan opportunities.
Yes.
We're not going to provide any additional color on that other than to say that they are all in the in the residential area. We are working on at least one of the commercial area as well now but yes.
Yes, those are just all in the reservoir and Sherri on there as we said they are small investments.
And it's probably going to be a little while before you see.
Very meaningful growth to portfolios back.
Markets like non QM and <unk>.
<unk>.
A little bit of everything in the residential space.
Okay.
And then you mentioned some of the spread widening in Securitizations can.
Could you just given that can you just talk about kind of where you see returns and.
So the execution of the securitization.
Yeah.
That moves returns today.
Sure. It's Mark So you saw just a tremendous amount of supply and a lot of sectors.
In October you had a lot of.
Mortgage 2.0 supply some of that non QM some of that agency eligible investor deals you saw a lot of CLO supply.
A lot of MBS supply.
And so you've seen.
A little bit of widening in investment grade bonds and now.
That's being matched by slightly lower loan prices. So when I net the two together I don't see a big.
Difference in securitization economics other than that it means here with lower loan prices were retaining less prepayment risk, which I think is generally a good thing.
Great. Thank you.
Well go next to Crispin Love with Piper Sandler.
Thanks, Thanks, Good morning, and thank you for taking my questions.
First looking at slide nine with the credit portfolio breakout.
I can't recall, a time, where the residential portfolio was near the 64% level that you are now so is that largely due to the opportunities youre seeing in non QM and RTL in the flow you are getting or are you at all incrementally more negative on the commercial mortgage market and also in that presentation. It looks like you might have.
Increased your ski MBS hedging a little bit so just a little color there would be great.
Sure Hey, Chris minutes, Jr. Yes, I think the first thing you suggested is spot on namely it's driven by a larger non QM portfolio quarter over quarter, I mean, just to put some numbers on it.
At September 30, our non QM portfolio.
Was about $585 million of the around $1 seven of the credit portfolio is about 35%, whereas at June 30th those numbers were about $300 million and 22%. So by far the biggest driver there is non QM followed by residential residential transition loans.
Larry mentioned that those two strategies.
Were record quarters for Ellington financial in terms of origination volume.
Zero directly reflected on this pie chart I would say that the point about commercial mortgages.
We're definitely and Larry mentioned it as well in his prepared remarks, we're definitely seeing growth there.
The slide also has <unk>, where we had opportunistic sales. So you have some offsetting.
Sales and pay downs offsetting.
Growth in the small balance commercial mortgage sector. So I would say we are very excited about the loans, we're seeing in commercial real estate, we would we would expect to see continued.
Portfolio of growth there as well.
Okay. Thanks, there and then.
Did you also mentioned that lend shares looking at adding some additional products. In addition to non QM and is there.
Any color that you could give there or would you expect to get flow from the new products as well should they happen.
Sure it's mark.
So I think there is a lot less sure can do the.
Senior management team.
Is <unk>.
Extremely experienced an extremely thoughtful.
About mortgage credit so.
There could come a time, where they start getting involved in the RTL space.
They have been.
Having a lot of internal discussions and they're starting to lay the groundwork to potentially get involved in the prime jumbo space.
So I would say those two sectors I think now are the ones that are closest to.
Closest to actually.
Them starting to originate loans.
We've liked and they liked it sounds to me like we have like non QM.
<unk> well to us because.
You don't have much of a bank presence there.
There is.
There is a <unk> component to it you have to value. So just a lot of things that sort of we have core expertise that have sort of.
Meshed nicely with non QM. So that's why that's been the initial focus.
Okay and then just one just one quick clarifying question on the originator Stakes is there did you disclose one more than you did last quarter I think last quarter. You said that you added to and then I saw the commentary Okay. You've added I believe its three and no.
Last six months or is there one additional one or all three new.
No you are right. It's one additional one during the third quarter and so it's three until over the last six months or one incremental in Q3 and then we have several others that are I would say in discussion that we're hoping to close.
By year end.
Great. Thank you.
Thank you.
Well go next to Bob <unk> with UBS.
Hey, good morning.
Could you just talk generally about competitive dynamics in resident ready to transition and non QM as well are you seeing.
Other much larger organizations take another.
Look at those sectors look to look to move in and broaden the market and if and when that happens is that any sort of do you look at that as any sort of a competitive threat to your program or kind of a rising tide, where it just boost.
Boosts the profile of these alone niches.
Hey, Brian it's Mark So I would say in the RTL space.
That has.
There has been more of a focus there.
It's gotten sort of more publicity in the past year than what it has had in the past.
In that space I do think there are some larger pools of capital.
<unk> focused on that space, but it's a very fragmented space.
And the way we do it is really dependent upon.
Thoughtful underwriting of the projects.
And really understanding the local housing market. So I don't see it as a threat Larry mentioned in his prepared comments that we think that can be a lot of growth for us over the long run the median age of homes. In this country is very old there is a lot of deferred maintenance that needs to get done so I think.
We have ample.
The ample opportunities to grow our volumes there, but I.
I do just from what I read I do think there has been a little bit more focus on that sector from some large pools of capital than what you might've seen say pre COVID-19 say 2019.
Got it okay.
And just rotating over to Longbridge in the MSR.
Looking looking at that.
Yield curve now it seems like the pain trade, maybe maybe on here in terms of lower rates and a flattening.
Any.
Changes contemplated in terms of their their hedging.
Methodology.
Those sorts of things.
No.
It's Larry.
No no expected changes in terms of hedging methodologies, it's a little different from the forward MSR market, where it's so tied.
Just to the absolute level of mortgage rates.
In comparison to the outstanding stock of.
Mortgages.
Here.
Yes rates have sort of been low, but it wasn't low rates alone that was the trigger. It was also combined with just.
Continued home price appreciation and then you've got a bunch of borrowers who can take advantage of that by.
By borrowing more against their homes basically its a cash out situation.
Where they can replace their old loan with just a bigger loan.
So.
So it is not.
So that aspect really isn't all that hedgeable.
And the other aspect that's also not that hedgeable as that.
Theres really no TBA market, where you could sell H MBS forward.
And so but I think the good news is that we do believe that this is behind us.
H MBS prices are about as low as they've been in a while or they.
They were about as low as they were in a while when this write down took place and so I think that.
Wow.
I certainly think that when you look at the fact that originations continue to be incredibly strong and their market share continues to grow we just feel great about about that company's prospects.
Got it okay. Thanks for taking my questions.
Thank you.
We'll go next to Bose George with <unk>.
Hey, guys good morning.
Just maybe one more on on Longbridge just in terms of the I guess the positive side. It's all the home price appreciation et cetera can you just talk about.
Again on sale trends in the reverse business sort of how some of those fundamental strengths.
Yes sure.
The.
Longbridge itself.
Really we don't believe is that much exposure.
Credit perspective, right. Because these are these are.
Jay guaranteed mortgages ultimately.
We're originating.
So.
So yes, so in terms of gain on sale right the biggest.
The biggest headwind there right, which just that.
They had loans in the pipeline right that we're committed to and in some cases already closed on it takes a little while to sell those in the form of <unk> and so.
The gain on sale was just a lot lower.
And in some cases on some loans negative after the H MBS market had.
That spread widening event so.
So again that was sort of once that loans that we are all either already closed or in the pipeline. Once those are flushed out of the system now we've seen <unk>.
Margins come back.
And.
There is elasticity in the market because they are where theyre originating loans buying loans.
Yes.
Especially in the wholesale market Theres definitely elasticity, there so they've been able to cut their prices that they are buying loans at and wholesale market.
And.
And therefore, our restore.
Most of the gain on sale profitability per unit that they had.
<unk> so.
Again October was was nicely profitable again very profitable and we.
I think that origination volume should continue to be very strong as you probably know.
It's a market that theres just not that many players in and Longbridge is one of the most significant obviously as we said number three.
<unk> MBS issuers so so.
So, yes, we really feel good about.
The gain on sale prospects going forward.
Okay, and then the spread widening that you saw there was that caused by the pick up in prepayments or was that the main driver yes.
Okay, great. Thanks, and then actually just switching over to the up the capital and operating companies can you just talk about.
The incremental allocation is there.
Kind of a level of allocation that.
Where we could think that could go as you know, you're obviously, you're continuing to sort of invest in new operating companies.
Yes, I don't think.
We're going to continue to take the opportunities as they present themselves and as we find them.
We have been.
Proactively looking.
At.
Sometimes it'll be for example, an originator that we're buying loans from <unk> and then we will after seeing the.
The quality of their business.
Then approach them.
See if they're interested in selling a stake and obviously as we said we would give them lots of things can return, sometimes we give them additional credit lines.
The data.
In analytics that Mark mentioned before so.
So we don't really have a budget in terms of how big we want this portfolio to grow.
We're certainly able to have substantial growth and still meet the REIT tests.
As you probably know that the Trs testers.
Measured on a gross asset basis. So we have plenty of growth there as Mark said, we focused more on smaller investments initially.
I mean, just simple and short our original investment was under $5 million right now.
That's obviously worth a lot more so.
We would rather.
Make these investments and not have as much capital or risk just based upon overall cyclical changes in the origination business.
We'd rather.
Have less at stake there.
And obviously.
Obviously, if we can.
Symbiotically.
Increase there are they are.
Their origination and our flows that just works for everyone and that's an important obviously been a very important component as you can see with land sure in terms of.
What.
The way, we've been able to grow our loan portfolios.
Okay, great. Thanks.
Yeah.
Well go next to Trevor Cranston JMP Securities.
Okay. Thanks.
Question on the couple of the recent changes we've seen from the FHFA.
Specifically in terms of bringing back CRT assurance and removing the caps on.
The GSE industrial loan purchases.
But I'm just curious if you guys have any thoughts on how you are.
Bring it back CRT and potentially reducing some of the private label issuance of the industrial loans.
The overall supply demand dynamics of the resi credit sector.
It's a great question. So it's mark so I would say.
For the caps the investor loans I don't think that's going to have a big impact on.
Label issuance in that sector.
Because private label issuance in that sector right now is being driven by.
Just economically.
Better for.
It's just better it's just better economically to issue in the private label market. If people are willing to if you're a private capital willing to underwrite the credit risk.
<unk> third and what the Gse's have done and if you have private capital willing to.
Take some of the aggregation risk so I think youre going to continue to see.
Private capital involved in the agency eligible sector in regards to CRT.
I guess, we sort of view that pause.
What was the aberration and not so much the restarting of it you know I think crts has been an important way for the GSE to mitigate shareholder risk on.
The guarantee fee business.
So we think we think that'll that'll.
That will continue.
The one thing I would say that you have these changes now in leadership at FHFA. So.
Wouldn't be surprised at all to see additional changes and.
There's a lot there.
It can be done with the Gse's two.
To.
Promote some of the goals of you know more affordable housing.
More first time homeowners and there's obviously been challenges to that from some business lines that are out there now there have been some people that have been critical about the single family rental business.
That it squeeze that first time homebuyers and so.
I think youre going to see dynamic policy changes going forward.
Okay. That's helpful color. Thank you guys.
We'll go next to Eric Hagen with BPH.
Hey, Thanks, Good morning, maybe just one how sensitive do you guys expect the cost of repo in the credit segment might be the changes at the short end of the yield curve.
Including the haircuts that gets applied.
On that collateral and can you remind us the collateral which has pledged their right now thanks.
Yes.
Go ahead Mark.
So I would say, we don't anticipate significant changes in haircuts.
Because you've had stable credit performance and you've had relatively stable asset prices increases in haircuts.
Normally.
The consequence of either weakness in performance and or weakness in asset prices.
We think that the.
Changes in repo costs, we think theyre going to track.
What the fed is going to do on the short end one.
Thing we've done on the agency side of the portfolio, where you have a little bit more dynamic financing market as we have them.
Extended the term of our repo because we thought it was advantageous so we've done some when you repo and we think that the one year repo rates are certainly going to go up because now that sort of spilling into close to period of time, where people think the fed could be active so in term.
Terms of.
Net interest margin.
If you have assets priced off the front end of the curve like a lot of the non QM loans or floating rate assets like lot of the commercial bridge loans.
Our net interest margins are going to hold up very well because.
We don't expect a change in repo spread to a change in haircut, but I do think just the overall.
Levels of LIBOR is going to affect our financing costs.
And I, just just to add to what Mark said, So I think if you look at agency repo.
The haircuts there historically I mean, they have been incredibly steady and resilient.
Really since the financial crisis, I would say.
The 2000.
<unk> financial crisis so.
Right around for customers like us right around in that 5% to 6% area and frankly.
That's plenty of leverage being able to leverage <unk> 20 times, five or 6% haircut.
Is.
As plenty of leverage.
So.
We certainly don't see let's say if rates go up or something like that because of the taper.
Sure.
At the end of.
Easing or whenever you want to call it.
It's.
I don't think youre going to see a significant increase in agency aircraft at all.
And in terms of spreads those really have track.
Again other than in certain extreme situations like COVID-19, those really have tracked very closely.
Just the <unk>.
General collateral Treasury sofa market now.
Now you'd call it so.
Obviously, a few basis points here or there.
It can move but if you look at certainly certainly in recent times and I think we.
In IRI Ellington residential deck, we actually have a slide on that in terms of just.
Repo costs and things like that but.
Yeah.
It's a very close tracking now I think where it gets interesting is in the credit sector right. Because we also have repo not Justin and agency mortgages. We also have them in non agency MBS and in all the other products that we invest including loans right. Some of our loans are actually financed via repo.
And.
There when you look at the haircuts and spreads <unk> seen nothing by compression and I think the pattern. There is that you'll have.
Event in the market like Covid in early 2020, and then in response to that right. That's a liquidity crisis youre going to see haircuts go up immediately you're going to see yield spreads go up on the asset themselves and you're also going to see financing spreads go up so that happened and then the asset always seems to Lee.
Lead to financing historically I think that's been the pattern.
Really both ways so.
Hello.
Since then obviously in the last year and a half <unk> seen haircuts steadily come down you've seen spreads steadily come down they haven't come down as fast as the asset yields will come down, but I think the.
The trend is still in that direction. So we're certainly hopeful that we'll continue to see and I believe you will continue to see.
Spreads on the credit.
The credit assets and they are rebuilt continue to compress and haircuts, maybe compress a little bit from here.
Thanks, a lot appreciate it.
Thank you. Thank you Maher.
That was our final question for today, we thank you for participating in the Ellington financial third quarter 2021 earnings Conference call. You may disconnect. Your line at this time and have a wonderful day.
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