Q4 2021 Ellington Financial Inc Earnings Call

February 24, 2022

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Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington financial fourth quarter 2021 earnings conference call. 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 would like to.

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It's now my pleasure to turn the call over to Jason Frank.

<unk> 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 1995 forward looking statements are not historical in nature.

As described under item one a up our annual report on Form 10-K as 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'm joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark to Kottke Co Chief investment Officer of UFC, and Jr. Herlihy, Chief financial Officer of USD.

Scribed in our earnings press release, our fourth quarter earnings Conference call presentation is available on our website Ellington financial Dot com.

Management's prepared remarks will track the presentation.

Note that any references to figures in this presentation are 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 in Ellington financial.

I'll begin on slide three.

I'd like to the financial closed out a strong 2021 by generating net income of 61 per share and core earnings of 44 per share in the fourth quarter.

For the full year, we delivered an economic return of nearly 14% and a total return to shareholders of 26%.

Im, especially pleased with our performance in 2021, given that it followed a successful 2020, when we were able to navigate the market volatility profitably and be in a prime position to play offense in the aftermath of the Covid related liquidity crisis.

During the fourth quarter of 2021.

Our investment portfolio continued to expand with our credit portfolio exceeding the $2 billion Mark for the first time.

By comparison, our credit portfolio was $1 4 billion at year end 2019, just prior to the onset of the pandemic. So it has grown by over 40% in the past two years.

Most of this growth has occurred in our proprietary loan portfolios, which have increased by a combined 80% since December 2019, and Furthermore, this growth is a direct result of the origination businesses that we have successfully cultivated.

Our origination business is now span across the non QM commercial mortgage residential transition reverse mortgage and consumer loan sectors.

Notably we've been able to achieve this portfolio growth, while lowering our overall recourse leverage.

In part this reflects that we have been able to grow by substantially expanding our equity base as opposed to just adding leverage.

In the fourth quarter for example, we executed on two well timed equity raises namely our common equity raise in October and a preferred equity raise in December .

And with our GAAP earnings per share nicely exceeding our dividend rate book value for common share actually rose during the fourth quarter. Despite the much larger equity base.

Meanwhile, we have been able to invest the proceeds from those recent equity raise as efficiently across our diversified portfolio and thereby avoid slippage in earnings.

The proceeds of both of our Q4 equity capital raises were invested within about a month each.

We have also been able to add extend and improve the economic terms of many of our financing facilities.

So significantly ramping up the volume and pace of our non QM securitization activity.

We just closed our 10th non QM securitization last month, and our securitization pace has now increased to one deal per quarter, which is much more efficient from a financing standpoint.

These securitizations are important to us because they provide low cost long term locked in financing, which strengthens our balance sheet. While also generating highly attractive retained tranches that have helped enhance our overall earnings.

The credit performance of our non QM Securitizations has been among the best in the sector and in fact, one of our 2020 Del's was just upgraded last week by Fitch.

One of the keys to our portfolio growth has been the strategic relationships that we have with our originator affiliates.

Through these relationships, we can better adjust both the acquisition volume and the underwriting criteria of our loan investments.

As a result over the past two years, our loan portfolios have become among Ellington financials largest highest yielding and best performing strategies.

At the same time, the profits generated by our equity investments in these origination companies have provided a strong tailwind for our earnings and book value per share.

By owning both the ultimate loans produced as well as stakes in the originators themselves, we have two ways to win.

During the fourth quarter, we completed the acquisition of three more loan originator equity stakes, including an investment in the commercial mortgage bridge loan lender Sheridan capital, which is our first equity investment in the commercial mortgage originator space.

We have been investing and commercial mortgage loans with the Sheraton team for more than a decade.

Over a wide range of market environments. The Sheraton team has provided us with a steady stream of attractive investments. While also building their own reputation in the market as a flexible and reliable source of capital for real estate owners.

To the additional operating capital provided by this strategic transaction Sheraton is poised for even greater growth.

In fact, sheraton's flexibility and efficiency were highlighted just this past quarter as it was able to get a number of loans over to finish line to accommodate year end closing deadlines, which many other lenders were unable to do.

Our teams worked diligently up into the final day every year and we were able to pick up some very attractive commercial mortgage bridge loan investments.

In recent quarters, we have emphasize the growth of our commercial mortgage loan portfolio as one of our key drivers of earnings and as you can see on slide 11, Ellington financial had $191 million of CRE originations in the fourth quarter, which set yet another record for us and which grew our total portfolio by 30% even at.

After paydowns and resolutions to $458 million.

With our emphasis on relatively low ltvs and short durations. The credit performance of these loans has been excellent including throughout the Covid market shock.

You can see the latest attributes of our diversified commercial mortgage portfolio on the preceding slide slide 10.

Nearly 90% of our new originations during the fourth quarter were multifamily and as you can see on this slide about two thirds of our portfolio consists of multifamily back loans and asset class, where we've consistently found attractive risk adjusted returns.

Turning back to slide 11, you can see the significant quarterly growth of our non QM and residential transition loan portfolios as well.

Finally, as we announced last night, we have just signed a definitive agreement to acquire substantially all of the remaining interest in our affiliate reverse mortgage originator Longbridge financial I'll provide more detail on that in my closing remarks.

I will now pass it over to Jr to discuss our fourth 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 December 31, 2021, Ellington financial reported net income of 61 per share and core earnings of <unk> 44 per share. These results compare to net income of 41 per share and core earnings of <unk> 46 46.

<unk> per share for the prior quarter our.

Our net income which includes the mark to market gains on our originator equity investments comfortably cover the dividend for the quarter, while our core earnings per share declined modestly quarter over quarter.

The decline was due to a small drag from investing the proceeds from our common equity raised during the quarter as well as incrementally lower overall asset yields on our non QM loan portfolio and our commercial mortgage loan portfolio.

The lower yield on our non QM portfolio were driven by faster prepay speeds and lower coupons on new loans purchase and then our commercial mortgage loan portfolio coupons on new originations were generally lower than coupons on loans that we resolved.

That said, we have seen non QM coupons on new originations ratchet up in recent weeks in response to rising interest rates and securitization spreads and we expect yields to be increasing from here and other than our other loan strategies as mark will discuss in more detail.

Looking ahead with the continued growth of our high yielding investment portfolio and the potential upcoming refinancing and upsizing of our unsecured notes I think that we are well positioned to grow both net income and core earnings from here in particular, we expect that our core earnings will again cover our dividend rate soon.

As Larry will mentioned our acquisition of the other half of Longbridge should also be accretive to our core earnings.

During the fourth quarter, we raised a total of about $220 million in equity.

This consisted of a common equity offering in October , which we raised near book value and a preferred equity offering in December that priced at a dividend rate of six 5%.

The new preferred equity series B was rated a minus and our existing preferred equity series. Eight was also upgraded one notch to a minus both of which are designated NII NTIC one.

These NII one ratings enabled us to price the series B at a spread of $4, 99% for the five year U S Treasury, which is among the among the highest executions ever in our sector.

These fourth quarter capital raises increased our equity base by a combined 20% and as Larry mentioned the proceeds from each were invested within a month.

Moving to slide four you can see that we finished the fourth quarter with 82% of our deployed capital allocated to credit strategies and 18% allocated to our agency strategy similar to how we are positioned last quarter.

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

During the fourth quarter the credit strategy generated total gross income of 91 per share while the agency strategy generated a small gross loss of <unk> <unk> per share.

These results compared to <unk> 60, <unk> 66 per share in the credit strategy and positive <unk> <unk> per share in the agency strategy in the prior quarter.

The strong performance of our credit portfolio was led by sequentially higher net interest income, which is the result of our larger high yielding loan portfolios naturally as well as by significant earnings from our investments in unconsolidated entities, primarily our loan originators.

Sure our non QM loan originator affiliate set another record quarter set another record for origination volume and profitability in the fourth quarter capping a tremendous year.

Our reverse mortgage originator affiliate Longbridge financial delivered a strong fourth quarter, while our smaller originator affiliates posted solid results as well.

In addition, our non agency MBS and <unk> strategies contributed nicely to our fourth quarter results.

In our agency strategy. It was a challenging quarter as short term interest rates rose sharply actual and implied volatility increase and the yield curve flattened with the federal reserve signaling that interest rate increases could be imminent.

The Federal Reserve also began the tapering of its asset purchases in November and then accelerated the pace of that tapering starting in December .

Most MBS underperformed U S Treasury securities during the quarter and higher coupons specified pools and other shorter duration RMB S, particularly underperformed in light of the flattening of the yield curve.

Net realized and unrealized losses on our agency portfolio exceeded net interest income and net gains on our interest rate hedges and so the agency strategy ended up generating a small loss for the quarter.

Turning next to slide six during the fourth quarter, our total long credit portfolio grew by 22% sequentially to $2.06 billion as of year end.

The majority of the growth occurred in the non QM residential transition and small balance commercial mortgage loan strategies.

And as you can see there slices of the overall pie grew roughly in proportion.

On slide seven you can see that our long agency MBS portfolio also increased during the quarter by 10% to $1 7 billion.

Turning to slide eight our overall debt to equity ratio adjusted for unsettled purchases and sales decreased modestly to $2 eight to one as of December 31 from $2 91 has increased borrowings related to the larger portfolio were more than offset by an increase in total equity.

The proportion of recourse borrowings did increase slightly however, and our recourse debt to equity ratio again adjusted for unsettled purchases and sales increased to two to one as of December 31 from one eight to one.

In any case, our leveraged and recourse leverage continued to be low. So we have ample room to continue to add assets at what could be just the right time.

We also further extended and improved our sources of financing and leverage in the quarter.

In addition to the non QM loan securitization. We also expanded one of our existing loan financing facilities to include residential transition loans, while simultaneously upsizing that line.

Finally, our weighted average borrowing rate declined by three basis points to one 4% as of December 31.

Okay.

For the fourth quarter total G&A expenses declined sequentially by <unk> <unk> per share to <unk> 14 per share while other investment related expenses increased by <unk> <unk> per share to Tencent.

Mainly due to non QM securitization issuance costs that we incurred in the fourth quarter, but not in the prior quarter.

Also during the fourth quarter, we recorded an incentive fee of $3 $2 million as we exceeded our net income hurdle for the trailing four quarter period.

Finally, our book value per common share was $18 39 per share at December 31 <unk>.

<unk> from 18 to 35 at September 30 <unk>.

Including the <unk> 45 per share of common dividends that we declared during the quarter, our economic return for the fourth quarter was two 7%.

For the full year our.

Our book value per share increased from $17 59 to $18 39.

And combining this book value per share appreciation with a $1 64 per share of common dividends that we declared during the year, our economic return for the year was 13, 9%.

Now over to Mark.

Thanks, Jr.

I'll first note that we are in a very different market environment today than when we spoke on our last earnings call and as compared to year end.

The fed is thinking about inflation tapering and the current heightened cycle pivoted in Q4, what it made 180 degree turn and its opinion about the likely persistence of inflation and where its current policy should be in relation to the long term inflation outlook. We're now seeing the market's reaction to that pivot intensify in 2022 as well as <unk>.

As far as the other evolving macro and geopolitical factors.

I'll speak first about the fourth quarter's performance and then I'll circle back to how we are thinking about what the fed hiking tapering of quantitative tightening cycle may mean for Ellington financial moving forward specifically how are we positioned what opportunities do we see and what risks are we thinking about.

The fourth quarter move in interest rates was a bayer flatten there as the market reacted to the fed's, new more hawkish stance towards inflation.

Tears swap rates were up more than 50 basis points over the quarter, while 10 year swap rates were up less than 10 basis points AIDS.

Agency MBS underperformed during the quarter as the fed announced that it would end support for the sector much sooner than it has previously communicated.

Despite this underperformance Ellington Financial's agency strategy had only a modest loss of <unk> <unk> per share, while our credit portfolio benefited from both a higher yielding portfolio as well as increasing value in our originator steaks and overall, we posted very strong results as you can see on slide six we had substantial.

<unk> growth and we're able to deploy the additional capital from our preferred and common equity deals quickly and efficiently.

As our origination partners have grown we can now deploy capital more quickly we had steady growth in non QM RTL and commercial mortgage originations.

And we got there with the low leverage generally low LTV portfolio, adding mostly short duration loan assets. Many of which are now being originated at higher yields or soon be restating to higher yields.

2021 was the year when income from our stakes in originators helped our overall net income to exceed our core income for the fourth quarter significantly so.

This is a powerful dynamic for IFC because it can allow our book value per share to grow even with the high dividend payout.

For other mortgage REIT, it's often the other way around where GAAP income trails core earnings and the dividend, which leads to book value erosion over time.

Traditional mortgage origination is a cyclical business and 2021 had some powerful macro tailwind for most originators that are not likely to be repeated in 2022, including an extraordinarily strong housing market historically low mortgage rates and stable securitization bond spreads.

This cyclicality is one reason why we focused our originator stakes in non traditional growing markets also by owning both the originators in the loan flow Ellington financial actually is actually is two ways to win and these different earnings streams can be counter cyclical.

Away from our originator Stakes, we had solid earnings contributions from commercial mortgage bridge loans bridge loans, non QM loans consumer loans and also from our non agency MBS and <unk> strategies.

It's particularly nice to see that after years of building the business our residential transition loan portfolio is now growing rapidly and contributing significant income to Ellington financial.

I mentioned a lot has changed since the end of the quarter.

I'll now turn it back to the fed hiking cycle, which will likely begin next month and what it may mean for <unk> and how we are positioned for it.

The first thing I would say is that <unk> management has lived through a lot of different interest rate cycles. Our focus has never been on predicting the fed's next move instead, our focus has always been first and foremost trying to insulate our portfolio against these moves so our book value is not tremendously impacted by changes in fed policy.

Secondly, when faced with the new market environment, we try to respond thoughtfully to position the portfolio to capture new opportunities and thrive.

Market is already priced in a significant increase in short term interest rates. This year. One month LIBOR is currently only 19 basis points, but the futures market is pricing LIBOR above 2% one year from now.

Do you mean that the market, which means that the market is expecting around $7 25 basis point hikes in the next 12 months.

Those are just market expectations of course, which are more often wrong than they are right because a lot of unpredictable things will happen in the next year, but it does tell you that a lot of the feds work has already been done even before the first rate hike has been implemented.

So what does all this mean for Ellington financial as the fed raised interest rates the coupons on our commercial mortgage grid load bridge loans will also rise as those are virtually all floating rate loans you can see this on slide 10 over 99% floating rate, mostly multifamily that we won't capture all of that yield increase because our repo cost.

Gulf as well.

But because we have relatively low leverage we should capture a good portion of those rate increases and our bottom line.

Our residential transition loans are also short duration typically less than a year, but they are fixed rates. So they have a different dynamic for AFC that means we will try to push the note rates higher on our new originations to keep generally the same spread over our funding costs, but we might not get there exactly.

<unk> market, so our pricing has to be consistent with other operators and there are and there is a lot of investor demand in that sector.

Moving to non QM, not only of two and three year swap rates increased significantly in 2022, so far but AAA spreads have also widened substantially.

But non QM credit performance has remained quite strong and the spread widening is not specific to non QM spread widening has occurred across the board in much of fixed income investment grade corporates high yield bonds agency MBS non agency MBS and the new non agency mortgage securitization spreads are wider and all of these sectors.

To put this in perspective, two year swap rates have increased about 75 basis points. So far in 2022, and non QM AAA spreads are wider by about 30 basis points that means new issue non QM Triple A's are getting done with coupons about 100 basis points higher than in Q4, just a few months ago.

That is a very large move in a very short period of time.

Loans that have already been originated but not yet securitized are worth a lot less than when they were than what they were worth at the end of the year.

Interest rate hedging recoup a good portion of that loss, but not all of it not to spread widening.

But after a sometimes painful transition note rate on loans tend to adjust its easy to see this in the agency MBS market, where the Freddie Mac survey rate has gone from three 1% to 392% so far this year.

And with the non QM note rates do adjust to the new interest rate and securitization spread regime that is supportive of both lend choice profitability as an originator as well as our profitability as an accumulator and securitizers.

We're working with our partners to help them adjust to this new pricing dynamic higher swap rates and wider securitization spreads means that originators must produce higher note rate to support gain on sale margins. It also creates new opportunities for us non QM prepayment speed to a blazing fast last year, they were slow with higher rates and that means that some of our retained.

Tranches will be worth more.

Generally speaking higher yields and wider spreads and more yield on everything we buy which should help our core earnings now of course, we're going to give back a portion of that with higher financing costs, but the spread widening should mean more yield on assets relative to hedging costs. So once we reach a period of spread stability, we should have a bit of a tailwind to core.

Earnings relative to the very low rate tight spread environment that we had been that had been persisting post COVID-19 .

Turning to agency MBS that is the sector that has really been in the crosshairs of a lot of this year's comments from fed members.

The sector has underperformed so far in 'twenty, two 2022 but it has been orderly and it has been an underperformance consistent with what we've seen in other parts of fixed income.

You can see on slide 10 that our agency portfolio did grow in the fourth quarter as our capital base grew but it grew at a much slower rate than the credit portfolio.

I think there are a few big questions hanging over agency MBS first once the fed is fully tapered in March. So there are no longer growing their portfolio, how long will it be before runoffs starts what will the pace of that run off be on will they supplement runoff with outright sales. Another big question is whether higher mortgage rates will reduce mortgage supply.

That happened in 2013 after the taper tantrum and many people forgot that after their initial swoon.

<unk> actually finished the year outperforming treasuries.

While there is uncertainty about the fed.

Agency MBS are a lot more attractively priced now than they were at the start of the year spreads are wider prepayments speeds are way down and pool pay ups are much lower we have a much bigger range of coupons and prepay stories, we can buy without paying very high dollar prices were very high specified pool pay ups.

So going forward I am excited about the opportunity ahead with fed support being withdrawn private capital should be able to demand a higher return on its capital we're seeing that now and <unk> is well positioned to capitalize on this dynamic now back to Larry.

Thanks Mark.

Some of our major goals for 2021.

We're to continue to build out our loan origination businesses and further capture the benefits of scale operationally and our portfolio and in the capital markets all of which we accomplished successfully.

Our expanding loan origination businesses drove both our portfolio growth and earnings and we were able to onboard five new loan originator investments over the course of the year.

In addition, Ellington financial's larger common equity base triggered inclusion in several additional equity indices, including the S&P 600 in May and <unk>, NASDAQ financial sector dividend yield index in December and these provide a nice tailwind for our stock.

Our larger size is also enabling larger and more efficient capital raises securitizations and financings, while helping keep our G&A expense ratio low.

For example, we will probably next turn to refinancing and possibly upsizing, our senior unsecured notes and I think we are well positioned there.

2022 has started out strong for Ellington financial we completed our first non QM securitization in January and we already have another one in the works.

Our flow in residential transition loans and commercial mortgage bridge loans continues to grow in leaps and bounds and.

In addition, as I mentioned earlier, we have just signed the definitive agreement to acquire substantially all of the remaining interest in our affiliate reverse reverse mortgage originator Longbridge financial.

Please now turn to slides 16 through 19 for details of the transaction and please note that the completion of this transaction is subject to regulatory approval and other closing conditions.

Yes.

Arlington has been investing in agency reverse mortgage pools and derivatives since 2012 and our.

And that space led to our collaboration with Dr. Chris Mayer.

Longbridge beginning in 2014.

In addition to founding and leading Longbridge. Dr. Mayer is a renowned economist and a thought leader in housing policy generally.

Our <unk> relationship with Longbridge has been highly synergistic and over the past nearly eight years Ellington has helped language develop into a top three reverse mortgage originator today with significant current earnings and significant franchise value.

As you know reverse mortgages enables seniors to convert a portion of their home equity into cash without having to make regular monthly mortgage payments. So they can be valuable retirement tools.

With the baby Boomer generation continuing to age the advantages of serving such a growing demographic are obvious and.

And similar to other markets in which into which Ellington financial has expanded we're not really competing with banks in the reverse mortgage space. This space is dominated by non banks largely for regulatory reasons the barriers to entry in the reverse mortgage origination business are formidable.

Longbridge has achieved tremendous growth and profitability in recent years.

From 2019 to 2021 longbridge more than tripled its annual loan volume to $2 2 billion and increased its net income over fivefold.

Longbridge recently ranked as the third largest reverse mortgage lender, both bi endorsement volume and securitization volume, where it has an 18% market share.

Additionally, long ridge is one of only two companies to be awarded a Morningstar MLR RVO two ranking for reverse mortgage originations.

Longbridge is growth.

As occurred in both its core agency eligible business as well as it and it's high margin proprietary business, which is actually the company's fastest growing division increasing almost five fold between 2019 and 2021.

As you can see at the bottom of slide 18, Longbridge posted a return on equity of more than 50% in 2020 retain those earnings to drive further growth and then return more than 30% on that higher equity balance in 2021.

Similar to what Ellington financial does and it's non QM business Longbridge originates and subsequently securitize the loans that it originates taking advantage of the stable long term financing offered by the securitization markets.

Longbridge, then retains the mortgage servicing rights and the loans, which should have securitized.

Ellington financial we view these reverse mortgage MSR is highly attractive assets.

In fact about half of long, where just current tangible book value is in these msr's and Longbridge holds its MSR is that fair value similar to how we account for our assets.

Given that long ridge is securitizing about $200 million of loans each month this producing more msr's every month, including via a healthy refinancing recapture program.

We project that the cash flows from these msr's will generate high investment yields and so we expect these MSR assets to be highly accretive to Ellington financials core earnings.

Finally, longbridge is origination revenue along with the unique features of its MSR portfolio should add yet another layer of diversification to our business.

In summary, I am very excited about this acquisition, we have seen firsthand the quality of the Longbridge management team.

Longbridge is in a non commoditized industry with significant barriers to entry and attractive margins and it has been a star performer for Ellington financial over the past few years generating some pretty incredible returns for us even during the depths of COVID-19 by the way.

The cost reverse mortgage loans provide liquidity to borrowers without the requirement of monthly principal and interest payments borrower demand for the product actually surged amidst the economic turmoil brought on by Covid and now with the economic recovery strong home price appreciation has only solidified the reverse mortgage value proposition.

In fact, the significant nationwide home price appreciation over the last 18 months has substantially increased seniors home equity and thus the size of the potential market and.

The reverse mortgage market penetration in the U S is only a fraction of what it is in more established markets like the U K.

With an aging U S population seeking to tap into the 10 trillion dollar plus of equity in their homes.

The reverse mortgage sector is harnessing some very powerful demographic trends.

The opportunity for scale here is significant.

I am excited about the days ahead for Ellington financial our businesses continue to flourish and grow and integrating Longbridge is just the next step in expanding and enhancing our loan origination businesses, where we can apply our analytics and manufacture our own investments in this case msr's.

Our incremental investment associated with this acquisition is about $75 million, but our entire combined investment of long Ridge will still just be 11% of Ellington financials total equity.

As such the reverse mortgage business will continue to be one of the multiple sectors that Ellington financial investment as we continue to manage a highly diversified portfolio.

We also think that this acquisition will offer synergies of its own for example.

Ellington financial now offers a variety of mortgage financing solutions, including reverse mortgages nonqualified mortgages as well as traditional agency mortgages.

Which enables a customized approach to addressing each homeowners' needs.

This represents significant cross selling opportunities for our portfolio companies.

In summary, our Upsized investment in long ridge should be an excellent complement to our non QM commercial mortgage residential transition and consumer loan businesses, along with our opportunistic securities portfolios.

Looking ahead as we see volatility pickup with quantitative tightening underway. We will continue to focus on our dual mandate of growing fsc's portfolio and earnings while also staying disciplined on risk and liquidity management to preserve book value across market cycles.

And with that we'll now open the call to your questions.

Operator.

At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that a start with line. If you would like to ask a question.

We'll take our first question from place Joy George with <unk>. Your line is now open.

Hey, everyone. Good morning, good morning.

First a couple on the Longbridge acquisition.

Is that going to be any goodwill created as a result of the acquisition and then can you just talk about the correlation between.

Rates and mortgage volumes and gain on sale in that market.

Hi, Good morning, Bose is it's Jay I'll start with your first question about you did well. The answer is yes, you can see on slide 16, I believe we provide a financial excuse me slide 18.

We provide summary financial results for Longbridge over the last three years.

You can see they started 2021 with equity around $92 million.

Net income of 31, five so putting those together year to book value of about $123 million at year end.

The transaction Hasnt closed is subject to regulatory approval and closing conditions and the price will also ultimately reflect the latest book value.

But if you look at the $75 million that we're paying for about half.

150 is above that 123 until these aren't exact numbers, but that delta would represent goodwill, which would show up on our balance sheet after closing.

Great. Thanks.

Yes.

In terms of our share.

And we will take our next question from Trevor Cranston with JMP Securities.

Securities. Your line is now open.

Okay. Thanks.

One more question on the Longbridge.

Acquisition.

On the financial results you guys show on Slide 18.

Theres, a pretty big range of Roe's, obviously, it's been very strong the last couple of years, maybe the company was sort of a different scale I guess in 2019, but can you talk more broadly about.

How you guys think about the long term.

Return prospects for their business.

Sure.

Yes. So so first of all actually let me introduce the answer to that question and I do want to follow up on <unk>.

Second half of those this question because it's actually on point to your question as well so.

And I think the question was really about sort of the rate sensitivity.

The origination volumes so.

These are by and large floating rate loans.

The underlying reverse mortgage loans.

So they don't have nearly.

The same.

Dynamic in terms of as rates go up.

Youre going to see right.

The regular conventional market youre going to see prepayments really slowed down tremendously right. So.

It's less sensitive to rates from that perspective, because they are floating rate loans on the other hand because of the ways that.

That you size the loans in relation to the home value as rates go up.

You do see just based upon the way the programs work that you'll have.

They are smaller.

Loan amount that youll be approved for in <unk>.

Our reverse mortgage so and that does drive a lot of.

The refinancing activity as well so we'll see.

Our cash out Refis as rates go up.

But it is we will see some slowdown because of that as well in originations, but less.

Let's face it what's really driving things and what is also correlated to interest rates.

Is home price appreciation right. So as you have.

Assuming that the inflation that we're seeing continues.

To drive home price depreciation of course, you've had tremendous home price appreciation last 18 months as we mentioned Youll just have a lot of home equity in this demographic.

And that will create more and more opportunities for origination. So we think that it's.

On balance.

Inflation associated with higher rates is probably over time actually supportive of higher loan volumes and plus this is also a market.

That has very low penetration right now as you said compared to for example, the United Kingdom.

The.

This is so this is a market that's just screaming out for a greater penetration and further growth.

So thats.

So that I just wanted to get that answer to <unk> question, and I think that hit some of the points here.

And I think also on bonuses, yes about goodwill I went through a calculation that implied a goodwill of but a little under 30, and that's not an exact number it's actually going to be higher than that we haven't disclosed exactly what that amount is in it.

The final transaction prices are also moving subject to book value movements, but the goodwill isn't amount higher than just the.

The year end balance sheet less compared to the 150 there other some other factors in play so it'll be it'll be higher than that number.

Right and okay, sorry, so if you could repeat your question.

Okay.

Yeah No problem. So my question was around.

The long term return expectations for for Longbridge.

The last couple of years have obviously been very strong that those are kind of representative of what you guys think is the company is capable of going forward or how we should think about that yes, we do.

So you've got they've built up quite an MSR portfolio and we think that Thats got really is almost you could think of it as a yield bearing assets.

<unk> got a servicing strip, it's a very interesting asset by the way not very well understood.

You've got a servicing strip.

Which of course isn't paid in cash because the reverse mortgages accrete, so thats, creating as well, but creating value accumulating value and then adding to the loan balance.

And then you've also have.

The ability in many of the MSR assets to fund future draws by homeowners.

And that creates another very important revenue stream as well so.

So basically theres a chunk if you will if you look at the tangible.

The tangible net worth of Longbridge and you think of that is really hard assets I call them MSR as loans.

<unk> sale all of that so thats going to generate a yield.

That's already pretty big at this point I think they have around as of year round about $90 million worth of Msr's and growing.

But then.

They've really come into their own.

In terms of the origination income as well and I think that.

That's running.

At over $30 million, a year I think going forward.

We'll probably be a little more conservative in our projections, but.

So we feel really good about what kind of net income this can continue to generate for us.

You have seen.

Youre going back maybe you're looking at a couple of years back.

The company is just much bigger than it was back then in origination volume is much higher and profitability much higher so.

And there is of course economies of scale like there are in.

Almost any business. So yes, so we feel really good about.

The <unk>.

Future income stream from our from Longbridge.

Okay that makes sense.

And then on the relationship with.

Sheridan.

Can you maybe talk a little bit about.

What the potential is for loan acquisition volume for <unk> balance sheet in the near term.

And.

The sectors, you guys would be looking to get exposure to or likely to be kind of similar to what <unk> been doing on the small balance commercial side, which has been skewed to multifamily or if it might be a little bit.

The more diverse than that yeah, we'll take what the market gives us.

And for a long time.

Multifamily was that we actually we like multifamily for a lot of reasons right.

We've talked about how there's a housing shortage in this country you have talked about on prior earnings calls.

You don't have the issues with <unk>.

Retail and malls and things like that.

So but for a while it was tough for us to get the flow there.

And you've seen in the past couple of quarters that that's actually now changed nicely and we've able to see some flow.

And.

Yes, so I would say that.

It will be.

Think.

We're going to be able to get.

Yet as I think as much small balance commercial flow as we can handle.

Of course.

So one thing I should mention is that we do.

Sure we have not just shared and we have many other.

Vendors that.

And brokers et cetera that we and we havent origination team here at Ellington.

From which we saw a small balance commercial loans and other ellington clients as well do.

Sure in that flow so.

<unk>.

Yes.

Think that.

I think we at this point given what we're seeing in terms of the overall slow here ally financial.

We will get as much of a handle I don't know Mark if you want to add anything to that.

I guess, the one thing the one thing I would add is that.

What we've liked the multis, it's not.

Sort of new construction aiming for higher rents.

It's sort of class B class C properties that were built a while ago properties, where the acquisition cost of the real estate is well well below with new construction costs would be so it has been in sectors where.

We don't see any.

New competition coming online and a lot of demand for it and it's been something we've been doing for a long time that sort of <unk>.

<unk> to a lot of our view on housing and the shortage.

There's going to be strong demand for it.

And so I mean, Sheridan, we partner with them for a long time we've.

We've done a lot of multi with them, but we've also done a little bit office, a little bit of retail little industrial.

Just have a lot of relationships they are extremely thoughtful in.

How they analyze potential loans and how they think about.

Credit risk and sort of where like minded with them and how we think about credit and it's sort of similar to the way, we sort of like minded with the management team at Linde sure. It's just been a good fit and we have.

Been with those guys for ups and downs in all different market cycles, and Covid and so we are extremely financial with that team what they're capable of doing.

And I think it's fantastic for us to have this equity stake where it just deepens and strengthen the relationship between the firms.

Okay.

Helpful.

Last thing for me.

The increase in value of the equity investments in originators this quarter.

It looks like.

Early large chunk of that came from <unk> in particular, but.

I'm just curious if that was.

Primarily driven by.

<unk> strong results in the quarter or if there was anything else going on there.

The change in valuation multiple.

Well there was a change in valuation multiple but it was driven by kind of a continued now if it was just one quarter of improved results right. Then you wouldnt see that but.

Sort of a strong so many together now and the growth.

By every metric.

As has been better and better throughout 2021 year, each succeeding quarter. So.

Putting all those things together.

The.

Yes.

Absolutely absolutely multiple expansion area.

Okay makes sense. Thank you.

We will take our next question from Crispin Love with Piper Sandler Your line is now open.

Thank you. Thanks for taking my questions. So first first question mining on the growth of the agency portfolio that 10% growth in the quarter is that partly placeholder assets from the from the recent capital raises which you would expect to deploy some of that into credit strategy assets over there.

Near term or is that not the right way to think about it.

Hey, Chris It's Mark So I would say if you look at.

How our capital base increased from the.

The common deal as well as the preferred deal.

The credit portfolio went up.

Sort of roughly proportionately the same as the increase in the capital base. The agency portfolio, we didnt bring up at the same rate so that didn't grow proportional to the increase in capital and it didnt grow as quickly as the.

Credit sensitive part of the portfolio.

A lot of what we did buy in Q4.

Sure I would characterize it more as sort of a very low pay up pools.

We had not been fans of higher pay up pools for a while.

So it's liquid all pay ups have come down, but when you pay up is just a couple of ticks a handful. It ticks. It doesn't have much to go for it to be TBA. So we.

We bought things that are by and large extremely liquid very low pay ups.

When we think about what percentage of the portfolio, we want to have an agency strategies, Bruce and credit strategies.

It's been sort of bouncing around that kind of at the low end, 15% at the high end kind of 20% to 23% for a while we're a little bit at the low end now it's something we always revisit and we sort of make those adjustments in response to market opportunities.

Okay great.

I'll just add that that.

It also helps with some of our test Retest 40 Act tests to have that agency portfolio.

So.

I do think you'll continue to see that trend down but.

It's that it's been a while if ever that it's been below 15% I probably got to go back many years before that was true.

Yes, we could.

We could get there again, but we like having that it really does help with the task. It really does give us a liquid portfolio that we can tap into like we did in Covid, where we.

<unk> reduced that portfolio with minimal friction and then we're able to not only get through but play offense.

Back end of that liquidity crisis, So I think Scott.

We are certainly no plans to just have that continue to shrink down to nothing yes, that's an interesting observation to that pre COVID-19 . The agency portfolio was nearly $2 billion in size and it's now $1 seven so as the credit portfolio is 40% higher the agent percentage is actually still.

Meaningfully smaller than say at year end 2019.

Great. Thank you appreciate all the color there.

And then just on interest rates.

Thank you Mark for kind of walking through all of the kind of the businesses impact on rates on the asset side and the liability side, but if I just kind of take a holistic picture of <unk>.

How would you.

Characterize the company as well.

Asset sensitive versus liability sensitive do you think it should be slightly asset sensitive you benefit a little bit more from a higher rate I'm just trying to.

Just wondering how youre thinking about that on a full company basis.

I mean, I guess I would say that.

We try to run the company.

In a way where.

We're trying to insulate the book value from changes in interest rates.

The REIT rules allow us.

And the necessary tools to do that either interest rate swaps short TBA Treasury futures.

<unk>.

So.

Whether interest rates are very low like they were last year or still low but materially higher now.

We're not we're not trying to be predictive about it we're just trying to sort of.

Neutralize our exposure to interest rate.

And trying to make our dividend sort of agnostic to the direction of interest rates.

We've had a bias towards shorter duration floating rate assets.

I made those comments.

On that.

Commercial bridge portfolio right because that is a floating rate portfolio and so what youre starting to see is all those coupons are going to go up and we don't we don't have a crystal ball to tell you whether the forward curve is going to materialize, but.

We have a loan with the margin of LIBOR, plus six and last year LIBOR was essentially nothing our coupon was six <unk>.

A year from now LIBOR at 2%, our coupon is eight and so youre going to see that where we're position to sort of benefit from that.

Other sectors that are sort of short duration, but not explicitly floating that I mentioned.

Residential transition loans, there, it's going to be.

A little bit of an open question, whether note rates are going to be able to.

Increase commensurate with the increase in <unk>.

Lending costs, because we don't typically securitize those and on new non QM my expectation is a little bit of marketing transition. So we're not there yet I think youre going to see note rates increase.

At least as much as this.

Move in interest rates because of securitization spreads have widened its sort of.

The last thing I said in my prepared comments is that.

Youre, having a fed that is going to stop.

Putting money into the system.

What that means is that our capital in other private capital.

Is more valuable now than it will be able to demand a higher return on capital because the world is not going to be flooded with sort of easy money the way it was.

From right after COVID-19 to kind of.

You sort of start to feel it sort of ebbing away kind of.

And the third quarter last year. So I think look the market has been extremely volatile this year.

And it's.

Spreads widening across the board in fixed income.

Big changes in interest rates includes the delta hedging costs.

That's not been an easy environment, but.

I see.

You always tend to go through this kind of.

Bit of bit of promo and then youll get some stability, but I see like.

Where we're going to settle in.

I think is higher rate.

Wider spreads.

And with.

Capital being a little bit more pressure than the way it felt sort of last year and I think those are all good things for us.

Good for us on the CUSIP side.

And the partnership we have with our origination partners.

We're constantly in dialogue with them about where securitization markets are and we're in no way should be so I think it's going to be good for them as well.

Yes.

If you wouldn't mind you.

You could turn to page 13 in the deck, which is our interest rate sensitivity analysis.

So there you can see.

That looking at the bottom line here in terms of what we think.

A 50 basis point decline or increase in interest rates will mean to our common equity per share.

You can see that we have basically the way we look at it is we've managed this portfolio down to close to zero duration.

Now.

A little bit negatively convex.

But.

That's basically the case. So you can almost think of it as we have this portfolio a lot of it's floating rate loans a lot of it's fixed rate loans, but we have interest rate swaps on.

That where we're paying fixed and receiving floating so kind of and we have stuff leverage and financed but when all is said and done one way you can kind of think of the company is that we've got a whole bunch of assets that are.

We basically converted through our hedging too.

Floater floating rate asset at LIBOR, plus 15%, let's just say right. So we've got a bunch of assets that through leverage in hedging and other we've converted to LIBOR plus 15%.

These are just illustrative these numbers and then we've got by the way we have some assets that arent really yield bearing assets like our investments in loan originators that are going to contribute to book value, but not necessarily core.

But so you take that LIBOR plus 15% and then what are you going to subtract from that Youre going to subtract your G&A youre going to have some slippage through hedging costs and things like that so youre going to get back to the dividend right, which for us has been around 10%.

And LIBOR has been very low so close to zero right. So thats close to LIBOR plus 10%.

On that.

And that's where we've been and LIBOR has been very low.

But as Mark just implied.

When short interest rates, whether it's so far LIBOR or however, you want to measure it as those start to rise now all of a sudden that's going to provide support for overall core earnings right. Because we have effectively converted so many of our assets to a.

LIBOR floater so.

So.

If you do the math right.

Short rates go up 2% right on a book value of roughly 18, we'll just do some monster math here that's 36.

A year.

Okay.

Is that the second.

Yes, I mean, those are some big numbers.

No.

So yes, so so that can be.

Really very supportive of our core earnings.

So I think just say illustrates we obviously, we're not benefiting having a LIBOR floater. If you will by having rates. So low for so long, but now will actually benefit from that and that should provide even more support for the dividend.

Okay, great. Thank you and thanks for the thoughtful answer Larry and Mark.

Okay.

Yes.

We'll take our next question from Doug Harter with Credit Suisse. Your line is now open.

Thanks first just on the Longbridge acquisition.

That more of an opportunistic acquisition because you had.

The other partner looking to sell or does this reflect kind of a change in your approach to some of your equity investments.

Look we had a willing buyer and a willing seller and Thats I think thats, maybe the best way to put it.

There was no gun to anyone's head, but.

I think they.

J O quite wrong, but I think even on their earnings call. They talked about it being a non strategic asset is that right, yes, more or less yes. So yes, I think it was it was a good fit.

For both of Us and we can.

Fact that now.

We can consolidate the MSR and other things in it.

Just like they were a great partner don't get me wrong.

And really help longbridge.

Evolve into a terrific operating company.

I think home point for that.

But now having come there.

They are going to be some great synergies and flexibility now.

Having control.

Great and then I know you've talked a little bit about.

Spreads widening on securitization can you just talk about what you might have had in the pipeline to be securitized.

And kind of the earnings risk from that from that pipeline and just I guess around expectations is to win rates on new loans or loans that youre buying might reflect the new securitization economics.

Doug It's Marc So I can give you some general things one Larry mentioned.

We're sort of at a pace now to do one securitization a quarter.

We did one in January which.

Was relatively good timing it was before you saw.

Lot of the spread widening occur, but you know we have a pipeline that we're always buying so.

We kind of cleared the decks of some of the holdings in January but.

There is still holding so I think it kind of.

So you can kind of based on sort of that average deal size of 300 to 400.

And we just got one done in the quarter you can kind of.

Get a sense of what might have been on the balance sheet and.

I mentioned that.

We have.

For years.

Add interest rate hedges on non QM loans and it certainly.

Cost a lot of money in 2020, when short rates plummeted.

This year it sort of has helped save us money, but.

We generally take that sort of spread widening spread tightening risk I think thats hard to hedge so thats been a component this year so.

That's obviously a negative I did lead to one thing Thats a positive.

A lot of what we retained when we do the securitization.

Is.

Sort of a credit IL people call it.

It's excess spread off the deal, but it is subject to.

Credit losses.

So.

Jr mentioned in his prepared remarks, just how.

We did have a little yield compression in Q4, and one of the things he pointed to was.

Fast speeds on retained non QM pieces.

Necessitating a value adjustment so that's going the other way. So we're going to have some retained pieces that are now going to look to us as having greater value than how they looked at year end, just because youre already seeing slower speeds on <unk>, there's a lot of moving parts.

And there is in addition to the loans that EMC has our balance sheet Lynch. Our origination partner like every originator has loans that they are financing on warehouse lines that they haven't sold.

<unk> there is.

There's pros and cons it's been.

It's been a big repricing I think we've tried to be disciplined about it but it's hard for me to really quantify it.

Okay.

You can see in our slide four that non QM was $735 million at year end I think our deal in January was for 2017, but Thats 735 also includes our retained tranches. So we cleared the decks of.

I guess most of the loans that we came into the year with.

You continue to accumulate and securitize again, but that's yes.

Yes.

Gives you an idea.

The deal in January relative to where we started the year and of course from an interest rate perspective.

That's we have hedges on against those but the spread widening that's.

That's a little different but like a lot of things we think.

We've got time until our next securitization and.

We will see we will see what happens.

Makes sense. Thank you.

And we will take our next question from Eric Hagen with BTG. Your line is now open.

Thanks, I'll try my hand at along Rich question too when you guys bring the portfolio on the company will go from being able to retain and build capital.

Appears sort of clearly support its growth up to this point too.

Presumably having most of its earnings distributed.

Being fully part of UFC.

Do you guys think that sort of changes the way you think about the capital structure of either.

Long bridge by itself or Ellington more generally.

And would you say that the growth opportunity looks any different.

If it kept on a trajectory of being able to retain capital.

Well actually it can retain capital even as.

Part of Ellington financial because even though its consolidated for GAAP pretax it's inside a Trs and this is really.

Necessary I mean, if you look at other mortgages as well that have origination subsidiaries youre going to buy them in a blocked.

Trs so.

And we there is no specific.

Requirement a timeframe to distribute earnings out of that Trs, obviously as a trs grows there are so called Trs tests for Reits in terms of limiting their size, but.

We have a lot of runway there.

So we can actually.

Continue to retain Longbridge is earnings and Longbridge.

Can also dividend goes up.

Which case they will those dividends will represent.

Taxable REIT income and presumably therefore be distributed of course, but until they're actually distributed up from the subsidiary from the taxable subsidiary.

We actually can continue to retain the earnings there.

And this is.

We haven't.

Completely.

<unk>.

Mapped out in terms of the future in terms of when we'll want to distribute those earnings it will depend on a lot of factors.

But that is it is.

An option, but it's not a requirement.

Okay. Thank you very much.

And we will take our next question from Brock Vandervliet with UBS. Your line is now open.

Thanks for the questions.

Just going back to Lynn sure Im not sure I heard this correctly, but.

Yes.

There was a step up in valuation how material was that to the book value calc.

Do we have enough with that.

Yes.

Material you can see it on the fair value of Glenn Schorr at $12 31.

On slide $445 million, which was an increase of about $18 million from September 30.

Okay $10 million okay. Thanks.

Alright ill go back and count that.

Separately.

In terms of the non non QM market not not.

Our residential transition space, but just non QM, we're seeing a number of existing players plus some new ones to look at the space, probably consistent with the uptick in rates.

How how large would you size this market to be or what could it be.

At this point.

Yeah, it's mark so I think a little bit depends.

What you see out of that.

<unk>.

Like.

Part of the reason non QM growth.

Yes. So we started let ensure back in 2014 soup and added a while right.

And the investment hypothesis back then.

Was post financial crisis.

Both Fannie and Freddie.

We're very focused on.

Essentially full documentation.

And.

<unk>.

The way their automated underwriting engines work desktop underwriter in loan prospector the way they were set up in the technology that we're using.

Really served borrowers that were.

It had a salary that was sort of.

The kind of borrower that would sail through their underwriting and could avail themselves of.

Relatively low rates in the agency mortgage space and so we saw at the time then.

There were a lot of self employed borrowers that.

Didn't fit for a number of reasons into the automated underwriting engines and they were really good borrowers need with low LTV and they had high credit scores and a lot of <unk>.

Demonstrable income that you could see on bank statements and so we started originating those loans with Lin sure before the first non QM deals got done and then there were other sort of addressable parts of the mortgage market that well served by Fannie and Freddie one is that.

Investor properties, where the.

Borrower is an LLC as opposed to an individual Fannie Freddie don't serve that part of the market and so so there is sort of.

A few different sectors of the market that we thought it may be were 15% of the housing market that could be better served and better addressed with non QM mortgage frame work with us.

More flexibility, it's a little bit more complicated underwrite than just an automated process right and we never tried to.

Go after borrowers that we thought fit well into the Fannie Freddie underwriting.

Technology because.

You can get a Fannie Freddie loan Thats divest right and that makes sense. So.

And then what you've seen now from.

FHFA since you've had the.

The transition from from to Biden is.

Sort of.

They pulled back from the.

Investor space, a little bit with the PSP caps.

Remove them, but they've increased cost on second homes, they've increased costs on jumbos. So.

They are sort of pulling back a little bit so I do think that opens up.

Non QM market.

The market has certainly grown but I think you could certainly see a double from what it was last year and I think but part of that growth is going to be a function of FHFA policy and I think the trend is that they are.

Being a little bit less expensive than what they've been in the past, which I think thats sort of good news for non QM volumes.

Got it thank you.

That was our final question for today, we thank you for participating in the Ellington financial fourth quarter 2021 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.

Yes.

[music].

Okay.

[music].

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 queue by pressing 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.

<unk> General Counsel and Secretary, Sir you may begin.

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.

I am joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark to Kottke Co Chief investment Officer of UFC, and Jr. Herlihy, Chief financial Officer of USD.

Described in our earnings press release, our fourth 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 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 in Ellington financial.

I'll begin on slide three.

I would like to the financial closed out a strong 2021 generating net income of 61 per share and core earnings of 44 per share in the fourth quarter.

For the full year, we delivered an economic return of nearly 14% and a total return to shareholders of 26%.

During the fourth quarter of 2021, our investment portfolio continued to expand with our credit portfolio exceeding the $2 billion Mark for the first time.

By comparison, our credit portfolio was $1 4 billion at year end 2019, just prior to the onset of the pandemic. So it has grown by over 40% in the past two years.

Our origination business is now span across the non QM commercial mortgage residential transition reverse mortgage and consumer loan sectors.

Notably we've been able to achieve this portfolio growth, while lowering our overall recourse leverage in part. This reflects that we have been able to grow by substantially expanding our equity base as opposed to just adding leverage in.

In the fourth quarter for example, we executed on two well timed equity raises namely our common equity raise in October and a preferred equity raise in December .

And with our GAAP earnings per share nicely exceeding our dividend rate book value for common share actually rose during the fourth quarter. Despite the much larger equity base.

Meanwhile, we have been able to invest the proceeds from those recent equity raise as efficiently across our diversified portfolio and thereby avoid slippage in earnings the proceeds of both of our Q4 equity capital raises were invested within about a month each.

We have also been able to add extend and improve the economic terms of many of our financing facilities.

Also significantly ramping up the volume and pace of our non QM securitization activity.

We just closed our 10th non QM securitization last month, and our securitization pace has now increased to one deal per quarter, which is much more efficient from a financing standpoint.

The credit performance of our non QM Securitizations has been among the best in the sector and in fact, one of our 2020 deals was just upgraded last week by Fitch.

One of the keys to our portfolio growth has been the strategic relationships that we have with our originator affiliates.

Through these relationships, we can better adjust both the acquisition volume and the underwriting criteria of our loan investments.

As a result over the past two years, our loan portfolios have become among Ellington financials largest highest yielding and best performing strategies.

At the same time, the profits generated by our equity investments in these origination companies have provided a strong tailwind for our earnings and book value per share.

By owning both the ultimate loans produced as well as stakes in the originators themselves, we have two ways to win.

We have been investing and commercial mortgage loans with the Sheraton team for more than a decade.

To the additional operating capital provided by this strategic transaction Sheraton is poised for even greater growth.

In fact, sheraton's flexibility and efficiency were highlighted just this past quarter as it was able to get a number of loans over the finish line to accommodate year end closing deadlines, which many other lenders were unable to do.

Our teams worked diligently up into the final day of the year and we were able to pick up some very attractive commercial mortgage bridge loan investments.

After paydowns and resolutions to $458 million.

With our emphasis on relatively low ltvs and short durations. The credit performance of these loans has been excellent including throughout the Covid market shock.

You can see the latest attributes of our diversified commercial mortgage portfolio on the preceding slide slide 10.

Turning back to slide 11, you can see the significant quarterly growth of our non QM and residential transition loan portfolios as well.

I will now pass it over to Jr to discuss our fourth quarter financial results in more detail.

Per share for the prior quarter.

The lower yield on our non QM portfolio were driven by faster prepay speeds and lower coupons on new loans purchased and then our commercial mortgage loan portfolio coupons on new originations were generally lower than coupons on loans that we resolved.

As Larry mentioned, our acquisition of the other half of Longbridge should also be accretive to our core earnings.

During the fourth quarter, we raised a total of about $220 million in equity.

This consisted of a common equity offering in October , which we raised near book value and a preferred equity offering in December that priced at a dividend rate of six 5%.

The new preferred equity series B was rated a minus and our existing preferred equity series. Eight was also upgraded a notch to a minus both of which are designated NII NTIC. One. These NII one ratings enabled us to price the series B at a spread of $4, 99% for the five year U S Treasury, which.

Among the among the tightest executions ever in our sector.

These fourth quarter capital raises increased our equity base by a combined 20% and as Larry mentioned the proceeds from each were invested within a month.

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

During the fourth quarter the credit strategy generated total gross income of 91 per share while the agency strategy generated a small gross loss of <unk> <unk> per share.

These results compared to <unk> 66 per share in the credit strategy and positive <unk> <unk> per share in the agency strategy in the prior quarter.

<unk>, our non QM loan originator affiliate set another record quarter set another record for origination volume and profitability in the fourth quarter capping a tremendous year.

Our reverse mortgage originator affiliate Longbridge financial delivered a strong fourth quarter, while our smaller originator affiliates posted solid results as well.

In addition, our non agency MBS and <unk> strategies contributed nicely to our fourth quarter results.

The Federal Reserve also began the tapering of its asset purchases in November and then accelerated the pace of that papering starting in December .

Most MBS underperformed U S Treasury securities during the quarter and higher coupon specified pools, and other shorter duration RMB, particularly underperformed in light of the flattening of the yield curve.

Turning next to slide six during the fourth quarter, our total long credit portfolio grew by 22% sequentially to $2.06 billion as of year end.

The majority of the growth occurred in the non QM residential transition and small balance commercial mortgage loan strategies.

And as you can see there slices of the overall pie grew roughly in proportion.

On slide seven you can see that our long agency MBS portfolio also increased during the quarter by 10% to $1 7 billion.

Turning to slide eight our overall debt to equity ratio adjusted for unsettled purchases and sales decreased modestly to $2 eight to one as of December 31.

$2 nine to one has increased borrowings related to the larger portfolio were more than offset by an increase in total equity.

In any case, our leveraged and recourse leverage continued to be low. So we have ample room to continue to add assets at what could be just the right time.

We also further extended and improved our sources of financing and leverage in the quarter.

In addition to the non QM loan securitization. We also expanded one of our existing loan financing facilities to include residential transition loans, while simultaneously upsizing that line.

Finally, our weighted average borrowing rate declined by three basis points to one 4% as of December 31.

For the fourth quarter total G&A expenses declined sequentially by <unk> <unk> per share to <unk> 14 per share while other investment related expenses increased by <unk> <unk> per share to <unk>, mainly due to non QM securitization issuance costs that we incurred in the fourth quarter, but not in the prior quarter.

Also during the fourth quarter, we recorded an incentive fee of $3 $2 million as we exceeded our net income hurdle for the trailing four quarter period.

Finally, our book value per common share was $18 39 per share at December 31 of <unk>.

<unk> from 18 to 35 at September 30.

Including the <unk> 45 per share of common dividends that we declared during the quarter, our economic return for the fourth quarter was two 7%.

For the full year.

Our book value per share increased.

$17 59 to $18 39.

And combining this book value per share appreciation with a $1 64 per share a common dividend that we declared during the year, our economic return for the year was 13, 9%.

Now over to Mark.

Thanks, Jr.

Ill first note that we are in a very different market environment today than when we spoke on our last earnings call and as compared to year end.

The feds thinking about inflation tapering and the current heightened cycle pivoted in Q4.

It made a 180 degree turn and its opinion about the likely persistence of inflation and where its current policy should be in relation to the long term inflation outlook. We're now seeing the market's reaction to that pivot intensify in 2022 as well as in response to other evolving macro and geopolitical factors.

The fourth quarter move in interest rates was a bear flatten there as the market reacted to the fed's, new more hawkish stance towards inflation.

Peer swap rates were up more than 50 basis points over the quarter, while 10 year swap rates were up less than 10 basis points agency.

Agency MBS underperformed during the quarter as the fed announced that it would end support for the sector much sooner than it has previously communicated.

Despite this underperformance Ellington Financial's agency strategy had only a modest loss of <unk> <unk> per share.

Our credit portfolio benefited from both a higher yielding portfolio as well as increasing value in our originator steaks and overall, we posted very strong results as you can see on slide six we had substantial portfolio growth and we're able to deploy the additional capital from our preferred and common equity deals quickly and efficiently.

As our origination partners have grown we can now deploy capital more quickly we had steady growth in non QM RTL and commercial mortgage originations.

And we got there with the low leverage generally low LTV portfolio, adding mostly short duration loan assets. Many of which are now being originated at higher yields were soon be restating to higher yields.

2021 was the year when income from our stakes in originators helped our overall net income to exceed our core income for the fourth quarter significantly so.

This is a powerful dynamic for FC because it can allow our book value per share to grow even with the high dividend payout.

For other mortgage REIT, it's often the other way around where GAAP income trails core earnings and the dividend, which leads to book value erosion over time.

This cyclicality is one reason why we focused our originators stakes in non traditional growing markets also by owning both the originators in the loan flow Ellington financial at Lee is actually is two ways to win and these different earnings streams can be counter cyclical.

Away from our originator Stakes with solid earnings contributions from commercial mortgage bridge loans bridge loans, non QM loans consumer loans and also for our non agency MBS and <unk> strategies.

It's particularly nice to see that after years of building the business our residential transition loan portfolio is now growing rapidly and contributing significant income to Ellington financial.

I mentioned a lot has changed since the end of the quarter.

I'll now turn it back to the fed hiking cycle, which will likely begin next month and what it may mean for <unk> and how we are positioned for it.

The first thing I would say is that DFT management has lived through a lot of different interest rate cycles. Our focus has never been on predicting the fed's next move instead, our focus has always been first and foremost trying to insulate our portfolios against these moves so our book value is not tremendously impacted by changes in fed policy.

Secondly, when faced with the new market environment, we try to respond thoughtfully to position the portfolio to capture new opportunities and thrive.

The market is already priced in a significant increase in short term interest rates. This year. One month LIBOR is currently only 19 basis points, but the futures market is pricing LIBOR above 2% one year from now which means that the market, which means that the market is expecting around $7 25 basis point hikes in the next 12 months.

Those are just market expectations of course, which are more often wrong been there right because a lot of unpredictable things will happen in the next year, but it does tell you that allows the feds work has already been done even before the first rate hike had been implemented.

So what does all this mean for Ellington financial as the fed raises interest rates. The coupons that are commercial mortgage grid load bridge loans will also rise.

As those are virtually all floating rate loans you can see this on slide 10 over 99% floating rate most of the multifamily that we won't capture all of that yield increase because our repo cost Gulf as well.

But because we have relatively low leverage we should capture a good portion of those rate increases and our bottom line.

Our residential transition loans are also short duration typically less than a year, but they have fixed rates. So they have a different dynamic for EMC that means we will try to push the note rates higher on our new originations to keep generally the same spread over our funding costs, but we might not get there exactly it's a competitive market. So our pricing has to be consistent with other <unk>.

And there are and there is a lot of investor demand in that sector.

Moving to non QM, not only of two and three year swap rates increased significantly in 2022, so far but AAA spreads have also widened substantially.

To put this in perspective, two year swap rates have increased about 75 basis points. So far in 2022, and non QM AAA spreads are wider by about 30 basis points.

That means new issue non term triple A's are getting done with coupons about 100 basis points higher than in Q4, just a few months ago.

That is a very large move in a very short period of time loans.

Loans that have already been originated but not yet securitized are worth a lot less than when they were than what they were worth at the end of the year.

Interest rate hedging recoup a good portion of that loss, but not all of it not to spread widening.

We're working with our partners to help them adjust to this new pricing dynamic higher swap rates and wider securitization spreads means that originators must produce higher note rate to support gain on sale margins. It also creates new opportunities for us non QM prepayment speeds were blazing fast last year, they were slow with higher rates and that means that some of our retained.

<unk> will be worth more.

Earnings relative to the very low rate tight spread environment that we had been that had been persisting post COVID-19 .

Turning to agency MBS that is the sector that has really been in the crosshairs of a lot of this year's comments from fed members.

The sector has underperformed so far in 'twenty to 2022, but it has been orderly and it has been an underperformance consistent with what we've seen in other parts of fixed income.

You can see on slide 10 that our agency portfolio did grow in the fourth quarter as our capital base grew but it grew at a much slower rate than the credit portfolio.

That happened in 2013 after the taper tantrum and many people forgot that after their initial swoon agency MBS actually finished the year outperforming treasuries.

While there is uncertainty about the fed.

So going forward I'm excited about the opportunity ahead with fed support being withdrawn private capital should be able to demand a higher return on its capital we're seeing that now and <unk> is well positioned to capitalize on this dynamic now back to Larry.

Thanks Mark.

Some of our major goals for 2021 were to continue to build out our loan origination businesses and further capture the benefits of scale operationally and our portfolio and in the capital markets all of which we accomplished successfully.

Our expanding loan origination businesses drove both our portfolio growth and earnings and we were able to onboard five new loan originator investments over the course of the year.

Our larger size is also enabling larger and more efficient capital raises securitizations and financings, while helping keep our G&A expense ratio low.

For example, we will probably next turn to refinancing and possibly upsizing, our senior unsecured notes and I think we are well positioned there.

2022 has started out strong for Ellington financial we completed our first non QM securitization in January and we already have another one in the works.

Our flow in residential transition loans and commercial mortgage bridge loans continues to grow in leaps and bounds and.

Please now turn to slides 16 through 19 for details of the transaction and please note that the completion of this transaction is subject to regulatory approval and other closing conditions.

Yes.

Arlington has been investing in agency reverse mortgage pools and derivatives since 2012.

Our activity in that space led to our collaboration with Dr. Chris Mayer.

Longbridge beginning in 2014.

In addition to founding and leading Longbridge. Dr. Mayer is a renowned economist and a thought leader in housing policy generally.

Our relationship with Longbridge has been highly synergistic and over the past nearly eight years Ellington has helped language developed into a top three reverse mortgage originator today with significant current earnings and significant franchise value as.

As you know reverse mortgages enables seniors to convert a portion of their home equity into cash without having to make regular monthly mortgage payments. So they can be valuable retirement tools.

With the baby Boomer generation continuing to age the advantages of serving such a growing demographic are obvious and.

Longbridge has achieved tremendous growth and profitability in recent years.

From 2019 to 2021 longbridge more than tripled its annual loan volume to $2 2 billion and increased its net income over fivefold.

Longbridge recently ranked as the third largest reverse mortgage lender, both bi endorsement volume and securitization volume, where it has an 18% market share.

Additionally, long ridge is one of only two companies to be awarded a Morningstar MLR RVO two ranking for reverse mortgage originations.

Longbridge is growth.

As occurred in both its core agency eligible business as well as in its high margin proprietary business, which is actually the company's fastest growing division increasing almost five fold between 2019 and 2021.

Longbridge, then retains the mortgage servicing rights and the loans, which had asked securitized.

I would like to the financial we view these reverse mortgage MSR is highly attractive assets.

In fact about half of long, where just current tangible book value is in these msr's and Longbridge holds its MSR is at fair value similar to how we account for our assets.

Given that long ridge is securitizing about $200 million of loans each month this producing more msr's every month, including via a healthy refinancing recapture program.

We project that the cash flows from these msr's will generate high investment yields and so we expect these MSR assets to be highly accretive to Ellington financials core earnings.

Finally, longbridge is origination riveted revenue along with the unique features of its MSR portfolio should add yet another layer of diversification to our business.

In summary, I am very excited about this acquisition, we have seen firsthand the quality of the Longbridge management team.

In fact, the significant nationwide home price appreciation over the last 18 months has substantially increased seniors home equity and thus the size of the potential market in the reverse mortgage market penetration in the U S is only a fraction of what it is in more established markets like the U K.

With an aging U S population seeking to tap into the 10 trillion dollar plus of equity in their homes. The reverse mortgage sector is harnessing some very powerful demographic trends the opportunity for scale here is significant.

Our incremental investment associated with this acquisition is about $75 million, but our entire combined investment Longbridge will still just be 11% of Ellington financials total equity.

As such the reverse mortgage business will continue to be one of the multiple sectors that Ellington financial investment as we continue to manage a highly diversified portfolio.

We also think that this acquisition will offer synergies of its own for example.

Ellington financial now offers a variety of mortgage financing solutions, including reverse mortgages nonqualified mortgages as well as traditional agency mortgages.

Which enables a customized approach to addressing each homeowners' needs.

This represents significant cross selling opportunities for our portfolio companies.

Looking ahead as we see volatility pickup with quantitative tightening underway. We will continue to focus on our dual mandate of growing <unk> portfolio and earnings while also staying disciplined on risk and liquidity management to preserve book value across market cycles.

And with that we'll now open the call to your questions.

Later.

Hey, everyone. Good morning, good morning.

First a couple on the Longbridge acquisition.

Is that going to be any goodwill created as a result of the acquisition and then can you just talk about the correlation between.

Rates and mortgage volumes and gain on sale in that market.

Good morning, Bose is it's Jr. I'll start with your first question about goodwill. The answer is yes, you can see on slide 16, I believe we provide.

National Keybanc slide 18.

We provide summary financial results for Longbridge over the last three years.

You can see they started 2021 with equity around $92 million.

Net income of 31, five so putting those together year to book value of about $123 million at year end.

The transaction Hasnt closed is subject to regulatory approval and closing conditions and the price will also ultimately reflect the latest book value.

But if you look at the $75 million, we are paying for about half.

150 is above that 123 until these aren't exact numbers, but that delta would represent goodwill, which would show up on our balance sheet after closing.

Great. Thanks.

Okay.

Sure.

And we will take our next question from Trevor Cranston with JMP Securities.

Securities. Your line is now open.

Okay. Thanks.

One more question on the Longbridge.

Acquisition.

And the financial results you guys show on Slide 18.

There is a pretty big range of Roe's, obviously has been very strong. The last couple of years, maybe the company was that sort of a.

A different scale I guess in 2019, but can you talk more broadly about what.

How do you guys think about the long term.

Return prospects for their business.

Sure.

Yeah. So so first of all actually let me introduce the answer to that question and I do want to follow up.

For the second half of those this question because it's actually on point to your question as well.

No.

And I think the question was really about sort of the rate sensitivity.

Origination volumes so.

These are by and large floating rate loans.

The underlying reverse mortgage loans.

So they don't have nearly.

The same dynamic.

Dynamic in terms of as rates go up.

Youre going to see right.

The regular.

Conventional market youre going to see prepayments really slowed down tremendously right. So.

It's less sensitive to rates from that perspective, because they are floating rate loans on the other hand because of the ways that.

That you size the loans in relation to the home value.

As rates go up.

You do see just based upon the way the programs work.

That youll have a smaller.

Loan amount that youll be approved for in.

In our reverse mortgage.

And that does drive a lot of the <unk>.

Refinancing activity as well, so we will see fewer cash out refis as rates go up.

But it is we will see some slowdown because of that as well in originations.

Right.

Let's face it what's really driving things and what is also correlated to interest rates.

Is home price appreciation right. So as you have.

Assuming that the inflation that we're seeing continues.

To drive home price depreciation of course, you've had tremendous home price appreciation last 18 months as we mentioned Youll just have a lot of home equity in this demographic and that will create more and more opportunities for origination. So we think that it's.

On balance.

Inflation associated with higher rates is probably over time actually supportive of higher loan volumes and plus. This is also a market that has very low penetration right now as you say compared to for example, the United Kingdom.

<unk>.

The.

This is so this is a market that's just screaming out for a greater penetration and further growth.

So thats.

So that I just wanted to get that answer to <unk> question, and I think that hit some of the points here.

And I think also on bonuses, yes about goodwill I went through a calculation that implied goodwill of but a little under 30, and that's not an exact number it's actually going to be higher than that we haven't disclosed exactly what that amount is in it.

The final transaction prices also moving subject to book value movements, but the goodwill isn't amount higher than just the.

The year end balance sheet less compared to the 150 there other some other factors in play so it'll be it'll be higher than that number.

Right and okay, sorry, so if you could repeat your question.

Okay.

Yeah No problem. So my question was around.

The long term return expectations for for Longbridge.

The last couple of years have obviously been very strong, but those are kind of representative of what you guys think is the company is capable of going forward or how we should think about but yes, we do.

So you've got they've built up quite an MSR portfolio and we think that that's got really is almost you could think of it as a yield bearing assets.

<unk> got a servicing strip it is a very interesting asset by the way not very well understood.

<unk> got a servicing strip.

Which of course isn't paid in cash because of the reverse mortgages accrete, so thats accretive as well, but creating value accumulating value and then adding to the loan balance.

And then you've also have.

The ability in many of the MSR assets to fund future draws by homeowners.

And that creates another very important revenue stream as well so.

So basically theres a chunk if you will if you look at the tangible.

The tangible net worth of Longbridge and you think of that is really hard assets I call them MSR as loans.

Having said all that so that's going to generate a yield.

That's already pretty big at this point I think they have around as of year round about $90 million worth of Msr's and growing.

But then.

They've really come into their own.

In terms of the origination income as well and I think that.

That's running.

At over $30 million, a year I think going forward.

We'll probably be a little more conservative in our projections, but.

So we feel really good about what kind of net income this can continue to generate for us.

You've seen I know.

Youre going back maybe youre looking at a couple of years back.

The company is just much bigger than it was back then in origination volume is much higher and profitability much higher so.

And there's of course economies of scale like there are in.

Almost any business. So yes, so we feel really good about.

Future income stream from our Longbridge.

Yes.

Okay that makes sense.

And then on the relationship with <unk>.

Sheridan.

Can you maybe talk a little bit about what the potential is for loan acquisition volume for <unk> balance sheet in the near term.

And.

The sectors, you guys would be looking to get exposure to or likely to be kind of similar to what you've been doing on the small balance commercial side, which then skewed the multifamily or if it might be a little bit.

The more diverse.

Yes, we'll take what the market gives us.

And for a long time.

Multifamily, we actually we like multifamily for a lot of reasons right.

We've talked about how there's a housing shortage in this country you have talked about in prior earnings calls.

You don't have the issues with <unk>.

Retail and malls and things like that.

So but for a while it was tough for us to get the flow there.

And you have seen in the past couple of quarters.

That's actually now changed nicely and we've able to see some flow.

And.

Yes, so I would say that.

It will be.

We're going to be able to.

Yet as I think as much small balance commercial flow as we can handle.

Of course.

So one thing I should mention is that we do.

Sure.

Not just shared and we have many other.

Vendors that.

And brokerage et cetera that we and we havent origination team here at Ellington.

From which we source small balance commercial loans and other ellington clients as well do share in that flow so but.

I think that.

I think we at this point given what we're seeing in terms of the overall slow here ally financial.

We will get as much can handle I don't know Mark if you want to add anything to that.

I guess, the one thing the one thing I would add is that.

What we've liked on the multis, it's not.

Sort of new construction aiming for higher rents.

We don't see any.

New competition coming online and a lot of demand for it and it's been something we've been doing for a long time.

Thematic too a lot of our view on housing and the shortage.

There's going to be strong demand for it.

And so I mean Sheridan, we've partnered with them for a long time.

A lot of multi with them, but we've also done a little bit office, a little bit of retail little industrial.

Theyre just have a lot of relationships, they're extremely thoughtful in.

How they analyze potential loans and how they think about.

Credit risk.

Sort of where like minded with them and how we think about credit and it's sort of similar to the way, we sort of like minded with the management team at <unk> has just been a good fit and we have.

Been with those guys for ups and downs in all different market cycles, and Covid and so we are extremely financial with that team what they're capable of doing.

And I think it's fantastic for us to have this equity stake where it just deepens and strengthen the relationship between the firms.

Okay.

Helpful.

Last thing for me.

The increase in value of the equity investments in originators this quarter looks like.

Early large chunk of that came from literature in particular.

Curious if that was primarily driven by.

<unk> strong results in the quarter or if there was anything else going on there.

Change in valuation multiples.

Well there was a change in valuation multiple but it was driven by kind of a continued now if it was just one quarter of improved results right. Then you wouldnt see that but.

Sort of a strong so many together now and the growth.

By every metric.

As has been better and better throughout 2021 year, each succeeding quarter. So.

Putting all those things together.

Hi.

<unk>.

Yes.

Absolutely absolutely multiple expansion area.

Okay. Thanks, guys.

Thank you.

We will take our next question from Crispin Love with Piper Sandler Your line is now open.

Near term or is that not the right way to think about it.

Hey, Chris It's Mark So I would say if you look at.

How our capital base increased from the.

The common deal as well as the preferred deal.

The credit portfolio went up.

Credit sensitive part of the portfolio.

A lot of what we did buy in Q4.

Sure I would characterize it more as sort of a very low pay up pools.

We had not been fans of higher pay up pools for a while.

So it's liquid all pay ups have come down, but when you pay up is just a couple of ticks a handful. It takes it doesn't have much to go for it to be TBA. So we bought things that are by and large extremely liquid very low pay ups.

<unk>.

When we think about what percentage of the portfolio, we want to have an agency strategies first and credit strategies.

It's been sort of bouncing around that kind of at the low end, 15% at the high end kind of 'twenty two 'twenty three present for a while we're a little bit at the low end now it's something we always revisit and we sort of make those adjustments in response to market opportunities.

Okay great.

I'll just add that.

It also helps with some of our test Retest 40 Act test to have that agency portfolio.

So.

I do think you'll continue to see that trend down but.

It's been a while if ever that it's been below 15% I probably have to go back many years before that was true.

And yes, we could.

We could get there again, but we like having that it really does help with the task. It really does give us a liquid portfolio that we can tap into like we did in Covid, where we.

Reduced that portfolio with minimal friction and then we're able to not only get through but play offense.

Back end of that liquidity crisis, So I think got.

We are certainly no plans to just have that continue to shrink down to nothing yes, that's an interesting observation to that pre COVID-19 . The agency portfolio was nearly $2 billion in size and it's now a $1 billion seven so as the credit portfolio is 40% higher the agent percentage is actually still.

Meaningfully smaller than say year end 2019.

Great. Thank you I appreciate all the color there.

And then just on interest rates.

Thank you Mark for kind of walking through all of the kind of the businesses impact on grapes on the asset side and the liability side, but if I just kind of take a holistic picture of Es how would you.

Characterize the company as well.

Asset sensitive versus liability sensitive do you think it should be slightly asset sensitive.

Benefit a little bit more from the higher rates I'm just trying to.

Just wondering how youre thinking about that on a full company basis.

I mean, I guess I would say that.

We try to run the company in a way where.

We're trying to insulate the book value from changes in interest rates.

In.

The REIT rules allow us.

I think the necessary tools to do that either interest rate swaps short TBA Treasury futures.

So.

Whether interest rates are very low like they were last year.

Or still low but materially higher now.

We're not we're not trying to be predictive about it we're just trying to sort of.

Neutralize our exposure to interest rate.

And trying to make our dividend sort of agnostic to the direction of interest rates.

We've had a bias towards shorter duration floating rate assets, that's why I made those comments.

On that.

Commercial bridge portfolio right because that is a floating rate portfolio and so what youre starting to see is all of those coupons are going to go up and we don't we don't have a crystal ball to tell you whether the forward curve is going to materialize, but we.

We are alone, but the margin of LIBOR, plus six and last year LIBOR was essentially nothing our coupon with six if a year from now LIBOR at 2% our coupon is eight and so youre going to see that.

We're positioned to sort of benefit from that.

Other sectors that are sort of short duration, but not explicitly floating that I mentioned.

Residential transition loans, there, it's going to be.

A little bit of an open question, whether note rates are going to be able to.

Increase commensurate with the increase.

Funding costs, because we don't typically securitize those.

And on new non QM my expectation is a little bit a market in transition. So we're not there yet I think youre going to see note rates increase.

At least as much as this.

Move in interest rates because of securitization spreads have widened sort of.

And the last thing I said in my prepared comments is that.

Youre, having a fed that is going to stop.

Putting money into the system and I think what that means is that our capital in other private capital is.

Is more valuable now than it will be able to demand a higher return on capital.

The world is not going to be flooded with sort of easy money the way it was.

From right after Covid to comment.

You sort of start to feel it sort of ebbing away kind of.

And the third quarter last year. So I think look the market has been extremely volatile this year.

And it's.

Spreads widening across the board in fixed income.

Big changes in interest rates fleet, the delta hedging costs, though.

It's not been an easy environment, but.

I see.

You always tend to go through this kind of.

Bit of bit of Tomo, and then youll get some stability, but I like.

Where we're going to settle in.

I think as higher rates.

Wider spreads.

And with.

Capital being a little bit more precious than the way it felt sort of last year and I think those are all good things for us.

Good Chris on the CUSIP side.

And the partnership we have with our origination partners.

We're constantly in dialogue with them about where securitization markets are and where note rate should be so I think it's going to be good for them as well.

Yes.

If you wouldn't mind.

You could turn to page 13 in the deck, which is our interest rate sensitivity analysis.

So there you can see.

Looking at the bottom line here in terms of what we think.

50 basis point decline or increase in interest rates will mean to our common equity per share.

You can see that basically the way we look at it is we've managed this portfolio down.

To close to zero duration.

Now.

A little bit negatively convex.

But.

That's basically the case, so you could almost think of it as we have this portfolio a lot of it's floating rate loans a lot of it is fixed rate loans, but we have interest rate swaps on.

That where we're paying fixed and receiving floating so kind of and we have stuff leverage financed but when all is said and done one way you can kind of think of the company is that we've got a whole bunch of assets that are we basically converted through our hedging too.

Floater floating rate asset at LIBOR, plus 15%, let's just say.

So we've got a bunch of assets that through leverage in hedging and other we've converted to LIBOR plus 15%.

So you take that LIBOR, plus 15% and then what are you going to subtract from that we're going to subtract your G&A youre going to have some slippage through hedging costs and things like that so youre going to get back to the dividend right, which for us has been around 10%.

And LIBOR has been very low so close to zero right. So thats close to LIBOR plus 10%.

On that and that's where we've been and LIBOR has been very low.

But as Mark just implied.

When short interest rates, whether it's so far LIBOR. However, you want to measure it as those start to rise now all of a sudden that's going to provide support for overall core earnings right. Because we have effectively converted so many of our assets to a.

Our LIBOR floater so.

So.

If you do the math right I mean, if short rates go up 2% right on our book.

Value of roughly 18, we'll just do some monster math here that's 36.

A year.

Yes.

Is that a second.

Yes, I mean, those are some big numbers so.

So yes, so so that can be.

Really very supportive of our core earnings.

Okay, great. Thank you and thanks for the thoughtful answer Larry and Mark.

Pamela.

Yes.

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

Thanks first just on the Longbridge acquisition.

More of an opportunistic acquisition because you had.

The other partner looking to sell or does this reflect kind of a change.

And your approach to <unk>.

Some of your equity investments.

Look we had a willing buyer and a willing seller thats I think thats, maybe the best way to put it.

There was no gun to anyone's head, but.

I think they.

J O clock wrong, but I think even on their earnings call. They talked about it being a non strategic asset is that right, yes, more or less yes. So I think it was it was a good fit.

For both of Us.

And we can.

Fact that now.

We can consolidate the MSR and other things in it.

Just like they were a great partner don't get me wrong.

And really help longbridge.

Evolve into a terrific operating company.

I think home point for that.

But now having come there.

They are going to be some great synergies and flexibility now.

Having control.

Great and then I know you've talked a little bit about.

Spreads widening on Securitizations can you just talk about what you might have had in the pipeline to be securitized.

And kind of the earnings risk from that from that pipeline and just I guess around expectations is to win rates on new loans or loans that you are buying might reflect the new securitization economics.

Doug It's Marc So I can give you some general things one thing Larry mentioned.

We're sort of at a pace now to do one securitization a quarter.

We did one in January which.

Was relatively good timing it was before you saw.

Lot of the spread widening occur.

But you know we have a pipeline that we're always buying so yes.

So we kind of cleared the decks of some of the holdings in January but.

No.

There is still holding so I think it's kind of.

You can kind of based on sort of that average deal size of 300 to 400.

And we've just got one done in the quarter you can kind of.

Get a sense of what might have been on the balance sheet and.

I mentioned that we have.

For years.

Add interest rate hedges on non QM loans and it certainly.

Cost a lot of money in 2020, when short rates plummeted.

This year it sort of has helped save us money, but we generally take that sort of spread widening spread tightening risk I think thats hard to hedge so thats been a component this year.

No.

That's obviously a negative I did lead to one thing Thats a positive.

A lot of what we retained when we do the securitization.

Is.

Sort of a credit IL people call it <unk>.

<unk>.

It's excess spread off the deal, but it's subject to.

Credit losses and so.

<unk> mentioned in his prepared remarks, just how we.

We did have a little yield compression in Q4, and one of the things he pointed to was.

Fast speeds on retained non QM pieces.

And there is in addition to the loans that EMC has our balance sheet.

<unk> originated <unk> partner like every originator has loans that they are financing on warehouse lines that they haven't sold so there is.

There's pros and cons, it's been it's been a big repricing I think we've tried to be disciplined about it but it's hard for me to really quantify it.

Okay.

You can see in our slide four that non QM with $735 million at year end I think our deal in January was for 2017, but that 735 also includes our retained tranches. So we cleared the decks of.

I guess most of the loans that we came into the year with and we obviously continue to accumulate and securitize again, but that's yes.

Yes that that gives you an idea.

The deal in January relative to where we started the year and of course from an interest rate perspective.

That's we have hedges on against those but the spread widening that's.

That's a little different but like a lot of things.

Thank God, we've got time until our next securitization and.

We will see we will see what happens.

Makes sense. Thank you.

And we will take our next question from Eric Hagen with BTG. Your line is now open.

Thanks, I'll try my hand at along Rich question too when you guys bring the portfolio on the company will go from being able to retain and build capital, which appears sort of I think clearly supported its growth up to this point too.

Presumably having most of its earnings distributed.

Being fully part of USA.

Do you guys think that sort of changes the way you think about the capital structure of either.

<unk> by itself or Ellington more generally.

And would you say that the growth opportunity looks any different.

If it kept on a trajectory of being able to retain capital.

Right well actually it can retain capital even as.

Part of Ellington financial because even though its consolidated for GAAP pretax it's inside a Trs and this is really.

Necessary I mean, if you look at other mortgages as well that have origination subsidiaries youre going to find them in a blocked.

Trs so.

And we there's no specific.

Requirement or time frame to distribute earnings out of that Trs, obviously as a trs grows there or is it so called Trs tests for Reits in terms of limiting their size, but.

We have a lot of runway there.

So we can actually.

Continue to retain Longbridge is earnings and Longbridge.

Can also dividend goes up.

Each case, they will those dividends will represent.

Taxable REIT income and presumably therefore be distributed of course, but until they're actually distributed up from the subsidiary from the taxable subsidiary.

We actually can continue to retain the earnings there.

And this is.

We haven't.

Completely.

Mapped out in terms of the future in terms of when we'll want to distribute those earnings it will depend on a lot of factors.

But that is it's an option, but it's not a requirement.

Okay. Thank you very much.

And we will take our next question from Brock Vandervliet with UBS. Your line is now open.

Thanks for the questions.

Just going back to Lynn sure I'm not sure I heard this correctly, but.

Okay.

There was a step up in valuation how material was that to the book value calc.

Do we have enough of that.

<unk>.

Yes.

The material you can see it on the fair value of Glenn Schorr at 12, 31 is on slide $445 million, which was an increase of about $18 million from September 30.

Yes.

Okay $10 million okay. Thanks.

Alright ill go back and kicked out.

Separately.

In terms of the non non QM market not not.

Residential transition space, but just non QM, we're seeing a number of existing players plus some new ones to look at the space, probably consistent with the uptick in rates.

How how large would you size this market to be or what could it be.

At this point.

Yes, it's mark so I think a little bit depends.

What you see out of.

FHFA.

Like.

Part of the reason non QM growth.

Yes, So we started Lynn sure back in 2014, so you've been added a while right.

In the investment hypothesis back then.

Was post financial crisis.

Both Fannie and Freddie.

We're very focused on.

Essentially full documentation.

And.

<unk>.

The way their automated underwriting engines work desktop underwriter in loan prospector the way they were set up in the technology that we're using.

Really served borrowers that were.

That had a salary that was sort of.

The claimed a borrower that would sail through their underwriting and could avail themselves of the relatively low rates in the agency mortgage space and so we saw at the time than that.

A lot of self employed borrowers that.

Didn't fit for a number of reasons into the automated underwriting engines and they were really good borrowers need with low LTV and they had high credit scores and a lot of them.

<unk> income that you could see on bank statements and so we started originating those loans with Lin sure.

For the first non QM deal got done and then there were other sort of addressable parts of the mortgage market.

That well served by Fannie and Freddie one is that.

Investor properties, where the borrower.

Borrower is an LLC as opposed to an individual benefit you don't serve that part of the market and so so there is sort of.

A few different sectors of the market that we thought it may be were 15% of the housing market that could be better served and better addressed with non QM mortgage frame work with us.

More flexibility, it's a little bit more complicated underwrite than just an automated process right and we never tried to.

Go after borrowers that we thought fit well into the Fannie Freddie underwriting.

Technology because.

You can get a Fannie Freddie loan, that's divest right and that makes sense. So.

And then what you've seen now from.

FHFA since the.

The transition from to Biden is.

Sort of.

They pulled back from the.

Investor space, a little bit with the PSP caps and they then they removed them, but they've increased cost on second homes. They have increased costs on jumbos. So.

They're sort of pulling back a little bit so I do think that opens up.

Non QM market.

Being a little bit less expensive than what they've been in the past, which I think thats sort of good news for non QM volumes.

Got it thank you.

That was our final question for today, we thank you for participating in the Ellington financial fourth quarter 2021 earnings Conference call. You May now disconnect. Your line at this time and have a wonderful day.

Q4 2021 Ellington Financial Inc Earnings Call

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