Q1 2023 Ellington Financial Inc Earnings Call
And we ask that you. Please continue to standby the conference will begin momentarily.
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Yeah.
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Good morning, ladies and gentlemen.
Thank you for standing by welcome to the Ellington Financial first quarter 2023 earnings Conference call.
Today's call is being recorded.
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It is now my pleasure to turn the call over to Al let in Chile Associate General Counsel you may begin.
Thank you before we start today I would like to remind everyone. Certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements are not historical in nature and as described under item <unk> of our annual report on Form 10-K for the year ended December 31, 2022 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.
Should not rely on these forward looking statements as predictions of future events statements made during this conference call with me as of the day of this call and the company undertakes no obligation to update or revise any forward looking statement, 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 Dekosky co Chief investment Officer of ESG, and Jr. Herlihy, Chief Financial Officer of the EIC as described in our earnings press release, our first quarter earnings Conference call presentation is available on our website at Ellington financial Dot com.
Management's prepared remarks will track the presentation. Please note that any references to figures in the presentation are qualified in their entirety by the end notes at the back of the presentation with that I'll now turn the call over to Larry Thanks, Howard Dean and good morning, everyone. As always thank you for your time and interest in Ellington financial.
I'll begin on slide three of the presentation.
In the first quarter Ellington financial generated net income of 58 per share and adjusted distributable earnings 45 cents per share both up sequentially and both of which covered our dividends for the quarter.
Despite some significant market swings during the quarter, most notably in mid March around the turmoil in the banking sector.
<unk> generated an economic return of three 3% or 14% annualized and grew book value per share.
In the second and third section here on slide three we break out our net income by strategy.
You can see that our credit strategy was the primary driver of our results and also that we had solid contributions from both agency and long ridge as well.
In credit net interest income from our loan portfolio has led the way on agency, we actually outperformed in a quarter, where the agency MBS underperformed treasuries and finally Longbridge had an excellent quarter driven by strong gain on sale margins and mark to market gains on its msr's and proprietary loves.
During the first quarter, you were again highly opportunistic with our capital management.
First we capitalized on a constructive market in January and February by raising capital through our common ATM when our stock price was much higher than it is today.
Then in early February we took advantage of a narrow window of market stability to raise $100 million of preferred stock the offering to strong institutional demand, which enabled us to price the offering a similar yield spread to every price to our series B preferred back in December 2021, that's significant because yield spreads on our targeted assets.
Much wider now than they were back then.
New series C preferred stock is rated a minus which along with our existing series, a and B preferred stock carries the only any IC one preferred stock rating in our sector.
Finally, after the mortgage REIT sector sold off in March we repurchased common shares at highly accretive levels. This is exactly what we want to be doing.
In addition to all the capital activity. We took further advantage of that window of stability in February by participating in our first non QM securitization of the year at attractive economics.
In contrast to the prior quarter, when we delayed a non QM securitization for a few months until we were happy with execution levels in the first quarter, we pushed to come to market quickly just six and a half weeks after a prior non QM securitization, while the securitization markets were still strong.
We were able to price the AAA tranche at a spread of plus 150 to cars and we achieved an overall cost of funds are under 6%, which enabled us to lock in very high returns on equity on the tranches we reject.
The majority of the non QM loans sold into these two securitizations were originated by lend short, an American heritage and which we have strategic equity investments.
Theres, a continual dialogue and exchange of information between our capital markets desk and these originators.
This feedback loop gives us input on the underwriting and great visibility on the credit profile to allow us and it gives them the ability to originate loans that could ultimately be profitably securitized.
We end up with a high degree of confidence in the quality of the collateral and we believe that the risk adjusted returns are extremely attractive on the retained tranches that we organically create.
I'm very pleased that we were able to get both our preferred stock issuance and our non QM securitization completed in February ahead of the risk off movement that started in March and that has now enhanced our opportunity set on the asset side of the balance sheet.
We've been strategic and selective in our deployment of the new capital so far.
First we allowed some repo to roll off temporary lowing, lowering our leverage pending stalled deployment set.
Second we were active in March with share repurchases as I mentioned.
And third we've added to our portfolios across some of our loan businesses, which this past quarter included a secondary market purchase of a portfolio of heck am buyout loans at what we believe to be distressed prices.
I'll note that we finished the quarter with Apple remaining dry powder to invest.
Our activities during the quarter translated into some concrete changes to our portfolio composition.
Our reverse mortgage investment portfolio increased largely because of that distressed purchase I'll take them bio launch that I mentioned, but otherwise the sizes of our agency and credit portfolios actually ticked down.
The agency portfolio declined another 12% this quarter as we continued to rotate capital out of agency. However, those net sales all occurred in January and February and we actually net added agency assets in March around the spread widening.
Meanwhile, our credit portfolio declined by 5% sequentially mostly into sectors.
We now have a smaller non QM portfolio.
The non QM securitization in February cleared out a good portion of our loans on balance sheet at great levels.
In addition to that we did.
Securitization spreads are getting widening in recent weeks the bid for non QM loans from whole loan buyers has become relatively stronger.
As a result, we've encouraged <unk>, an American heritage to sell more of their production to whole loan buyers and Emc's pace of acquisitions has subsided of course that could change at any time based on supply demand dynamics.
Second we now have a smaller commercial bridge loan portfolio.
The commercial real estate sector has been dealing with a number of issues recently, including the impact of higher interest rates on property.
Impact of higher interest rates on property values in financing costs.
Anders tightening underwriting standards and now distress at the regional banking level.
As a result, we have taken a somewhat more cautious approach in that sector, including continuing to focus on the multifamily sub sector.
We believe that the multifamily sub sector is much more insulated from the impending credit contraction that so many are predicting for several reasons.
First there was still an acute shortage of housing, which should support occupancy levels in rats.
Second fewer people can afford to buy homes, given where mortgage rates are that's driving more people to rep, who might otherwise buy.
And third is the Gse's, who serve as the primary lenders to the multifamily space as opposed to the small banks and other private lenders who serve as the primary primary lenders for the other property types like office retail and hotel.
GSE and government support which by the way also includes rent subsidies doesn't come and go based on market sentiment. So sponsors should still be able to finance and refinance at appropriate levels and multifamily.
In addition to focusing on multifamily we've also been tightening our underwriting criteria across all subsectors within commercial bridge included including lowering our ltvs.
As a result, our pace of new commercial bridge loan investments has ratcheted back.
At the same time, our existing bridge loan portfolio has a short duration. It's estimated weighted average life and March 31st was less than 12 months.
One benefit of the short term nature of these loans is that we can take action sooner when a property experience there's problems.
Another big benefit is that a significant portion of our loans continue to pay off each quarter.
As a result of steady payoffs in this sector and are slower lending pace. Our commercial bridge loan portfolio has now declined for three consecutive quarters.
Since mid year 2022, our commercial bridge loan portfolio has shrunk by 22% to $578 million down from $744 million.
All that said another reason were being cautious and selective in the commercial mortgage sector is that we think the turmoil in the regional banking system could have an outsized impact on the commercial real estate market generally and create opportunities for us specifically.
We estimate the small banks hold about 70% of commercial real estate loans across the banking system and further stress on their deposit basis could mean, an opportunity for us to acquire some of these loans, especially nonperforming loans at deeply discounted prices at.
At the same time as these small bank lenders withdraw from this space, we expect to see an opportunity to provide capital at higher spreads on conservatively underwritten new originations.
EMC has strong origination underwriting and workout capabilities, both in house at Ellington and through our strategic equity investment in Sheridan capital S.
As such I think we are very well positioned to benefit from this approaching opportunity.
Therefore, I wouldn't be surprised to see our commercial mortgage loan portfolio increase in the not too distant future.
Putting it altogether are slightly smaller investment portfolio larger balance of unencumbered assets and the significant growth of our equity base caused our recourse debt to equity ratio to decline to two to one at March 31 down nearly a half turn from year end, that's a meaningful decline.
We finished the quarter with ample dry powder available to invest as you can see from our cash and unencumbered asset figures I think it's a great time to have that dry powder with that I'll turn it over to Jr. To discuss our first quarter financial results in more detail.
Thanks, Larry and good morning, everyone for the first quarter Ellington financial is reporting net income of 58 per share on a fully mark to market basis, and adjusted distributable earnings of 45 per share.
These compare to net income of 37 per share and <unk> 42 per share for the prior quarter.
On slide five you can see the attribution of earnings among credit agency and Longbridge, each of which contributed positively to our first quarter results.
The credit strategy generated 53 per share of net income driven by net interest income on our loan portfolio's net gains on our non QM loans and positive overall earnings from unconsolidated entities, partially offset by a mark to market loss on our strategic equity investments and loan originators.
We also had net losses on our interest rate hedges driven by the decline in medium and long term interest rates quarter over quarter.
Finally, despite continued low levels of credit losses, and strong overall credit performance, we did see an uptick in delinquencies on our residential and commercial mortgage loan portfolios during the quarter.
Meanwhile, the agency portfolio generated positive net income of <unk> <unk> per share in a quarter when agency MBS underperformed U S treasuries.
The mortgage basis performed well in January but then widened widen beginning in mid February and through quarter end.
The widening with costs first by renewed anxiety over inflation and what the Feds response would be and then in March by turmoil in the banking system.
Agency MBS underperformance was most pronounced in sub 3% coupons, however, which we own relatively few up.
Net gains on our specified pools exceeded net losses on our interest rate hedges and slightly negative net interest income driven by sharply higher financing costs and we had an overall gain for the quarter and the agency strategy.
Moving now to Longbridge.
During the first quarter yield spreads in the reverse mortgage market actually tightened, which combined with lower interest rates increase the value of our heck of Msr's and our proprietary reverse mortgage loan portfolio.
In addition, higher gain on sale margins more than offset lower origination volumes sequentially. So longbridge also had a net gain in its origination business, which supports our adjusted distributable earnings.
Beginning in late March However, Ginnie Mae H MBS yield spreads began to widen which could pressure gain on sale margins on the bright side, we're entering more seasonally active month for originations and Longbridge has market share continues to rise in January it actually hit number one in newly originated <unk>.
<unk> net income for the first quarter also reflected a reduction in the fair value of our senior unsecured notes, which was driven by credit spread widening. This is included in unrealized gain less gain loss net and the corporate other column on slide five.
Next please flip to slide six and.
In the first quarter, our total long credit portfolio decreased by 5% sequentially to $2 $43 billion as of March 31 drew.
Driven by smaller commercial mortgage loan and non QM loan portfolios.
A portion of the decrease was offset by larger portfolios of residential transition loans and non QM retained tranches.
On the next slide slide seven you can see that our total long agency MBS portfolio decreased by about 12% quarter over quarter to $853 million.
Net sales and principal repayments exceeded net gain.
On slide eight you can see that our longbridge portfolio increased to $442 $5 million as of March 31.
Driven by an opportunistic purchase of a portfolio of packing buyout loans.
And incremental originations our proprietary reverse mortgage loans.
In the first quarter Longbridge originated $234 million across heckaman prop, 77% through its wholesale and correspondent channels and 23% through retail.
The shares for resale increased from 15% in the prior quarter.
Next please turn to slide nine for a summary of our borrowings.
Our overall weighted average borrowing rate increased by 38 basis points to 521%, primarily driven by higher short term interest rates and also because at March 31, a greater proportion of our borrowings are secured by our loan and MSR portfolios, which carry higher borrowing rates in agency assets.
Book asset yields for both our credit and agency strategies also increased over the same period, thanks to portfolio turnover and we continued to benefit from positive carry on our interest rate swap hedges.
Where are we net receive a higher floating rate and pay a lower fixed rate.
As a result net interest margins in both our credit and agency strategies expanded sequentially.
Our recourse debt to equity ratio decreased to two to one as of March 31, compared to $2 five to one as of December 31.
This decrease was driven by a smaller investment portfolio and increase in unencumbered assets and an increase in total equity quarter over quarter.
Our overall debt to equity ratio adjusted for unsettled purchases and sales also decreased during the quarter to $8 nine to one as of March 31.
As compared to $10 one to one as of December 31.
In January and February we issued $4 4 million common shares through our ATM program at an average price of $13 64 per share net of operating offering costs and in March we repurchased 1.06 million common shares at an average price of $11 38 per share.
Sure.
Also in March we replenished the repurchase program by adding $50 million in authorization.
In addition, we issued 4 million shares of series C preferred stock priced at an initial fixed dividend rate of eight five days, which is a 513 basis point spread to the five year Treasury.
Finally at March 31, our combined cash and unencumbered assets totaled approximately $618 million and our book value per common share was $15.10 up from $15.05 in the prior quarter.
Including the 45 per share common dividend that we declared during the quarter. Our total economic return for the first quarter with three 3%.
Now over to Mark Thanks.
Thanks, Jr. I'm pleased with <unk> results for the quarter, we had a total economic return of three 3% in the period of extreme rate volatility. The two year note had a range of 130 basis points. This quarter first as market expectations that fed behavior Ping pong between more hikes and almost eminent aggressive cuts.
And then with the developments in the banking sector in March.
Now we find ourselves in the middle of a potential full fledged banking crisis with three banks seized and the liquidation of agency MBS seized by the FDIC well underway like most crises, if you hunker down and weather the storm the future opportunities are great.
It can be a short term negative for current holdings.
Huge long term positive for the going forward opportunity set.
This current crisis is shaping up to be no different.
We think regional banks will significantly reduce lending in the commercial real estate market, which presents a huge long term opportunity for ESC, we have vast experience and institutional knowledge.
Working out delinquent and under collateralized commercial loans have been worked out tons of them in our time as a public company.
In regards to the ongoing sales as the Fdic's agency MBS, we were and we remain well positioned for those sales with limited exposure to the coupons being sold.
In fact, it turned out to be a great quarter for <unk> agency MBS strategy as well as for many of our other strategies I will review what worked for US in the first quarter with didn't then I'll discuss our outlook for the coming months and how we are positioned to capture the opportunities we expect to see.
Dream rate volatility and FDIC liquidations of six agency MBS, probably doesn't sound like a constructive backdrop for our agency strategy, we were able to generate a high teens annualized gross return on equity in the agency.
We have largely avoided the lowest coupons and the highest coupons and for the most part that's shields us from the technical effects of both bank liquidations and new production.
Made positive carry on a long specified pools versus short TBA and a lot of carry on pools versus sulfur hedges with all the volatility we saw lots of relative value opportunities in the quarter had excess returns, including buying some pools in March it widespread.
Even at a smaller size, we think that the agency strategy continued to deliver outsized returns for ESC because spreads are wide spec pool pay ups and many sectors are low and much of our portfolio requires minimal Delta AG.
And our non QM strategy, we were opportunistic we did a securitization in February at what were some of the tightest spreads of the year now we see a lot of competition for loans from other investors were just holding loans on their balance sheet.
They are attracted to the high coupon relative to the price and strong historical credit performance for the quarter. We also had excellent results from our non QM retained tranches credit performance remained strong and slow prepayments were big tailwind to many of our seasoned excess interest holdings.
<unk> is now our largest portfolio allocation.
<unk> were up modestly and loans, you're extending a bit but overall performance of our portfolio remains very strong.
Even though HPA has actually turned back positive recently a year ago.
Q2, 2022 home prices almost everywhere, we're higher than current home prices today.
So on the vintage of loans that were originated nine to 12 months ago, but the top of the housing market having completed the renovation at the home is the market the homes for sale. Our borrowers are now having to cut prices relative to where they thought they would sell the house when they initiated the project.
As a result time on the market is extending a little bit and that's delayed the resolution of our loans in many cases as we are seeing time to pay off extend so far everything looks manageable and home price drops are generally not been significant enough to impair our loans, we expect the time and the market will normalize in the Aberrational short times.
We saw post Covid and we've built that into our underwriting RTL has been a great strategy for us the U S housing stock is old which drastically in need of renovation and we don't have to compete with the gse's.
The Unlevered coupons, we earn are high the interest rate risk is limited and our performance has been excellent I expect all of this will continue.
And commercial bridge, we have seen real estate values decline and financing dry up the <unk>.
These effects have been felt most in property types wherever you're not as active in office and retail for example, which are about 15% of our portfolio combined regional banks or the biggest lenders to the sector.
Retail and office already had problem, but now the banking crisis is making it worse, because hamstrung largest pool of capital that has been supply lovely state loans to these property types. As a result, some sectors will continue to adjust to lower valuations and higher cap rates and be disproportionately impacted was interesting you can.
See on slide six is that our commercial mortgage portfolio shrunk again in the first quarter, we have been highly selective on new opportunities and we had 142 million in payoffs in the quarter.
As of March 31, our portfolio was 65% multifamily as you can see on slide 10.
That sector has held up better and not coincidentally the biggest lenders in that space of the Gse's Theyre still active and open for business.
Can also see on this slide that all of our commercial bridge loans are floating rate with so if we're at 5% our borrowers have had a huge incentive to refi to fixed rate debt and that is what is driving the payoff velocity.
We will have a few headaches in that portfolio and I expect some challenges related to maturity date, but I think the real story for US is the incredible opportunity regional bank stress is creating for us.
Recall that when we first started our commercial loan strategy back in 2010 was focused on acquired nonperforming loans in resolving those npls generated a great ROE for us the NPL opportunity dried up by 2018 and since then we've done mostly rigs loan originations.
The NPL opportunities now coming back and that's really exciting is.
As the large pipeline is maturing loans continues to come do many will require new equity or mezzanine capital to come in as the new loans will be smaller than the maturing loans that equity and mezzanine capital will not always be available. So we think that youre going to see more maturity defaults with many loan selling at big discounts to par and providing lots of.
<unk> for us.
You can see a preview of this and many see MBS conduit triple B tranches, some of which are down 25% to 30 points that sector is starting to look interesting to us.
As for New commercial bridge originations you are sure to see a lot less competition from regional banks given their deposit base. They always had a lower cost of capital. The FC we really couldnt compete with them on right now.
Now with those banks pulling back we're starting to see better quality sponsors and better quality deals coming our way.
Same thing with our consumer strategy that strategy returned modestly positive results in the quarter, but on a small amount invested in recent years, we have reduced capital net strategy significantly we just havent been seeing compelling scalable opportunities. We also expect that to change with credit contracting.
Looking ahead I think we have.
Prospects for the remainder of the year.
Housing, while still expensive is repriced slightly lower fed rate hikes may be over or close to over our agency strategy is making significant earnings contributions again agency.
Agency spreads are really wide right now so we think there is significant net interest margin to capture.
The non QM, while there is competition for whole loans, new issue securitization volumes are down. So I expect we will be able to replicate that very strong execution.
On a Q1 deal and.
In commercial bridge, our portfolio is holding up well and our decision to increase our <unk> credit hedges. In recent quarters has also has also really paid off we can now redeploy that capital at low ltvs lower property values and stricter underwriting in todays market, which is decidedly less competitive I also think there's a good chance we're going to see the.
Opportunity to deploy more capital in our consumer strategies, even auto or unsecured consumer and.
And in anticipation of future regulation and investor scrutiny at the retail banking level, we expect their lending appetite in the commercial and consumer sectors to come down significantly which should present opportunities for ESC.
Now back to Larry.
Thanks, Mark I am very pleased with Ellington financial strong performance to start the year in a volatile market no less.
In the first quarter, we added capital lowered our leverage while also growing net income per share.
<unk> distributable earnings per share and book value per share.
Expanding our credit and agency net interest margins, it's nice to see our ongoing portfolio rotations translate into NIM expansion.
With the recent volatility around the banking sector I'll highlight a few areas of the portfolio and balance sheet, where we've been particularly focused on.
First area of focus is long performance the credit performance of our loan portfolio continues to be strong, but we are beginning to see delinquencies tick up in both our residential and commercial portfolios.
Actual credit losses continue to be extremely low in our portfolios. However, and thanks to our focus on first liens and low ltvs in both our residential and commercial mortgage portfolios I expect actual losses to continue to be low.
Second area of focus recently has been monitoring the health of our Counterparties and our exposures to those counterparties.
Core tenet of our liability management is to diversify our lending relationships and not to concentrate risk in any one counterparty. That's why you see on slide 23 at ESC currently has 27 counterparties.
Our objective is to get ahead of any concerns with particular counterparties and for that we leverage off Alex since counterparty review function.
As further financing diversification and to lock in long term financing. We also make extensive use of the securitization markets and we've also tap the unsecured corporate bond market in the form of our senior notes.
Third area of focus has been capital management, where we have been opportunistic issuing capital when the markets are open.
We've repurchased stock during selloffs.
As it pertains to repurchases we balance they are accretive effect on book value per share against the attractiveness of the investment opportunities available in the market together with the effect on our expense ratios and liquidity of our stock.
Signaled before that as long as our liquidity is strong we view repurchases as particularly attractive whenever a price to book ratio falls below 80% and that's indeed, what we transacted our repurchases this past March.
Looking forward market volatility and forced selling has historically generated exciting opportunities for us I discussed earlier, how the turmoil of the regional regional banking sector could lead to opportunities and nonperforming commercial mortgage loans.
As you can see on slide 11, we are fortunate to have loan origination capabilities in a wide variety of sectors, which ever sectors get hit hardest by the contraction of credit any one of our lines of businesses could benefit from the resulting lending void.
While it's great to come off the first quarter of strong earnings, it's even better to come off that quarter with low leverage and dry powder, which position us well to take advantage of the opportunities that I think will find as the year unfolds.
On a final note I'd like to remind our investors that our annual meeting is coming up next week on Tuesday may 16.
And we encourage you to please vote on the matters in our proxy statement. If you have not done so already.
With that we'll now open the call up to questions.
Operator, Please go ahead.
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 star two.
Once again that is star one to ask a question. Our first question comes from Crispin Love with Piper Sandler.
Thanks, and good morning, everyone. Good.
Morning, Chris.
Right now it seems like there is there are a lot of opportunities to grow Eft's agency exposure just given widespread right now in patients on the credit side, so over the near term.
Or do you expect to increase that you have these agency equity and asset allocation and then what levels would you be comfortable increasing agency to for capital and asset levels.
Hey, Chris it's Mark.
Great question, So I would say right now, we're probably comfortable with the capital allocation, we have in the agency space.
As I mentioned in my part of the prepared remarks agency spreads are wide, but they're wide for a reason right. You have this steady drumbeat of sales going on as the FDIC.
Yes.
As their agent selling off that.
The portfolios they have seized.
So.
I think what youre going to see on the agency side is widespread.
And you know cap.
Capture of net interest margin, but I'm not sure you're going to see significantly significant spread tightening.
And.
We are really constructive.
The opportunities we see on the credit side, we view.
Increased regulation on regional banks.
As creating a significant high yielding opportunity for a lot of our lending businesses. So right now I'd say, we sort of like the balance we have between agency and credit.
That said I just wanted to add Mark I mean, yes.
If all of a sudden you see something going on in agencies, where we have so much dry pattern right.
That.
Say, if it's not match to what we're seeing in credit.
We had only 10% now at quarter end in terms of the agency allocation, we could easily increase that a few percent, which would translate into several hundred million dollars of assets.
If I, if we thought the opportunities right.
Yes.
Thanks, I appreciate the color there and then.
Just kind of following up on that on and that the meaningful dry powder that you have available.
And you expect the asset sales from banks to come other than some of the bank failures out there have you seen banks in the market yet selling loans at levels that you might be interested that or still too soon to tell right now and then kind of your expectations of what types of sectors you'd be most interested in buying loans from banks I guess.
What types of commercial sectors I presume.
I still think it's early stages, but I think there is a cure clear catalysts to create volume right in the cabinet is gonna be maturity date, where at Lee.
On the commercial side, our expectation is youre going to have a lot of properties that are find properties, but the current interest rates.
Versus the current operating income isn't going to support a refinance loan as large as the existing loan and so that's where you get into the situation where.
People have to put in new capital or there is a maturity default and that's where I think we're going to see a lot of opportunities. So it'll start it'll start coming up I think youre a little bit early still and we mentioned we think you can see opportunities on the consumer side right.
Credit unions have been really active on the consumer side in unsecured consumer and in auto loans for the past. Several years. There are cost of funds have gone up down to pay more for deposits, we think theyre going to be.
Less aggressive in growing their loan portfolios given the uncertainty they have so it's another area, where I think there's going to be potentially good opportunities for us.
Haven't seen volumes really come out yet.
The typical cycle where first.
Youre going to see the most liquid securities sold we've already seen some of those come out.
Managed by third parties.
On behalf in some cases the government.
And we understand that and then it'll delegate some of the less liquid securities and then finally on the loan side.
My understanding is is that in terms of who is going to be managing those loan sales. That's still that's still being worked out and we haven't seen any.
Anything sort of come out, but it's going to come out.
Thanks, Larry Thanks, Mark I appreciate you guys, taking my questions.
Thanks Kristen.
Thank you. Our next question comes from Trevor Cranston with JMP Securities.
Alright, thanks, good morning.
You guys mentioned that you made.
Distressed purchase of her can buyout loans this quarter.
I was wondering if you could provide some more color there.
If that was sort of a one off opportunity or if you think there is.
Going to be more opportunities to deploy additional capital into the reverse space in coming quarters. Thanks.
Yes so.
This was related to.
Bankruptcy that occurred late last year.
The reverse mortgage space.
And.
So we actually those loans were refinanced.
Actually bought that package.
That was seized essentially from the lender.
So.
And I think there could be absolutely more of that product coming out both from that bankruptcy.
Especially from that bankruptcy in particular, because all the product has not come out at this point. So you could see us add to that.
Don't see it necessarily as a recurring business.
Yes.
Why is this bankruptcy was obviously a important event in the reverse mortgage space, but.
But but yes that was.
It was a great.
We were in a great place, having the dry powder back this was.
In the fourth quarter, but I believe it closed in the first quarter. So.
So yes, it's just.
So little more of a one off opportunity, but there could be follow up purchase related to the same.
The same original cut.
Any that had.
Bought out those loans in the first place.
Got it okay that makes sense.
And then you know in general it sounds like you guys think there could be a pretty significant opportunity to deploy capital.
In coming months.
Obviously, where your stock is today doesn't necessarily make sense to.
Raise capital through that Avenue.
I was curious.
There are some other smaller mortgage REIT to trade at a pretty distressed levels. So I was curious if you could comment on if it potentially make.
Thanks for ESG too.
Look at gaining some scale on additional capital through.
Central acquisition of another company, how are you thinking about that.
Sure.
Yeah.
As usual we're not.
We're not going to comment that potential M&A activity.
Sure.
If we had the opportunity.
To grow in a way that makes sense, yes, youre, absolutely right it doesn't make sense to be issuing stock at.
Wherever we are 12 12 and change dollars per share on in fact closer to buying.
Buying back stock as we said at those levels.
Sub 12 like we did in the in the first quarter than issuing.
But sure.
Thanks, Ed.
<unk>.
Absolutely Scott.
Bill is important, especially as we see this.
Potential crisis unfolding and we see lots of opportunities in so many different sectors. So.
And to be opportunistic on all things, whether it's M&A activity stock repurchases stock issuances by assets all of the above us flexibility is important.
Okay I appreciate the color. Thank you guys.
Thank you again to ask a question. Please press star one.
Our next question comes from Lee Cooperman with Omega family Office. Thank you.
This listening carefully seems that your profitability should be increasing and do you agree with that.
Given the.
Stressed credit environment.
Number one number two back I guess in 2014 dividend was over $3 a share.
Currently runs about $1 80.
With the prospect of a dividend increase given the outlook that you have for the business and to attached to that what kind of sustainable ROE do you think you could generate the way you want to run the business.
Thanks, Lee no great to hear from you. So first of all I would say right dividend right now is at around 12% annualized.
Return on return on equity, obviously is what that implies and Thats net of SAR expenses, all of our G&A and whatnot.
I think that's a good number.
Going forward.
In terms of a dividend increase all sort of say I'll continue to say what I said in the past as I just think that.
Hi.
We like where the dividend is obviously, we've had a consistent 15th sensor or a very long time now.
Such a bad thing too.
To increase book value per share as well.
All right.
I think if I were to say like okay.
Okay.
Going to be a move at some point upward or downward I would say the next move.
I'm, certainly expecting and hopeful that will be upward.
<unk> downward.
Conditions that led to a $3 dividend back in 2014.
Wow, you're stretching my memory I guess first of all I'm going to guess that our book value per share was probably $23, 50% higher.
So like.
So that sort of normalize for maybe put you down more towards $2. So it's really not that different.
We will have somebody check on that as we're talking but.
But.
So look like a lot of and I think we've done so much better I Miss that and then the rest of the peer group might look rights reached payout their earnings.
By and large and when their dividend exceeds their earnings which has happened to us in a couple of years, most notably frankly last year and I believe 2016, I'm trying to remember, but we.
We're going to have some book value degradation, and we haven't had that much I think in the context of things over many many years you can see on slide <unk>.
25 kind of the progress thank you Omar.
Our book value and dividends over time, and the fact that we've been able to achieve eight 5% annualized when LIBOR probably average.
Maybe it was 2% over that time period.
So.
So I think the book value degradation has been very very key.
<unk> and we've never had to do a reverse split like you've seen so many others do.
Yes, I've been told on Sept, 32014, $23.78, a share as I thought south of 50% higher.
More than 50% higher so it's normalized actually pretty close right $3 out of that.
$23.
Yeah.
What is that 13% I mean, it's yes, it's pretty close.
Yeah.
No comment I'm listening.
Thank you Scott.
Yeah, well again Lee Thanks for your support it's always great to hear from you.
Thank you we'll take our next question from Doug Harter with credit Suisse.
Okay.
Thanks.
Can you just talk about what.
Are there conditions youre looking for to maybe.
It'd be a little bit more on the offense as far as adding assets versus kind of the risks that you laid out that you know, especially in the commercial real estate side. That's led you to kind of shrink for the past three quarters.
Hey, Doug it's Mark.
I think we need to see the assets come out right. So it's been.
Pretty clear between signature Silicon Valley Bank.
What assets the FDIC took over.
And they have a third party agent now selling the agency MBS portion of it.
They have sold some of the non agency.
Our MBS securities as well.
But no there's a lot of commercial loans that haven't come out yet.
Few other sectors that haven't come out yet so.
Those sectors will come out and they also think so that's one thing that's sort of like a catalyst for sales that.
We hope we hope will participate in and we hope assets will come at levels that will be accretive to our performance.
That and the other side, which is more sort of a slow burn but just.
As you get this wall of maturity on the commercial space, we think.
Banks that have previously made commercial loans are going to be pretty tough on the terms at which they're going to roll. We think that's going to create another opportunity for us.
Yeah, we brought the leverage down a little bit, but some of that was just a function of.
The preferred deal we did.
We're continuing to make new investments.
Just amongst the view that.
It's good to have some dry powder because it gives a clear catalyst.
For assets to come out at levels that have the potential to be materially cheaper than where they've been the last couple of years you have.
The fed balance sheet shrinking.
Yes at least two giant pools of low cost of capital out there, it's deferred and its banks right. The feds clearly shrink and we expect that to be ongoing and banks at least <unk> 250 billion smaller.
We think theyre going to also be spending a lot of time getting their house in order and are going to be less interested in new originations. So.
That combination of factors.
The no securities we know we're going to come out by the FDIC. That's one thing and just the banks are going to be less aggressive we expect on the lending side.
For us that we're going to see a lot of investment opportunities and we're just waiting for them to come out we're ready now it's not as though we're waiting for.
No.
And in the economy or some statements from the fed just when assets come out that are interesting to us we plan on B, we plan on participate.
Makes sense. Thank you.
Thanks, Doug.
Thank you. Our next question comes from Bose George with <unk>.
Hey, guys. Good afternoon can you talk about the liquidity risks related to repurchasing heck am loans based on their LTV.
Does that risk managed and what kind of drives that because I assume that was kind of issue for this banker portfolio that you purchased.
Right Youre not talking about the liquidity risk having bought them in the secondary market right now.
Yes, just managing.
Quiddity of having to buy them in sizing that potential.
Based on LTV.
Sure.
So so the portfolio or that particular originator that went bankrupt they had a very very old portfolio and they have been originating.
Business much longer than longer so longer just portfolio of loans that it originates and securitize.
And youre right when those loans hit 98%.
Yes.
Get bought out from the pool. So that's.
It's a trickle in terms of because again language portfolio is so much so much younger.
And.
The other thing that was going on frankly with this other originator I don't want to get into too many specifics.
About their processes, but they actually.
Instead of filing claims with the FHA.
When they could.
With these buyouts, which would have cleared.
Cleared the loans off the dacs and off the balance sheet and freed up capital.
Really it seems made a conscious decision to sort of continue to earn tried to earn positive carry on those assets and hold them on balance sheet and that just turned out to be a big mistake.
So.
So if they had.
We would not let me put it this way if we would not plan at Longbridge.
Two.
To have that as a strategy, where we could be filing claims with the FHA.
And recirculating that capital as opposed to holding on to those assets for longer in the hope of very positive.
Okay, great Yeah, that's definitely helpful. Thanks.
And then just in terms of what's lung British share ASP, the reverse mortgage market and then in terms of your capital allocation, there where could we see that go.
Yes, so it's.
It's in the low twenties correct I believe.
Is the.
Is there market share which is I.
I think Jeremy mentioned they hit number one in January although I think.
I think more.
Our correctly described as number two I mean that was just one particular month I think right yes.
But.
So they have number two market share and yes.
Low 20% and growing.
And then in terms of capital allocation.
The.
Maybe you could comment on that in terms of where that stood at quarter end sure as <unk>. It was 12% at quarter end and that of total equity total equity right and that is driven by.
The portfolio grew quarter on quarter as we discussed because of the second buyout acquisition.
Also prop.
Drew on the margin.
So as we hold those assets on balance sheet internationally.
It takes capital allocation in terms of where that could go.
I think in the team that we're opportunistic right. So we are not.
So specific on where we're going to be deploying capital at a given time overseas opportunity. There this quarter we deployed.
So 10% to 15% is probably a good range.
And that could even tick down just because we basically made the conscious decision it doesn't.
The financing lines that we have right now.
For I believe whether it's that those had some buyout loans or the profit loans, which is also a growing portfolio too it doesn't get the same rates, whether we hold those at Longbridge, who are back up at the REIT. If you will so.
We're actually talking about moving them up to the REIT, we may do that very soon and that and Youll see it tick down right you will see the when that happens you'll see the equity in Longbridge ticked down so I think.
And we love these products as long as we think they are just terrific assets.
Buyouts again, maybe not a recurring business but.
We got them at distress prices. So so I think you could see some shrinkage there. So I think it's a better way to look at it in terms of just the total equity.
At Longbridge would be to think of more of the origination business itself right and.
And for that the Longbridge is capital that supports the origination business and their MSR right to have this big MSR asset.
Mostly the heck of MSR asset right and then they also have some MSR.
MSR as well.
But.
So that and that's.
That's an asset which again, we could also explore moving not the MSR per se, but we could explore moving in excess servicing right similar to what you've seen in other structures, where you've got the mortgage servicing rights held by the regulated licensed entity and then issues in cells and excess servicing right up to the REIT.
So thats another I'd be a little more complicated to do that with reverse mortgages.
But we do think we have a path to that and that would also reduce.
By quite a bit the equity.
Investment, if you will or add longbridge. So.
So so yes. There is there is ways for us to manage that and again you sort of think of most of the equity investment a language now is as consisting of.
Yield bearing assets, whether it's the msr's or.
The loans themselves yes.
Maybe just one last thing to add to that I think the way to think about the capital supporting the origination businesses say, 1% of the UTP of.
10 basis points of ETB of the Heck am So 8 billion 80 to support that business would be the Ginnie Mae requirement right MSR, so that would be 6% of our capital and then everything on top right. So that's true that's kind of a floor.
That's a good point the Ginnie Mae.
Our requirement of 10 basis points.
What you see on the balance sheet in terms of the really the H MBS.
Issued you can see is that's going to that's going to be a floor. So currently in that $80 million range on one.
We could if we really strip lot assets on a one to one 1% sorry, 1%, okay. Great. Thanks, a lot Arthur one for Scott.
Yeah look through the other ones for you.
Requirement right.
Yeah.
Thanks again.
Thank you.
That was our final question for today, we thank you for participating in the Ellington financial first quarter 2023 earnings Conference call.
May disconnect your lines at this time and have a wonderful day.
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