Q2 2023 Ellington Financial Inc Earnings Call

Speaker 1: appreciate your patience in holding. We ask that you please continue to stand by. Your program will begin momentarily.

We ask that you. Please continue to stand by your program will begin momentarily.

[music].

Speaker 2: Kmedical

Speaker 2: The.

Speaker 1: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Second Quarter 2023 Earnings Conference call. Today's call is...

Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington Financial second quarter 2023 earnings Conference call.

Today's call is being recorded.

Speaker 1: At this time, all participants have been placed in listen-only mode, and the floor will be open for your questions following the presentation.

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

Speaker 1: If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad.

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

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Speaker 1: Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Tara Byrne. You may begin.

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

It is now my pleasure to turn the call over to Tom Byrne you may begin.

Speaker 3: 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 security litigation Reform Act of 1995. sc educators. Qualification set in.

Okay.

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.

Speaker 3: As described under Part 1, Item 1A of our annual report on Form 10K, in Part 2, Item 1A of our quarterly report on Form 10Q for the quarter ended March 31, 2023. Forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results.

As described under part one item one a of our annual report on Form 10-K and par.

Two I don't want a quarterly report on Form 10-Q for the quarter ended March 31 2023.

Forward looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results.

Speaker 3: to differ from its beliefs, expectations, estimates, and projections.

To differ from its beliefs expectations estimates and projections.

Speaker 3: 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.

Currently you should not rely on these forward looking statements as predictions of future events statements.

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.

As a result of new information future events or otherwise.

Speaker 3: I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Tkotsky, Co-Chief Investment Officer of EFC, and JR Herlihy, Chief Financial Officer of EFC.

I'm joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark just Koskey co Chief investment officer of yesterday.

Jr, Herlihy, Chief Financial Officer at U S C.

Speaker 3: as described in our earnings press release. Our second quarter earnings conference call presentation is available on our website, EllingtonFinancial.com.

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

Speaker 3: Managements prepared remarks will track the presentation. Please note that any references to figures in the presentation are qualified in their entirety by the endnotes at the back of the presentation. With that, I will now turn to the next speaker.

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 will now turn the call over to Larry.

Speaker 4: Thank you, Tara, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on slide...

Thank you Tara 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.

Speaker 4: For the second quarter, we reported net income of $0.04 per share and adjusted distributable earnings of $0.38 per share.

For the second quarter, we reported net income of <unk> per share and adjusted distributable earnings of 38 per share.

Speaker 4: Steady performance from our non-QM residential transition loan and commercial mortgage bridge loan portfolios, combined with notably strong performance from our credit risk transfer investments, offset net losses elsewhere in the portfolio, and Ellington Financial generated a modestly positive economic return overall.

Steady performance from our non QM residential transition loans and commercial mortgage bridge loan portfolios combined with notably strong performance from our credit risk transfer investments offset net losses elsewhere in the portfolio and Ellington financial generated a modestly positive economic return overall.

Speaker 4: You can see on slide three that the credit strategy was the primary driver of our quarterly results, contributing 40 cents per share of net income, while Agency generated 6 cents per share on a relatively small capital allocation, and Longbridge contributed a positive 4 cents per share even as wider HECM yield spreads, compressed gain on sale margins, and weight on results.

You can see on slide three that the credit strategy was the primary driver of our quarterly results contributing <unk> 40 per share of net income.

Agency generated <unk> <unk> per share on a relatively small capital allocation and Longbridge contributed a positive four cents per share even as wider yield spreads compressed gain on sale margins and weighed on results.

Speaker 4: The lower margins at Longbridge were also the primary driver of the sequential decline in the FC's overall adjusted distributive learning.

The lower margins in long rates were also the primary driver of the sequential decline in the FCS overall adjusted distributable earnings.

Speaker 4: HECCA margins recovered somewhat in July , however, and notably, shortly after quarter end, Longbridge was able to acquire a reverse mortgage servicing portfolio out of a bankruptcy proceeding at a distressed price, which we expect will be immediately accretive to EFC's earnings and adjusted attributable earnings going forward.

Heck of margins recovered somewhat in July however, and notably shortly after quarter end Longbridge was able to acquire a reverse mortgage servicing portfolio out of a bankruptcy proceeding at a distress price, which we expect will be immediately accretive to <unk> earnings and adjusted distributable earnings going forward.

Speaker 4: The net interest margins for both credit and agency also ticked up sequentially, as higher book asset yields due to portfolio rotation exceeded higher borrowing costs.

The net interest margins for both credit and agency also ticked up sequentially as higher book asset yields due to portfolio rotation exceeded higher borrowing costs.

Speaker 4: Higher NIMS should of course be supportive of ADE going forward as well.

Higher Nims should of course be supportive of any of <unk> going forward as well.

Speaker 4: Also during the second quarter, we signed definitive agreements for strategic acquisitions of two public mortgage reads, Arlington Asset Investment Corp and

Also during the second quarter, we signed definitive agreements for strategic acquisitions of two public mortgage rates Arlington asset investment Corp, and Great Ajax Corp.

Speaker 4: Each of these transactions will add assets that complement and further diversify Elington Financial's existing investment strategy.

Each of these transactions will add assets that complement and further diversifies Ellington financials existing investment strategies align with our expertise and offer other strategic advantages.

Speaker 4: align with our expertise, and offer other strategic advantages.

Speaker 4: With Arlington, we pick up a portfolio of low-coupon mortgage servicing rights at scale.

With Arlington, we pick up a portfolio of low coupon mortgage servicing rights at scale.

Speaker 4: These MSRs benefit in a rising interest rate environment, and so they provide an earnings profile that should function as a natural hedge to many of Allenton Financial's existing interests.

These msr's benefit in a rising interest rate environment and so they provide an earnings profile that should function as a natural hedge to many of Ellington financials existing investments and.

Speaker 4: And with Great Ajax, we substantially grow our RPL and PL strategy by adding a portfolio of over $1 billion of first lien residential loans, also at scale and with limited credit risk by virtue of their low LTV.

And with Great Ajax, we substantially grow our RP L. NPL strategy by adding a portfolio of over $1 billion of fish first lien residential loans also at scale and with limited credit risk by virtue of their low ltvs.

Speaker 4: This RPL-NPL portfolio includes both loans owned directly on balance sheet and loans financed via securitization.

This RFP on NPL portfolio includes both long is owned directly on balance sheet and loans financed via Securitizations.

Speaker 4: These transactions also provide other important benefits to Ellington Financial. With Arlington, we will assume more than $100 million of term, non-mark-to-market unsecured debt and perpetual preferred stock, both with attractive costs of capital.

These transactions also provide other important benefits to Ellington financial with Arlington, We will assume more than $100 million of term non mark to market unsecured debt and perpetual preferred stock both with attractive cost of capital.

Speaker 4: And with Great Ajax, we will acquire a strategic equity investment in Gregory Funding LLC. Great Ajax is highly respected affiliated mortgage loan servicer, which could unlock multiple synergies and operating efficiencies across Ellington Financial's existing investment portfolio

And with Great Ajax, we will acquire a strategic equity investment in Gregory funding LLC, great Ajax's highly respected affiliated mortgage loan servicer, which could unlock multiple synergies and operating efficiencies across Ellington financial's existing investment portfolio.

Speaker 4: In addition to these benefits, the acquisition should provide additional capital, both upfront and over time, to deploy into Ellington Financial's existing investment strategies at the highly attractive yield spreads available in the market.

In addition to these benefits the acquisition should provide additional capital both upfront and over time, it's deploy into Ellington financial's existing investment strategies at the highly attractive yield spreads available in the market.

Speaker 4: You can find additional information about these transactions in the presentation section of the Ellington Financial Web.

You can find additional information about these transactions in the presentations section of the Ellington financial website.

Speaker 4: Moving back to Ellington Financial's portfolio, we took several other steps during the quarter that should position us to drive earnings while continuing to navigate market volatility.

Moving back to Ellington financials portfolio, we took several other steps during the quarter that should position us to drive earnings while continuing to navigate market volatility.

Speaker 4: agency yield spread still wide on historical basis. We grew that portfolio by 8% in the second quarter after shrinking it significantly in prior quarters.

With agency yield spreads still wide on historical basis, we grew that portfolio by 8% in the second quarter. After shrinking it significantly in prior quarters. We also took advantage of an attractive entry point to add credit risk transfer investments early in the quarter before the spread tightening in that sector in June and July and continue to expand our portfolio of high.

Speaker 4: We also took advantage of an attractive entry point to add credit risk transfer investments early in the quarter, before the spread tightening in that sector in June and July , and continued to expand our portfolio of high yielding residential transition loans and proprietary reverse mortgage.

Yielding residential transition loans and proprietary reverse reverse mortgage loans.

Speaker 4: Similar to the prior three quarters, the size of our commercial Bridgeland portfolio again declined in the second quarter as payoffs and principal paydowns significantly exceeded new origination.

Similar to the prior three quarters the size of our commercial bridge loan portfolio again declined in the second quarter as payoffs and principal pay downs significantly exceeded new originations.

Speaker 4: In addition, loans on multifamily continue to represent the majority of our commercial bridge portfolio.

In addition loans on multifamily continues to represent the majority of our commercial breaks portfolio.

Speaker 4: In 9QM, the bid from hold-on buyers, particularly insurance companies, continues to be relatively strong.

And non QM.

From whole loan buyers, particularly insurance companies continues to be relatively strong.

Speaker 4: As a result, we were able this past quarter to get good execution on one of our non-QM pools via an outright hole-own sale. And we now regularly consider hole-own sales as an alternative to securitization.

As a result, we were able this past quarter to get good execution on one of our non QM pools via on the outright hold on staff and we now regularly consider whole loan sales as an alternative to securitization.

Speaker 4: Similarly, our originator affiliates, LenSure and American Heritage, have recently been selling more of their production to third-party, whole-own buyers.

Similarly, our originator affiliates <unk> and American heritage have recently been selling more of their production to third party whole loan buyers.

Speaker 4: Not surprisingly, given how high mortgage rates have been, new originations in the 9QM sector continue to be very low compared to last year.

Not surprisingly given how high mortgage rates have been new originations of non QM sector continue to be very low compared to last year.

Speaker 4: As a result, our 9QM hold on portfolio remains relatively small, finishing the quarter at $446 million, which is a more than 40% year-over-year decline.

As a result, our non QM whole loan portfolio remains relatively small, finishing the quarter at $446 million, which is a more than 40% year over year decline.

Speaker 4: Of course, other segments of our loan portfolio, especially residential transition loans, have taken up the slack. And if spreads widen or securitization spreads continue to tighten, our non-prem portfolio should have plenty of room to regrow.

Of course other segments of our loan portfolio, especially residential transition loans have taken up the slack and if spreads widen our securitization spreads spreads continue to tighten our non QM portfolio should have plenty of room to reroute.

Speaker 4: Our loan portfolios continue to benefit from their short duration and strong overall credit performance.

Our loan portfolios continue to benefit from their short duration and strong overall credit performance.

Speaker 4: We continue to dynamically adjust our interest rate and credit hedges. And this past quarter, that also included establishing new hedges related to those pending public MRED acquisition.

We continue to dynamically adjust our interest rate and credit hedges and this past quarter that also included establishing new hedges related to those pending public REIT acquisitions.

Speaker 4: In fact, it was the addition of interest rate hedges related to those pending acquisitions. That explains why our interest rate sensitivity table, which you'll find on slide 14 of the presentation, all of a sudden shows a modest negative duration.

In fact, it was the addition of interest rate hedges related to those pending acquisitions that explains why our interest rates sensitivity table, which you'll find on slide 14 of the presentation.

All of a sudden shows a modest negative duration.

Speaker 4: Meanwhile and as usual, we have maintained high levels of liquidity and additional borrowing capacity.

Meanwhile, and as usual, we have maintained high levels of liquidity and additional borrowing capacity.

Speaker 4: We ended the quarter with a recourse debt-to-equity ratio of 2.1 to 1, which is still towards the lower end of our historical level.

We ended the quarter with our recourse debt to equity ratio of two one to one which is still towards the lower end of our historical levels.

Speaker 4: As you can see back on slide three, our cash and unencumbered asset levels reflect that we have substantial dry powder to invest.

As you can see back on slide three our cash and unencumbered asset levels reflect that we have substantial dry powder to invest in.

Speaker 4: In particular, our commercial mortgage loan portfolio is as small as it's been in a while. And with the distress that we and others expect to hit the commercial real estate sector, I wouldn't be surprised if we ultimately deploy a lot of that dry powder in non-performing commercial mortgages.

In particular, our commercial mortgage loan portfolio is as small as its been in a while.

With the distress that we and others expect to hit the commercial real estate sector I wouldn't be surprised if we ultimately deploy a lot of that dry powder and nonperforming commercial mortgage loans.

Speaker 4: Finally, we look forward to closing the Arlington and Great Ajax acquisitions later this year, which will add meaningfully to our capital.

Finally, we look forward to closing the Arlington and great Ajax acquisitions later, this year, which will add meaningfully to our capital base and with that I'll turn it over to Jr. To discuss our second quarter financial results in more detail.

Speaker 4: With that, I'll turn it over to JR to discuss our second quarter financial results in more detail.

Speaker 5: Thanks, Larry, and good morning, everyone. For the second quarter, we reported net income of $0.04 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.38 per share.

Thanks, Larry and good morning, everyone for the second quarter, we reported net income of four cents per share on a fully mark to market basis, and adjusted distributable earnings of 38 per share.

Speaker 5: These results compared in that income of 58 cents per share and ADE of 45 cents per share for the private quarters.

These results compare to net income of 58 per share and <unk> 45 per share for the prior quarter.

Speaker 5: On slide five, you can see the attribution of earnings between credit, agency, and long-term.

On slide five you can see the attribution of earnings between credit agency and Longbridge.

Speaker 5: The credit strategy generated 40 cents per share of net income, driven by net interest income on our loan portfolios, net gains on our CRT portfolio, and net gains on our interest rate hedges.

The credit strategy generated 40 per share of net income driven by net interest income on our loan portfolio's net gains on our CRT portfolio and net gains on our interest rate hedges.

Speaker 5: portion of these gains were offset by negative results in our investments in unconsolidated entities including net losses on equity investments in loan originators and commercial mortgage loan related entities.

A portion of these gains were offset by negative results and our investments in unconsolidated entities, including net losses on equity investments and loan originators and commercial mortgage loan related entities.

Speaker 4: as well as net realized and unrealized losses on our consumer loans and credit.

As well as net realized and unrealized losses in our consumer loans and credit hedges.

Speaker 4: Finally, although we have seen an uptick in delinquencies in these portfolios year to date, our residential and commercial mortgage loan portfolios continue to experience low levels of credit losses and strong overall credit performance.

Finally, although we have seen an uptick in delinquencies in these portfolios year to date, our residential and commercial mortgage loan portfolios continue to experience low levels of credit losses, and strong overall credit performance.

Speaker 4: In fact, several classes of our non-QM securitization were upgraded by FISH in May.

Several classes of our non QM securitizations were upgraded by Fitch in May.

Speaker 4: According to Bank of America research from June , among the 17 issuers with 5 or more deals outstanding.

According to Bank of America Research from June among the 17 issuers with five or more deals outstanding.

Speaker 4: Our EFMT non-QM shelf is tied for the lowest reported 30-plus day delinquent.

Our E F N T. Non QM shelf is tied for the lowest reported 30 plus day delinquencies.

Speaker 4: Since 2017, we've done 14 EFMT securitizations and currently have 11 deals outstanding, encompassing approximately 5800 loans and $2.5 billion of UP.

It's 2017, we've done 14, FMT Securitizations and currently have 11 deals outstanding outstanding encompassing approximately 5800 loans and $2 5 billion.

Speaker 4: And remarkably, despite the large size of that portfolio, those deals have experienced no cumulative losses like

And remarkably despite the large size of that portfolio those deals have experienced no cumulative losses life to date.

Speaker 4: Meanwhile, our agency portfolio generated net income of 6 cents per share for the second quarter.

Meanwhile, our agency portfolio generally generated net income of six cents per share for the second quarter.

Speaker 4: The quarter began with elevated interest rate volatility and widening agency MBS yield spreads as the market prepared for sales by the FDIC of MBS from failed regional banks.

The quarter began with elevated interest rate volatility and widening agency MBS yield spreads as the market prepared for sales by the FDIC of MBS from failed regional banks.

Speaker 4: Later in the quarter, with the FEIC sales well absorbed and with the debt ceiling dispute resolved, volatility declined and agency MBS yield spreads tightened.

Later in the quarter with the FDIC sales, well absorbed and with the debt ceiling dispute resolved volatility declined in agency MBS yield spreads tightened accordingly, we experienced moderate losses in April but these were reversed in may and June and on balance we had positive net income for the quarter and the agency strategy.

Speaker 4: Accordingly, we experienced moderate losses in April , but these were reversed in May and June and on balance we had positive net income for the quarter in the agency strategy.

Finally, longbridge contributed four cents per share of net income in the quarter.

Speaker 4: Finally, Longbridge contributed $0.04 per share of net income in the quarter.

Speaker 4: Longbridge's positive results were driven by net gains related to the resolutions of HECM buyout loans, net gains on proprietary reverse mortgage loans, and net gains on interest rate hedges.

<unk> positive results were driven by net gains related to the resolution of hacking buyout loans net gains on our proprietary reverse mortgage loans and net gains on interest rate hedges.

Speaker 4: These gains were partially offset by net losses on the HMVS MSR equivalent, which is driven by the combination of higher interest rates and wider yield spreads in the Heccom markets during the quarter. And in net loss in originations, as reduced gain on sale margins on Heccom loans, more than offset an increase in overall origination volume.

These gains were partially offset by net losses on the H M. B S. MSR equivalent, which is driven by the combination of higher interest rates and wider yield spreads and heck of market during the quarter.

And a net loss in originations as reduced gain on sale margins on <unk> loans more than offset an increase in overall origination volumes.

Speaker 4: EFC's net income for the second quarter also reflected expenses related to the Arlington and Great Ajax transactions, as well as net losses driven by higher interest rates. On the interest rate swaps, we used a hedge of referred equity and unsecured long-term debt.

<unk> net income for the second quarter also reflected expenses related to the Arlington and great Ajax transactions as well as net losses, driven by higher interest rates on the interest rate swaps, we used to hedge our preferred equity and unsecured long term debt.

Speaker 4: On slide six, you can see a breakout of ADE among the investment portfolio, Longbridge, and corporate overhead.

On slide six you can see a breakout of AE among the investment portfolio Longbridge in corporate overhead.

Speaker 4: Next, please flip to slide 7. In the second quarter, our total long credit portfolio increased by 1% sequentially to $2.45 billion as of June 30.

Next please flip to slide seven in the second quarter, our total long credit portfolio increased five 1% sequentially to $2 $45 billion as of June 30.

Speaker 4: The slight increase was driven by moderately larger non-QM and RTL loan portfolios quarter of a quarter and by net purchases of CRT investments which occurred primarily in May.

The slight increase was driven by moderately larger non QM and RTL loan portfolios quarter over quarter and by net purchases of CRT investments, which occurred primarily in may.

Speaker 4: A portion of the increase was offset by a smaller commercial bridge loan portfolio where loan paydowns significantly exceeded new origination.

A portion of the increase was offset by a smaller commercial bridge loan portfolio, where loan paydowns significantly exceeded new originations.

Speaker 4: for the RTL commercial bridge and consumer loan portfolios in total.

For the RTL commercial bridge and consumer loan portfolios in total.

Speaker 4: we received principal paydowns of $349 million during the second quarter, which represented 22% of the combined fair value of those portfolios coming into the market.

We receive principal pay downs of $349 million during the second quarter, which represented 22% of the combined fair value of those portfolios coming into the quarter.

Speaker 4: On the next slide, slide 8, you can see that our total long agency R&BS portfolio increased by 8% quarter over quarter to $918 million, as we opportunistically added specified pools during the quarter.

On the next slide slide eight you can see that our total long agency MBS portfolio increased by 8% quarter over quarter to $918 million.

We opportunistically added specified pools during the quarter.

Speaker 4: On slide 9, you can see that our Long Bridge portfolio decreased by 3% to $430 million as of June 30.

On slide nine you can see that our longbridge portfolio decreased by 3% to $430 million as of June 30.

Speaker 4: The decrease was driven primarily by the success Longbridge had during the quarter, resolving Heckenbiot loans, most of which were acquired, which most of which were acquired in the transaction that closed in March.

The decrease was driven primarily by the success Longbridge had during the quarter resolving how can buyout loans most of which were acquired what's most of which were acquired in the transaction that closed in March.

Speaker 4: this decline was partially offset by originations of prop reverse mortgage.

This decline was partially offset by originations.

Reverse mortgage loans.

Speaker 4: In the second quarter, Longbridge originated $297 million across Heckman Prop, which was up 27% quarter over quarter. The share of originations through Longbridge's wholesale and correspondent channels increased incrementally to 79% from 77%, while retail declined to 21% from 23%. Next, please...

And the second quarter Longbridge originated $297 million of cross heckmann prop, which was up 27% quarter over quarter.

The share of originations through Longbridge is wholesale and correspondent channels increased incrementally to 79% from 77%.

Retail declined to 21% from 23%.

Next please turn to slide 10 for a summary of our borrowings.

Speaker 4: The top of this slide now shows the cost related to our recourse borrowings only. On our recourse borrowings, the weighted average borrowing rate increased by 29 basis points to 6.67% as of June 30th, driven by the increase in short-term interest rates.

The top of this slide now shows the costs related to our recourse borrowings only on a recourse borrowings the weighted average borrowing rate increased by 29 basis points to 667% as of June 30, driven by the increase in short term interest rates.

Speaker 4: Book asset yields for both our credit and agency strategies also increased during the quarter thanks to portfolio turnover, and we continue to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.

Book asset yields for both our credit and agency strategies also increased during the quarter. Thanks to portfolio turnover and we continue to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.

Speaker 4: As a result, net interest margins in both our credit and agency strategies expanded to quarter...

As a result net interest margins in both our credit and agency strategies expanded sequentially.

Speaker 4: Our recourse debt-to-equity ratio adjusted for unsettled purchases and sales remained low at 2.1 to 1 as of June 30th compared to 2 to 1 as of March 31st. Our overall debt-to-equity ratio, again adjusted for unsettled purchases and sales, increased incrementally to 9.2 to 1 as of June 30th as compared to 8.9 to 1 as of March 31st.

Our recourse debt to equity ratio adjusted for unsettled purchases and sales remained low at $2. One to one as of June 30, compared to two to one as of March 31, or.

Our overall debt to equity ratio.

Again, adjusted for unsettled purchases and sales increased incrementally to $9 two to one as of June 30, as compared to $8 91 as at March 31.

Speaker 4: Finally, at June 30th, our combined cash and unencumbered assets totaled approximately $538 million and our book value for common share was $14.70, down from $15.10 in the prior quarter.

Finally at June 30, our combined cash and unencumbered assets totaled approximately $538 million and our book value per common share was $14 70.

Down from 15 10 in the prior quarter.

Speaker 4: including the 45 cents per share of common dividends that we declared during the quarter, our total economic return was 30 basis points for the second quarter.

Including the <unk> 45 per share common dividend that we declared during the quarter. Our total economic return was 30 basis points for the second quarter.

Now over to Mark.

Speaker 6: Thanks, J.R. EFC had a slightly positive return in a very volatile quarter. There was volatility in both the absolute level of rates. As the five year note moved in an 86 basis point range and in the slope of the yield curve, as the slope of the two year versus ten year moved in a 65 basis point range, that is a huge range and reflects a market oscillating between fear of more bank failures and fear of persistent inflation.

Thanks, Jr. AFC had a slightly positive return in a very volatile quarter. There was volatility in both the absolute level of rates is the five year note moved in at 86 basis point range and then the slope of the yield curve.

Both of the two year versus 10 year moving to 65 basis point range that is a huge range and reflects a mark's market oscillating between fear of more bank failures and fear persistent inflation.

Speaker 6: Credit spreads also saw a lot of volatility, with the on-the-run investment rate index moving in the 17 basis point range. While it wasn't a memorable quarter for returns, we were busy at Ellington Financial with two announced public MREIT acquisitions and some new opportunities materializing that can help to drive future returns.

Credit spreads also saw a lot of volatility with the armed with an investment grade index moving in a 17 basis point range.

While it wasn't a memorable quarter for returns we were busy at Ellington financial with two announced public REIT acquisitions, and some new opportunities materializing that can help to drive future returns.

Speaker 6: Despite growing market consensus that the Federal Reserve is either at or very near the end of its hiking cycle, the heightened levels of interstate volatility that characterized the market in 2022 have persisted in 2023, including into the third quarter.

Despite growing market consensus that the federal reserve is either at or very near the end of a tightening cycle. The heightened levels of interest rate volatility that characterize the market in 2022 have persisted in 2023, including into the third quarter.

Speaker 6: Larry mentioned that we kept our interest rate hedging discipline across all portfolios and I think that is very important to preserve book value.

Larry mentioned that we kept our interest rate hedging discipline across all portfolios and I think that is very important to preserve book value.

Speaker 6: As you can see from slide seven, the credit portfolio was remarkably stable in size. Most categories did not move much, although we did opportunistically add CRT at some very wide spreads. By late last year, we identified some specific sectors within CRT as potentially offering above market returns. unrelated

As you can see from slide seven the credit portfolio was remarkably stable in size.

Categories did not move much although we did opportunistically at CRT at some very widespread by late last year, we identified some specific sectors within CRT.

Potentially offering above market returns to 2020 in 2021 vintage Fannie Freddie production that back. These bonds have had both tremendous HPA as well as very fast prepayment speeds until mid last year.

Speaker 6: The 2020 and 2021 vintage Fannie Fannie production that backed these bonds have had both tremendous HPA as well as very fast prepayment speeds until mid last year, both of which have helped to substantially de-risk the bond.

Both of which have helped to substantially de risked the bonds. Additionally.

Speaker 6: Additionally, unlike floating-weight borrowers that have been constrained by increasing debt service costs, these borrowers have locked in 30 years of very low fixed rate payments. And now wage grains are driving their debt to income ratios even lower.

Additionally, unlike floating rate borrowers that are being screened by increasing debt service costs. These borrowers have locked in 30 years of very low fixed rate payments and now wage gains are driving their debt to income ratio is even lower.

Speaker 6: Combine this with a large GSE bond tendering program this year, and you have a combination of great fundamentals and great technicals, which has driven strong total returns. This is a good example of the breadth of Ellington's investment expertise and the flexibility of our mandate helping to drive EFC's total return.

Combine this with a large GSE bond tendering program. This year and do you have a combination of great fundamentals, great Technicals, which has driven strong total returns. This is a good example of the breadth of Ellington's investment expertise and the flexibility of our mandate, helping to drive <unk> total return.

Speaker 6: On slide eight, you can see the larger agency portfolio is discussed. And on slide nine, you can see that through Longbridge, we added private label reverse, which we view as an exciting and growing part of the reverse mortgage market.

On slide eight you can see the larger agency portfolio as discussed.

<unk> nine you can see that through Longbridge, we added private label reverse, which we view as an exciting and growing part of the reverse mortgage market.

Speaker 6: On slide 19, you can see that our credit hedges grew substantially in the quarter. We added protection as index spreads tightened, both for those pending public MRE acquisitions and as a spread hedge for non-QM&H

On slide 19, you can see that our credit hedges grew substantially in the quarter. We added protectionist index spreads tightened both for those pending public with acquisitions and.

And as the spread hedge for non QM in agency.

Speaker 6: In terms of portfolio performance in the quarter, our RTL portfolio continues to chug along, generating substantial net interest income.

In terms of portfolio performance in the quarter, our RTL portfolio continues to chug, along generating substantial net interest income.

Speaker 6: One area of focus for us is working through our second quarter 2022 vintage loans, which were originated at the top of the housing market.

One area of focus for US is working through our second quarter 2022 vintage loans, which were originated at the top of the housing market.

Speaker 6: Some of these loans have extended their maturity because it has taken longer for the borrower to sell the property than they expected.

Some of these loans have extended their maturity because it has taken longer for the borrower to sell the property they expected.

Speaker 6: but we ultimately expect credit performance to be strong for these loans.

But we ultimately expect credit performance to be strong for these loans.

Given the Ltvs that we underwrote to.

Speaker 6: For newer vintages, including loans originated in Q4 2022 and Q1 2023, we are seeing strong, albeit still early performance.

For newer vintages, including <unk> loans originated in Q4 2022 in Q1 2023, we're seeing strong, albeit still early performance.

Speaker 6: Despite affordability challenges, home prices stabilized earlier this year and have been edging higher.

Despite affordability challenges home prices stabilized early this year and it's been edging higher.

Speaker 6: Meanwhile, our Commercial Bridge Loan Portfolio continued to pay down. We're starting to see some more interesting opportunities in that section.

Meanwhile, our commercial bridge loan portfolio continued to pay down and we're starting to see some more interesting opportunities in that sector.

Speaker 6: A lot has been written about the pullback of regional banks from lending and the recent Fed Commission SLUCE report confirms that's happening in real time. This is all great for Ellington Financial. We're seeing some high quality deals come to us that historically would have gone to regional banks. Also, the substantial cash flow stress in part of the commercial mortgage market is presenting us with more distressed and NPL opportunities.

A lot has been written about the pullback of regional banks, some lending and the recent Fed Commission sluice report confirms that is happening in real time.

Great for Ellington financial we are seeing some high quality deals come to us. They historically would have gone to banks.

Also the substantial cash flow stress and part of the commercial mortgage market is presenting us with more distressed and NPL opportunities. Those are exactly the kind of investments that we are the bread and butter of our commercial mortgage strategy. When we started over a decade ago.

Speaker 6: Those are exactly the kind of investments that were the bread and butter of our commercial mortgage strategy when we started over a decade ago.

Speaker 6: Sheridan Capital, our commercial mortgage loan originator and servicing partner, has been a great relationship for us so far and I expect them to be highly strategic for EFC going forward.

Sheridan capital, our commercial mortgage loan originator and servicing partner has been a great relationship for us so far and expect them to be highly strategic <unk> going forward.

Speaker 6: Not only are they generating operating profits now, but their expertise in construction, renovation, and property management further broadens EFC's own capabilities and expands the net in terms of what types of opportunities we can pursue.

Not only are they generating operating profits now, but their expertise in construction renovation and property manager management further broadens eft's own cap capabilities and experienced a net in terms of what types of opportunities we can pursue.

Speaker 6: Our portfolio of non-prem loans and retained tranches also performed well in the quarter. As Larry mentioned, that sector has attracted strong demand from insurance companies, which has helped solidify spreads, both for whole loan sales and securitization.

Our portfolio of non QM loans and retained tranches also performed well in the quarter as Larry mentioned that sector has attracted strong demand from insurance companies, which has helped solidify spreads both for whole loan sales and securitizations.

Speaker 6: Loan sales and securitization are now both viable and profitable exit strategies and provide some healthy competition for each other.

Loan sales and Securitizations are now both viable and profitable exit strategies.

And provide some healthy competition for each other.

Speaker 6: That's true for both EFC portfolio loans as well as productions from our originator affiliate.

That's true for both EMC portfolio loans as well as production from our originator affiliates.

Speaker 6: For EFC, our non-comb portfolio has shrunk substantially.

For <unk>, our non QM portfolio has shrunk substantially since half of last year when prices were quite depressed now with securitization spreads tighter and liquidity improved.

Speaker 6: and half of last year when prices were quite depressed. Now, with securitization spreads tighter and liquidity improved, we see a substantial opportunity to grow the portfolio again moving forward.

We see a substantial opportunity to grow the portfolio again moving forward.

Speaker 6: Our non-agency R&BS portfolio also had a strong quarter, led by CRT.

Our non agency MBS portfolio also had a strong quarter led by CRT we.

Speaker 6: We tend to increase allocations to non-agency RMBS when securities are cheap with loans. We have seen this dynamic a few times in the past nine months.

We tend to increase allocations to non agency MBS when securities or loans and we have seen this dynamic a few times in the past nine months.

Speaker 6: We constantly think about the relative value merits of loans versus securities. And pivoting some incremental capital between these two sectors is a great way to add excess return.

We constantly think about the relative value merits of loans versus securities.

And pivoting some incremental capital between these two sectors is a great way to add excess return.

Speaker 6: For our lone originator affiliates, it looks like the worst may be behind.

For a loan originator affiliates it looks like the worst may be behind us loan prices are creeping up and most of the volume is still well below 2021 levels. It has been stable and in some cases growing.

Speaker 6: Loan prices are creeping up, and while the volume is still well below 2021 levels, it has been stable and in some cases growing.

And agency MBS were modestly profitable for the quarter.

Speaker 6: In Aid and CMBS, we are modestly profitable for the quarter. There were some moments of very widespread from the quarter which we used to grow that portfolio. It's almost unimaginable how the opportunity set in that space has been recharged.

Just a moment to very widespread in the quarter, which we used to grow that portfolio. It's almost unimaginable, how the opportunity set in that space has been recharged.

Speaker 6: Fannie Six Nast closed in July at a lower price than where Fannie Two's traded just two years earlier.

<unk> closed in July at a lower price than where Fannie twos traded just two years earlier.

Speaker 6: The forward curve is telling us that the Fed is probably nearing the end of its hiking cycle, so some of the tail risk is probably taken out of the market, but rate volatility is yet to subside.

The forward curve is telling us that the fed is probably nearing the end of a tightening cycle. So some of the tail risk is probably taken out of the market, but rate volatility has yet to subside.

Speaker 6: Looking ahead, many sectors in our portfolio have very high unlevered asset yields, including RTL, commercial mortgage bridge, and non-trim loans, which gives strong support to our ADE and our dividend.

Looking ahead, many sectors in our portfolio have very high unlevered asset yields, including RTL commercial mortgage bridge and non QM loans, which gives strong support to our a D E and our dividend. These yields are a tailwind to be sure, but there were headwinds to origination.

Speaker 6: These yields are a tailwind to be sure, but there are headwinds too. Origination volumes are low and competition in many asset classes, especially from insurance companies, is fierce.

Origination volumes are low competition in many asset classes, especially from insurance companies is fierce we have a lot of work ahead to complete the Arlington, great Ajax acquisitions, but when we do the incremental capital and strategic investments should only enhance our ability to take advantage of a broad range of investment strategies now.

Speaker 6: We have a lot of work ahead to complete the Arlington and Great Ajax acquisitions, but when we do, the incremental capital and strategic investments should only enhance our ability to take advantage of a broad range of investment strategies. Now, back to Larry.

Back to Larry.

Thanks Mark.

Speaker 7: I am pleased with Ellington Financial's performance so far this year in what continues to be a fluid market.

I am pleased with Ellington Financial's performance, so far this year and what continues to be a fluid market.

Speaker 7: Despite the interest rate volatility, a regional banking crisis, and a difficult origination environment, EFC generated an annualized economic return of 7.4% through the first six months of 2023.

Despite the interest rate volatility, our regional banking crisis, and a difficult origination environment UFC generated an annualized economic return of seven 4% through the first six months of 2023.

Speaker 7: I think we're in a good position to grow adjusted distributable earnings going forward with wider net interest margins, both in credit and in agency, and at Longbridge as well with improving HECM gain on sale margins and that recent distressed MSR purchase.

I think we're in a good position to grow adjusted distributable earnings going forward with wider net interest margins both in credit and in agency and at long Ridge as well with improving heck am gain on sale margins and that recent distressed MSR purchase.

Speaker 5: And as Mark highlighted, we're benefiting from reduced competition from banks and our lending businesses, which could be another catalyst for strong, long-term risk-adjusted returns.

And as Mark highlighted we're benefiting from reduced competition from banks in our lending businesses, which could be another catalyst for strong long term risk adjusted returns.

Speaker 5: Of course, the pending acquisitions of Arlington and Great Ajax represent important milestones for Ellington Financial.

Of course, the pending acquisitions of Arlington, Great Ajax represent important milestones for Ellington financial.

Speaker 5: Each of these transactions will add strategic assets that complement and further diversify Ellington Financial's existing investment strategies and align with our expertise.

Each of these transactions will add strategic assets that complement and further diversify ellington financials existing investment strategies and align with our expertise.

Speaker 5: And by significantly increasing our scale and bringing us a substantial additional group of shareholders, these transactions should enhance the liquidity of our common stock while lowering our operating expense ratios to boot.

And by significantly increasing our scale and bringing us a substantial additional group of shareholders. These transactions should enhance the liquidity of our common stock while lowering our operating expense ratios to boot.

Speaker 5: We project that each of these transactions will be accretive to our earnings within the coming year.

We projected each of these transactions will be accretive to our earnings within the coming year.

Speaker 4: We expect to close both transactions before the end of 2023, at which time, EFC's equity base should exceed $1.7 billion. That would be around double our equity base at the end of 2019, right before COVID no longer exists.

We expect to close both transactions before the end of 2023 at which time you have six equity base should exceed $1 $7 billion that would be around double our equity base at the end of 2019 right before Covid no less.

Speaker 4: It is clearly a time of consolidation in the mortgage read space, and Ellington Financial's strong balance sheet and track record of steady returns have enabled us to be an attractive partner in these two transactions.

It is clearly a time of consolidation in the mortgage REIT space and the Ellington Financial's strong balance sheet and track record of steady returns have enabled us to be an attractive partner and these two transactions.

Speaker 4: When you consider the accretive impact to earnings that we are expecting from these M&A transactions, the benefits of increased scale, and the dry powder we have available for the attractive opportunities set in front of us, it is definitely an exciting time for Ellington Financial.

When you consider the accretive impact to earnings that we are expecting from these M&A transactions the benefits of increased scale and the dry powder, we have available for the attractive opportunity set in front of US. It is definitely an exciting time for Ellington financial.

Speaker 4: Finally, I'd like to close by addressing existing Arlington and Great Ajax shareholders.

Finally, I'd like to close by addressing existing Arlington and great Ajax shareholders. We hope you agree that these pending transactions should be highly attractive and accretive for you as well.

Speaker 4: We hope you agree that these pending transactions should be highly attractive and accretive for you as well.

Speaker 4: We look forward to introducing ourselves and our company to you, and we sincerely hope that your ownership continues. With that, I'll see you next time.

We look forward to introducing ourselves and our company to you and we sincerely hope that your ownership continues.

With that we'll now open the call up to questions.

Writer.

At this time, if you would like to ask a question. Please press star one on your telephone keypad.

Speaker 1: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing star 2. Again, to ask a question, please press star 1 on your telephone keypad.

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Again to ask a question please press star one.

Speaker 1: Our first question comes from Boz George with KBW. Please go ahead.

Our first question comes from Bose George with <unk>. Please go ahead.

Speaker 8: Hey, everyone. Good morning. I'm trying to figure out the just the impact of the pending acquisition. So there was, I guess it was like that 3.6 million of expenses related to the acquisition. And how much was the financial impact of the hedges that were in place, you know, ahead of the deal closing.

Everyone. Good morning. Thanks, Good morning, if you figure out.

Just the impact of the pending acquisition. So there was I guess it was like $3 6 million of expenses related to the acquisition and how much was the financial impact of the hedges that were in place.

The deal closing.

Speaker 4: Sorry, I mean that the bills haven't closed. I mean had at quarter end.

Sorry, you mean that the deals haven't closed had at.

At quarter end, I guess, maybe yeah actually I would say.

Speaker 8: Yeah, actually, I think the comment that you made that you had some interest rate hedges on.

I think the comment that you made that you had some interest rate hedges on.

Speaker 8: I guess in anticipation of the deals closing, is that right? Are these hedges? Yes, that's right. So, what the impact was there a financial impact related to that that was also running through earnings this quarter. Yeah, for Q2 the impact of those hedges were not material, were very small. And you got it, the 3.6 million is the right number of expenses that we put through related to that.

I guess in anticipation of the deal closing is that right.

Yes.

That's right. So just curious what the impact was there a financial impact related to that that was also running through earnings this quarter for Q.

For Q2, the impact of those hedges were not material were very small.

You got it at three six and $3 $6 million is the right number of expenses that we put through related to the transactions in the second quarter.

Speaker 8: Okay, and then for the second half of the year or just before the deal until the deal closes, is there much in terms of transaction expenses or is this kind of the bulk?

Okay, and then for the second half of the year or just before the deal until the deal closes is there much in terms of transaction expenses or is this kind of the bulk of it.

Speaker 4: There are, you know, the banker fees are success-based, right? So, and then, you know, then otherwise the expenses are taken as incurred. So, we still have more, you know.

There are.

The banker fees are.

Right, So thats right and then than otherwise.

Fences are taken as incurred so we saw more legal work to do between now and then so it's.

Speaker 4: between now and then. So it's, um, chemicals are those are the big uh...

Yes, it goes it doesn't pick up.

The primary components.

Speaker 8: OK. And then just on the MSR, the distressed reverse MSR you acquired, how much capital did that entail?

Okay, and then just on the MSR the distressed reverse MSR you acquired how much capital did that entail.

Negligible.

Speaker 8: Okay. And then just one on excess capital. How would you characterize your, sort of your dry powder? Are you keeping some excess also ahead of the acquisition?

Okay.

And then just one on excess capital.

How would you characterize sort of your dry powder.

Keeping some excess also the head of the acquisitions.

Speaker 4: Sure, so we had cash of 195, which is about 15% of our NAV. So, you know, we keep 10 to 15% typically. Other encumbered assets of 340 million and leverage on agency was about six times. So, between those two categories, we could probably add in 2022. We were a range of 2.3 to 2.7 times recourse debt equity.

Sure. So we had cash of 195, which is about 15% of our NAV. So we keep 10% to 15%.

Typically.

Other encumbered assets of $340 million.

And leverage on agency was about six times so between those two categories.

We could probably add in 2022, we were a range of two three to two seven times recourse debt to equity two.

Speaker 4: 2019, we are 262629, 2019 with granted a larger allocation of capital to agency. But from our 2.1 today, we could pretty comfortably get into the 2.5 area just based on what's unencumbered and additional borrowings passed beyond assets that are financed.

2019 were $2 six to six to nine 2019 was granted a larger allocation of capital to agency, but from our $2 one today.

We could I think pretty comfortably get into the two two and a half area.

Just based on whats unencumbered, an additional borrowing capacity on an assets that are finance.

Okay, great. Thank you.

Thank you Frank.

Speaker 1: Thank you. We'll take our next question from Crispin Love with Piper Sandler.

Yeah.

Thank you we'll take our next question from Crispin Love with Piper Sandler.

Speaker 9: Thanks, appreciate you taking my questions. In the release and on the call, you mentioned credit strength and low levels of losses, but a pickup in delinquencies. I'm just curious if you could expand on that a little bit. What levels of delinquencies are you seeing? And are they primarily in the commercial portfolios and RTL? Or are there any other areas worth calling out?

Thanks, I appreciate you taking my questions and the release and on the call you mentioned credit strength and low levels of losses, but.

Pickup in delinquencies I'm, just curious if you could expand on that a little bit what levels of delinquencies are you seeing and are they primarily in the commercial portfolios in RTL or are there any other areas worth calling out.

Speaker 4: Sure, so it's really the RTL and commercial bridge where we're seeing upticks. And I know, Mark, if you want to speak qualitative to those, I mean, they're still, I think, small in the scheme of things. Certainly, the credit losses are small. The Q tomorrow will flush out those precise numbers. But I don't know, Mark, if you want to talk about the trends, especially that we're seeing in RTL, which I think you got into a bit in your prepared remarks, but maybe expand on that theme.

Sure.

It's really that RTL in commercial bridge, where we're seeing upticks.

And Mark if you want to speak qualitative to those I mean, there is still I think small in the scheme of things and certainly the credit losses are small the Q tomorrow, what will flesh out those precise numbers I don't have Mark do you want to talk about the trends, especially than we're seeing in <unk> and <unk>, which I think you've got into a bit in your prepared remarks that maybe <unk>.

Spanned on ethane.

Speaker 6: Yep. Hey, Crispin. So, um, yeah, I mentioned in

Yeah, Hey, Chris So I mentioned.

And in my comments that.

Speaker 6: The second quarter of 2022 for most areas represented the peak at home prices. And then they sort of drifted lower second half of last year. And now they've been gradually increasing, I believe last year, you know, last year, four months, you know, the most recent three or four months of this year. So what happens is

The second quarter of 2022 for most areas represented the peak at home prices and then they sort of drifted lower second half of last year and now they've been gradually increasing I believe last year last three or four months at the most recent three or four months of this year. So what.

Happens is.

Speaker 6: The construction partners that we lent money to that bought homes in the second quarter of 2022

The.

<unk> partners that we lent money to do that bought homes in the second quarter of 2022.

Speaker 6: when they went to sell the properties, it was taking them a little bit longer to sell the properties than we have historically seen. So we have a model informed by historical data that looks at a lot of different features, how complex the renovation is, and geography and all that stuff. And we could see the second quarter 2022.

When they went to put the property sell the properties it was taken them a little bit longer to sell.

Sell the properties than we have historically seen so we have a model informed by historical data to that.

It looks a lot different features how complex the renovation is in geography, and all that stuff and.

And we could see the second quarter 2022.

The houses were on the market for a little bit longer. It also took them a little bit longer to finish.

Speaker 5: the houses were on the market for a little bit longer. It also took them a little bit longer to.

Speaker 5: finished the reservation. So we're working through that.

Finish the reservation, so we're working through that.

Speaker 5: You know, it's been a focus. Everything's going pretty well. And what you see now is home prices sort of stabilized now started to pick back up a little bit that trend. We don't see that trend anymore. So now sort of the fourth quarter of 2022 and the first quarter of 2023. Those resolutions are coming at sort of exactly the rate that we would have predicted.

You know it's been a focus everything is going pretty well and what you see now as home prices sort of stabilize now started to tick back up a little bit.

That trend, we don't see that trend anymore. So now sort of the fourth quarter of 2022, and the first quarter of 2023, those resolutions are coming at sort of exactly the rate that we would have predicted.

Speaker 5: I don't think it's really going to be a performance issue. I just think it's going to be a little bit of a timeline extension. And you know, there are extension fees and so, you know, there's sort of, um, economics that can recruit a company, one to alone, do extend. But I just wanted to mention it because it's just, um, you know, it was a trend.

So I don't think it's I don't think it's really going to be a performance issue.

I think it's gonna be a little bit of a timeline extension and you know there are extension fees and so no. There is sort of economics that can accrue to a company when do extend but I just wanted to mention it because it's just.

It was a trend.

Speaker 5: that we have been focusing on for the last few months and something we've been working through.

You know that we had been focusing on for the last few months and something we've been working through.

Speaker 9: Thanks Mark and Jared, appreciate all the color there. And just one last one from me. Mark, can you talk a little bit about the distress NPL opportunities you're seeing in the market? Sounds like you've begun to see some opportunities. So curious if you've bought any yet and what are the key areas in CRE where you expect the majority of these NPL opportunities over the next several years?

Thanks, Mark and Jay I appreciate all the color there and just one last one from me Mark can you talk a little bit about the distress NPL opportunities youre seeing in the market. It sounds like you've begun to see some opportunity. So curious if you bought any yet and are there and what are the key areas in Cree, where you expect the majority of these.

NPL opportunities over the next several quarters.

Speaker 5: So yeah, no, that's a great question. They're coming in two flavors, right? So the first flavor is you're seeing in the CMBS market, so commercial mortgage backed securities, not loans, you're seeing in CMBS.

So yeah no. That's a great question Theyre coming in two flavors right. So the first flavor is you were seeing in the sea MBS market. So commercial mortgage backed securities not not loans youre seeing in see MBS.

Speaker 5: you know, tranches that had been previously investment grade and came to market as an investment grade and traded it, you know, relatively tight spread. Say, you know, inside you have 150, 170 to the curve when they were priced, you know, when those markets were priced, you know, you had a lot of people with a lot of people that were not in the market.

No tranches that had been previously investment grade and came to market from guests with great traded at relatively tight spreads say you know inside you have 150 170 to the curve where they were priced.

When those markets came to market.

Speaker 5: Some of those prices now are down substantially, so sub $50 price. Some of them are.

Some of those prices now are down substantially so sub $50 price some of them are.

Speaker 5: single-asset, single-borrower deals. Some are more just conduit deals where the amount of delinquency is high relative to the enhancement levels. So the market is pricing in a recovery less than par. And I'd say, you know, in the past month or so, we've seen a pickup in that. So that's exciting for us. Now, the other area is going to be just delinquent mortgage loans. And that used to be...

A single asset single borrower deals some of them are more just conduit deals where the amount of delinquency is high relative to the enhancement levels. So the market is pricing in a recovery less than par and.

I'd say you know in the past month or so we've seen a pickup in that so that's exciting for US now the other area is going to be just delinquent mortgage loans and that used to be.

Speaker 5: pretty much the main thing we did in our commercial strategy going back 2010, 2011.

Pretty much the main thing we did in our commercial strategy going back 2010 2011.

Then it you know that opportunity dried up there was a great opportunity and bridge origination we pivoted, but now we're seeing that opportunity, we think it's going to come back on.

Speaker 5: you know, that opportunity dried up. There was a great opportunity in bridge origination. We pivoted, but now we're seeing that opportunity. We think it's going to come back.

Speaker 5: on non-performant commercial loans. And there's obviously been some of these bank takeovers by the FTC is going to add some volume. But away from that, we've...

Nonperforming commercial loans and there's obviously been you know some of these are backed takeovers by the FTC is going to add some volume but away from that we've.

Speaker 5: I've seen some opportunities where you're buying loans at substantial discounts to par, right? And that I would characterize, you know.

<unk> seen some opportunities where you're buying loans at substantial discounts to par right now, but I would characterize you know below 75 cents in the dollar and its really more of a real estate play as opposed to.

Speaker 5: below 75 cents on the dollar and it's really more of a real estate play as opposed to

Speaker 5: just you know, you're putting out capital to earn your coupon, right? And so that is early stages.

Just you know you're putting out capital to earn your coupon rate and so that is early stages.

Look you know we mentioned that sluice.

Speaker 5: that senior loan officer opinion survey, right, that banks

That senior loan officer opinion survey right that.

Banks are.

Speaker 5: probably going to be, depending on the size, probably going to be in an environment where they're going to have more capital requirements.

Probably going to be depending on the size of it probably going to be in an environment, where they're going to have more capital, they're going to have more capital requirements.

Speaker 5: they're probably going to have more regulatory scrutiny upon some of the commercial activities and delinquent loans.

They're probably going to have more regulatory scrutiny upon some of the commercial activities.

<unk> loans.

Speaker 5: And so we think that there are going to be loans that come to maturity where the new loan is going to have to be smaller in size than the old loan. And that's sort of the catalyst for opportunity. Either a bank might want to sell a loan at a discount.

And so we think that theyre going to be loans that come to maturity, where the new loan is going to have to be smaller in size than the old loan.

And that's that sort of the catalyst for opportunity either you know a bank might want to sell loans at a discount or youre going to need a partner to come and inject some capital. So it's early stages, but we.

Speaker 5: or you're going to need a partner to come and inject some capital. So it's early stages, but

Speaker 5: We think that that's going to be a big, persistent opportunity.

We think that that's going to be a big persistent opportunity.

Speaker 5: And it's an opportunity set that requires a very specific set of expertise on a part of a manager. And we have...

It's an opportunity set that requires a very specific set of expertise on a part of a manager and where we have we have a lot of resources that have a lot of experience in that area. We've done a bunch of it and so I think that we are excited that that's going to be a place that we can do.

Speaker 5: You know, we have a lot of resources that have a lot of experience in that area. We've done a bunch of it. And so I think that we are excited that that's going to be a place that we can deploy a lot of capital. And have and deploy in an area where we can have very high expected returns.

A lot of capital and have and deploy and in an area, where we can have very high expected returns.

Yeah.

Thanks for that I appreciate the answers.

Thank you we'll take our next thank you we'll take our next question from Doug Harter with credit Suisse.

Speaker 1: Thank you. We'll take our next question from Doug Harter with Credit...

Speaker 10: Thanks. Can you talk about how you're balancing diversification and the benefits of that across all the opportunities? I know this is a very exciting subject but unfortunately we can kind of get the twitter channel moving.

Alright. Thanks.

Can you talk about how you're balancing.

Diversification and the benefits of that across all the opportunities and some personnel.

Speaker 10: kind of the ability to have scale and kind of be larger in any of those opportunities.

The ability to have scale and kind of be larger than in any of those opportunities.

And then I don't know if I'm sorry.

Speaker 5: No, you go ahead, Mark. Yeah, sure. I was just going to say, so it's a very interesting question.

No. You go ahead Martin Yeah sure I was just going to say so it's a very interesting question. There are certain sectors that you have substantially better economics. If you have scale. So I think non QM is a great example, right. If you are and we went through this back in 2017, where our origination volumes were $30 million.

Speaker 5: there's certain sectors that you have substantially better economics if you have scale so i think non-cure music great example right if you are and we went through this back in 2017 when our origination volume for thirty million bucks a month from our origination partners it was taken a year to ramp to a deal that means you got to have you know loans on repo for a year and you're hedging for a year and securization mark change a lot and so

A month from our <unk>.

Nation partners. It was taken a year to ramp to a deal. So that means you got to have you know loans on repo for a year and your hedging them for a year and securitization market can change a lot and so.

Speaker 5: Now, you know, we have much greater volume. We can ramp to deal size much quicker. You have better economic time, your transactions. We kind of have a virtuous cycle of being a repeat issuer that we get sort of tighter spreads than sort of the new originator. So scale, no question there is super helpful. And.

Now we have much greater volume, we can ramp to deal size much quicker you have a better economics on your transactions, but kind of a virtuous cycle being a repeat issuer that we get sort of tighter spreads than sort of new originators. So scale. No question. There is super helpful and.

Speaker 5: You know, EFC has got to have enough capital and these acquisitions are going to help us with that. We've got to have enough capital to have scale in all the major businesses, right? So non-scale matters. I think in RTL it matters too. You've got to be a meaningful takeout for your partners. You've got to have meaningful loan balances to get the best levels from your repo counterparties. Commercial bridge, same thing. We have a lot of repeat...

<unk> got to have enough capital and these acquisitions are going to help us with that we got to have enough capital to have scale in all the major businesses right so scale matters.

I think in RTL it matters to you got to be a meaningful take out for your partners.

Gotta have meaningful loan balances to get the best levels can be repo counterparties.

Commercial bridge same thing we have a lot of repeat.

Speaker 5: You know, we have a lot of repeat customers, people that have borrowed from us in the past, had a good experience. They come back, seem to have capital to be available when...

Yeah, we have a lot of repeat customers people that are far from us in the past had a good experience they come back it seemed to have capital to be available when.

Speaker 5: you know, some of your partners have another property they want to buy and you are like-minded with them on the value proposition. I don't-

Some of your partners have another property they want to buy and you are like minded with them on the value proposition.

I don't.

Speaker 5: You know, I think we have enough. But I think we have enough.

You know I think we have enough right I think we have enough.

Speaker 5: I'm excited Larry mentioned it, but one thing with Arlington is we're getting into servicing, right? And servicing has been, it's an interesting sector. It's a sector where our core competence in understanding prepayments as a function of interest rates and loan attributes is gonna matter a lot in being able to value and hedge those investments appropriately. And so with Arlington, we're getting scale in that sector. And that's another sector where you need to have scale to be meaningful. So.

I am excited Larry mentioned, it but one thing with Arlington is we're getting into servicing right in servicing has been it's an interesting sector.

It's a sector, where our core competence in understanding prepayments as a function of interest rates and loan attributes is going to matter a lot in being able to value and hedge those investments appropriately and so with Arlington, we're getting scale in that sector and that's another sector, where you need to have scale to be meaningful so.

Speaker 5: You know, I think like you hadn't seen this venture into something like that a couple years ago. And maybe part of the reason was just it was hard to get to scale. Do you have enough capital? So that that happened. The bigger capital base.

You know I think like you hadn't seen this venture into something like that a couple of years ago and maybe part of the reason was just it was hard to get to scale do you have enough capital. So.

That happened the bigger capital base.

Speaker 5: is going to be really important because it lets you be scale at a range of things that help you diversify in the servicing. It's potentially a huge diversification because that's a negative duration asset. Pretty much everything else we have is kind of floating rate, so zero duration or positive duration asset. So that can really help you know servicing is an eye-op play. Now with distress in the agency market, and non-Agency market we have a lot of discount security. So...

He is going to be really important because it lets you be scale at a range of things that help you diversify and the servicing is potentially a huge diversification because that's negative duration asset pretty much everything else. We have is kind of floating rate zero duration or positive duration assets. So that can really help you know servicing is now.

Hey, now with distress in the agency market and non agency market, we have a lot of discount security so.

Speaker 5: That's a good question. It's something we think about and I think

Yeah.

That's a good question, it's something we think about and I think.

Speaker 5: We have enough scale for all the things that are most of interest to us right now.

We have enough scale for all the things that you're most of interest to us right now.

Speaker 4: And I would just add, thanks Mark, I would just add that.

And I would just add thanks, Mark I would just add that.

Speaker 4: Diversification for a long time for Ellington Financial has been really important. I mean, we recognize that a lot of our peers...

Diversification for a long time for Ellington financial has been really important.

We recognize that.

There are a lot of our peers.

Speaker 4: are more focused in particular sectors, right, in the mortgage read space. I mean, you have

Our more focused in particular sectors right in the mortgage REIT space I mean, you have obviously commercial reservoirs.

Speaker 4: commercial versus with versus residential you've got You know agency versus non-agency securities versus loans

Versus residential you've got.

Agency versus non agency securities versus loans.

Speaker 4: But it's really important to us.

And.

But it's really important to us.

Speaker 4: that we can rotate and be affirmative in terms of how we allocate capital to where we see the best opportunities at each point in time. Now to do that obviously, you need to have dry powder, you need to be able to take advantage of liquidity in your portfolio and have sometimes a trading mentality. I think we have all those things.

That.

We can rotate and.

The affirmative in terms of how we allocate capital to where we see the best opportunities at each point in time now to do that obviously.

You need to have dry powder you need to.

Be able to take advantage of liquidity in our portfolio and have sometimes a trading mentality I think we have all of those things.

Speaker 4: But when you think about how opportunities go in and out, and dangers go in and out of all these different sectors, it's been really important to us to be able to kind of dial up and down, as we've been doing with non-QM and as we've been doing recently.

When you think about how opportunities go in and out and dangerous go in and out of all of these different sectors.

<unk> been really important to us to be able to kind of dial up and down.

As we've been doing with the non QM and as we've been doing recently.

Speaker 4: with our commercial mortgage bridge where we've been letting that portfolio run down a bit and then because we see the opportunity in the horizon coming.

With our commercial mortgage bridge, where where we've been letting that portfolio run down a bit and then because we see the opportunity in the horizon coming.

Speaker 4: So, again, it all helps the fact that we've got a short duration portfolio that's spitting out a lot of cash, often in terms of the form of principal repayments that can help us maintain that dry pattern, can help us allocate capital differently in relatively short periods of time compared to what other companies can do. So I think that's been really important to our success and I think it's going to continue to be really important going on.

So and again all helps the fact that we've got a short duration portfolio. That's spitting out a lot of cash often in terms of.

The form of principal repayments that can help us maintain that dry powder and can help us.

Allocate capital differently in relatively short periods of time compared to what other companies can do so I think that's been really important to our success and I think it's going to continue to be really important going forward.

Speaker 10: I appreciate that answer. And then, you know, just you guys have been focused on kind of shorter duration assets.

I appreciate that answer and then just you guys have been focused on kind of shorter duration assets.

Speaker 10: Any change to that, you know, kind of, you know, given, given where returns are today, would you be willing to kind of take more longer duration assets, or do you still like that shorter duration?

Any sense of that you know kind of a.

Given given where returns are today, what's been willing to kind of take more longer duration assets or do you still like that.

That's shorter duration asset.

Speaker 4: Well, I mean, I think, you know, if you, if you look at, it's interesting, right? There's some longer duration assets like non QM, you know, that's not a short duration asset. And reverse mortgage loans are not a short duration assets, but, you know, they're securitizable. And now, you know, we've been talking about whole loan sales.

Well I mean, I think if you look at it's interesting right theres some longer duration assets like non QM, that's not short duration asset.

And reverse mortgage loans are not a short duration assets, but.

Theyre securitize the ball.

And now we've been talking about whole loan sales.

Speaker 4: I think there were just some very interesting opportunities to...

I think there was just some very interesting opportunities too.

Speaker 4: know, to get good profits, you know, and realize those profits in different ways. So yeah, but in general, I think we intend or inclined to keep duration short, especially seeing how, you know, there are opportunities that, you know, are pretty visible now that could be coming around the corner, like in

To get good good profits.

And realize those profits in different ways.

So yes, but in general I think we are.

In tandem are inclined to keep the duration short, especially seeing.

There are opportunities that are pretty visible now.

That could be coming around the corner like in.

Speaker 4: commercial mortgage bridge in distress and distressed opportunities.

Commercial mortgage bridge.

In distress and distressed opportunities.

Speaker 4: in the reverse mortgage space that Longbridge has been able to take advantage of, starting at the end of last year.

In the reverse mortgage space that Longbridge is has been able to take advantage of.

Starting at the end of last year.

Speaker 4: when, in the beginning of this year, when it acquired some of those buyout loans that, you know, look like are going to be very profitable. And that distressed acquisition of mortgage servicing rights that happened in early July that we think we'll see more opportunities there as well.

When and beginning of this year when it acquired some of those buyout loans.

At <unk>.

It looked like are going to be very profitable.

And that distressed acquisition of mortgage servicing rights.

In early July that we think.

We will see more opportunities there as well.

It's Ed.

Yeah.

Speaker 4: sector that's where there's not a lot of competition as you know.

It's a sector thats, where theres not a lot of competition is as I'm sure you know.

Great appreciate it thank you.

Thank you we'll take our next question from mechanic Oberman with JMP Securities.

Speaker 1: Thank you. We'll take our next question from Michael Goberman with JMP Security.

Speaker 11: Hey guys, good morning. Most of my questions have already been answered, but if I could just squeeze in one more. If you guys are seeing any M&A type opportunities outside of the reach space at the moment, or you kind of taking a step back and digesting.

Hey, guys. Good morning, most of my questions have already been answered, but if I could just squeeze in one more.

If you guys are seeing any M&A type opportunities outside of the REIT space at the moment.

Or are you kind of taken it taken a step back and digesting the two that you've just completed thanks.

Speaker 4: Right, well, we're not looking at any controlling interests. We always have our antenna out there and are pursuing with various levels.

Right well, we're not we're not looking at any controlling interests. We are we always have.

Our.

10 out there and are pursuing with various levels.

Speaker 4: of intensity taking.

Of.

<unk> intensity, taking <unk>.

Speaker 4: Stakes, modest stakes usually in small originators. So we still have some

Stakes modest stakes, usually and smaller originators, so we still have.

Some.

Speaker 4: I wouldn't even call it necessarily deals on a pipeline there, but it certainly deals that we're exploring. Nothing tremendous in the material at this point, and nothing that would be controlling at this point. Thank you.

I wouldn't even call it necessarily deals in the pipeline there, but certainly deals that we're exploring but nothing nothing tremendously material at this point.

And nothing that would be controlling at this point.

Alright, Thanks, guys. Good luck best of luck going forward.

You too.

Thanks.

Speaker 1: Thank you. We'll take our next question from Eric Hagan with BTIG.

Thank you we'll take our next question from Eric Hagen with <unk>.

Speaker 12: Hey, thanks. How are we doing, guys? You know, looking at the MSR, following up on the MSR here, I'm just curious how big you guys think you can get in that strategy, how much capital you can devote there. You know, we've seen other companies run the paired MSR MBS strategy. Just wondering how you might run that strategy any differently than the stocks do now. Have you guys even managed that strategy historically at Ellington?

Hey, how are you doing guys.

Looking at the MLP following up on the MSR here I'm just curious how big you guys think you can get in that strategy, how much capital you can devote there.

We've seen other companies run the paradigm SRM MBS strategy, just wondering how you might run that strategy any differently than the stocks do you now have you guys, even manage that strategy historically at Ellington.

Speaker 12: even more broadly in any performance results you can share from being an MSR investor in the past. Thank you.

Given more broadly and any performance results you can share from being an MSR invested in the past. Thank you.

Speaker 4: Sure. So, okay. So let's.

Sure.

So okay, so let's see.

Speaker 4: Let's let's take that one at a time. So in terms of whether we've acquired MSR's in the past I think you know, let's not talk about Longbridge For now when we acquired that that was obviously acquiring as well an MSR business, but the answer is no We this is the first time

Let's let's take them one at a time so in terms of whether we've acquired msr's in the past.

I think let's not talk about Longbridge for now, but when we acquired that that was obviously acquiring as well an MSR business, but the answer is no.

We this is the first time.

Speaker 4: that when we close the Arlington transaction, that'll be the first time that we have such a.

That.

When we close the Arlington transaction that'll be the first time that we have.

Such a.

Speaker 4: such an interest in mortgage servicing rights, residential mortgage servicing rights of any substantial size. It always marked me

Such an interest in mortgage servicing rights residential mortgage servicing rights of any substantial size.

But as Mark mentioned this is right up our alley in terms of in terms of the.

Speaker 4: you know, right up our alley in terms of the

Speaker 4: the prepayment characteristics, which are, of course, the main driver of returns in that.

The prepayment characteristics, which are of course, the main driver of returns in that.

Speaker 4: and we'll work with...

And.

We'll work with that.

Speaker 4: third party master servicers probably to start with.

Third party Master Servicers, probably to start with.

And.

Speaker 4: You know, I think that could grow pretty big. The portfolio that we're acquiring, you know, is kind of a, you know, it's at scale. And, you know, one nice thing in that market is that you can bolt on smaller size packages at a lot of times.

I think that could grow pretty pretty big.

The portfolio that we're acquiring.

Is kind of a.

It's at scale.

And one nice thing in that market is that you can bolt on smaller sized packages at.

Lot of times.

Speaker 4: much lower prices, sometimes the bigger packages trade.

Much lower prices, sometimes the bigger packages trade.

Speaker 4: at higher prices in the smaller packages. But yeah, so I think we do plan to have a little bit of a roll up strategy there, certainly in the beginning. But I see no reason as long as, frankly, financing is there, continues to be there at attractive levels to be able to finance the MSR's, that's gonna be key. But the yields that they're trading at,

At higher prices than the smaller packages, but yes. So I think we do plan to have a little bit of a.

Of a roll up strategy there certainly in the beginning but I see no reason as long as frankly financing as there continues to be there at attractive levels to be able to finance the msr's, that's going to be key.

But.

The yields that they're trading at.

Speaker 4: given the risk profile and given the financing costs that are available currently.

Given the risk profile.

And given the financing costs that are available currently.

Speaker 4: you know, make it an attractive strategy. It's not a trading strategy.

<unk>.

An attractive strategy, it's not a trading strategy.

Speaker 4: Right. So I think just consistent with what I was saying before, it's not going to be, I don't think a huge part of our portfolio anytime soon, but it's something that I think.

Alright.

So I think just.

Consistent with what I was saying before it's not going to be.

Thank you.

A huge part of our portfolio anytime soon but it's something that I think continues to that will continue to add to and diversify returns and can achieve well.

Speaker 4: that will continue to add to and diversify returns and can achieve well into mid teens returns or not higher on a leverage basis.

Well into mid teens returns are not higher.

On a leverage basis.

Speaker 5: Yeah, I just wanted to add one thing. I think how we're going to think about it relative to our peer group.

Yeah I just wanted to add one thing I think how we're going to think about it relative to our peer group.

Speaker 5: We're probably going to take more of a relative value view, so like

We're probably going to take more of a relative value view so like.

Speaker 5: You know, I don't exactly replicate servicing. There's late fees and recapture and float, but like they're kissing cousins, right? So I think we'll be more focused on relative value if the IOMarket gets cheaper servicing.

You know I don't exactly replicate servicing theres late fees and recapture and float but like.

Kissing cousins right. So I think we'll be more focused on relative value if the io market gets cheap to servicing you'll.

Speaker 5: You'll see us put capital there. If servicing gets cheap to IO, then the pendulum swings towards servicing. So I think that's one thing we'll do that others don't do. What's interesting about the opportunity set now is just the way we think about prepayments and the way a lot of our models work is we tend to believe in technology and efficiencies that can make prepayments very fast on larger loans when they get in the money, right? So if you look at like...

You'll see us put capital there if servicing gets cheap to io than the pendulum swings towards servicing. So I think that's one thing we will do that others don't do what's what's interesting about the opportunity set now with just the way our the way, we think about prepayments and the way a lot of our models work as we tend to believe in technology.

Inefficiencies that can make prepayments very fast on larger loans when they get the money right. So if you look at like.

Speaker 5: buying servicing in 2021, right, you were buying new production stuff, larger loans, you know, a lot of nonbank, you know, rocket, UWM efficient servicers. And so we kind of saw an S curve on those kind of loans that can get very fast and they get in the money. And that turned out to be the case, right? What you have now, though, you have a giant pool of loans that are, you know,

Following servicing in 2021, right you were buying new production stuff larger loans, you know a lot of non bank rocket new Wm efficient servicers and so we kind of saw a S curve on those kind of loans that can get very fast and they get in the money and that turned out to be the case right where you have.

Now, though you have a giant pool of loans that are you know.

Speaker 5: well over 200 basis points out of the money. So it's more of a turnover play. It's more of a seasonal play. And I think that

Well over 200 basis points out of the money. So it's more of a turnover play it's more of a seasonal play and I think that.

Speaker 5: We just see a little bit better relative value in that market.

We just see a little bit relative better relative value in that market. So.

Speaker 5: There's that makes it more interesting now maybe a few years ago and also too, just that the banks have pulled back. They're not nearly as big a force in Fannie, Freddie origination as they used to be. And those were the back, it was Wells Fargo, it was JP Morgan, it was Bank of America that from time to time had really lofty servicing valuations, cause they, you know, they had cross sell and all this other stuff. Now is it kind of a non-bank world in the agency space, valuations have come down. I think it's a good sector for us.

Does that makes it more interesting now maybe a few years ago and also to just that the banks have pulled back they're not nearly as big a force and Fannie Freddie originations that used to be and those were the bad. It was wells Fargo. It was Jpmorgan with bank of America that from time to time had really lofty servicing valuations because they you know they had cross sell them.

So this stuff now as it's a kind of a non bank world in the agency space valuations have come down.

Think it's a good sector for US now so it's sort of like it's been this evolution in who's originating mortgages at this rate move that you have a big pool of way out of the money stuff, which we like and that you know just things lined up and through Arlington, we're able to get to scale pretty quickly.

Speaker 5: So it's just sort of like it's been this evolution in who's originating mortgages. It's this rate move that you have a big pool of way out of the money stuff, which we like, and that, you know, just things lined up and through Arlington, we're able to get to scale pretty quickly.

Yes, that's really helpful commentary. Thank you guys.

Thank you.

Speaker 1: Thank you. That was our final question for today. We thank you for participating in the LNC 2020-2023 Earnings Conference call. You may disconnect your line at this time, and have a wonderful day.

Thank you that was our final question for today, we thank you for participating in the Ellington Financial's two.

2023 earnings conference call.

Disconnect. Your line at this time and have a wonderful day.

Yes.

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