Q4 2023 Ellington Financial Inc Earnings Call
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Operator: Welcome to the Ellington Financial fourth quarter and full year 2023 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in listen-only mode.
Welcome to the Ellington financial fourth quarter, and full year 2023 earnings conference call.
Today's call is being recorded.
At this time, all participants have been placed on listen only mode.
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Operator: Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Aladin Shillay. You may begin.
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It is now my pleasure to turn the call over to Aldi and Shirley you.
You may begin.
Aladin Shillay: Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K and Part 2, Item 1A of our quarterly report on Form 10-Q, forward-looking statements are subject to a variety of risks and uncertainties that could cause a company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events.
Thank you before we start I would like to remind everyone that certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements are not historical in nature as described under item one a of our annual report on Form 10-K, and part two item one.
<unk> quarterly report on Form 10-Q forward looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs expectations estimates and projections. Consequently, you should not rely on these forward looking statements as predictions of future events statements made during this conference call are made as of the date of this call.
Larry Penn: Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Tokoski, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, EllingtonFinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in the presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry. Thanks, Eladine, and good morning, everyone.
The company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I'm joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark to Koskey Co Chief Investment Officer, and Jr. Herlihy, Chief Financial Officer of ESG as described in our earnings press release, our fourth quarter earnings Conference call presentation is available on our website Ellington financial Dot Com <unk>.
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.
Thanks, Dan and good morning, everyone.
Larry Penn: As always, thank you for your time and interest in Ellington Financial. I'll begin on slide three of the presentation. For the fourth quarter, we reported net income of $0.18 per share from a GAAP perspective, while our adjusted distributable earnings were $0.27 per share from an economic return perspective. Strong performance from our Residential Transition Loan Portfolio and our agency and non-agency MBS didn't quite offset merger-related dilution and expenses, together with net losses from Longbridge and other facilities, leading to a small negative economic return overall for the quarter. That did drop during the quarter, but it should recover as Longridge continues to build towards profitability, as we work out a few non-performing commercial mortgage loans and REO assets, and as we continue to deploy new capital and rotate capital into higher-yielding sectors. That said, management expects to recommend to the board a reduction of the monthly dividend from $0.15 to $0.13 per share beginning in March. It is understood that all dividends are ultimately determined by the board.
As always thank you for your time and interest in Ellington financial.
I'll begin on slide three of the presentation.
For the fourth quarter, we recorded net income of <unk> 18 per share from a GAAP perspective.
Our adjusted distributable earnings were 27 cents per share.
From an economic return perspective strong performance from our residential transition loan portfolio and our agency and non agency MBS didnt quite offset merger related dilution and expenses together with net losses from Longbridge in other positions leading to a small negative economic return overall for the quarter.
Looking at our adjusted distributable earnings or <unk> metric that did drop during the quarter, but it should recover as long ridge continues to build towards profitability.
Work out a few nonperforming commercial mortgage loans, and Oreo assets and as we continue to deploy new capital and rotate capital into higher yielding sectors.
That said management expects to recommend to the board a reduction of the monthly dividend from 15 to 13 cents per share beginning in March is being understood that all dividends are ultimately determined by the board.
Larry Penn: I would note that this is just one penny below the $0.14 per share monthly dividend level we set a full five years ago when we first shifted from a quarterly to a monthly dividend. In mid-December, we completed the merger with Arlington, which immediately added scale, taking EFC's equity base above $1.5 billion, and which further strengthened our balance sheet, as the merger included the assumption of Arlington's low-cost, long-term, unsecured debt. Upon closing of the merger, we promptly got to work freeing up capital in the Arlington portfolio, both by monetizing its liquid assets and by beginning to add leverage to the MSR portfolio. The closing of the merger happened to coincide with a market rally driven by unexpectedly dovish messaging from the Fed's December meeting, and it was an opportune time to be selling assets.
I would note that this is just one penny below the 14th per share monthly dividend level, we set a full five years ago. When we first shifted from a quarterly to a monthly dividend.
Okay.
In mid December we completed the merger with Arlington, which immediately added scale, taking ufc's equity base above $1 5 billion and which further strengthened our balance sheet as the merger included the assumption of arlington's low cost long term unsecured debt.
Upon closing of the merger, we promptly got to work freeing up capital in the Arlington portfolio, both by monetizing its liquid assets and by beginning to add leverage to the MSR portfolio.
The closing of the merger happened to coincide with a market rally driven by unexpectedly dovish messaging from the Fed's December meeting and it was an opportune time to be selling assets within 24 hours of closing the deal we get sold essentially all of Arlington's agency portfolio and most of them see MBS all at prices above Arlington.
Larry Penn: Within 24 hours of closing the deal, we sold essentially all of Arlington's agency portfolio and most of its CMBS, all at prices above Arlington's prior mark. We have been busy deploying Freeduck Capital to our target investors, and expect to drive value to shareholders in 2024. During the fourth quarter, with yield spreads attractive, we continued to expand our RTL and proprietary reverse mortgage portfolios, and I expect to continue growing these and our other proprietary loan portfolios moving forward. Despite that growth, EFC's recourse leverage actually ticked down sequentially to 2.0-to-1 from 2.3-to-1, driven first by the absorption of Arlington's low leverage capital structure and second by a smaller commercial. Bridge Portfolio, where we continue to allow loan payoffs to exceed new originations as we gear up for the distressed opportunities we anticipate seeing shortly. And third, a reduced non-QM portfolio, where we've recently opted for loan sales over new securitizations, capitalizing on a strong whole loan bid in the market. At just 2.0 times leverage, we have plenty of additional borrowing capacity to drive incremental portfolio growth, and as you can also see on slide three.
Prior marks.
We have been busy deploying the freed up capital into our target investments, which we expect to drive value to shareholders in 2024.
During the fourth quarter with yield spreads attractive we can.
Continued to expand our RTL and proprietary reverse mortgage portfolios and I expect to continue growing these and our other proprietary loan portfolios moving forward.
Despite that gross <unk> recourse leverage actually ticked down sequentially to 2.0 to one from two three to one.
Driven first by the absorption of Arlington's low leverage capital structure second by a smaller commercial.
<unk> portfolio, where we continue to allow loan payoffs to exceed new originations as we gear up for the distressed opportunities, we anticipate seeing shortly and third by reduced non QM portfolio, where we've recently opted for loan sales over new Securitizations capitalizing on our strong whole long bid in the marketplace.
At just 2.0 times leverage we have plenty of additional borrowing capacity to drive incremental portfolio growth.
As you can also see on slide three.
Larry Penn: Our high cash and unencumbered asset levels at year-end represent further dry power. Finally, I'll note that our book value per share, of $13.83 at year-end, reflected modest dilution from the Arlington merger of about 1.1%. We expect to earn back that dilution in relatively short order from the combined benefit of lower operating ratios and deploying the incremental capital at high expected returns on equity. However, until we fully redeploy that incremental capital, we view ourselves as effectively trading some short-term pressure on adjusted distributable earnings for longer-term earnings accretion for shareholders. With that, I'll turn the call over to JR to discuss our fourth quarter financial results in more detail. Thanks, Larry, and good morning, everyone.
Our high cash and unencumbered asset levels at year end represents further dry powder.
Finally, I'll note that our book value per share of $13 83 at year end reflected modest dilution from the Arlington merger of about one 1%.
We expect to earn back that dilution in relatively short order from the combined benefit of lower operating ratios and deploying the incremental capital at high expected returns on equity.
Until we fully redeploy that incremental capital, we view ourselves as effectively trading some short term pressure on adjusted distributable earnings for longer term earnings accretion for shareholders.
With that I'll turn the call over to Jr. To discuss our fourth quarter financial results in more detail.
Thanks, Larry and good morning, everyone for the fourth quarter, we reported GAAP net income of <unk> 18 per share on a fully mark to market basis, and adjusted distributable earnings of <unk> 27 per share.
JR Herlihy: For the fourth quarter, we reported gap net income of $0.18 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.27 per share. On slide five, you can see the attribution of net income among credit, agency, and Longbridge. The credit strategy generated $0.18 per share of net income in the quarter, driven by strong net interest income and net gains on our non-agency RMBS investment. However, a proportion of this income was offset by net losses on consumer loans and on interest rate and credit hedging. The credit strategy results also reflect a net positive gain on our investments and loan originators, as a markup driven by a strong year for American heritage, as well as a modest markup on our stake in Lensure, exceeded a write-down on our consumer loan originator investment.
On slide five you can see the attribution of net income among credit agency and Longbridge.
The credit strategy generated <unk> 18 per share of net income in the quarter driven by strong net interest income and net gains on our non agency MBS investments.
Fortunately this income was offset by net losses on consumer loans, and an interest rate and credit hedges.
The credit strategy results also reflects a net positive gain on our investments and loan originators as a markup driven by a strong year for American heritage as well as a modest markup on our stake in lunch or exceeded a write down on our consumer loan originator of investment.
During the fourth quarter delinquencies again ticked up on a commercial and residential loan portfolios.
JR Herlihy: During the fourth quarter, delinquencies again ticked up on our commercial and residential loan portfolios. In commercial, that's tied to a handful of non-performing assets that we are diligently working through. In residential, beginning with non-QM, much of the increase in delinquencies was a temporary event attributable to a servicing transfer after the servicer we use was acquired by a larger servicer. The servicing transfer-related issues have been largely addressed now, and we've seen delinquency rates begin to normalize, with total delinquencies declining to 3.5% today from 5.2% at year-end. In RTL, most of the delinquency uptick is related to the 2022 Origination Vintage, which has been a challenging vintage given the volatility of home prices we've seen since the housing market reached its peak in mid-2022 in many markets we lend in.
In commercial that's tied to a handful of nonperforming assets that we are diligently working through.
And residential beginning with non QM much of the increase in delinquencies was a temporary event attributable to servicing transfer after the servicer. We used was acquired by a larger servicer.
The servicing transfer related issues have been largely addressed now and we've seen delinquency rates begin to normalize with dose with total delinquencies declining to three 5% today from five 2% at year end.
And RTL most of the delinquency uptick is related to the 2022 origination vintage which has been a challenging vintage given the volatility of home prices. We've seen since the housing market reached its peak in mid 2022, and many markets with London.
JR Herlihy: By virtue of the short duration of our RCL portfolio, we've been able to identify and address issues early and have now worked through most of this vintage with minimal, if any, adverse consequences. Across our commercial and residential loan strategies, net realized losses continue to be low, but the effect of the higher delinquencies is more immediately seen in ADE, as loans shifting to non-accrual status cease generating interest income, and as REO expenses also weigh on ADE. Turning to slide 6, we break out our adjusted distributable earnings by segment.
By virtue of the short duration of our RTL portfolio, we've been able to identify and address issues. Early it has now worked through most of this vintage with minimal if any adverse consequences.
Across our commercial and residential loan strategies net realized losses continued to be low, but the effect of the higher delinquencies is more immediately seen in AE as loans shifting shifting to non accrual status six generating interest income and as Oreo expenses also weigh on AE.
Turning to slide six we break out our adjusted distributable earnings by segment.
JR Herlihy: In the investment portfolio, the sequential ADE decline was driven by higher delinquencies and by the absence of an ADE boost that we had benefited from in the third quarter, when we had earned back interest on a previously non-performing loan. In Corporate Other, the ADE decline included some higher GNA. You can also see on this slide that the ADE contribution from Longbridge was just a penny per share, mostly attributable to low origination volume. In terms of net income, the Longbridge segment generated a net loss of $0.04 per share for the fourth quarter, as a net loss in originations and a drag from interest rate hedges exceeded net gains on proprietary loans, reversed MSR-related net assets, and servicing income. In Originations, while Longridge's volume was lower quarter over quarter, mainly due to seasonal and macro factors.
And the investment portfolio the sequential <unk> decline was driven by higher delinquencies and by the absence of an Adi boost that we had benefited from in the third quarter. When we had earned back interest on a previously nonperforming loan.
In corporate other the 80 decline included some higher G&A.
You can also see on this slide that the ADR contribution from Longbridge was just a penny per share mostly attributable to low origination volumes.
In terms of net income the Longbridge segment generated a net loss of <unk> <unk> per share for the fourth quarter as.
As a net loss in originations and a drag from interest rate hedges exceeded net gains on proprietary loans reverse MSR related net assets and servicing income.
In originations, while languages volume was lower quarter over quarter, mainly due to seasonal and macro factors tied.
JR Herlihy: Tighter yield spreads and lower interest rates did improve gain on sale margins on both Hecum and Prop. Looking forward, while we expect another quarter of slow originations in Q1, more constructive margins are improving the prospects for originations to turn profitable later this year and start contributing to EFC's overall ADE as well. In agency, after a tumultuous start to the fourth quarter that saw U.S. Treasury yields rise to 15-year highs and yield spreads widened sharply, markets subsequently rallied through year-end in anticipation of the conclusion of the Federal Reserve's hiking cycle. Overall for the quarter, agency MBS, especially lower and intermediate coupons where EFT's portfolio is concentrated, generally outperformed interest rate swaps and U.S. Treasury securities, which are our primary hedging instruments.
Tighter yield spreads and lower interest rates did improved gain on sale margins on both heckaman prop.
Looking forward, while we expect another quarter of slow originations in Q1 more constructive margins are improving the prospects for originations to turn profitable later this year and start contributing to yes.
Overall <unk> as well.
Okay.
And agency after a tumultuous start to the fourth quarter, that's all U S. Treasury yields rise of 15 year highs and yield spreads widened sharply.
Markets subsequently rallied through year end in anticipation of the conclusion of the federal reserve's hiking cycle.
Overall for the quarter agency, MBS, especially lower and intermediate coupons, where eft's portfolio is concentrated generally outperformed interest rate swaps and U S Treasury Securities, which are our primary hedging instruments.
JR Herlihy: As a result, our agency portfolio generated a net gain of $0.20 per share. Our net income for the fourth quarter also includes the bargain purchase gain associated with the closing of the Arlington merger, which was partially offset by merger-related transaction expenses, including certain compensation and severance costs that were previously negotiated as part of the merger agreement. Although the bargain purchase gain, net of the related expenses, contributed positively to net income during the quarter, overall, the common shares issued in connection with the merger were diluted to book value per share by approximately 1.1%. In addition, our Q4 net income was reduced by the $5 million payment we made in October to Great Ajax and a mark-to-market loss on the 1.67 million common shares in Greyjacks we acquired as part of the termination of the merger, both of which were recognized in the fourth quarter, whereas our related hedging gains had largely been recognized in the third quarter.
As a result, our agency portfolio generated a net gain of <unk> 20 per share.
Our net income for the fourth quarter also includes the bargain purchase gain associated with the closing of the Arlington merger, which was partially offset by merger related transaction expenses, including certain compensation and severance costs that had been previously negotiated as part of the merger agreement.
Although the bargain purchase gain net of the related expenses contributed positively to net income during the quarter.
Overall, the common shares issued in connection with the merger what are dilutive to book value per share by approximately one 1%.
In addition, our Q4 net income was reduced by $5 million payment, we made in October to great Ajax.
And our mark to market loss on the $1 six 7 million common shares and great Ajax, we acquired as part of the termination of the merger.
Both of which were recognized in the fourth quarter, whereas our related hedging gains had largely been recognized in the third quarter.
JR Herlihy: Our Q4 net income also reflects the net gain, driven by the declining interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity. Next, please turn to slide 7. In the fourth quarter, our total long credit portfolio increased by 10% to $2.74 billion as of December 31. The increase was driven by the addition of Arlington.
Our Q4 net income also reflects the net gain driven by the decline in interest rates on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long term debt and preferred equity.
Next please turn to slide seven.
In the fourth quarter, our total long credit portfolio increased by 10% to $2 $74 billion as of December 31.
The increase was driven by the addition of Arlington's MSR portfolio and a larger residential transition loan portfolio, where net purchases exceeded principal pay downs.
A portion of the increase was offset by smaller commercial bridge loan and non QM loan portfolios as loan Paydowns and in the case of non QM loan sales exceeded new originations during the quarter.
For the RTL commercial mortgage bridge and consumer loan portfolios. We received total principal pay downs of $302 million during the fourth quarter, which represented 20% of the combined fair value of those portfolio is coming into the quarter.
As those short duration portfolios continue to return capital steadily.
On the next slide slide eight you can see that our total long agency MBS portfolio to clean declined by 12% sequentially to $853 million as we took advantage of the market rally to monetize pools at attractive yields and rotate that capital into credit investments.
More than three quarters of our net agency sales occurred in November and December after yield spreads had tightened considerably.
Slide nine illustrates that our longbridge portfolio increased by 13% sequentially to $552 million as at year end, driven primarily by proprietary reverse mortgage loan originations.
In the fourth quarter Longbridge originated $262 million across heckaman crop, which is a 15% decline from the previous quarter.
The share of originations through Longbridge is wholesale and correspondent channels remained steady at 82% with retail again accounting for 18%.
Please turn next to slide 10 for a summary of our borrowings.
On a recourse borrowings the total weighted average borrowing rate declined by 10 basis points to 678% at year end.
We continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rates.
In the agency portfolio, the extent of this benefit declined quarter over quarter, which led to NIM compression in that part of the portfolio.
However, as we continue to turnover our agency portfolio, we expect to see that NIM compression reverse.
We also saw a NIM compression in our credit for in our credit portfolio.
In that case it was caused by the shift of some delinquent loans to non accrual status, which dragged down overall asset yields.
With both credit and agency experiencing compressed nims quarter over quarter. There are contributions to AE also declines.
Our recourse debt to equity ratio, excluding U S Treasury securities and adjusted for unsettled trades decreased to two point out to one at year end from two three to one as of September 30th driven by our larger capital base.
Our overall debt to equity ratio also decreased to $8 four to one as of year end from nine four to one at September 30.
I would also point out that because most of Arlington's agency pools that we sold in mid December settled regular way in January we had an unusually large investment related receivable on our balance sheet at year end that balance has since normalized with the settlement of those sales in the new year.
At December 31, our combined cash and unencumbered assets totaled approximately $645 million up substantially from September from September 30th in part, reflecting the incremental liquidity, we added through the island's merger.
Through that merger, we added about $176 million of common and preferred equity and $88 million principal balance of unsecured debt.
Ellington financial now has about $300 million of unsecured debt with a ladder maturity schedule over the next three years.
Meanwhile, we have only a small amount of borrowings against our large MSR portfolios clearly we have lots of dry powder to deploy.
At December 31, our book value per common share was $13 83 down from $14 33 at September 30th.
Our total economic return was a negative 35 basis points for the fourth quarter now over to Mark.
Thanks J R.
Okay. There was a lot going on at AFC This quarter with the completion of the Arlington merger the monetization of some of their assets and reinvestment of that capital and what's going on in the market with a pivot and expectations for fed cuts instead of hikes and a strong recovery in agency MBS performance.
As the quarter progressed, we finally got better news on inflation and some more dovish comments from the fed.
That caused the rates market to make a U turn midway through the quarter in mid October the 10 year note nearly hit 5%.
And then ended the year around $3 90, So we had an astonishing 110 basis point rally.
And a little over a month.
The change in expectations with the market then believing that we had seen the peak in fed funds for the tightening cycle, but everyone to breathe a huge sigh of relief.
We went from wondering when hikes would end to asking when cuts we're going to start.
We have seen many times before a pivot in the direction of interest rates combined with the drop in volatility that puts rates back in a familiar and reasonable trading range is often very good for spread products. This was certainly the case in Q4 some of the cash that was waiting on the sidelines in October to see how high rates would go got put to work in.
The second half of the quarter.
Flows into fixed income funds were strong and fixed annuity sales were robust.
The notable exception of Sam BS, which has its own unique challenges virtually all spread products tightened in Q4, including agency MBS investment grade corporates high yield bonds, CRT, non QM CLO et cetera.
Despite the rally there were there are certainly still some fundamental challenges in several parts of structured products office vacancies are high multi.
Multifamily rents are stagnating in some markets and overall economics for commercial real estate are challenging.
Portability and the housing market is still weak and we've seen a modest delinquency increase for lower FICO borrowers and most mortgage sectors, but.
But our view is that yield and yield spreads are still very high in many sectors and most second most sectors are exhibiting very strong credit performance. Despite these challenges.
I'm really excited to keep deploying capital at yields and spreads we could have only dreamed about two years ago.
If and when the fed executes its first rate cut we think that will be a catalyst for book value gains and a tailwind for our E D.
Meanwhile, housing has performed well despite skyrocketing mortgage rates in October agency mortgage rates nearly touch seven 8% the highest level seen in over two decades before retreating into year end the lock in effect for tens of millions of borrowers.
Willing to move because they are low fixed rate mortgages as both years of under building across the U S and some news aging in place.
All have been factors in supporting home prices.
Our single family loans, mainly related.
Our single family residential related strategies of RTL, non QM and agency MBS non agency MBS and CRT all contributed positively to Ellington Financial's returns.
This strategy is not only delivered meaningful spread income, but they also have price action that outperformed rate hedges. So that means they delivered gains above and beyond just the 80 ebay provided our vertical integration, where we team up with our origination partners in the loan underwriting process and which is illustrated on slide 12 has been a key fab.
And the success of our residential strategies.
While gain on sale margins at our non QM originator affiliates got a boost during Q4 from some spread tightening and higher loan prices. The high interest rate environment for most of 2023 was still a challenging time to be a mortgage originator.
Sure an American heritage, both manage things very well in fact, both companies were solidly profitable in 2023.
And our commercial bridge loan strategy after years without material headaches, we do have two longer term multifamily workouts now underway it.
It's not at all unexpected and that business. We have marked down those holdings appropriately through net income and book value, but the strategy still generated double digit returns on capital for 2023.
I believe that our partnership with Sheridan and our own in house expertise gives us great capabilities to maximize values and works out situations.
These nonperforming loans will generate negative E. While we're working them out, but we're hopeful that we'll see resolutions that generate significant income for us and then of course, we'll be able to recycle that capital into positive E generating investments again.
Finally, I'll note that results from our consumer loan strategy were negative for the fourth quarter.
Performance for lower FICO borrowers has been weak and while we don't have a lot of exposure there by design. The exposure, we do have what's the drag on earnings.
Turning back to slide seven you can see how our credit portfolio evolved during the quarter. It grew a little over 10%, partially as a result of incorporating Arlington assets RTL grew but our non QM shrunk as we sold some packages into a strong market.
We continue to shrink our commercial bridge portfolio, both overall in size and as a percentage of the pie.
As you can also see on this slide that forward MSR is in that 6% of the credit portfolio and these services are risk mitigating a lot of ways M.
MSR is have a directionally opposite sign compared to many of our other holdings. They appreciate when rates go up not down the appreciate when MBS widened rather than tightened and they may even appreciate when housing goes down not up these MSR investments stand on their own.
It's an attractive contributor to returns and ETE, but they're traditionally attractive as a stabilizer to some of our other holdings.
On the agency portfolio, which you can see on slide eight we took advantage of substantially tighter mortgage spreads to sell off a 100 plus million of the portfolio, mostly in November and December.
We continue to rotate out of some of our older Holdings that were acquired when rates were lower which should help recharge our a D E going forward with the completion of the Arlington merger forward and my sellers are now a new return stream and diversify our for us.
And one that may grow in the future. This is a great sector to leverage the breadth and depth of <unk> capabilities.
Looking ahead I believe that the current market environment is a great one for us to generate attractive risk adjusted returns.
Old spreads while not at the October peak are still very wide.
Meanwhile, despite the recent uptick in CPI the market is still predicting albeit slightly delayed from prior predictions a series of rate cuts by the fed starting later this year eventually leading to a steepening yield curve.
A steep yield curve pushes investors out of cash and also tends to be tends to lead to more securitization activity and.
Demand for both agency and non agency MBS. It's also a catalyst for bank buying in these sectors.
Becomes profitable again for banks to buy spread product and fund it with deposits.
Therefore, a steeper yield curve generally leads to a more vibrant market and tighter spreads.
A steeper yield curve with lower interest rates would also benefit longbridge as reverse mortgages offer homeowners bigger lines of credit when rates are lower and reverse mortgage borrowers are generally very sensitive to the size of the credit line they can get.
While we have all the hedging tools, we need to manage risk and generate returns in a flat and inverted yield curve for all these reasons, we do think a steeper yield curve in the future, which the market is pricing in would be a net benefit to our strategies now back to Larry.
Thanks Mark.
I am pleased to have closed the Arlington merger and integrated its balance sheet into ours moves.
Moving forward, our larger capital base ample liquidity and additional borrowing capacity should allow us to capitalize on the many attractive investment opportunities we are seeing.
Our diversified portfolio provides multiple sourcing channels as.
As I mentioned earlier, we have continued to grow our RTL and <unk> loan portfolios. We also opportunistically added CLO investments and residential rps at attractive yield spreads in recent weeks.
We continue to expect that the ongoing dislocation in the commercial mortgage and banking sectors will generate compelling opportunities for Ellington financial both to acquire distressed assets and to add market share at our originator affiliates.
While we haven't been awarded anything yet in this sector, we expect to see more and more distressed commercial real estate debt put up for sale, including situations or otherwise high quality assets just have unsustainable capital structures.
Also seeing compelling opportunities in <unk>, yes.
So while our commercial mortgage loan and see MBS portfolios are small as they have been since late 2021, those portfolio should expand again in future quarters.
As Jeremy mentioned, we expect Longbridge is origination platform to turn the corner back to profit, but profitability later this year.
Barring any unexpected increases in long term interest rates I expect this to happen around mid year.
As a reminder, we report Longbridge is origination income as component of our adjusted distributable earnings which is the return of their origination platform to profitability will be a significant boost to our AE since spin and since it's been a drag on our adv for the last three quarters or so.
Yes.
Overall UFC stock delivered a total return to shareholders of 18% in 2023.
And we look forward to driving additional value to both our existing and new shareholders in the year ahead.
We sized our new dividend consistent with where we see our <unk> going in the near term.
We have plenty of dry powder to continue to grow our asset base, whether by using cash on hand, or our untapped financing lines.
There are lots of distressed investment opportunities on our doorstep.
We also expect longbridge to contribute to <unk> again by midyear.
And our stock is back within repurchase range, which is another lever we can Paul.
With that we'll now open the call to questions. Operator. Please go ahead.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
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We will pause for a moment to allow questions to queue.
Our first question comes from Crispin Love with Piper Sandler.
Okay.
Thanks, Good morning, I appreciate taking my questions.
In the release and on the call and Larry You just mentioned some just then but you mentioned distressed opportunities in Crete debt. So I'm. Just curious if you can go a little deeper there on kind of what types of areas you see the best opportunities from where and then also what youre seeing in the bridge multifamily space.
And if you'd be interested in adding mezz or press and any bridge loans that had been originated with other lenders just given the stress in the space.
Mark.
Sure Hey, Chris It's Mark So you have seen a couple of.
Portfolios of commercial loans, primarily.
Tri State area concentration come out for bid.
We bid on both the packages. We saw we were competitive we werent awarded anything so I think you will continue to see that.
There continues to be news in the banking sector. There was that big announcement about truest last week.
Selling off the insurance arm.
And you know.
That being a catalyst for them to reorient their portfolio. So we think they're going to be more opportunities to bid on commercial loans that.
Are challenged.
It's gonna be a great opportunity.
We mentioned in the prepared remarks that the.
The stake, we Havent Sheraton and a long partnership we have with those guys really gives us the ability to.
Oversee construction and to really manage properties in a way that.
Few competitors can so I think we are really well resource in that sector and I do think youre going to see.
It's more opportunities to buy to buy loans. There. So to date, we've been more focused on buying loans.
We haven't.
Been as focused on being a mezz provider I wouldn't rule it out, but I think what's more likely for us given the activity. We saw in the last three or four months is just buy is to just by commercial loans and then.
I think he also asked about new issue bridge.
We're still active there. It's just the number of transactions. We are seeing is down I think that's sort of consistent across the board and commercial real estate.
So you know while we.
We're still originating.
Another thing you mentioned in the prepared remarks, the origination volume has not kept pace with the resolutions. We've seen so we continue to look for those opportunities, but just it just has not been a very active sector to deploy capital right now.
Thanks Mark.
All very helpful. There and then.
Just looking at expenses comp and benefits are more than doubled in the quarter I assume a good portion of that is related to onetime comp expenses from the Arlington deal can you confirm that Jr. And then if you could also just provide how much of those expenses are one time to get to a better run rate number going forward for our comp and Ben.
Yes exactly.
$22 1 million.
Sure.
Merger related expenses.
The bargain purchase gain of 28, but those are all nonrecurring items. So if you exclude that $22 one.
Youre closer to a run rate.
Perfect. Thank you and then.
Are you able to size the net interest income impact in the quarter that was related to non accruals that you mentioned.
So we haven't broken out the exact contribution of the different variables at play.
Have the Longbridge contribution of a penny we have the non accruals as you mentioned, which is in resi and commercial.
We haven't sized it exactly but it is.
Big chunk of it.
But there are other variables at play we haven't exactly broken out each line item by contribution, but the nonaccrual was that was a material amount of the sequential decline.
Alright, Thanks, Terry I appreciate it.
Wanted to add that.
When when loans resolve and we're we're very LTV LTV focused and mark talked about how.
So far we've just been doing first liens and.
Don't have any specific plans to do anything else.
So when alone resolves nonperforming loan resolves.
You can recapture right if you've done your underwriting right.
And your LTV was.
It enables you to basically.
Recapture euro.
Investment your initial investment alone and then some.
Hugh.
You get to take.
That interest income that you had.
Yeah.
Kept out of your of your adjusted distributable earnings our interest income previously right you get to take that into interest income.
When that gets.
When that gets resolved.
Assuming you collected at that point so.
I think we mentioned that one phenomenon between the third and fourth quarters was we had a bunch of interest income that was recouped in the third quarter quarter on alone.
And that wasn't recurring obviously.
So thats the kind of thing, where I think youll see right as we.
As long as they're working out get resolved, you'll see just that.
It will boost the ADT going forward, but it does make these things lumpy for sure.
Thanks, Mike I appreciate the added color there.
The next question comes from Trevor Cranston with JMP Securities.
Alright. Thanks.
A follow up to the comments you were just making Larry about the kind of Lumpiness you could get from.
Interest income recognition on the non accruals.
And you guys sort of walk us through how you are thinking about the.
The most likely sort of timeline on resolution of the loans that are in.
In particular that wanted to non accrual status in the fourth quarter.
Hey, Trevor.
Thanks for the question.
So I'd say the timelines are.
Different between commercial and residential we do in commercial we have a couple of situations that we think will be a longer term process.
We don't have exact timelines on that but caused more than a few quarters potentially.
Whereas in residential and we can work through delinquencies much more quickly.
Maybe inside of a quarter in many cases.
I would say that part of our motivation in owning part of Sheridan is to have a captive servicer servicing platform with the resources and expertise to manage through work looks like.
We're underway with right now.
Including the capability of taking back and managing Oreo assets when necessary, we think there's significant value there.
I don't know Mark if you have anything to add on the timeline of resolutions among commercial and.
In residential.
For the commercial.
It's very project specific so as Jeremy mentioned.
The two that we are working out now it's going to be longer term like at least a couple of quarters, but I.
I think it's very.
Three loan in project specific so.
Yeah look I think that.
The capabilities we have.
We're in.
It incentivize us to be patient and to really maximize value.
It's not something we do a lot we've been doing commercial bridge for MFC for a long long time.
And you know it used to be all workout situations. So.
I think we have a good handle on what it takes.
To maximize value for the shareholders and that's that's really what our focus is.
Okay got it thats helpful.
And then on the investment you guys.
Having great Ajax can you remind us if theres any.
Restrictions on that position or.
Maybe just generally talk about sort of your intentions and if you're.
Are willing and if you're sort of free to potentially dispose of that at any time.
If you wanted to.
I can't comment on that sorry.
Okay fair enough. Thank you.
Yeah.
Okay.
Thanks, Kevin.
The next question comes from Bose, George with <unk>.
Hey, guys. Good afternoon, just going back to the delinquency and when you look at your pipeline are there.
Other loans that could potentially roll into that.
And just can you talk about some of the drivers is it macro is it varies.
Sponsor specific in terms of stuff that's happening.
Sure.
I can start out mark.
I mean, I think they're generally and maybe four categories.
In commercial.
Talked about the few that were working through now and I think there are any other big looming headaches that were seeing right now, but there's going to be noise and lumpiness.
Hi.
In the portfolio I think quarter to quarter, but not seeing any big other headaches on that on the horizon. Besides that the handful we're working through.
In non QM.
Had a transfer of servicing.
In September and October of our non QM loans as the servicer reuse was sold to our.
Our largest servicer.
The servicing transfer caused delinquencies to tick up in Q4.
But we think those are temporary and in fact I think we put this stat in the prepared remarks, we've seen delinquencies come down by about a third between year end and kind of today. So that's.
I think that's explained by the servicing transfer largely in non QM and then an RTL.
Out of the.
I guess, the delinquencies and issues, we worked through had been a function of the 2022 origination vintage.
When.
Prices peaked in many of these markets in mid 2022 at this point, we've worked through I think three quarters or more of that vintage.
So hopefully that we're seeing those trend down, but when we file the K later this week, you'll see that in our investment loans note in our financials.
Published attendant 90, plus delinquency youll see that.
The numbers for those categories as well as in consumer.
And Mark mentioned lower FICO borrower FICO borrowers have been underperforming.
And thats been kind of.
A trend now for a few quarters I would say.
Okay, Great. That's helpful detail. Thanks, and then in terms of the portfolio kind of the overall leverage.
Do you guys are you sort of under Levered now with this with the deal and the growth in equity.
Is there kind of a way to think about the earnings contribution as you kind of lever more appropriately yes. So that's a that's a big.
Component here I think we were at two times debt to equity recourse debt to equity at year end.
We could easily get into the two five times.
Range, which would add on $1 billion in half the capital another seven or $800 million of investments.
In 2022, we were basically two five to two six times levered recourse debt to equity leverage for most of the year. So.
So we have.
Liquidity on balance sheet unencumbered assets as well as just additional borrowing capacity even on the assets that are encumbered, but lightly levered or Msr's. For example, so that's certainly part of what we see driving <unk>. This year is adding leverage in investments.
Okay, great. Thank you.
Thanks.
The next question comes from Lee Cooperman with Omega family Office.
Thank you I actually have two questions and then observation my questions are keep emphasizing a lot of dry powder. How long do you think it will take to restore the dividend back to where it was.
Question one.
Oh, that's a great question Haley.
I don't know I can tell you like I said, we've resized. It so that we think we're going to cover it pretty soon.
I think what it would take as realistic as to even build a little book value back but.
If you which is another motivation for dropping the dividend a bit.
So well go ahead.
It doesn't make any sense you dropped the dividend to get the stock to go down.
No no no no no two to just.
Sort of.
Rebuilds book value.
It's a small contributor but.
I think that.
Right when you dividend out cash that gives you less of our base to invest and earn your dividend right. So.
So it can be sort of a cycle, but I think that.
I think.
Let's just take it one.
One quarter at a time, we're hoping.
Later this year hopefully within a couple of quarters to be covering the new dividend.
I think we've talked about all of the catalysts that can do that long rates returning to profitability.
Getting our leverage up our asset leverage off right. We're only at 2.0 on a debt.
Leverage perspective, so that could help a tremendous amount and look we haven't built a little bit of a war chest.
Capital here.
Because we think that the opportunities, especially in distressed commercial are going to be so great. So.
It's all kind of part of our strategy, we sold down our non QM portfolio. The spreads are still wide there, but we thought that it was the right tactical move to make.
And we've talked about how we've also.
Reducing the size of our of our bridge bridge loan portfolio again, as we're sort of making room for these investments. So we're trying not to be too short term oriented and if we can.
Take advantage of some distressed situations that can help us like I said build book value back up and then I think once we do that.
Because I was just sort of capital gain type situations right youre buying if we buy distressed assets, whether it's in loans or <unk>.
Can be authorize the dividend was not restored by the end of the year.
Restore two.
The pricing moves that level I don't think you should view that as an expectation.
Okay second question in the past you bought back stock we chose trade at around 80% of book would you say that that strategy is likely to change or remain the same.
I would.
Say that strategy is not likely to change I think I mentioned in my remarks that were where we were in range earlier today.
And we're certainly I don't want to comment on what specifically, whether <unk> certainly within range.
80% of 13 changes $10 50.
No no no I think maybe three with our year end 13.
<unk> hundred 83 right.
So I think with 80% of 13 80 311, our sex.
Okay.
Alright.
And we would make an observation.
Do you have taking undervalued public market equity and paying private market vetted by business. The question was strategy do you agree with that or disagree.
What how does that apply to us.
Okay.
We understand that we don't because part of the dilution what was it.
The acquisition you made if you didn't make the acquisition you wouldn't have the dilution.
So you know.
What I'm, saying I've seen over the years.
Companies continue to do deals and take undervalued auction market stock.
Pay private more convey to buy businesses, which I think is a question of the strategy.
Right No I agree I think we have some very specific reasons. We also had some for this transaction.
We love getting into the MSR business.
And.
I think.
Now that we're in it with the acquisition that is another area, where we can see very high returns on equity.
I think one 1% dilution is pretty modest frankly for growing our equity base by $200 million.
But I hear you I hear you, it's not something I look we I'll just say another thing too Ken.
It's too much detail here, but.
We.
Well the fact that.
We had two deals sort of in process I guess in 2023, right only one of them was consummated.
That was highly unusual right, we had never done that before so.
I don't think you should extrapolate from that is sort of establishing a pattern.
Alright good.
Sure I understand the view alright.
Alright. Good luck. Thank you thanks Leif.
The next question comes from Matthew Howlett with B Riley.
Hey, guys. Thanks for taking my question.
Just a modeling question.
When it when you first consolidated.
Contributing 910.
Distributable earnings when its going good is going great. Obviously, I think you said you expect it to turn mid this year. My question is just on the commitment to it.
So it's a new segment, we're all getting used to it.
Would you like to grow as you wanted to make acquisitions would you consider at some point could you sell at one point with <unk>.
Less than 50%, but I just wanted to hear the investment case for keeping it.
What the <unk>.
The value of this for shareholders.
Yes look thanks, it's taking up.
This was a big investment of ours and it's grown so we have got a lot of capital.
In the business both in the form of <unk>.
Just say harder assets like loans and servicing and then of course, you've got the franchise right. So it's a business that we absolutely believe in long term.
And we since we.
Since we started many years ago and even since.
<unk> 2022, when we bought the other half of it.
And as you said consolidated debt.
We've long, which has been growing market share quite a bit.
It's been a tough business Longbridge is actually I think done great relative to the competition.
We've added servicing at very attractive values and I think we're going to do more of that.
And that's again, a great sort of ETE generator.
And I think theyre going to be more and more of our competitors sort of falling by the wayside.
Demographically. This is an area where I think.
Just obviously theres a lot of growth so.
We believe in the business, we believe in the long term prospects.
It's.
There's nothing we can do about the macro environment with rates where they are.
But.
Jr talked about how we've been increasing prop and and so you are not.
That sort of a growth area for us and the yields are very attractive.
Absolutely believe in our long term look anything is possible in terms of with many many many years from power or whatever.
We get full value from someone really full value and decided to out of course, it's possible, but we certainly are not exploring anything we don't have any plans for that.
And we're committed to the company we've continued to add capital.
And we think that.
Many many different ways that this company can.
And generate the kind of earnings when it was much smaller it was generating lucky made over $30 million just.
Just a few years ago.
There are regulatory changes that could happen.
That would completely change the landscape as well in a positive way so there's just.
A lot of option value here.
And even more than option value just actual opportunity that looks like it's coming in earnings that are coming pretty soon.
Yes, you asked about the heck am programming.
The originations to decline was just due to seasonal factors and obviously higher rates and.
Slow housing, but theres been no change with how come on and is that nothing bad.
Nothing nothing ominous and Adam you said the program actually can be well, yes. There has been no right. So there hasnt been any major regulatory changes recently, but there could be some positive ones coming it's very possible. So.
And.
I will just say those stemmed from right. There was a bankruptcy pretty notable at the end of 2022 right and.
Very large reverse mortgage originator.
And since then.
The regulators have been thinking well.
Is it possible that we can make things a little easier.
On the originator and servicer so it's.
These are things that again, we're not counting on them but.
They are just add I think additional option value.
To the to the whole franchise.
Franchising proposition.
Great and then just a final question on the non QM. Thank you said your whole loan prices have risen I'd love to hear just sort of why that is.
Envision going back to sort of.
Securitization at some point or just take these cash loan prices and just keep it going and you have seen.
Lynch, where American hers, you're doing great just talk about the outlook.
On the non QM to gain on sale.
Yeah look we continue to buy non QM and originated.
We're very flexible in terms of what we do with the product.
And whether it's hold it.
It's been quite a while actually since we did a securitization right. So we've been holding loans for a long time and earnings spread rather on repo.
Certainly we could hold on forever that way.
We can also securitize them and but we're only going to take that step to securitize them. When we think that the securitization spreads.
Are the best outcome.
Securitizing and locking in that long term cost of funds at attractive levels and then of course, the third one which again, we havent historically done so much but there's a very strong bid, especially from insurance companies thats been in the market recently and we just decided seeing one of those beds at that was at the time the right thing to do.
As to sell.
The gain on sale.
And.
Potentially reload later at at wider spreads these are decisions that we make.
As portfolio managers kind of all the time and it's great to have it's great to be able to hold these.
Long term, if we need to and just earn that spread that's the business. We're in obviously there are.
A lot of originators I can't do that they have to sell.
It gives you plenty of Optionality I appreciate it thanks a lot.
Thanks, Matt.
Yes.
That was our final question for today, we thank you for participating in the Ellington financial fourth quarter and full year 2023 earnings conference call.
You may disconnect your lines at this time and have a wonderful day.
Okay.
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Got it.
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