Q2 2024 Ellington Financial Inc Earnings Call

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[music].

Please standby we're about to begin.

Operator: Please stand by; we're about to begin. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ellington Financial second quarter 2024 earnings conference call.

Speaker Change: Good morning, ladies and gentlemen, and thank you for standing by welcome to the Ellington financials second quarter 2024 earnings Conference call.

Operator: Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, simply press the star then the number 1 on your telephone keypad. If at any point, your question has been answered, you may remove yourself from the queue by pressing star 2. Finally, should you require operator assistance, you may press star zero. I'd now like to turn the call over to Alaa Dean Shaleh. Please go ahead.

Speaker Change: Today's call is being recorded at this time all participants have been placed in a listen only mode. The floor will be opened for your questions. Following the presentation.

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

Speaker Change: If at any point. Your question has been answered you may remove yourself from the queue by pressing star two.

Speaker Change: Lastly, should you require operator assistance you May press Star zero.

Speaker Change: I'd now like to turn the call over to Alan Dean Shelley. Please go ahead.

Alaa Dean Shaleh: 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 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.

Speaker Change: 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 back to 95.

Speaker Change: Forward looking statements are not historical in nature as described under item one.

Speaker Change: Of our annual report on Form 10-K, and part two item one.

Speaker Change: Although our 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 and the company honestly.

Alaa Dean Shaleh: 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 Tecotzky, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com.

Speaker Change: No obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

Speaker Change: Joining us on the call today by Larry Penn Chief Executive Officer, Austin Financial Mark Dekosky Co Chief Investment Officer, UFC, and Jr. Herlihy, Chief Financial Officer ESC.

Speaker Change: As described in our earnings press release, our second quarter earnings Conference call presentation is available on our website Ellington financial Dot Com management's prepared remarks will track. The presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation with that I will now turn the call over to Larry.

Alaa Dean Shaleh: Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Larry Penn: Thanks, Elladina. Good morning, everyone.

Larry: Thanks, Alan and good morning, everyone as always thank you for your time and interest in Ellington financial.

Larry Penn: As always, thank you for your time and interest in Ellington Financial. I'll begin on slide three of the presentation. In the second quarter, broad-based contributions from our diversified credit and agency portfolio, as well as from our Reverse Mortgage Platform, Lawn Growers, drove strong results for Ellington Financial and generated an economic return of 4.5%, non-annualized. We grew our book value per share after paying dividends. I am very pleased with these results

I'll begin on slide three of the presentation.

Larry: In the second quarter.

Speaker Change: <unk> based contributions from our diversified credit and agency portfolios as well as from our reverse mortgage platform Longbridge drove strong results for Ellington financial.

Larry: For the quarter.

We generated an economic return of four 5% non annualized we grew our book value per share after paying dividends and.

And we increased adjusted distributable earnings per share by a full five to.

Larry: <unk> 33 per share and we see momentum for our AE to keep increasing from here.

Speaker Change: I am very pleased with these results.

Larry Penn: I'll first highlight the strong performance of our non-QM loan business in the quarter. In April, we completed our first non-QM securitization in 14 months, taking advantage of the tightest AAA yield spreads we've seen in two years. And so in April, we decided to securitize some of our non-crime loans rather than sell them. That securitization transaction not only provided attractive economics, but it also provided us with high-yielding residual retain troshes to boot.

Speaker Change: I'll first highlight the strong performance of our non QM loan business in the quarter.

Speaker Change: In April we completed our first non QM securitization in 14 months.

Speaker Change: Taking advantage of the tightest AAA yield spreads we've seen in two years and booking a significant gain as a result.

Speaker Change: In the months, leading up to that April deal.

Speaker Change: We've been taking advantage of strong whole loan bids in the marketplace by selling many of our non QM loans, rather than securitizing them.

Speaker Change: While the whole loan bid for non QM loans remain very strong we saw AAA securitization spreads tightened back to early 2022 levels and so in April we decided to securitize some of our non QM loans rather than sell.

Speaker Change: That securitization transaction not only provided attractive economics, but it also provided us with high yielding residual retained tranches to boot.

Larry Penn: Following that April securitization, we proceeded to sell other non-QM loans into that strong home loan system. In addition, the continued strong demand for non-QM loans drove improved origination volumes and gain-on-sale margins industry-wide, which generated excellent results at our affiliate non-QM loan originators, Lendsure and American Heritage Lending, and led to mark-to-market gains on our equity investments in those affiliates Meanwhile, Longbridge also contributed robust earnings for the quarter, led by both strong origination volumes and strong performance of proprietary reverse mortgage loans. Similar to the boost in industry non-QM volumes, HECM origination volumes were also up significantly for the quarter, including for one.

Speaker Change: Following that April securitization, we proceeded to sell other non QM loans into that strong how long debt.

Speaker Change: As you can imagine given the recent risk off move in the financial markets. All this activity turned out to be extremely well types.

Speaker Change: In addition, the continued strong demand for non QM loans drove improved origination volumes and gain on sale margins industry wide, which generated excellent results at our affiliate non QM motor resonators lend shore at American Heritage lending and led to Mark to market gains on our equity investments in those affiliates.

Speaker Change: Meanwhile, Longbridge also contributed robust earnings for the quarter led by both strong origination volumes and strong performance our proprietary reverse mortgage loans.

Speaker Change: Similar to the boost to the industry non QM volumes <unk> origination volumes were also up significantly for the quarter, including for Longbridge, but unlike non QM, we saw wider yield spreads and the H MBS securitization markets.

Speaker Change: As a result gain on sale margins for Longbridge is heck of a business actually compressed in the quarter, which mostly offset the benefit of their high origination volumes.

Larry Penn: Finally, following quarter end, but prior to the recent market volatility, we successfully completed our second securitization of proprietary reverse mortgage loans originated by long. That transaction also provided us with a high-yielding residual retain structure. On last quarter's earnings call, we predicted a second quarter turnaround, and Longridge did a great job and delivered, both on a gap basis and a DE. Long Bridge is an important part of that ADE momentum I mentioned earlier.

Speaker Change: Finally, following quarter end, but prior to the recent market volatility we successfully completed our second securitization our proprietary reverse mortgage loans originated by long rich achieving incrementally stronger execution than our inaugural deal that we executed in the first quarter.

Speaker Change: This securitization converted another slug of short term repo financing into long term locked in non mark to market financing.

Speaker Change: Again, given the risk off move we've seen in August this was another well timed transaction.

Speaker Change: That transaction also provided us with high yielding residual retained tranches.

Speaker Change: On last quarter's earnings call, we predicted a second quarter turnaround at long Ridge and long rich did a great job and deliver both on a GAAP basis and <unk> basis. Longbridge is an important part of that <unk> momentum I mentioned earlier.

Larry Penn: Also, in the second quarter, Ellington Financial's results benefited significantly from the very solid performance of our residential transition and commercial mortgage loan strategies, as well as non-agency RMBF. Both for the second quarter and continuing into the third, we have added attractive high-yielding investments over a wide array of our credit strategies. Specially, he Locks in closed end second mortgages, prop Reverse, commercial mortgage loans, residential RPL-NPL, CMBS, and CLOs.

Speaker Change: Also in the second quarter Ellington Financial's results benefited significantly from the very solid performance of our residential transition and from commercial mortgage loan strategies as well as non agency MBS.

Speaker Change: Both for the second quarter and continuing into the third.

Speaker Change: We have added attractive high yielding investments over a wide array of our credit strategies, especially helocs and closed end seconds crop reverse commercial mortgage loans residential RP L NPL see MBS and CLO.

Speaker Change: The growth of the commercial mortgage portfolio has included both new originations as well as the purchase of two additional nonperforming commercial mortgage loans.

Larry Penn: The growth of the commercial mortgage portfolio included both new originations as well as the purchase of two additional non-performing commercial mortgages. At the same time, we have continued to call securities and lower yielding sectors, including agency and non-agency RMVS.

Speaker Change: At the.

<unk> time, we've continued to call securities and lower yielding sectors, including agency and non agency MBS.

Larry Penn: Since we generally utilize higher amounts of leverage in our MBS portfolios, especially our agency MBS portfolios, these MBS sales, coupled with the non-QM securitization, drove down our leverage ratios overall in the second quarter, despite the increased capital deployment in our credit strategy. Moving forward, we have plenty of cash and borrowing capacity to drive portfolio and earnings growth. Significant Unencumbered Assets Plus Other Lightly Leveraged, That dry powder is particularly valuable given the recent spread.

Since we generally utilize higher amounts of leverage in our MBS portfolios, especially our agency MBS portfolio. These MBS sales coupled with the non QM securitization drove down our leverage ratios overall in the second quarter. Despite the increased capital deployment in our credit strategies.

Speaker Change: Moving forward, we have plenty of cash and borrowing capacity to drive portfolio and earnings growth with significant unencumbered assets plus other lightly leveraged assets.

Speaker Change: That dry powder is particularly valuable given recent spread widening.

Larry Penn: With that, I'll turn the call over to JR to discuss the second quarter financial results. On slide five, you can see the attribution of net income between credit agency and Longbridge. The credit strategy generated a robust $0.80 per share of GAAP net income in the quarter, driven by strong net interest income and net gains from non-QM loans, retained non-QM RMBS, non-agency RMBS, and commercial mortgage loans. We also benefited from mark-to-market gains on our equity investments in Lendshore and American Heritage Lending, which reflected strong performance from increased origination volumes and strong gain-on-sale margins for those originators. Similar to the prior quarter, we received another sizable cash dividend from Lensure in the second quarter.

Speaker Change: That I will turn the call over to Jr. To discuss the second quarter financial results in more detail.

Speaker Change: Yes.

Jr.: Thanks, Larry and good morning, everyone for the second quarter, we are reporting GAAP net income of 62 per share on a fully mark to market basis, and adjusted distributable earnings of 33 per share.

Speaker Change: On slide five you can see the attribution of net income between credit agency and Longbridge.

The credit strategy generated a robust 80 per share of GAAP net income in the quarter driven by strong net interest income and net gains from non QM loans retained non QM RBS non agency RBS and commercial mortgage loans. We also benefited from mark to market gains on our equity investments in <unk>.

Speaker Change: <unk>, an American heritage lending, which reflected strong performance from increased origination volumes and strong gain on sale margins for those originators.

Speaker Change: Similar to the prior quarter, we received another sizeable cash dividend from <unk> in the second quarter.

Speaker Change: In addition, with interest rates slightly higher quarter over quarter.

Speaker Change: We had net gains on our interest rate hedges.

Speaker Change: Offsetting a portion of all these gains was a modest net loss and modest net loss in residential <unk> NPL.

J.R. Herlihy: Meanwhile, the Long Bridge segment generated a gap net income of $0.05 per share for the second quarter, driven by net interest income and net gains on proprietary reverse mortgage loans, along with positive results from services. In Hecum Originations, higher volumes were mostly offset by a decline in gain-on-sale margins driven by wider yield spreads on newly originated HMBS. Notably, Longbridge also contributed $0.06 per share to our ADE, in contrast to its $0.01 per share contribution last quarter.

Speaker Change: Meanwhile, the Longbridge segment generated GAAP net income of <unk> <unk> per share for the second quarter, driven by net interest income and net gains on proprietary reverse mortgage loans, along with positive results from servicing.

Speaker Change: And heck of originations higher volumes were mostly offset by a decline in gain on sale margins driven by wider yield spreads on newly originated H MBS.

Speaker Change: Servicing tighter yield spreads on more seasoned H MBS led to improved execution on tail Securitizations, which contributed positively to the positive results from servicing.

Speaker Change: Notably Longbridge also contributed <unk> <unk> per share to our Adv in contrast to its negative <unk> 10 per share contribution last quarter.

Speaker Change: Finally in what was a down quarter for the agency mortgage basis overall, our agency strategy. Nevertheless, Nevertheless generated positive net income of a penny per share for the second quarter as net gains on our interest rate hedges along with net interest income slightly exceeded net losses on agency MBS.

Speaker Change: Our results for the quarter also reflected net gain driven by the increase in interest rates on our senior notes.

J.R. Herlihy: This gain was partially offset by a net loss also driven by the increase in interest rates on the fixed receiver interest rate swaps that we used to hedge the fixed payments on both our unsecured long-term debt and our preferred equities. Here's where you can see that solid $0.06 per share contribution from Longbridge, which drove the overall increase in EFC's ADE, which rose $0.05 per share sequentially to $0.33.

Speaker Change: This gain was partially offset by a net loss also driven by the increase in interest rates on the fixed receiver interest rate swaps that we used to hedge the fixed payments on both our unsecured long term debt and or preferred equity.

Speaker Change: Turning to slide six you can see the breakout of Adv by segment, Here's where you can see that solid <unk> per share contribution from Longbridge, which drove the overall increase in Eic's, AE, which rose five per share sequentially to 33.

J.R. Herlihy: Turning next to Loan Performance. In our residential mortgage loan portfolio, after excluding the impacts of our purchase of one non-performing loan portfolio and our consolidation of another non-performing loan portfolio, the percentage of delinquent loans increased only slightly quarter over quarter. Meanwhile, in our commercial mortgage loan portfolio, including loans accounted for as equity method investments, the delinquency percentage also ticked down sequentially. We also had a significant mark-to-market gain on one of our non-performing commercial mortgage loans based on progress in the resolution process.

Speaker Change: Turning next to loan performance.

Speaker Change: In our residential mortgage loan portfolio after excluding the impact of our purchase of one nonperforming loan portfolio and our consolidation of another nonperforming loan portfolio the percentage of delinquent loans increased only slightly quarter over quarter.

Meanwhile, in our commercial mortgage loan portfolio, including loans accounted for as equity method investments the delinquency percentage also ticked down sequentially.

Speaker Change: We also had a significant mark to market gain on one of our nonperforming commercial mortgage loans based on progress on the resolution process.

J.R. Herlihy: That said, we continue to work through those two non-performing multi-family bridge loans that we referenced last quarter. While not meaningfully higher quarter-over-quarter, loans in non-accrual status and REO expenses continue to weigh on ADE in the second quarter. Next, please turn to slide seven.

Speaker Change: That said, we continue to work through those two nonperforming multifamily bridge loans that we referenced last quarter.

Speaker Change: While not meaningfully higher quarter over quarter loans in nonaccrual status and Oreo expenses continued to weigh on the AE in the second quarter.

Speaker Change: Next please turn to slide seven.

J.R. Herlihy: In the second quarter, our total long credit portfolio decreased by 2.5% to $2.73 billion as of June 30. The decline was driven by the cumulative impact of the non-QM securitization completed during the second quarter and net sales of non-agency RMBS, retained non-QM RMBS, and non-QM loans. Residential RPL MPL, CNBS, and CLOS.

Speaker Change: In the second quarter, our total long credit portfolio decreased by two 5% to $2 73 billion as of June 30.

Speaker Change: The decline was driven by the cumulative impact of the non QM securitization completed during the second quarter and net sales of non agency MBS retained non QM, RBS and non QM loans, which more than offset net purchases of commercial mortgage bridge loans Helocs and closed end seconds.

Speaker Change: Loans residential RTL, NPL CBS and CLO.

Larry Penn: For our RTL, commercial mortgage, and consumer loan portfolios, we received total principal paydowns of $381 million during the second quarter, which represented 21% of the combined fair value of those portfolios coming into the quarter, as those short-duration portfolios continued to return capital steadily. Slide nine illustrates that our Long Bridge portfolio increased by 18% sequentially to $521 million, driven primarily by proprietary reverse mortgage loan origination. Please turn next to slide 10 for a summary of our borrowing.

Speaker Change: For our RTL commercial mortgage and consumer loan portfolios. We received total principal pay downs of $381 million during the second quarter, which represented 21% of the combined combined fair value of those portfolios coming into the quarter as those short duration portfolios continue.

Speaker Change: To return capital steadily.

Speaker Change: That steady return that steady stream of principal payments should provide lots of dry powder to take advantage of opportunities, especially if we are entering a risk off environment.

Speaker Change: On slide eight you can see that our total long agency MBS portfolio declined by another 31% in the quarter to $458 million.

Speaker Change: We continue to shrink the size of that portfolio and rotate that capital into higher yielding opportunities.

Speaker Change: Slide nine illustrates that our longbridge portfolio increased by 18% sequentially to $529 million driven primarily.

Speaker Change: Merrily by proprietary reverse mortgage loan originations and.

Speaker Change: In the second quarter long branch originated $305 million across acumen, and prop, which was a nearly 50% increase from the previous quarter.

Speaker Change: As Larry mentioned shortly after quarter end in July we completed our second securitization of property versus loans from Longbridge, which locked in term non mark to market financing at an attractive cost of funds.

Speaker Change: Please turn next to slide 10 for a summary of our borrowings.

Speaker Change: On a recourse borrowings the total weighted average borrowing rate increased by 11 basis points to $6, 98% at June 30.

Larry Penn: 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. Our recourse debt equity ratio decreased to 1.6 to one at June 30th, down from 1.8 to one as of March 31st, driven by the non-QM securitization in April and a decline in borrowings on our smaller but more highly levered agency RMBS portfolio, up from $732 million on March 31st.

Speaker Change: 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 Change: The net interest margin on our credit portfolio declined modestly quarter over quarter, while the NIM on agency assets increased.

Speaker Change: Our recourse debt to equity ratio decreased to one six to one at June 30 down from one eight to one as of March 31, driven by the non QM securitization in April and a decline in borrowings on our smaller but more highly Levered agency MBS portfolio.

Speaker Change: Our overall debt to equity ratio ticked down as well to $8 two to one from eight three to one.

Speaker Change: At June 30, our combined cash and unencumbered assets totaled approximately $764 million up from $732 million at March 31.

Speaker Change: Our book value per common share was $13.90 at quarter ends up nicely from $13 69 at March 31.

Mark: And our total economic return was four 5% non annualized for the second quarter now over to Mark.

Mark: Thanks, Jr.

Larry Penn: This was a very solid quarter for EFC. Not only did we have a strong economic return, which drove book value higher per share, but we also had a sequential improvement in our ADE, which I expect to continue. While Q2 was a quarter of tight spreads and strong demand for structured products, this past week should serve as a reminder that market consensus can change on a dime, often leading to violent repricings in a matter of days.

Mark: This is a very solid quarter for EMC not only did we have a strong economic return, which drove book value higher per share, but we also had a sequential improvement in our <unk>, which I expect to continue.

Mark: Our earnings this quarter showed the value of <unk> vertically integrated platform.

Speaker Change: It's been a challenging couple of years for the mortgage origination business with mortgage rates. So high housing affordability, so bad existing home sales, so low, but Lynn sure an American heritage lending have persevered and have both posted solid earnings in Q2, driven by higher gain on sale margins and increased origination volumes, which led to.

Speaker Change: An increased valuation for our equity stakes in them.

Speaker Change: Longbridge also contributed strongly to the 80 this quarter driven by profits and their proprietary reverse business.

Speaker Change: But at AFC, we don't just own the originators, we also buy their loans collaborate with them on credit decisions maximize proceeds via Securitizations when the arb is attractive and retain what we expect to be high yielding assets from those securitizations for our portfolio all of that helped this quarter the power vertical.

Speaker Change: <unk> integration was on full display for us.

Speaker Change: We did another securitization of Longbridge is probably reverse mortgages in July and we expect longbridge as loan origination volumes as well as their securitization volume to continue to grow in that sector.

Speaker Change: In the second quarter.

Speaker Change: We also completed a non QM securitization and Opportunistically sold more of those loans as well credit spreads were relatively tight in Q2. So we took some gains in a few different parts of the portfolio now we are well positioned for some wider spread opportunities that we're seeing this week with the recent volatility.

Speaker Change: We had another strong quarter from our commercial mortgage platform as well.

Speaker Change: Filiate originator servicer Sheridan capital has a like minded approach to commercial mortgage credit risk they have been fantastic at not only sourcing opportunities, but also working with our <unk> commercial team to help manage our few delinquent loans.

Speaker Change: Sheridan capital has deep property management expertise to closely monitor construction progress capex capex expenditures and renovation quality control.

Speaker Change: This expands <unk> capabilities to manage nonperforming loans and Oreo when necessary to maximize proceeds.

Speaker Change: While Q2 was a quarter of tight spreads and strong demand for structured products. This past week should serve as a reminder, that market consensus can change on a dime often leading to violent repricing in a matter of days.

Speaker Change: Look at Slide 19, we've kept many of our credit hedges in place in Q2. They provided insurance, we didn't end up needing but they are once again showing their value in August hedges provide multiple benefits to us we use them to minimize the risk of spread widening for upcoming securitizations.

Larry Penn: We use them to stabilize our NAV in times of volatility, and we use them to potentially help offset some of the impact of increasing corporate and consumer stress if the economy weakens. We think this is a large and exciting opportunity for us, and we have invested the time and resources to build out our prepayment and credit models and have developed our sourcing capability. With their higher note rates, this sector adds a lot of ADE to Ellington Financial.

Speaker Change: We use them to stabilize our NAV in times of volatility and we use them to potentially help offset some of the impact of the increase in corporate and consumer stress if the economy weakens.

Speaker Change: <unk> been adding to our portfolio of high quality closed end seconds, and HELOC and even picked up an attractive pool late last week amid the selloff.

As opposed to our non QM loan portfolio, where we lend to borrowers who arent served by the Gse's. These second liens in the HELOC generally are offered to borrowers with low note with low note rate Fannie Freddie Ginnie Mae loans and provide a way for high quality low LTV LTV borrowers to extract equity from their homes when having a.

Speaker Change: Low note rate first lien.

Speaker Change: Which makes the cash out refi inefficient.

Speaker Change: We think this is a large and exciting opportunity for us and we have invested the time and resources to build out a prepayment and credit models and they have developed their sourcing capabilities with the higher note rates the sector as a lot of ETE for Ellington financial.

Larry Penn: As for the rate and spread volatility of the past week, While I wouldn't be surprised if it led to marked market losses in some parts of the portfolio, we also see this volatility as charging the opportunity set with wider spreads and some price dislocations to capitalize. Given that all these platforms have excess lending capacity, greater volumes should be supported for bottom-line economics.

Speaker Change: As to the rate and spread volatility of the past week.

Speaker Change: I wouldn't be surprised if it led to mark to market losses in some parts of the portfolio. We also see this volatility is recharging the opportunity set with wider spreads and some price dislocations to capitalize on.

Speaker Change: Furthermore, if lower interest rates lower interest rates, we're seeing if they stick should lead to increased loan origination volumes in both non QM and at Longbridge given that all of these platforms have excess lending capacity greater volumes should be supportive of bottom line economics.

Speaker Change: <unk> is in a good position to add assets here and we're really excited about the current opportunity now back to Larry.

Larry: Thanks, Mark I.

Larry Penn: I was very pleased with our performance in the second quarter, where we saw strong results across our credit portfolios and took advantage of tight spreads to monetize gains. In particular, it was great to see the strength in our non-QM and reverse mortgage loan platform, which drove the sequential growth in our book Value Per Share and ADE. The size of the loans that borrowers are able to take out generally increases as long-term interest rates decline.

I was very pleased with our performance in the second quarter, where we saw strong results across our credit portfolios and took advantage of tight spreads to monetize gains in.

Larry: In particular was great to see the strength in our non QM and reverse mortgage loan platforms, which drove the sequential growth in our book value per share and AE.

Speaker Change: At long Ridge, we have more work to do to grow origination volumes further, but the positive developments in the proper versus securitization markets and a strong July and originations should bode well for longbridge going forward.

Speaker Change: Lower long term interest rates could also provide a big boost along but just origination business since the size of the loans that borrowers are able to take out generally increases as long term interest rates decline.

Speaker Change: It is loan size more than loan interest rate that is the key driver of origination volumes in the reverse mortgage market both for purchases and for refinancings.

Larry Penn: Meanwhile, both during calmer times and more volatile times, we continue to rebalance our portfolio and direct capital to where we see the best opportunity, ample dry powder, and in the past few days, we've been putting that dry powder to good use.

Speaker Change: Meanwhile, both during calmer times and more volatile times, we continue to rebalance our portfolio and direct capital to where we see the best opportunities.

Speaker Change: So far in the third quarter, we have added scale and non QM RTL crop reverse commercial mortgage bridge and closed end seconds in helix growing each of those portfolios meaningfully.

Speaker Change: At this point, we are still trimming in some lower yielding sectors, but I expect the pace of that coming to slow going forward.

Speaker Change: We're also working on adding to our financing lines, specifically for our forward MSR portfolio and I see that getting done around the end of Q3.

Speaker Change: As we've been detailing today, our investment pipeline across our diversified proprietary loan origination channel channels is strong and our loan originators and which we have invested are not only providing healthy flow into that pipeline, but generating operating income themselves.

Speaker Change: Because we have equity investments in those same originators. This in turn also helps drive our results.

Speaker Change: We continue to actively pursue making small but strategic investments in other non QM and RTL originators and in fact, we closed on another one following quarter end, helping locked in another strategic sourcing channel.

Speaker Change: In light of the recent market volatility I am, particularly happy to have executed on our recent asset sales and securitizations in different parts of the portfolio ahead of that selloff.

Speaker Change: These moves locked in gains when spreads were tighter. They also freed up additional borrowing capacity and capital to redeploy.

Speaker Change: With ample dry powder and just in the past few days, we've been putting that dry powder to good use.

Speaker Change: I believe Ellington financial is well positioned for continued portfolio and earnings growth over the remainder of the year.

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

Speaker Change: Please go ahead.

Operator: Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question and star 2 to remove yourself. We will pause for just a moment to assemble the question queue.

Speaker Change: Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad you.

Speaker Change: You may remove yourself from the queue at any time by pressing star Q once they get another star one to ask a question in star two to remove yourself, we will pause for just a moment to assemble the question queue.

Speaker Change: We will go first to Bose George with <unk>.

Speaker Change: Okay.

Bose George: Hey, guys good afternoon.

Speaker Change: The first question was just about <unk>.

Bose George: Capital deployment, how would you characterize your the level of capital deployment is there still you mentioned some dry powder, but just how much upside to it is just from fully optimizing the balance sheet.

Speaker Change: Yeah, Hey.

Speaker Change: Good morning.

Speaker Change: So I think that the first answer first of all I would approach. The question would be to look at the unencumbered cash on balance sheet so that.

Speaker Change: We had $5 65 of unencumbered and I think close to 200 of cash and typically we will keep call it 10% of equity and cash so that's maybe $1 50.

Speaker Change: If we add to.

Speaker Change: So the recourse leverage on credit was one five times, if we took that to two times that.

Speaker Change: Our overall recourse debt equity back to two times in ads.

Speaker Change: A few hundred million dollars more of <unk>.

Speaker Change: Borrowings of $600 million more I guess in that example.

Speaker Change: I would say in this quarter.

Speaker Change: Yes, there are a few moving pieces in the portfolio, but we continue to trim and call lower yielding assets. So thats been offsetting we went through the laundry list of credit.

Speaker Change: Portfolios that we grew in Q2 and into Q3, but then we also sold agency and non agency MBS. So those are kind of working.

Speaker Change: In opposite directions, but suffice to say it one six overall leverage.

Speaker Change: We have we have lots of room both from.

Speaker Change: Excess cash on the balance sheet.

Speaker Change: Because those unencumbered assets to add leverage and then other assets like our Florida Msr's that are levered, but lightly levered. So.

Speaker Change: You can draw several hundred million of additional buying capacity just from those different numbers that would still take us just a few times.

Unknown Executive: draw several hundred million of additional buying capacity just from those different numbers, but that would still take us just twice.

Larry: Recourse debt to equity and as we as Larry as we trim.

Larry: From that agency portfolio and more.

Larry: <unk> just in the credit sectors, you could sort of think of that two to one leverage ratio I think is kind of a fully invested.

Larry: Being fully invested so probably again as we trim agency, probably not going to get.

Larry: All the way to two to one in terms of being fully invested but at 1.6, we had hundreds of millions of shares set of of room to add even before we get close to that yes, and then and.

Larry: We're really focused on senior secured financing longer term, we have several tranches of unsecured debt at Ellington financial in pricing for recent deals.

Larry: Been wider than it had been in prior years, but I think it's fair to say over the longer term, we see adding more unsecured debts the liability structure.

Larry: As another step that we would consider so that would also take up the the recourse debt to equity ratio, but again over a longer term period.

Speaker Change: Okay, Great. That's helpful. Thanks, and then why do you hedge your portfolio very closely can you just talk about how the portfolio potentially benefits from it from a steeper yield curve. The forward curve is right and the fed is cutting quite a bit over the next year.

Larry: Alright.

Bose George: Hey, Bose.

Bose George: No.

Bose George: Yeah in.

Bose George: In terms of interest rate hedging, we try to hedge out across the curve. So we don't really expressed an opinion on what the future shape of the yield curve is going to be to our interest rate hedges. So.

Speaker Change: Just kind of mathematically you're on paper.

Speaker Change: Just the first order effect of a steeper yield curve or a flatter yield curve.

Speaker Change: We kind of neutralize that with hedges now I think there is a couple of other things going on whenever you have.

Speaker Change: When the notional balance of your repo.

Speaker Change: Exceeds the notional size of your swaps.

Speaker Change: And then a drop in financing costs is going to be a beneficial rate like if you have the if the swaps exactly equal the size of the repo and the market is predicting now I think the base cases, a 50 basis point cut in September the fed cut 50 basis points. Okay. Our repo cost go down 50 basis points, but the floating leg we receive on swap.

Speaker Change: It goes down 50 basis points too. So if your if your repo exactly equal your swaps than it is kind of washes out.

Speaker Change: When you have repo in excess of your swap notional amounts.

Speaker Change: And then sort of Thats, a beneficial thing to you.

The things we're thinking more about is.

Speaker Change: When you see.

Speaker Change: Cutting cycle start I.

Speaker Change: Do think you see investors with.

Speaker Change: Express a preference for fixed rate assets as opposed to floating rate assets. So we've been adjusting some of our hedges internally to be more focused on loan indices as opposed to say a high yield bond index. So thats kind of one second order effect I think makes sense and it's kind of interesting if you look at.

Speaker Change: Some of the recent fund flows there's this $11 billion.

Speaker Change: AAA CLO ETF J AAA that just came out of the Blue. This year I think it has had its first outflow ever yesterday right. So the expectation of the market that youre going to see lower short term rates.

Mark Tecotzky: That is starting to be reflected in fund flows. So we certainly think about how we position the portfolio. And I also do think that when you see steeper yield curves, that tends to be supportive of agency mortgages and non-QM mortgages. So I think there are some second order effects for us. And we're positioning around it. But in terms of like a big move in ADE for the portfolio, I think you're only going to see that really significantly to the extent that the notional amount of our repo borrowings exceeds the notional amount of the swap pay.

Speaker Change: That is starting to be reflected in fund flows. So we certainly think about and how we position the portfolio and I also do think when you see steeper yield curves that does tend to be supportive of agency mortgages and non QM mortgages.

Speaker Change: I think theres, some second order effects for us.

Speaker Change: And we're positioning around it but in terms of like a big move in a day for the portfolio I think youre only going to see that really significantly to the extent that.

Speaker Change: The notional amount of our repo borrowings exceeds the notional amount of the swap hedges.

Larry Penn: I'll just add one thing. I agree with everything Mark said. If you look at what's now a very large segment of the portfolio, which is residential transition loans, they're short; we don't really meaningfully hedge those from an interest rate perspective. And I do think that if you see, you know, rates tend to be a little stickier in that sector. I do think that if you see a drop in short-term rates, right, as everybody's predicting, I do think that

Speaker Change: Okay great.

Speaker Change: I'll, just and I'll just add one thing right. So I agree yes.

Speaker Change: So everything Mark said.

Speaker Change: If you look at though.

Speaker Change: It's now a very large segment of the portfolio, which is residential transition loans.

Speaker Change: So so we don't know their short we don't really meaningfully hedge those from an interest rate perspective.

Speaker Change: And I do think.

Speaker Change: That.

Speaker Change: <unk> see.

Speaker Change: Rates tend to be a little stickier in that sector.

Speaker Change: I do think that if you see a drop in short term rates right as everybody is predicting.

Speaker Change: I do think that.

Speaker Change: You will actually have wider net interest margin on that portfolio, because I think the.

Larry Penn: You will actually have a wider net-ish margin on that portfolio because I think, you know, our repo rates, they float, they'll absolutely... Ratchet down almost, you know, basis point per basis point with Fed cuts. But I think that the rates, the coupons that we'll be able to get on RTLs will be a little stickier. So and, you know, that's the opposite that we saw when rates were right. Exactly. Right. Yeah, we've had some.

Speaker Change: Our repo rates that float.

Speaker Change: Absolutely.

Speaker Change: A ratchet down.

Speaker Change: Almost basis point per basis point with fed cutting.

But I think that the.

Speaker Change: The rates the coupons that will be able to get on RTL will be.

Although stickier, so and that's the opposite that we saw when rates were exactly right. Yes, we've had some NIM compression in that sector.

Speaker Change: Versus where we were a few years ago when rates were.

Speaker Change: Short term rates were a lot lower so yeah. So I think that's one good thing to look forward and then.

Speaker Change: Bose I think got you.

Speaker Change: I think some of the things I've seen you've written would echo this as well which is that.

Speaker Change: Let's say, we fast forward to a year a year unchanged from now and we've got.

Unknown Executive: got, you know, long-term rates and short-term rates, you know, with a three-handle, right? That's going to be good for, you know, you're going to see mortgage rates go down across the board, just on an absolute basis. And that should be really good for originators, right? Just, you'll, you'll see a lot more refi activity, etc.

Speaker Change: Long term rates.

Speaker Change: And short term rates with a three handle right that's going to be good.

Speaker Change: Or youre going to see mortgage rates go down across the board just on an absolute basis and that should be really good for originators right just youll see a lot more refi activity et cetera.

Operator: That's good, very helpful. Thank you.

Speaker Change: Okay, great very helpful. Thank you.

Speaker Change: Okay.

Operator: We'll go next to Crispin Love with Piper Sandler.

Crispin Love: We will go next to Crispin love with Piper Sandler.

Crispin Love: Thanks. Good morning, everyone.

Crispin Love: Thanks, Good morning, everyone. I appreciate taking my questions first just on Helocs and closed end seconds.

Crispin Love: Appreciate you taking my questions. First, just on key locks and close in seconds, is this an area that you expect to see a lot of runways just given home affordability, higher HPA, and higher rates with many mortgages in the 3 to 5% range? Or if we do get a sizable rate rally, could this opportunity diminish income in quarters, but then you get the benefit from higher originations as you've indicated? Just curious about your thoughts there.

Speaker Change: Area, but you would expect to see a lot of runway given home affordability hirings higher rates with many mortgages in the three 5% range or if we do get a sizable rate rally opportunity diminish in coming quarters, but then you get the benefit from higher origination.

Speaker Change: As I've indicated you just curious on your thoughts there.

Mark Tecotzky: Yeah, hey Crispin, it's Mark. If you just look at it, how many Fanny 2s and Fanny 2.5s and Fanny 3s? that are out there in existence. You know, all the stuff that was created in 2020, 2021, and the first half of 2022. That is an enormous pile of Fannie, Freddie, and Ginnie loans, plus the second liens on the Helox we've been buying. The originators are targeting borrowers with those really low note rates first. If rates were just to stay where they are, that opportunity looks like it's pretty big. You're exactly right.

Speaker Change: Yeah, Hey, Chris it's Mark.

Speaker Change: If you just look at.

Speaker Change: How many Fannie twos, and Fannie two and a half and Fannie threes.

Yeah.

Speaker Change: That are out there in existence.

Speaker Change: All the stuff that was created in 2000 22021 first half of 2022 that is an enormous pile of.

Speaker Change: Fannie Freddie Ginnie loans.

Speaker Change: And for the second liens in the HELOC Threep and buying.

Speaker Change: The originators are targeting borrowers with those really low note rate.

Speaker Change: First liens.

Speaker Change: So that.

Speaker Change: If rates were just to stay where they are that opportunity looks like it's pretty big.

Mark Tecotzky: If you saw a big rate rally and mortgage rates came down a lot, then all of a sudden, doing a cash-out refi is going to start to look, um, you know, to be comparable economics to people that are saying, "I'm going to stay put with my fixed-rate first lien mortgage." And if I want to borrow, you know, $70,000 for some home renovation or something, I'm going to take this closed end second lien.

Speaker Change: You're exactly right. If you saw a big great rally in mortgage rates came down a lot then all of a sudden.

Speaker Change: The cash out refi is going to start to look.

Speaker Change: To be comparable economics to people that are saying I'm going to stay put with my.

Speaker Change: The fixed rate first lien mortgage and if I want to borrow $70000 due some home renovation or something I'm going to take this.

And second lien so yes, there is a tradeoff between.

Mark Tecotzky: So yeah, there is a trade-off between, you know, we're first in mortgage rates and how big that opportunity set is, but you're exactly right. We've positioned ourselves to have a seat at the origination table, not in Fannie and Freddie space, but in non-QM space with our originators, and so lower mortgage rates across the board, I think would definitely be supportive of origination volume. This, you know, we don't kind of think about it explicitly as sort of a hedge on origination volumes, but it certainly functions that way.

We're first lien mortgage rates and how big that opportunity set is but you're exactly right. We've positioned ourselves to have a seat at the origination table not in Fannie Freddie space, but in the non QM space with our originators and so lower mortgage rates across the board I think would be definitely supportive too.

Speaker Change: The origination volume so.

Mark Tecotzky: We're attracted to it now because you get a really high note rate. It's very supportive of ADE. We think we understand the prepayment function, and the credit quality is really strong. So that's what sort of driving us. It just looks like an attractive asset to add to the portfolio to complement already what we're doing in RTL and non-QN.

Speaker Change: This we don't kind of think about it explicitly sort of hedge on origination volumes, but it certainly functions that way we are.

Speaker Change: You're attracted to it now because you get a real high note rate, it's very supportive V D.

Speaker Change: We think we understand the prepayment function.

Speaker Change: And the credit quality is really strong.

Speaker Change: So that's what's sort of been driving us it just looks like an attractive asset to add to the portfolio to complement already what we're doing in RTL and non QM and the private label reverse.

Speaker Change: Okay, and if I could just add to that mark.

Larry Penn: Yeah, and if I could just add to that, Mark, I just want to add that I really, you know, based on what Mark said, right about, but rates would have to drop a lot for those, you know, all those low coupons that were originated, you know, pre 2022, especially right now, to become refinanceable. You know, if mortgage rates are, maybe, they're getting close to 6% now, but, you know, you're, that's still 200 basis points away, right? So you're gonna need it.

Speaker Change: Just wanted to add that.

I really based on what Mark said right about.

Speaker Change: But rates would have to drop a lot for those all of those low coupons that were originated pre.

Speaker Change: Pre 2022, especially right too to become refinance at all.

Speaker Change: Mortgage rates are made.

Speaker Change: Maybe they are getting close to 6% now but.

Speaker Change: Yes.

That's still 200 basis points away right, so youre going to need a.

Larry Penn: Quite a big drop, I think, before Hellox in close in seconds will no longer make as much sense for people. The thing that I'm a little more, you know, sort of on the radar screen about is what's going on with the agencies, right? So I don't think volume is necessarily going to be an issue for a very long time in terms of that market. But the question is, with this agency pilot program coming out and all that.

Speaker Change: Quite a big drop I think before.

Speaker Change: He locks and closed end seconds aren't going to no longer make as much sense for people the thing that a little more.

Speaker Change: Sort of on the radar screen about is what's going on with the agencies right. So I am not I don't think volume is necessarily going to be an issue for a very long time in terms of.

Speaker Change: That market, but the question is with this.

Speaker Change: Agency pilot program coming out and all that.

Larry Penn: That could obviously lead to some serious competition. I mean, it's not a big pilot program, but if it becomes more than a pilot program, there could be some serious competition there. And, you know, we don't wanna be competing with the agencies, but, you know, we're gonna keep going. The assets that we're seeing now are looking great, as Mark said.

Speaker Change: That could obviously lead to some serious competition, it's not a big pilot program, but.

Crispin Love: Great, thank you. That'll make sense. And then there is just one last question from me.

Speaker Change: If it becomes more than a pilot program there could be some serious competition there.

Speaker Change: And we don't want to be competing with the agencies, but we're going to we're going to keep going the assets that we're seeing now.

Mark: Looking greatest Mark said.

Mark: And.

Speaker Change: We'll see what happens.

Speaker Change: Great that all makes sense and then just one last question from me are you seeing single asset single borrower security.

Crispin Love: Are you seeing single asset, single borrower security opportunities in the current landscape? Is this an area where you're adding, and would that fit well within ESB's credit portfolio on the commercial side? And just kind of curious what kind of returns you think you might be able to get right there if you are interested.

Speaker Change: <unk> currently landscape.

Speaker Change: In the area, when you're adding them would that fit well with it.

Speaker Change: Credit portfolio on the commercial side.

Speaker Change: Im curious what kind of returns do you think you might be able to get right. There. Thank you are interested.

Unknown Executive: Yeah, it's a great question. Do you want me to take a J.R., or do you want to take it yourself?

Speaker Change: Yes, yes.

Speaker Change: Yes, it's a great question.

Speaker Change: Okay.

Speaker Change: Do you want me to take a Jr. Do you want to take it.

Speaker Change: So I think the first on FASB question, yes.

Speaker Change: That's part of the market, we've been focused on and small size and you see that the portfolio grew from 22% to $42 million quarter over quarter and CBS.

Speaker Change: It is still.

Speaker Change: A small percentage of the overall credit portfolio, but yes, certainly SaaS b is an area that we focused on.

Speaker Change: Passengers D pieces have been a much larger percentage of our CBS portfolio now.

Speaker Change: Most of them are smaller so yeah on the margin side view of the deals we're looking at in terms of how those yields pencil Mark you want to.

Speaker Change: Address that.

Speaker Change: We get the I'm just thinking about in our disclosures, where we would give more detail there will be more diesel in the queue.

Mark: On that.

Speaker Change: On that question, but I know anecdotally markets you want to talk about some of the FASB <unk>.

Mark: Cvs incremental yields you're seeing.

J.R. Herlihy: Yeah, it's been a wild sector, right? A lot of new issues, SASB, and it's been a pretty big volume and it's push spreads a little wider. So yeah, the, uh, what's been going on in SAAS, has really been a lot of the focus of our CMBS team. As JR mentioned, you know, for years, we were very active in the BP's market and just that market with not a lot of conduit issuance, there's just not, you know, it doesn't have the same opportunities as it used to, but this SASB opportunity on either lower dollar price, distressed SASB where you're really doing you know, very, very detailed analysis of the properties, and then up the capital stack to, Some of the bigger SASB deals that we think are coming at very attractive spreads.

Mark: Yes, it's been a wild sector right. So.

Mark: For years, we had almost no says b exposure.

Speaker Change: It was a market where sort of triple BS and above all kind of traded in a tight spread range and everything came at par and just didn't look that interesting to us and now as you have this tremendous divergence of outcomes in commercial space is a function of property type.

Speaker Change: <unk> seen some really interesting opportunities you know there have been bought.

Speaker Change: Bonds that are still investment grade SaaS b that have been down dollar prices in the <unk> and <unk>.

Speaker Change: And then so there is that that's been interesting opportunity for us and the other interesting thing is youre getting.

Speaker Change: A lot of new issue SaaS, B, and it's been a pretty big volume and it's pushed spreads a little wider.

Speaker Change: So from a leverage spread basis.

Speaker Change: Certainly looks attractive to us or maybe even slightly more attractive to us than some of the other sort of bread and butter sectors like CRT or legacy non agency on the CUSIP.

Speaker Change: CUSIP side.

Speaker Change:

Speaker Change: Yeah.

Speaker Change: What's been going on in SaaS B.

Jr.: Has really been a lot of the focus of our C. MBS team as Jr. Mentioned, you know for years, we were very active in the bps market and just that market with not a lot of conduit issuance.

Jr.: They're just not it doesn't have the same opportunity set as it used to but the SaaS b opportunity on either lower dollar priced distressed SaaS b, where you're really doing.

Speaker Change: You know very very detailed analysis of the properties and then up the capital stack too.

Speaker Change: Some of the bigger SaaS be deals that we think are coming at very attractive spreads.

Speaker Change #100: I definitely.

Speaker Change #100: Thank you can see more capital get allocated there.

Speaker Change #100: Okay.

Speaker Change #101: Great. Thank you for answering my question I'll also be helpful.

Jason: Thanks, Jason.

Jason: We will go now to Doug Harter with UBS.

Jason: Thanks.

Doug Harter: Given given the market volatility can you talk about.

Doug Harter: Your appetite for potentially looking at more illiquid assets versus your recent strategy of.

Speaker Change #104: More proprietary credit loans.

Speaker Change #105: Sure I mean I think it's.

Speaker Change #106: I think it's both right like I think.

Speaker Change #106: We've been opportunistic about that.

Speaker Change #106: Followed us for years right.

Speaker Change #106: Look at what we did in 2020, we added a lot of legacy non agency.

Speaker Change #106: In a.

Speaker Change #106: A few months before that we were adding a lot of non QM loans. So.

Speaker Change #106: We're constantly looking at the trade off between securities and loans.

Speaker Change #106: And we take into account the difference in financing levels to difference in liquidity. So.

Speaker Change #107: I would say for this market volatility.

Speaker Change #107: What that means to me is that maybe you are looking for incrementally a bigger pickup in loans relative to Q sips than you might normally look for and Thats typically what happens when you see this volatility that sort of liquidity bases tend to accordion out so.

Speaker Change #107: And you see it every way you know less liquid self versus more liquid shelves.

Speaker Change #107: You know unrated seniors versus rated seniors all of those things.

Speaker Change #107: Had been kind of going one way this.

Speaker Change #107: This year up until the last week or so liquidity spreads coming in.

Speaker Change #107: We did some loan selling alone monetizing to take advantage of that and now you seem to start to go the other way so.

Speaker Change #107: That that relative value trade off is something we always look at.

Speaker Change #107: And I think.

Speaker Change #107: I sit down and we discuss things with the Pms that means to us that the threshold for adding loans relative to securities is incrementally a little bit wider now than what it was a couple of weeks ago.

Larry Penn: And the other thing I would add, this is Larry, is that, in general, when you have these, you know, big market moves, and for example, we saw some mutual fund selling, right, or, you know, ETF selling, QSIPs tend to trade more, obviously, and to be a little more volatile, right, in terms of just what you're actually able to buy. So I think when stuff like that happens,

Speaker Change #107: Yes.

Speaker Change #107: Thanks, Mark and the other thing I would add this is Larry is that.

Speaker Change #108: It was.

Speaker Change #109: We happen to be looking last week at our second lien portfolio.

Speaker Change #110: Pulled the trigger on that.

Speaker Change #110: And.

Speaker Change #110: In the face of SaaS, Cal off which was great.

Speaker Change #110: Got a better price but.

In general when you have these big market moves and for example, we saw some mutual fund selling right.

Speaker Change #110: <unk> selling.

Speaker Change #110: CUSIP tend to trade more obviously and to be a little more volatile right in terms of <unk>.

Speaker Change #110: What you're actually able to buy so I think when stuff like that happens.

Q Simpson: The first opportunities that are going to arise youre going to be in Q Simpson and absolutely if it looks like theres some for selling will gobble those up it's a little harder to.

Q Simpson: Dialogue you are proprietary pipelines.

Mark: Immediately right. That's just something that is going to kick in longer. So as you have these big risk off moves and now in the last couple of days, it's gone moves youre going to see more activity just in CUSIP and be able to pounce on those but longer term as Mark said I think our expectation is that it's going to be on the private side of the portfolio.

Mark: The non CUSIP square, we're going to continue to see driving R. R.

Speaker Change #112: Great. Thank you.

Doug Harter: Thanks, Doug.

Speaker Change #112: Okay.

Speaker Change #112: We will go now to Eric Hagen with BT IGT. Please go ahead.

Eric Hagen: Hey, Thanks, how are you guys doing I actually wanted to follow up right, there and ask about non agency securities repo.

And your outlook there for spreads over software to stay stable, including just the general kind of supply of capital that's coming from some of the big banks typically supply back capital and maybe the appetite to continue.

Eric Hagen: Flying funding there for the market.

Speaker Change #114: Perspective, thank you.

Speaker Change #115: We have seen.

Speaker Change #116: We've seen the same thing you've seen.

Larry Penn: The Big Banks are now very interested in repo as a balance sheet asset, right? It doesn't have price volatility.

Speaker Change #117: The big banks now are very interested in repo as a balance sheet asset right. It doesn't have price volatility it has a healthy spread through its contributes to NIM. So its not only.

Larry Penn: It has a healthy spread, so it contributes to NIM. So it's not only traditional banks, but you also have some very large investment banks that converted to banking charters during the financial crisis. We have been able to negotiate better financing terms.

Speaker Change #117: Traditional banks, but you also have some very large sort of investment banks that that converted to banking charters.

Speaker Change #117: During the financial crisis. So we have seen we've gotten a lot more.

Speaker Change #117: Inbound calls from people wanting to add repo not on the agency side, but thats kind of been stuck at like sofa, plus anywhere between five and 10, but it's been.

Speaker Change #117: On the loan side and on the CUSIP side, so anything sort of.

Speaker Change #117: I would say so for plus 125 to plus two in a quarter those kind of asset classes.

Speaker Change #117: There's been a lot of interest in.

Speaker Change #117: Lenders trying to get more.

Speaker Change #117: Get more borrowings under balance sheet and so we've seen.

Speaker Change #118: But you know it's like what.

Speaker Change #119: What rate of lenders that is important but it's not the only thing that matters on the repo side, it's how easier there to work with.

Speaker Change #119: What's their eligibility likes there's a million other things but.

Speaker Change #119: We have been able to negotiate better financing terms.

Speaker Change #119: On loans this year than what we had in place last year and I think that will keep going.

Speaker Change #119: Because.

Speaker Change #119: I think what would stop that would be if you saw a sofa really come down a lot, but it's five and three ace now silver comes out you know 5100 basis points I think it's still going to be attractive for the bank. So.

Speaker Change #119: That's another way I think at the margin we're going to grow some ETE is just by continuing to.

Speaker Change #119: Negotiate.

Speaker Change #119: And take advantage and be opportunistic about the best financing levels. We can get one thing that is sort of helping that is the securitization spreads Larry mentioned.

Speaker Change #120: Tighter non QM spreads this year that is sort of give the gift the lenders a little bit more confidence to come down on the sofa spreads so.

Larry: That has been across the board.

Larry: Or whether it's Q sips or whether it's loans, but for the Q says I'm talking about it's sort of like.

Larry Penn: You know, the SASB that Crispin was asking about, or CRT, or Legacy Non-Agency. And the agency stuff, you know, that's been fine for years. It didn't really widen in 22, it hasn't come in this year, that sort of stuck where it is. But anything else, we've gotten better financing terms. And I do think that that's going to continue.

Larry: You know SaaS B that Chris was asking about or CRT or legacy non agency and the agency stuff.

Larry: Thats been fine for years.

Larry: It didn't really widened in 'twenty two it hasnt come in this year that sort of stuck where it is but anything else.

Speaker Change #121: We've gotten better financing terms and I and I do think that that's going to continue.

Speaker Change #121: And I think what was it.

Speaker Change #121: I think especially in repo on fixed income <unk> I think it has further to come down given how much spreads have tightened and just given how.

Speaker Change #122: When was the last time, you heard about a lender.

Speaker Change #123: Having a loss on fixed income CUSIP repo I mean, it's been a really long time, they're much better at managing that risk the haircuts are high.

Speaker Change #123: A lot higher even than in a lot of like warehouse loan repo on the loan side as opposed to the CUSIP side. So I think.

Speaker Change #123: I think that actually has room to come down more.

Speaker Change #124: Always appreciate your detailed response.

Speaker Change #123: More.

Speaker Change #125: Can you share how much capital you have allocated to the credit hedges and how you think about maybe scaling that opportunities.

Speaker Change #125: Rotate more capital.

Speaker Change #126: And will the credit portfolio.

Speaker Change #127: So on slide 19, we give an overview of the credit hedges and you can see on it that's not exactly the capital allocation, but.

Speaker Change #127: Our high yield equivalent.

Speaker Change #128: $120 million notional is our CTX, which is where most of our corporate hedges are we have a small amount in <unk> and then European related to currency risks for the most part so if it's meaningful and Mark went through the different uses.

Speaker Change #129: Benefits it provides but relative to the size of the buyer.

Speaker Change #130: Several billion dollars.

Speaker Change #131: Credit and agency portfolios, it's small, but it does help on the margin and the way that he mentioned.

Larry Penn: We have taken the size of these credit hedges down over time as we move more toward loans and away from Q-SIPs that don't always have... low short spread durations, for example.

Speaker Change #132: We've taken the size of these credit hedges down over time, as we move more towards loans and away from <unk> that don't always have.

Speaker Change #132: Hedging instruments available or the need to hedge with <unk>.

Speaker Change #133: Low short spread duration for example, yes.

Speaker Change #132: Okay.

Speaker Change #134: They really take minimal capital to put on and maintain.

Speaker Change #134: And there are in fact risk reducing so in terms of when we think about now I'll take any capital way certainly.

Speaker Change #134: Our ability to add assets.

Speaker Change #134: Yes.

Speaker Change #135: Thank you guys. So much appreciate it.

Eric Hagen: Thanks, Eric.

Operator: We'll go now to Matthew Erdner with Jones Trading.

Matthew <unk>: Well go now to Matthew <unk> with Jones trading.

Matthew <unk>: Hey, guys. Thanks for taking the question can you talk about current expectations for credit performance and then recent economic data has kind of made you shipped asset allocation.

Matthew <unk>: But more.

Speaker Change #137: More so in the credit and away from the agency.

Speaker Change #138: Sure Mark one I think the first half of that and you can go second if that works.

Speaker Change #139: So on the sure.

Speaker Change #139: Performance.

Speaker Change #139: Our loan portfolios.

Speaker Change #139: <unk>.

Speaker Change #139: We mentioned in our prepared remarks, and the earnings releases that in commercial.

Speaker Change #139: Delinquency percentage decline quarter to quarter, we do still have the two multi use downlink.

Speaker Change #139: Loans that were working through.

Ramsey: But overall the percentage of delinquencies relative to fair value declines between the two quarters and then Ramsey it ticked up slightly by 10 basis points call. It.

Ramsey: When you exclude npls that we that we bought during the quarter. So.

Ramsey: Yes.

Ramsey: And credit realized losses continue to be small, but we do highlight those two non performing multifamily properties that we're working through remember and also remember that we mark to market through our income statement right. So we mark those.

Ramsey: Those two non performers down and so when those resolved we do not expect.

Ramsey: To that affect our net income in any negative way and in fact.

Ramsey: What it will do is free up capital to redeploy.

Ramsey: So that we can.

Ramsey: Continue to boost our AE.

Speaker Change #141: Gotcha. That's helpful. Thank you guys.

Operator: And the second half of your question about, I think, an economic slowdown and how that might change our perception of adding credit assets. Would you mind repeating that? And maybe, Mark, if you would not mind tackling that, please?

Speaker Change #141: Sure.

Speaker Change #142: The second half of your question about.

Speaker Change #143: I think an economic slowdown and how that might change our our perception of VAT in credit assets.

Speaker Change #144: Would you mind repeating that in any markets you wouldn't mind tackling that please yes.

Speaker Change #145: Just kind of if we were to kind of go into a recession. How you guys would think about asset allocation and if it would change from your current stance.

Speaker Change #146: Yes, I guess the way I think about it is okay.

You know in the early days of non QM.

Speaker Change #147: Loss expectations on it.

Speaker Change #148: Which areas would take loan loss reserves.

Speaker Change #149: And what we saw is that performance was so good shockingly good debt.

Speaker Change #149: They they built up a war chest of loan loss reserves and because there weren't any losses right and so to me. The aberration has been you know really youll tailwind of home price isn't really strong.

Speaker Change #150: Default performance from say I mean, we started Lynch for 2014, you know too.

Speaker Change #150: 2014 up to you know middle of 2022.

Speaker Change #150: <unk> performance was aberrational, good and I think now we're going into we are in a period of time.

Mark Tecotzky: Where, you know, you're gonna see some delinquencies, and best underwriting practices where you can be relevant to, you know, the brokers or the correspondence you're working with, but you're getting, you know, great quality loans. And so if we see, you know, performance deterioration in certain parts of the portfolio. Then that serves as the feedback loop when you change your eligibility. So that process, that iterative process of analyzing the data and then updating and adjusting guidelines is a reaction to it. That's why I see that as a big part of our job. You know

Speaker Change #150: Where you know you're going to see some delinquencies.

I'm not going to see some losses, but I think it's it's absolutely consistent with sort of how we underwrite things and the same thing is true for our residential transition lending.

Speaker Change #150: You've seen the unemployment.

Speaker Change #150: Rate tick up Jay Powell was talking about it a lot at the press conference.

Speaker Change #150: You know, we make no predictions about the economy, but we watch things like a hawk right and so.

Speaker Change #150: We slice and dice the data a million different ways, we've certainly seen a lot's been written about it that.

Speaker Change #151: Theres been kind of FICO inflation that a 700 FICO today is probably more like a 680 FICO four years ago right. So that that observation or that belief has informed our creditor eligibility criteria.

Speaker Change #151: Matriculated up in FICO and I think you know as an originator and this gets to the point I want to make in the prepared remarks about how.

Speaker Change #152: It's not just the one originator and we were hands off we're collaborative right and so we give them access to our data scientists and our data and our research team to kind of come up with best underwriting practices, where you can be relevant to the brokers or correspondent.

Speaker Change #152: Working with but you're you're getting great quality loans and so.

Speaker Change #152: If we see you.

Speaker Change #153: No performance deterioration in certain parts of the portfolio.

Speaker Change #153: Then that serves the feedback loop when you change your eligibility so.

Speaker Change #153: That process that iterative process of analyzing the data and then updating and adjusting guidelines as a reaction to it that I see that as a big part of our job.

Mark Tecotzky: And, you know, it was a big part of our job 10 years ago. But just 10 years ago, you didn't see a lot of delinquencies. You'd look at it, say delinquencies are fine. OK, let's go ahead.

Speaker Change #154: And he was a big part of our job 10 years ago, but just 10 years ago, you didn't see a lot of delinquency if you'd look at it see delinquencies define okay. Let's go ahead now you are into sort of a much more normal regime home price, they're more expensive note rates are high people are signing up for bigger payments and so.

Mark Tecotzky: Now you're into sort of a much more normal regime. Home prices are more expensive. Note rates are higher. People are signing up for bigger payments. And so, you know, there's going to be some delinquencies. And so we monitor it. We're pricing for it, and I think we're very well equipped to respond to it. That's very helpful. Thank you.

Speaker Change #154: There's going to be some delinquencies and so we monitor it.

Speaker Change #154: We're pricing for it.

And I think we're very well equipped to respond to it.

Speaker Change #155: That's very helpful color.

Speaker Change #156: I want to add one thing just if you turn to page 12.

Larry Penn: of the presentation, right? You can see a kind of the various segments. And you can see, you know, consumer loans are a very small segment, right, compared to the others. And if you look at our portfolio generally, right, we are a residential-focused company in terms of the credit risk that we're taking on the multi-family side, you're going to really help the cap rate issue and remember where these are bridge loans in terms of the vast majority of our commercial mortgage loan portfolio.

Speaker Change #157: The presentation right you can see kind of the various segments.

Speaker Change #157: Of our <unk>.

Speaker Change #157: Loan origination business in those pipelines that we've been talking about.

Speaker Change #157: And you can see consumer loans, it's a very small segment right.

Speaker Change #158: Compared to the others I mean tiny.

Speaker Change #158: And if you look at our portfolio generally right we are.

Speaker Change #158: Residential focused company in terms of the credit risk that we're taking and less include also a multifamily in that right because thats most of our commercial mortgages.

Speaker Change #158: Our multifamily properties and you can see that on another slide in the presentation, but but as to your question. If we go into a recession right youll see rates come down.

Speaker Change #158: And even though.

Speaker Change #158: There is definitely issues right on affordability.

Speaker Change #158: Of housing there's also a lot of issues on supply right and you have those two things you have very little supply.

Speaker Change #159: Versus the demand.

Speaker Change #159: But you've got an affordability problem right and so those two things are kind of counteracting each other.

Speaker Change #159: But if if we go into a recession and again to your question and rates go down and mortgage rates go down which they would in that scenario. You are now all of a sudden you're really helping the affordability issue.

Speaker Change #159: Because you're going to have mortgage rates lower.

Speaker Change #159: And on the multifamily side Youre going to really help the cap rate issue and remember were.

Speaker Change #160: These are bridge loans.

Speaker Change #161: In terms of the <unk>.

Speaker Change #161: Vast majority of our commercial mortgage loan portfolio, so you're really talking about valuations at the end of that 12 to 18 months term so with cap rates if they come down so.

Larry Penn: So you're really talking about valuations at the end of that 12 or 18-month term. So, with cap rates, you know, if they come down. So I really feel good about how our portfolio, again, being very residential based and giving the technicals of that market, and, in addition, what would happen if long-term rates came down. I feel very good about how we would withstand that kind of market.

So I really feel good about how our portfolio again being very residential base and giving the technicals of that market.

Speaker Change #161: In addition, what what happened there sorry, if long term rates came down I feel very good about.

Speaker Change #161: How we would withstand that.

Speaker Change #161: That kind of a scenario.

Speaker Change #162: Got it alright, thank you very much.

Speaker Change #162: We'll hear next from Lee Cooperman with Omega family Office.

Lee Cooperman: Thank you.

Lee Cooperman: Cell phone can you hear me.

I can thanks Lee to to hear from you.

Speaker Change #164: To need a little bit late.

Speaker Change #165: His appointment.

Speaker Change #165: I have three questions.

Speaker Change #166: Most people own the stock for income.

Speaker Change #167: Given everything you've heard to say thank you restart your dividend before the end of the year to 50 per month level.

Speaker Change #168: I feel great about maintaining the dividend where it is.

Speaker Change #169: At this point no that's not something that I would expect to raise it.

Speaker Change #169: And but we've tended to keep our dividend stable for a long time.

Speaker Change #169: And so I wouldn't I wouldn't have that expectation of raising it.

Larry Penn: So you would think a dividend would be sustainable at the 13th cent a month level.

Speaker Change #169: So you would think the dividend really sustained at 37 months level.

Speaker Change #170: Yes, absolutely alright.

Speaker Change #171: Alright second question you guys have been active in capital management, what is your attitude towards that presently.

Speaker Change #172: Yes, I think Jay or kind of alluded to it earlier I think our next kind of big move.

Jay Powell: On the capital management side is going to be unsecured debt rates have come down in those.

Speaker Change #174: When you look at baby bonds or other types of offerings, they tend to be a little sticky so we're being patient.

Speaker Change #174: And watching that market, so I think adding unsecured debt to the portfolio.

Speaker Change #174: Think is important.

Speaker Change #174: And.

Speaker Change #174: It's also a little bit of a.

Speaker Change #174: A healthy cycle as you do that because ultimately look we're not.

Larry Penn: You know, we're not rated by any of the big companies like S&P and Moody's, for example. Right now, we have a great Egan Jones rating. But at some point, you know, that's something we might want to look into, is to, you know, get a rating from, let's say, S&P and Moody's and the like. And that will enable us to issue even more unsecured debt. Of course, as we add things like baby bonds, which aren't rated, that also helps the capital structure and can help us get those other ratings.

Speaker Change #175: We're not rated.

Speaker Change #174: Hi.

Speaker Change #174: Any of you know looks like S&P and Moody's for example, right now we have a great Egan Jones rating.

Speaker Change #174: But at some point, that's something we might want to look into is too.

Speaker Change #174: Get a rating from let's say S&P and Moody's and alike.

Speaker Change #174: And that will enable us to issue even more unsecured debt.

Speaker Change #174: Of course as we add.

Speaker Change #174: Things like baby bonds, which arent rated that also helps the capital structure and can help us get those other ratings, so but anyway. The next move I think.

Larry Penn: So but anyway, the next move, I think, you know, a significant move, again, this is just a prediction. I can't predict where the capital markets will go, and they're not there yet for us, I think it would be some sort of an unsecured.

Speaker Change #174: Significant move again. This is just a prediction I can't predict where the capital market's goin', they're not there yet for us I think would be some sort of an unsecured deal.

Unknown Executive: I need you to help me out since you guys are smarter in the credit markets than I am. Everyone seems to think interest rates are too high. I actually think they're low, and the evidence I would use is that the stock market is near a high. There is a lot of speculation in the market. Prior to the Great Financial Crisis of 2008, the 10-year bond yielded in line with nominal GDP. If you have inflation of 2% to 3% and real growth of 2% to 3%, the 10-year would not be undervalued at a 4% or 6% yield.

Speaker Change #176: And I need you to help me out since you guys are smarter in the credit markets to me.

Speaker Change #177: Everyone seems to think interest rates are too high.

Speaker Change #178: I actually think they're low.

Speaker Change #178: But I'd say, we use the stock market's near high there's a lot of speculation in the market prior to the great financial crisis of 2008 to 10 year bond yield in line with nominal GDP.

Speaker Change #178: <unk> of 2% to 3% real growth of 2% to 3%.

Speaker Change #179: Then you would not be.

Speaker Change #179: Undervalued at a four 6% yield.

So I think interest rates go up.

Speaker Change #180: I read the Democratic platform, which was 80 pages long I read the Republican platform, which was 22 pages long.

Speaker Change #181: Nobody seems to be carried by the debt that we're creating in the system. So I think we're heading towards some kind of financial crisis and I don't know if it hits. It two five years 10 years. That's again, it's at all what's your view of what's going on in the country politically.

Larry Penn: Yeah, so again, as Mark said, I just want to reiterate, we try not to color and this is just us, you know, I understand that other companies and of course, you with your own portfolio, Lee, are going to take a different approach, but we try not to color our interest rate hedging. We try to focus, you know, more on okay, here's where long term interest rates are, here's where short term interest rates are, you know, what can we buy just given those realities, as opposed to an end hedging appropriately, but I absolutely agree with you not on short term rates necessarily, but on I do agree with you on the longer term rates, that given the increasing size of the debt, budget deficits, nobody's talking about really cutting in any meaningful way, and not to mention that it's not so clear that notwithstanding what we've seen a report or two, that wage inflation is really behind us, which is the thing that I look at most closely, I think, in terms of thinking about where, you know, all of this could go.

Marc: Yeah. So again as Marc said I just want to reiterate we try not to color and this is just us I understand that other companies and of course, you with your own portfolio Lee are going to take a different approach, but we try not to color our interest rate hedging.

Marc: Try to focus more on okay, Here's where long term rates are here's where short term interest rates are what can we buy just given those realities as opposed to and then hedging appropriately but.

Lee Cooperman: I absolutely agree with you not on short term rates necessarily but I do agree with you on the longer term rates.

Marc: That.

Marc: Given.

Marc: The increasing size of the debt budget.

Speaker Change #183: Budget deficits.

Speaker Change #184: Nobody is talking about really cutting in any meaningful way and.

Speaker Change #184: And not to mention that it's not so clear that notwithstanding what we've seen.

Speaker Change #184: A report or two that wage inflation is really behind us.

Speaker Change #184: Which is the thing that I look at most closely I think in terms of thinking about where.

Larry Penn: I agree with you. I think long-term rates are going to be challenging for the Fed to get, you know, even not 2%, even 2.5%, whatever. And so I think, you know, I think it's going to be challenging for long-term rates, you know, ultimately, to get to at least maybe the forward curve the markets are predicting.

Speaker Change #184: All of this could go I agree with you I think long term rates I think it can be challenging for the fed to get.

Speaker Change #184: Ed.

Speaker Change #184: Not 2%, even two and a half whatever.

Speaker Change #184: And so I think.

Speaker Change #184: I think it's going to be challenging for long term rates ultimately to get where at least maybe the forward curve. The markets are predicting I agree with you.

Unknown Executive: I agree with you. I can't, I'm out of time. Okay, thank you very much for coming. Good luck. Good luck to you, too. Thanks, Lee. Always a pleasure.

Speaker Change #185: Okay. Thank you very much for your time and good luck.

Speaker Change #185: Good luck to yourself, Thanks, Lee always a pleasure.

Speaker Change #186: Thank you everyone that was our final question for today I would like to thank everyone for participating in the Ellington financials second quarter 2024 earnings Conference call. You may disconnect. Your line at this time and everyone have a wonderful day.

Speaker Change #186: Okay.

Speaker Change #186: [music].

Speaker Change #186: Hum.

Speaker Change #186: Hum.

Speaker Change #186: [music].

Speaker Change #186: Uh-huh.