Q3 2024 Ellington Financial Inc Earnings Call

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Good morning, ladies and gentlemen. Thank you for standing by.

Speaker Change: Welcome to the Ellington Financial 3rd Quarter 2024 Earnings Conference Call.

Today's call is being recorded.

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

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 1995.

Speaker Change: Forward-looking statements are not historical in nature, as described under 1A.

Speaker Change: of our annual report on Form 10-K and Part 2, Item 1A of our quarterly report on Form 10-Q, forelooking 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.

Speaker Change: Consequently, you should not rely on these forward-looking statements as predictions of future events.

Speaker Change: Statements made during this conference call are made as of the day of this call, and the company undertakes no obligation to update or revise any forward-looking statement, whether a

Speaker Change: 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. Herlithy, Chief Financial Officer of EFC.

Speaker Change: As described in our earnings press release, our third quarter earnings conference call presentation is available on our website, EllingtonFinancial.com. Management's prepared remarks will track this presentation.

Speaker Change: Please note that any references to figures in this presentation are qualified in their entirety by the notes at the back of the presentation. With that, I will now turn the call over to Larry.

Larry Penn: Thanks Ella Dean and good morning everyone. As always thank you for your time and interest in Ellington Financial.

I'll begin on slide three of the presentation.

Larry Penn: Perhaps the highlight of the quarter was the increase in our adjusted distributable earnings to 40 cents per share, which was a 7 cent increase from the second quarter and which covered our 39 cents in dividends for the quarter.

Speaker Change: The main driver of this quarter's increase in ADE was the contribution from our proprietary reverse mortgage business in our Longbridge segment.

which included our second prop reverse securitization of the year.

back in the first quarter of this year.

Speaker Change: ADE in our long bridge segment was actually negative, but it has increased each quarter since then, and it registered 12 cents per share in the third quarter.

Speaker Change: Our Longbridge segment represents about 12% of our equity capital allocation, so it's great to see ADE having steadily improved in that segment.

Speaker Change: I've been consistently highlighting our Long Bridge segment as holding significant untapped potential for Ellington Financial.

Speaker Change: Even if Longridge's ADE can stabilize around nine cents per share per quarter.

Speaker Change: We should be in excellent shape from a dividend coverage standpoint.

Speaker Change: In the third quarter, Ellington Financial's investment portfolio expanded as we utilized our strong balance sheet to continue growing our high-yielding loan portfolios.

Speaker Change: For the quarter, our non-QM, RTL, commercial mortgage bridge, HELOC, and closed and second lien loan portfolios increased by a combined 26 percent.

Speaker Change: That portfolio growth drove our overall leverage a bit higher, to 1.8 times from 1.6 times.

Speaker Change: even as we continue to shrink our lower-yielding agency portfolio and maintain additional dry powder to invest.

Speaker Change: At quarter end, our agency portfolio had shrunk another 14% sequentially, and cash plus unencumbered assets totaled $765 million, which was just under 50% of our total equity.

Speaker Change: Not surprisingly, much of the expansion of our loan portfolios has been the direct result of the loan origination businesses that we have cultivated across a variety of credit sectors and over a number of years.

Speaker Change: Our originator relationships, including the equity stakes we hold in many loan originators and our emphasis on striking forward flow agreements with a diversified roster of originators,

Speaker Change: and others have enabled us to adjust the acquisition volume and the underwriting criteria of our loan investments.

Speaker Change: This has enabled our loan portfolios to become among our largest, highest yielding, and best performing strategies.

Speaker Change: Meanwhile, the profits generated from originator equity stakes have been a nice boost to our earnings and book value, while also enhancing the diversification of our earnings stream.

Speaker Change: This continued in the third quarter, with strong profits at Lendshore and American Heritage Lending, where continued robust demand for non-QM loans drove strong origination volumes and wider origination margins.

Speaker Change: Recently, our loan portfolio expansion has also included adding meaningful exposure to the HELOC and closed-end second lien sectors.

Speaker Change: where we have both bought loans with an eye toward securitization as well as participated as securitization co-sponsor with a large mortgage originator.

Speaker Change: We currently see the retained tranches and call options from these securitizations as offering very attractive risk-adjusted returns.

Speaker Change: The mortgage securitization markets are in great shape and in turn that's been great for Ellington Financial.

Speaker Change: During the third quarter, we priced a non-QM securitization that achieved AAA yield spreads near their two-year lows.

Speaker Change: And as I mentioned earlier, we also completed a proprietary reverse mortgage securitization backed by loans originated by Longridge, with incrementally stronger execution than our inaugural deal earlier this year.

Speaker Change: Finally, even aside from these excellent securitization executions, we're also continuing to improve the rest of the liability side of our balance sheet.

Speaker Change: Recently, we've added new financing lines on non-QM loans, closed-end seconds and HELOCs, and consumer loans. And before the end of the year, we expect to add several cost-effective lines for our reverse mortgage business, as well as a new financing line on the forward MSRs that we acquired through the Arlington merger.

Speaker Change: We anticipate using some of the proceeds from these financing lines to replace some of our existing higher cost debt and floating rate preferred equity.

Speaker Change: For example, we announced yesterday that we are redeeming our Series E preferred stock that we inherited in the Arlington merger.

Speaker Change: which now carries a cost of funds of well over 10 percent following its fixed to floating rate conversion earlier this year.

Speaker Change: These types of refinancing should be immediately accretive to earnings, since in the current environment we see returns on equity on incremental asset acquisitions reaching well into the teens.

Speaker Change: Meanwhile, with our overall leverage still low, we have additional capacity to issue more long-term unsecured debt, and we look forward to doing so.

Speaker Change: With that I'll turn the call over to J.R. to discuss the third quarter financial results in more detail. J.R.?

Thanks Larry and good morning everyone.

J.R. Herlithy: For the third quarter, we are reporting gap net income of $0.19 per share on a fully marked market basis and adjusted distributable earnings of $0.40 per share.

Speaker Change: On slide 5, you can see the attribution of net income between credit, agency, and Longbridge.

Speaker Change: The credit strategy generated 45 cents per share of net income in the quarter.

Speaker Change: We also benefited from Mark's market gains on our equity investments in Lendshore and American Heritage Lending, which reflected strong performance at those originators, driven by increased volumes and wider origination margins.

Speaker Change: Offsetting a portion of these gains were net losses on our consumer loan portfolio and a related equity investment in a consumer loan originator, as well as negative operating income on certain non-performing commercial mortgage loans in REO.

Speaker Change: Finally, we had a net loss on the Great Ajax Common Shares we purchased in connection with last year's terminated merger.

Speaker Change: We had a mark-to-market gain on our HMBS MSR equivalent, but this gain was muted by wider HMBS yield spreads, so the gain didn't keep pace with the net losses on the interest rate hedges that we hold against this position.

Speaker Change: Wider HMBS yield spreads adversely affect the value of our HMBS MSR equivalent because they lower the component of projected servicing income that stems from the right to fund and securitize future borrower draws.

Speaker Change: In hecum originations, a decline in origination margins, also driven by wider HMBS yield spreads, was partially offset by higher volumes.

or as in Prop Reverse Originations.

Speaker Change: Results were boosted by the securitization we completed in July along with improved origination margins and higher volumes, and this led to strong profits in that product line.

Speaker Change: In total, origination volume at Longbridge increased 16.5% sequentially, even as industry-wide volumes were down overall for the quarter.

Speaker Change: Notably, Longbridge contributed $0.12 per share of ADE in the third quarter, driven by the strong quarter from Prop Reverse.

Speaker Change: For the quarter, our agency strategy generated net income of $0.06 per share, with net gains on our agency RMBS exceeding net losses on interest rate hedges.

Speaker Change: In the quarter, interest rates fell, the yield curve steepened, and agency MBS yield spreads tightened as the market anticipated the beginning of the Federal Reserve's interest rate cutting cycle.

Speaker Change: Indeed, in September, the Fed reduced the target range for the Fed funds rate by 50 basis points and also released updated projections that implied another 50 basis points of interest rate cuts later in 2024, although that expectation is no longer shared by the market.

Speaker Change: Finally, our results for the quarter also reflect a net loss on our senior notes, driven by the decline in rates.

Speaker Change: This loss was partially offset by a net gain, also driven by the decrease 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 equity.

Speaker Change: Turning to slide 6, you can see the breakout of ADE by segment. Here's where you can see the 12 cents per share contribution from Longbridge, which drove the overall increase in EFC's ADE to 40 cents per share for the quarter.

Turning next to Loan Credit Performance.

Speaker Change: In our residential mortgage loan portfolio, the percentage of delinquent loans decreased quarter over quarter. In our commercial mortgage loan portfolio, the percentage of delinquent loans increased, with four small-bounce commercial mortgage loans moving to 90-plus-day delinquency during the quarter.

Speaker Change: But I'll note that, subsequent to quarter end, one of those loans paid off at par plus all past due interest, two others are expected to resolve favorably in the fourth quarter, and for the fourth, we believe that the property value roughly approximates the UPB.

Speaker Change: We also continue to work through these two larger non-performing multifamily bridge loans that we referenced last quarter.

Speaker Change: Moving into next year, we expect that resolutions of delinquent loans and REO, together with redeployment of resolution proceeds, will be a tailwind to ADE.

Next, please turn to slide 7.

Speaker Change: The increase was primarily driven by net purchases of non-QM loans, closed-end seconds, HELOCs, commercial mortgage bridge loans, and non-agency RMBS.

Speaker Change: A portion of the increase was offset by smaller CLO and CMBS portfolios driven by net sales.

Speaker Change: For our RTL, commercial mortgage, and consumer loan portfolios, we received total principal paydowns of $318 million during the third quarter, which represented 21% of the combined fair value of those portfolios coming into the quarter.

Speaker Change: On slide 8, you can see that our total long agency RMBS portfolio declined by another 14% in the quarter to $395 million.

Speaker Change: We continue to sell down that portfolio and rotate the capital into higher yielding opportunities.

Speaker Change: Slide 9 illustrates that our Long Bridge portfolio decreased by 5% sequentially to $494 million, driven primarily by the completion of our securitization of prop reverse mortgage loans, partially offset by new proprietary reverse mortgage loan originations during the quarter.

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

Speaker Change: On our recourse borrowings, the total weighted average borrowing rate decreased by 21 basis points to 6.77% at September 30th.

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 increased to 1.8 to 1 at September 30th, up from 1.6 to 1 at June 30th, primarily driven by an increase in borrowings on our larger credit portfolio.

Speaker Change: Partially offset by a decrease in borrowings on our smaller agency portfolio, the proprietary reverse mortgage securization, which converted certain recourse borrowings to non-recourse borrowings, and an increase in shareholders' equity.

Our overall debt-to-equity ratio ticked up.

as well, to 8.3 to 1 from 8.2 to 1.

Speaker Change: Since mid-June, we've added three new loan financing facilities that have increased total borrowing capacity by $550 million.

Speaker Change: At September 30th, our combined cash and unencumbered assets totaled approximately $765 million, roughly unchanged from June 30th.

Speaker Change: Our book value per common share was $13.66 a quarter ends, and our total economic return was 0.9% non-annualized for the third quarter. Now, over to Mark.

Thanks JR. This was a strong quarter for EFC.

Mark Tecotzky: We had a lot of portfolio growth in our core strategies.

Speaker Change: That portfolio growth, together with strong ADE at Longbridge, helped our ADE cover our dividend, which has been a primary goal of ours.

Speaker Change: We had solid contributions from our core strategies that should be repeatable. Our origination partners continued to grow their franchises and gain market share, which helped us acquire the loans we like at attractive valuations and at the volumes we've been targeting.

Speaker Change: The vertical integration of EFC was on full display this quarter. Our non-QM and RTL partners generally grew market share and increased profitability.

Speaker Change: These greater origination volumes allowed EFC to buy more loans with the credit profiles we seek. EFC's consistent loan pricing then allows our originators to offer more stable pricing to their broker and correspondent relationships, which makes them the counterparty of choice in many cases and helps them grow market share.

Speaker Change: With the securitization ARB as attractive as it's been this year, our securitization team takes over right after EFC approaches a critical mass of purchase loans. For the quarter, non-agency mortgage bond spreads remained range-bound and much tighter than much of last year.

Speaker Change: Our securitization team optimizes deal structure based on investor preferences and rating agency feedback.

Speaker Change: including the deal that priced last week. We've now completed three securitizations since the end of July.

Speaker Change: two of non-QM loans and one of prop reverse loans. Securitization serves three important objectives for EFC. Firstly, they allow us to replace short-dated repo with match funded non-marked market securitization financing.

Speaker Change: That both lowers the cost of financing and reduces the risks of funding hiccups and margin calls.

Speaker Change: Secondly, by leveraging loans with wide yield spreads with the investment grade bonds that we sell at tighter yield spreads, we manufacture high yielding retained tranches that are often more attractively priced

and similar securities available in the secondary market.

with superior visibility and input on the credit profile.

Speaker Change: Thirdly, after a lock-up period, these securitizations have call features, which provide us with significant economic benefits if interest rates drop and or yield spreads tighten sufficiently.

Speaker Change: Another big trend for EFC this quarter is our growing presence in both the home equity line of credit market and the closed-end second lien market.

Speaker Change: To frame this opportunity, there's currently more than $30 trillion of home equity, much of which is controlled by homeowners with low fixed rate, first lien mortgages. In fact, 85% of Fannie Freddie mortgages now have interest rates below current mortgage rates.

Speaker Change: And nearly 70% of those mortgages are at least 2% below current mortgage rates.

Speaker Change: Over time, many of these borrowers will want to tap some of this home equity for a variety of reasons, like home renovation or debt consolidation, without disturbing their first mortgage.

Speaker Change: Currently the two dominant loan products to facilitate this equity extraction are fixed rate second lien loans and floating rate HELOCs. We have worked diligently to develop sourcing channels to acquire these products and have made a lot of progress in the past six months.

Speaker Change: Meanwhile, our research teams develop prepayment and loss models for these products as a natural extension of our long-standing agency and non-agency models.

Speaker Change: Based on these efforts, we concluded that these growing sectors represent another attractive high-yielding sector of the mortgage market for EFC's diversified credit portfolio.

Speaker Change: As you can see on slide 7, we not only bought Q-SIPS back by second lien loans in the third quarter, but we also added both HELOCs and second lien loans to the portfolio. That's the slice of the pie labeled D.

Speaker Change: And our buying in these sectors has continued at a brisk pace post-quarter end.

Speaker Change: Both Secolins and Helox fit seamlessly into EFC's portfolio as natural complements to our non-QM loan business.

Speaker Change: We have secured attractive financing terms so we can finance these loans and pocket a levered NIM. In addition, much like non-QM, we can also securitize these loans, selling investment-grade bonds at terms we believe are more favorable to us than repo, and retaining high-yielding tranches for our investment portfolio.

Speaker Change: Just like Non-QM, these securitizations have valuable call features after a lock-up period, which gives us the ability to refinance or sell the collateral down the road.

Speaker Change: Getting back to earnings, not only did our loan strategies have a good quarter but we also had solid contributions from many of our QSIP strategies such as CLOs, CMBS and other ABS.

Speaker Change: We also had meaningful contributions from our investments and loan originators.

Speaker Change: And while it continues to shrink, we also had a strong contribution from our agency MBS portfolio.

Speaker Change: We did face some headwinds, however. We had some write-downs in our consumer portfolio and a write-down of our investment in the consumer loan originator. But these were one-off events that should be behind us.

We continue to work out a few non-performing assets.

Speaker Change: And while those should not be a continuing drag on GAAP earnings, they will continue to be a modest drag on ADE until we can resolve the assets and redeploy the proceeds.

Speaker Change: The combination of our stable credit portfolio with consistent and well-received new-issue securitization calendar has resulted in greater appetite among our repo lenders to provide us with repo financing and at more attractive terms.

Speaker Change: Being able to negotiate better financing terms from our repo lenders drops directly to the bottom line gap earnings and ADE.

Speaker Change: Q3 brought us the first Fed cut in four years. Even with the post-election surge in interest rates, the market is still pricing in a few more cuts, which should be a bit of a tailwind for ADE and spread products going forward.

Speaker Change: Spread products typically do quite well in an easing cycle, and we still haven't really seen much of incremental bank demand for structured products So there is certainly still room for spread tightening

Speaker Change: At the same time, let's not forget that the rate cuts are in part a response to a slowing employment picture.

Speaker Change: We can't be complacent and we need to remain very focused on credit performance.

Speaker Change: We noted in our earnings release that our residential delinquency rate dropped in the third quarter. As the job market cools, we need to continue watching these metrics closely and tighten underwriting guidelines as necessary.

Speaker Change: We've already seen how higher debt costs, insurance costs, and property taxes have been a challenge for some multifamily properties.

Speaker Change: We've been moving up in FICOM in our residential loan portfolios and are making good progress managing and stabilizing our few commercial assets that are under stress.

Speaker Change: I'm happy about our portfolio growth and the resulting ADE growth in the third quarter. I believe in time, resources and effort we have put into our loan origination platforms can continue to deliver strong returns going forward. Now back to Larry.

Thanks, Mark.

Larry Penn: It's great to see the growth of our adjusted attributable earnings during the third quarter, hand-in-hand with the continued expansion of our integrated loan origination businesses, which now effectively drive the returns of our investment portfolio.

Speaker Change: I believe that we've established genuine franchise value in our securitization businesses.

Speaker Change: where our eFMT shelf has now added two successful proprietary reverse securitizations to the 16 total non-QM securitizations that we have completed since 2017.

Speaker Change: Performance of our non-QM EFMT securitizations continues to be very strong. We have rightfully earned a long roster of repeat investors in the tranches that we issue.

Speaker Change: We've also helped our loan originator partners to build significant franchise value themselves as we provide them with capital, help them secure favorable warehouse financing, collaborate with them on credit decisions, and work together with them on strategic initiatives.

Ellington financial benefits not only from high-quality loan flow

Speaker Change: But in many cases from our pro-rata share of both of their profits as well as the increase in the value of their platforms

Speaker Change: Ellington Financial's fourth quarter has started off with a good October.

Speaker Change: Our credit portfolio grew further during the month in what was a broad-based expansion across sectors.

Speaker Change: It performed well from both the credit performance and total return perspective, and it benefited from yet another strong execution in the non-QM securitization market.

Speaker Change: Meanwhile, in our Longbridge segment, Prop Reverse Origination Volumes, Origination Margins, and Loan Performance were again all strong in October.

Speaker Change: Finally, I should also add that we that we were positioned conservatively going into Election Day from a leverage, liquidity, and interest rate exposure perspective, so the post-election volatility in interest rates has not materially affected us.

Speaker Change: With that, we'll now open the call up to questions. Operator, please go ahead.

Speaker Change: Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. And we will pause for a moment to allow questions to queue.

Speaker Change: And we will take our first question from Trevor Cranston with Citizens JMP. Please go ahead.

Hey, thanks. Good morning

Speaker Change: There's obviously been some significant moves in interest rates and agency spreads in particular so far in the fourth quarter. Can you guys maybe just give us an update on how you're thinking about relative value between agencies and credit opportunities as things stand today?

Mark Tecotzky, Laurence Penn

Yeah, you had pretty aggressive spread widening.

You know non-agency organization origination securitization businesses

RTL, our commercial bridge.

Speaker Change: And so, that's been behind the capital rotation. You know, there's certainly times when you get this bounce of spread widening in the agency market that it offers, you know, compelling relative value.

But...

Speaker Change: You know for EFC, I think what you should expect is

Speaker Change: continued decline in the amount of capital allocated to the agency portfolio. It's already very small and the pace of that decline I don't think is going to be too impacted by sort of relative volume and that portfolio is

Speaker Change: small right now and We see growing capital needs in some of our loan businesses where we think we can create sort of you know better longer-term franchise value

Speaker Change: We can be opportunistic and we can vary the extent to which we hedge our non-QM portfolio.

You guys, we're accumulating non-QM loans.

Speaker Change: It's and that's something that depending upon our view on the mortgage baseness We can dial up the extent to which are hedging or non-QMs with TBAs versus more vanilla instruments like a straight swap

Speaker Change: Yeah, it's a great point. We actually did, when we saw that big spread widening...

Speaker Change: You know, third week of October, we did reduce the TBA hedge on the non-QM and moved it more into swaps. Look, you're at a point in the agency market that if rates stay where they are, origination volumes are going to be pretty low, and you're going to have a very large

Speaker Change: You know, Treasury calendar. So it's things that are you know, there's there's reasons to be constructive on the mortgage basis here for sure

Speaker Change: Okay, makes sense. And then, you know, on Long Bridge, you guys highlighted in the prepared comments the improvement in earnings there, which has been a nice tailwind. And Larry, you kind of mentioned the nine-cent number as, you know, a level that would give you

Decent dividend coverage

Speaker Change: Is that kind of a level that's a good baseline to think about if we see more stability and rates and spreads from here or Any sort of color you can give around kind of what you think about as a baseline contribution from them would be helpful. Yeah

Sure, thanks. I have mentioned before that Longbridge's

You know, business, it being in the reverse mortgage business.

is, you know, it's definitely rape-sensitive.

So, as rates go up, borrowers can...

Speaker Change: Just because of the way the math works, borrowers can borrow less against their houses.

Speaker Change: and vice versa. As rates go down they can borrow more.

Speaker Change: which is a big picture. They tend to see, I mean there's seasonal factors, other factors too, but they do, market share obviously is going to factor into it, but they tend to see more origination volume when rates are lower. So we actually have a hedge.

Speaker Change: expect to see lower volumes and therefore lower profits as rates go up.

at www.thevenusproject.com

Speaker Change: it's not doesn't contribute to ADE you know if it's profitable it's more of a

Speaker Change: of a gain or loss, like a capital gain or loss.

Thank you.

Speaker Change: and I'm really just trying to make the point that A, it's achievable, and B, that's kind of a number where we think ADE will cover dividend.

you know a target.

Speaker Change: It's not a it's not an unreasonable target, but you know you will see volatility with rates

Speaker Change: We did beat it in this quarter, and I think the other thing that I mentioned was that our ability to do securitizations, we've done two so far, that's going to really help that number too. That was a nice boost. I can't quantify it, but that was a nice boost as well.

So, yeah, so I think...

Speaker Change: From a modeling perspective, I'm not uncomfortable with that as a long-term sort of stabilized value and of course over time Long Bridge, you know getting into other businesses You know prop reverse was not a big business for it

Speaker Change: can add ADE in the future, even away from its existing business lines.

Got it. Okay, that's helpful. Thank you, guys.

Speaker Change: Thank you and we will take our next question from Bo George with KBW.

Speaker Change: Hi, good morning. This is Frankie Labedion for BOSE. I just want to start, can you discuss the competition you're seeing within the non-QM market? And also, how has the more active participation from insurance companies impacted that market? Thanks.

Sure, this is Mark. Those are great questions, so...

Ellington

like

most people in the non-QM space

has from...

Speaker Change: From a lot of insurance companies a lot of them that are fixed annuity sellers really I'd say for the last

Speaker Change: two-and-a-quarter, two-and-a-half years. So that has been a fixture of the market for a while.

Speaker Change: I think it's done a couple things. One is, it has stabilized loan prices.

Speaker Change: So you used to see a lot of volatility in non-kim loan prices. I really think about, you know,

Speaker Change: And I think the presence of consistent buying from insurance companies has taken out some of that volatility. So for our originators, I think it's been welcome because they sell to Ellington, but they sell to other buyers as well. It creates competition, right?

The insurance companies have different yield bogeys

a different liability structure.

Speaker Change: then you know an Ellington Financial or an Annaly that is really you know funding on repo and then doing securitization so So there can be times

Speaker Change: where the competition from insurance companies can be serious and it really you know can can push levels around to level to Places where you know it doesn't look as attractive as it does other times, but I'd say for now It's been sort of

Speaker Change: you know, it's been sort of a consistent presence that has stabilized the market. It's been a welcome diversifier for our originators. And you also see insurance companies buying the securitization. So I feel like in some ways they're competitors, in some ways they're also clients.

Speaker Change: There's been enough volume to go around, but it's definitely created a different dynamic than what we had, I'd say, you know, pre-COVID when it was not a market where you saw a lot of active insurance company participation.

Speaker Change: Thank you. That helps a lot. And then just to move to operating expenses, they're roughly up 18% over the quarter. Can you just discuss what drove that increase and can we expect to see higher op-ecs going forward?

Speaker Change: Sure, so part of that is we converted, we redeemed, I guess you could say, options at the Long Bridge level. So that's one of the largest drivers of the, which is a one-time thing. Employee-held options. Employee-held options, thank you. So that's a non-recurring that we would not see next quarter in Q4.

That's probably the biggest driver.

Thank you.

Speaker Change: Thank you. And we will take our next question from Matthew Erdner with Jones Trading. Please go ahead.

Matthew Erdner: Hey guys, thanks for taking the question. Did you talk about your expectation for pace of securitizations and then can you speak a little to the execution and how that's been on the reverse deals?

Speaker Change: Well on the reverse deals, I mean you say how it's been, I mean we're happy with the executions. I don't want to, I'm not sure exactly how you'd like me

to elaborate further on that.

You know, we, we've got.

Speaker Change: You know, it's not as uniform, that space, in terms of the

Speaker Change: The structures that people use in the reverse mortgage space are, you know, different and that there's not a lot of issuance there and different issuers use slightly different structures in terms of the, you know, how the debt is structured.

Speaker Change: but you know we we've been very pleased we've got repeat buyers and and we you know are accumulating for you know for another deal and you know we think that

Speaker Change: that really helps us, you know, having that securitization outlet, right, in that long-term locked-in financing, on what's a very long-term product, obviously, is something that gives us a lot of confidence to continue to ramp up that, you know, origination at Longbridge.

Mark, do you want to speak, too?

Thank you.

Mark Tecotzky: Yeah, pace of non-QM securitization next year. I think, you know, four to six deals is sort of a cadence I would expect us to do.

Speaker Change: It's going to depend on origination volumes and deal structures and there were times where we perceived repo financing is a better way to go, but if

Speaker Change: If the market kind of looks broadly similar to how it is now, I think four to six is where we should be.

I mean, one thing that we've...

One thing that we've really tried to build here

Speaker Change: and have succeeded now is we not only have a diversified

Speaker Change: diversified, and robust sourcing of all these different loan products, whether it's non-QM,

RTL, we have many sellers.

Speaker Change: We're buying a lot of loans each month and we can

Speaker Change: We can dial up or down small balance commercial bridge lending. We're seeing also now increased volume there

Speaker Change: So, we can dial up and down where we, you know, it's like a faucet, right?

Speaker Change: You turn the faucet a little higher and you get a little more flow But then you know you can turn one faucet down and you can turn the other faucet up and the different different products that we buy so I think we're in a great place to take advantage of

Speaker Change: our, you know, turn the faucet down in our 9-2-M buy, well, you know, we can pick it up.

Speaker Change: in RTL or Small Bounce Commercial Bridge or just Q-tips, right? So I really feel good about the diversity of our sources.

of Growing the Portfolio.

Speaker Change: Yeah, that's very helpful and that kind of led into my second question, you know about where are you guys seeing opportunities right now? I know in the past you've talked about commercial you just touched on the the bridge lending there But is it just kind of factor of what the the markets throwing at you and then you know Could you expand a little more on what you guys are seeing and plan on doing in a HELOC and second lien space?

Sure. Yeah, I would say in terms of opportunity,

Buying the loans we like.

Speaker Change: getting to critical mass for securitization, executing the deals, and keeping retained tranches that

Speaker Change: We expect you're going to have very high yield and the ability, you know, via the call options to get loans back in the future.

That's...

Speaker Change: That's a good opportunity for us right now, and we're pursuing that and it's been that way, you know last six months for sure and You know, I expect that to be the case. We've also seen very good opportunity in Q-CIPS I mentioned I prepared remarks we had great contributions in

Speaker Change: Some of our non-agency stuff, CRT, we've done well on CMBS CLO we mentioned that we shrunk it a little bit because we took gains so

We have a broad platform at Ellington and really...

Speaker Change: I mean, I think a phenomenal suite of PMs and so we have a lot of different sort of arrows in the quiver So and I like I like having some Q-sips as well as some loans it's sort of a different return stream And it's nice to sort of get the alpha that you can get from Q-sips

Speaker Change: So, and then the second part of your question, second liens and helox.

Speaker Change: You know, again, the prepared remarks to us, we think we engage with that product the same way we do with non-QM.

Speaker Change: It's a high-yielding asset. It has a big spread versus our financing, so just having it on portfolio on a levered basis

Speaker Change: You know, with an interest rate hedge on the closed-end seconds, you don't need one on the HELOC because they're floating off a prime. Prime's kind of been locked to SOFR. So, with an appropriate interest rate hedge from time to time, a credit hedge.

Speaker Change: That gives a nice leveled return, but there's also securitization opportunities there. So I would expect us to do a securitization relatively soon.

Speaker Change: on you know one or both of those products and follow the same playbook we have for non-QM, retaining some high-yielding assets.

Keeping our call rights in place.

Speaker Change: and replacing repo financing with selling investment-grade bonds that we think, you know, have a lower, you know, lower yield than the yield on the repo. And, you know, we talked about in the paradox, you know, it's matched funding, you reduce margin calls.

Speaker Change: That's our plan for that product and it can be, you know, anything we can do in non-QM We can do that in the Helox and then the closed-end seconds

Speaker Change: So all that sort of, that whole skill set we have and the whole playbook there, it's really transferable.

Yeah, that's great. Thank you for all the color. Sure.

Speaker Change: Thank you. And we will take our next question from Eric Hagen with BTIG. Please go ahead.

Hey, thanks. How we doing?

Speaker Change: As you retire the preferred and make a move toward more unsecured, is that going to change the optics of your leverage? And is there maybe like a change in philosophy around how you manage with the secured leverage and the repo and where that leverage gets applied to certain assets as you retire the PREF?

Okay, I'll...

Speaker Change: I'll start out Eric. Thanks. Thanks for the question. So I guess first off retiring that preferred Which is now that it's floating is well over you know over 10% cost of funds like that seems like a no-brainer to us And it's it's small it's

financing to the balance sheet.

Speaker Change: and I'm going to turn it over to Larry to talk a little bit more about security and unsecured. On the unsecured side, Larry mentioned that we have, I would say, an appetite to do more. Of course, we need to balance what the pricing is going to look like relative to secured financing and other options.

Larry Penn: in our current $210 million deal a couple of years ago, it was at a spread of...

Speaker Change: 322. And now, you know, recent deals in the mortgagory sector have been

sincerest thanks again and have a wonderful day.

Speaker Change: We've utilized some, but not all of that. So we have more to draw on new lines. We're expecting to add a new line for the MSRs that we got from Arlington. I think Larry mentioned that as well. Those...

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Speaker Change: A few other things to think about, we have unencumbered assets on balance sheet of

550 at at quarter ends

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Speaker Change: At least some of that I would consider to be surplus debt. We've been working on deploying in October, and Larry mentioned that the portfolio, the credit portfolio, is bigger in October. So anyway, that was a lot of different pieces, but hopefully that gets your question. Yeah, and then I'll just add that from a leverage perspective.

Speaker Change: With unsecured financing, we're more comfortable increasing leverage, so I do think that, you know, if we can do one or more unsecured deals...

then you'll see our leverage tick up.

Speaker Change: You know, we'd love to replace just over time. Now, this is really more of a longer-term goal, but if we can replace a lot of our short-term repo financing

Speaker Change: with Longer-Term Financing that obviously just more Just a better company frankly so so that's something that's a that's a longer-term aspirational goal if you look at the mortgage REITs

Speaker Change: and on the residential mortgage rates, they don't really, haven't been able to pull that off as well, frankly, but that's something that we definitely would have an eye towards long-term.

Speaker Change: You know, but short term, we're just looking at, as Jennifer said, some of the, you know, like the floating rate preferred that now we can replace. And yes, and that, that decreases our equity and increases.

Speaker Change: Our debt. So yeah, that's going to definitely at least show up as as an increase in leverage So we have to you know, we try to manage portfolio very conservatively from a liquidity management perspective. So Well, you know, we'll keep a close eye on that

Speaker Change: you know, here in the next quarter or two. And that's probably recourse, right? Recourse. Yeah, correct.

Great stuff. Appreciate you guys very much.

Take care.

Thanks Eric. Thanks.

Speaker Change: Thank you. And we will take our next question from Matthew Howlett with B Riley. Please go ahead.

Matthew Howlett: Oh, hi everybody. Thanks for taking my question. Just to follow up on the preferred, I mean, you could replace that preferred, right, with some of your other assurances, the ATMs, and if you wanted to at lower costs, or is there a ratio you want to take down?

Sorry, which ATMs?

Do you have one of the EMS's? Yes.

Yeah, I mean the

Speaker Change: Look, I think the preferred the new issuance on preferred has been

Speaker Change: pretty low in our sector in the past couple of years. So we do have ATM facilities on different, common and preferred as you point out. I mean, volumes have been pretty low on preferred, so.

It doesn't seem like there's a

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Speaker Change: I think that we try to be opportunistic on the capital structure and that's another potential tool but the volumes in Preferred are pretty low and it seems like investor appetite for unsecured is a lot greater than for new issue Preferred. And if you look at where...

Speaker Change: There's a trading it would still be expensive right so these right the the lower the one that hasn't the one that's still fixed Yeah, right is Trading it at you know a pretty big discount so So I'm not sure if you you know true. That's not

Speaker Change: We can't replace that coupon at bar, so yeah. So I think that is a better.

Speaker Change: Just if we really which we don't want to do if we really want to reduce our you know I call it cost of funds not technically debt right but from the commons perspective it is so If we really want to reduce the load the cost of funds on the common

with some form of debt, whether it's secured or unsecured.

Speaker Change: Right, I got you. You were always the market leader on low-cost. That's why I asked the question, but if it does open up I'm sure you'll be back involved second question on

Speaker Change: The duration of the credit book, you guys have always been sort of short duration, high yields, short durations, you've always pulled this off time and time again. As you start to invest more in retained tranches, non-QM, I mean, do you want to take a little more duration on the credit book given we're on the right cycle? Or do you foresee still being, you know, in that, you know, short and intermediate term?

Speaker Change: Yeah, I think, you know, non-QM retained tranches, there are the, you know, BP subordinated tranches that we retain that are long, but there's also excess diodes.

That's quite short in duration.

So I think, um...

Speaker Change: And then, you know, as you mentioned, the other products are short iteration products with, you know, it's turnover fast, a lot of principal repayments, whether it's RTL, bridge loans, etc. So...

Speaker Change: I think all of the things being equal I think we like to stay shorter in duration but but we're not afraid like look at the reverse mortgage space that's really long duration so when we are retained trushes there

So, I think it depends, yeah.

Speaker Change: You're picking up great yields. Can you quantify what you could call, securitization-wise, next year?

Speaker Change: You know how much was the stuff issued and I'm sure I'm assuming if 2002 2003 all the stuff issued back then could be called if rates, you know move lower Going for it is yeah, I don't I I don't have that at my fingertips. Sorry, but you're right. There's going to be some deals that You know are gonna

Passed a lockup period at some point and I don't

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Speaker Change: I can point you to that. Yeah, Matt, it's marked, you know.

Speaker Change: Yeah, no, I would just say Matt, it's an interesting point. You did see Veris call a few deals a couple of weeks ago. So basically on the non-QM side, the rules are you can call it the earlier of

three years

or when the amount of loans in the deal...

by current face are less than 30% of the

Speaker Change: You know at deal closing. So I think given the prepayment environment we've been in so far What's going to come sooner is the three-year date. So anything, you know 22 and you know, we get to 2025 It's going to be anything 22 and earlier. You'll you'll you'll have the

Speaker Change: You have the right to call them, and you definitely have some of that activity.

Speaker Change: All right, so some of those deals obviously had very low coupons on them. Yeah, yeah, we have we have we have deals out there where the senior bond had a had a coupon below 1% so Yeah, we're not going to be out

Speaker Change: There are going to be some deals out there that got done with pretty high note rates that are going to get in the call window soon.

Right.

Speaker Change: That's interesting, it's upside, it's clearly, you have the option of doing it, so if spreads remain tight, I'm assuming you'll look at a lot of these deals. Yeah, I mean, to be fair...

To be fair, and, you know...

When we do a deal...

Speaker Change: We know about the call, and depending on what the note rate is and what the forward curve is, we may ascribe some value to it. We discount that value at a really high discount rate.

Speaker Change: You know, we take it into account, it's not like 100% found money, but we've called a bunch of deals in the past and when we have, it's been certainly a profitable event.

Yep. Great.

Speaker Change: We'll look forward to that and we'll look forward to the Q. Last question is, you know, I've covered Ellington for a long, long time. The company, as it evolves, it's growing. You know, these originators, these stakes and originators are all growing. And, of course, you have Longbridge. Just to clarify, Longbridge is not – that's just consolidated on the balance sheet. There's no mark-to-market fair value on Longbridge versus Amerishore and the others.

Speaker Change: Yeah, we have yeah, we mark to market there that the assets that are consolidated on a balance sheet So we fair value those loans like we fair value everything else. But yeah, that's right. There's no

Speaker Change: Yeah, there's no equity value for the originator explicitly on the balance sheet.

Speaker Change: So my question for the shareholders, I know you update the 1366 book, but I mean, when you start to think about the potential value of something like Longbridge or even your other originators, and you look at, you know, these other originators, Rocket, Penny, Cooperall, they're trading way above reported book.

Lauren Tecotzky, The Big Game Hunters, www.TheBigGameHunters.com

Right, well, I think, look, we...

Speaker Change: I think if you if you look just even recently, right, like I mentioned earlier that Long Bridge had negative AD in the first quarter of this year, right, so I don't want, I think we need to put up some stability there.

If we're not there yet, we're heading there soon.

Speaker Change: But you're absolutely right that That it would be it would be great. And I think once we can achieve that stability where you can say, okay There's a and this is really frankly more Your expertise than ours and more your job than ours, but you would say okay, so there's a chunk

Speaker Change: this company that should be trading in a multiple of earnings, not, you know, a percentage of book value, right? I mean, that's really, I think what you're getting at. And absolutely. And I agree with that 100%. And, you know, we said that right now our capital allocation, I said earlier, our capital allocation long Tech will beMccatt thirteen percent,

But, you know, you can, even a high multiple on 12% of the company can have a meaningful impact in your overall.

you wrote where you trade overall, but look, I think...

Speaker Change: It's, you know, for now, it's about covering the dividend, you know, and RAD covered the dividend in the third quarter, and I think we're, you know, it's...

I feel good about it.

Speaker Change: Yeah, and I would just, I think, underscoring the point, we talked about nine cents as kind of a stabilized rate, or maybe run rate, or target on bombers. That's a lot more than 12% of our dividend, right? So they're 12% of capital, right? You know, that's 23% of our $0.39 dividend.

Yep, so

Speaker Change: I'm assuming all entities you're hiring and all originators are all hiring now? I'm assuming you guys are in growth modes for all these stakes you have.

Speaker Change: yeah you know everybody's trying to be more efficient so I don't I don't know that we're that we're necessarily at you know at our originator whether it's

Speaker Change: ones that we own stakes in or the ones that we don't are long bridge obviously which is part of us

Speaker Change: I don't know if you're going to see massive hiring at this point. I think everybody's been able to over the past, you know, few years, just get a lot more efficient after, you know, the rates spiked in 2022. Right.

So I think they've

Speaker Change: I don't think you're necessarily going to see a huge amount of hiring there.

Speaker Change: You might see some, especially as product lines increase, things like that.

Speaker Change: Great, well I look forward to continued contribution from Long Bridge and the others. I appreciate it.

Absolutely. Thanks, Pat.

Speaker Change: Thank you. That was our final question for today. We thank you for participating in the Ellington Financial Third Quarter 2024 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.

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["Pomp and Circumstance"]