Ellington Credit Company Q2 FY2026 earnings call

Overall Financial Performance

• The company delivered a strong quarter with GAAP net income of $0.43 per share, adjusted distributable earnings (ADE) of $0.60 per share, an annualized economic return of 13.6%, and a $0.05 increase in book value per share to $13.61 after $0.39 per share in dividends. ADE and GAAP net income both exceeded the current quarterly dividend for the eighth consecutive quarter.
• The proprietary residential loan portal now processes over $15 million in daily loan purchases, an annualized pace of ~$4 billion, and supplied a significant portion of the ~$2 billion of loans securitized in the quarter.

Strategic Ecosystem & Competitive Advantages

• The company's integrated, vertically integrated ecosystem (originator partnerships -> loan sourcing -> securitization -> retained investments) creates reinforcing value drivers: strong sourcing supports securitization volume, securitization releases capital for redeployment and creates attractive retained investments, strong credit performance boosts investor demand for securitizations, and growing originator affiliates expand loan supply and directly contribute to earnings.
• 20% of employees are dedicated to research and technology, with recent AI advances improving underwriting, risk selection, and liquidity management. The EFMT non-QM securitization shelf ranks among the strongest in its cohort for low delinquencies and controlled prepayment speeds.

Disclosure Updates

• Agency MBS has been incorporated into the broader investment portfolio disclosure, as the company has rotated capital out of Agency MBS and into higher-return credit strategies where it has clearer competitive advantages, and Agency now represents a small share of capital.
• Separate disclosure of HECM and proprietary reverse mortgage origination volumes, channel composition, and submission volumes (a leading indicator for future origination) has been added, showing strong sequential growth in Q2 submissions.
• Separate roll-forwards for HMBS MSRs and Proprietary Reverse Mortgage MSRs, including breakdowns of value changes and servicing earnings, have been added to improve transparency for investors.

Funding & Balance Sheet Improvements

• The weighted average borrowing rate on recourse borrowings was 5.5% (flat quarter-over-quarter), resulting in a solid net interest margin of 336 bps (also flat). 29% of recourse borrowings are long-term and non-mark-to-market, and 17% are unsecured debt. The weighted average remaining term of repo borrowings increased to 9.3 months, approximately double mid-2025 levels, reducing near-term refinancing risk.
• Securitization volume totaled $4 billion UPB in the first half of 2026, approaching the full-year 2025 total of $4.4 billion, and continues to replace short-term mark-to-market financing with longer-term non-recourse funding. Outstanding unsecured notes currently trade at a premium despite higher broad interest rates, reflecting progress strengthening the balance sheet.
• At quarter-end, the recourse debt-to-equity ratio remained 1.9:1, while the overall debt-to-equity ratio increased modestly to 9.2:1, primarily due to additional non-recourse borrowings from recent securitizations.

Operational Updates

• Productivity improvements from technology and AI investments at Longbridge have more than doubled the number of funded loans per operations employee since January 2023, supporting efficient scalable growth.
• The company is near completing the acquisition of a small residential loan servicer, expected to close in Q3 2026, to build out a best-in-class in-house special servicing platform for delinquent loans, which will preserve portfolio value through market cycles.

1. Investment Portfolio: This segment was the core earnings driver, contributing approximately $0.37 to adjusted distributable earnings (ADE) per share after accounting for overhead and Longbridge's contribution. Net interest income increased quarter-over-quarter due to higher average portfolio size and attractive asset yields, with strong gains on hedges offsetting net realized and unrealized losses. Inception-to-date cumulative realized credit losses are 17 bps on $20.4 billion of residential mortgage fundings and 39 bps on $2.5 billion of commercial mortgage bridge loans, with excellent sustained credit performance. Agency MBS now represents less than 1% of allocated capital and is included within this broader segment, down from over 20% historically. The adjusted long investment portfolio grew modestly in the quarter, driven by growth in residential transition loans, commercial mortgage bridge loans, and retained RMBS. This segment contributed 62% of total Q2 2026 ADE.

2. Longbridge Financial (Reverse Mortgage Segment): Delivered an outstanding quarter, contributing $0.21 to $0.23 per share to ADE in the first half of 2026, up from an average of $0.12 per share in 2025. Longbridge originated $590 million of loans, a 38% year-over-year increase, with proprietary reverse mortgages reaching record volume and representing 54% of total origination, while HECM (government reverse mortgages) represented the remaining 46%. Net servicing profits from MSRs contributed approximately 6-6.5 cents per share to ADE this quarter. Enterprise-level interest rate hedges stabilized earnings during the quarter's rate increase, and generated additional gains alongside strong origination profitability. This segment contributed approximately 38% of total Q2 2026 ADE.

3. Corporate Other: Recognized net unrealized losses in the quarter, driven by tightening credit spreads on the company's outstanding unsecured debt (which is carried at fair value) and unrealized losses on fixed receiver interest rate swaps hedging unsecured note and preferred equity payments.

• Management maintains a base ADE run rate guidance of high 40s cents per share, even if Longbridge only completes one securitization per quarter (down from two in Q2 2026).
• The current monthly dividend of $0.13 ($0.39 quarterly) remains appropriate. Management noted that with ADE running well above the dividend, there could be upward pressure on the dividend per REIT distribution requirements, but the company currently prioritizes retaining excess earnings to grow book value per share.
• The company expects to continue being an opportunistic issuer of unsecured debt and preferred equity when market conditions are favorable, to further diversify funding sources and improve financial flexibility, with the goal of a strengthening balance sheet leading to improved credit ratings.
• Private label non-agency mortgage securitization issuance is expected to reach approximately $250 billion in 2026, a large enough size to create a virtuous cycle of improved liquidity, expanding investor base, and better execution for the company's securitization platform.

• Higher interest rates can create downward pressure on mortgage origination volumes and margins, though the company maintains enterprise-level interest rate hedges to stabilize earnings across different interest rate environments.
• Lower FICO score borrowers and cash-out refinance loans have exhibited more elevated delinquency rates over the past year, leading the company to reduce the size of its consumer loan portfolio as a percentage of total holdings.
• Commercial real estate is experiencing a downturn with growing non-performing loan supply, though management views this as a potential opportunity rather than a core risk for the company's focus on smaller-balance commercial loans.
• If interest rate volatility increases (for example due to changes in Federal Reserve communication policy), it could create higher portfolio volatility, though the company's hedging framework is designed to insulate earnings and book value from most interest rate changes.
• Growing portfolio size naturally leads to higher delinquency volumes, requiring increased investment in special servicing capabilities to preserve asset value.

Q: What details can you share on the pending residential servicer acquisition, including whether it includes MSR assets? / A: It is a small servicer with single-digit billions of servicing rights, diversified across multiple loan types, and includes some subservicing contracts. It is expected to close in September 2026, and does not bring enough MSRs to have an immediate material impact on the balance sheet or earnings. The primary goal is to build out in-house special servicing capabilities, as third-party special servicing options have diminished, and high-touch in-house servicing will improve outcomes for delinquent loans.

Q: What is the normalized long-term ADE contribution run rate from Longbridge as it scales, and where does Ellington see the best and worst risk-adjusted credit returns today? / A: Longbridge contributed $0.23 and $0.21 per share to ADE in the first two quarters of 2026, up from a 2025 average of $0.12. MSRs contribute ~6-6.5 cents per share, and strong securitization execution pushed origination contribution higher in the first half of 2026, so the long-run normalized contribution will be slightly lower than recent levels but still enough to support the company's overall high 40s ADE run rate. For credit returns, the spread between loan purchase yields and securitized bond sale yields has been preserved even as overall spreads have tightened, allowing retained investments to maintain historical yields. The company is less comfortable adding lower FICO and cash-out refinance consumer loans due to rising delinquency, and sees potential attractive opportunities in emerging small-balance distressed commercial mortgage supply.

Q: How does Ellington balance short-duration and long-duration assets in its portfolio, and has this strategy changed? / A: The company retains call rights on most securitized deals, which act as longer-duration exposures that provide valuable optionality if rates fall. Short-duration assets like residential transition loans and most commercial bridge loans remain core to the strategy, as their nature fits the company's risk preference, improves liquidity visibility, and supports strong risk management. Reverse mortgages and non-QM loans are naturally longer-duration, and the company already holds large exposures in these attractive growing markets. The overall portfolio mix of largely short-duration assets with targeted long-duration exposures remains unchanged.

Q: What is Ellington's approach to credit and interest rate hedging, and how does it account for potential increased volatility under new Fed leadership? / A: The company uses credit hedges tactically to lock in securitization execution during deal marketing, and strategically to protect book value in the event of an economic downturn or recession. For interest rate risk, the company always hedges most exposure to generate ADE that is spread-based to SOFR, insulating results from rate changes regardless of Fed leadership. While new Fed communication policy may increase interest rate volatility, this has been manageable so far, and does not change the company's hedging framework.