Ellington Financial Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Loan Portfolio Expansion: The non-QM RTL, Commercial Mortgage Bridge, HELOC, and closed-end second lien loan portfolios increased by 26% during the quarter. Leverage rose to 1.8 times from 1.6 times as the portfolio grew.
• Longbridge Segment: The proprietary reverse mortgage business showed improvement, with ADE increasing sequentially. The segment holds untapped potential, and even stabilized ADE around $0.09 per share per quarter would aid dividend coverage.
• Securitization: Completed three securitizations since end of July, including two non-QM loans and one prop reverse loan. Securitization helps lower financing costs and reduce funding risks.
• Originator Relationships: Profits from equity stakes in originators like LendSure and American Heritage Lending boosted earnings. These originators saw strong origination volumes and margins due to robust demand for Non-QM loans.

Segment Performance

• Credit Strategy: Generated $0.45 per share of net income in the third quarter. Included strong net interest income and gains from non-QM loans, retained tranches, non-agency RMBS, closed-end second lien loans, and CMBS. Offsets included net losses in consumer loan portfolio and non-performing commercial mortgages. Contributed to the overall earnings.
• Longbridge segment: GAAP net loss of $0.03 per share in Q3, but contributed $0.12 per share to adjusted distributable earnings (ADE). Represents approximately 12% of equity capital allocation. ADE in this segment improved from negative in Q1 to $0.12 per share in Q3.
• Agency Strategy: Generated net income of $0.06 per share. Net gains on agency RMBS exceeded net losses on interest rate hedges, driven by falling interest rates and yield curve steepening.

Guidance

• Management expects continued growth in loan portfolios, utilizing the balance sheet to invest in high-yielding loans. Leverage is expected to tick up as they replace higher-cost debt.
• Anticipate 4-6 non-QM securitizations next year, depending on origination volumes and market conditions.
• Target Longbridge segment ADE to stabilize around $0.09 per share per quarter to ensure dividend coverage.

Risks

• Interest rate fluctuations impacting the Longbridge segment, as it is rate-sensitive.
• Credit risks in commercial mortgage loans and consumer portfolios, including non-performing assets.
• Volatility in mortgage spreads affecting securitization execution and portfolio valuations.

Question and Answer Q: Update on relative value between agencies and credit opportunities.

A: Mark Tecotzky states the reduction in agency portfolio allocation is due to shifting capital to non-agency origination and securitization businesses. Larry Penn adds they can be opportunistic with hedging non-QM portfolios using TBAs.

Q: Competition in the non-QM market and impact of insurance companies.

A: Mark Tecotzky mentions insurance companies have stabilized non-QM loan prices and created competition, but there's enough volume for all participants.

Q: Operating expenses increase.

A: JR Herlihy notes a one-time conversion of employee-held options at Longbridge as a major driver of the increase, a non-recurring item.

Q: Securitization pace and reverse mortgage execution.

A: Laurence Penn and Mark Tecotzky discuss plans for 4-6 non-QM securitizations next year and positive execution in reverse mortgage deals, with repeat buyers and ongoing accumulation for future deals.

Q: Refinancing preferred stock and leverage management.

A: JR Herlihy and Laurence Penn discuss replacing high-cost preferred stock with unsecured debt, aiming to increase unsecured financing and manage leverage carefully.

Q: Duration of credit book and value of originator stakes.

A: Laurence Penn and JR Herlihy talk about the short duration of most credit portfolios and the potential value of originator stakes beyond book value, though stability in Longbridge segment ADE is key for dividend coverage.