Ellington Financial Inc. Q2 FY2025 earnings call

• Ellington Financial demonstrated strength and adaptability in a volatile quarter, with broad-based contributions from the investment portfolio and loan origination platforms.
• Completed 6 securitizations in the quarter, a record, replacing repo financing with long-term financing.
• Longbridge had an excellent quarter with strong contributions from originations and servicing, including higher origination volumes in HECM and proprietary reverse loans, and MSR-related income.
• Expanded non-QM loan origination portal enables more loan purchases and diversifies origination footprint.
• Commercial mortgage bridge loan business is in growth mode with partnerships, and equity stakes in originators are growing market share and loan volumes.

Ellington Financial had a strong second quarter. GAAP net income was $0.45 per share, with an annualized economic return of nearly 14% and book value per share at $13.49. Adjusted distributable earnings per share increased to $0.47, exceeding dividends of $0.39 per share. Portfolio income breakdown: $0.61 per share from credit, negative $0.01 from Agency, and $0.11 from Longbridge. ADE breakdown was $0.56 per share from the investment portfolio segment and $0.13 per share from the Longbridge segment. The adjusted long credit portfolio increased 1% quarter-over-quarter to $3.32 billion. The total long Agency RMBS portfolio increased 5% to $269 million, while the Longbridge portfolio decreased 1% sequentially to $546 million.

• Confident ADE and GAAP earnings will continue to cover dividends.
• Third quarter off to a good start with 4 securitizations, and Longbridge had a high origination month in July.
• Launch of Longbridge's HELOC for Seniors program has potential to contribute to earnings.
• Optimistic about expanding unsecured debt to improve capital structure and deploy capital more effectively.

• Weakness in home prices, monitoring closely and pricing for risk.
• Potential funding shocks, but securitizations enhance balance sheet stability.
• Need to stay focused on execution and adjust lending guidelines based on incoming data to respond to housing or consumer health weakness.

Q: Can you talk about the outlook for Longbridge? If rates decline, just how it helps the business? And then to the extent that volumes are increasing across the board for a lot of other asset mortgage types as well, how does that impact it? Do -- is there kind of a shift of attention for some of the producers to other loan types? Or yes, just if you can just walk through that.

A: Laurence Eric Penn said declining rates would increase reverse mortgage activity as principal factors increase, enticing borrowers to take out more reverse mortgages. Mark Ira Tecotzky added that originators they work with are primarily non-QM focused, and if rates drop, some non-banks might shift to core agency business but their originators remain non-QM focused.

Q: Can you just share your latest on credit quality? I know you had some bridge multifamily workouts. I think there's just one left today. So just curious on progress there, current view on the credit portfolio. And then also just what's the drag on net interest income today from the workouts.

A: J. R. Herlihy said they have one significant workout remaining, with other delinquent loans resolving quickly. The one significant workout is over $30 million fair value, with a longer-term resolution horizon, and otherwise, resolutions are moving quickly with low drag on earnings.

Q: Following up on this discussion here, I mean, would you say you're more constructive on the RTL space or the non-QM right now? I mean it seems like the returns in RTL could be higher, but there's probably more stable funding and access to leverage for non-QM. So how should investors like adjust for those? Where would you say the better, like, risk-adjusted return is in the market right now.

A: Mark Ira Tecotzky said they like both RTL and non-QM, with both having significant roles in the balance sheet. Laurence Eric Penn added that non-QM is more liquid and they are exploring RTL securitization, with both markets having advantages in risk-adjusted return depending on allocation.