Ellington Financial Inc. Q3 FY2025 earnings call

• Ellington delivered strong performance with growth in adjustable distributable earnings, investment portfolio, and balance sheet. GAAP net income was $0.29 per share and ADE was $0.53 per share, exceeding dividends. - ADE increase is due to higher net interest income from loan portfolios and securitization gains. Priced 7 securitizations in Q3, a record, with 20 year-to-date. - Balance sheet portfolio holdings grew 12% during the quarter, led by non-QM, proprietary reverse mortgage, and commercial mortgage bridge loans. - Longbridge had record quarter for proprietary reverse origination volumes. - Strengthened balance sheet by increasing long-term non-mark-to-market financings via securitizations and $400 million 5-year senior unsecured notes issuance. - Credit portfolios had strong credit performance with exceptionally low realized credit losses since inception.

For the third quarter, Ellington Financial reported GAAP net income of $0.29 per share and ADE of $0.53 per share. On the ADE breakdown by segment, $0.59 per share came from the Investment Portfolio segment and $0.16 from the Longbridge segment. The portfolio income breakdown by strategy was $0.42 per share from credit, $0.04 from Agency, and $0.09 from Longbridge. The credit portfolio saw net interest income growth sequentially, with net realized and unrealized gains on residential transition loans and other loans in ABS, partially offset by losses on non-QM retained tranches, CLOs, etc. The Agency portfolio had strong results with net gains on long Agency RMBS and associated interest rate hedges. The Longbridge segment had excellent contributions from originations and servicing, with record Prop reverse mortgage loan origination volumes but a net unrealized loss on retained tranches due to prepayment speed and discount rate factors.

• Continued earnings strength and dividend coverage expected. - Shift to long-term unsecured and securitization financing fortifying balance sheet, enhancing risk management, and supporting earnings stability. - Expect upgrades in credit ratings as unsecured debt proportion increases, enabling more attractive debt issuance and virtuous cycle. - Well-positioned with conservative leverage, ample liquidity from unsecured notes, and steady securitizations to deliver strong and sustainable dividend coverage.

• Market risks including potential cracks in the economy, job formation weakness, and corporate bankruptcies. - Credit hedges as safeguards against market risks, though they were a drag on returns this quarter. - Prepayment risks in securitizations, which are a focus area for risk management, including understanding borrower responses and using hedging and call options to mitigate risk.

Q: Just on the loan originator platforms, how has the more conducive mortgage rate environment changed valuations in stakes and overall operating performance, and are there other areas to add capacity?

A: The stakes are third-party valued twice a year with adjustments based on interim P&L. Strong earnings performance has driven book value up, leading to higher values. In terms of new products, working with affiliates on adjustable-rate mortgages.

Q: On credit, elaborate on what's seen in the portfolio and best capital allocation?

A: Weakness in consumer spending at bottom 50% income levels, but higher-end borrowers' credit performance is strong. Commercial mortgage loan business has low cumulative losses, and residential has 13 basis points cumulative losses. Focus on FICO and personal guarantees in RTL.

Q: On credit hedge portfolio size decline, commentary on spread widening risk and approach?

A: Drop in credit hedge was a blip as cash from deals obviated need for much hedge, but expected to increase as cash is deployed.

Q: On debt issuance and common equity, should debt issuance decrease appetite for common equity?

A: ATM issuance is accretive, and capital is deployed quickly into various strategies. Additional ATM issuance is accretive and helps G&A ratios.

Q: On Longbridge competition and Longbridge portfolio upside potential and leverage?

A: Little competition in prop reverse mortgage space. Longbridge's servicing has high yield without leverage, and proper reverse loans' leverage is transient.

Q: On non-QM convexity risk and reverse mortgage space impact?

A: Prepayment speeds are a focus, with hedging and call options to mitigate risk. Regulatory environment has little change, but HPA impacts residual exposure. HPA stalling affected retained pieces in prop reverse securitizations but with cushion from low LTVs.