Ellington Financial Inc. Q1 FY2026 earnings call

Larry noted strong first quarter performance despite market volatility. Longbridge had standout quarter with record origination volumes, market share gains, and successful securitization. Lensure had excellent performance. Securitization platform was highly active with large volumes. Credit performance was strong with delinquency rates declining. Balance sheet grew by 4% net of securitization. Equity activity included raising $117 million common equity to redeem preferred stock. J.R. walked through financial results showing ADE contribution by segment, portfolio changes, borrowings, and book value per share. Mark highlighted resilience and stability, securitization volumes, originator affiliates' performance, and market trends.

Ellington Financial had strong first quarter performance. Gap net income was 78 cents per share with annualized economic return of 26% and book value per share appreciation of 3%. ADE was $0.55 per share, exceeding dividend. Longbridge had near record proprietary reverse mortgage loan origination volumes, gains in HECM market share, and strong gain on sale margins. Its securitization was successful with lowest cost of funds. Lensure had high origination volumes and strong gain on sale margins. Portfolio strategies like non-QM, closed-end second lien, agency-eligible had robust results with strong securitization executions. Securitization platform was active with seven transactions totaling over $2.8 billion from EFMT shelf.

Management increased quarterly guidance on ADE per share to the 45 cents per share area, which is well above the dividend run rate of 39 cents.

Potential risks include higher energy prices persisting leading to less disposable income for consumers, making it harder for lower income individuals to meet debt obligations. Also, housing price appreciation (HPA) is no longer a strong tailwind to credit performance as 2025 was the weakest year in a decade, making it harder for borrowers facing income disruption to pay off mortgages through home sales.

Q: Hey, good morning, guys. This is Frankie Libetti on for Bose. I wanted to start with just your current run rate. ADE has consistently been above the dividend, and you noted on the call earlier that you raised your ADE guidance. Where do you guys, where does the board see current dividend policy going forward, and what's the tradeoff of pertaining earnings through a book versus reinvesting some of those earnings in your operating companies?

A: Yeah. Let me just start off by saying we're certainly not thinking of lowering the dividend. So let's just start with that. I think the dividend is a good place. I think it does achieve a good balance. We were able to and have been able now recently to build some book value per share. Our yield You know, at an 11 handle, I think that's a good yield. So I would say, again, certainly no thoughts of lowering the dividend. Could the next, you know, move at some point be a raise? Sure. But at this point, I think we just like where it is.

Q: And then on the commercial REO performance, you showed some unrealized gains there. Roughly 60% of your commercial book is multifamily. Are those gains coming from successful workouts in the sector, or are you seeing some just more positive trends there?

A: Yeah, so it's more the latter, and the way that we mark those assets is we run a DCF that projects what we – expenses and CapEx expenditures we expect, and then we discount those back to a net present value today, typically at a pretty high return, you know, in the double digits. And then the idea is if we deliver on those expectations and there's a higher terminal value at the end, the fair value should accrete up to that terminal value over time because of the high discount rate. And so that dynamic is what was driving the P&L in Q1 on the commercial REO book. as opposed to some large resolution. But, you know, we thought it was worth flagging given its contribution to P&L.

Q: Just on your agency allocation, you know, come down over time, where do you guys see that trending? Do you see it roughly in this 1% range going forward?

A: Sure. I would say given the substantial recovery you saw in agency MBS spreads in 2005 and continuing on this year, albeit at a slower pace, I don't see that allocation going up. It'll probably drop a little over time. We mentioned I think it dropped face amount or investment amount dropped by 3%. We have expertise there. And should you get to a point in relative value of agency MBS versus all the other things we're doing that we thought it was compelling, we could certainly bring it up. The other area where you see activity on agency MBS, and JR mentioned it, I believe, is hedging activities, right? Especially some of the securitizations like agency eligible investor loans and eligible second homes. A lot of those AAA bonds are explicitly priced at a dollar price spread relative to the agency market. It functions as a very effective hedge.

Q: Yes, hi, good morning. Thanks for taking the question, and congrats on another great quarter. Looking at the origination volumes at Longbridge, some other peers to Longbridge noted that March was a stronger quarter in the reverse space for origination volume. I was wondering if you all witnessed the same thing at Longbridge, if March's volume is stronger than January's. in February, and if that theme has persisted through April and May, and then, as well, if you could just maybe provide some colors on what you thought the driver of outperformance there was.

A: Yeah, I would say that we put the context that Q1 is typically seasonally slow, and despite that, Longbridge's sequential decline, so just from Q4 to Q1, was very modest. So in other words, they originated almost as much in Q1 as they did in Q4, and then it was 50% higher year over year to the Q1 of 2025, to the seasonality point. April is looking good. So to the second part of the question, we're seeing that momentum continue so far into Q2. Yeah, and I think I need to look at month-by-month origination volumes, whether it was March versus January. I think that's probably right, but I think the more important point is that it was a quarter of strength, and we've continued in the Q2 so far, and props proving more resilient in the face of those higher interest rates than HECM has. I mean, HECM volumes have certainly declined. Yeah, and I would just add also that this is still a very small market in the context of the entire mortgage market. So even though this is a seasonally slow quarter, I think that this product, right, is gradually getting more traction overall. And I'm speaking now especially of the prop product. And, you know, you've got now coming out of the seasonally slow months, you know, I would expect to see some, you know, good seasonal effects. But again, this market, you know, we talked about the demographics. I think in terms of the marketing efforts that Longridge has undertaken, those are helping as well. Better pull-through rates. I mean, there's just, you know, a lot of things that we're doing to ultimately originate more loans that don't even necessarily have to do with seasonality. So I'm looking for continued strong performance there.

Q: As we think about net interest income, took a pretty big material step up from 4Q to 1Q. Are there some one-off items driving that growth? And is there any sort of guidance or color you want to provide to how we should think about net interest income going forward, looking at the larger portfolio.

A: I'll just update the prior question about origination volumes. They did, just looking at month by month at Longbridge, they did trend up from Jan to Feb to March, so March being the highest of the month by a decent margin. So we did see that same dynamic. In terms of net interest income, you know, we were – $0.55 overall ADE. We mentioned $0.45 area as kind of a run rate moving forward, which is in line with Q4. Q4 is $0.47. What I would say is that the contribution from the investment portfolio segment, which is where most of the net interest income comes from, is kind of running at a steady state. So in other words, most of the exceedance this quarter was from Longbridge, which is driven more by their origination activity, their securitization activity. And so the NII we're seeing has been trending up nicely in line with the growth of the portfolio. And we improved cost of funds this quarter, as we talked about. So I don't know that there's huge volatility in NII quarter to quarter. The guidance is more kind of signaling that we shouldn't expect 21 cents from Longridge every month, excuse me, every quarter, but the NII contribution from the investment portfolio has been kind of, as designed, pretty stable quarter to quarter. Yeah, and our retained, you know, the retained trushes, and we talked about those, those are very high yielding, right? And that continues to grow. So, look, we're continuing to grow the equity base as well, right? And so, hopefully, everything is keeping pace with that as well.

Q: There's been a decent move up in mortgage rates since the initial announcement of the GSE portfolio buying. I guess I'm curious for you guys' current thoughts on you know, the likelihood of more sort of targeted government policies aimed at lowering mortgage rates as we go through the balance of the year. And I'm particularly curious if you think there's any chance that, you know, the GSA do something like reducing LLPAs or G fees in an attempt to get mortgage rates to a lower level.

A: Hey, Trevor, it's Mark. So, yeah, when that announcement first came out, It seemed like if the focus is affordability, there were two other logical levers, not the GSEs, but FHA could pull. One is LLPAs, because LLPAs clearly for many types of GSE loans are far in excess of historical losses or expected losses. So that was one thing. And they're also losing market share to the non-agency market because of high LLPA, so that was one easy lever. And the other lever was either an ongoing or upfront cost cut to MIPS on the FHA side, right? And so when you didn't see those get done, our takeaway is then it's probably not top of mind right now. You're seeing other tweaks to affordability, you know, changes in title insurance, and now, you know, acceptance advantage scores, you know, advantage pull is materially cheaper than a traditional FICO pull. So while we think LLPA, G-fee, ongoing cuts are possible, we probably characterize them as not likely. And the other thing is I know some people have spoken about maybe there's a possibility that Fannie and Freddie would increase their purchases above and beyond their current caps they have in place and above and beyond the $200 billion. Again, we think it's possible, but we think that's not likely. But what you have seen this year, and you have seen relatively strong performance rate in CMBS, you are starting to see some pickup in bank buying. So that was really coming from some clarity around Basel III. and some of the proposals from Bowman about changing capital requirements as a function of LLPA. So we think that is broadly supportive of bank participation in the market. And bank buying was very, very weak last year. So I think banks will be a bigger part of the market. That's certainly a tailwind. You've certainly seen REITs issuing shares and buying more agency MBS. So we think that's a positive tailwind. And you've seen better foreign participation, so non-U.S. participation. So there's pools of capital, more aggressively buying agency MBS than what you had at the start of 2025. And we think that's going to be where the support comes. And if these other things that help add affordability, we think it's possible, but we think they're sort of at the margin and definitely second-order effects. But, you know... What you're seeing what helped affordability last year, and I mentioned it in prepared remarks, is that HPA growth that is less than income growth and the decline in mortgage rates you saw since the beginning of 2025, those have been supportive to affordability as well. Yeah, and if I could just add, just taking a step back there, when you think about overall mortgage rates, though these effects, they're important on spreads, but let's face it, overall interest rates, treasury rates, for example, are going to drive, you know, mortgage rates a lot more. And there, when you talk about, you know, where's inflation, where's the deficit and the debt, what's Fed policy? I mean, those things are going to dwarf the impacts, and they're significant right now. Those are going to dwarf the impacts that I think some of these moves could have on, you know, on mortgage rates.

Q: Hey, good morning, guys. Thanks for taking the question, and congrats on a strong quarter. You mentioned that you sold a whole loan pool to an insurance company during the quarter. Could you talk a little bit about how this kind of came about and where you're seeing kind of sales execute there versus where they would execute in the securitization market right now?

A: This is Markham. Thanks for the question. Yeah. So we did a lot of whole loan sales. I'm trying to think back probably in 2023 when securitization spreads were wide, then a lot of instances that looked like materially better execution than securitizations. I think, you know, at the margin, our preference is securitizations. We mentioned all the, you know, benefits of operating at scale, improved liquidity for the shelf. Yeah. So I think at the margin, our preferences for securitizations, that transaction we talked about was, that was a little bit of a one-off. And I think we made the point that there were parts, there were moments in the quarter where there was some real volatility in equity prices and in credit spreads and in interest rates, right? And we are disciplined on the hedging side. of mortgage loans, which means not only interest rate hedging, you know, including partials along the curve, but also thinking about our exposure to changes in implied and realized vol, and also the correlation between mortgage spreads and broader, you know, corporate credit spreads, either IG or high yield, right? And so there was a moment in time where corporate credit spreads, both high yield and IG, widened substantially. But the spreads on the loans, on the mortgage loans relative to treasuries, hadn't really moved. So it was opportunistic for us to take advantage of that by making a loan sale and then buying back the sort of pro-rash share credit hedges we had allocated to those loans. So that was, I think, kind of unique to the volatility in that quarter. You know, look, We look at loan sales all the time. Where we are in the cycle now, I think they're going to be not a big part of what we do going forward. We really like the yields and the profiles and the call ops as we retain from doing securitizations. We like the momentum our shelf has and the better liquidity and the bigger scale and how that's delivering more assets and better liquidity to the investors that support our shelf. So right now that's where our focus is.

Q: you know, Longbridge, you mentioned you're kind of leveraging technology there. You know, is there anything you guys are doing from an AI standpoint across there and the other originators, you know, where you're going to see some more efficiencies or I guess cost savings as you continue to scale that?

A: Absolutely. So Longbridge has, you know, rolled out an important AI product, you know, whereby its employees, even the ones that are customer facing, you know, can get quick through the AI, quick access to, for example, its underwriting guidelines, you know, to get better and quicker and responses to customers' questions. So that's just one example. But obviously, across many of our businesses, we're using AI in a big way to just be more efficient.