Ellington Financial Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025
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Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Ellington Financial First Quarter twenty twenty five Earnings Conference Call.

Operator

Today's call is being recorded. At this time, all participants have been placed in a listen only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing and 2.

Operator

It is now my pleasure to turn the call over to Aledin Chelet. You may begin.

Alaael-Deen Shilleh
Alaael-Deen Shilleh
Associate General Counsel & Secretary at Ellington Financial

Thank you. Before we begin, I'd like to remind everyone that this conference call may include forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our annual and quarterly reports filed with the SEC. Actual results may differ materially from these statements, so they should not be considered to be predictions of future events. The company undertakes no obligation to update these forward looking statements.

Alaael-Deen Shilleh
Alaael-Deen Shilleh
Associate General Counsel & Secretary at Ellington Financial

Joining me today are Larry Penn, Chief Executive Officer of Allington Financial Mark Tecoski, Co Chief Investment Officer and J. R. Herlihy, Chief Financial Officer. Our first quarter earnings conference call presentation is available on our website, allingtonfinancial.com. Today's call will track that presentation, and all statements and references to figures are qualified by the important notice and endnotes in the back of the presentation.

Alaael-Deen Shilleh
Alaael-Deen Shilleh
Associate General Counsel & Secretary at Ellington Financial

With that, I'll hand it over to Larry.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Thanks, Eladine. Good morning, everyone, and thank you for joining us today. I'll begin on Slide three of the presentation. Ellington Financial started the year with a solid first quarter, driven by continued strength in our diversified residential and commercial mortgage loan portfolios, in combination with continued excellent deal executions in our securitization platform. For the quarter, we generated GAAP net income of $0.35 per share, and our adjusted distributable earnings at $0.39 per share continue to cover our dividends.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Our loan businesses remain a dependable source of growth and profitability, and we again benefited from strong ADE contributions from our loan originator affiliates, as well as net gains on our forward MSR portfolio. Our reverse mortgage platform, Longbridge Financial, more than covered its proportional share of ADE to support the dividend, despite lower seasonal origination volumes for HECM. However, with interest rates sharply lower over the quarter, losses on interest rate hedges led to slightly negative GAAP net income overall for the quarter at our Longbridge segment. I'll note that while seasonality caused HECM origination volumes at Longbridge to decline sequentially, Prop reverse origination volumes were stable, and their origination margins actually improved, providing further evidence of the growing demand for our Prop reverse product. In fact, in April, loan submissions in Prop were considerably higher year over year.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Meanwhile, our non QM originator affiliates, including LendSure and American Heritage, continued not only to provide us with excellent flow of product, but their strong profitability also continued to contribute nicely to our bottom line. Extending the strong momentum we built in our securitization platform last year, we priced five new securitization deals in the first quarter, taking advantage of tight spreads to secure long term, non mark to market financing at attractive terms. These transactions also enabled us to expand our portfolio of high yielding retained tranches to support earnings growth, And they added deal call rights to our portfolio, enhancing portfolio optionality. Thanks to the strong historical credit performance of our eFMT shelf, we were able to lock in some extremely favorable debt spreads on our first quarter securitizations. I'm pleased that we completed a high volume of deals in the first quarter, while market conditions were still favorable.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

In fact, securitization debt spreads widened somewhat late in the quarter and then surged in early April amidst the overall market volatility. And so we refrained from pricing any more securitizations in April, until very late in the month, when we priced another non QM securitization after debt spreads had recovered somewhat. Given the diversified array of warehouse lines that we have at our disposal, we can be patient during extended periods of debt spread widening. To that point, we added two more loan financing facilities during the first quarter. We've also made some important tactical moves in the form of outright asset sales.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Earlier in the first quarter, we sold a wide variety of credit sensitive securities before yield spreads widened to lock in gains, free up capital and enhance liquidity. Then in early April, we sold most of our HELOC position, crystallizing profits on those investments, while freeing up capital to reinvest in the more attractive opportunities we are seeing in other sectors. Meanwhile, we closed on yet another mortgage originator joint venture investment in the first quarter. And as usual, this included a forward flow agreement with that originator. We have two more such investments in the term sheet stage now.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

We remain focused on establishing these joint ventures to secure consistent access to high quality loans at attractive pricing and on a predictable timeline. Finally, we made notable progress on a handful of commercial mortgage workouts, including one significant resolution in March and another one scheduled to close today, eliminating negative carry assets and freeing up capital for redeployment. We expect that by the end of the second quarter, we will have only one significant remaining workout asset detracting from our adjustable distributable earnings. At the bottom of slide three, you can see that our recourse leverage remained low at just 1.7:one. That's even slightly lower than our year end level of 1.8:one, with our significant securitization activity and opportunistic asset sales in the first quarter more than offsetting another $1,000,000,000 plus quarter of loan purchases.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

I'll make a few observations on our leverage. First, whenever we complete a securitization, we convert a sizable amount of borrowings from recourse to non recourse, thus lowering our recourse leverage. Second, these securitizations also convert loan assets into retained tranches, which carry much higher yields, and therefore require little or no leverage to generate attractive returns on equity. Third, in the wake of the March and April volatility, we continue to see better investment opportunities. So it's great to have made more room to add leverage from here.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And fourth, if we're going to increase our recourse leverage significantly, we prefer to do it by issuing long term unsecured debt. However, debt spreads are currently too wide in that market relative to asset spreads for us to be issuing unsecured debt. When that relationship between debt spreads and asset spreads normalize, we'll consider issuing unsecured debt again. And with that, I'll turn the call over to JR to walk through our financial results in more detail.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

JR?

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Thanks, Larry. Good morning, everyone. For the first quarter, we reported GAAP net income of $0.35 per common share on a fully mark to market basis and ADE of $0.39 per share. On Slide five of the deck, you can see the income breakdown by strategy, dollars $0.05 8 per share from credit, zero five per share from agency and negative $01 per share from Longbridge.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

And on Slide six, you can see the ADE breakdown by segment, dollars 0.32 per share from the Investment Portfolio segment net of corporate expenses and $07 per share from the Longbridge segment. Positive performance in the credit portfolio was driven by sequentially higher net interest income, net gains from forward MSR related investments, commercial mortgage loans, closed end second lien loans, non QM retained tranches and ABS. And net gains on our loan originator equity investments. Partially offsetting higher net interest income were net realized and unrealized losses on consumer loans, CLOs, non QM loans and residential transition loans, as well as losses on residential and commercial REO. Meanwhile, thanks to our coupon and hedge positioning, our agency portfolio generated excellent returns for the quarter, even as agency RMBS slightly underperformed benchmarks market wide.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Turning now to Longbridge. While that segment reported a slight net loss overall due to interest rate hedges with rates sharply lower during the quarter, Longbridge had positive contributions from both servicing driven by a net gain on the HMBS MSR and from originations driven by higher origination margins for Prop Reverse and steady margins for Hecum despite seasonally lower origination volumes in HECM quarter over quarter. Our results for the quarter also reflected gains on the fixed receiver interest rate swaps used to hedge the fixed payments on our unsecured notes and preferred equity with interest rates lower during the quarter. These gains exceeded net losses on our unsecured notes, which included a mark to market loss on our unsecured notes driven by lower interest rates as well as a realized loss related to the par redemption of our 6.5% notes that we had carried at a slight discount to par. Turning now to portfolio changes during the quarter.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Slide seven shows a 4% decrease for our adjusted long credit portfolio to $3,300,000,000 The decline was due to the impact of securitizations completed during the quarter, as well as a smaller residential transitional loan portfolio, where principal pay downs exceeded net new purchases and net sales of CLOs. Offsetting a portion of the decline were larger commercial mortgage bridge and non QM loan portfolios, both driven by net purchases. On Slide eight, you can see that our total long agency RMBS portfolio declined by another 14% to $256,000,000 by design, as we continue to sell down that portfolio and rotate the capital into higher yielding opportunities. Slide nine illustrates that our Longbridge portfolio increased by 31% sequentially to $549,000,000 driven by a proprietary reverse mortgage loan originations. Please next turn to Slide 10 for a summary of our borrowings.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

At March 31, the total weighted average borrowing rate on recourse borrowings decreased by 12 basis points to 6.09%. Quarter over quarter, the net interest margin on our credit portfolio decreased by 12 basis points, while the NIM on agency increased by 24 basis points. Our recourse debt to equity ratio declined to set 1.7:one from 1.8:one quarter over quarter and including consolidated securitizations, our overall debt to equity ratio decreased slightly to 8.7:one from 8.8:one. During the quarter, we paid off one of the tranches of unsecured notes that we brought over from Arlington upon their maturity in March. At March 31, combined cash and unencumbered assets increased to approximately $853,000,000 or more than 50 percent of our total equity.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Book value per common share stood at $13.44 and total economic return for the first quarter was 9.5% annualized. With that, I'll pass it over to Mark.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Thanks, JR. This was a strong quarter for EFC. We covered our dividends with ADE, made substantial progress in resolving our larger delinquent commercial mortgage loans, and had broad based contributions to earnings from our diversified investment portfolio. One highlight for the quarter was our portfolio of agency mortgage servicing rights, where we not only had substantial positive carry but a substantial mark to market gain as well. These MSRs are backed by very low rate Fannie Freddie loans.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

We acquired these MSRs through the Arlington acquisition, and they remain one of the few holdings of theirs that we kept in our portfolio. On prior calls, we have spoken about the mortgage lock in effect, putting a wet blanket on prepayments and creating a huge opportunity in second liens and HELOCs for us. Well, another consequence of that lock in effect is that values of servicing have gone up as each month's prepayment data confirms very slow speeds on low coupon MBS. In addition, there has been a trend in the mortgage space to put an increasingly higher value on the customer relationships that come with owning servicing rights, particularly customers with high FICOs. That is part of the driver behind Rocket's recently announced acquisition of Mr.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Cooper. While we don't expect this quarter's mark to market gain to be repeated, we do expect an ongoing meaningful contribution to our ADE from this MSR portfolio. We also had a great quarter in our non QM loan business. For our non QM origination partners in which we had ownership stakes, their strong profitability in 2024 has continued into 2025. We continue to expand our footprint in NonQM, and we remain an active deal sponsor.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

We waited out the mid market April volatility and priced the NonQM deal last week and were rewarded with great execution. The securitization process creates high yielding investments for the EFC portfolio as well as giving us a growing portfolio of call options that potentially provide us access to high note rate seasoned loans in the future. In recent months, we have been tightening our underwriting guidelines, preferring to focus on higher FICO borrowers and loans with a more extensive underwrite. That view is heavily informed by Ellington's internal research, and as we see the market now pricing in a greater probability of a slowdown in The U. S.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Economy, that scenario should favor a more conservative positioning. We also had another strong quarter from non agency RMBS, both in terms of earnings contribution and portfolio growth. With the growing securitization market in non QM, jumbo, and second liens, we are finding a rich opportunity set in the market and have been deploying capital accordingly. Last year, we identified as a growth area for Us equity release products offered to high FICO agency borrowers with low fixed rate mortgages. Since then, we have been an active buyer and securitizer of second lien loans.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

We had strong contributions from those investments in the first quarter and have also been cosponsoring third party securitizations of closed end seconds that create retained tranches for us to hold. We expect those retained tranches to provide very high yields and generate outsized ADE. We also made substantial progress on a handful of delinquent commercial mortgage loans in our portfolio one resolved in the first quarter, '1 is scheduled to resolve today, and one is in the middle of CapEx and lease up. We continue to originate commercial bridge loans and are seeing a stronger set of sponsors looking to partner with us. The relationship and expertise at our origination affiliate, Sheridan, are a big benefit to us here.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Similar to residential, we have become progressively more restrictive in our underwriting guidelines, but our pricing power remains strong, and we continue to see a high volume of deal flow. We also had a very strong quarter in our agency portfolio, as we were well positioned to capture both positive carry and mark to market gains over our hedges. Now let's talk about April. That was one of the most volatile months we have seen in a long time. While results are still preliminary, we estimate that it was a positive return month for EFC.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

The tariff uncertainty is challenging many business models and causing a huge amount of volatility in both high yield bonds and bank loans. Amidst the market weakness, low LTV real estate loans with high FICO borrowers in the case of residential and high quality sponsors in the case of commercial have been a safe, high yielding place to invest so far, as they appear to be much better insulated from tariff uncertainty than many parts of the corporate market. Now look on slide 19. You can see we continued to increase our credit hedges in Q1. Those are primarily corporate focused, and they certainly did their job helping to predict book value in April.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Going forward, we are closely watching credit performance across many market sectors for signs of weakness. So, if need be, we can adjust our credit hedges and or pivot and rotate between sectors. In addition, we want to keep pushing our advantage of vertical integration, both to drive value creation of our portfolio origination companies and drive investment creation for EFC's portfolio. In addition, we are seeing the value of many of the technology initiatives we developed last year coming to bear, and we are actively developing more proprietary tools to support loan origination. Now back to Larry.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Thank you, Mark. I'm very pleased with how we started out the year. In the first quarter, we continued to grow our residential and commercial loan businesses, building on the strength of our vertically integrated platform, opportunistically accessing securitization markets and maintaining dividend coverage. Our investment teams executed skillfully in the face of growing macro headwinds, generating solid returns and executing key tactical and strategic maneuvers, such as asset sales, securitizations and hedging adjustments. As a result, we were positioned really well coming into the second quarter.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

The current high levels of volatility are recharging the opportunity set and creating compelling trading opportunities. This is an environment that we believe is well suited to our core strengths. Our short duration loan portfolios continue to steadily return principal, enabling us to redeploy capital at higher yields. As during previous periods of market stress, our dynamic hedging strategies, diversified portfolio, broad financing base and low leverage are all helping us protect book value. To that point, please turn to slide 19.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

As Mark mentioned, we have built up our credit hedges considerably since mid twenty twenty four. So we were able to amass a significant portfolio of credit hedges when spreads were much higher than they are now. Even though our assets are mortgage focused, we mostly use derivatives on corporate bonds, especially high yield corporate bonds, to hedge credit risk because of their liquidity and their robust protection in big market tail events, like what we saw during COVID. We also opportunistically use CMBX to hedge. Those are credit default swaps on commercial mortgage backed securities.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

On this slide, you can see that at quarter end, our corporate credit hedges alone represented an estimated short position of over $450,000,000 high yield corporate bonds. For context, that figure one year prior was only about a hundred and $20,000,000. In April, those credit hedges did their job beautifully. They generated huge profits and cash for us when credit spreads blew out earlier in the month. And for the full month of April, even with credit spreads staging somewhat of a recovery later on, they still helped offset valuation declines that we saw in the long portfolio.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

As a result, despite the widespread market weakness weakness in April, we estimate that our economic return was still positive for the month. In summary, with our strong capital base, ample liquidity, highly diversified portfolio strategy, disciplined leverage and active hedging, I believe that we are exceptionally well positioned to take advantage of the recharged opportunity set that we're seeing in this period of heightened market volatility. With that, let's open the floor to Q and A. Operator, please go ahead.

Operator

We'll We'll take our first question from Crispin Love with Piper Sandler. Please go ahead. Your line is open.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Thank you. Good morning, everyone. Just drilling a little bit deeper on the volatility that you've seen in the past months setting you up for some attractive trading opportunities. Have you so far have you been able to deploy a material amount of capital in these types of trades? And then also where are you seeing the best opportunities in addition to the credit hedges that you've called out?

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Hey, It's John. Mark, do you want me to start off with the first half of that? Sorry to interrupt you. The first half of the question and then you can do the second half?

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Yes, absolutely.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

So thanks, Tristan. I would say not material growth in April, but the portfolio has grown net relative to where we were March 31. I would put the growth in two buckets. Bucket one being continuing to grow loan portfolios, so think non QM, close in seconds, proprietary reverse, kind of somewhat ordinary course, although we've seen spreads widened and recharging the opportunity set. But then in bucket two, we're able to pick up securities more opportunistically.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

And non agency MBS, for example, has, has grown in April, in that category. So, we have grown in in those areas. And and, Mark, I don't know if you wanna talk about more more specifically what what you like and what you're seeing in this market.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Sure. Yes. So there was by April, I mean, the volatility was really extreme. And so to put a perspective on it, we saw quality non QM deals from good originators with a AAA response the AAA's priced at 190 to the curve. And those same deals earlier in the year were 115 to 120 to the curve.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

So, know, 70 odd basis points widening. Now, Larry mentioned the deal we did April, to give you a sense what the recovery is, we wound up getting 160 in our AAAs. So, waiting out sort of the eye of the storm definitely worked to our advantage. But, you know, by mid April, you know, when you saw these one ninety prints on triple a, there were people pretty nervous. So we were able to buy some loan packages that made sense, even assuming 190 execution, the top part of the capital stack.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

And also, CUSIP. I mentioned in the prepared remarks how we're seeing a better, a richer opportunity set in non agency QSIPs than we had maybe a couple of years ago. And part of that is non agency securitization market has grown in jumbos, in non QM, in seconds. And so, actively find opportunities in buying securities in that market. And a lot of times, there's a pretty healthy new issue concession that we can capture and monetize.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

So, those have probably been the biggest areas.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Great. I appreciate all the color there, JR, Mark. Then you also called out the resolutions in some of your commercial bridge loans recently. Can you just give a little bit more detail on what those resolutions look like? Were the loans modified?

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Were they sold? Just curious on those details. And then the positive impact you would expect to see to ADE from those resolutions on a go forward basis?

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Sure. So let me think. One was a discounted payoff. One, that's scheduled to close today is an REO sale. Right.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

And then we have another that goes in active CapEx and lease up that's a longer, you know, longer horizon. In total, the fair value on those at at quarter end were or excuse me, year end were in the, you know, 50 to $60,000,000 range. And we've resolved by fair value a little less than half of that. So freeing up 20,000,000 to $25,000,000 to reinvest, and maybe some financing on that as well. But the numbers aren't huge, but they're disproportionate in terms of not just, being available to invest in high yield assets, but also turning off negative carry, on the underlying.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Yeah. We just have, as we said, we think by the end of the second quarter, we'll just have one significant one left. That's, I think, in the 30 odd millions, right, in terms of the value of that. And, you know, that's great. So we really just are going to have, you know, some continued negative ADE drag from that.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

But it's you know, that's a very small, obviously, percentage of our portfolio. So I think it's great to have these behind us. And I think, in retrospect, compared to what a lot of other lenders, especially lenders in the commercial space, have seen, I think we did great in terms of limiting how many problem assets we end up having. And I think we're towards the end here a lot sooner than, than other people. So I think, you know, the team's done a great job.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Yeah. And I would just clarify. So one, an REO sale, it's a pretty straightforward. My discount and payoff, it was it was in a bankruptcy process. So it was it 's a little more complicated than that,

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

but but to give you

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

a flavor of of of how the resolution happened.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And that was an asset that that bank just wanna say one more thing. That bankruptcy asset was an was an asset that we had inherited from Arlington. So even then, not something that was the result of our underwriting team. So I think they've done a great job.

Crispin Love
Crispin Love
Director at Piper Sandler Companies

Okay, great. Thank you and I appreciate you taking my questions.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Thanks.

Operator

We'll take our next question from Trevor Cranston with Citizens JMP. Please go ahead. Your line is open.

Trevor Cranston
Managing Director at JMP Securities LLC

Hey, thanks. Mark just mentioned the spread volatility you guys have seen in the securitization market so far in the second quarter. Does that high level of spread volatility have any material impact on your near term appetite for loan acquisitions given some level of uncertainty about ultimate securitization execution levels? Can you maybe just provide some color on what loan acquisition activity has been like through the market volatility over the last several weeks? Thanks.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Sure. This is Mark. That's a great question, right? Because we think about that all the time. We have choices in these markets to just buy securities that other people make.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Sometimes you have to be deal sponsored to get the ones you want, sometimes you don't. Or taking a longer view and doing securitizations yourself and then retaining things that you've had more control over the underwriting and more control over the guidelines and how the deal is put together. But if you want to do the latter, you have to go through a fairly long process, a couple month process of ramp up, right, where you're acquiring loans, you're hedging the interest rate risk. We have been diligent about hedging spread widening risk and then executing the deal in the open market. So, are pros and cons to both.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

When you see heightened volatility, if you don't get a corresponding widening of loans relative to securitization execution, then it looks like that ramp up risk, you might not be getting fully paid for it. So, I think what our view of the world in April was that when spreads really widened a lot on top of the capital stack, we thought that the securities looked really cheap, a little bit cheaper than the loans. And we responded by buying some securities. Then, as you started to get a little bit more consistent pricing on deal execution, loans didn't fully tighten to reflect that, then we thought loans looked attractive. I think one thing about April, which was very interesting, and it was materially different than what you saw in kind of the last big stress was maybe March 2020, is that in April, there were people that wanted to sell risk, but there were people that wanted to buy risk.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

So it's not as though the origination market shut down the way it did in COVID, where you were kind of flying blind as to where securitizations would be, you had to price loans assuming you're just going to hold them in portfolio on repo, which is what we did. But in April, there were as many or more buyers, I think, than there were sellers. So deals were getting consistently done the way they were getting priced. They were getting priced very quickly. So, there was capital on each side of the market.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

So, I think that definitely gave us a little more confident in things. So, I think the first leg, we thought securitizations had lagged. We're a little cheap. We had some securitizations. And then, through the course of the month, as we saw opportunities to buy loans and you had better transparency and tighter spreads on securitizations, then we thought loans look attractive relative to the securitizations.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

And ultimately, sort of, we expressed that by pricing of securitization, I guess, last week or week before in April.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And if I could just add one more thing to that, Mark. The velocity, the frequency of our especially in non QM securitizations has increased a lot versus where it was a couple of years ago, for example. So instead of doing one deal a quarter, we're looking at, under normal circumstances, do at least two deals a quarter. Right? So that just cuts down the time frames.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

So when we're you know, if we're buying a loan package, we might be doing a securitization. Granted, not of those very loans, but of loans that we've held, we might be doing a securitization, in that same week, for example, that we're buying a new loan package. And so you're derisking one package, and then putting on risk in another. And if you have this frequent volume of securitizations, that just limits that gestation risk, if you will. And at the same time, as we mentioned, we are doing something that we think not a lot of other people are doing, which is we're using credit hedges to, you know, to mitigate those spread movements.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And we found that they've been, you know, extremely effective and correlated with the spreads that we've seen in the securitization markets versus, you know, how our hedges have have reacted. So we think that's working well for us.

Trevor Cranston
Managing Director at JMP Securities LLC

Right. Okay. Very helpful. Thank you, guys.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Thank you.

Operator

We'll take our next question from Randy Binner with B. Riley. Please go ahead. Your line is open.

Randy Binner
Managing Director at B.Riley Securities

Hey, thanks for taking the question. I think we heard in the prepared remarks that you're in discussions with potential JVs with two originators. Just wondering if you can share kind of timing on that or any size, so we might gauge the impact there.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Sure. Yes. Thanks, Randy. I would say that, maybe starting with size, neither of these is a large investment, under $5,000,000 I think in total would be our equity So, but we have a stable of these types of small investments that have produced, loan flow well, multiples in excess of what our equity investment is. So, I think we point those two deals out in term sheet stage, think we put it, to point out that we're further diversifying our sourcing channels in the same products.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Not necessarily that either will be material, in size, but just adding to the stable of originator investments that have been successful for us over the last couple of years.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Yeah. And it's a win win. I mean, even with the amount of money that we're providing in terms of working operating capital for them may not be a big number for us in terms of an investment. But it's very meaningful, especially for an originator that is not so long established, for them to ramp up. And a lot of these smaller originators just getting started, they could be originating $40,000,000 a month, something like that, pretty soon after we supply that working capital.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And so if that's supplying us close to $05,000,000,000 a year alone, it's just a win win for both parties. It jump starts turbocharges their growth, gives them they don't have to worry about an outlet for their product. They can even sell to us on a forward basis, which they do all the time. They can even lock in a sale, even if they haven't originated the loans yet. So there's just lots of advantages going both ways.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

These are great joint venture arrangements that we've put in over time, and we now have a lot of these.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Yeah.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

And I'd timing wise, next quarter or two is the expectation.

Randy Binner
Managing Director at B.Riley Securities

Got it. Got it. Okay. Thank you for that. But they're small, agree on your comments.

Randy Binner
Managing Director at B.Riley Securities

And then, I just one more if I could. Just something that Mark said stood out to me in that kind of the increased value on consumer relationships and how Rocket Coop is, know, example of that. I guess the question I have is that just a reflection of, you know, this lock in effect where the mortgage rates are higher now than they were before? Or is this more of a permanent shift in your view?

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

And a lot of cross selling opportunities. Go ahead, Mark.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

I think it's something bigger than that because you had Rocket Coop, but before that, you had Rocket Redfin. Right? So it's this notion that let's think about home buying as a process. And there's services rendered and there's fees paid along the way. So, you have a real estate agent.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Then you find a home. Then you buy a home. With that, there's real estate commission. There's title insurance. There's mortgage insurance.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Then you get a loan. Then you're in that loan for three years. Maybe rates drop. And then you refinance the loan. Then your family needs change.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Maybe you sell that house and get another house. So I think there's a notion growing among the really scale players that if I establish a relationship with a customer now and I maintain that relationship over the that customer's life, there might be four or five loans. There might be three houses. There's a lot of fees and commissions and things paid along the way, not to mention the cross sell of second liens or consumer loans. And so it's not that different than what you see in other parts of the economy where the scale players have gained market share.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

You certainly see it in the national builders. So, if you start thinking about the world that way, then who are the clients that you think you want to have the strongest relationships with? It's going to be clients that have a history of paying their bills as reflected in their FICO score. It's clients that have demonstrated an ability to save as demonstrated by showing up with a 20%, twenty five % down payment to buy a home. And so, that's I think there's that is sort of what's going on.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Mean, you look at like it's not that different from American Express buying resi, right? Okay, you're going to make restaurant reservations, and maybe you're going to make hotel plans. You're going to put everything on your American Express card. So that way of thinking is in the mortgage space now.

Randy Binner
Managing Director at B.Riley Securities

All right. That's really interesting. I appreciate the comments.

Mark Tecotzky
Mark Tecotzky
Co-Chief Investment Officer at Ellington Financial

Sure.

Operator

We'll take our next question from Bose George with KBW. Please go ahead. Your line is open.

Francesco Labetti
Equity Research Associate at Keefe, Bruyette & Woods (KBW)

Hi, guys. This is actually Frank Lombetti on for Bose. Just to start, last quarter you mentioned the zero nine dollars earnings for the Long Ridge segment for like long for run rate. Is that still achievable like given current trends and

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Yes. We think it is. They were $07 of ADE in Q1, which as a percentage of their capital usage covers zero three nine dollars But we did we have said kind of consistently $0.9 is the longer term run rate as we see it. Their volumes were down seasonally. So, they originated $420,000,000 combined Techum and Prop in Q4, down to $3.40 in q one.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

You know, I think largely seasonally driven. So margins held up, and and they were still, you know, profitable within originations and servicing, you know, setting aside the interest rate hedge. So, you know, with April selling season and April excuse me, spring selling season and April, looking good from a proper submission perspective, as Larry mentioned in his prepared remarks, you know, we're I think we're, we haven't changed the outlook for those reasons.

Laurence Penn
Laurence Penn
CEO, President & Director at Ellington Financial

Also, it's going to be a little lumpy based upon securitization activity at Longbridge. So we did not do a deal in the first quarter, but I think we expect to do one shortly. So every time when we do the deals, that's when they ring the cash register in terms of the AD on origination profits on prop. So with that prop reverse deal, securitization deal expected to come soon, and you didn't have one in the first quarter, I think that explains a lot of it as well.

Francesco Labetti
Equity Research Associate at Keefe, Bruyette & Woods (KBW)

Great. Thank you. And then you noted some sales of CLOs during the quarter. Can you just talk about current performance and dynamics in that market? Thanks.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Yes. Would say CLOs for EFC have been a small part of the portfolio. It's ebbed and flowed kind of opportunistically across the last several years, frankly. So it's more of a complementary business to the core businesses, loan businesses than than a core business on its own. You know, the so a lot of the you know, so the negative performance for CLOs came from spread widening, particularly in CLO equity, which is not necessarily reflective of underlying credit issues or impairments, but more, reflective of wider credit spreads market wide.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

So I would just highlight that for EFC, the invested amount of CLOs is a pretty small amount. I mean, in our earnings release, you can see that we own CLOs of $28,000,000, at March 31, down from $61,000,000 at year end, but that compares to a total adjusted long credit portfolio of $3,300,000,000, 1%. So 1%, less than 1%, yeah, exactly.

Francesco Labetti
Equity Research Associate at Keefe, Bruyette & Woods (KBW)

Great. Thank you.

JR Herlihy
JR Herlihy
Chief Financial Officer at Ellington Financial

Yeah. Thank you.

Operator

And that was our final question today. We thank you for participating in the Ellington Financial first quarter twenty twenty five earnings conference call. You may disconnect your line at this time, and have a wonderful day.

Executives
    • Alaael-Deen Shilleh
      Alaael-Deen Shilleh
      Associate General Counsel & Secretary
    • Laurence Penn
      Laurence Penn
      CEO, President & Director
    • JR Herlihy
      JR Herlihy
      Chief Financial Officer
    • Mark Tecotzky
      Mark Tecotzky
      Co-Chief Investment Officer
Analysts
    • Crispin Love
      Director at Piper Sandler Companies
    • Trevor Cranston
      Managing Director at JMP Securities LLC
    • Randy Binner
      Managing Director at B.Riley Securities
    • Francesco Labetti
      Equity Research Associate at Keefe, Bruyette & Woods (KBW)
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Key Takeaways

  • Ellington reported GAAP net income of $0.35 per share and adjusted distributable earnings (ADE) of $0.39 per share for Q1, which fully covered its dividend.
  • The firm’s diversified loan platform saw growth across residential and commercial mortgages, with strong non-QM origination flows and improved margins in its proprietary reverse (Prop) mortgage business despite seasonal HECM declines.
  • Ellington priced five new securitizations in Q1 at narrow spreads, expanding its high-yield retained tranches, converting borrowings to non-recourse debt and reducing recourse leverage to 1.7:1.
  • The company executed opportunistic portfolio actions—selling credit-sensitive securities and HELOC positions, trimming agency RMBS by 14%, and resolving ~$25 million of commercial workout assets—to crystallize gains and free capital.
  • A robust hedging strategy, including over $450 million in high-yield corporate credit hedges, generated substantial profits during April’s market volatility and helped offset long-portfolio valuation drops.
AI Generated. May Contain Errors.
Earnings Conference Call
Ellington Financial Q1 2025
00:00 / 00:00

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