Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Financial Third Quarter 2020 Earnings Conference Call. 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 1 on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K filed on March 13, 2020, and under Part 2, Item 1A of our quarterly report on Form 10-Q for the three-month period ended March 31, 2020, Forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Takotsky, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our third quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. Ellington Financial had another excellent quarter, as we benefited from strong performance across virtually all of our strategies. As you can see on slide four, we generated net income of $1.06 per share, core earnings of 41 cents per share, and a non-annualized quarterly economic return of 6.7%. Earlier this week, the Board increased our monthly dividend for the second time this year, this time by 11%. And given that our core earnings this past quarter still comfortably exceeds our new higher dividend run rate, and in light of our current earnings power, we should have ample room for additional dividend growth from here. With our investment activity back to normal levels throughout the entire third quarter, we methodically grew our credit portfolio, mostly in non-QM loans, but we still kept our overall leverage relatively low. Despite this conservative positioning, we were still able to grow core earnings and book value per share significantly this quarter. Given the continuing uncertainty around fiscal stimulus and economic recovery, we believe that our lower leverage and high cash balances position us well to withstand any additional market shocks and enable us to capitalize on new investment opportunities, whether in the credit-sensitive sectors still grappling with the pandemic or in agency RMBS, where we're in the middle of a massive prepayment wave. During the third quarter, Our loan portfolios continued their resilient performance, producing another solid quarter of ROEs while continuing to return capital quickly for redeployment, often at higher reinvestment yields, I would note. Meanwhile, the securities portfolios in our credit strategy benefited from some nice spread tightening, and our agency portfolio had another very strong quarter and has now generated a positive return on equity on a year-to-date basis through September. But the part of our portfolio I'd like to focus most on today is the strength and growth of our loan origination businesses. Ellington Financial's results this quarter were again boosted by strong performance from our strategic investments and loan originators, most notably Longbridge Financial, which continued its excellent performance this year. As we've discussed on past calls, because the reverse mortgage business provides liquidity to borrowers without the requirement of monthly principal and interest payments, borrower demand for the product has surged this year, amidst the economic turmoil brought on by COVID. Meanwhile, Lensure has done an extraordinary job restarting its loan production after the market stresses temporarily interrupted new originations earlier this year. Lensure's loan production in September and October exceeded production levels right before the pandemic-related volatility, and in fact, October was a record $80 million origination by a month for Lensure. Last week, Ellington Financial closed another securitization of Lendsure Loans, our second such securitization this year. And in fact, we achieved the tightest financing spread yet of any post-COVID non-QM securitization. The performance of our Lendsure Loans continues to be excellent, and our entire non-QM business continues to be an important driver of earnings for Ellington Financial. Ellington Financial also has a strategic investment in a third loan originator, this one in the consumer loan space. This pipeline has generated, and we expect it will continue to generate, attractive risk-adjusted returns for us. All three of these originators weathered the COVID-19 volatility successfully and emerged in a strong position to add market share. In addition to investments in these three originators, Ellington has been active in the small-balance commercial mortgage loan sector for more than a decade now, and we've developed strong and reliable sourcing channels over the years. We benefit from several successful joint ventures in the space, We originate many of our bridge loans and source many of our commercial mortgage NPLs directly out of Ellington Financial, using our own loan sourcing and origination teams here at Ellington. We have also well-established origination channels for residential transition loans, as well as flow agreements with other loan originators in the consumer space. We believe that our array of proprietary loan pipelines is a key differentiator for Ellington Financial, and they are critical for our business for at least two primary reasons. First and foremost, our loan pipelines are designed to provide a steady flow of high-quality investments to Ellington Financial. The loans coming out of these pipelines have been a key driver of our portfolio and core earnings growth over the past few years, and we believe that they will continue to drive our growth going forward. At the same time, our loan pipelines enable us to leverage Ellington's core strengths of modeling and data analytics. We apply our analytics to help shape the underwriting criteria of the loans that we and our partners originate. And our goal is to manufacture and control our own sources of return rather than possibly accepting what the secondary markets have to offer. But there's also a second reason why I'm highlighting our proprietary loan pipelines. And that has to do specifically with our investments in loan originators that we've made to help build and broaden those pipelines. There's been a tremendous flow of public capital into loan originators recently at premium valuations. Several companies have gone public in recent months. and the mortgage originator sector is trading at a very significant premium to where the mortgage rates, including EFC, are trading. But if you look at EFC stock price, I think it's clear that the market is undervaluing our investments in loan originators, and therefore this represents significant upside for EFC stock. Over time, we believe that the market will recognize not only the synergies, but also the franchise value that these loan originators represent for Ellington Financial. One final note on our originator investments. We fair value these investments through our income statement. So any P&L that they generate for us is reflected in our gap earnings. However, the appreciation on these investments is not captured in our core earnings. Therefore, if we're able to continue covering our dividend through core earnings, as we've done every quarter since we started reporting core earnings, by the way, The appreciations on these loan originator investments can be a significant tailwind to our EPS and book value per share. Before I turn the call over to JR, I'd also like to highlight that we are not only keeping leverage low in anticipation of plentiful investment opportunities, but we are also continuing to extend and improve our sources of financing. During the third quarter, we added another financing facility for our residential loan strategies. And just within the past two weeks, we not only closed our sixth non-QM securitization We also priced the securitization of unsecured consumer loans. These rated securitizations add additional term, non-mark-to-market borrowings to our balance sheet. They also have significantly lowered borrow cost relative to repo and other types of financing. It used to be that repo and other bank lines, while coming with the serious disadvantages of shorter terms and mark-to-market margining, generally provided lower cost financing than securitization financing. But lately, especially in those sectors where securitizations have become commonplace, it's the securitization market that now provides lower borrowing costs, even while affording all the important advantages of long-term, locked-in, and non-mark-to-market financing terms. With that, I'll pass it to JR to discuss our third quarter financial results in more detail.