Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Second Quarter 2021 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 one 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 16, 2021, as amended, 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 second 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 continued its strong performance during the second quarter of 2021. As you can see on slide three, we generated net income of 75 cents per share, good for an annualized economic return of nearly 18%. And we generated core earnings of 51 cents per share, which was 19% higher and 38% higher than our core earnings in Q1 and Q4, respectively. Driven by the strong performance in earnings growth, the Board raised our monthly dividend twice during the second quarter to its current level of 15 cents per share. which is now a full 50% higher than it was in March. Our loan origination businesses again drove both GAAP earnings and core earnings in the quarter. Beginning with our non-QM business, Lendsure had its second consecutive record quarter for origination volume, and a loan flow from Lendsure helped us execute our second non-QM securitization of the year. In connection with that non-QM securitization, we exercised a call option on one of our 2019 securitizations and included the vast majority of those called loans in our new deal. By calling and re-securitizing, we lowered our borrowing costs by over 200 basis points on those $110 million of mortgage loan assets. In addition, we were able to get a higher advance rate on the securitization as compared to the 2019 securitizations. So by calling and re-securitizing, we also freed up additional capital for us to reinvest. This was the third time that we've called one of our non-QM deals, and each time it's created a nice boost to earnings. We currently have five more non-QM securitizations where we retain the call option. None of these options are currently exercisable, but our non-QM call option portfolio continues to represent nice potential upside to future earnings. Meanwhile, in the reverse mortgage space, Longbridge delivered yet another quarter of excellent results. Longbridge's earnings through the first six months of 2021 are now nearly equal to those from all of 2020, which was itself a record year for Longbridge. While there's been some recent yield spread widening in the HECA market that has caused some margin compression, that could easily reverse itself. And either way, I'm still very bullish on Longbridge's growth and earnings prospects. Elsewhere in the credit portfolio, we continued to see excellent performance in our short-duration loan portfolios, particularly residential transition mortgage loans, consumer loans, and small-balance commercial mortgage loans. And in securities, we generated significant gains in our CLO, CMBS, and non-agency strategies. In the agency portfolio, it was a very challenging quarter for agency RMBS, but our agency strategy managed to generate just a modest loss, thanks to the concentration of our long investments in lower coupons and assisted by our significant TBA short positions in higher coupons. Higher coupons are the weakest performers in the agency RMBS sector during the quarter. Now please turn to slide 11. This is a new slide that we've added this quarter to our earnings presentation where we're including some additional detail on our proprietary loan pipelines. On this slide, we highlight the five primary sectors where we're involved in loan origination. Non-QM loans, small balance commercial mortgage loans, residential transition loans, consumer loans, and reverse mortgage loans. In all of these businesses, we leverage off of Ellington Strong Analytics, and we capitalize on the lending void left by banks, which have faced much stricter regulations since the global financial crisis of 2007-2008. On the first row of the chart, you can see that in four of these five verticals, we've established strategic equity investments at the origination level. And just in the last couple of months, we've increased the number of our originator investments to a total of five strategic investments, following the acquisition of two new small but strategic investments in the residential mortgage origination space. These two additional strategic investments should further expand and diversify our loan sourcing channels. Furthermore, we are currently engaged in several other active dialogues, and we expect to add a couple more originator investments to our roster by year end. Moving down the chart, you can see that in addition to the strategic originator stakes, we also source loans via numerous joint ventures and flow agreements with third-party originators. And then on the next row, we highlight our in-house origination teams, specifically in the small balance commercial mortgage space and in the residential transition loan space. Putting it all together, you can see that we have a very diverse, efficient, and expanding array of channels that feed our proprietary loan pipelines. At the bottom of this chart, you can see that we acquired $445 million of loans during the second quarter across these five business lines, and that the combined size of these loan portfolios was nearly $900 million at June 30th. The largest growth in acquisitions last quarter came from non-QM, small-balance commercial mortgage, and residential transition loans. In fact, we had record quarters for loan originations in non-QM, small amounts commercial, and RTL in the second quarter, funding $259 million, $87 million, and $68 million, respectively. By the way, residential transition loans in column three is a sector we are particularly excited about, given the strength of the housing market, the supply, demand, and balance for housing, and the chronic underinvestment in housing in many areas of the country. the performance of our RTL loans has been tremendous, including through COVID, and the strategy continues to offer very attractive risk-adjusted returns and improving financing options. In column four, you can see that we acquired about $30 million of consumer loans during the second quarter, but these new originations just kept pace with repayments, and the size of our consumer portfolio was actually roughly unchanged at quarter end. Finally, in column five, you can see that our activity in reverse mortgage loans has so far been limited to our investment in Longbridge itself. We have not purchased any assets from Longbridge, at least not yet. Also, when you look at the loan totals on this slide, keep in mind that we are not showing any loans that we've securitized, which in many cases are consolidated onto our balance sheet. Of course, if we were to include those loans in this chart, the total would be much, much larger. And in many ways, those retained tranches from loan securitizations epitomize what it means to be vertically integrated. Instead of just buying loan-backed security tranches in the secondary market, where we'd have to pay full retail prices, we are involved from the outset and at all the most important stages in the lifecycle of these loans. Our involvement starts with the crafting of the underwriting and pricing guidelines, which enables us to acquire the kinds of loans we want to acquire and at wholesale prices to boot. Then we warehouse these loans, pending securitization, and finally we securitize. And when we securitize, we think it's useful to look at things two different ways. First, we view securitizations as providing long-term locked-in financing of our loans at a low cost of funds. Second, we view securitizations as a way to manufacture highly attractive retained tranches at prices we could never find in the secondary market. With that, I'll pass it to JR to discuss our second quarter financial results in more detail.