Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Third Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in 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 star 2. 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, 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 Takosky, 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, Jane.

Good morning, everyone. As always, thank you for your time and interest in Ellington Financial. After a challenging first half of the year, July started the third quarter on a constructive note, with volatility, interest rates, and most yield spreads reversing much of their second quarter increases. The rally proved short-lived, however. Over the course of August and September, continued elevated levels of inflation and hawkish messaging from the Fed drove interest rates sharply higher. Volatility shot up to record levels, fears of a recession intensified, and the yield curve inverted, stressing equity and fixed income markets alike. Market sentiment steadily weakened, and we saw widespread selling across sectors, particularly toward the end of the quarter. In some cases, this included forced selling by asset managers to meet margin calls or redemptions. Liquidity declined, and yield spreads widened in virtually every fixed income sector, with many sectors reaching their widest levels of the year. Against this difficult backdrop, Ellington Financial generated a net economic loss for the quarter of 3.4%, driven by losses on non-QM, agency RMBS, and originator stakes. Nevertheless, our diversified portfolio, stable sources of financing, and dynamic hedging significantly limited the magnitude of that loss. During the quarter, we had strong performance in our residential transition loan, small balance commercial mortgage loan, CLO, and CMBS portfolios. And we benefited from significant net gains on our interest rate hedges and non-QM interest only securities. We also completed our third non-QM securitization of the year during the quarter. Turning now to the investor presentation. On slide three, you'll see that we are reporting adjustable distributable earnings of $0.44 per share, which is a $0.03 sequential increase and which nearly covered our dividend. The increase resulted from our continued rotation of capital into higher reinvestment yields and from a larger credit portfolio as we got more invested. With interest rates rising so dramatically this year, especially in the short end of the yield curve, we've been playing a bit of catch-up with our adjusted distributable earnings. The purchase yields on many of our assets, especially our agency pools, still reflect the much lower interest rate environment that we had earlier this year. So, as we continue to rotate out of that lower yielding portfolio, we should get a boost to our ADE. In addition, keep in mind that a lot of our credit portfolios are quite short in duration, so those will rotate more or less by themselves, naturally. The bottom line is that we're still constructive on where our ADE is heading. Meanwhile, as you can see from our cash and unencumbered asset figures, we've continued to maintain a strong liquidity position, even as we've grown the credit portfolio. Finally, I'd like to move to the LongBridge transaction. With all required regulatory approvals finally obtained, we closed on the acquisition of the other half of our affiliate reverse mortgage originator, LongBridge Financial, shortly after quarter end. the final purchase price of $38.9 million was substantially lower than the initial estimated price of $75 million that we announced in February and reflected a discount to Longbridge's book value rather than their premium as originally estimated, along with a lower book value. With the closing of this transaction, Ellington Financial now holds a controlling stake in Longbridge, and so we will fully consolidate Longbridge onto our financials, beginning with our fourth quarter financials. JR will elaborate on that later. From a business perspective, we believe that Longbridge's future earnings prospects are strong, even with the challenging marketing conditions we've seen so far this year. Given the substantially lower final purchase price that we paid, we believe that the stage is set for an excellent return on equity on our investment going forward. While it's been a really tough market for all mortgage originators, Longbridge actually managed to turn a profit in the third quarter. And with much of its competition hobbled, Longbridge also became the second largest issuer of new issue HECM HMBS with a 20% market share. That said, the surge in interest rates has driven HECM volumes lower so far in Q4. And the Ginnie Mae HMBS outlet for Longbridge's HECM production is still trading at wide levels. Those are going to be headwinds for the business in the near term. But make no mistake. The situation in the reverse mortgage market is quite different from that of the forward mortgage market. The reverse mortgage market is still largely untapped. Longbridge's market share has been rising, and the demographic trends are extremely favorable. So we're definitely constructive on Longbridge's long-term prospects. Furthermore, the income stream that we expect to see from the Longbridge acquisition should also enhance the diversification and quality of EFC's earnings stream. The reverse mortgage origination business can flourish in an economic downturn, for example, because reverse mortgages provide liquidity to borrowers without the requirement to make monthly principal and interest payments. In fact, the last peak in HECM originations was in the wake of the global financial crisis in 2009, when home prices were falling rapidly. And Longbridge's origination profits soared in the second quarter of 2020 during the depths of COVID, when other fixed income businesses were teetering. there is definitely a countercyclical component to the reverse mortgage business. With that, I'll pass it over to JR to discuss our third quarter financial results in more detail.