Ellington Financial Inc. Common Stock

To all sites on hold, thank you for your patience in holding. We ask that you please continue to hold. Your conference will begin momentarily. Again, thank you for your patience in holding. We ask that you please continue to hold. Your call will begin momentarily. Thank you. Thank you. Thank you. Thank you. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2022 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 star 2. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Tara Byrne, Vice President of SEC Reporting. You may begin.

Tara Byrne 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. It's described under Item 1A of our annual report on Form 10-K and Part 2, Item 1A of our quarterly report on Form 10-Q for quarter-ended September 30, 2022. 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 fourth 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 to back the presentation. With that, I will now turn the call over to Larry.

Thanks, Tara, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on slide three of the presentation. For the fourth quarter, we are reporting net income for the quarter of 37 cents per share and adjusted distributable earnings of 42 cents per share. Excellent performance from Longridge Financial, our reverse mortgage originator, and from our agency RMBS strategy, in addition to another positive quarter from our loan portfolios, drove Ellington Financial's results. I'll start with Longridge Financial, since that's driving a change now and going forward to our financial reporting. We had owned a minority stake in Longbridge, dating all the way back to 2014. And this past October, we acquired a controlling stake in the company. As a result, we are now consolidating Longbridge's balance sheet and results of operations into EFC's financials, beginning with the fourth quarter. During the fourth quarter, Ginnie Mae HMBS yield spreads tightened. And that increased the value of the HECM reverse mortgage loans and mortgage servicing rights that Longbridge holds on its balance sheet, and which by consolidation, we now hold on our balance sheet. The tighter yield spreads also expanded Longbridge's gain on sale margins on new originations. But as expected, origination volumes were down seasonally, and that led to a modest net loss on originations. Putting it all together, Longbridge generated strong results for the quarter. On the middle of slide three, you can see Longbridge contributing 24 cents to our net income per share. You can also see on this slide the significant contribution from our agency strategy in the quarter. Driven by a more benign outlook on inflation and Fed monetary policy, the agency mortgage basis rebounded sharply in the fourth quarter, following three consecutive quarters of dismal underperformance in the sector. Our agency strategy delivered net income per share of 19 cents for the quarter, as we were able to recover a portion of our losses in the strategy from earlier in the year. We took advantage of the strong agency market to sell some specified pools, especially around the yield spread tightening in November, and we rotated that capital to further expand and diversify our credit portfolio, where we see strong earnings potential and attractive net interest margins going forward. Our adjusted distributable earnings, or ADE, did decline quarter over quarter, but that was not surprising for a quarter where short-term interest rates spiked so substantially. Most of our borrowings float off of either SOFR or LIBOR, and those indices have skyrocketed with the multiple recent Fed hikes, so our cost of funds spiked as well. Meanwhile, the purchase yields on some of our existing investments still reflect the lower interest rate environment from the early part of 2022. This includes many of the agency pools that we still hold, as well as many of the fixed-rate RTL loans that we originated before the rate hikes. The good news is that our RTL portfolio is very short in nature, with average lives of well under a year. But they do have fixed-rate coupons, whereas the financing is floating rate. So there's a natural drag in our NIM in a market where interest rates are rising and yield spreads are widening. But that should be a short-term drag, since we are originating new RTL loans at yields that are often 200-plus dollars. basis points above the rates on the RTL loans that are paying off. So turnover in this portfolio should be a big boost to our NIM and our ADE in 2023. In addition, the contribution to Ellington Financial's ADE from the Longbridge segment was just one cent per share for the fourth quarter. The contribution was modest, mainly because of low origination volumes. But as I mentioned, that was due to seasonal factors. Once spring comes, I expect Longbridge to start contributing to our ADE in a significant way. Keep in mind that while the fourth quarter appreciation in Longbridge's MSRs contributed to EFC's net income in the fourth quarter, that appreciation isn't factored into ADE. Another highlight of the fourth quarter was the completion of our fourth non-QM securitization of 2022 in December. We had originally intended for this deal to come to market in September, But securitization spreads were wide in September, so we decided to postpone the launch and instead keep those loans on balance sheet. That patience was rewarded as we were able to take advantage of a more constructive market in December to achieve stronger deal execution. I think it's important to understand how we had the flexibility to delay because this gets to a core tenet of our risk management. At EFC, we stress maintaining a diversity of borrowing sources as well as keeping extra borrowing capacity and liquidity available. so that our hand isn't forced. In this case, we didn't want to be forced to securitize these non-QM loans and lock in poor long-term financing rates just to get the loans off of repo lines. Our strong balance sheet and liability management enables us to be opportunistic about when we launch our securitizations. And in fact, by waiting, we estimate that we were able to price the AAA debt around 30 basis points tighter than what would have cleared the market in September. Looking at how this year has progressed so far, the securitization markets have continued to improve, and we were able to close another non-QM securitization earlier this month with even more attractive long-term financing costs. In fact, our blended cost of funds on this most recent securitization was even lower than our cost of repo, so we got that benefit in addition to all the important benefits of financing through securitizations. Combined, our last two non-QM securitizations have provided us with an incremental $406 million of non-recourse, non-mark-to-market, long-term locked-in financing. Finally, we continue to maintain a strong liquidity position during the fourth quarter, as you can see from our cash and unencumbered asset figures, and we were also able to access the preferred equity market earlier this month, which I'll discuss in my concluding remarks. And with that, I'll turn it over to JR to discuss our fourth quarter financial results in more detail.