Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Second Quarter 2018 Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Jason Frank, Associate General Counsel of Ellington and Secretary. Sir, you may begin.

Thank, and good morning. 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 15, 2018, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from it's 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 have on the call with me today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and JR Herlihy, our Chief Financial Officer. 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 turn to Slide 4 to follow along. 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 welcome everyone to our second quarter 2018 earnings call. We appreciate you taking the time to listen to the call today. Our prepared remarks today will follow the earnings presentation that we posted on our website last night. Please turn to Slide 4, Ellington Financial had excellent performance in the second quarter. We were able to build on the strong momentum of the first quarter as we continue to benefit from our growing credit portfolio which increased another 9% this quarter. As a result net investment income is also growing nicely increasing to $0.36 for the quarter, almost covering the dividend on it's own. Overall, Ellington Financial generated net income of $21.2 million or $0.69 per share and an economic return of 3.8% for the second quarter. Adjusted for dividends, book value is now up 8.2% through the first half of the year or 17.1% annualized. Based on yesterday's closing price of $16.40 per share our annualized dividend yield is 10%. Excellent performance within our credit portfolio drove the quarter's results. We benefited from strong performance in several of our loan related strategies including consumer loans, small balance commercial mortgage loans, European non-performing loans, and non-QM loans. Among our security strategies; U.S. and European CLOs, U.S. CMBS, corporate credit relative value, and European RMBS all posted strong returns. The growth in performance of our securitizations continues to be a key driver of our results. This past quarter we participated in our third Ellington sponsored corporate CLO achieving tighter pricing and a longer investment period than our previous issuances even in the phase of a softer overall CLO new issue market. We believe we have a differentiated strategy in the CLO space, we rely on our deep credit underwriting expertise to find inefficiencies in the lower rated less…

Thanks, Larry and good morning, everyone. Please turn to Slide 6, for a summary of our income statement. In the second quarter, EFC generated net income of $21.2 million or $0.69 per share broken down as follows; net investment income after G&A and management fees and incentive fee of $11 million or $0.36 per share less net realized loss of $1.3 million or $0.04 per share plus change in net unrealized gain of $12.5 million or $0.41 per share minus allocation to non-controlling interests of $991,000 or $0.03 per share. Our net income comfortably covered our dividend of $0.41 per share, as we continue to grow the credit portfolio and rotate capital into higher yielding. Net investment income grew this quarter despite a higher cost of funds and our borrowings. By comparison, last quarter we had net income of $21 million or $0.67 per share and net investment income of $10.2 million or $0.32 per share. We view net investment income as a good proxy for our earnings power but keep in mind that it has it's limitations. At any point in time some portion of our capital will always be invested in asset that do not generate net investment income. For example; strategic and equity investments in mortgage originators where appreciation shows up in franchise value, and thus the contribution to earnings is reflected in unrealized gains. As another example; when we successful foreclose on a commercial mortgage NPL, we typically recognize an unrealized gain on the value of the real estate versus our basis in the loan, and that's not considered an investment income. Moreover, net investment income will never capture the portion of the total return that we generate via opportunistic trading. Please turn to Slide 7 for details on the attribution of earnings between our credit…

Thanks, JR. EST [ph] had a great quarter with almost all sectors of the credit portfolio making meaningful contribution and a solid $0.06 per share gross income for our agency portfolio which is only a small part of our capital allocation. Halfway through the year we have generated a total economic return of 8% plus non-annualized. This is particularly impressive given that credit spreads have struggled this year with the mortgage components of Barclay's Ag down 1% year-to-date through the end of June, and the corporate component down over 3%. We accomplished this with a broad-base contribution from all sectors of our credit portfolio, residential mortgages, commercial mortgages, consumer and corporate. 2018 is an inflection point for financial markets for a few reasons. First, the Fed is now implementing meaningful balance sheet reduction so investors can no longer ride the Fed's cocktails [ph] to generate returns Since yield curve is so flat now, investors can't expect to generate big returns by running a big duration gap, and in fact that can lead to negative returns when rates are rising as they have over the past year. Second, these credit spreads have tightened so much over the past few years, we think that in many highly credit sensitive sectors most of the returns to be made have already been made, and this year these sectors are mostly trading water; so you can't just camp out in the most commoditized parts of the credit market like credit risk transfer and expect further spread compression to drive returns. At the same time, there is some tremendous opportunities in other sectors; loan origination, for example, has a great tailwind from better financing terms that we've outlined and tighter securitization spreads. We have cast a wide net, we look at a lot of sectors quite…

Thanks, Mark. I'm really pleased with the progress we've made growing our portfolio, and the results we've generated so far this year. Our strategy of being patient and diligent and adding assets and building our strategic loan pipeline is really paying off; we've generated an economic return of 8.2% year-to-date, and the total return on our stock is nearly 20% year-to-date. Even with that total return we're still trading at a 15% discount to last reported book; so we still have room to perform from here. We talked a lot today about playing offense, by building the portfolio and adding leverage. We see plenty of reasons for some caution; they were the more modest challenges represented by a flattening yield curve and rising interest rates but the possibility of big shocks is still out there whether from the prospect of trade wars, slowing growth in China, or political turmoil in Europe. Additionally, as quantitative easing around the globe continues to give way to quantitative tightening, the market will continue to lose an important stabilizing force. So in light of these risks we believe that it's important as ever to be disciplined about hedging and leverage, and to keep duration on much of our portfolio relatively short. Of the volatility that we saw early this year does return, we believe that this will enable us to take advantage by adding assets at higher yields and trading out of some of the more liquid parts of our portfolio. The year is off to a great start but I'd like to reiterate that maintaining the stability of our book value is always an important objective of ours. As you can sort of -- see on Slide 13, the stability of our quarterly economic returns was unmatched in our peer group. Slide 14 provides…

[Operator Instructions] Your first question comes from the line of Bill Carter [ph] with Credit Suisse.

On one of those last points you're making about kind of the short duration of the portfolio, can you just talk about kind of where you see the flow of new products creation in non-QM or the consumer loans relative to the kind of the run-off of those portfolios and whether you're -- you can continue to sort of grow those in a steady state?

I mean, non-QM, the volume has increased and I see there in the last few months some of that is seasonal but some of that is just a more mature platform. So I would say in non-QM, when you get to deal size which is around $200 million, we typically see paydowns in that portfolio when it's relatively new, maybe on the order of $3 million a month, and monthly origination volume is sort of 10x of that, say $30 million plus. So that portfolio will continue to grow, then we'll do a securitization potentially and retain some pieces. On the consumer side, where some of the loans are very short maturity, inside two years; it's closer to a steady state where there is material run-off relative to new purchases.

And then can you just talk about -- maybe help us size the more liquid credit assets that you have -- you kind of -- you could use two to rotate into kind of the non-QM or other target assets as you're able to source those?

I'm sure, so in terms of market value does that fits in U.S. CLO notes and U.S. non-agencies, it's around $200 million or so of market value, that's levered. In the meantime they provide a strong contribution, particularly to net investment income; so I think they're good investments now but they're available to the run-off as we take assets out of the pipeline and close.

And I guess there hasn't been much of a change in kind of the potential -- either ROA or ROE pick-up as you can rotate into your targeted longer term assets?

I think we said about 2.5% pick up, I think that's still a good number.

Our next question comes from the line of Steve Delaney with JMP Securities.

I'm struck by the slide on Page 11, I think that's a new slide and under the residential mortgages; Larry, I can remember two or three years ago you were using some phraseology talking about Ellington being a specialty finance type of entity and to that end you made some strategic investments and some non-bank specialty finance companies with non-conforming type loans. In that 46% of the portfolio how many of those relationships exist today where Ellington has made some type of an equity or debt investment in the strategic partner?

In terms of equity investment there is two but we're working on a third with an existing flow provider and that's progressing nicely. So I think I expect that by the end of the year that will be three.

That was my second question as is -- do you continue to see that those – to expand this whether it's just to expand the volume or different products that that approach of making strategic investments is this superior than just be one of multiple slow buyers. I mean, is it…

Right and by the way, it just occurred to me we're also considering a fourth, again, with an existing co-provider. So yes, that could actually be four by the end of the year.

So it sounds like to me -- honestly, I mean, your markets and you're looking at everything, but it seems to me that an awful lot of energy and frankly, a lot of the benefit to your improved results in that 9% blended yield is coming from that 46% of the pie?

Yes. And just to be clear, right, some of the strategic investments I mentioned ones we don't have yet, but we're considering in the consumer loan space. But yes, yes, that's another slice of the pie there. But I think that when it comes to, I mean, for example, if you look at on the residential mortgages, NPL/RPL especially, we have in bridge loans and then in commercial mortgages, again bridge loans and NPLs. That's a very relationship-oriented business. Those businesses are not -- you don't call your broker at Merrill Lynch and say show me some bridge loans. So it's something that we really spent. I mean, we've been doing small balance commercial loans since at least 2010, maybe earlier. So these relationships and networks of loan brokers and things like that, that we've built up over many, many years now.

And are you doing on servicing on your loans?

So, no, we're not doing our own servicing per se, but keep in mind, that a lot of them -- so you got two types of loans. You've got nonperforming loans -- yes, so you don't have that much in collection, so they're nonperforming. So what servicing you're really talking, about negotiations with the borrower, you're talking about shepherding through the legal process in the foreclosure process, those types of things. It's very high and that certainly handling that in-house. Sometimes, we have partners some of the people that bring as these opportunities we like to see them co-invest we talk about some of the non-controlling interest look at our balance sheet lot of that comes from our partners on these deals that they bring to us and then we certainly encourage co-investment by those partners.

Great. Just to close out from me. You mentioned -- thank you for mentioning the continued evaluation process for the corporate structure. My question on that is, the decision that may or may not be made, is this a calendar year type of decision process, whereby if a decision is not made effective for 2019, that then if it's takes longer whatever that if it's not 2019, it's got to be 2020; in other words, it's not for something that you would do midyear, am I think not thinking correctly there?

Yes. That's a great question. It really depends. If -- obviously, if we stay, then there is no issue. If we shift to a C corp, that's the kind of thing that can pretty much be done at any time -- your shorter tax year for your -- not a big deal. Of course, if it works, you're going to have extra cash return. That's going to add complexities. It's work that you do it before the end of this calendar year and now we're getting pretty late in the calendar year. So anything that we do at this point, I can tell, would not be the effect of -- if we do anything, will not be effective until Jan 1, 2019. Now in the case of a REIT, by the way, it gets even more complicated if you try to do it towards the end of, let's say, 2018, because then you have to sort of satisfy your very short period of time, which puts kind of strain on that analysis. You want sort of the whole year to smoothen things out. So again, I wouldn't expect anything to take effect until the beginning of 2019. And as long as we do something relatively in the beginning and not like too long, I would say it could be worthwhile to do it, it didn't have to be January 1, but that's something that we've got in the back it would be nice if we're going to make a change to make one as 1 year, 1 structure next.

Congratulations on brining Lisa back in her new role.

Thank you.

Our next question comes from the line of Crispin Love from Sandler O'Neill.

Can we have a little more color on, Michael leaving the board and kind of what is the rationale for him leaving the board after being on it since 2007?

Sure, yes, it's really all about Lisa as opposed to about Mike. When Lisa retired in March, and the board, obviously, Lisa extremely well, we have tremendous respect for here, and really, this is an opportunity to have Lisa -- and more of Lisa instead of less Lisa. And that's always a good thing. And even in the short term, I mean, Lisa has got a lot to offer as we just talked about continuing to consider change in our corporate tax structure. And we couldn't -- so it's really a positive of about adding Lisa. The thing is we couldn't just add Lisa and leave it at that because it's a small board. It's only 5 directors. New York Stock Exchange rules provide of independence. So if we just added one lately, so we would not be considered independent because she is newly -- she was employed by the management of the company obviously very recently. So that would be 3 3, not a majority of independence. And for those of you, who know Mike, that he is a trader and a portfolio manager at heart and will always be a trader and portfolio manager. And so as Co-CIO of Ellington Financial, I mean this makes sense for Mike as well. And actually, we've a slide -- actually, it was a Slide 25. I think yes, 25, you can see that management owns 12% of Ellington Financial. I think most of that is Mike. I mean, that's -- he's still as engaged as ever, still owns the shares, still is the CEO of the external manager. So this is really just, I would say, making room for Lisa, and obviously, Mike's voice will be heard as always.

That's helpful with the majority of the independence. And then, the second one. So this is a second consecutive quarter that you've outsides realized and unrealized gains. Can you give us a little color on key drivers of the gains, and if you can expect them to continue in the second half of 2018? I know JR, you talked a little bit about it in your prepared comments about slowing kind of foreclosed properties, but just kind of speaking to that a little bit deeper?

Yes, sure. So as I mentioned, we had a sale of consumer NPLs in Europe that closed subsequent to quarter-end, so it appeared as unrealized gain on June 30 and then subsequent quarter, that will move into realized in reverse side of unrealized. So that's one of the big drivers. In terms of realized gains really across the portfolio, we had realized gains in nearly every bucket. We have -- the reason that in the attributions table, you see that it's not that meaningful is because there is corporate credit relative value strategy. We actually had a big unrealized gain and offsetting realized loss, so we have in a long shot strategy. So that's the number a little bit. But suffice to say, we had healthy realized gains across most strategies, not really any one particular driver on the realized side. And then, the unrealized, we had some mark-to-market gains, again pretty evenly distributed across handful of strategies with the one notable exception the European loan trade that I mentioned.

Okay. And then, what kind of growth you guys are expecting for the Credit portfolio in the second half of '18? Is kind of the 7% or 9% that we saw in second quarter, around there or a little bit less than that?

I think, it's really hard for us to predict. I mean, first of all, if we do a non-QM securitization, by some measures that number goes up, by some measures it goes down. JR mentioned we got $200 million of these lower-yielding, more liquid assets that are sort of available to turnover at any time and probably would apply little less leverage to the higher-yielding assets than we're applying from more liquid assets. I just think it's really hard. We think the important thing may be to take away is just that we don't think that we're -- we don't think we're capped out by any stretch, and we should continue to grow overall. But if you look at the trends, you'll see that we're leveling off. Really, I'm not comfortable kind of putting the number on the growth for the rest of the year.

Okay. And do you think the Credit portfolio should be fully ramped by the end of 2018 or it could even see some growth into '19 as well?

Yes. I mean, that's certainly what we are targeting is to be to have at that full level by the end of the year. But what can happen between now and yes absolutely, maybe even before. [Indiscernible] big picture. If you look at where we were at the end of 2016 in the Credit portfolio and then you look at where we are 18 months, it's more than doubled. So I mean, I wouldn't project that the level of growth to continue.

And then just one last one from me. At the current valuation, would you expect to not be repurchasing shares there because I saw you haven't repurchased any in the third quarter so far?

Right, yes. So I wouldn't necessarily read too much into that other than to reiterate what we said before, which is that at 85% or close to that now, so I think we say 84% just right now?

Yes.

So At 84%, we're not interested in buying back shares. I mean, it's not accretive enough to book value to justify given the of expense ratio, liquidity of our stock, just smaller company versus a bigger company. So we're certainly where we are now. We're not really too interested. Below 80%, as we said we're really interested, the kind of trade below 80% very long. This past quarter, we kind of we could. Of course, the parameters of our 10B51 programs, which we talked we put in place with blackout periods, which went and basically, shortly after this call. So those kind of affect things in terms of where we exactly we place those parameters, those have to be automated. So -- yes, so I just think that given what we're seeing now in terms of investment opportunities, given where we're trading now, which is just close to 85%, we wouldn't be buying stock back here. As we get close to 80% or below 80% yes. And close to 80%, no, we'll stay. It will kind of depend upon the parameters of the 10b51 program and what we're seeing. So I think that's pretty good guidance. If you look over long, I'm sure, this is 1 past quarter or say 1.5 quarter, if you're looking at, but if you look over a longer period of time, I think since last December, we repurchased around 6% of our shares, again, discount around 20%, maybe little bit more average discount. Just we reloaded our share repurchase program. I think that's disclosed in the earnings release. So that 1.55 million shares were certainly not reluctant to reload that that's available. So I think it's going to be consistent with our prior guidance.

Our next question comes from the line of Eric Hagen from KBW.

Could you actually say what the total income contribution was from equity investments during the quarter?

No. No, we don't break that. Out. I mean, the strategic investments?

Yes.

I can tell you that. For the year, it's been a strong contributor. But, yes. So, but it's small, small amount of capital right. We've got what is the number, maybe not the were $30 million-ish?

It's about $30 million. So it's not. It's only 5% of our -- and if that's not leverage equity [indiscernible] So it's kind of it's really -- those investments are -- yes, obviously, we're happy that this year they've have done well, those equity investments, but those are as much about the effect that it has on the asset side -- rest of the asset side of our portfolio as opposed to per se, although we do think that those are some great feeds of possible great returns even on that equity investment we really believe in this company is there small companies could be worth lot of money one day.

Yes. Well, actually the $30 million of fair value that you have between the two investments, what is the breakdown between Longbridge and LendSure with regards to $30 million?

Yes, it's -- one is around, LendSure is around $3 million, I think.

Yes.

Yes, there you go. The other is around $27 million.

Our next question comes from the line of Tim Hayes with B. Riley FBR.

Just wanted to follow up on Steve's question regarding the C-Corp and reconversion. Can you just touch on the analysis that still needs to be done or just kind of where you are in the process of evaluating those in the feedback you're getting from shareholders at this point?

Yes. Well, I think no matter what whatever what tact we take, I think that -- if do convert either to a C-Corp or REIT, I think it will help our share price, right? We've seen that with we saw KKR. I think that happened in the second quarter, right? So the stock has done extremely well and so part of is watching to see how these other companies have their share price react. Of course, every company is different in terms of the effect on the effective tax rate. In our case, I think that in terms of looking at a REIT, the challenges there is that we probably would have to shed a few strategies. And the question is how important are those strategies. And we would, if we were to do that, then that would be little friction in terms of tax perspective. You still have -- we would have -- right now, our effective tax rate is very low. I don't know if it's few percent But if we were to convert to a REIT, we will have to shift more assets to subsidiary, some of the nonmortgage assets for example, and shed some of those strategies, which again could be done somewhat by actually selling, it could be done somewhat more organically because some of those are just runoff. We would have to shift tax that considerable amount of assess into subsidiary and then those would be that's basically like a C-Corp for tax purposes so you'd be paying taxes, which is 21%-plus any state and local. So yes that would have a, I would say, a definite, but a moderate effect on our overall tax rate. So that's the kind of also shared some of it being pretty modest. C-Corp as a much bigger…

At this time, there are no further questions. This concludes today's conference call. You may now disconnect.