Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Second 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 opened for your questions following the presentation. [Operator Instructions] 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’m joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, 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. The challenges of the previous quarter intensified during the second quarter of 2022. The federal reserve sought to slow inflation by accelerating its interest rate hiking cycle and initiating the runoff of its balance sheet, while recessionary and geopolitical concerns also weighed heavily on markets. Interest rates continue to surge and interest rate volatility spiked to levels, not seen since the COVID liquidity crisis in early 2020 and before that not seen since the global financial crisis in 2009. Prices fell and liquidity dried up in most markets, including the securitization markets. Volatility really was the great equalizer across asset classes this past quarter, as most everything sold off in concert, even agency MBS and US treasuries. Ellington Financial had an economic loss of 6% for the quarter. This was mainly the result of losses on our unsecuritized non-QM loans and agency RMBS, where we were hurt by rapidly rising interest rates and widening yield spreads. We also sustained significant mark-to-market losses on our investments in loan originators where unrealized losses totaled $26.5 million or $0.44 per share during the quarter. LendSure was again profitable in the second quarter, but it further revised downward its earnings projections for 2022, which led to a mark-to-market drop in the value of our equity stake in the company. However, we believe that LendSure is well positioned to emerge from the current market volatility with increased market share and stronger earnings prospects. The partnership between Ellington Financial and LendSure continues to be highly synergistic. We believe that LendSure's underwriting standards are absolutely top notch as demonstrated by the stellar credit performance of the three plus billion dollars of loans we've bought over the years from them.…

Thanks, Larry and good morning, everyone. I'll start on Slide 3 of the presentation. For the quarter ended June 30, Ellington Financial reported a net loss of $1.08 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.41 per share. These results compared to a net loss of $0.17 per share and ADE of $0.40 per share for the prior quarter. Beginning this quarter, you'll notice that we renamed core earnings as adjusted distributable earnings, consistent with evolving industry practice. Please note that it's a name change only, and the calculation itself is not changed. So it's valid to compare a current period ADE to prior period's core earnings. There are a few reasons why adjusted distributable earnings did not increase proportionately with the growth of the portfolio in the second quarter and did not cover our dividends. First undeployed capital; we now have interest expense on the new $210 million of senior notes, which amounts to $0.05 per share per and with the ATM issuance in March and early April, our share account increased by 2.6 million shares. Until all of that capital is deployed it will be a drag on ADE per share. Second, our cost of funds increased sharply this quarter, primarily due to higher rates. And even though we have a lot of floating rate loans in other short duration assets in the credit portfolio, the asset yields on our invested assets lag the increase in financing costs this past quarter, especially for fixed rate RTL and [ph] loans, and thus our NIM compressed. Moving forward however, I expect that asset yields will catch up with the higher financing costs as we continue to turn over the portfolio, and that should expand our NIM again and be a tailwind for ADE. Moving back…

Thanks J.R.. The second quarter had incredible volatility in every dimension in interest rates in credit and agency spreads and expectations of fed policy. There was substantial widening in most sectors across fixed income, and it was a very challenging environment. Our economic return was negative 6%, not a result you're used to seeing from us, not a result we want, but not a disaster either. And a lot of it, I think we can earn back because much of the loss was due to spread widening on non-term loans and agency MBS as is often the case after a quarter like that, the going forward opportunity set looks really good today. We see very wide spreads, very high yields and stable financing, all with less competition for assets, credit performance as measured by delinquencies defaults and credit losses continues to be very strong across our diversified portfolio. But with the sharply increased risk of an economic slowdown, we have been very focused on tightening our underwriting guidelines with a particular focus on keeping LTVs low HPA has been strong, but there are clear signs of housing weakness, and we have to be prepared for price declines. And some reasons of the country given poor housing affordability during the second quarter, any sector with a lot of interest rate risk, a lot of volatility exposure or where pricing is dependent on the securitization execution got hurt, not surprisingly, then our non-term strategy was our biggest drag this past quarter to put the spread widening on non QM this year in perspective, consider these two data points on January 14th, we priced the first non QM deal of the year. The triple A's priced at a spread of 97 to swaps the added 2.2% fix rate coupon and were priced at…

Thanks Mark. I am happy when I hear that there have been some audio issues at the conference call hosting service. They're having some technical difficulties. So we're going to look into whether we can post, perhaps post the script somewhere or provide perhaps on the audio replay that will, that'll have all the content. So we're going to look into that. Okay. Just to conclude though so far in the third quarter, volatility has subsided a bit interest rates have dropped somewhat and yield spreads in most sectors have retraced a portion of their second quarter widening per our normal process. Later this month will be putting out a book value per share estimate for July 31st. So keep an eye out for that update. Meanwhile, time will tell how long the contraction in the, in the origination markets will last and how much more of a shakeout will occur in non QM, lower whole loan price, premiums and falling volumes have taken their toll, especially on those originators who did not properly hedge their li their locked loan pipelines, or were under-capitalized or both. We have seen several mortgage originators, severely scale back operations, and even a couple closed shop while market dislocations have created a drag on FCS book value in the near term. Our strong balance sheet is enabling us to lean into the wider credit spreads and together this presents the opportunity for us to grow market share at our origination platforms. Long term, we believe that a thinning of the herd will be a net benefit for the stronger origination platforms remaining in their respective spaces. A final note I'll make on our originator investments is that it's important to keep the size of our originator investments in perspective, relative to the rest of…

[Operator instructions] And we'll take our first question from Trevor Cranston with JMP Securities. Your line is open.

Thanks. Couple questions on the non-QM market. First I guess, after the substantial increase in rates on non-QM products and the disruption to some of the originators in that space, can you talk about kind of how much origination volume you're expecting to see in that product over the second half of the year compared to the first half of the year. And as a second part of the question, you guys clearly kind of laid out the opportunity on the loan side there with the spread widening are you guys also interested in buying some of the up in the stack securities from other non-QM deals or are you really more focused on the loan side at this point?

Hey, Trevor. It's Mark. So I would say that the first question about change in volume. So in terms of securitized volume for the second half of the year versus the first half of the year, I think that's going to be down a lot. But part of the reason is a lot of the securitized volume for the first half of the year were loans that were really originated back in 2021. So there were a lot of platforms sitting on a lot of four and a half, four through quarter note rate loans that they didn't securitize in '21 that they put into the market in 2022. So if you take away that, I think my projection is that just at these higher note rates and also at higher HCA, you're probably just going to see organic non-QM volume dropped by I would guess at least 30%, I just think it's fewer borrowers qualify. If fewer borrowers are looking to buy homes right now, given what the payments are with the kind of double whammy of higher HPA and higher mortgage rates. And if you look at a lot of housing metrics, if you look at like what's happening to views on Zillow, and I think you're going to start to see it a little bit in listing times that, I just think there's sort of an overall, an overall slowdown that you're going to see in housing. The other thing about buying pieces of other deals. So the way we think about the when we do securitizations, where we think about that is the, the bonds we sell are really sort of replacing re both. We consider them to a term financing. So when we do our own deals, depending on what tranches we retain, and some…

Got it. Okay. That's helpful. And you guys talked about the challenges that a lot of originators are facing and the impact on your investments in, in some of those companies as, as you look at the originator landscape, are you guys looking at, or pursuing any opportunities to maybe, provide a capital injection to like a good quality company who's a little bit beaten up right now? Or are you guys just kind of comfortable with the investments you guys have at this point?

Yeah, we're definitely seeing opportunities like that. And I think similar to what we've done in the past, I think a modest, amount of capital absolutely could be, could be a great use of capital to do that. provide some sort of line of credit or capital infusion in exchange for and then getting forward flow, potentially warrants. There's a lot of things that, these companies that are struggling could be, help them basically get through this and provide a great opportunity for us. again, we're, we're not the type that usually writes big checks. So as we've said but I think this could be a great opportunity to do that and we are seeing a couple of opportunities presented.

Okay. Got it. And then last question on the, on the agency portfolio can you talk about how you're thinking about the overall net long exposure kind of given where spreads are in the agency market and, and where of all children's at currently?

Yeah, so we typically keep the net long in that portfolio, significantly lower than what you'd see from sort of, an agency rate. And part of that is just the philosophical belief that shareholders in Ellington financial are primarily looking to generate returns through credit investments. So historically we haven't wanted to introduce some of the risks inherent elaborate agency portfolio about volatility and basis widening. We haven't wanted that to really dominate returns for EFC given that it's really credit focused. So I think, and J.R. can correct me. I think the agency portfolio was down roughly 6% on its capital this quarter. Right. So I think that's sort of like at the better end of what you're seeing from the agency peer group in part, because it's fully hedged and also doesn't have as much mortgage exposure. Yeah, mortgages are certainly wide right now, but they're wide for a reason everybody knows, right? You have the, the fed stepping back their purchases it's possible even though, a lot of market participants think less likely, but it's certainly possible that they could engage in sales. And also, the other thing is Fannie and Freddy greatly increased their loan limits. So the new crop of agency mortgages that are originated in the higher coupons 4.5 and 5, they're really big loan balances. So there's going to be a lot of sort of pot potentially and unfavorable prepayment curve for some of those things. So all that kind of feeds into spreads. I mean, I'd say like right now, if you look at non-QM or a lot, a lot of sectors of credit have sort of had spreads correlated with agency spreads a little bit. So I feel like EFC has a lot of it's, it's taking advantage of wider spreads right now in some of these other sectors. So I wouldn't say right now, probably that's where we'd add a lot of risk. Agencies had a very good quarter in July, so they recouped some of that widening. But if we saw credit spreads tighten to the point where they weren't as attractive as they are now and the agency spreads not, then I think at that point, it'd be a time to really consider increase in the mortgage basis exposure in the, in the agency portfolio and Ellington financial, well, right now we're in credit spread so wide. I think we're going to sort of take more of the risk in the portfolio focused on the credit side.

Hey and Mark, We're looking at the numbers here. Yeah. The return on equity on the equity that was allocated to the agency strategy was, in the single digits. It was obviously a lot better than you've seen from the agency res in terms of their, return on equity. So and that's due to the fact that in no small part, as you mentioned, we hedge more of the basis risk via TBAs in that strategy than typical agency rate would.

We'll take our next question from Doug Harter from Credit Suisse. Your line is open.

Thanks. Can you talk a little bit more about your comment to hold non QM loans on, on warehouse clients longer? how, how you kind of think about the risk of that and kind of, do you plan to kind of just be more opportunistic around the securitization market? Just, just to kind of flesh that out a little bit. Thank you.

Yeah. Hey, Doug, it's Mark. So, maybe I didn't phrase it properly, but I wouldn't say it's our intention to hold Mon QM loans on repo because we see a lot of benefits of being securitizer right. We certainly saw it when you went through. COVID how having securitized a lot of our production leaves less marked to market risk in the portfolio and volatile times. I also think you build a brand, excuse me, you get tighter spreads over time, just sort of a virtuous cycle there. I was just making the comment that you got near a point in July where security, inspiration spreads had widened so much relative to repo that for the first time in years and years, we at least said, let's look at levered returns just from keeping things on balance sheet, since then securitization threads have come in. So I would say now, our expectation is that we're going to continue to securitize, but, I would just say the stability in repo has sort of for the first time, in a long time, at least to us, and we're kind of guiding the world, securitizer been, at least, an alternative to consider.

And, Mark, I just want to make one other point which is that one thing that so it's, so, so yeah, so it's not, first of all, it's not like we have a gun to our head right. And need to get these things off REPA right away. One thing that we look at very closely is we look at the relationship between the securitization spreads and where we can buy loans, non QM loans right. And so when we did the securitization, which we completed last week, one of the things that I think contributed to our, wanting to do that securitization, even though, spreads are obviously a lot wider than they were early in the year, is that we can replace that risk if you will. Right. So we're, de-risking by doing the securitization. But we can replace that risk pretty much right away now with non cm loans, right. That are priced very attractively relative to where securitization spreads are, that wasn't true, a couple months ago, securitization spreads widened. And it took a while before the primary market where you could buy, where you could originate, where you could originate, and purchase via forward flow agreements or whatever it is, there was a lag there. So once that sort of re normalized where it should be, which is that, it should be profitable to originate loans and securitize. So once that got back, it was like, okay, let's do the securitization because we can now replenish that risk in a profitable way in terms of the loans that we are seeing available for purchase today.

And I guess on that commentary about the ability to source loans, I guess, how do you view kind of the, the timeline to, to agg+regate enough to enough size to securitize? How does that compare kind of in the back half to, to kind of what you experienced in the first half?

Well, it's compressed a lot for us, it, it look back, we, we, first, we were a year between that I think six months, four months, three months now, I think we have enough flow and inventory, frankly, that, we could be doing deals much more frequently and typical size deal for us is in the $300 million to $400 million range.

Yeah. Our last deal was about $350 million and we acquired $350 million originated $550 in the second quarter. So that would imply yeah. You share that exactly. Right. Exactly. So I think you could definitely see now every two or three months as opposed to every three or four months.

We'll take our next question from Bose George with KBW. Your line is now active.

Hey guys, this is actually Mike Smith on for Bose. Maybe just one on leverage. If we look at total leverage currently at 3.8 times, just wondering if we get some macro clarity in the back half of the year, just wondering how high you could look to take leverage.

Sure. So thanks for the question Jr. I'll start out. And then Mark and Larry obviously supplement as you see fit. So the 3.8 times includes all of the non QM securitizations that we consolidate for gap. So that's a total leverage statistic, but recourse test equity which we talk about that's the, that's the ratio we focus on, cause it excludes non-recourse financing, which is largely the non-QM securitizations that measure did increase from 2.3 to one to 2.6 to one quarter of a quarter. And 2.6 times is higher than it's been kind of post COVID, but not as high as it was pre COVID. We gave the statistic that unencumbered assets about $600 million and plus cash of another two and a quarter. So we, we still had, that's one of the ways that we measure, dry powder. Larry mentioned that we closed on the senior notes on March 31st. So that was 210 million of those income -- of the dry powders as we think about it. So I think it, the, the answer to this question is usually it depends on the opportunities, having that many unencumbered assets and cash that is above the balance that we typically carry implies that we have more borrowing capacity. On the other hand, we did do a securitization that closed last week. And so that takes recourse financing off our balance sheet, but we've also, continued to take advantage of investment opportunities. So there are different moving pieces. But I think in short we still have room to take leverage up further. Does unencumbered assets of about $600 million, if you say, let's just say $400 million is readily financable at attractive rates, and we leverage that one to one or thereabouts that would raise another $400 million plus another say $50 million of our cash. Cash is higher relative to NAV than it typically is that that math would get us to the high twos before accounting for securitization. So we don’t typically give leverage targets, but those numbers might give you a sense of how much borrowing capacity we have remaining if we choose to use it. Yeah. And just to reemphasize what J. R. said when you think about where our leverage could go, I wouldn’t focus on that recourse number because the non QM securitizations do blow up the balance sheet. And, but the amount of, they don’t blow up the balance sheet with incremental risk, as far as that financing being pulled, right. That’s locked in long term financing. So when we do a $350 million securitization and well, in the old days, we would retain, 20 million worth of assets, usually mostly IO, non-QM, and some subordinate tranches as well.

Right? So that blows up your recourse leverage by $350 million, which is not a small number given, we have a billion dollars of equity, but in terms of how many really sort of assets you’ve added to the balance sheet it’s a, that’s a relatively small number we’re retaining more now, so that that percentage has increased, but still relative to the size of the balance sheet, the amount of retained tranches, that we add when we do a securitization is still pretty low. So again, I think focusing on the recourse number, which is what we think of, especially in terms of our liquidity management and, and making sure that we can withstand market shocks and things like that is, better to focus on Q – Mike Smith: Great, that’s really detailed and helpful color. And then maybe just one on, on strategy and, and, the potential for M&A, I’m just wondering how strategic of an asset is, is earned to Ellington the manager. Just wondering if, EFC could ever look to acquire earned and, maybe to increase scale, or could you ever look at any other strategic transactions we saw peer put themselves up for sale assets. I’m just wondering, if you could provide any color on the backdrop for M and a, that would be helpful. Thanks.

Yeah. All I can say there is, nothing’s changed. People have asked us that. And it’s of course if it were right for both companies, it’s something that we would absolutely have to consider. Right. But it’s not on the radar screen right now, and I wouldn’t want to comment more than that. Q – Mike Smith: Great. Thanks for taking the questions.

We’ll take our next question from Eric Hagen with BTIG. Your line is open. Q –Eric Hagen: Hey, thanks. Good morning guys. Hope you’re. Well I, I have a few here. Did you address the unsecured debt? That’s rolling over in September and how you’ll handle that? It sounds like you have enough capacity on the balance sheet. I just want to hear you kind of talk about it and say it, and then can you speak to some of the credit attributes, the quality of the non QM portfolio? I think a lot of loans or some of them anyway, just for the market generally have been bank statement loans. And how you think about that, including just how you think about it relative to the value of being able to lever something like a CRT.

Yeah. So J. R., why don't you handle the question about that deal coming due, right. And then Mark will handle, yeah, I think we see it as we, we, we planned liquidity wise to, to, to pay it off here in a few weeks. And there was nothing really more nuanced about that. It's going to be, ordinary course that we've planned to, to pay it off that maturity and we've planned on the liquid excited you, so, yeah. And if, rates hadn't spiked and spread out right after we did that other, secured note deal, we probably would've used those proceeds to, pay off the five and a half coupon even sooner, but five and a half coupon, which was looking like a expensive, short term funding in just in in March, it was now looking pretty attractive shortly thereafter, so we decided to keep it on. And we could've paid it off at any time, but it, it certainly looks like we're just going to pay it off in maturity with cash on hand. Mark, you want to repeat maybe the second half of the question,

Right? No, I think I got it with the yeah. So with the bank statement loans, that's sort of, I think that's sort of one differentiator among different non originators is how they think about bank statement loans. And I think the NCHE originator, we own lends shore has a very good process there. It's a really deep dive into that you and people are, self-employed, it's really deep dive into the economics of that business. It's looking at multiple years of bank statements and so the performance there has been excellent. And in a lot of ways you wind up learning more about those borrowers financials than you do just on the regular full doc. So we're totally comfortable with bank statement underwriting at show when we start buying loans from other originators, then our team has to do a bunch of work to understand how they do the bank statement underwrite, and there, sometimes we can get comfortable with it. And there's times we can't it, when I think about sort of the opportunity set, I think you're talking about in non-retained pieces versus CRT, CRTs, like, more liquid and it's got pretty good financing terms. I think they're both attractive, like for a long time, I'd say, like last year, the year before we didn't find CRT particularly attractive because it wasn't that wide things at par. And it always sort of has a little bit of this cat bond that catastrophe, catastrophe bond quality to it that, the enhancement levels are so thin that flooding in Houston was an issue for CRT. You could see wildfires being an issue for CT. You could see a localized economic stress in one or two big MSAs related to a specific industry being an issue for CRT. Whereas it's…

We'll take our next question from Crispin Love with Piper Sandler. Your line is open.

Thanks. And thank you for taking my question. One question on the NIM for the credit portfolio I saw, I was about 2.7, 5% second quarter down from about 3.6% in the first. I'm just curious how you'd expect that to, to rebound in the third quarter, and then should it kind of steadily increase off that base as investments for higher yields begin, begin to make of the larger part of the portfolio as the, as the portfolio turns over Chrisman, thanks.

So, I would say that, I think we mentioned in our prepared remarks that financing costs on our portfolio adjusted more quickly than asset yields overall as, as an average of, of both sides of the portfolio. And we expect NIM to expand going forward as asset yields pick up. And we do have a short duration portfolio, especially in loans where some loans are floating rate. And so those are adjusting real time. But others are technically fixed rate, but might have a six month average life, for example many of our RTLS. And so if you have a six month loan that has a fixed rate, it's going to take that time to turnover, whereas it's financing might be floating to for LIBOR. So hopefully it's a short term phenomenon in asset yields catch up and we mentioned that we've been able to push spreads and we're seeing higher yields and spreads in the market, and certainly the market yields on our portfolio were both up sequentially by 60 basis points, give or take on the asset side. Again, we didn't see that yet on our cost yields in Q2, but we expected to kind of catch up going forward.

Okay, great. Thanks for the color Jr. And just one last from me I appreciate all of your comments that you've made on the securitization markets. And I just have one clarification on what you said on the non-deal in July versus January. Could you say 150 basis points wider.

Yes. In spread. So obviously much, much higher yield, much, much higher.

And the coupon, and the coupon was a 2.2 coupon in January and it was a five coupon in July and the five coupon on July traded about a point lower than the 2.2 coupon.

Okay. Okay. Sounds good, Mark. Thanks.

So that's a big move that's like, wow.

Right. Absolutely. Thank you for the color and the clarification. That's all for me.

And Crispin, just to add one more thing. while we definitely look at a D when thinking about our dividend we're also looking at looking forward right. And seeing where we see where we see these metrics going, including a D in others and earnings and where so it's, I, I wouldn't necessarily focus too much on that, necessarily over the near term. We're looking at market yields that are very high. We're going to turn over the portfolio. We still have an agency portfolio that from a relative value perspective, we really like a lot of that was put on at lower yield. So I think you're going to see over the next quarter or two, a lot of turnover in movement. Some of it is just the, the natural recycling of capital on those short duration loan portfolios. We talked about, some of it is just taking advantage of the right time to sell some of the agency pools that we have and replace them, just, naturally which whatever is in the market at time, but that's going to recharge and the other thing I want to mention is that it hasn't been that long where and they're still going to be going up where short term, money market rates are higher. And that's also a boost because that all that cash that we have, and, if you will the benchmark off of which are floating rate assets are yielding us. Those are all going up and going up quite a bit, several hundred basis points from where they were literally last year. So that's also a good tailwind for that has not, absolutely has not been fully factored in yet.

All right. Thank you for the call, Larry. Okay.

That was our final question for the day. I would like to turn the call back over to Larry Penn for any additional or closing remarks.

Yeah, no, thanks everyone. I just want to add, we're going to we're going to take a listen to the audio and if there was something that we considered significant in terms of a GAAP based upon this issue that the hosting company had we will definitely look into hosting the script the prepared remarks on our website and for the Q&A, I think it seems like the audio was didn't gap there. So I think we're going to be okay in terms of just the normal services, then post those transcripts, but we will look at posting the prepared as appropriate.

We thank you for participating in the Ellington Financial second quarter 2022 earning conference call. You may now disconnect your line at this time and have a wonderful day.