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. [Operator Instructions]. It is now my pleasure to turn the call over to , Vice President of SEC Reporting. 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 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 Tecotzky, Co-Chief Investment Officer of EFC; and JR 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, ellingtonnfinancial.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, Tara, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on Slide 3 of the presentation. For the fourth quarter, we are reporting net income for the quarter of $0.37 per share and adjusted distributable earnings of $0.42 per share. Excellent performance from Longbridge 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 Longbridge Financial, since that's driving a change now and going forward to our financial reporting. We had 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 modest net loss on originations. Putting it all together, Longbridge generated strong results for the quarter. On the middle of Slide 3, you can see Longbridge contributing $0.24 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 3 consecutive quarters of dismal underperformance in the sector. Our Agency strategy…

Thanks, Larry, and good morning, everyone. For the fourth quarter, we are reporting net income of $0.30 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.42 per share. These results compare to a net loss of $0.55 per share and ADE of $0.44 per share for the prior quarter. You'll notice some changes to our disclosures this quarter around the consolidation of Longbridge Financial. As Larry mentioned, we acquired a controlling interest in Longbridge Financial in October. And beginning with our fourth quarter results, we consolidate Longbridge. In the earnings presentation on Slide 5, you can see the attribution of earnings between Longbridge and our existing credit and Agency portfolios as well as corporate level expenses. And on Slide 29, you can see each strategy's contribution to EFC's adjusted distributable earnings. If you turn next to Slide 27, you can see the impact that the consolidation has on our balance sheet. Longbridge's largest business is the origination of home equity conversion mortgage loans, or HECM, which are insured by the FHA and eligible for inclusion in Ginnie Mae guaranteed HMBS pools. When issuing these Ginnie Mae HMBS pools, Longbridge retains the mortgage servicing rights and the servicing-related obligations that come with those rights. And even though these HMBS pools are sold to unrelated third-party investors, those sales transactions are not treated as true sales under GAAP. This is a well-known idiosyncrasy of the reverse mortgage industry. In any case, under GAAP, the HECM loans remain on balance sheet even after the HMBS pool is sold with the HMBS pool treated as a long-term financing of those HECM loans. Since July 2017, Longbridge has securitized roughly $9.5 billion of HECM loans into HMBS pools. Of course, many of those loans have paid off since origination. But as…

Thanks, JR. Over the first 9 months of 2022, we had seen elevated volatility and that continued to be the case in October. In November and December, however, volatility came down considerably and interest rates ended the year significantly off their intra-quarter highs. Agency MBS, which had been the first sector to widen, was not surprisingly also the first sector to materially outperform hedging instruments, which we saw in Q4. You often see spread tightening and spread widening cycles for Agency MBS and credit-sensitive parts of fixed income that are out of phase with each other. We've seen this numerous times, most notably in late March 2020 when Fed buying of Agency MBS initially led to extreme outperformance for Agency to see credit sectors catch up and outperform Agency 1 or 2 quarters later. In 2022, we saw a different scenario play out. When money managers, pension funds and insurance companies need to raise cash quickly to meet redemptions or other -- or address other cash needs, they often sell Agency MBS first because MBS are liquid and these investors typically have large MBS holdings. This kind of selling is a negative technical for Agency MBS, and because prices for MBS are highly transparent, the underperformance these abrupt sales can cause are very visible to the market in real time. We saw this scenario play out for much of 2022 as selling that was concentrated in Agency was at least one of the reasons that Agency significantly underperformed many credit-sensitive fixed income sectors. But Q4 felt like an inflection point for the bond market and for Agency MBS specifically. Beginning in the second half of the quarter, money manager outflows stabilized and then turned into inflows and what had been a technical headwind for Agency MBS for much of '22,…

Thanks, Mark. 2022 certainly had its challenges. We had to navigate periods of extreme volatility and market dysfunction with interest rates rising rapidly and yield spreads widening along the way. In the Agency MBS sector, in particular, there was truly nowhere to hide. As you can see on Slide 24, our Agency strategy was responsible for more than half of our portfolio losses for the year, even though it only represented a small fraction of our capital allocation. But most importantly, we were able to largely avoid crystallizing mark-to-market losses in our credit portfolio. We were patient with our securitization activity, opportunistic with capital management and discipline with hedging and leverage. We were able to limit our book value decline during the year. We maintained our dividend throughout, and we capitalized on the market volatility to add attractive assets and add origination market share, growing the credit portfolio significantly over the course of the year, while strategically downsizing our Agency portfolio. We took advantage of some extreme stock market sell-offs last year to repurchase our common shares at a big discount to book value. And then when markets rebounded, we efficiently raise capital through our ATM program to provide just-in-time capital to fund attractive investment opportunities. We also extended several loan facilities throughout the year, including in the fourth quarter. We acquired Longbridge, a top 3 reverse mortgage originator, at a very attractive level. And I believe that acquisition gives us huge upside as well as great synergies, including access to Longbridge's attractive loan pipeline. We really accomplished a lot last year. We closed out the year well. We entered 2023 with strong liquidity and a balanced portfolio positioned to drive earnings growth going forward. On last quarter's earnings call, we discussed our excitement about the ample investment opportunities in…

[Operator Instructions]. Our first question comes from Eric Hagen with BTIG.

I think I got a couple of questions. But the 1.8x recourse leverage at Longbridge, is that the origination -- does that apply to the origination pipeline or the MSRs? Can you say what that funding is supporting and what the cost of funds looks like, even how many counterparties you have supporting that funding? And then in the resi transition loans, are you guys buying loans directly from brokers? Or are you buying from other originators that can't necessarily hold the loans themselves. Maybe you can also give us some color around the credit characteristics, the profile, how [indiscernible] average balance is, the LTV and that sort of thing?

Eric. Okay. Let me tackle the first one. So on Longbridge, the recourse leverage we cite, so that has to do with the holdings at Longbridge, not the HECM loans that have been securitized, but it's really 2 major principal categories that HECM loans are waiting, securitization and [indiscernible] the prop loans on balance sheet that are on these loan facilities and then the MSRs have financing themselves. So those are the 3 categories. The amount is summarized on Slide 9. You see $238 million of Longbridge recourse financing in the page. You divide that by the equity in Longbridge, the capital allocated to Longbridge, and that's where the ratio comes from.

Yes. And buyouts don't represent a significant factor at all for Longbridge. Their MSR is relatively new and young, I should say, and doesn't experience much buyout activity at all, right?

And you can see the weighted average borrowing rate was 7.86% combined on those portfolios that -- those borrowings at year-end, the number of counterparties, it's with 4 or 5 counterparties.

Okay. That's very helpful.

And the next question was?

Resi transition loans...

Right. Yes. So Eric, so we don't buy individual loans from brokers. We have several originators, some of whom we have an equity stake in, some of whom we just have a very long-standing relationship with where we have seen how they underwrite, see how they think about property improvements, and we're sort of like-minded on credit that we buy from. So in terms of attributes, that market is opposed like non-QM that just sort of has a single loan-to-value ratio in the -- one of the big metrics of risk control in residential transition loans is sort of 2 LTVs, if you will. The first is loan to cost. So how much are you lending that builder versus what they're paying for the property. And it's a property that generally needs some sort of renovation to maximize value. So what are you lending them versus what they're paying for it as is? And then at the time of loans, most of the loans we do, there's a rehab component. So there is a rehab budget, there's a rehab plan. Then they get paid in arrears for draws once they've done some of that construction. And so at the time of origination, there's this second LTV, which is how much you're lending versus add repaired value? So you're lending a certain amount day 1, then you're going to be funding either all or some portion of that renovations. So then at the end, how much have you going to be -- how much -- what's the total debt you've expended to that -- extended to that builder versus what your expectation is and their expectation of what the property is going to be worth when the renovations are done, right? So one important metric, I talked a little bit in…

Our next question comes from Crispin Love with Piper Sandler.

It's actually Justin Crowley, on for Crispin this morning. So just looking at the credit and Agency portfolios in the quarter, both were down due to paydowns and other factors. I think you mentioned in the prepared remarks, maybe seeing an inflection point on the Agency side. So I guess taking that and then the preferred issuance this month, curious where you're seeing some of the most investment opportunities right now, how deployment -- how you foresee deployment of preferred progressing? And maybe like square that with what sort of a wait-and-see approach you're seeing -- you anticipate there?

Yes. So I guess I would say that markets aren't as volatile as what they were, say, Q3 and early Q4 2022, but they're still volatile, right? And when they're volatile, you're incented to invest, I think, at a more measured pace because typically, the markets from time to time, like maybe today's example, hit some air pockets, and then you can really get some good investments, right? So I think just the volatility and the uncertainty around how high the Fed is going to hike argues for being a little bit more measured in the pace of deployment because the likelihood of just on a certain day or a couple of days being presented with some portfolios, you can pick up at really advantageous levels. That's -- we signed a higher probability of that than we would sort of in a normal market. In terms of the sectors we like, JR talked about how we had a lot of paydowns in small balance commercial. We're looking at new opportunities there. It's a space we like. I think we're also going to get some opportunities to buy some nonperforming loans there. There has been a huge driver of EFC returns 2010, 2011, 2012, and then you had lack of supply for the NPLs for certain. We think that's going to pick up. It's still likely. We talked about the residential transition loans. We talked about non-QM securitizations tightening. So sort of the levered returns on retained pieces looks pretty good to us there and also still some QSIP opportunities. So I think all that -- and then Larry mentioned that the -- now that we have -- now that we own all of Longbridge, that's going to create some opportunities for us that we didn't have before. I don't know if, Larry, you want to expand on that.

Yes. Thanks, Mark. No, that's great. But yes, I would like to add. So first of all, this market is very bipolar, right? I mean everything is to be the risk on or risk off. Then you have a day like today when, oh my gosh, inflation is still a big risk. I mean, obviously, it's been a big risk. So we don't want to be too -- be too enthusiastic one way or another. But when it comes to raising capital, you got to go for what you think is -- because those are opportunities that you're not doing a preferred deal every day or a debt deal every day, right? So when we saw the opportunity to do a deal at a spread, like I said, was similar to what we had done in December of '21, which was a much, much tighter spread investment environment, we had to capitalize on that. And as Mark said, you're going to hit a pocket where all of a sudden the market will overreact on the downside, and that's where we're going to pick up more assets. I think being patient here is going to be really, really good for us because Mark mentioned -- you just mentioned commercial NPLs. We have very few commercial NPLs right now. But that was -- we were buying loans as NPLs several years ago. And we think with all the distress in office and even retail to some extent, we think that you're going to see a lot of NPL opportunities. And we want to be ready for those. And if you try to raise capital when spreads are wide, well, then you're going to be raising capital widespreads, right? So we want to raise capital when the opportunity -- and these are long-term preferred equity is something that we're going to live with potentially forever, right? It is a perpetual preferred. So -- we want to jump on those opportunities when they come at attractive spreads and then we'll absolutely take advantage of opportunities, but we'll be patient. And we have so many different strategies. Mark just mentioned with the Longbridge acquisition. I mentioned prop, right? That is a new asset class for us, and it's a very, very attractive asset class, not one that you hear much about because it's a tiny market. But our biggest competitor in reverse mortgages, that's rightly one of the focuses of their business model, too. So with this acquisition now Longbridge can ramp up its activities and prop, and we can put those go right on our balance sheet, right? So we just have lots and lots of different sectors that we can choose from. And we'll see where those opportunities are. RTL continue to be big inflows for us. Non-QM goes in waves. Maybe we want to have lunch or sell those on the open market, maybe we want to buy them and securitize. We have a lot of flexibility.

Okay. Got it. That's helpful. And then so taking that -- the idea of the capital deployment fitting from higher rates to drive higher ADE. With regards to ADE and covering dividend, what are your thoughts there in the near term as far as covering the dividend? Could it take a few quarters as funding costs remain elevated? Just wanted to get your commentary there.

It's a great question. It really depends on the pace of deployment. It's not going to happen probably in Q1, just given the amount of capital that we've raised, but that's okay. Where we have no plans to cut the dividend. We look -- that is a -- we look longer term, and we're confident that we're going to cover it. And could the inflection point happen in the second quarter? Sure, it could happen in the second quarter. But we're not going to force it, but certainly, that would be a good target.

Okay. Got it. Helpful...

And the second quarter -- sorry to add one more thing. The second quarter also should be much different for Longbridge as well. And they -- again, I don't want to say past performance is always indicative of future results. But if you look back to 2021, what was their net income for the year was well over $30 million right? So I believe we'll have to check that. But -- so that could be a very large addition to our core -- ADE excuse me in starting potentially in the second quarter. As I mentioned, the seasonality, right? So in spring, you should start to see -- second quarter, you should start to see strong origination income again from Longbridge.

Okay. Understood. And then, I guess, shifting gears. You provided some commentary on credit quality across the portfolio. Are there any areas where you're beginning to see signs of stress, areas of becoming more cautious on. I know you talk a little bit about the office portfolio and then also retail to some extent. So I guess just broad commentary on credit signs that you're paying attention to? And then certainly on the office side, I'd love for you to dig a little bit more into that and sort of how you see that asset class shaping out over -- just looking into your crystal ball over the next couple of years?

I'll let Mark handle that. But before he does, I do want to just emphasize that if you look at our portfolio, Mark mentioned, and you can see on Slide 10, how multifamily focus is, but we have very little office and retail. And I don't think -- and by the way, I did just confirm the $30 million number for Longbridge in 2021. But I don't think that we really have any headaches in those sectors where we're seeing the headaches in the rest of the market. But Mark, go ahead where you think the problem spots for the market are going to be.

So I guess the first thing I'd say is that if you look at affordability, just how much consumers, how much a home buyer has to pay if they buy a house now and they borrow anywhere near the Fannie-Freddie rate, which is or something, that things aren't affordable, right? Things are not affordable, and you can -- that can correct a few ways, it can correct from home prices coming down, and you're already down about 5% from the peak. And in some areas, you're down 20% from the peak. It can correct with -- if mortgage rates drop, it can correct if incomes increase, right? And it's probably going to be [indiscernible] maybe some combination of those 3. But right now, homes generally are not affordable to most people, and that's one of the reasons why you're seeing sales numbers come off. So I think we've got to be cautious about things, and we have to protect ourselves with loan-to-value ratios. We have to protect ourselves in the residential transition portfolios by being in sectors where we think that are going to hold up better and you have to respond to the market as it evolves. But it's a -- we started non-QM. We started that originator in end of 2014, with the first loan in 2015, to the first securitization in 2017. So there's a lot -- we had many years, 6-odd years, where home prices were sort of marching higher, and we thought affordability looks good. And come last year, things are really different. So I think you have to make focusing on credit, a big, big part of how you spend your day. On the commercial side, I think I mentioned it on -- in the prepared comments that you have a lot of --…

Okay. I appreciate that color. And then sort of taking that and looking at multifamily, which has been a pretty resilient asset class and squaring that with some of the home affordability hurdles that you mentioned. Do you see demand starting to pull back just given cap rates compared to that cost? Or are some of those other factors as far as single-family homeownership? Do you anticipate that continuing to lend support to the strength of multifamily?

So one thing with our approach to multifamily space is it's never really been Class A, right? It's never really been properties that are new construction, rents of $2,000 a month, lots of amenities. We've always been sort of Class B and Class C workforce properties, rent $600 to $800. And the reason why we've liked that sector is, there's just an unfortunate -- it's unfortunate, but there's a huge shortage of affordable housing in this country. So there's need and there's demand for that apartments that have lower rent costs, but also, two, there's no new construction there. So 2023 is interesting because there is a lot of multifamily construction that's going to come online in 2023. But it's all at the higher end, right? No one's building properties to rent them out for $700 a month, right? So -- and so then what happens on these Class B multis is that we're lending at a discount to property value, obviously, LTV and that's our cushion. But the buyer is buying those properties at a big discount to replacement costs. So construction costs are high. So the operators we see buying the Class B, Class C multis, they're getting into these properties at the market level, but the market level is way below the cost of new construction. So that's why you're not seeing new construction there. So I think it kind of gives us a double layer of protection. Do I think some of the [indiscernible] going to have a hard time pushing rents as much as they thought they were going to be able to push them when they first bought the thing? Yes. And are they going to be feeling it as SOFRs marched higher since they took up the loan? They are. We work closely with them. That's our job. Their job is to manage through it. This is such a big move in rates and such a big U-turn from the Fed that everyone is going to have -- everyone's going to have their headaches, ours included. I just think, for us, the headaches we have are going to be small relative to the much, much greater opportunities that this market is presenting to us.

Our next question comes from Trevor Cranston with JMP Securities.

You guys mentioned the potential opportunity to add more in the proprietary reverse mortgage space after the acquisition of Longbridge. Can you elaborate a little bit on what the terms of the proprietary reverse loans look like compared to the sort of standard Ginnie Mae product and how you guys would look to sort of utilize the financing structure around investments in that space?

Yes. I mean it's pretty simple. They are generally fixed rate loans. They have spreads that are obviously wider than the HECM product. And they -- in terms of -- they can be securitized. We wouldn't -- we'd probably wait to get some critical mass before doing so. The big reason why someone gets a prop loan as opposed to a HECM loan is really going to be loan size. So -- and from an underwriting perspective, the LTVs are going to be much lower than on the HECM product. So the HECM of product is -- the LTVs there are driven by the so-called principal limited factors, where essentially FHA dictates exactly what LTV they are willing to guarantee the loan at. In prop, we have much more flexibility. And so we can be more conservative on LTVs. But it's a pretty similar product to the fixed rate product that you see in -- that goes into the Ginnie Mae's.

Got it. Okay. And then on the book value update you guys gave for the end of January. I was just curious, credit spreads and Agency spreads seemed to have done pretty well in January. So I was wondering if you could maybe provide some color around sort of what drove the kind of flat book value performance over the month.

Sure. So right, the Agency and non-QM had strong months. We obviously declared a $0.15 dividend, so that would be netted out. We also were active in the ATM. And so that there's some dilution from ATM is factored into that $15 a share. But it's -- if you factor in that last adjustment, it's pretty close to on top of the dividend.

Our next question comes from Bose George with KBW.

In terms of the growth outlook at Longbridge, I was curious, is there any sort of inorganic opportunities on the bulk side, either MSR or origination capacity?

Sure. I don't think from an origination -- well, so I'm sure you saw the bankruptcy towards the end of last year, right? So we -- I don't know if you -- I don't know if you call this organic or inorganic, but we were able to pick up a lot of producers, loan officers, et cetera, in the wake of that bankruptcy. So without having to sort of to do anything in terms of an outright acquisition, potentially paying a premium whatever. And that also -- Ginnie Mae basically acquired, took over, seized, if you will, that MSR and that MSR will probably come to market in the near future. Now it's a very different MSR from the MSR that Longbridge currently owns. It's a much older MSR. And so it has different sort of benefits and risks. But that could be a very, very substantial acquisition and potentially not even requiring that much capital. So yes, so we -- I don't think we would have any plans to sort of go out there and look for MSRs to acquire at this point in time, nor looking to sort of acquire any other existing operations per se. We -- Longbridge has shown actually great flexibility in terms of being able to dial up and down its capacity in terms of its staffing in response to market opportunities.

Okay. Great. That makes sense. And then just in terms of the returns on HECM MSRs, what are the kind of, I guess, the unlevered yields on that when you book them?

Talking about the reverse MSRs?

Yes. Yes, the reverse MSRs, yes.

Yes, they're in the, I'd say, the low -- very low double digits, between 10% and 15%.

That was our final question for today. We thank you for participating in Ellington Financial Fourth Quarter 2022 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.