Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ellington Financial Inc (EFC, Financial) generated an economic return of 4.5% non-annualized for the second quarter.
- The company increased its adjusted distributable earnings per share by $0.05 to $0.33 per share.
- Strong performance in the non-QM loan business, including a successful securitization in April, contributed significantly to the results.
- Longbridge, EFC's reverse mortgage platform, delivered robust earnings driven by strong origination volumes and proprietary reverse mortgage loans.
- EFC's diversified credit strategies, including residential transition loans, commercial mortgage loans, and non-agency RMBS, performed well and contributed to the overall positive results.
Negative Points
- Gain on sale margins for Longbridge's HECM business compressed due to wider yield spreads in the HMBS securitization markets.
- The percentage of delinquent loans in the residential mortgage loan portfolio increased slightly quarter over quarter.
- Loans in non-accrual status and REO expenses continued to weigh on adjusted distributable earnings (ADE) in the second quarter.
- The total long credit portfolio decreased by 2.5% to $2.73 billion as of June 30, driven by net sales of non-agency RMBS and non-QM loans.
- The total long agency RMBS portfolio declined by 31% in the quarter to $458 million, reflecting a strategic shift away from lower-yielding sectors.
Q & A Highlights
Q: How would you characterize the level of capital deployment and its impact on ADE?
A: We have $565 million of unencumbered assets and close to $200 million in cash. If we leverage our credit assets to 2x, we could add several hundred million more in borrowings. Despite trimming lower-yielding assets, we have significant room to add leverage and optimize the balance sheet. (J. R. Herlihy, CFO)
Q: How does the portfolio benefit from a steeper yield curve if the Fed cuts rates?
A: We hedge across the curve to neutralize the impact of yield curve changes. A steeper yield curve could benefit our net interest margin if repo costs drop faster than the floating leg of our swaps. Additionally, lower short-term rates could support agency and non-QM mortgages. (Mark Tecotzky, Co-CIO)
Q: What is the outlook for HELOCs and closed-end seconds given current market conditions?
A: The opportunity is significant due to many low-rate first liens from 2020-2022. Even with a rate rally, the demand for HELOCs and closed-end seconds should remain strong unless rates drop significantly. We are well-positioned to benefit from this sector. (Mark Tecotzky, Co-CIO)
Q: Are you seeing opportunities in single asset, single borrower (SASB) securities?
A: Yes, we are focused on SASB, especially in distressed and lower dollar price segments. The yields are attractive, and we expect to allocate more capital to this area. (Mark Tecotzky, Co-CIO)
Q: How does market volatility affect your appetite for liquid assets versus proprietary loans?
A: We are opportunistic, balancing between securities and loans. In times of volatility, CUSIPs tend to offer immediate opportunities, but long-term, we expect proprietary loans to drive ADE. (Laurence Penn, CEO)
Q: What is your outlook on non-agency securities repo spreads and capital supply?
A: We've seen increased interest from banks in repo financing, especially for non-agency assets. Financing terms have improved, and we expect this trend to continue, benefiting our net interest margin. (Mark Tecotzky, Co-CIO)
Q: How do you manage credit performance and asset allocation in a potential recession?
A: We closely monitor data and adjust our underwriting criteria. Our residential focus and the potential for lower rates in a recession should support our portfolio's performance. (Mark Tecotzky, Co-CIO)
Q: What are your plans for capital management and dividend sustainability?
A: We aim to maintain the dividend at $0.13 per month. Our next significant move in capital management could be issuing unsecured debt, depending on market conditions. (Laurence Penn, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
