Ellington Financial Inc. Q4 FY2024 earnings call

• Fourth quarter was very strong, capping a successful 2024. The company expanded loan portfolios and sourcing channels, strengthened financing and balance sheet, and grew adjusted distributable earnings. • Key drivers of results included a strong quarter from the Longbridge reverse mortgage segment, continued strong performance from non-QM and other loan originator affiliates, and sizable gains from securitizations. • In the fourth quarter, the closed-end second lien HELOC, proprietary reverse, and commercial mortgage bridge loan portfolios grew by a combined 39% due to further expansion of proprietary loan origination businesses with forward flow agreements. • Strengthened the liability side of the balance sheet in three ways: executed on securitizations (completed four securitization transactions across three product lines, including non-QM, proprietary reverse mortgage, and closed-end second lien loans), added and improved warehouse lines (capitalized on increased competition in warehouse financing), and redeemed high-cost debt and preferred stock (accretive to earnings). • Longbridge had excellent originations driven by higher volumes (up 18% sequentially across all products), improved origination margins in HECM, and net gains from the prop reverse securitization. • Diversification across asset types, sectors, durations, and credit hedges is key to the company's performance, distinguishing it from other mortgage REITs

In the fourth quarter, Ellington Financial generated net income of $0.25 per share. Adjusted distributable earnings (ADE) reached $0.45 per share. On a net income breakdown by strategy: $0.32 per share came from the credit portfolio, $0.30 from the Longbridge segment, and there was a negative $0.04 from the Agency strategy. For ADE breakdown by segment: $0.28 per share originated from the investment portfolio segment (net of corporate expenses), and $0.17 came from the Longbridge segment. The credit portfolio's positive performance was driven by sequentially higher net interest income (wider net interest margin and larger portfolio quarter over quarter) and net gains from non-agency RMBS, HELOCs, forward MSR investments, ABS, and loan originator equity investments, offset by modest net losses on non-QM loans, retained tranches, commercial mortgage loans, and consumer loans due to slight credit performance declines. Longbridge's robust results were attributable to excellent origination volumes (up 18% sequentially across all products), improved origination margins in HECM, and net gains related to the prop reverse securitization. The agency strategy generated a modest loss for the quarter due to rising interest rates and intra-quarter volatility around the presidential election driving underperformance of Agency RMBS relative to hedging instruments market-wide

• Maintain the securitization momentum built across multiple business lines in 2025. • Already closed three securitization deals in the first two months of 2025. • Have a few originator investments in the pipeline that are expected to further expand asset sourcing channels. • Expect adjusted distributable earnings to continue covering dividends and build additional franchise value in 2025

• Commercial mortgage loans in default: Resolution processes for the three most significant delinquent commercial mortgage loans are more protracted and expensive than initially anticipated. • Uptick in residential loan delinquencies: There has been an uptick in residential loan delinquencies, particularly in the non-QM portfolio, though these haven't translated into material losses yet. • Home insurance premiums: Some parts of the country are experiencing a big jump in home insurance premiums

Q: Can you talk a little bit more about some of the originator investments that you're making and kind of the appetite for non-QM given the commentary you made around delinquencies?

A: Mark Tecotzky said originator investments go back to 2014, looking for synergistic situations. Delinquencies are higher than in previous years but not shocking, and the company still sees value in the non-QM market Q: On Longbridge, can you just help contextualize the ranges of earnings that you would expect?

A: JR Herlihy said last quarter discussed a $0.09 per share per quarter run rate target, and Q4 exceeded that, with $0.09 run rate plus or minus being a good number to consider Q: Back to the agency portfolio and the allocation there, can you share why that maybe isn't more attractive to you at these valuations? And if you guys had maybe more incremental capital, what you would potentially do with that?

A: Mark Tecotzky said the company has been credit-focused, using vertical integration as a competitive advantage, and believes capital is better utilized in the lending side rather than the agency portfolio Q: On the non-QM delinquencies, is there an expectation from investors that you buy those loans out of the trust even if you don't expect an eventual credit loss? Do you need to maybe temporarily manage your liquidity any differently as a result of that?

A: Mark Tecotzky said there is no expectation to buy loans out of the trust, and the company expects to work out the loans while they are in the securitization Q: Question on related to Longbridge. I know a lot of the focus there is on the proprietary side of things, but wondering if you guys could comment on whether or not you guys have seen or you foresee any impact on the HMBS market and the rollout of HMBS two point o related to staffing cuts at HUD and other places?

A: Larry Penn said it's an important question, but they'll have to see how things play out, and Longbridge's proprietary business is driving earnings Q: Just on the HUD, that's a really interesting area. So you understood that there's a lot to monitor with what the new administration, but I believe they've already had some pretty significant staffing cuts at HUD. So is there just real time? Are you y'all feeling anything just from a procedural perspective? In dealing with the government?

A: Larry Penn said no impact has been felt yet Q: Question on related to REO workouts. Have you quantified how much capital gets freed up and what the timing of that would be as a result of these REO workouts?

A: Larry Penn said the capital freed up isn't game-changing, with less than $100 million invested in commercial delinquent loans overall Q: Can you just dig a little bit deeper into closed-end seconds HELOCs and the opportunity there? It looks like you more than doubled the portfolio there in the fourth quarter. Is that rate driven along with affordability and HPA moves? And was that growth mostly through acquisitions? And just curious on how demand could be in that space if rates do come down?

A: Mark Tecotzky said it's a big opportunity set with borrowers tapping equity in their homes, the securitization market is active, and demand could change if rates drop significantly Q: Big picture question. On the potential for GSEs coming out of conservatorship and the new administration. Just how do you view the probability of that happening? And impacts the EFC as you'd see it. And is there any way for you to position and I'm on that maybe occurring over the next few years?

A: Mark Tecotzky and Larry Penn discussed that the probability of GSE reform is low, with potential short-term volatility, and private capital's role in the housing market is increasing