Yahoo Finance Ellington Financial Inc (EFC) (Q1 2024) Earnings Call Transcript Highlights: Navigating Market ...
Net Income: $0.32 per share
Adjusted Distributable Earnings (ADE): $0.28 per share
Credit Strategy Net Income: $0.48 per share
Agency Strategy Net Income: $0.03 per share
Longbridge GAAP Net Income: $0.1 per share
Total Loan Credit Portfolio: Increased by 2% to $2.8 billion
Agency RMBS Portfolio: Decreased by 22% to $663 million
Longbridge Portfolio: Decreased by 20% to $441 million
Book Value Per Common Share: $13.69 at quarter end
Total Economic Return: Positive 2.1% for the first quarter
Release Date: May 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Ellington Financial Inc reported a net income of $0.32 per share and adjusted distributable earnings of $0.28 per share for the first quarter.
The credit strategy was the primary contributor to quarterly results, generating $0.48 per share of net income, driven by strong performance in non-QM and residential transition loan businesses.
Successful completion of the inaugural securitization of proprietary reverse mortgage loans, converting repo financing into non-mark-to-market financing at an attractive cost of funds.
Expansion of the credit portfolio, driven by a larger residential transition loan portfolio and opportunistic corporate CLO purchases.
Strong origination flow from affiliate Sheraton Capital, sourcing a couple of non-performing loans (NPLs) for Ellington Financial in 2024.
Negative Points
Longbridge's adjusted earnings were slightly negative for the quarter, weighing down overall adjusted distributable earnings for Ellington Financial.
Agency strategy contributed only modestly with $0.03 per share as agency MBS lagged the broader rally in credit.
Increase in delinquencies in the residential loan portfolio, driven by higher non-QM delinquencies in line with broader market trends.
Net losses on credit hedges and negative operating income on certain commercial non-performing mortgage loans and REO.
Challenges in the commercial real estate sector, with borrowers becoming more realistic about property valuations, impacting loan origination volumes in previous quarters.
Q & A Highlights
Q: Can you provide more details on the opportunities and financing strategies for closed-end seconds and HELOCs? A: (Mark Tecotzky - Co-Chief Investment Officer) Closed-end seconds and HELOCs are generally sourced from different entities, particularly from borrowers with low-rate agency first-lien mortgages from around 2020 or 2021. Financing options include repo financing and securitization outlets, which offer high note rates and appear to be of high credit quality.
Q: How do you view the opportunity and deployment of capital into CLOs compared to other investments? A: (Laurence Penn - CEO) The investment in secondary CLOs is opportunistic and represents a small part of the portfolio. Although the growth in this area is notable, it is not considered a core, long-term holding but is part of a broader opportunistic strategy.
Q: What is your comfort level with the current dividend, and when do you see normalized earnings aligning with the dividend? A: (Laurence Penn - CEO) The dividend is set at a level that is expected to be stable for some time. Normalized earnings aligning with the dividend is contingent on resolving non-performing loans (NPLs) and real estate owned (REO), which currently drag earnings. Positive contributions from Longbridge in Q2 are expected.
Q: Can you discuss the reluctance of regional banks to engage in residential transition loans (RTL) and how non-bank competition affects yields? A: (Mark Tecotzky - Co-Chief Investment Officer) Regional banks typically lack the specific expertise required for RTL, which involves detailed knowledge of construction costs and timelines. The sector remains competitive, but Ellington Financial has not experienced pressure to relax underwriting standards.
Q: How are you hedged for a "higher for longer" interest rate environment, and do you use credit hedges for portfolios like the bridge and CRE portfolios? A: (Mark Tecotzky - Co-Chief Investment Officer) The company uses a variety of interest rate and credit hedges to mitigate risks. These include hedges against non-QM loans and corporate indices to manage overall macroeconomic risks and spread volatility. The strategy includes being well-positioned to benefit from high-yield opportunities in a higher rate environment.
Q: Could you provide details on the returns and economics of non-QM loan securitizations, including the retained credit tranches? A: (Laurence Penn - CEO and J.R. Herlihy - CFO) Non-QM securitizations are viewed as sales of loans with the purchase of retained tranches, aiming for mid-teen returns. The economics include gains on sale and the valuation of retained tranches, which are conservatively estimated and can significantly contribute to earnings over time.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
