Ellington Financial Inc. (NYSE:EFC) Q3 2023 Results Conference Call November 8, 2023 11:00 AM ET

Company Participants

Larry Penn - Chief Executive Officer

Mark Tecotzky - Co-Chief Investment Officer

JR Herlihy - Chief Financial Officer

Conference Call Participants

Crispin Love - Piper Sandler

Trevor Cranston - JMP Securities

Eric Hagen - BTIG

Matthew Howlett - B. Riley

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial’sT hird Quarter 2023 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 following the presentation [Operator Instructions]. It is now my pleasure to turn the call over to [Aladdin Chile]. Please begin.

Unidentified Company Representative

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 Part 1 Item 1A of our annual report on Form 10-K and Part 2 Item 1A of our quarterly report on Form 10-Q for the quarter ended June 30, 2023, 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 obligations 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 third quarter earnings conference call presentation is available on our Web site, 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 backs of the presentation.

With that, I will now turn the call over to Larry.

Larry Penn

Thanks, [Aladdin], 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 third quarter, we have reported net income of $0.10 per share and adjusted distributable earnings of $0.33 per share. Steady performance from our credit portfolio, along with significant net gains on our interest rate hedges exceeded net losses in agency MBS, and we delivered a positive economic return in an extremely volatile market. On this Slide 3, you can see the strong contribution from the credit portfolio, which was led by positive performance from our residential transition, non-QM and commercial mortgage bridge loan businesses and our credit risk transfer securities. Our agency strategy, on the other hand, contributed a loss of $0.16 per share for the third quarter in what was arguably the most challenging environment for agency RMBS investors we've seen since March of 2020. During the quarter, long term interest rates rose sharply and volatility spiked as the market priced in a higher-for-longer interest rate environment and the uncertainty related to a possible gov shutdown. While we did have a significant loss in our agency strategy, our interest rate hedging strategy which included aggressive duration rebalancing throughout the quarter and a positive contribution from our short TBA positions helped prevent further losses. We had entered the third quarter with high levels of liquidity and additional borrowing capacity. And because of that, we were well-positioned to capitalize on the investment opportunities that the market volatility presented. With agency yield spreads near the historical wides, we took advantage by adding portfolio and we also captured attractive yield spreads by expanding our non-QM residential transition loan and reverse proprietary mortgage loan portfolios during the quarter.