Ellington Financial Inc (EFC) Q4 2024 Earnings Call Highlights: Strong Portfolio Growth and ...

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Fri, Feb 28, 2025, 11:13 PM 4 min read

Net Income: $0.25 per share for Q4 2024.
Adjusted Distributable Earnings (ADE): Increased by $0.05 to $0.45 per share, covering the quarterly dividend of $0.39 per share.
Credit Portfolio Growth: Increased by 39% in Q4 2024.
Loan Portfolio: Adjusted loan credit portfolio increased by 5% to $3.42 billion.
Longbridge Segment: Originations increased by 18% sequentially.
Book Value Per Share: $152 at year-end.
Total Economic Return: 1.8% for Q4 2024, non-annualized.
Recourse Debt-to-Equity Ratio: Unchanged at 1.8:1.
Total Debt-to-Equity Ratio: Increased to 8.8:1 from 8.3:1.
Cash and Unencumbered Assets: Increased to approximately $810 million, over 50% of total equity.

Warning! GuruFocus has detected 5 Warning Signs with EFC.

Release Date: February 28, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Ellington Financial Inc (NYSE:EFC) reported a strong fourth quarter with net income of $0.25 per share and adjusted distributable earnings of $0.45 per share, comfortably covering the quarterly dividend of $0.39 per share.
The company achieved significant growth in its loan portfolios, with a combined 39% increase in closed-end second lien, HELOC, Prop Reverse, and commercial mortgage bridge loan portfolios.
EFC successfully executed four securitization transactions across three different product lines, capitalizing on tight securitization spreads and securing non-mark-to-market long-term financing.
The Longbridge Reverse Mortgage segment performed excellently, contributing significantly to the company's earnings with increased origination volumes and improved margins.
EFC's strategic use of securitizations and strong relationships with originators have been key to its portfolio growth and earnings, providing a competitive advantage in the market.

Negative Points

The company experienced modest net losses on non-QM loans and retained tranches, commercial mortgage loans, and consumer loans due to a slight decline in credit performance.
There was negative operating income on REO workouts, which have been more protracted and expensive than initially anticipated.
EFC faced an uptick in residential loan delinquencies, particularly in the non-QM portfolio, attributed to higher loan sizes and mortgage rates.
The Agency strategy generated a modest loss for the quarter due to rising interest rates and volatility, impacting the performance of Agency RMBS.
The company noted that some parts of the country are experiencing a significant increase in home insurance premiums, contributing to higher delinquency rates.

Q & A Highlights

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, Co-Chief Investment Officer: Our strategy for originator stakes dates back to 2014, focusing on platforms where we align on credit quality and underwriting. We aim for synergistic relationships, helping lower warehousing costs and providing consistent pricing. Despite higher delinquencies, we still find value in the non-QM market, adjusting our loss expectations and pricing accordingly.

Q: On Longbridge, can you help contextualize the ranges of earnings that you would expect where 4Q would sit where 3Q sits in that as we think about the go-forward earnings power of the business? A: J. R. Herlihy, Chief Financial Officer: We previously mentioned a $0.09 per share per quarter as a longer-term run rate target for Longbridge. While Q4 exceeded this, we anticipate maintaining around that $0.09 run rate, which aligns with our capital allocation and dividend coverage.

Q: Can you share why the Agency portfolio maybe isn't more attractive to you at these valuations? And if you had more incremental capital, what would you potentially do with that? A: Mark Tecotzky, Co-Chief Investment Officer: We've focused on credit and vertical integration, which offers a competitive advantage. While the Agency sector is attractive, we believe permanent capital is better utilized in credit, allowing us to control underwriting and partner with originators. We retain the ability to be opportunistic in the Agency market when dislocations occur.

Q: On the net interest income, is the current quarter a good run rate to think about going forward? A: J. R. Herlihy, Chief Financial Officer: Yes, the improvements in liability costs are ongoing, and the current quarter's net interest income is a good run rate. We've seen a decline in the weighted average cost of funds, and the portfolio composition supports this level.

Q: Can you dig deeper into closed-end seconds, HELOCs, and the opportunity there? Is that growth mostly through acquisitions, and how could demand change if rates come down? A: Mark Tecotzky, Co-Chief Investment Officer: We've focused on second liens with low note rate first liens, offering a smart way to tap home equity. The opportunity is significant due to low first lien rates and high borrower equity. If rates drop, refinancing might become more attractive, but current conditions support strong demand for second liens.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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