Ellington Financial(US:EFC)2022-05-06 21:46Financial Data and Key Metrics Changes - For Q1 2022, Ellington Financial reported a net loss of $0.17 per share on a fully mark-to-market basis and core earnings of $0.40 per share, compared to net income of $0.61 per share and core earnings of $0.44 per share in the prior quarter [15][29] - The book value per common share was $17.74 at March 31, down 3.5% from $18.39 per share at year-end [29] - The economic return for the first quarter was around negative 1.1% [29] Business Line Data and Key Metrics Changes - The total long credit portfolio grew by 11% sequentially to $2.3 billion at March 31, with significant growth in non-QM residential transition and commercial mortgage loan origination businesses [22] - The capital allocation to credit investments increased to 85% as of March 31, up from 79% year-over-year, while agency allocation decreased to 15% [16] - The Credit strategy generated total gross income of $0.28 per share, while the Agency strategy generated a gross loss of $0.34 per share during the first quarter [17] Market Data and Key Metrics Changes - Interest rates rose rapidly, and the yield curve flattened significantly, with the two-year note moving to 160 basis points, its highest quarterly move since 1984 [31] - The spread between two years and 30 years flattened by more than one percentage point to just 12 basis points at quarter end [31] - High yield spreads widened by 70 basis points, impacting the pricing of various mortgage-backed securities [32] Company Strategy and Development Direction - The company plans to continue increasing its allocation to credit investments, expecting to maintain a higher allocation based on the growth of loan origination businesses [16] - The company is focused on maintaining a diversified portfolio and low leverage while dynamically rebalancing hedges in response to market conditions [53] - The company sees opportunities to grow market share in the non-QM sector as competition among originators decreases [47][80] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the investment opportunities arising from the current market volatility, indicating that the yields and spreads are the best seen since the market recovered from COVID [52] - The company is cautious about the potential impact of rising interest rates on loan origination volumes but believes it can capitalize on market share opportunities [56] - Management noted that while the agency strategy suffered losses, the yield spread widening has improved future opportunities in that sector [42] Other Important Information - The company completed a $210 million five-year senior unsecured note offering, which is expected to be accretive to earnings [12][13] - The debt-to-equity ratio adjusted for unsettled purchases and sales increased to 3.2:1 as of March 31, from 2.8:1 at year-end [26] - The company raised $38.5 million of common equity through its ATM program during the quarter [27] Q&A Session Summary Question: How are new reinvestment yields compared to the cost of funds? - Management expects net interest margins to widen due to rising yields and wider spreads, with ROEs on new investments seen in the teens [59][61] Question: Update on book value through April? - Management refrained from providing specific numbers but acknowledged mark-to-market declines since quarter-end [63] Question: How spreads could respond as newer collateral gets securitized in non-QM? - Management indicated that tighter securitization spreads are expected as higher note rate non-QM loans are securitized [66] Question: Size of excess liquidity to take advantage of wider spreads? - The company has about $1 billion in cash and unencumbered assets, indicating significant additional borrowing capacity [68][70] Question: How agency versus credit mix might trend? - Management expects the current 85-15 split to continue, with potential for agency allocation to decrease if spreads recover [71][73] Question: Lower earnings guide for LendSure? - Management explained that lower volumes and gain on sale margins are expected due to higher mortgage rates and lower loan prices [75][78] Question: Concerns about the residential transition market slowing? - Management reported that the market remains strong, with quick sales and manageable renovation costs despite supply chain issues [84][88] Question: Opportunities to acquire other companies in the mortgage sector? - Management indicated that while there may be opportunities, the focus is currently on growing existing companies and potentially acquiring teams or personnel [89]