Ellington Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 delivered stable earnings and book value: GAAP diluted EPS $0.35, ADE $0.39 covered the $0.39 quarterly dividend; book value per share was $13.44 (down $0.08 QoQ) with low recourse leverage at 1.7x.
• Versus estimates: EPS was essentially in line at $0.39 vs $0.391 consensus, while “Revenue” (S&P definition) missed $83.84M vs $106.04M consensus; five EPS and revenue estimates suggest modest coverage breadth. Expect estimate fine‑tuning toward mix/definition clarity for mortgage REITs [Functions.GetEstimates]*.
• Portfolio execution remained a strength: five securitizations priced pre‑volatility, rotation out of Agency/non‑Agency RMBS/HELOCs/CLO notes at tight spreads, and two new financing facilities added. Credit hedges generated April profits that more than offset long‑side marks, leaving April economic return positive per management.
• Longbridge posted a small GAAP loss on hedges despite stronger origination margins in proprietary reverse; ADE contribution remained positive and management reaffirmed a ~$0.09/share longer‑term ADE run‑rate for Longbridge, contingent on securitization cadence resuming shortly.
• Potential catalysts: dividend coverage durability, continued securitization momentum, progress on commercial workouts (expect just one significant detractor by end‑Q2), and evidence that April’s positive return extended into Q2.

What Went Well and What Went Wrong

• What Went Well

  • Strong capital markets execution: priced five securitizations early in the quarter, locking in long‑term, non‑mark‑to‑market financing and expanding high‑yielding retained tranches; also added two loan financing facilities and monetized gains via opportunistic asset sales at tight spreads.
  • Hedging and liquidity posture: management “built up credit hedges considerably since mid‑2024,” and “profits on those credit hedges in April 2025 more than offset any valuation declines,” with a positive April economic return estimated; recourse leverage held at 1.7x.
  • Agency/MSR and non‑QM ecosystems: Agency RMBS NIM rose to 2.46% (from 2.22%); MSRs delivered positive carry and mark‑to‑market gains; non‑QM origination partners stayed profitable and securitization execution remained attractive (priced again late April after spreads recovered).

• What Went Wrong

  • Revenue shortfall vs consensus and lower credit NIM: S&P “Revenue” missed ($83.84M actual vs $106.04M est), and credit portfolio NIM compressed to 2.90% from 3.02% on higher cost of funds despite higher asset yields [Functions.GetEstimates]*.
  • Mark‑to‑market drags and pockets of weakness: realized/unrealized losses in consumer loans, CLOs, non‑QM and RTL; net losses on residential/commercial REO; Agency also saw March spread widening after tightening earlier in the quarter.
  • Longbridge GAAP loss on hedges: despite higher proprietary reverse origination margins and gains on HMBS MSR Equivalent, interest‑rate hedge losses led to a $(1.0)M segment GAAP loss in Q1.

Transcript

Operator (participant)

Please stand by, your program is about to begin. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2025 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 open for your questions following the presentation. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing star and two. Lastly, if you should require any operator assistance, please press star and zero. It is now my pleasure to turn the call over to Alaael-Deen Shelleh. You may begin.

Alaael-Deen Shilleh (Associate General Counsel and Secretary)

Thank you. Before we begin, I'd like to remind everyone that this conference call may include forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our annual and quarterly reports filed with the SEC. Actual results may differ materially from these statements, so they should not be considered to be predictions of future events. The company undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Financial, Mark Tecotzky, Co-Chief Investment Officer, and JR Herlihy, Chief Financial Officer. Our First Quarter Earnings Conference call presentation is available on our website, ellingtonfinancial.com.

Today's call will track that presentation, and all statements and references to figures are qualified by the important notice and end notes in the back of the presentation. With that, I'll hand it over to Larry.

Larry Penn (CEO)

Thanks, Alaael-Deen Good morning, everyone, and thank you for joining us today. I'll begin on slide three of the presentation. Ellington Financial started the year with a solid first quarter, driven by continued strength in our diversified residential and commercial mortgage loan portfolios, in combination with continued excellent deal executions in our securitization platform. For the quarter, we generated GAAP net income of $0.35 per share, and our adjusted distributable earnings at $0.39 per share continue to cover our dividends. Our loan businesses remain a dependable source of growth and profitability, and we again benefited from strong ADE contributions from our loan originator affiliates, as well as net gains on our forward MSR portfolio. Our reverse mortgage platform, Longbridge Financial, more than covered its proportional share of ADE to support the dividend, despite lower seasonal origination volumes for HECM.

However, with interest rates sharply lower over the quarter, losses on interest rate hedges led to slightly negative GAAP net income overall for the quarter at our Longbridge segment. I'll note that while seasonality caused HECM origination volumes at Longbridge to decline sequentially, prop reverse origination volumes were stable, and their origination margins actually improved, providing further evidence of the growing demand for a prop reverse product. In fact, in April, loan submissions in prop were considerably higher year over year. Meanwhile, our non-QM originator affiliates, including LendSure and American Heritage, continued not only to provide us with excellent flow of product, but their strong profitability also continued to contribute nicely to our bottom line.

Extending the strong momentum we built in our securitization platform last year, we priced five new securitization deals in the first quarter, taking advantage of tight spreads to secure long-term non-mark to market financing at attractive terms. These transactions also enabled us to expand our portfolio of high-yielding retained tranches to support earnings growth, and they added deal call rights to our portfolio, enhancing portfolio optionality. Thanks to the strong historical credit performance of our EFMT shelf, we were able to lock in some extremely favorable debt spreads on our first quarter securitizations. I'm pleased that we completed a high volume of deals in the first quarter while market conditions were still favorable.

In fact, securitization debt spreads widened somewhat late in the quarter and then surged in early April amidst the overall market volatility, and so we refrained from pricing any more securitizations in April until very late in the month when we priced another non-QM securitization after debt spreads had recovered somewhat. Given the diversified array of warehouse lines that we have at our disposal, we can be patient during extended periods of debt spread widening. To that point, we added two more loan financing facilities during the first quarter. We have also made some important tactical moves in the form of outright asset sales. Earlier in the first quarter, we sold a wide variety of credit-sensitive securities before yield spreads widened to lock in gains, free up capital, and enhance liquidity.

In early April, we sold most of our HELOC position, crystallizing profits on those investments while freeing up capital to reinvest in the more attractive opportunities we are seeing in other sectors. Meanwhile, we closed on yet another mortgage originator joint venture investment in the first quarter, and as usual, this included a forward flow agreement with that originator. We have two more such investments in the term sheet stage now. We remain focused on establishing these joint ventures to secure consistent access to high-quality loans at attractive pricing and on a predictable timeline. Finally, we made notable progress on a handful of commercial mortgage workouts, including one significant resolution in March and another one scheduled to close today, eliminating negative carry assets and freeing up capital for redeployment.

We expect that by the end of the second quarter, we will have only one significant remaining workout asset detracting from our adjusted distributable earnings. At the bottom of slide three, you can see that our recourse leverage remained low at just 1.7 to 1. That's even slightly lower than our year-end level of 1.8 to 1, with our significant securitization activity and opportunistic asset sales in the first quarter more than offsetting another billion-dollar-plus quarter of loan purchases. I'll make a few observations on our leverage. First, whenever we complete a securitization, we convert a sizable amount of borrowings from recourse to non-recourse, thus lowering our recourse leverage. Second, these securitizations also convert loan assets into retained tranches, which carry much higher yields and therefore require little or no leverage to generate attractive returns on equity.

Third, in the wake of the March and April volatility, we continue to see better investment opportunities, so it's great to have made more room to add leverage from here. Fourth, if we're going to increase our recourse leverage significantly, we prefer to do it by issuing long-term unsecured debt. However, debt spreads are currently too wide in that market relative to asset spreads for us to be issuing unsecured debt. When that relationship between debt spreads and asset spreads normalizes, we'll consider issuing unsecured debt again. With that, I'll turn the call over to JR to walk through our financial results in more detail. JR?

JR Herlihy (CFO)

Thanks, Larry. Good morning, everyone. For the first quarter, we reported GAAP net income of $0.35 per common share on a fully mark to market basis and ADE of $0.39 per share. On slide five of the deck, you can see the income breakdown by strategy: $0.58 per share from credit, $0.05 per share from agency, and -$0.01 per share from Longbridge. On slide six, you can see the ADE breakdown by segment: $0.32 per share from the investment portfolio segment net of corporate expenses and $0.07 per share from the Longbridge segment.

Positive performance in the credit portfolio was driven by sequentially higher net interest income, net gains from forward MSR-related investments, commercial mortgage loans, closed-end second lien loans, non-QM retained tranches, and ABS, and net gains on our loan originator equity investments, partially offsetting higher net interest income where net realized and unrealized losses on consumer loans, CLOs, non-QM loans, and residential transition loans, as well as losses on residential and commercial REO. Meanwhile, thanks to our coupon and hedge positioning, our agency portfolio generated excellent returns for the quarter, even as agency RMBS slightly underperformed benchmarks market-wide. Turning now to Longbridge.

While that segment reported a slight net loss overall due to interest rate hedges, with rates sharply lower during the quarter, Longbridge had positive contributions from both servicing, driven by a net gain on the HMBS MSR, and from originations, driven by higher origination margins for prop reverse and steady margins for HECM, despite seasonally lower origination volumes in HECM quarter over quarter. Our results for the quarter also reflected gains on the fixed receiver interest rate swaps used to hedge the fixed payments on our unsecured notes and preferred equity, with interest rates lower during the quarter. These gains exceeded net losses on our unsecured notes, which included a mark to market loss on our unsecured notes driven by lower interest rates, as well as a realized loss related to the par redemption of our six and three-quarter notes that we had carried at a slight discount to par.

Turning now to portfolio changes during the quarter. Slide seven shows a 4% decrease for our adjusted long credit portfolio to $3.3 billion. The decline was due to the impact of securitizations completed during the quarter, as well as a smaller residential transitional loan portfolio where principal paydowns exceeded net new purchases and net sales of CLOs. Offsetting a portion of the decline were larger commercial mortgage bridge and non-QM loan portfolios, both driven by net purchases. On slide eight, you can see that our total long agency RMBS portfolio declined by another 14% to $256 million by design as we continued to sell down that portfolio and rotate the capital into higher yielding opportunities. Slide nine illustrates that our Longbridge portfolio increased by 31% sequentially to $549 million, driven by proprietary reverse mortgage loan originations. Please next turn to slide 10 for a summary of our borrowings.

At March 31st, the total weighted average borrowing rate on recourse borrowings decreased by 12 basis points to 6.09%. Quarter over quarter, the net interest margin on our credit portfolio decreased by 12 basis points, while the NIM on agency increased by 24 basis points. Our recourse debt to equity ratio declined to 1.7 to 1 from 1.8 to 1 quarter over quarter, and including consolidated securitizations, our overall debt to equity ratio decreased slightly to 8.7 to 1 from 8.8 to 1. During the quarter, we paid off one of the tranches of unsecured notes that we brought over from Arlington upon their maturity in March. At March 31st, combined cash and unencumbered assets increased to approximately $853 million, or more than 50% of our total equity. Book value per common share stood at $13.44, and total economic return for the first quarter was 9.5% annualized.

With that, I'll pass it over to Marc.

Mark Tecotzky (Co-CIO)

Thanks, JR. This was a strong quarter for EFC. We covered our dividends with ADE, made substantial progress in resolving our larger delinquent commercial mortgage loans, and had broad-based contributions to earnings from our diversified investment portfolio. One highlight for the quarter was our portfolio of agency mortgage servicing rights, where we not only had substantial positive carry but a substantial mark to market gain as well. These MSRs are backed by very low-rate Fannie Freddie loans. We acquired these MSRs through the Arlington acquisition, and they remain one of the few holdings of theirs that we kept in our portfolio. On prior calls, we have spoken about the mortgage lock-in effect, putting a wet blanket on prepayments and creating a huge opportunity in second liens and HELOCs for us.

Another consequence of that lock-in effect is that values of servicing have gone up as each month's prepayment data confirms very slow speeds on low-coupon MBS. In addition, there has been a trend in the mortgage space to put an increasingly higher value on the customer relationships that come with owning servicing rights, particularly customers with high FICOs. That is part of the driver behind Rocket's recently announced acquisition of Mr. Cooper. While we do not expect this quarter's mark to market gain to be repeated, we do expect an ongoing, meaningful contribution to our ADE from this MSR portfolio. We also had a great quarter in our non-QM loan business. For our non-QM origination partners in which we had ownership stakes, their strong profitability in 2024 has continued into 2025. We continue to expand our footprint in non-QM, and we remain an active deal sponsor.

We waited out the mid-market April volatility and priced a non-QM deal last week and were rewarded with great execution. The securitization process creates high-yielding investments for the EFC portfolio, as well as giving us a growing portfolio of call options that potentially provide us access to high-note rate season loans in the future. In recent months, we have been tightening our underwriting guidelines, preferring to focus on higher FICO borrowers and loans with a more extensive underwrite. That view is heavily informed by Ellington's internal research, and as we see the market now pricing in a greater probability of a slowdown in the U.S. economy, that scenario should favor a more conservative positioning. We also had another strong quarter from non-agency RMBS, both in terms of earnings contribution and portfolio growth.

With the growing securitization market in non-QM, Jumbo, and second liens, we are finding a rich opportunity set in the market and have been deploying capital accordingly. Last year, we identified as a growth area for us equity release products offered to high FICO agency borrowers with low fixed-rate mortgages. Since then, we have been an active buyer and securitizer of second lien loans. We had strong contributions from those investments in the first quarter and have also been co-sponsoring third-party securitizations of closed-end seconds that create retained tranches for us to hold. We expect those retained tranches to provide very high yields and generate outsized ADE. We also made substantial progress on a handful of delinquent commercial mortgage loans in our portfolio. One resolved in the first quarter, one is scheduled to resolve today, and one is in the middle of CapEx and lease-up.

We continue to originate commercial bridge loans and are seeing a stronger set of sponsors looking to partner with us. The relationship and expertise at our origination affiliate Sheridan are a big benefit to us here. Similar to residential, we have become progressively more restrictive in our underwriting guidelines, but our pricing power remains strong, and we continue to see a high volume of deal flow. We also had a very strong quarter in our agency portfolio as we were well-positioned to capture both positive carry and mark to market gains over our hedges. Now let's talk about April. That was one of the most volatile months we have seen in a long time. While results are still preliminary, we estimate that it was a positive return month for EFC.

The tariff uncertainty is challenging many business models and causing a huge amount of volatility in both high-yield bonds and bank loans. Amidst the market weakness, low LTV real estate loans with high FICO borrowers in the case of residential and high-quality sponsors in the case of commercial have been a safe, high-yielding place to invest so far as they appear to be much better insulated from tariff uncertainty than many parts of the corporate market. Now look on slide 19. You can see we continue to increase our credit hedges in Q1. Those are primarily corporate-focused, and they certainly did their job helping to protect book value in April. Going forward, we are closely watching credit performance across many market sectors for signs of weakness. If we need to, if need be, we can adjust our credit hedges and/or pivot and rotate between sectors.

In addition, we want to keep pushing our advantage of vertical integration, both to drive value creation in our portfolio origination companies and drive investment creation for EFC's portfolio. In addition, we are seeing the value of many of the technology initiatives we developed last year coming to bear. We are actively developing more proprietary tools to support loan origination. Now back to Larry.

Larry Penn (CEO)

Thank you, Mark. I'm very pleased with how we've started out the year. In the first quarter, we continued to grow our residential and commercial loan businesses, building on the strength of our vertically integrated platform, opportunistically accessing securitization markets, and maintaining dividend coverage. Our investment teams executed skillfully in the face of growing macro headwinds, generating solid returns, and executing key tactical and strategic maneuvers such as asset sales, securitizations, and hedging adjustments. As a result, we were positioned really well coming into the second quarter. The current high levels of volatility are recharging the opportunity set and creating compelling trading opportunities. This is an environment that we believe is well-suited to our core strengths. Our short-duration loan portfolios continue to steadily return principal, enabling us to redeploy capital at higher yields.

As during previous periods of market stress, our dynamic hedging strategies, diversified portfolio, broad financing base, and low leverage are all helping us protect book value. To that point, please turn to slide 19. As Mark mentioned, we have built up our credit hedges considerably since mid-2024, so we were able to amass a significant portfolio of credit hedges when spreads were much tighter than they are now. Even though our assets are mortgage-focused, we mostly use derivatives on corporate bonds, especially high-yield corporate bonds, to hedge credit risk because of their liquidity and their robust protection in big market tail events like what we saw during COVID. We also opportunistically use CMBX to hedge. Those are credit default swaps on commercial mortgage-backed securities.

On this slide, you can see that at quarter end, our corporate credit hedges alone represented an estimated short position of over $450 million of high-yield corporate bonds. For context, that figure one year prior was only about $120 million. In April, those credit hedges did their job beautifully. They generated huge profits and cash for us when credit spreads blew out earlier in the month. For the full month of April, even with credit spreads staging somewhat of a recovery later on, they still helped offset valuation declines that we saw in the long portfolio. As a result, despite the widespread market weakness in April, we estimate that our economic return was still positive for the month.

In summary, with our strong capital base, ample liquidity, highly diversified portfolio strategy, disciplined leverage, and active hedging, I believe that we are exceptionally well-positioned to take advantage of the recharged opportunity set that we're seeing in this period of heightened market volatility. With that, let's open the floor to Q&A. Operator, please go ahead.

Operator (participant)

Absolutely. At this time, if you would like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and two. We'll take our first question from Crispin Love with Piper Sandler. Please go ahead. Your line is open.

Crispin Love (Senior Research Analyst)

Thank you. Good morning, everyone. Just drilling a little bit deeper on the volatility that you've seen in the past month, setting you up for some attractive trading opportunities. So far, have you been able to deploy a material amount of capital in these types of trades? Also, where are you seeing the best opportunities in addition to the credit hedges that you've called out?

JR Herlihy (CFO)

Hey, Crispin. It's JR. Thanks. Mark, do you want me to start off with the first half of that? Sorry to interrupt you. The first half of the question, and then you can do the second half.

Mark Tecotzky (Co-CIO)

Yeah, absolutely.

JR Herlihy (CFO)

Thanks, Crispin. I would say not material growth in April, but the portfolio has grown net relative to where we were March 31st. I would put the growth in two buckets. Bucket one being continuing to grow loan portfolios, so I think non-QM, closed-end seconds, proprietary reverse, kind of somewhat ordinary course, although we've seen spreads widened and recharging the opportunity set. In bucket two, we're able to pick up securities more opportunistically, and non-agency MBS, for example, has grown in April in that category. We have grown in those areas. Mark, I don't know if you want to talk about more specifically what you like and what you're seeing in this market.

Mark Tecotzky (Co-CIO)

Sure. Yeah. There was, by middle of April, I mean, the volatility was really extreme. To put a perspective on it, we saw quality non-QM deals from good originators with a AAA price at 190 to the curve. Those same deals earlier in the year were 115-120 to the curve, so 70-odd basis points widening. Now, Larry mentioned the deal we did end of April, give you a sense of what the recovery is. We wound up getting 160 in our AAAs. Waiting out sort of the eye of the storm definitely worked to our advantage. By mid-April, when you saw these 190 prints on AAAs, there were people pretty nervous. We were able to buy some loan packages that made sense, even assuming 190 execution at the top part of the capital stack. Also QSIP.

I mentioned to Mark how we're seeing a better, a richer opportunity set in non-agency QSIPs than we had maybe a couple of years ago. Part of that is non-agency securitization market has grown in Jumbos, in non-QM, in seconds. We actively find opportunities in buying securities in that market. A lot of times, there's a pretty healthy new issue concession that we can capture and monetize. Those have probably been the biggest areas.

Crispin Love (Senior Research Analyst)

Great. Appreciate all the color there, JR, Mark. You also called out the resolutions in some of your commercial bridge loans recently. Can you just give a little bit more detail on what those resolutions look like? Were the loans modified? Were they sold? Just curious on those details. The positive impact you would expect to see to ADE from those resolutions on a go-forward basis.

JR Herlihy (CFO)

Sure. Let me think. One was a discounted payoff. One that's scheduled to close today is an REO sale. We have another that goes in active CapEx and lease-up that's a longer horizon. In total, the fair value on those at quarter end were, or excuse me, at year end were in the $50 million-$60 million range. We've resolved by fair value a little less than half of that, so freeing up $20 million-$25 million to reinvest and maybe some financing on that as well. The numbers aren't huge, but they're disproportionate in terms of not just being available to invest in high-yield assets, but also turning off negative carry on the underlying.

Larry Penn (CEO)

Yeah. We just have, as we said, we think by the end of the second quarter, we'll just have one significant one left. That's, I think, in the $30 million-odd, right, in terms of the value of that. And that's great. We really just are going to have some continued negative ADE drag from that. That's a very small, obviously, percentage of our portfolio. I think it's great to have these behind us. I think in retrospect, compared to what a lot of other lenders, especially lenders in the commercial space, have seen, I think we did great in terms of limiting how many problem assets we end up having. I think we're towards the end here a lot sooner than other people. I think it seems to have done a great job.

JR Herlihy (CFO)

Yeah. I would just clarify.

One, an REO sale, it's pretty straightforward. My discounted payoff, it was in a bankruptcy process. It's a little more complicated than that. To give you a flavor of how the resolution happened, yeah, that was an asset.

Larry Penn (CEO)

Just wanted to say one more thing. That bankruptcy asset was an asset that we had inherited from Arlington. Even then, not something that was the result of our underwriting team. I think they've done a great job.

Crispin Love (Senior Research Analyst)

Okay. Great. Thank you. I appreciate you taking my questions.

Larry Penn (CEO)

Thanks.

Operator (participant)

We'll take our next question from Trevor Cranston with Citizens JMP. Please go ahead. Your line is open.

Trevor Cranston (Managing Director)

Okay. Thanks. Mark just mentioned the spread volatility you guys have seen in the securitization market so far in the second quarter. Does that high level of spread volatility have any material impact on your guys' near-term appetite for loan acquisitions, given some level of uncertainty about ultimate securitization execution levels? Can you maybe just provide some color on what loan acquisition activity has been like through the market volatility over the last several weeks? Thanks.

Mark Tecotzky (Co-CIO)

Sure. This is Mark. That's a great question, right, because we think about that all the time. We have choices in these markets to just buy securities that other people make. Sometimes you have to be deal sponsored to get the ones you want. Sometimes you do not. Taking a longer view and doing securitizations yourself and then retaining things that you have had more control over, the underwriting and more control over the guidelines and how the deal is put together. If you want to do the latter, you have to go through a fairly long process, a couple-month process of ramp-up, right, where you are acquiring loans, you are hedging the interest rate risks. We have been diligent about hedging spread widening risk and then executing the deal in the open market. There are pros and cons to both.

When you see heightened volatility, if you do not get a corresponding widening of loans relative to securitization execution, then it looks like that ramp-up risk, you might not be getting fully paid for it. I think our view of the world in April was that when spreads really widened a lot off top of the capital stack, we thought that the securities looked really cheap, a little bit cheaper than the loans. We responded by buying some securities. As you started to get a little bit more consistent pricing on deal execution, loans did not fully tighten to reflect that, then we thought loans looked attractive.

I think one thing about April, which was very interesting and it was materially different than what you saw in kind of the last big stress was maybe March 2020, is that in April, there were people that wanted to sell risk, but there were people that wanted to buy risk. It is not as though the origination market shut down the way it did in COVID, where you were kind of flying blind as to where securitizations would be, and you had to price loans assuming you are just going to hold them in portfolio on repo, which is what we did. In April, there were as many or more buyers, I think, than there were sellers. Deals were getting consistently done. The way they were getting priced, they were getting priced very quickly. There was capital on each side of the market.

I think that definitely gave us a little more confidence in things. I think the first leg, we thought securitizations had lagged. We were a little cheap. We added some securitizations. Through the course of the month, as we saw opportunities to buy loans and you had better transparency and just tighter spreads on securitizations, we thought loans looked attractive relative to the securitizations. Ultimately, we expressed that by pricing of securitization, I guess, last week or a week before in April.

Larry Penn (CEO)

If I could just add one more thing to that, Mark. The velocity, the frequency of our, especially in non-QM securitizations, has increased a lot versus where it was a couple of years ago, for example. Instead of doing one deal a quarter, we are looking at, under normal circumstances, doing at least two deals a quarter, right? That just cuts down the time frames. When we are, if we are buying a loan package, we might be doing a securitization, granted not of those very loans, but of loans that we have held. We might be doing a securitization in that same week, for example, that we are buying a new loan package. You are de-risking one package and then putting on risk in another. If you have this frequent volume of securitizations, that just limits kind of that gestation risk, if you will.

At the same time, as we mentioned, we are doing something that we think not a lot of other people are doing, which is we're using credit hedges to mitigate those spread movements. We've found that they've been extremely effective and correlated with the spreads that we've seen in the securitization markets versus how our hedges have reacted. We think that's working well for us.

Trevor Cranston (Managing Director)

All right. Okay. Very helpful. Thank you, guys.

JR Herlihy (CFO)

Thank you.

Operator (participant)

We'll take our next question from Randy Binner with B. Riley. Please go ahead. Your line is open.

Randy Binner (Managing Director)

Hey. Thanks for taking the question. I think we heard in the prepared remarks that you're in discussions with potential JVs with two originators. Just wondering if you can share kind of timing on that or any size so we might gauge the impact there.

Larry Penn (CEO)

Sure. Yeah. Thanks, Randy. I would say that maybe starting with size, neither of these is a large investment. Under $5 million, I think, in total would be our equity investment. But we have a stable of these types of small investments that have produced loan flow well multiples in excess of what our equity investment is. I think we point those two deals out in term sheet stage, I think we put it, to point out that we are further diversifying our sourcing channels in the same products. Not necessarily that either will be material in size, but just adding to the stable of originator investments that have been so successful for us over the last couple of years. Yeah. And it is a win-win.

I mean, even with the amount of money that we're providing in terms of working operating capital for them, it may not be a big number for us in terms of an investment. But it's very meaningful, especially for an originator that is not so long established, for them to ramp up. A lot of these smaller originators just getting started, they could be originating $40 million a month, something like that, pretty soon after we supply that working capital. If that's supplying us close to $500 million a year alone, it's just a win-win for both parties, right? It jump-starts and turbocharges their growth, gives them they don't have to worry about an outlet for their product. They can even sell to us on a forward basis, which they do all the time.

They can even lock in a sale even if they have not originated the loans yet. There are just lots of advantages going both ways. These are great joint venture arrangements that we have put in over time, and we now have a lot of these. Yeah. I think timing-wise, in the next quarter or two is the expectation.

Randy Binner (Managing Director)

Got it. Got it. Okay. Thank you for that. They're small. I agree on your comments. One more, if I could, just something that Mark said stood out to me in that kind of the increased value on consumer relationships and how Rocket Coop is an example of that. I guess the question I have is that is that just a reflection of this lock-in effect where the mortgage rates are higher now than they were before? Is this more of a permanent shift in your view?

Larry Penn (CEO)

A lot of cross-selling opportunities. Yeah. Go ahead, Mark.

Mark Tecotzky (Co-CIO)

I think it's something bigger than that because you had Rocket Coop, but before that, you had Rocket Redfin, right? It's this notion that let's think about home buying as a process. There are services rendered, and there are fees paid along the way. First, you have a real estate agent. Then you find a home. Then you buy a home. With that, there's real estate commission. There's title insurance, right? There's mortgage insurance. Then you get a loan. Then you're in that loan for three years. Maybe rates drop, and you refinance the loan. Your family needs change. Maybe you sell that house and get another house. I think there's a notion growing among the really scale players that if I establish a relationship with a customer now and I maintain that relationship over that customer's life, there might be four or five loans.

There might be three houses. There is a lot of fees and commissions and things paid along the way, not to mention the cross-sell of second liens or consumer loans. It is not that different than what you see in other parts of the economy where the scale players have gained market share. You certainly see it in the national builders. If you start thinking about the world that way, then who are the clients that you think you want to have the strongest relationships with? It is going to be clients that have a history of paying their bills as reflected in their FICO score. It is clients that have demonstrated an ability to save, as demonstrated by showing up with a 20%,25% down payment to buy a home. I think that is sort of what is going on.

I mean, if you look at it, it's not that different from American Express buying Resy, right? Okay. You're going to make restaurant reservations, and maybe you're going to make hotel plans. You're all going to put everything on your American Express card. That way of thinking is in the mortgage space now.

Randy Binner (Managing Director)

All right. That's really interesting. Appreciate the comments.

Mark Tecotzky (Co-CIO)

Sure.

Operator (participant)

We'll take our next question from Bose George with KBW. Please go ahead. Your line is open.

Franklin Bettie (Analyst)

Hey, guys. This is actually Franklin Bettie on for Bose. Just to start, last quarter, you mentioned $0.09 earnings for the long range segment for run rate. Is that still achievable given current trends?

JR Herlihy (CFO)

Yeah. Yeah. We think it is. They were $0.07 of ADE in Q1, which as a percentage of their capital usage covers $0.39. But we have said kind of consistently $0.09 is the longer-term run rate as we see it. Their volumes were down seasonally. They originated $420 million combined Tecum and Prop in Q4, down to $340 million in Q1, I think largely seasonally driven. Margins held up, and they were still profitable within originations and servicing, setting aside the interest rate hedge. With April's selling season and April, excuse me, spring selling season and April looking good from a prop reverse submission perspective, as Larry mentioned in his prepared remarks, I think we have not changed the outlook for those reasons.

Larry Penn (CEO)

Also, it is going to be a little lumpy based upon securitization activity at Longbridge.

We did not do a deal in the first quarter, but I think we expect to do one shortly. Every time when we do the deals, that's when they ring the cash register in terms of the ADE on origination profits on prop. With that prop reverse deal, securitization deal expected to come soon, and you did not have one in the first quarter, I think that explains a lot of it as well.

Franklin Bettie (Analyst)

Great. Thank you. You noted some sales of CLOs during the quarter. Can you just talk about current performance and dynamics in that market? Thanks.

JR Herlihy (CFO)

Yeah. I would say CLOs for EFC have been a small part of the portfolio. It's ebbed and flowed kind of opportunistically across the last several years, frankly. It is more of a complementary business to the core businesses, loan businesses, than a core business on its own. A lot of the negative performance for CLOs came from spread widening, particularly in CLO equity, which is not necessarily reflective of underlying credit issues or impairments, but more reflective of wider credit spreads marketwide. I would just highlight that for EFC, the invested amount of CLOs is a pretty small amount. I mean, in our earnings release, you can see that we own CLOs of $28 million at March 31, down from $61 million at year-end. That compares to a total adjusted long credit portfolio of $3.3 billion.

Franklin Bettie (Analyst)

1%.

JR Herlihy (CFO)

1%. Less than 1%. Yeah. Exactly.

Franklin Bettie (Analyst)

Great. Thank you.

JR Herlihy (CFO)

Yeah. Thank you.

Operator (participant)

That was our final question today. We thank you for participating in the Ellington Financial First Quarter 2025 earnings conference call. You may disconnect your line at this time and have a wonderful day.