Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Third Quarter 2019 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 questions following the presentation. [Operator Instructions] It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir you may begin.

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 Item 1A of our Annual Report on Form 10-K filed on March 14 2019 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 obligation to update or revise any forward-looking statements whether as a result of new information future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and JR Herlihy, our Chief Financial Officer. As described in our earnings press release our third quarter earnings conference call presentation is available on our website 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 back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. As always thank you for your time and interest in Ellington Financial. On our call today, I'll begin with an overview of the third quarter. Next JR will summarize our financial results and then Mark will discuss our portfolio positioning and performance, recent market trends, and our investment outlook going forward. Finally, I will provide some closing comments and then we'll open the floor to questions. Ellington Financial had another strong quarter led by our proprietary loan businesses most notably non-QM loans small balance commercial mortgage loans and residential transition mortgage loans. We also benefited from strong performance in our Agency portfolio where our focus on high quality specified pools and disciplined interest rate hedging generated excellent results despite a challenging environment for Agency RMBS during the quarter that included wide swings in long-term interest rates increasing prepayment rates and an inverted yield curve. Our common equity raise in mid-July was well timed as it provided us with dry powder to capitalize on some great buying opportunities that emerged from the market volatility in August in addition to providing capital for our ongoing high yielding loan pipelines. We opportunistically added a significant amount of specified pools at wide yield spreads following the broad market sell-off in August, but of course it was our credit portfolio that absorbed the majority of the additional capital with the largest growth in our non-QM and residential transition loan strategies, where we are seeing highly accretive return on equity. We fully deployed the capital from our July common equity raise in only about seven weeks. So we struck a good balance between getting invested quickly to avoid a material drag on earnings and being patient enough that we were able to take advantage of the excellent buying opportunities that…

Thanks JR. EFC had a solid quarter with broad-based contributions from our diversified Credit and Agency portfolios. We continue to see strong underlying credit performance in our residential, commercial and consumer loan portfolios. Our strategic partnerships continue to deliver high-yielding assets, which increased core earnings. In the market where low yields have pushed many credit sectors to the tightest spreads of the year, EFC's proprietary flow channels provided a consistent supply of loans. Having our own sources of loans also allows us to maintain consistent underwriting discipline to keep both credit quality and yields high. Lending standards typically erode several years into a credit cycle when competition for assets is fierce as it is today. The strategic relationships that we have built with our origination and sourcing partners is one of the most important tools to help ensure strong credit quality. This quarter our loan portfolios continue to grow as our strategic partners leverage Ellington's analytic firepower and credit expertise to grow their businesses. As we've said in the past, we believe that these relationships are crucial to protecting core earnings and creating franchise value for EFC. While at EFC we don't make directional interest rate bets, many of our strategies are still impacted by the Fed policies and general market conditions. The substantial drop in mortgage rates has improved housing affordability and supported home prices and thereby home equity, which in turn has helped to support the strong credit performance in our non-QM and residential transition loan strategies. Additionally, lower rates have helped to increase our origination volumes and in fact LendSure had its biggest origination month ever in October at around 60 million in loans closed. We also priced our second non-QM deal of the year this week, which is accretive with robust investor demand. Our repo borrowing…

Thanks, Mark. I'm very pleased with Ellington Financial's performance through the first nine months of 2019. Net income has been strong, book value has been stable. And we've steadily grown core earnings each quarter, creating a nice cushion to our dividend. While it's true that asset yields in many sectors have compressed this year, we've also been able to negotiate very significant rate and spread compression on many of our financing lines. Some of these financing improvements we achieved just this past quarter, so that should provide another tailwind to our net income and core earnings going forward. Moreover, with our diversified array of strategies and businesses, we always strive to rotate capital out of sectors that we think have run up too far and into sectors where we see the best opportunities. Also with some of our loan pipelines, we can dynamically adjust our pricing to turn up or down the flow based on our views on relative value, observe changes in loan performance, whether positive or negative, and the needs of our portfolio. I strongly believe that these are important differentiators as we build lasting franchise value for Ellington Financial. In October, after we had fully deployed the capital from our July common equity raise and seeing strong demand from investors in the REIT preferred stock space, we were able to raise additional capital through our inaugural preferred equity raise. Our preferred stock, our net investment grade rating and saw strong participation from both institutional and retail investors. We were pleased with the execution, which priced at a dividend rate that is among the lowest in our sector, and which we believe rightly reflected Ellington Financial's long track record of book value stability, disciplined and dynamic hedging, effective risk management and prudent leverage. The preferred equity raise further…

[Operator Instructions] Your first question is from the line of Trevor Cranston with JMP Securities.

All right, thanks, good morning.

Good morning.

First question, on the resi loan portfolio, we heard from one of your peers the other day that, their view was that pricing for the transitional resi loans had become I guess somewhat less attractive versus the non-QM space. I was curious, if you guys had any thoughts there and commentary on kind of where you are seeing trends in pricing and returns on the various resi loan products?

Hey, Trevor, it's Mark.

Hey Mark.

That's a great question. So when we started buying RPL loans, your fix and flip loans, we had expected that portfolio to have had more significant growth than we've had. And I certainly attribute that to the fact that we do see some underwriting practices in that space, that we consider aggressive. And we don't want to compete with. So, I guess, what I would say, if you're thoughtful about your partners. And you're thoughtful about other aspects of the underwriting we see that as a very attractive sector. But I definitely concur that there are certain lending practices going on in that space that to us, look like they expose the lender to some more significant risk than what you see generically in the non-QM space.

Got you, okay that's helpful. And I guess -- so another question on the non-QM side, we saw in the news, I guess, last week, that one of the larger independent non-QM lenders was being acquired by another company. So I was curious, I know you guys obviously made some strategic investments in origination partners. And we've seen that from some other companies as well. But I was curious if you guys had any bigger picture thoughts on, some of the independent non-QM lenders that are out there. If there is likelihood that they could continue to be acquired going forward., as investors try and kind of lock-up supply of loans. And how that might play into the market in general and the ability to source loans in the future?

Yeah, Trevor, it's Mark again. Yeah, we have seen that. And I think if you go back three years four years ago, when we got started in this space. It wasn't at all clear but volumes were going to be, we made our equity stake before any securitization has gotten done. And so now, you're seeing a consistent securitization market. I think, it does -- it makes non-QM origination a little bit of a more mature business. EFC has -- we have a few equity stakes we made in originators, it's in partnerships that there's an exchange on underwriting guidelines and data and I think it's -- we look for things where it's symbiotic that our resources, our credit expertise, and our ability with data helps a partner grow and it's a partner that's receptive to our partnership. So, I think if more opportunities like that arise, we're certainly interested in it, but we really look for situations where one plus one is three that what we bring to the table coupled with what the originator brings to the table with our involvement makes something better than what they had before. It's not just buying a fully formed originator.

And I'd just add one thing. I think the -- some people put RTL fix and flip in that non-QM category roughly. That market is much more fragmented than what we usually refer to as non-QM, which are the longer term financing or just for borrowers that just for whatever reason don't qualify for Agency. So, I think that market can help but defragment the RTL market, but the non-QM market where we're certainly not looking at -- if you're asking if there is any -- if we're looking at buying any others or anything like that, we're very happy with LendSure. Their volumes have been growing substantially and we -- from an M&A perspective, I mean I don't think there is nothing to talk about there.

Got you. Okay, that's helpful. And then last question from me. Mark you made the comment that you guys have been adding to the CMBS book recently and particularly with the proceeds of the preferred offering. Can you provide any additional color sort of around where you're finding opportunities there either within the CMBS capital stack or within different sectors of the market? Thanks.

We've always been CMBS B piece buyers, right? So, we are comfortable we've bought B pieces and we're certainly comfortable that we have the expertise and the skillset to buy anywhere in the capital stack. But beyond that, I don't think we've been more specific about parsing out sort of the ratings distribution on those investments.

Okay, got it. Thank you. Appreciate the comments.

Your next question is from the line of Crispin Love with Sandler O'Neill.

Hi thanks for taking my questions. I was wondering if you could give an update on how much of the preferred offering has been deployed so far and when you would expect it to be fully deployed? Would you expect it by kind of the end of this year or would it go into next year?

Yeah. So, if you look at the pace that we deployed the July offering, it took us just short of seven weeks and it was a $70 million raise that was 10th week. So, yes, if you project that out that would take us out pretty much almost exactly to year end. I don't want to give too precise an update, but I do want to say that we're -- so far it's going faster than that. So, it's going very well to deployment. It is going faster than the deployment in July. Obviously, with year-end coming, we're certainly hopeful and certain hence that there'll be some additional great opportunities available to deploy that capital even more quickly. But it's going faster and it's going very well.

Okay. And then also the dividend coverage has been really solid this year. I was wondering what your thoughts are regarding the current dividend as it stands now. And then would you in the Board consider a special dividend considering the coverage that we've seen for the last several quarters?

In terms of the special dividends that might be also a little bit of a tax-oriented question. I don't and we have to wait to see sort of as we get closer to the end of the year, whether one would be necessary. I doubt. I'll just say right now, I doubt that one will be necessary from that perspective. So that's not something that we've been discussing. Special dividend in terms of where the dividend is now and we have been comfortably covering it as you noted. So I think what I'll just repeat what I've said before which is without speaking to timing I'll just say that, I do think the next move is up.

All right thanks. That's all my questions.

Your next question is from the line of Eric Hagen with KBW.

Hi guys, good quarter. One more on the dividend, is core earnings a good proxy for your taxable earnings?

It's the best proxy that we have and obviously when you -- with one great exception of course is that, if anything -- if you have a realized gains or losses on capital then that's that obviously in one sense, can also affect taxable income. But the REIT rule is a different as regards capital gains versus ordinary. So yeah I think, if I understand I think the real purpose of the question that I think it's if it is the best proxy certainly that we publish.

Yeah that is the purpose of the question. Thank you. As you guys -- and then another one on the non-QM as you guys have completed these deals what percentage of the deal are you retaining?

It's still at 6% -- Mark?

You're talking about the QM deal

In terms of market size…

Yeah it's mandated by risk retention. Yeah 5% is obviously the risk retention rule. And I think we've typically retained 6% just where yeah I mean -- so and -- that's been in the form of I mean this is all in the prospectus and all that, we sell we retain IOs from the deal. And we retain I think it's the two junior most B pieces.

Yeah what's the unlevered yield on those two junior pieces that you guys hold on to?

So excluding the IOs generally think of those as very high single digits unlevered.

Got it. Helpful. Thank you. On the CLO side, corporate credit in general are you guys seeing any pressure on credit conditions from corporations that might be over-levered?

Yeah so absolutely we are seeing that and I think JR, if you look at our earnings release that was one of the underperforming sectors this past quarter.

Which industries within corporate credit do you feel like are beginning to show signs of cracks or again are just over-levered in general?

It's some -- the interesting thing is that in the markets where our CLOs are it's very idiosyncratic. So it's not even really industry-specific in terms of our portfolio. So I don't have a broader answer for you.

Okay, thanks guys. Appreciate it.

Your final question comes from the line of Tim Hayes with B Riley FBR.

Hey, good afternoon, guys and congrats on a good quarter. My first -- a few of my questions have been answered but just on a couple of line items on the income statement this quarter. Servicing expense and comp expense both a little bit lower than they had been running. Just wondering what drove the decline and how to think about that on a run rate basis?

Sure. Hey, Tim, it's JR. So on comp expense I think we're just updating accruals. If you take as nine months year-to-date and annualize that that's probably the best proxy as opposed to looking kind of just for three months to three months. On servicing expense, so there are a few pieces here. The first is that we shrink even though overall the loan portfolios grew one that had relatively high servicing expense actually declined quarter-to-quarter. So that's part of it. Another part is within small balance commercial, we had a resolution of one asset. So the sort of expense associated with that asset came off the books. We converted another loan to REO. And so the management fee or asset management fee on the REO does not show up in servicing expense whereas it did when it was a loan.

Hey JR can you just explain why the servicing -- why the resolution in the small balance commercial space all that goes into service.

Sure. So we at the beginning of the period we had a loan and we are paying monthly servicing expense on it. And once we resolve the loan, which was actually a positive P&L on the realization bucket, the loan simply comes off the books. So there is no more servicing fee associated with that loan. And then we also within the consumer bucket, one of the portfolios is considered for GAAP the securities rather than loans and as such the associated servicing expenses is showing up net of the waterfall. So and obviously, when we buy a CMBS bonds, their servicing expense within that CMBS but we don't show the servicing expense on our income statement it's netted out of the distributions that we take on the bond but in either event it's showing up the same way in core earnings. So those are -- that was probably a pretty detailed description, I'm happy to take that offline but those were kind of the main drivers of servicing expenses quarter-over-quarter decline.

Yeah, no that's helpful. And I appreciate the granularity. And then I guess you mentioned one of those two factors was an asset moving to REO. And was that the same I guess asset that was sold during the quarter say at $1.2 million of realized gains on REO, just wondering what type of asset that was, what market and if that was you just being opportunistic or if there are any other potential asset sales in the pipeline?

Sure. So I know you've clearly done your homework. So it's different but we did have -- one of the drivers of the strong performance in small balance commercial this quarter which includes loans in REO was the resolution of an REO at a pretty attractive realized gain, so that happened, that's different from what I just described. So we took another asset REO and it's -- we don't give too much detail on individual assets and markets and property types for REO besides saying that in some cases when we're -- so the SBC strategy has originations that at par performers. But we also have NPL acquisitions as part of the portfolio and as one of the potential life mitigation strategies. It's taking REO and then typically selling that REO. So that's kind of the path that we took on one asset is taking into REO and we can hold it. As a REIT we have more flexibility of just holding it if it's generating positive income, positive rental income above whatever carry expenses.

Yeah. And there are going to be times when we take over an REO and the optimal resolution strategy and as JR said, we can be patient is to do some things that could be some capital improvements that could be things to improve occupancy or whatever.

Right

…to improve occupancy but that can -- if things go according to plan there and our first impulse on when we have an REO is not necessarily to be an operator. But if the risk-reward is compelling then we absolutely will take those additional measures to improve the ultimate resolution and that often can lead to a very nice realized P&L in the back-end.

Got it. Yeah that makes sense. Well thanks again for taking my questions and congrats on a great quarter.

Thank you.

Thank you.

Your final question comes from the line of Steve Delaney with JMP Securities.

Good morning, thanks for allowing me a quick follow-up to Trevor's questions. You guys I'm sure probably saw a article on Bloomberg first thing Monday morning about n-QM delinquencies and we've gotten some questions from clients on that. I guess a couple of quick things that -- the author suggested 3% to 5% 30-day delinquencies on the n-QMs on general matter, just curious your reaction to that? Do you think they will in fact -- are you seeing them in that range of that high relative to less than 1% for Agency loans?

I mean it's Mark. Hey Steve.

Hey, Mark.

So we expect non-QM loans are going to have higher delinquency than Agency loans.

Sure.

Definitely, Fannie Freddie, but when we look at outstanding performance out through now you're getting a bigger body of data, right? You've had securitizations for the last you go back to beginning of 2016. We haven't seen a worrisome uptick in delinquencies certainly in our deals we've been -- our deals we've been very pleased with the performance. I do think with any mortgage right as loans season, as loan age, you're going to see higher delinquencies, right? You have a source, you're going to see the dynamic of better borrowers curing and maybe now qualifying for Agency loans and then you're just going to see life events illness, loss of income, divorce. And so as deals factor down, it's not unusual to be expected that delinquency rates will get higher, but if you look at losses in that space relative to origination balances, it's been -- which demonstrates very strong performance so far.

Mark, the rating agencies defined the guidelines for n-QM or securitizations such that it's a tight box and essentially all n-QMs are being created equal or would you say there is variation in quality from some lenders' programs versus others?

So I think the rating agencies have been relatively conservative in the capital structures they're associating with non-QM deals. We look the lot at if you go back and you look at the early days of Alt-As 2003 2004 those loans looked a lot like today's non-QM those deals you were seeing AAAs with 5-odd percent credit enhancement. Today's non-QM deals you're seeing credit enhancement in the 30s. And if you look at how those early Alt-A deals performed the first year-and-a-half or two years they are alive so looking at them say from 2003, 2004 up ending 2006 so really before the housing crisis their delinquencies were very similar to what non-QM deals are now. So I would say that, I would characterize the capital structures from the rating agencies as relatively conservative. Now they have sort of tried and true metrics they look at LTV credit score. And so you certainly see those applied to non-QM capital structure. So if you two deals that look similar in terms of credit score but one might have 5% or 6% higher in LTV you'll certainly see that reflected in the capital structure from the rating agencies in non-QM so they've – they're using their traditional metrics of credit. But I think they're applying them with a lot of conservatism which I think was prudent given that it was a new asset class three years or four years ago and certainly they've gotten unambiguously too aggressive on mortgage capital structures right before the crisis. But I think one thing it's interesting is you've seen a lot of upgrades in that market because that combination of fast prepayment speeds with delevered structures and strong performance.

That's great. That's all very helpful. Thank you for let me hop on at the end. And we look forward to seeing you next week.

And Steve I just want to add that –

Yes Larry.

Two things which is number one no surprise we're very LTV conscious I think probably more than others. And I do think that our performance well what if you see an uptick in the industry I don't think that you can necessarily extrapolate that to us since – certainly not in terms of the losses right? So we are –

Exactly

Yeah. We're very comfortable with where we have our non-QM loans marked and obviously we are fully mark-to-market through the income statement. So we haven't seen any reason at all at this point especially given. I think the types of LTVs that we underwrite to and just what I believe are better underwriting standards than others in the industry to sort of reevaluate our loss projections or anything like that. Our performance has really been excellent.

Okay. Thank you, Larry. Operator: Thank you, ladies and gentlemen, this concludes today conference call. You may now disconnect.