Ellington Financial (EFC) Q2 FY26 earnings call: guidance and Q&A

Can you provide more details on the pending acquisition of a residential servicer, specifically if it includes MSR assets or sub-servicing contracts?

The acquisition is of a small servicer with single-digit billions of servicing rights and some sub-servicing contracts, diversified across loan types. It's not expected to significantly impact MSRs or earnings initially, but the focus is on building out special servicing capabilities to optimize outcomes for delinquent loans. The motivation is to address diminished third-party special servicing capabilities as Ellington's market footprint grows.

“It's a recognition that over the past several years, you know, we used to have a lot of servicing at Rushmore. Rushmore was bought by Mr. Cooper. Now Mr. Cooper is bought by Rocket. We used to have servicing some other platforms that have been absorbed. It's just a recognition that as our footprint in the market grows and the available third party special servicing capabilities have been diminished, we think there's a real need for high quality touch servicing and we've seen the benefit of building things organically in collaboration with an experienced management team so it's really really.”

asked by Unknown Speaker · answered by Mark Tecotzky (Executives)

How are Longbridge's volume and margins trending early in Q3, considering the impact of higher rates?

Proprietary reverse mortgages are less sensitive to higher rates than HECM. Q2 submissions were $870 million, up from $750 million in Q1, indicating positive volume trends for Q3. Margins are influenced by securitization activity, which was strong in Q2. When rates rise, the proprietary product can gain market share from the government HECM product due to more flexible terms.

“We did include submissions for the first time in our presentation on slide 11, I believe. slide 9, and you can see that submissions in Q2, you know, for loans that are prospectively closing in Q3, $870 million in Q2 versus under $750 million in Q1. You can just see an upward trend we showed the last six quarters. So, I think that should give a good... of what Q3 may look like.”

asked by Unknown Speaker · answered by Unknown Speaker (Unknown Speaker)

Can you discuss a more normalized earnings run rate or contribution to ADE from Longbridge as it continues to grow?

Longbridge contributed 23 cents to ADE in Q2 and 21 cents in Q1, compared to a 12 cents average in 2025. Net profits from MSRs are about 6-6.5 cents per share, with the remaining 16-17 cents from originations, securitizations, and G&A. While 16-17 cents might be high as a run rate due to strong Q2 securitization, a low-to-mid teens contribution is sufficient for the company's mid-40s ADE target. If one securitization occurs per quarter, ADE could be in the high 40s.

“For the last two quarters, their contribution to AD was 23 cents and 21 cents. And the average of 2025 was 12 cents. The portfolio is growing, origination volumes are growing, the MSR portfolios are growing, and so that kind of recurring base servicing income is growing.”

asked by Francesco Labetti · answered by Unknown Speaker (Unknown Speaker)

Given current spreads, where do you see the best risk-adjusted returns in credit, and where are you least comfortable adding?

Credit spreads have tightened across the board, but the difference between loan purchase spreads and bond sale spreads has been preserved, allowing for consistent expected yields on retained investments. Pockets of weakness include lower FICO scores and cash-out refinancing in a high-rate environment, leading to a smaller consumer portfolio. The commercial mortgage space is seeing increased supply of stressed and distressed assets, particularly in smaller loan sizes (sub-$50 million, sub-$25 million), which could present attractive opportunities.

“I think we also are watching closely cash-out refinancing, so borrowers that are choosing to cash out in this environment of relatively high interest rates, that can also be a signal. And so we have kept our consumer portfolio relatively small.”

asked by Francesco Labetti · answered by Mark Tecotzky (Executives)

How do you think about maintaining short duration versus adding duration to lock in returns, and has your philosophy changed?

The company generally maintains short duration for RTLs and commercial mortgages due to the nature of the risk and preference for visibility. However, securitizations often include call rights, which provide a long-term investment opportunity that can be profitable with lower rates and well-behaved credit spreads. Reverse mortgages are long-duration assets where the company has strong market share and attractive returns. The overall strategy is to have a portfolio with high cash-flowing assets, including principal, to manage liquidity and risk.

“So your point about seeing attractive spreads on retained securitizations, keeping those call options, it does really lengthen out the – it doesn't really change the cash flow of the retained pieces, but it gives us – one way of participating in tighter market spreads and lower yields in the future, by virtue of having these call options, which I think can have, you know, we've mentioned, we didn't talk about it on this call, but I think we mentioned maybe on the previous call, we think those can be tremendously valuable in, you know, many different future paths.”

asked by Doug Harder · answered by Mark Tecotzky (Executives)