Ellington Financial Inc. (EFC) Earnings Call Transcript & Summary

Good morning, and welcome to Ellington Financial, Inc.'s 2020 Annual Stockholders Meeting. At this time, I would like to turn the conference over to Tom Robards, Chairman of the Board of Directors at EFC. Please go ahead.

Thank you, and good morning, everyone. On behalf of the entire Board, I would like to thank you for attending our Annual Meeting of Stockholders. Last year, we had our first virtual annual meeting. Given the health and safety considerations of COVID, we are pleased to conduct our annual meeting virtually again this year. By hosting the meeting virtually, all of our stockholders are able to attend and vote without incurring costs to travel to an in-person meeting. At today's meeting, following the introduction of the members our Board of Directors, we will conduct the formal portion of our annual meeting. Our President and Chief Executive Officer, Laurence Penn, will then make a few remarks to be followed by a question-and-answer session. If you submit a question, please identify yourself when you do so. I would now like to introduce the other members of our Board of Directors, all of whom are virtually attending today's meeting. In addition to myself, our directors are Laurence Penn, Lisa Mumford, Edward Resendez and Ronald Simon. In addition, David Gerstley from PricewaterhouseCoopers LLP, our registered independent public accounting firm, is on the line today. Mr. Gerstley will be available to answer any appropriate questions you may have after the formal meeting. With that, I will now call our 2020 Annual Stockholders Meeting to order. We will now conduct the formal business as set forth on the notice of meeting and proxy statement, which was mailed to all shareholders of record as of March 20, 2020, and the agenda shown on the website. EFC stockholders as of the record date were sent notice of the annual meeting on or about March 30, 2020, along with the proxy statement and requests for a proxy by the Board of Directors. The notice of the annual meeting also stated the date, time and meeting purpose, along with the web address for participating in today's virtual meeting. I'm pleased to announce that there are, present by proxy, a sufficient number of the voting shares of the company to constitute a quorum. Accordingly, this meeting is duly called to order. A copy of the notice, proxy statement and the form of proxies as well as an affidavit of distribution of Broadridge Financial Solutions that will be made a part of the record of this meeting. At this time, any stockholders that are logged in and who have not already submitted a proxy and wish to vote their shares may do so by clicking on the vote here button on your screen. [Voting]

While we allow time for our stockholders who haven't already done so to complete their voting, I'd like to remind you of some of the statement -- that some of the statements made at this meeting may be considered forward looking. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the cautionary statements and other information contained in the company's filings with the SEC, including our annual report on Form 10-K for fiscal 2019, which identifies certain factors that could cause actual results to differ materially from those projected in any forward-looking statements made during this meeting. Copies of the 10-K and other filings are available through the company or online. At this point, the polls are closed, and I will now report the preliminary results of the voting. There are 3 proposals to be considered during this meeting, all of which were described in detail in the proxy statement furnished to stockholders. The company has not received notice from any of its stockholders of any other matter to be considered at today's meeting. The first item of business is the election of directors. The Board has selected myself, Tom Robards, Laurence Penn, Lisa Mumford, Ed Resendez and Ron Simon as its nominees for election as directors. I am pleased to report that each of the directors standing for election at today's annual meeting have received the affirmative vote of a plurality of the votes cast and are hereby elected. Second item of business relates to the nonbinding advisory vote on the company's executive compensation program. Majority of the shares present or represented by proxy at this meeting have voted in favor of this proposal. Consequently, the proposal has received the advisory approval of stockholders. The third proposal relates to the ratification of the appointment of PricewaterhouseCoopers to serve as the company's independent registered public accounting firm for the company's 2020 fiscal year. A majority of the shares present or represented by proxy at this meeting have voted in favor of this proposal. Consequently, the proposal has been approved. The final tabulation of these votes will appear on our required Form 8-K to be filed with the Securities and Exchange Commission. This concludes the formal portion of our 2020 Annual Shareholders -- Stockholders Meeting. This time, Larry Penn, Chief Executive Officer of the company, will make a short presentation regarding the company, and then we will have a short question-and-answer period for our investors. Once again, if you submit a question, please identify yourself. Larry?

Thank you, Tom. Welcome again to the Ellington Financial Annual Stockholders Meeting as the company approaches its 13th anniversary. From our inception in 2007 through year-end 2019, Ellington Financial generated an average annualized return on book value of 10%. As always, we appreciate the support of our shareholders, and we hope that everyone with us today in the meeting is healthy and safe during this difficult time. At past annual meetings, we typically summarized the prior year's accomplishments and then spoken about our outlook for the year to come. We'll do that again today, but obviously, everything pales in comparison to the events over the last 2 months. So I'll touch on 2019 more briefly. 2019 was a truly transformational year for Ellington Financial. At the start of the year, we successfully completed our REIT conversion, the benefits of which have been numerous. By electing REIT status, many of our shareholders will benefit from the 20% REIT tax deduction. The REIT conversion also triggered EFC's inclusion in several stock indexes, greatly improved our stock's trading volume and expanded our investor base. As a REIT, we were able to maintain and even expand our core investment strategies while continuing our disciplined hedging of interest rate risk and our opportunistic hedging of credit risk. All of this enabled us to grow our capital base by about 40% through a series of well-timed and well-executed common and preferred equity offerings. Among other benefits, these capital raises have greatly improved the liquidity of our stock, have allowed us to spread our G&A expenses over a larger capital base, thus helping support earnings per share and have allowed us to expand our high-yielding loan pipelines. Over the course of 2019, net of pay downs, we originated and/or acquired $638 million of non-QM and residential transition loans, which was a 72% increase compared to 2018 as well as $212 million of small balance commercial mortgage loans, which was a 41% increase compared to 2018. Our overall investment portfolio steadily grew over the course of 2019, and core earnings consistently covered our dividend. For the full year, we delivered an economic return of 9.3%, excluding the slightly dilutive impact of the capital raises. And the total return on EFC stock for 2019 was an impressive 32%. Of course, more recently, the ongoing COVID-19 pandemic has brought the global economy to a virtual standstill and has resulted in widespread market dislocations. Beginning in March, we implemented our business continuity plans and have continued to be fully operational with most personnel working productively from home. The team has done an incredible job getting us through the past 2 months, operating under extremely difficult circumstances. I'm so proud of how we managed through the unprecedented challenges of the first quarter of 2020, especially given that leveraged credit portfolios were in the crosshairs of the distress in the financial markets. Our risk management and liquidity management practices did what they're designed to do. They protected book value, and they protected our shareholders. Financial crisis can also create investment opportunities. And as we look ahead, the diversified credit-sensitive sectors in which Ellington Financial has deep experience, particularly in many of our loan businesses, are facing a severe supply/demand imbalance, with net interest margins that are as wide as we've seen in years. We believe that this imbalance will present highly attractive asset acquisition opportunities for Ellington Financial for some time to come. But the path forward is highly uncertain. We don't know what the length and severity of the economic downturn will be, what the ultimate path to recovery will look like or what the resulting effect will be on our current portfolio or on future investments. And on the liability side, it's unclear what the terms and availability of financings for these assets will be. In light of this uncertainty, our goal will be to balance defense, that is building in a margin of safety to absorb additional market shocks with offense, that is the ability to capture what we see as great opportunities. Ellington's core risk management principles have served us well over many market cycles, including during Ellington Financial's very first years from 2007 through 2009, when Ellington Financial not only survived intact through the financial crisis, but thrived in its aftermath. We believe that these same risk management principles continue to be critical now, both in protecting EFC's book value and keeping EFC well positioned to capitalize on the opportunities that we are seeing and that we are anticipating. And always, management remains strongly aligned with our shareholders with a significant co-investment in Ellington Financial. Once again, I'd like to offer my sincere thanks to the exceptional members of our Board of Directors with whom I proudly serve. Thank you to Tom Robards, Ron Simon, Ed Resendez and Lisa Mumford for your invaluable support, guidance and dedication. Ellington Financial and its stockholders are very fortunate to have all of you as directors as you truly appreciate the importance of the undertaking and responsibilities that you have accepted. And thank you again to our stockholders for your continued support and confidence, and we look forward to a successful 2020. For all of those listening on the call today and to all of those around the world who are suffering through this pandemic, we hope that you and your family stay healthy and safe. And with that, we'll open the floor to questions. All right. Seeing no questions, this concludes the question-and-answer session and our 2020 Annual Meeting. And I will turn it back to Tom.

Okay. Thank you. I would like to thank all of you for attending this annual meeting virtually. I would also like to express my appreciation to all of the stockholders who submitted their proxies, but were not able to be present, and my sincere best wishes to all stakeholders affected by this pandemic. I'd also like to sincerely express the Board's appreciation to our manager for their clear-eyed and consistent adherence to their long-standing principles of risk management, liquidity management and resilience. Thank you to the whole team. The directors and officers of Ellington Financial, Inc., appreciate the loyalty and confidence of all of our stockholders. And at this point, operator, you can please end the meeting.

The meeting has now concluded. Thank you for attending today's presentation. You may now disconnect.