Q3 2026 Ellington Financial Earnings Conference Call - VITRIA TECHNOLOGY INC

Explicit Guidance:

• Q4 2026 Adjusted Distributable Earnings (ADE) outlook is approximately $0.45 per share.
• Future ADE projections assume approximately one proprietary reverse securitization per quarter.
• Longbridge originations are expected to show improved margins in Q4 2026 as offering rates have repriced higher following a period of compression.
• Reverse mortgage originations at Longbridge are expected to see continued growth into 2027, driven by favorable demographics and product traction, though year-over-year percentage growth rates are not expected to sustain current massive levels indefinitely.
• Company intends to issue additional unsecured notes over time as market conditions permit to strengthen credit profiles and achieve tighter spreads.
• Company is evaluating opportunities to return to the preferred equity market if pricing makes sense.
• Current monthly dividend of $0.13 per share is maintained as appropriate; distribution requirements are based on taxable income, which could be affected by market volatility.

Business-Segment Outlook:

• Longbridge (Origination):
  • Expected to introduce new proprietary reverse mortgage products in 2027 targeting hybrid structures (e.g., paying some interest but less than traditional reverse loans) to address home equity needs where first mortgages are not economical.
  • Proprietary reverse submissions reached record levels in September; management expects this segment to remain a key earnings driver as high rates make the product more competitive versus FHA loans.
  • Origination margins were compressed in Q3 due to competitive rate defense but are improving in Q4 as offering rates repriced upward industry-wide.
  • Management anticipates potential acquisition of originator platforms as other industry players face capital constraints or the higher rate environment, though no deals are imminent.
• StateBridge (Servicing):
  • Objective to build a "premier special servicer" in the mortgage space by leveraging Ellington's data and work-out experience.
  • Current portfolio: ~15,000 loans, ~$2 billion unpaid principal balance (as of Sept 30, 2026).
  • Targeting growth via AI integration to reduce time and cost of servicing late-stage delinquencies.
  • Expected to expand beyond internal loan flow to third-party clients as the platform demonstrates superior resolution outcomes and addresses the industry gap left by mega-servicers ignoring special servicing.
• Investment Portfolio:
  • Non-QM and Agency-Eligible Securitizations: Retained IOs expected to perform well in rising rate environments due to slower prepayments.
  • Securitization Structures: Introduction of traditional sequential pay structures in non-QM to address senior investor extension concerns; this structure is expected to tighten execution and improve economics for retained portions.
  • Agency MBS: Expansion into owner-occupied conforming balance securitization (first deal priced in October) with the belief that current loan-level price adjustments exceed required compensation, making the segment profitable.
  • Commercial Real Estate (CRE): Proceeding with commercial mortgage bridge loans and residential transition loans with "elevated levels of caution" due to higher refinancing barriers; viewing the CMBS opportunity set as "decidedly more interesting" following spread widening.

Market and Competitive Outlook:

• Non-QM Market: Resilient despite volatility; spreads have widened by at least 10 OAS relative to pre-sell-off levels, creating attractive entry points for opportunistic investors.
• Competitive Position: Management believes their model is differentiated from other public mortgage originators due to symbiotic partnerships (e.g., LendSure) that provide consistent liquidity and data, allowing for a longer-term view and market share gains.
• Industry Consolidation: Anticipated consolidation in the servicing sector creates opportunities for focused players like StateBridge, as mega-servicers lack scale incentives to prioritize special servicing.
• Pricing Dynamics: Origination margin compression observed in Q3 was temporary; management expects normalization and improvement in Q4 as competitor rate defense lifts.

Macro / Industry Outlook:

• Interest Rates: Higher rates viewed as an "unambiguous headwind" to real estate values (commercial and residential) and a barrier to refinancing/sales. However, they also enhance the competitiveness of proprietary reverse products against FHA loans.
• Home Price Appreciation (HPA): Recent revisions to home price projections (downward) were driven by Q3 market weakness; long-term models will continue to be updated quarterly.
• Commercial Sector: Greater fundamental concern regarding floating-rate commercial loans due to increased debt costs, rent growth challenges, and rising expenses (taxes, insurance); some squeeze expected but may abate with recent rate reversals.
• Residential Sector: Borrowers generally locked into long-term fixed rates, providing more stability compared to commercial floating-rate exposure.
• Regulatory/Policy: Monitoring changes in FHA modification policies and noting increased delinquency pipelines in the non-QM market as the HPA tailwind dissipates.

Strategic Initiatives:

• Capital Structure Optimization: Continued focus on replacing short-term mark-to-market repo with long-term unsecured debt; target to improve credit ratings and tighten issuing spreads.
• Acquisitions:
  • Completed acquisition of controlling interest in StateBridge (special servicer) in September to vertically integrate and improve outcomes on delinquent loans/REO.
  • Open to M&A of originator platforms if market conditions (e.g., distressed peers) present viable opportunities.
• Capital Management: Maintaining discipline on share repurchases at approximately 85% of book value (threshold raised from 80%) when accretive opportunities arise; raised $34M via ATM at book value earlier in quarter, repurchased < $4M at 15% discount later.
• Technology: Leveraging AI and data analytics to accelerate StateBridge's build-out and optimize loan servicing workflows.
• Liquidity: Maintained significant dry powder and financial flexibility entering Q4; unencumbered assets reached $1.92 billion.

Risks and Headwinds to Outlook:

• Interest Rate Volatility: Sharp moves in rates (e.g., late Q3 sell-off) can impact book value if hedging is not perfectly aligned, though disciplined hedging is the primary defense.
• Hedging Costs: Maintaining interest rate and credit hedges creates a "small headwind" to returns in quieter markets but is essential for capital preservation during dislocations.
• Securitization Timing: ADE results remain sensitive to the timing of proprietary reverse securitizations (assuming one per quarter) and potential markdowns on retained tranches based on home price projection revisions.
• Commercial Real Estate Stress: Higher rates and economic uncertainty could lead to increased delinquencies in commercial bridge and transition loans; management is proceeding with caution.
• REIT Distribution Requirements: Future dividend payout ratios are tied to taxable income rather than ADE; volatility could force changes in distribution amounts regardless of earnings strength.
• Market Liquidity: While improving, the non-agency market still faces volatility risks related to Fed policy and overseas market stress (e.g., France).

Management Tone on the Future:

• Confidence Level: High confidence in the model's resilience; management expresses that the "opportunity set is clearly richer" in Q4 due to spread widening and asset discounting.
• Hedging Discipline: Emphasizes strict, unchanged hedging protocols (heavy use of TBA short positions) as the key to preserving book value during volatility; views current environment as "easier" to manage due to increased market liquidity and data points.
• Capital Allocation: Demonstrates strong discipline, prioritizing accretive stock buybacks and long-term debt issuance over dilutive equity offerings.
• Outlook: Views current market dislocations as "rich opportunities" to buy assets and stock at discounts, contrasting their strong performance with "much weaker results" from public peers.

Miscellaneous:

• StateBridge Valuation: Acknowledges that StateBridge's immediate contribution to earnings will be modest ("small but quite diversified") but strategic value lies in optimizing EFC's outcomes on delinquent assets.
• LendSure Partnership: Attributes LendSure's strong performance to deep experience, disciplined management, and the "symbiotic" nature of Ellington's capital provision, allowing for market share gains during industry volatility.
• Book Value Preservation: Q3 book value per share declined only 0.6% despite sharp rate moves; management attributes this to ample liquidity reserves and effective hedging.
• Hedges: Net TBA short positions and credit hedges were increased in Q3 to match portfolio growth and market condition changes.