EFC - NYSE

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Fourth Quarter and Full-Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in 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 Alaael-Deen Shilleh. 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 non-historical in nature. As described under Item 1A of our annual report on Form 10-K and Part 2 Item 1A of our quarterly report on Form 10-Q, 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. 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 am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, Co-Chief Investment Officer of EFC; and JR Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website at ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in the 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, Alaael-Deen and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. I'll begin on Slide 3 of the presentation. For the fourth quarter, we reported net income of $0.18 per share from a GAAP perspective, while our adjusted distributable earnings were $0.27 per share. From an economic return perspective, strong performance from our residential transition loan portfolio and our agency and non-agency MBS didn't quite offset merger-related dilution and expenses together with net losses from Longbridge and other positions, leading to a small negative economic return overall for the quarter. Looking at our adjusted distributable earnings or ADE metric that did drop during the quarter, but it should recover as Longbridge continues to build towards profitability as we work out a few non-performing commercial mortgage loans and assets and REO assets, and as we continue to deploy new capital and rotate capital into higher-yielding sectors. That said, management expects to recommend to the board, a reduction of the monthly dividend from $0.15 to $0.13 per share beginning in March. It being understood that all dividends are ultimately determined by the board. I would note that, this is just $0.01 below the $0.14 per share monthly dividend level we set the full five years ago when we first shifted from a quarterly to a monthly dividend. In mid-December, we completed the merger with Arlington, which immediately added scale, taking EFC's equity base above $1.5 billion and which further strengthened our balance sheet as the merger included the assumption of Arlington's low-cost long-term unsecured debt. Upon closing of the merger, we promptly got to work, freeing up capital in the Arlington portfolio both by monetizing its liquid assets and by beginning to add leverage to the MSR portfolio. The closing of the merger happened to coincide with the market route, driven by unexpectedly dovish messaging from the Fed's December meeting and it was an opportune time to be selling assets. Within 24 hours of closing the deal, we had sold essentially all of Arlington's agency portfolio and most of its CMBS, all at prices above Arlington's prior marks. We have been busy deploying the freed up capital into our targeted investments, which we expect to drive value to shareholders in 2024. During the fourth quarter, with yield spreads attractive, we continued to expand our RTL and proprietary reverse mortgage portfolios. And I expect to continue growing these and our other proprietary loan portfolios moving forward. Despite that growth, EFC's recourse leverage actually ticked down sequentially to 2.0:1 from 2.3:1, driven first by the absorption of Arlington's low leverage capital structure; second, by a smaller commercial bridge portfolio where we continue to allow loan pay-offs to exceed new originations as we gear up for the distressed opportunities we anticipate seeing shortly; and third, by reduced non-QM portfolio where we've recently opted for loan sales over new securitizations, capitalizing on a strong whole loan bid in the marketplace. At just 2.0x leverage, we have plenty of additional borrowing capacity to drive incremental portfolio growth. And as you can also see on Slide 3, our high cash and unencumbered asset levels at year end represent further dry powder. Finally, I'll note that our book value per share of $13.83 at year end reflected modest dilution from the Arlington merger of about 1.1%. We expect to earn back that dilution in relatively short order from the combined benefit of lower operating ratios and deploying the incremental capital at higher expected returns on equity. Until we fully redeploy that incremental capital, we view ourselves as effectively trading some short-term pressure on adjusted distributable earnings for longer term earnings accretion for shareholders. With that, I'll turn the call over to JR to discuss our fourth quarter financial results in more detail.

Thanks, Larry, and good morning, everyone. For the fourth quarter, we reported GAAP net income of $0.18 per share on a fully mark-to-market basis and adjusted distributable earnings of $0.27 per share. On Slide 5, you can see the attribution of net income among credit, agency and Longbridge. The credit strategy generated $0.18 per share of net income in the quarter, driven by strong net interest income and net gains on our non-agency RMBS investments. A portion of this income was offset by net losses on consumer loans in non-interest rate and credit hedges. The credit strategy results also reflects a net positive gain on our investments in loan originators as a mark-up, driven by a strong year for American Heritage as well as a modest mark-up on our state and LendSure exceeded a write-down on our consumer loan originator investment. During the fourth quarter, delinquencies again ticked up on our commercial and residential loan portfolios. In commercial, that's tied to a handful of non-performing assets that we are diligently working through. In residential, beginning with non-QM, much of the increase in delinquencies was a temporary event attributable to servicing transfer after the servicer we use was acquired by a larger servicer. The servicing transfer related issues have been largely addressed now and we've seen delinquency rates begin to normalize with total delinquencies declining to 3.5% today from 5.2% at year end. In RCO, most of the delinquency uptick is related to the 2022 origination vintage which has been a challenging vintage, given the volatility of home prices we've seen since the housing market reached its peak in mid-2022 and many markets we lend in. By virtue of the short duration of our RCO portfolio, we've been able to identify and address issues early and have now worked through most of this vintage with minimal if any adverse consequences. Across our commercial and residential loan strategies, net realized losses continued to be low, but the effect of the higher delinquencies is more immediately seen in ADE as loans shifting to non-accrual status seized generating interest income and as REO expenses also weigh on ADE. Turning to Slide 6, we breakout our adjusted distributable earnings by segment. In the investment portfolio, the sequentially ADE decline was driven by higher delinquencies and by the absence of an ADE boost that we had benefited from in the third quarter when we had earned back interest on a previously non-performing loan. In corporate/other, the ADE decline included some higher G&A. You can also see on this slide that ADE contribution from Longbridge was just $0.01 per share, mostly attributable to low origination volumes. In terms of net income, the Longbridge segment generated a net loss of $0.04 per share for the fourth quarter as net loss in originations and a drag from interest rate hedges exceeded net gains on proprietary loans reversed MSR-related net assets and servicing income. In originations, while Longbridge's volume was lower quarter-over-quarter, mainly due to seasonal and macro factors, tighter yield spreads and lower interest rates did improve gain on sale margins on both HECM and prop. Looking forward, while we expect another quarter of slow originations in Q1, more constructive margins are improving the prospects for originations to turn profitable later this year and start contributing to EFC's overall ADE as well. In agency, after a tumultuous start to the fourth quarter, that's how U.S. Treasury yields rise of 15-year highs and yield spreads widened sharply, markets subsequently rally through year end in anticipation of the conclusion of the Federal Reserve's hiking cycle. Overall for the quarter, agency MBS, especially lower and intermediate coupons where EFC's portfolio is concentrated, generally outperformed interest rate swaps and U.S. Treasury securities, which are our primary hedging instruments. As a result, our agency portfolio generated a net gain of $0.20 per share. Our net income for the fourth quarter also includes the bargain purchase gain associated with the closing of the Arlington merger, which was partially offset by merger-related transaction expenses, including certain compensation and severance costs that have been previously negotiated as part of the merger agreement. Although the bargain purchase gain net of the related expenses contributed positively to net income during the quarter, overall, the common shares issued in connection with the merger were diluted to book value per share by approximately 1.1%. In addition, our Q4 net income was reduced by $5 million payment we made in October to Great Ajax and a mark-to-market loss on the 1.67 million common shares in Great Ajax we acquired as part of the termination of the merger, both of which were recognized in the fourth quarter, whereas our related hedging gains had largely been recognized in the third quarter. Our Q4 net income also reflects the net gain driven by the decline in interest rates on the fixed receiver interest rate swaps that we used to hedge the fixed payments on both our unsecured long-term debt and our preferred equity. Next, please turn to Slide 7. In the fourth quarter, our total long credit portfolio increased by 10% to $2.74 billion as of December 31. The increase was driven by the addition of Arlington's MSR portfolio and a larger residential transition loan portfolio where net purchases exceeded principal paydowns. A portion of the increase was offset by smaller commercial bridge loan and non-QM loan portfolios as loan paydowns, and in the case of non-QM, loan sales exceeded new originations during the quarter. For the RTL, commercial mortgage bridge and consumer loan portfolios, we received total principal paydowns of $302 million during the fourth quarter, which represented 20% of the combined fair value of those portfolios coming into the quarter as those short duration portfolios continue to return capital steadily. On the next slide, Slide 8, you can see that our total long agency RMBS portfolio declined by 12% sequentially to $853 million as we took advantage of the market rally to monetize pools at attractive yields and rotate that capital into credit investments. More than three quarters of our net agency sales occurred in November and December after yield spreads had tightened considerably. Slide 9 illustrates that our Longbridge portfolio increased by 13% sequentially to $552 million as at year end, driven primarily by proprietary reverse mortgage loan originations. In the fourth quarter, Longbridge originated $262 million across HECM and prop, which was a 15% decline from the previous quarter. The share of originations through Longbridge's wholesale and correspondent channels remained steady at 82% with retail, again, accounting for 18%. Please turn next to Slide 10 for a summary of our borrowings. On our recourse borrowings, the total weighted average borrowing rate declined by 10 basis points to 6.78% at year end. We continue to benefit from positive carry on our interest rate swap hedges where we overall received a higher floating rate and pay a lower fixed rates. Although in the agency portfolio, the extent of this benefit declined quarter-over-quarter, which led to NIM compression in that part of the portfolio. However, as we continue to turnover our agency portfolio, we expect to see that NIM compression reverse. We also saw NIM compression in our credit portfolio, but in that case, it was caused by the shift of some delinquent loans to non-accrual status, which dragged down overall asset yields. With both credit and agency experiencing compressed NIMs quarter-over-quarter, their contributions to ADE also declines. Our recourse debt-to-equity ratio excluding U.S. Treasury securities and adjusted for unsettled trades, decreased to 2.0:1 at year end from 2.3:1 as of September 30, driven by our larger capital base. Our overall debt-to-equity ratio also decreased to 8.4:1 as of year-end from 9.4:1 at September 30. I would also point out that because most of Arlington's agency pools that we sold in mid-December settled regular way in January, we had an unusually large investment-related receivable on our balance sheet at year end. That balance has since normalized with the settlement of those sales in the new year. At December 31, our combined cash and unencumbered assets totaled approximately $645 million, up substantially from September 30, in part reflecting the incremental liquidity we added through the Arlington merger. Through that merger, we added about $176 million of common and preferred equity and $88 million principal balance of unsecured debt. Ellington Financial now has about $300 million of unsecured debt with a laddered maturity schedule over the next three years. Meanwhile, we have only a small amount of borrowings against our large MSR portfolios. Clearly, we have lots of dry powder to deploy. At December 31, our book value per common share was $13.83, down from $14.33 at September 30. Our total economic return was a negative 35 basis points for the fourth quarter. Now, over to Mark.

Thanks, JR. Okay. There was a lot going on at EFC this quarter with the completion of the Arlington merger, the monetization of some of their assets and reinvestment of that capital and lots going on in the market with a pivot and expectations for Fed cuts instead of hikes and a strong recovery in agency MBS performance. As the quarter progressed, we finally got better news on inflation and some more dovish comments from the Fed. That caused the rates market to make a U-turn midway through the quarter. In mid-October the 10-year note nearly hit 5% and it then ended the year around 390, so we had an astonishing 110 basis point rally in a little over a month. The change in expectations with the market then believing that we had seen the peak in Fed funds for the second cycle let everyone to breathe a huge sigh of relief. We went from wondering when hikes would end to asking when cuts were going to start. Like we have seen many times before, a pivot in the direction of interest rates combined with the drop in volatility that put rates back in a familiar and reasonable trading range is often very good for spread products. This was certainly the case in Q4. Some of the cash that was waiting on the sidelines in October to see how high rates would go got put to work in the second half of the quarter. Flows into fixed income funds were strong and fixed annuity sales were robust. With the notable exception of CMBS, which has its own unique challenges, virtually all spread products tightened in Q4, including agency MBS, investment-grade corporates, high yield bonds, CRT, non-QM, CLOs, et cetera. Despite the rally, there are certainly still some fundamental challenges in several parts of structured products. Office vacancies are high, multifamily rents stagnating in some markets and overall economics for commercial real estate are challenging. Affordability in the housing market is still weak. We've seen a modest delinquency increase for lower FICO borrowers in most mortgage sectors. But our view is that yields and yield spreads are still very high in many sectors and most sectors are exhibiting very strong credit performance despite these challenges. I'm really excited to keep deploying capital at yields and spreads we could have only dreamed about two years ago. If and when the Fed executes its first rate cut, we think that will be a catalyst for book value gains and a tailwind for our ADE. Meanwhile, housing has performed well despite skyrocketing mortgage rates. In October, agency mortgage rates nearly touched 7.8%, the highest level seen in over two decades before retreating into year end. The lock-in effect for tens of millions of borrowers who are unwilling to move because their low fixed rate mortgages as well as years of under building across the U.S. and seniors aging in place, all have been factors in supporting home prices. Our single-family residential-related strategies of RTL, non-QM and agency MBS, non-agency RMBS and CRT, all contributed positively to Ellington Financial's returns. These strategies not only delivered meaningful spread income, but they also have price action that outperformed rate hedges. So that means they delivered gains above and beyond just the ADE they provided. Our vertical integration where we team up with our origination partners in the loan underwriting process, and which is illustrated on Slide 12 has been a key factor in the success of our residential strategies. While gain on sale margins that our non-QM originator affiliates got a boost during Q4 from some spread tightening and higher loan prices, the high interest rate environment for most of 2023 was still a challenging time to be a mortgage originator. LendSure and American Heritage both managed things very well. In fact, both companies were solidly profitable in 2023. In our commercial bridge loan strategy, after years without material headaches, we do have two longer term multifamily work-outs now underway. It's not at all unexpected in that business. We have marked down those holdings appropriately through net income and book value, but the strategy still generated double-digit returns on capital for 2023. I believe that our partnership with Sheridan and our own in-house expertise gives us great capabilities to maximize values and work-out situations. These non-performing loans will generate negative ADE while we're working them out, but we're hopeful that we'll see resolutions that generate significant income for us. And then of course, we'll be able to recycle that capital into positive ADE generating investments again. Finally, I'll note that results from our consumer loan strategy were negative for the fourth quarter. Performance for lower FICO borrowers has been weak. And while we don't have a lot of exposure there by design, the exposure we do have was a drag on earnings. Turning back to Slide 7. You can see how our credit portfolio evolved during the quarter. It grew a little over 10%, partially as a result of incorporating Arlington assets. RTL grew, but our non-QM shrunk as we sold some packages into a strong market. We continue to shrink our commercial bridge portfolio both overall in size and as a percentage of the pie. As you can also see on this slide that forward MSRs are now 6% of the credit portfolio and these serve as a risk-mitigant in a lot of ways. MSRs have a directionally opposite sign compared to many of our other holdings. They appreciate when rates go up, not down. They appreciate when MBS widened rather than tightened. And they may even appreciate when housing goes down not up. These MSR investments stand on their own as an attractive contributor to returns in ADE, but they are additionally attractive as a stabilizer to some of our other holdings. On the agency portfolio, which you can see on Slide 8, we took advantage of substantially tighter mortgage spreads to sell-off $100-plus million of the portfolio, mostly in November and December. We continued to rotate out of some of our older holdings that were acquired when rates were lower, which should help recharge our ADE going forward. With the completion of the Arlington merger, forward MSRs are now in new return stream and diversifier for us and one that may grow in the future. This is a great sector to leverage the breadth and depth of EFC's capabilities. Looking ahead, I believe that the current market environment is a great one for us to generate attractive risk-adjusted returns. Yield spreads while not at the October peak are still very wide. Meanwhile, despite the recent uptick in CPI, the market is still predicting, albeit slightly delayed from prior predictions, a series of rate cuts by the Fed starting later this year eventually leading to a steepened yield curve. A steep yield curve pushes investors out of cash and also tends to lead to more securitization activity and demand for both agency and non-agency MBS. It's also a catalyst for bank buying in these sectors as it becomes profitable again for banks to buy spread product and fund it with deposits. Therefore, a steeper yield curve generally leads to a more vibrant market and tighter spreads. A steeper yield curve with lower interest rates should also benefit Longbridge as reverse mortgages offer homeowners' bigger lines of credit when rates are lower and reverse mortgage borrowers are generally very sensitive to the size of the credit line they can get. While we have all the hedging tools we need to manage risk and generate returns in a flat and inverted yield curve, for all these reasons, we do think a steeper yield curve in the future, which the market is pricing in, would be a net benefit to our strategies. Now back to Larry.

Thanks, Mark. I'm pleased to have closed the Arlington merger and integrated its balance sheet into ours. Moving forward, our larger capital base, ample liquidity and additional borrowing capacity should allow us to capitalize on the many attractive investment opportunities we are seeing. Our diversified portfolio provides multiple sourcing channels. As I mentioned earlier, we've continued to grow our RTL and prop loan portfolios. We've also opportunistically added CLO investments and residential RTLs at attractive yield spreads in recent weeks. We continue to expect that the ongoing dislocation in the commercial mortgage and banking sectors will generate compelling opportunities for Ellington Financial, both to acquire distressed assets and to add market share at our originator affiliates. While we haven't been awarded anything yet in this sector, we expect to see more and more distressed commercial real estate debt put up for sale, including situations where otherwise high quality assets just have unsustainable capital structures. We are also seeing compelling opportunities in CMBS. So while our commercial mortgage loan and CMBS portfolios are small as they've been since late 2021, those portfolios should expand again in future quarters. As JR mentioned, we expect Longbridge's origination platform to turn the corner back to profitability later this year, barring any unexpected increases in long-term interest rates. I expect this to happen around mid-year. As a reminder, we report Longbridge's origination income as component of our adjusted distributable earnings. So the return of their origination platform to profitability would be a significant boost to our ADE, since it's been a drag on our ADE for the last three quarters or so. Overall, EFC's stock delivered a total return to shareholders of 18% in 2023. And we look forward to driving additional value to both our existing and new shareholders in the year ahead. We've sized our new dividend consistent with where we see our ADE going in the near-term. We have plenty of dry powder to continue to grow our asset base, whether by using cash-on-hand or our untapped financing lines. There are lots of distressed investment opportunities on our doorstep. We also expect Longbridge to contribute to ADE again by mid-year. And our stock is back within repurchase range, which is another lever we can pull. With that, we'll now open the call to questions. Operator, please go ahead.

[Operator Instructions]. Our first question comes from Crispin Love with Piper Sandler.

Thanks. Good morning. Appreciate taking my questions. In the release and on the call -- and Larry, you just mentioned some just then, but you mentioned distressed opportunities in credit debt. So I'm just curious if you can go a little deeper there on kind of what types of areas you see the best opportunities and from where? And then also, what you're seeing in the bridge multi-family space? And if you'd be interested in adding mezz or press in any bridge loans that have been originated with other lenders just given the stress in this space?

Mark?

Sure. Hey, Crispin, this is Mark. So you have seen a couple of portfolios of commercial loans, primarily tri-state area concentrations come out for bid. We bid on both the packages we saw, we were competitive. We weren't awarded anything. So I think you will continue to see that. There continues to be news in the banking sector. There was that big announcement about Truist last week selling off the insurance arm and that being the catalyst for them to reorient their portfolio. So we think there are going to be more opportunities to bid on commercial loans that are challenged. I think it's going to be a great opportunity. We mentioned in the prepared remarks that the stake we have in Sheridan and the long partnership we have with those guys really gives us the ability to oversee construction and to really manage properties in a way that I think few competitors can. So I think we are really well resourced in that sector. And I do think you're going to see more opportunities to buy loans there. So to date, we've been more focused on buying loans. We haven't been as focused on being a mezz provider, I wouldn't rule it out. But I think what's more likely for us given the activity we saw in the last three or four months is just buy -- is to just buy commercial loans. And then I think you also asked about new issue bridge. We're still active there. It's just the number of transactions we are seeing is down. I think that's sort of consistent across the Board in commercial real estate. So while we're still originating, we -- its everything mentioned in the prepared remarks, the origination volume has not kept pace with the resolutions we've seen. So we continue to look for those opportunities, but just -- it just has not been a very active sector to deploy capital right now.

Thanks, Mark. All very helpful there. And then just looking at expenses, comp and benefits more than doubled in the quarter. I assume a good portion of that is related to one-time comp expenses from the Arlington deal. Can you confirm that JR? And then if you could also just provide how much of those expenses are one-time to get to a better run rate number going forward for comp and benefits?

Yes, exactly. $22.1 million were merger-related expenses. As you see the bargain purchase gain of $28 million, but those are all non-recurring items. So if you exclude that $22.1 million, you're closer to a run rate.

Perfect. Thank you. And then, JR, are you able to size the net interest income impact in the quarter that was related to non-accruals that you mentioned?

So we haven't broken out the exact contribution of the different variables at play. We have the Longbridge contribution of $0.01. We have the non-accruals, as you mentioned, which is in resi and commercial. I mean, that's -- we haven't sized it exactly, but it's a big chunk of it. But there are other variables at play. We haven't exactly broken out each line item by contribution, but the non-accrual was a material amount of the sequential decline.

All right. Thanks, JR. I appreciate that.

I just wanted to add that when loans resolve -- and we're very LTV focused, and Mark talked about how so far we've just been doing first liens and don't have any specific plans to do anything else. So when a loan resolves, the non-performing loan resolves, you can recapture, right? If you've done your underwriting right and your LTV was enabled you to basically recapture your investment, your initial investment of loan and then some, you get to take that interest income that you had kept out of your adjusted distributable earnings or interest income previously. You get to take that into interest income when that gets resolved assuming you collected at that point. So I think we mentioned that one phenomenon between the third and fourth quarters was we had a bunch of interest income that was recouped in the third quarter on a loan and that wasn't recurring obviously. So that's the kind of thing where I think you'll see as we -- as the loans that we're working out, get resolved. You see a little boost to ADE going forward, but it does make things lumpy for sure.

Thanks, Larry. I appreciate the added color there.

The next question comes from Trevor Cranston with JMP Securities.

Hey, thanks. A follow-up to the comments you were just making, Larry, about the kind of lumpiness you could get from interest income recognition on the non-accruals. Can you guys sort of walk us through how you're thinking about the most likely sort of timeline on resolutions of the loans, in particular, that went into non-accrual status in the fourth quarter? Thanks.

Hey, Trevor. Thanks for the question. So I'd say, the timelines are different between commercial and residential. We do -- in commercial, we have a couple of situations that we think will be a longer term process. We don't have exact timelines on that, but call it more than a few quarters potentially. Whereas in residential, that we can work through delinquencies much more quickly. Maybe inside of a quarter in many cases. I would say that part of our motivation and owning part of Sheridan is to have a captive servicing platform with the resources and expertise to manage through work-outs like we're underway with right now, including the capability to taking back and managing REO assets when necessary. We think there's significant value there. I don't know, Mark, if you have anything to add on the timeline of resolutions among commercial and residential?

For the commercial, it's very project-specific. So as JR mentioned, the two that we are working out now is going to be longer term, like at least a couple of quarters. But I think it's very three loan and project specific. So look, I think that the capabilities we have wherein it incentivizes us to be patient and to really maximize value. It's not something we do a lot. We've been doing commercial bridge for EFC for a long, long time. And it used to be all workout situations. So I think we have a good handle on what it takes to maximize value for the shareholders, and that's really what our focus is.

Okay. Got it. That's helpful. And then on the investment you guys have in Great Ajax, can you remind us if there's any restrictions on that position or sort of maybe just generally talk about sort of your intentions and if you're willing -- and if you're sort of free to potentially dispose of that anytime if and when you wanted to?

Yes, I can't comment on that. Sorry.

Okay. Fair enough. Thank you.

Thanks, Trevor.

The next question comes from Bose George with KBW.

Hey, guys. Good afternoon. Just going back to the delinquencies, when you look at your pipeline, are there other loans that could potentially roll into that? And just can you talk about some of the drivers? Is it -- are they the macro? Is it very sort of sponsor-specific in terms of stuff that's happening?

Sure. So I'll -- I can start out, Mark. And I think they are generally in four categories. In commercial, we've talked about the few that we're working through now. I don't think there's any other big looming headaches that we're seeing right now, but there's going to be noise and lumpiness in the portfolio I think quarter-to-quarter. But not seeing any big other headaches on the horizon besides the handful we're working through. In non-QM, we had a transfer of servicing in September and October of our non-QM loans as the servicer we use was sold to a larger servicer. That servicing transfer caused delinquencies to tick-up in Q4, but we think those are temporary. And in fact, I think we put this stat in the prepared remarks, we've seen delinquencies come down by about a third between year-end and kind of today. So that's -- I think that's explained by the servicing transfer largely non-QM. And then in RTL, a lot of the -- I guess the delinquencies initiatives we've worked through had been a function of the 2022 origination vintage when prices peaked in many of these markets in mid-2022. At this point, we've worked through I think three quarters or more of that vintage. So hopefully, that we're seeing those trend down. But when we file the K later this week, you'll see the -- in our investment loans note in our financials we published 90-plus delinquency, you'll see that in the numbers for those categories as well as in consumer. And Mark mentioned lower FICO borrowers have been underperforming and that's been kind of a trend now for a few quarters, I would say.

Okay, great. That's helpful detail. Thanks. And then in terms of the portfolio, kind of the overall leverage, do you guys -- are you sort of under-levered now with this -- with the deal and the growth in equity? And is there kind of the way to think about the earnings contribution as you kind of lever more appropriately?

Yes. So that's a big component here I think. We were 2x debt-to-equity -- recourse debt-to-equity at year end. I think we can easily get into the 2.5x range, which would add on $1.5 billion the capital, another $700 million or $800 million of investments. In 2022, we were basically 2.5x to 2.6x levered recourse debt-to-equity leverage for most of the year. So we have liquidity on balance sheet, unencumbered assets as well as just additional borrowing capacity even on the assets that are encumbered, but lightly levered, our MSRs for example. So that's certainly part of what we see driving ADE this year is adding leverage and investments.

Okay, great. Thank you.

Thanks.

The next question comes from Lee Cooperman with Omega Family Office.

Thank you. I actually have two questions and an observation. My questions are, you keep emphasizing a lot of dry powder. How long do you think it will take to restore the dividend back to where it was? Question one.

Well, that's a great question. Hey, Lee. I don't know. I can tell you, like I said, we've resized it so that we think we're going to cover it pretty soon. I think what it would take is realistic is to even build a little book value back, but if you -- which is another motivation for dropping the dividend a bit. So I...

That doesn't make any sense. You dropped the dividend to get the stock to go down?

No, no, no to just sort of rebuild book value. It's a small contributor. But I think that right when you dividend out cash, that gives you less of a base to invest and earn your dividend, right? So it can be sort of a cycle. But I think that -- I think let's just take it one quarter at a time. We're hoping later this year hopefully within a couple of quarters to be covering the new dividend. I think we've talked about all of the catalysts that can do that, Longbridge returning to profitability, getting our leverage up, our asset leverage up. We're only at 2.0 on a debt to -- debt leverage perspective. So that could help a tremendous amount. And look, we have built a little bit of a war chest of capital here because we think that the opportunities, especially in distressed commercial, are going to be so great. So it's all kind of part of the strategy. We sold down our non-QM portfolio. The spreads are still wide there, but we thought that it was the right tactical move to make. And we've talked about how we've also been reducing the size of our bridge loan portfolio, again as we're sort of making room for these investments. So we're trying not to be too short-term oriented. And if we can take advantage of some distressed situations, that can help us, like I said, build book value back up. And then I think once we do that -- because those are sort of capital gain type situations. You're buying -- if we buy distressed assets, whether it's in loans or CMBS, we can...

We can be surprised if the dividend was not restored by the end of the year?

Restored to -- you mean to the prior level? I don't think you should view that as an expectation.

Got you. Okay. Second question. In the past you've bought back stock and chose to trade around 80% of book. Would you say that that strategy is likely to change or remain the same?

I would say, that strategy is not likely to change. I think I mentioned in my remarks that we're -- we were in range earlier today and we're certainly -- I don't want to comment on specifically whether we're in range now, but we're certainly within range.

80% of 13 and change is 10.50?

No, no, no I think...

13.83 was our year end book.

Yes, 13.83, right. So I think...

What's 80% of 13.83?

Yes, 11.06.

Okay. Finally...

I mean, again, we try not to...

We are making observation. The idea of taking undervalued public market equity and paying private market value by business, the question was strategy. Do you agree with that or disagree?

What -- how does that apply to us?

In other words, we understand that we don't -- because part of the dilution was a result of the acquisition you made. If you didn't make the acquisition, you wouldn't have the dilution. So what I'm saying, I've seen over the years, companies continue to do deals and take undervalued works in market stock and pay private market value by businesses, which I think it's a questionable strategy.

Right. No, look, I agree. I think we had some very specific reasons. We also had some -- for this transaction. We love getting into the MSR business. And I think now that we're in it with the acquisition, that is another area where we could see very high returns on equity. I think 1.1% dilution is pretty modest frankly for growing our equity base by $200 million. But I hear you. It's not something -- and look, we -- I'll just say another thing too. I can't get into too much detail here. But we -- well, the fact that we had to deal sort of in process, I guess, in 2023, right only one of them was consummated, but that was the highly unusual, right. We had never done that before. So I don't think you should extrapolate from that as sort of establishing a pattern.

All right, good. I just want to make sure you understand the view. All right. Good luck. Thank you.

Thanks, Lee.

Thanks.

The next question comes from Matthew Howlett with B. Riley.

Hey, guys. Thanks for taking my question. I guess, just on Longbridge. When you first consolidated it, I mean, it was contributing $0.09, $0.10 of distributable earnings. I mean, when it's going good, it's going great. Obviously, I think you said mid -- you expect it to turn mid this year. My question is just on the commitment to it. Obviously, it's a new segment. We're all getting used to it. Would you like to grow it, would you want to make acquisitions, would you consider at some point could you sell it at one point less than 30%? But I just wanted to hear the investment case for keeping it and what the value it is for shareholders?

Yes, look, thanks. It's taking up. This was a big investment of ours and it's grown. So we have got a lot of capital in the business, both in the forms of, I'll just say harder assets like loans and servicing. And then, of course, then you've got the franchise. So it's a business that we absolutely believe in long-term. And we've -- since we -- well, since we started many years ago and even since late 2022 when we bought the other half of it, and as you said, consolidated it, we've -- Longbridge has been growing market share quite a bit. It's been a tough business. Longbridge has actually I think done great relative to the competition. We've added servicing at very attractive values and I think we're going to do more of that. And that's again a great sort of ADE generator. And I think there are going to be more comp, more of the competitors sort of falling by the wayside. And demographically, this is an area where I think just obviously there's a lot of growth. So we believe in the business. We believe in the long-term prospects. It's -- there's nothing we can do about the macro environment with rates where they are. But JR talked about how we've been increasing prop. And so you're not -- that's sort of a growth area for us and the yields are very attractive. We absolutely believe in our long-term look. Anything is possible in terms of many, many, many years from now or whatever. We get full value from someone, really full value and decide to sell it, of course, it's possible. But we certainly are not exploring anything, we don't have any plans for that and we're committed to the company. We've continued to add capital. And we think that many, many different ways that this company can generate the kind of earnings when it was much smaller it was generating, look, made over $30 million just a few years ago. There are regulatory changes that could happen that would completely change the landscape as well in a positive way. So there's just -- there's a lot of option value here. And even more than option value, just actual opportunity that looks like it's coming in earnings that are growing pretty soon.

Yes. That's what the HECM program indeed. The originations, the decline is just due to seasonal factors and obviously higher rates and slow housing. So there's been no change with HECM and is that nothing big -- nothing ominous in HECM, you said the program actually could be changing...

Well, yes. There's been no -- right. So there haven't been any major regulatory changes recently, but there could be some positive ones coming, it's very possible. So -- and I'll just say, those stemmed from -- there was a bankruptcy pretty notable at the end of 2022 of a very large reverse mortgage originator. And since then the regulators have been thinking well. Is it possible that we can make things a little easier on the originators and servicer? So it's -- these are things that again we're not counting on them, but they are just add I think additional option value to the whole franchise and proposition.

Great. And then just a final question on the non-QM. I think you said your home prices have risen. Love to hear just sort of why that is? And then you envision going back to sort of getting the securitization at some point or you'll just take these cash of home loan prices and you just keep it going. I mean, obviously, LendSure, American Heritage are doing great. Just talk about the outlook on the non-QM gain on sale?

Yes. Look, we continue to buy non-QM at originated. We're very flexible in terms of what we do with the product. And whether it's hold it, it's been quite a while actually since we did a securitization. So we've been holding loans for a long time and earnings spread while they're on repo. That's certainly we could hold loans forever that way. We can also securitize them. But we're only going to take that step to securitize them when we think that the securitization spreads are the best outcome securitizing and locking in that long-term cost of funds at attractive levels. And then of course the third one, which again, we haven't historically done so much, but there's a very strong bid especially from insurance companies that's been in the market recently. And we just decided seeing one of those bids that that was at the time the right thing to do was to sell, take the gain on sale and potentially reload later at wider spreads. These are decisions that we make as portfolio managers kind of all the time. It's great to have space to be able to hold these long-term if we need to and just earn that spread, that's the business we're in. Obviously, there are lot of originators that can do that, they have to sell.

It gives you plenty of optionality. I appreciate it. Thanks a lot.

Thanks.

Thanks, Matt.