Ellington Financial Inc. (NYSE: EFC) (the "Company") today
reported financial results for the quarter ended June 30,
2023.
Highlights
- Net income attributable to common stockholders of $2.9 million,
or $0.04 per common share.1
- $30.7 million, or $0.46 per common share, from the investment
portfolio.
- $27.0 million, or $0.40 per common share, from the credit
strategy.
- $3.7 million, or $0.06 per common share, from the Agency
strategy.
- $2.5 million, or $0.04 per common share, from Longbridge.
- Adjusted Distributable Earnings2 of $25.7 million, or $0.38 per
common share.
- Book value per common share as of June 30, 2023 of $14.70,
including the effects of dividends of $0.45 per common share for
the quarter.
- Dividend yield of 13.5% based on the August 4, 2023 closing
stock price of $13.31 per share, and monthly dividend of $0.15 per
common share declared on July 10, 2023.
- Recourse debt-to-equity ratio3 of 2.1:1 as of June 30,
2023, adjusted for unsettled purchases and sales. Including all
non-recourse borrowings, which primarily consist of
securitization-related liabilities, debt-to-equity ratio of
9.2:14.
- Cash and cash equivalents of $194.6 million as of June 30,
2023, in addition to other unencumbered assets of
$343.3 million.
- Signed definitive agreements for the strategic acquisitions of
two public mortgage REITs, Arlington Asset Investment Corp. and
Great Ajax Corp.
Second Quarter 2023 Results
"In the second quarter, steady performance from our non-QM,
residential transition loan, commercial mortgage bridge loan, and
credit risk transfer portfolios offset net losses on our loan
originator investments and other investments, and EFC generated a
modestly positive economic return overall," said Laurence Penn,
Chief Executive Officer and President of Ellington Financial.
"During the quarter, we signed definitive agreements for
strategic acquisitions of two public mortgage REITs, Arlington
Asset Investment Corp. and Great Ajax Corp. Each of these
transactions will add assets that complement and further diversify
Ellington Financial's existing investment strategies and align with
our expertise, while also substantially increasing our capital
base. As important components of these transactions, we will assume
more than $100 million of term, non-mark-to-market unsecured debt
and perpetual preferred stock, with attractive costs of capital, as
well as a strategic equity investment in a mortgage loan
servicer.
"These acquisitions represent important milestones for Ellington
Financial. By significantly increasing our scale, they should
enhance liquidity for our shareholders and reduce our operating
expense ratios, and we project that each of these transactions will
be accretive to our earnings within the coming year. We expect to
close both transactions later in 2023, at which time EFC's equity
base should exceed $1.7 billion.
"We took several other steps during the quarter that should
position us to drive earnings while continuing to navigate market
volatility. We took advantage of some attractive entry points to
add Agency RMBS and CRT investments, while we also incrementally
grew our portfolio of high-yielding RTLs and proprietary reverse
mortgage loans. At the same time, we continued to keep duration
short on our loan portfolios and dynamically adjust our interest
rate and credit hedges, all while maintaining high levels of
liquidity and additional borrowing capacity. While Longbridge’s
gain-on-sale margins compressed during the quarter, which was the
primary driver of the sequential decline in our Adjusted
Distributable Earnings, Longbridge’s gain-on-sale margins have
recovered somewhat after quarter end. Notably, shortly after
quarter end Longbridge was able to acquire, out of a bankruptcy
proceeding, a reverse mortgage servicing rights portfolio at a
distressed price, which should be immediately accretive to our
earnings and Adjusted Distributable Earnings going forward."
Financial Results
Investment Portfolio Summary
The Company's investment portfolio generated net income
attributable to common stockholders of $30.7 million, consisting of
$27.0 million from the credit strategy and $3.7 million from the
Agency strategy.
Credit Performance
The Company's total long credit portfolio, excluding
non-retained tranches of consolidated non-QM securitization trusts,
increased by 1% sequentially, to $2.45 billion as of June 30, 2023.
This slight increase was driven by larger non-QM and RTL loan
portfolios quarter over quarter, as net purchases exceeded
principal paydowns, and by net purchases of CRT investments. A
portion of the increase was offset by a smaller commercial bridge
loan portfolio, as loan paydowns in that portfolio again
significantly exceeded new originations during the quarter.
Net interest income5 on the Company's loan portfolios, net gains
on its CRT portfolio, and net gains on its interest rate hedges
were the primary drivers of the positive results in the Company's
credit strategy. A portion of these gains were offset by negative
results in the Company's investments in unconsolidated entities,
including net losses on equity investments in loan originators and
commercial mortgage loan-related entities, as well as net realized
and unrealized losses on consumer loans and credit hedges. The
Company's residential and commercial mortgage loan portfolios
continue to experience low levels of credit losses and strong
overall credit performance, although the Company has seen an uptick
in delinquencies in these portfolios year-to-date.
During the quarter, borrowing costs on the Company's credit
investments increased, driven by sharply higher short-term interest
rates. At the same time, the Company's asset yields also increased,
and it continued to benefit from positive carry on its interest
rate swap hedges, where it overall receives a higher floating rate
and pays a lower fixed rate. As a result, the net interest margin6
on the Company's credit portfolio increased quarter over quarter to
2.91% from 2.49%.
Agency Performance
With Agency RMBS yield spreads still wide on a historical basis,
the Company opportunistically added to its Agency portfolio during
the quarter. As a result, the Company's total long Agency RMBS
portfolio increased by approximately 8% quarter over quarter to
$918.5 million.
The second quarter began with elevated interest rate volatility
and widening Agency MBS yield spreads, as the market prepared for
sales by the FDIC of MBS from failed regional banks. Later in the
quarter, with the FDIC sales well absorbed and with the debt
ceiling dispute resolved, volatility declined and Agency MBS yield
spreads tightened. Accordingly, the Company experienced moderate
losses in its Agency strategy in April, but these were reversed in
May and June. On balance, the Agency strategy had positive income
for the quarter as net gains on interest rate hedges exceeded net
losses on Agency RMBS and negative net interest income, which was
driven by sharply higher financing costs.
Average pay-ups on the Company's specified pools decreased
slightly to 0.78% as of June 30, 2023, as compared to 0.89% as of
March 31, 2023.
As was the case with its credit portfolio, higher borrowing
costs on the Company's Agency portfolio were more than offset by
higher asset yields and greater positive carry on its interest rate
swap hedges, quarter over quarter. As a result, the net interest
margin5 on its Agency RMBS, excluding the Catch-up Premium
Amortization Adjustment, increased to 1.31% from 1.14%.
Longbridge Summary
Longbridge's portfolio decreased by 3% sequentially to $429.8
million as of June 30, 2023. The decrease was due to smaller
holdings of unsecuritized HECM loans, primarily driven by
significant resolutions of HECM buyout loans, and a smaller HMBS
MSR Equivalent quarter over quarter, partially offset by increased
holdings of proprietary reverse mortgage loans.
Longbridge's portfolio generated net income attributable to
common stockholders of $2.5 million. Longbridge's net income for
the quarter was driven by net gains related to the resolutions of
HECM buyout loans, net gains on proprietary reverse mortgage loans,
and net gains on interest rate hedges. These gains were partially
offset by net losses on the HMBS MSR Equivalent7, which was driven
by the combination of higher interest rates and wider yield spreads
in the HECM market during the quarter, and a net loss in
originations, as reduced gain-on-sale margins on HECM loans more
than offset an increase in overall origination volumes.
_______________________________
1 Includes ($30.3) million of preferred
dividends accrued and certain corporate/other income and expense
items not attributed to either the investment portfolio or
Longbridge. 2 Adjusted Distributable Earnings is a non-GAAP
financial measure. See "Reconciliation of Net Income (Loss) to
Adjusted Distributable Earnings" below for an explanation regarding
the calculation of Adjusted Distributable Earnings. 3 Excludes U.S.
Treasury securities and repo borrowings at certain unconsolidated
entities that are recourse to the Company. Including such
borrowings, the Company's debt-to-equity ratio based on total
recourse borrowings was 2.3:1 as of June 30, 2023. 4 Excludes U.S.
Treasury securities. 5 Excludes any interest income and interest
expense items from interest rate hedges, net credit hedges and
other activities, net. 6 Net interest margin represents the
weighted average asset yield less the weighted average secured
financing cost of funds. It also includes the effect of actual and
accrued periodic payments on interest rate swaps used to hedge the
assets. 7 HMBS assets are consolidated for GAAP reporting purposes,
and HMBS-related obligations are accounted for on the Company's
balance sheet as secured borrowings. The fair value of HMBS assets
less the fair value of the HMBS-related obligations approximate
fair value of the HMBS MSR Equivalent.
Corporate/Other
The Company's results for the quarter also reflected a net loss
on the interest rate swaps that it uses to hedge its preferred
equity and unsecured long-term debt, its "Senior Notes," which was
driven by rising interest rates quarter over quarter, as well as
expenses related to the agreed upon, but not yet completed, mergers
of Arlington Asset Investment Corp. and Great Ajax Corp.
Credit Portfolio(1)
The following table summarizes the Company's credit portfolio
holdings as of June 30, 2023 and March 31, 2023:
June 30, 2023
March 31, 2023
($ in thousands)
Fair Value
%
Fair Value
%
Dollar denominated:
CLOs(2)
$
24,722
0.6 %
$
31,044
0.8 %
CMBS
20,752
0.5 %
16,422
0.4 %
Commercial mortgage loans and
REO(3)(4)
419,915
10.7 %
455,114
11.5 %
Consumer loans and ABS backed by consumer
loans(2)
93,116
2.4 %
87,976
2.2 %
Corporate debt and equity and corporate
loans
21,907
0.6 %
18,882
0.5 %
Debt and equity investments in loan
origination entities(5)
38,815
1.0 %
40,906
1.0 %
Non-Agency RMBS
224,075
5.7 %
207,068
5.2 %
Non-QM loans and retained non-QM
RMBS(6)
2,077,870
53.2 %
2,122,561
53.7 %
Residential transition loans and other
residential mortgage loans and REO(3)
963,772
24.7 %
951,811
24.1 %
Non-Dollar denominated:
CLOs(2)
1,738
0.1 %
1,674
0.1 %
Corporate debt and equity
238
— %
213
— %
RMBS(7)
20,979
0.5 %
19,525
0.5 %
Total long credit portfolio
$
3,907,899
100.0 %
$
3,953,196
100.0 %
Less: Non-retained tranches of
consolidated securitization trusts
1,458,673
1,527,527
Total long credit portfolio excluding
non-retained tranches of consolidated securitization trusts
$
2,449,226
$
2,425,669
- This information does not include U.S. Treasury securities,
securities sold short, or financial derivatives.
- Includes equity investments in securitization-related
vehicles.
- In accordance with U.S. GAAP, REO is not considered a financial
instrument and as a result is included at the lower of cost or fair
value.
- Includes equity investments in unconsolidated entities holding
small balance commercial mortgage loans and REO.
- Includes corporate loans to certain loan origination entities
in which the Company holds an equity investment.
- Retained non-QM RMBS represents RMBS issued by non-consolidated
Ellington-sponsored non-QM loan securitization trusts, and
interests in entities holding such RMBS.
- Includes an equity investment in an unconsolidated entity
holding European RMBS.
Agency RMBS Portfolio(1)
The following table summarizes the Company's Agency RMBS
portfolio holdings as of June 30, 2023 and March 31, 2023:
June 30, 2023
March 31, 2023
($ in thousands)
Fair Value
%
Fair Value
%
Long Agency RMBS:
Fixed rate
$
872,726
95.0 %
$
803,654
94.2 %
Floating rate
5,329
0.6 %
5,881
0.7 %
Reverse mortgages
26,928
2.9 %
28,638
3.4 %
IOs
13,511
1.5 %
14,939
1.7 %
Total long Agency RMBS
$
918,494
100.0 %
$
853,112
100.0 %
- This information does not include U.S. Treasury securities,
securities sold short, or financial derivatives.
Longbridge Portfolio(1)
Longbridge originates reverse mortgage loans, including home
equity conversion mortgage loans, or "HECMs," which are insured by
the FHA and which are eligible for inclusion in GNMA-guaranteed
HECM-backed MBS, or "HMBS." Upon securitization, the HECMs remain
on the Company's balance sheet under GAAP, and Longbridge retains
the mortgage servicing rights associated with the HMBS, or "HMBS
MSR Equivalent." Longbridge also originates "proprietary reverse
mortgage loans," which are not insured by the FHA, and Longbridge
has typically retained the associated MSRs. The following table
summarizes Longbridge's loan-related assets as of June 30,
2023 and March 31, 2023:
June 30, 2023
March 31, 2023
(In thousands)
HMBS assets(2)
$
8,158,304
$
8,083,845
Less: HMBS liabilities
(8,055,288
)
(7,975,916
)
HMBS MSR Equivalent
103,016
107,929
Unsecuritized HECM loans(3)
132,845
187,782
Proprietary reverse mortgage loans
185,052
138,234
MSRs related to proprietary reverse
mortgage loans
7,473
8,100
Unsecuritized REO
1,417
421
Total
$
429,803
$
442,466
- This information does not include financial derivatives or loan
commitments.
- Includes HECM loans, related REO, and claims or other
receivables.
- As of June 30, 2023, includes $9.9 million of assignable HECM
buyout loans, $14.1 million of non-assignable HECM buyout loans,
and $4.6 million of other inactive HECM loans. As of March 31,
2023, includes $52.0 million of assignable HECM buyout loans, $16.4
million of non-assignable HECM buyout loans, and $4.4 million of
other inactive HECM loans.
The following table summarizes Longbridge's origination volumes
by channel for the three-month periods ended June 30, 2023 and
March 31, 2023:
($ In thousands)
June 30, 2023
March 31, 2023
Channel
Units
New Loan Origination
Volume(1)
% of New Loan Origination
Volume
Units
New Loan Origination
Volume(1)
% of New Loan Origination
Volume
Retail
397
$
62,037
21 %
375
$
52,765
23 %
Wholesale and correspondent
1,338
235,375
79 %
1,106
180,829
77 %
Total
1,735
297,412
100 %
1,481
233,594
100 %
- Represents initial borrowed amounts on reverse mortgage
loans.
Financing
The Company's recourse debt-to-equity ratio2, excluding U.S.
Treasury securities and adjusted for unsettled purchases and sales,
increased slightly to 2.1:1 at June 30, 2023 from 2.0:1 at March
31, 2023, driven by an increase in borrowings and a decrease in
total equity. The Company's overall debt-to-equity ratio, excluding
U.S. Treasury securities and adjusted for unsettled purchases and
sales, also increased during the quarter, to 9.2:1 as of
June 30, 2023, as compared to 8:9:1 as of March 31, 2023.
The following table summarizes the Company's outstanding
borrowings and debt-to-equity ratios as of June 30, 2023 and
March 31, 2023:
June 30, 2023
March 31, 2023
Outstanding
Borrowings(1)
Debt-to-Equity
Ratio(2)
Outstanding
Borrowings(1)
Debt-to-Equity
Ratio(2)
(In thousands)
(In thousands)
Recourse borrowings(3)(4)
$
3,010,764
2.2:1
$
2,859,538
2.1:1
Non-recourse borrowings(4)
9,527,656
7.1:1
9,510,508
6.9:1
Total Borrowings
$
12,538,420
9.3:1
$
12,370,046
9.0:1
Total Equity
$
1,344,657
$
1,374,763
Recourse borrowings excluding U.S.
Treasury securities, adjusted for unsettled purchases and sales
2.1:1
2.0:1
Total borrowings excluding U.S. Treasury
securities, adjusted for unsettled purchases and sales
9.2:1
8.9:1
- Includes borrowings under repurchase agreements, other secured
borrowings, other secured borrowings, at fair value, and senior
unsecured notes, at par.
- Overall debt-to-equity ratio is computed by dividing
outstanding borrowings by total equity. The debt-to-equity ratio
does not account for liabilities other than debt financings.
- Excludes repo borrowings at certain unconsolidated entities
that are recourse to the Company. Including such borrowings, the
Company's debt-to-equity ratio based on total recourse borrowings
is 2.3:1 and 2.2:1 as of June 30, 2023 and March 31, 2023,
respectively.
- All of the Company's non-recourse borrowings are secured by
collateral. In the event of default under a non-recourse borrowing,
the lender has a claim against the collateral but not any of the
other assets held by the Company or its consolidated subsidiaries.
In the event of default under a recourse borrowing, the lender's
claim is not limited to the collateral (if any).
The following table summarizes the Company's operating results
by strategy for the three-month period ended June 30,
2023:
Investment Portfolio
Longbridge
Corporate/Other
Total
Per Share
(In thousands except per share
amounts)
Credit
Agency
Investment Portfolio
Subtotal
Interest income and other income (1)
$
73,544
$
7,816
$
81,360
$
6,305
$
1,195
$
88,860
$
1.31
Interest expense
(41,672
)
(9,645
)
(51,317
)
(6,117
)
(3,109
)
(60,543
)
(0.89
)
Realized gain (loss), net
(4,271
)
(14,794
)
(19,065
)
—
—
(19,065
)
(0.28
)
Unrealized gain (loss), net
(1,984
)
1,403
(581
)
5,611
—
5,030
0.07
Net change from reverse mortgage loans and
HMBS obligations
—
—
—
7,544
—
7,544
0.11
Earnings in unconsolidated entities
(5,868
)
—
(5,868
)
—
—
(5,868
)
(0.09
)
Interest rate hedges and other activity,
net(2)
14,787
18,877
33,664
14,949
(9,319
)
39,294
0.58
Credit hedges and other activities,
net(3)
(1,798
)
—
(1,798
)
—
—
(1,798
)
(0.03
)
Income tax (expense) benefit
—
—
—
—
(83
)
(83
)
—
Investment related expenses
(1,830
)
—
(1,830
)
(7,560
)
—
(9,390
)
(0.14
)
Other expenses
(2,035
)
—
(2,035
)
(18,256
)
(12,951
)
(33,242
)
(0.49
)
Net income (loss)
28,873
3,657
32,530
2,476
(24,267
)
10,739
0.16
Dividends on preferred stock
—
—
—
—
(5,980
)
(5,980
)
(0.09
)
Net (income) loss attributable to
non-participating non-controlling interests
(1,847
)
—
(1,847
)
25
(4
)
(1,826
)
(0.03
)
Net income (loss) attributable to common
stockholders and participating non-controlling interests
27,026
3,657
30,683
2,501
(30,251
)
2,933
0.04
Net (income) loss attributable to
participating non-controlling interests
—
—
—
—
(35
)
(35
)
Net income (loss) attributable to common
stockholders
$
27,026
$
3,657
$
30,683
$
2,501
$
(30,286
)
$
2,898
$
0.04
Net income (loss) attributable to common
stockholders per share of common stock
$
0.40
$
0.06
$
0.46
$
0.04
$
(0.45
)
$
0.04
Weighted average shares of common
stock and convertible units(4) outstanding
67,978
Weighted average shares of common stock
outstanding
67,162
- Other income primarily consists of rental income on real estate
owned, loan origination fees, and servicing income.
- Includes U.S. Treasury securities, if applicable.
- Other activities include certain equity and other trading
strategies and related hedges, and net realized and unrealized
gains (losses) on foreign currency.
- Convertible units include Operating Partnership units
attributable to participating non-controlling interests.
The following table summarizes the Company's operating results
by strategy for the three-month period ended March 31, 2023:
Investment Portfolio
Longbridge
Corporate/Other
Total
Per Share
(In thousands except per share
amounts)
Credit
Agency
Investment Portfolio
Subtotal
Interest income and other income (1)
$
73,570
$
7,121
$
80,691
$
4,165
$
1,912
$
86,768
$
1.29
Interest expense
(40,579
)
(8,852
)
(49,431
)
(4,346
)
(3,135
)
(56,912
)
(0.84
)
Realized gain (loss), net
(10,382
)
(25,849
)
(36,231
)
(3
)
—
(36,234
)
(0.54
)
Unrealized gain (loss), net
21,911
42,338
64,249
6,133
6,510
76,892
1.14
Net change from reverse mortgage loans and
HMBS obligations
—
—
—
31,587
—
31,587
0.47
Earnings in unconsolidated entities
3,444
—
3,444
—
—
3,444
0.05
Interest rate hedges and other activity,
net(2)
(9,042
)
(9,443
)
(18,485
)
(5,591
)
838
(23,238
)
(0.34
)
Credit hedges and other activities,
net(3)
369
—
369
—
—
369
0.01
Income tax (expense) benefit
—
—
—
—
(21
)
(21
)
—
Investment related expenses
(2,619
)
—
(2,619
)
(6,057
)
—
(8,676
)
(0.13
)
Other expenses
(886
)
—
(886
)
(19,390
)
(8,950
)
(29,226
)
(0.43
)
Net income (loss)
35,786
5,315
41,101
6,498
(2,846
)
44,753
0.66
Dividends on preferred stock
—
—
—
—
(5,117
)
(5,117
)
(0.08
)
Net (income) loss attributable to
non-participating non-controlling interests
(238
)
—
(238
)
(2
)
(4
)
(244
)
0.00
Net income (loss) attributable to common
stockholders and participating non-controlling interests
35,548
5,315
40,863
6,496
(7,967
)
39,392
0.58
Net (income) loss attributable to
participating non-controlling interests
—
—
—
—
(476
)
(476
)
Net income (loss) attributable to common
stockholders
$
35,548
$
5,315
$
40,863
$
6,496
$
(8,443
)
$
38,916
$
0.58
Net income (loss) attributable to common
stockholders per share of common stock
$
0.53
$
0.08
$
0.61
$
0.10
$
(0.13
)
$
0.58
Weighted average shares of common
stock and convertible units(4) outstanding
67,488
Weighted average shares of common stock
outstanding
66,672
- Other income primarily consists of rental income on real estate
owned, loan origination fees, and servicing income.
- Includes U.S. Treasury securities, if applicable.
- Other activities include certain equity and other trading
strategies and related hedges, and net realized and unrealized
gains (losses) on foreign currency.
- Convertible units include Operating Partnership units
attributable to participating non-controlling interests.
About Ellington Financial
Ellington Financial invests in a diverse array of financial
assets, including residential and commercial mortgage loans,
reverse mortgage loans, residential and commercial mortgage-backed
securities, consumer loans and asset-backed securities backed by
consumer loans, collateralized loan obligations, non-mortgage and
mortgage-related derivatives, debt and equity investments in loan
origination companies, and other strategic investments. Ellington
Financial is externally managed and advised by Ellington Financial
Management LLC, an affiliate of Ellington Management Group,
L.L.C.
Conference Call
The Company will host a conference call at 11:00 a.m. Eastern
Time on Tuesday, August 8, 2023, to discuss its financial results
for the quarter ended June 30, 2023. To participate in the
event by telephone, please dial (800) 245-3047 at least 10 minutes
prior to the start time and reference the conference ID EFCQ223.
International callers should dial (203) 518-9765 and reference the
same conference ID. The conference call will also be webcast live
over the Internet and can be accessed via the "For Our
Shareholders" section of the Company's web site at
www.ellingtonfinancial.com. To listen to the live webcast, please
visit www.ellingtonfinancial.com at least 15 minutes prior to the
start of the call to register, download, and install necessary
audio software. In connection with the release of these financial
results, the Company also posted an investor presentation, that
will accompany the conference call, on its website at
www.ellingtonfinancial.com under "For Our
Shareholders—Presentations."
A dial-in replay of the conference call will be available on
Tuesday, August 8, 2023, at approximately 2:00 p.m. Eastern Time
through Tuesday, August 15, 2023 at approximately 11:59 p.m.
Eastern Time. To access this replay, please dial (800) 945-0804.
International callers should dial (402) 220-0667. A replay of the
conference call will also be archived on the Company's web site at
www.ellingtonfinancial.com.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve
numerous risks and uncertainties. The Company's actual results may
differ from its beliefs, expectations, estimates, and projections
and, consequently, you should not rely on these forward-looking
statements as predictions of future events. Forward-looking
statements are not historical in nature and can be identified by
words such as "believe," "expect," "anticipate," "estimate,"
"project," "plan," "continue," "intend," "should," "would,"
"could," "goal," "objective," "will," "may," "seek" or similar
expressions or their negative forms, or by references to strategy,
plans, or intentions. Forward-looking statements are based on our
beliefs, assumptions and expectations of our future operations,
business strategies, performance, financial condition, liquidity
and prospects, taking into account information currently available
to us. These beliefs, assumptions, and expectations are subject to
risks and uncertainties and can change as a result of many possible
events or factors, not all of which are known to us. If a change
occurs, our business, financial condition, liquidity, results of
operations and strategies may vary materially from those expressed
or implied in our forward-looking statements. The following factors
are examples of those that could cause actual results to vary from
our forward-looking statements: changes in interest rates and the
market value of the Company's investments, market volatility,
changes in mortgage default rates and prepayment rates, the
Company's ability to borrow to finance its assets, changes in
government regulations affecting the Company's business, the
Company's ability to complete each of its previously announced
mergers with Arlington Asset Investment Corp. and Great Ajax Corp.
in a timely manner or at all and the Company's ability achieve the
cost savings and efficiencies, operating efficiencies, synergies
and other benefits, including the increased scale, and avoid
potential business disruption from each such previously announced
merger, the Company's ability to maintain its exclusion from
registration under the Investment Company Act of 1940, the
Company's ability to maintain its qualification as a real estate
investment trust, or "REIT," and other changes in market conditions
and economic trends, such as changes to fiscal or monetary policy,
heightened inflation, slower growth or recession, and currency
fluctuations. Furthermore, forward-looking statements are subject
to risks and uncertainties, including, among other things, those
described under Item 1A of the Company's Annual Report on Form
10-K, which can be accessed through the Company's website at
www.ellingtonfinancial.com or at the SEC's website (www.sec.gov).
Other risks, uncertainties, and factors that could cause actual
results to differ materially from those projected may be described
from time to time in reports the Company files with the SEC,
including reports on Forms 10-Q, 10-K and 8-K. The Company
undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events,
or otherwise.
ELLINGTON FINANCIAL INC. CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
Three-Month Period
Ended
Six-Month Period Ended
June 30, 2023
March 31, 2023
June 30, 2023
(In thousands, except per share
amounts)
NET INTEREST INCOME
Interest income
$
88,092
$
87,174
$
175,266
Interest expense
(63,433
)
(59,617
)
(123,050
)
Total net interest income
24,659
27,557
52,216
Other Income (Loss)
Realized gains (losses) on securities and
loans, net
(17,388
)
(36,767
)
(54,155
)
Realized gains (losses) on financial
derivatives, net
29,780
(25,447
)
4,333
Realized gains (losses) on real estate
owned, net
(1,245
)
(56
)
(1,301
)
Unrealized gains (losses) on securities
and loans, net
(11,383
)
99,257
87,874
Unrealized gains (losses) on financial
derivatives, net
8,340
2,763
11,103
Unrealized gains (losses) on real estate
owned, net
1,174
4
1,178
Unrealized gains (losses) on other secured
borrowings, at fair value, net
12,152
(29,680
)
(17,528
)
Unrealized gains (losses) on senior notes,
at fair value
—
6,510
6,510
Net change from reverse mortgage loans, at
fair value
32,120
163,121
195,241
Net change related to HMBS obligations, at
fair value
(24,576
)
(131,534
)
(156,110
)
Other, net
5,689
3,504
9,193
Total other income (loss)
34,663
51,675
86,338
EXPENSES
Base management fee to affiliate, net of
rebates
4,913
4,956
9,869
Investment related expenses:
Servicing expense
4,968
4,807
9,775
Other
4,422
3,869
8,291
Professional fees
6,351
3,556
9,907
Compensation and benefits
15,179
14,670
29,849
Other expenses
6,799
6,044
12,843
Total expenses
42,632
37,902
80,534
Net Income (Loss) before Income Tax
Expense (Benefit) and Earnings from Investments in Unconsolidated
Entities
16,690
41,330
58,020
Income tax expense (benefit)
83
21
104
Earnings (losses) from investments in
unconsolidated entities
(5,868
)
3,444
(2,424
)
Net Income (Loss)
10,739
44,753
55,492
Net Income (Loss) Attributable to
Non-Controlling Interests
1,861
720
2,581
Dividends on Preferred Stock
5,980
5,117
11,097
Net Income (Loss) Attributable to
Common Stockholders
$
2,898
$
38,916
$
41,814
Net Income (Loss) per Common
Share:
Basic and Diluted
$
0.04
$
0.58
$
0.62
Weighted average shares of common
stock outstanding
67,162
66,672
66,919
Weighted average shares of common
stock and convertible units outstanding
67,978
67,488
67,734
ELLINGTON FINANCIAL INC. CONDENSED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
As of
(In thousands, except share and per share
amounts)
June 30, 2023
March 31, 2023
December 31, 2022(1)
ASSETS
Cash and cash equivalents
$
194,595
$
188,555
$
217,053
Restricted cash
1,602
1,601
4,816
Securities, at fair value
1,500,863
1,389,547
1,459,465
Loans, at fair value
11,822,695
11,812,567
11,626,008
Loan commitments, at fair value
3,800
3,299
3,060
Mortgage servicing rights, at fair
value
7,473
8,100
8,108
Investments in unconsolidated entities, at
fair value
118,420
118,747
127,046
Real estate owned
21,076
26,717
28,403
Financial derivatives–assets, at fair
value
131,472
104,033
132,518
Reverse repurchase agreements
183,676
180,934
226,444
Due from brokers
33,118
24,291
36,761
Investment related receivables
183,222
163,029
139,413
Other assets
100,853
90,105
76,791
Total Assets
$
14,302,865
$
14,111,525
$
14,085,886
LIABILITIES
Securities sold short, at fair value
$
161,718
$
158,302
$
209,203
Repurchase agreements
2,557,864
2,285,898
2,609,685
Financial derivatives–liabilities, at fair
value
30,502
24,245
54,198
Due to brokers
46,421
35,431
34,507
Investment related payables
61,202
48,373
49,323
Other secured borrowings
242,900
363,640
276,058
Other secured borrowings, at fair
value
1,472,368
1,534,592
1,539,881
HMBS-related obligations, at fair
value
8,055,288
7,975,916
7,787,155
Senior notes, at fair value
185,325
185,325
191,835
Base management fee payable to
affiliate
4,913
4,956
4,641
Dividend payable
14,183
14,043
12,243
Interest payable
19,010
14,926
22,452
Accrued expenses and other liabilities
106,514
91,115
73,819
Total Liabilities
12,958,208
12,736,762
12,865,000
EQUITY
Preferred stock, par value $0.001 per
share, 100,000,000 shares authorized; 13,420,421, 13,420,421 and
9,420,421 shares issued and outstanding, and $335,511, $335,511,
and $235,511 aggregate liquidation preference, respectively
323,920
323,920
227,432
Common stock, par value $0.001 per share,
200,000,000, 100,000,000, and 100,000,000 shares authorized,
respectively; 67,161,740, 67,185,076, and 63,812,215 shares issued
and outstanding, respectively(2)
67
67
64
Additional paid-in-capital
1,308,158
1,308,107
1,259,352
Retained earnings (accumulated
deficit)
(309,587
)
(282,262
)
(290,881
)
Total Stockholders' Equity
1,322,558
1,349,832
1,195,967
Non-controlling interests
22,099
24,931
24,919
Total Equity
1,344,657
1,374,763
1,220,886
TOTAL LIABILITIES AND EQUITY
$
14,302,865
$
14,111,525
$
14,085,886
SUPPLEMENTAL PER SHARE
INFORMATION:
Book Value Per Common Share (3)
$
14.70
$
15.10
$
15.05
- Derived from audited financial statements as of December 31,
2022.
- Common shares issued and outstanding at June 30, 2023 includes
23,336 repurchased under the Company's share repurchase
program.
- Based on total stockholders' equity less the aggregate
liquidation preference of the Company's preferred stock
outstanding.
Reconciliation of Net Income (Loss) to Adjusted Distributable
Earnings
The Company calculates Adjusted Distributable Earnings as U.S.
GAAP net income (loss) as adjusted for: (i) realized and unrealized
gain (loss) on securities and loans, REO, mortgage servicing
rights, financial derivatives (excluding periodic settlements on
interest rate swaps), any borrowings carried at fair value, and
foreign currency transactions; (ii) incentive fee to affiliate;
(iii) Catch-up Premium Amortization Adjustment (as defined below);
(iv) non-cash equity compensation expense; (v) provision for income
taxes; (vi) certain non-capitalized transaction costs; and (vii)
other income or loss items that are of a non-recurring nature. For
certain investments in unconsolidated entities, the Company
includes the relevant components of net operating income in
Adjusted Distributable Earnings. The Catch-up Premium Amortization
Adjustment is a quarterly adjustment to premium amortization
triggered by changes in actual and projected prepayments on the
Company's Agency RMBS (accompanied by a corresponding offsetting
adjustment to realized and unrealized gains and losses). The
adjustment is calculated as of the beginning of each quarter based
on the Company's then-current assumptions about cashflows and
prepayments, and can vary significantly from quarter to quarter.
Non-capitalized transaction costs include expenses, generally
professional fees, incurred in connection with the acquisition of
an investment or issuance of long-term debt. For the contribution
to Adjusted Distributable Earnings from Longbridge, the Company
adjusts Longbridge's contribution to the Company's net income in a
similar manner, but it includes in Adjusted Distributable Earnings
certain realized and unrealized gains (losses) from Longbridge's
origination business ("gain-on-sale income").
Adjusted Distributable Earnings is a supplemental non-GAAP
financial measure. The Company believes that the presentation of
Adjusted Distributable Earnings provides information useful to
investors, because: (i) the Company believes that it is a useful
indicator of both current and projected long-term financial
performance, in that it excludes the impact of certain
current-period earnings components that the Company believes are
less useful in forecasting long-term performance and
dividend-paying ability; (ii) the Company uses it to evaluate the
effective net yield provided by its investment portfolio, after the
effects of financial leverage and by Longbridge, to reflect the
earnings from its reverse mortgage origination and servicing
operations; and (iii) the Company believes that presenting Adjusted
Distributable Earnings assists investors in measuring and
evaluating its operating performance, and comparing its operating
performance to that of its residential mortgage REIT and mortgage
originator peers. Please note, however, that: (I) the Company's
calculation of Adjusted Distributable Earnings may differ from the
calculation of similarly titled non-GAAP financial measures by its
peers, with the result that these non-GAAP financial measures might
not be directly comparable; and (II) Adjusted Distributable
Earnings excludes certain items that may impact the amount of cash
that is actually available for distribution.
In addition, because Adjusted Distributable Earnings is an
incomplete measure of the Company's financial results and differs
from net income (loss) computed in accordance with U.S. GAAP, it
should be considered supplementary to, and not as a substitute for,
net income (loss) computed in accordance with U.S. GAAP.
Furthermore, Adjusted Distributable Earnings is different from
REIT taxable income. As a result, the determination of whether the
Company has met the requirement to distribute at least 90% of its
annual REIT taxable income (subject to certain adjustments) to its
stockholders, in order to maintain its qualification as a REIT, is
not based on whether it distributed 90% of its Adjusted
Distributable Earnings.
In setting the Company's dividends, the Company's Board of
Directors considers the Company's earnings, liquidity, financial
condition, REIT distribution requirements, and financial covenants,
along with other factors that the Board of Directors may deem
relevant from time to time.
The following table reconciles, for the three-month periods
ended June 30, 2023 and March 31, 2023, the Company's Adjusted
Distributable Earnings to the line on the Company's Condensed
Consolidated Statement of Operations entitled Net Income (Loss),
which the Company believes is the most directly comparable U.S.
GAAP measure:
Three-Month Period
Ended
June 30, 2023
March 31, 2023
(In thousands, except per share
amounts)
Investment Portfolio
Longbridge
Corporate/Other
Total
Investment Portfolio
Longbridge
Corporate/Other
Total
Net Income (Loss)
$
32,530
$
2,476
$
(24,267
)
$
10,739
$
41,101
$
6,498
$
(2,846
)
$
44,753
Income tax expense (benefit)
—
—
83
83
—
—
21
21
Net income (loss) before income tax
expense (benefit)
32,530
2,476
(24,184
)
10,822
41,101
6,498
(2,825
)
44,774
Adjustments:
Realized (gains) losses, net(1)
(547
)
—
(1,743
)
(2,290
)
65,741
—
—
65,741
Unrealized (gains) losses, net(2)
2,695
—
8,261
10,956
(64,020
)
—
(9,679
)
(73,699
)
Unrealized (gains) losses on MSRs, net of
hedging (gains) losses(3)
—
(1,888
)
—
(1,888
)
—
(4,225
)
—
(4,225
)
Negative (positive) component of interest
income represented by Catch-up Premium Amortization Adjustment
483
—
—
483
482
—
—
482
Non-capitalized transaction costs and
other expense adjustments(4)
1,053
566
3,723
5,342
457
2,059
95
2,611
(Earnings) losses from investments in
unconsolidated entities
5,868
—
—
5,868
(3,444
)
—
—
(3,444
)
Adjusted distributable earnings from
investments in unconsolidated entities(5)
2,848
—
—
2,848
3,752
—
—
3,752
Total Adjusted Distributable Earnings
$
44,930
$
1,154
$
(13,943
)
$
32,141
$
44,069
$
4,332
$
(12,409
)
$
35,992
Dividends on preferred stock
—
—
5,980
5,980
—
—
5,117
5,117
Adjusted Distributable Earnings
attributable to non-controlling interests
138
5
301
444
229
19
318
566
Adjusted Distributable Earnings
Attributable to Common Stockholders
$
44,792
$
1,149
$
(20,224
)
$
25,717
$
43,840
$
4,313
$
(17,844
)
$
30,309
Adjusted Distributable Earnings
Attributable to Common Stockholders, per share
$
0.67
$
0.02
$
(0.30
)
$
0.38
$
0.66
$
0.06
$
(0.27
)
$
0.45
- Includes realized (gains) losses on securities and loans, REO,
financial derivatives (excluding periodic settlements on interest
rate swaps), and foreign currency transactions which are components
of Other Income (Loss) on the Condensed Consolidated Statement of
Operations.
- Includes unrealized (gains) losses on securities and loans,
REO, financial derivatives (excluding periodic settlements on
interest rate swaps), borrowings carried at fair value, and foreign
currency transactions which are components of Other Income (Loss)
on the Condensed Consolidated Statement of Operations.
- Represents net change in fair value of HMBS MSR Equivalent and
mortgage servicing rights related to proprietary mortgage loans
attributable to changes in market conditions and model assumptions.
This adjustment also includes net (gains) losses on certain hedging
instruments, which are components of realized and/or unrealized
gains (losses) on financial derivatives, net on the Condensed
Consolidated Statement of Operations.
- For the three-month period ended June 30, 2023, includes $3.6
million of expenses related to the agreed upon, but not yet
completed, mergers of Arlington Asset Investment Corp. and Great
Ajax Corp., $0.9 million of non-capitalized transaction costs, $0.4
million of non-cash equity compensation expense, and $0.4 million
of various other expenses. For the three-month period ended March
31, 2023, includes $1.1 million of professional fees related to the
acquisition and integration of Longbridge, $0.7 million of
non-capitalized transaction costs, $0.4 million of non-cash equity
compensation expense, and $0.4 million of various other
expenses.
- Includes net interest income and operating expenses for certain
investments in unconsolidated entities.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230807614555/en/
Investors: Ellington Financial Inc. Investor Relations (203)
409-3575 info@ellingtonfinancial.com or Media: Amanda Shpiner/Sara
Widmann Gasthalter & Co. for Ellington Financial (212) 257-4170
Ellington@gasthalter.com
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