Ellington Financial Inc. (NYSE: EFC) ("we," "us," or "our")
today reported financial results for the quarter ended September
30, 2023.
Highlights
- Net income attributable to common stockholders of $6.6 million,
or $0.10 per common share.1
- $14.2 million, or $0.21 per common share, from the investment
portfolio.
- $24.8 million, or $0.37 per common share, from the credit
strategy.
- $(10.5) million, or $(0.16) per common share, from the Agency
strategy.
- $4.1 million, or $0.06 per common share, from Longbridge.
- Adjusted Distributable Earnings2 of $22.5 million, or $0.33 per
common share.
- Book value per common share as of September 30, 2023 of $14.33,
including the effects of dividends of $0.45 per common share for
the quarter.
- Dividend yield of 14.2% based on the November 6, 2023 closing
stock price of $12.70 per share, and monthly dividend of $0.15 per
common share declared on October 6, 2023.
- Recourse debt-to-equity ratio3 of 2.3:1 as of September 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
9.4:14.
- Cash and cash equivalents of $174.7 million as of September 30,
2023, in addition to other unencumbered assets of $394.6
million.
- Subsequent to quarter-end, we announced the mutual termination
of our previously announced merger with Great Ajax Corp. We expect
to close our pending merger with Arlington Asset Investment Corp.
during the fourth quarter.
Third Quarter 2023 Results
“In the third quarter, Ellington Financial generated net income
of $0.10 per share and Adjusted Distributable Earnings of $0.33 per
share,” said Laurence Penn, Chief Executive Officer and President.
“Our positive results, in an extremely volatile market, were driven
by steady performance from our residential transition loan, non-QM,
commercial mortgage bridge, and credit risk transfer portfolios,
along with significant gains on our interest rate hedges, which
exceeded net losses elsewhere in the portfolio.
“During the quarter, we took advantage of continued wide yield
spreads by increasing our residential loan investments—most notably
non-QM, residential transition, and proprietary reverse mortgage
loans—as well as Agency RMBS, while continuing to ratchet down our
commercial mortgage bridge loan portfolio. While our overall
leverage ticked up incrementally, we still finished the quarter
with additional borrowing capacity and ample liquidity.
“We have always endeavored to hedge EFC’s interest rate
exposure. This positioning was critical in the third quarter, and
with rates rising sharply, the profits on our hedges were
substantial. If we are indeed in a ‘higher-for-longer’ interest
rate environment, I believe that we are well positioned with our
hedging expertise and short duration, high-yielding loan
portfolios.
"As we look ahead, we continue to progress toward completing the
Arlington Asset Investment Corp. merger, which we expect to close
by year end. As a reminder, we have highlighted several strategic
benefits to this transaction. First, we will be adding a sizable
portfolio of low-coupon Agency mortgage servicing rights, which
should perform well in a higher interest rate environment and
further diversify Ellington Financial’s earnings stream. Second, we
will be able to tap into Arlington's substantial dry powder to
deploy in a market rich with opportunities, both by financing
Arlington’s currently unlevered Agency MSR portfolio, and by
monetizing Arlington’s liquid assets and rotating that capital into
higher-yielding investments. Third, we will significantly increase
our capital base in a highly efficient manner, not only with common
equity, but also with low-cost preferred equity and unsecured
debt.
“In addition, we expect that ongoing dislocations in the banking
sector will continue to generate compelling opportunities for us,
both to capitalize on distressed asset sales and to add market
share at our originator affiliates. We have always focused on
sectors where banks are less active and where there is less
competition, and we have built up deep and experienced teams and
strong track records in these businesses across market cycles.”
Financial Results
Investment Portfolio Summary
Our investment portfolio generated net income attributable to
common stockholders of $14.2 million, consisting of $24.8 million
from the credit strategy and $(10.5) million from the Agency
strategy.
Credit Performance
Our total long credit portfolio, excluding non-retained tranches
of consolidated non-QM securitization trusts, increased slightly to
$2.48 billion as of September 30, 2023, from $2.45 billion as of
June 30, 2023. Our non-QM and residential transition loan
portfolios increased sequentially, as net purchases exceeded
principal paydowns, and we also net purchased non-Agency RMBS
during the quarter. Conversely, our commercial mortgage bridge loan
portfolio continued to shrink, as loan paydowns in that portfolio
again significantly exceeded new originations during the
quarter.
Higher net interest income5 and significant net gains on our
interest rate hedges drove the positive results in the credit
strategy. A portion of this income was offset by net realized and
unrealized losses on our consumer loans, non-QM loans, commercial
mortgage bridge loans, and CMBS. Our residential and commercial
mortgage loan portfolios continue to experience low levels of
credit losses and strong overall credit performance, although we
have seen an uptick in delinquencies in these portfolios recently
and are monitoring developments closely.
During the quarter, borrowing costs on our credit investments
increased, driven by higher short-term interest rates. At the same
time, our asset yields also increased, and we continued to benefit
from positive carry on our interest rate swap hedges, where we
overall receive a higher floating rate and pay a lower fixed rate.
As a result, the net interest margin6 on our credit portfolio
increased slightly quarter over quarter to 2.95% from 2.91%.
Agency Performance
Our total long Agency RMBS portfolio increased by 5% quarter
over quarter to $964.3 million, as opportunistic purchases exceeded
sales, principal repayments, and net losses.
In the third quarter, Agency RMBS faced the significant
headwinds of elevated market volatility and rising long-term
interest rates. Yield spreads widened and Agency RMBS significantly
underperformed U.S. Treasury securities and interest rate swaps for
the quarter, with the most pronounced underperformance coming on
lower coupon RMBS. Meanwhile, our delta-hedging costs, which are
tied to interest rate volatility, remained high. Overall, net
losses on our Agency RMBS and negative net interest income exceeded
net gains on our interest rate hedges, resulting in a net loss in
our Agency RMBS strategy for the quarter.
Average pay-ups on our specified pools decreased slightly to
0.75% as of September 30, 2023, as compared to 0.78% as of June 30,
2023.
In the Agency strategy, the increase in our cost of funds
exceeded the increase in our asset yields; as a result, the net
interest margin5 on our Agency RMBS, excluding the Catch-up
Amortization Adjustment, decreased to 1.05% from 1.31%.
Longbridge Summary
Our Longbridge portfolio generated net income attributable to
common stockholders of $4.1 million for the third quarter, driven
primarily by net gains on interest rate hedges, partially offset by
net losses on our HMBS MSR Equivalent7 and MSRs (collectively, our
"MSR-related Net Assets"), net losses on proprietary loans, and a
net loss in originations. In originations, the combination of
higher interest rates and wider yield spreads negatively impacted
gain-on-sale margins on both HECM and proprietary loans, which more
than offset a modest uptick in overall origination volumes.
Net losses on our MSR-related Net Assets consisted primarily of
an aggregate mark-to-market loss of $8.2 million, as a significant
mark-to-market loss on our existing MSR-related Net Assets was
partially offset by a significant mark-to-market gain on the MSR
portfolio we acquired out of a bankruptcy proceeding on July 1st.
The mark-to-market loss on our existing MSR-related Net Assets
resulted from our adoption of more conservative valuation
assumptions in light of current market conditions. These revised
assumptions included both higher NPV discount rates (reflecting
higher market interest rates and reduced liquidity in the reverse
mortgage sector) and reduced projected cash flows (reflecting
upward adjustments to assumed sub-servicing expenses and downward
adjustments to projected income from tail securitizations). The
mark-to-market gain on the MSR portfolio we acquired out of
bankruptcy resulted from our application of our revised, more
conservative valuation assumptions to that portfolio, which we were
able to purchase out of bankruptcy at a distressed price.
Our Longbridge portfolio increased by 14% sequentially to $488.2
million as of September 30, 2023, driven primarily by proprietary
reverse mortgage loan originations and the July MSR portfolio
acquisition. These increases were partially offset by the
above-referenced mark-to-market loss on our existing MSR-related
Net Assets.
Corporate/Other Summary
Our results for the quarter reflect a significant gain, driven
by higher interest rates, on the fixed payer interest rate swaps
that we held in connection with the then-pending merger with Great
Ajax Corp.; partially offset by a net loss, also driven by higher
interest rates, on the fixed receiver interest rate swaps that we
use to hedge the fixed payments on both our unsecured long-term
debt, or "Senior Notes," and our preferred equity. Our results for
the quarter also reflect expenses related to our pending merger
with Arlington Asset Investment Corp. and our then-pending merger
with Great Ajax Corp.
On October 20, 2023, we announced the mutual termination of our
previously announced merger with Great Ajax Corp. Including
activity both in the third quarter and through October, the net
gains on the hedges we held in connection with this transaction
covered all of our costs associated with this transaction,
including mark-to-market losses on our termination-related
investment in the common shares of Great Ajax Corp. When the merger
was mutually terminated, we neutralized the associated hedges.
We expect to close our pending merger with Arlington Asset
Investment Corp. prior to year end.
____________________
1
Includes $(11.7) million of preferred
dividends accrued and certain corporate/other income and expense
items not attributed to either the investment portfolio or
Longbridge segments.
2
Adjusted Distributable Earnings is a
non-GAAP financial measure. See "Reconciliation of Net Income
(Loss) to Adjusted Distributable Earnings" below for an explanation
regarding the calculation of Adjusted Distributable Earnings.
3
Excludes U.S. Treasury securities and repo
borrowings at certain unconsolidated entities that are recourse to
us. Including such borrowings, our debt-to-equity ratio based on
total recourse borrowings was 2.4:1 as of September 30, 2023.
4
Excludes U.S. Treasury securities.
5
Excludes any interest income and interest
expense items from interest rate hedges, net credit hedges and
other activities, net.
6
Net interest margin represents the
weighted average asset yield less the weighted average secured
financing cost of funds. It also includes the effect of actual and
accrued periodic payments on interest rate swaps used to hedge the
assets.
7
HMBS assets are consolidated for GAAP
reporting purposes, and HMBS-related obligations are accounted for
on the balance sheet as secured borrowings. The fair value of HMBS
assets less the fair value of the HMBS-related obligations
approximate fair value of the HMBS MSR Equivalent.
Credit Portfolio(1)
The following table summarizes our credit portfolio holdings as
of September 30, 2023 and June 30, 2023:
September 30, 2023
June 30, 2023
($ in thousands)
Fair Value
%
Fair Value
%
Dollar denominated:
CLOs(2)
$
29,294
0.8
%
$
24,722
0.6
%
CMBS
20,587
0.5
%
20,752
0.5
%
Commercial mortgage loans and
REO(3)(4)
365,329
9.4
%
419,915
10.7
%
Consumer loans and ABS backed by consumer
loans(2)
90,474
2.3
%
93,116
2.4
%
Other ABS
1,285
—
%
—
—
%
Corporate debt and equity and corporate
loans
21,836
0.6
%
21,907
0.6
%
Debt and equity investments in loan
origination entities(5)
37,947
1.0
%
38,815
1.0
%
Non-Agency RMBS
259,543
6.7
%
224,075
5.7
%
Non-QM loans and retained non-QM
RMBS(6)
2,060,036
53.0
%
2,077,870
53.2
%
Residential transition loans and other
residential mortgage loans and REO(3)
975,667
25.1
%
963,772
24.7
%
Non-Dollar denominated:
CLOs(2)
1,578
0.1
%
1,738
0.1
%
Corporate debt and equity
177
—
%
238
—
%
RMBS(7)
19,608
0.5
%
20,979
0.5
%
Total long credit portfolio
$
3,883,361
100.0
%
$
3,907,899
100.0
%
Less: Non-retained tranches of
consolidated securitization trusts
1,398,748
1,458,673
Total long credit portfolio excluding
non-retained tranches of consolidated securitization trusts
$
2,484,613
$
2,449,226
(1)
This information does not include U.S.
Treasury securities, securities sold short, or financial
derivatives.
(2)
Includes equity investments in
securitization-related vehicles.
(3)
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.
(4)
Includes equity investments in
unconsolidated entities holding small balance commercial mortgage
loans and REO.
(5)
Includes corporate loans to certain loan
origination entities in which we hold an equity investment.
(6)
Retained non-QM RMBS represents RMBS
issued by non-consolidated Ellington-sponsored non-QM loan
securitization trusts, and interests in entities holding such
RMBS.
(7)
Includes an equity investment in an
unconsolidated entity holding European RMBS.
Agency RMBS Portfolio(1)
The following table summarizes our Agency RMBS portfolio
holdings as of September 30, 2023 and June 30, 2023:
September 30, 2023
June 30, 2023
($ in thousands)
Fair Value
%
Fair Value
%
Long Agency RMBS:
Fixed rate
$
914,262
94.8
%
$
872,726
95.0
%
Floating rate
5,154
0.5
%
5,329
0.6
%
Reverse mortgages
33,529
3.5
%
26,928
2.9
%
IOs
11,341
1.2
%
13,511
1.5
%
Total long Agency RMBS
$
964,286
100.0
%
$
918,494
100.0
%
(1)
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 our 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 September 30,
2023 and June 30, 2023:
September 30, 2023
June 30, 2023
(In thousands)
HMBS assets(2)
$
8,256,881
$
8,158,304
Less: HMBS liabilities
(8,181,922
)
(8,055,288
)
HMBS MSR Equivalent
74,959
103,016
Unsecuritized HECM loans(3)
135,061
132,845
Proprietary reverse mortgage loans
247,021
185,052
MSRs
29,653
7,473
Unsecuritized REO
1,484
1,417
Total
$
488,178
$
429,803
(1)
This information does not include
financial derivatives or loan commitments.
(2)
Includes HECM loans, related REO, and
claims or other receivables.
(3)
As of September 30, 2023, includes $7.3
million of assignable HECM buyout loans, $12.1 million of
non-assignable HECM buyout loans, and $4.7 million of other
inactive HECM loans. As of June 30, 2023, includes $9.9 million of
assignable HECM buyout loans, $14.1 million of non-assignable HECM
buyout loans, and $4.6 million of other inactive HECM loans.
The following table summarizes Longbridge's origination volumes
by channel for the three-month periods ended September 30, 2023 and
June 30, 2023:
($ In thousands)
September 30, 2023
June 30, 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
384
$
55,576
18
%
397
$
62,037
21
%
Wholesale and correspondent
1,367
251,215
82
%
1,338
235,375
79
%
Total
1,751
$
306,791
100
%
1,735
$
297,412
100
%
(1)
Represents initial borrowed amounts on
reverse mortgage loans.
Financing
Our recourse debt-to-equity ratio2, excluding U.S. Treasury
securities and adjusted for unsettled purchases and sales,
increased slightly to 2.3:1 at September 30, 2023 from 2.1:1 at
June 30, 2023. Our overall debt-to-equity ratio, excluding U.S.
Treasury securities and adjusted for unsettled purchases and sales,
also increased during the quarter, to 9.4:1 as of September 30,
2023, as compared to 9.2:1 as of June 30, 2023.
The following table summarizes our outstanding borrowings and
debt-to-equity ratios as of September 30, 2023 and June 30,
2023:
September 30, 2023
June 30, 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)
$
3,084,174
2.3:1
$
3,010,764
2.2:1
Non-recourse borrowings(4)
9,586,489
7.2:1
9,527,656
7.1:1
Total Borrowings
$
12,670,663
9.5:1
$
12,538,420
9.3:1
Total Equity
$
1,337,417
$
1,344,657
Recourse borrowings excluding U.S.
Treasury securities, adjusted for unsettled purchases and sales
2.3:1
2.1:1
Total borrowings excluding U.S. Treasury
securities, adjusted for unsettled purchases and sales
9.4:1
9.2:1
(1)
Includes borrowings under repurchase
agreements, other secured borrowings, other secured borrowings, at
fair value, and senior unsecured notes, at par.
(2)
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.
(3)
Excludes repo borrowings at certain
unconsolidated entities that are recourse to us. Including such
borrowings, our debt-to-equity ratio based on total recourse
borrowings is 2.4:1 and 2.3:1 as of September 30, 2023 and June 30,
2023, respectively.
(4)
All of our 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 us or our 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 our operating results by strategy
for the three-month period ended September 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)
$
77,809
$
10,490
$
88,299
$
9,593
$
1,581
$
99,473
$
1.45
Interest expense
(43,791
)
(11,619
)
(55,410
)
(7,540
)
(3,117
)
(66,067
)
(0.96
)
Realized gain (loss), net
(10,226
)
(6,007
)
(16,233
)
—
—
(16,233
)
(0.24
)
Unrealized gain (loss), net
(9,205
)
(33,034
)
(42,239
)
19,201
(4,410
)
(27,448
)
(0.40
)
Net change from reverse mortgage loans and
HMBS obligations
—
—
—
(15,800
)
—
(15,800
)
(0.23
)
Earnings in unconsolidated entities
(978
)
—
(978
)
—
—
(978
)
(0.01
)
Interest rate hedges and other activity,
net(2)
16,516
29,639
46,155
23,948
11,082
81,185
1.18
Credit hedges and other activities,
net(3)
(1,141
)
—
(1,141
)
—
(235
)
(1,376
)
(0.02
)
Income tax (expense) benefit
—
—
—
—
(224
)
(224
)
—
Investment related expenses
(2,330
)
—
(2,330
)
(7,273
)
—
(9,603
)
(0.14
)
Other expenses
(1,441
)
—
(1,441
)
(18,046
)
(10,362
)
(29,849
)
(0.44
)
Net income (loss)
25,213
(10,531
)
14,682
4,083
(5,685
)
13,080
0.19
Dividends on preferred stock
—
—
—
—
(5,980
)
(5,980
)
(0.09
)
Net (income) loss attributable to
non-participating non-controlling interests
(438
)
—
(438
)
12
(3
)
(429
)
(0.01
)
Net income (loss) attributable to common
stockholders and participating non-controlling interests
24,775
(10,531
)
14,244
4,095
(11,668
)
6,671
0.10
Net (income) loss attributable to
participating non-controlling interests
—
—
—
—
(80
)
(80
)
Net income (loss) attributable to common
stockholders
$
24,775
$
(10,531
)
$
14,244
$
4,095
$
(11,748
)
$
6,591
$
0.10
Net income (loss) attributable to common
stockholders per share of common stock
$
0.37
$
(0.16
)
$
0.21
$
0.06
$
(0.17
)
$
0.10
Weighted average shares of common stock
and convertible units(4) outstanding
68,605
Weighted average shares of common stock
outstanding
67,790
(1)
Other income primarily consists of rental
income on real estate owned, loan origination fees, and servicing
income.
(2)
Includes U.S. Treasury securities, if
applicable.
(3)
Other activities include certain equity
and other trading strategies and related hedges, and net realized
and unrealized gains (losses) on foreign currency.
(4)
Convertible units include Operating
Partnership units attributable to participating non-controlling
interests.
The following table summarizes our 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
(1)
Other income primarily consists of rental
income on real estate owned, loan origination fees, and servicing
income.
(2)
Includes U.S. Treasury securities, if
applicable.
(3)
Other activities include certain equity
and other trading strategies and related hedges, and net realized
and unrealized gains (losses) on foreign currency.
(4)
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
We will host a conference call at 11:00 a.m. Eastern Time on
Wednesday, November 8, 2023, to discuss our financial results for
the quarter ended September 30, 2023. To participate in the event
by telephone, please dial (800) 343-4849 at least 10 minutes prior
to the start time and reference the conference ID EFCQ323.
International callers should dial (203) 518-9848 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 our 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, we also posted an investor presentation, that will
accompany the conference call, on our website at
www.ellingtonfinancial.com under "For Our
Shareholders—Presentations."
A dial-in replay of the conference call will be available on
Wednesday, November 8, 2023, at approximately 2:00 p.m. Eastern
Time through Wednesday, November 15, 2023 at approximately 11:59
p.m. Eastern Time. To access this replay, please dial (888)
562-3381. International callers should dial (402) 220-1189. A
replay of the conference call will also be archived on our 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. Our actual results may differ
from our 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 our investments, market volatility, changes in
mortgage default rates and prepayment rates, our ability to borrow
to finance our assets, changes in government regulations affecting
our business, our ability to complete our pending merger with
Arlington Asset Investment Corp. in a timely manner or at all and
our ability achieve the cost savings and efficiencies, operating
efficiencies, synergies and other benefits, including the increased
scale, and avoid potential business disruption from such pending
merger, our ability to maintain our exclusion from registration
under the Investment Company Act of 1940, our ability to maintain
our 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 our
Annual Report on Form 10-K, which can be accessed through our
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 we file with the SEC,
including reports on Forms 10-Q, 10-K and 8-K. We undertake 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
Nine-Month Period
Ended
September 30, 2023
June 30, 2023(1)
September 30, 2023
(In thousands, except per share
amounts)
NET INTEREST INCOME
Interest income
$
96,216
$
88,092
$
271,482
Interest expense
(68,702
)
(63,433
)
(191,752
)
Total net interest income
27,514
24,659
79,730
Other Income (Loss)
Realized gains (losses) on securities and
loans, net
(17,362
)
(17,388
)
(71,518
)
Realized gains (losses) on financial
derivatives, net
26,283
29,780
30,617
Realized gains (losses) on real estate
owned, net
(155
)
(1,245
)
(1,456
)
Unrealized gains (losses) on securities
and loans, net
(63,850
)
(11,383
)
24,024
Unrealized gains (losses) on financial
derivatives, net
55,794
8,340
66,897
Unrealized gains (losses) on real estate
owned, net
(1,712
)
1,174
(533
)
Unrealized gains (losses) on other secured
borrowings, at fair value, net
18,660
12,152
1,133
Unrealized gains (losses) on senior notes,
at fair value
(4,410
)
—
2,100
Net change from reverse mortgage loans, at
fair value
99,929
32,120
295,170
Net change related to HMBS obligations, at
fair value
(115,729
)
(24,576
)
(271,840
)
Other, net
28,772
5,689
37,965
Total other income (loss)
26,220
34,663
112,559
EXPENSES
Base management fee to affiliate, net of
rebates
4,890
4,913
14,759
Investment related expenses:
Servicing expense
5,261
4,968
15,036
Other
4,342
4,422
12,633
Professional fees
3,847
6,351
13,753
Compensation and benefits
14,675
15,537
45,261
Other expenses
6,437
6,441
18,544
Total expenses
39,452
42,632
119,986
Net Income (Loss) before Income Tax
Expense (Benefit) and Earnings from Investments in Unconsolidated
Entities
14,282
16,690
72,303
Income tax expense (benefit)
224
83
328
Earnings (losses) from investments in
unconsolidated entities
(978
)
(5,868
)
(3,403
)
Net Income (Loss)
13,080
10,739
68,572
Net Income (Loss) Attributable to
Non-Controlling Interests
509
1,861
3,090
Dividends on Preferred Stock
5,980
5,980
17,077
Net Income (Loss) Attributable to
Common Stockholders
$
6,591
$
2,898
$
48,405
Net Income (Loss) per Common
Share:
Basic and Diluted
$
0.10
$
0.04
$
0.72
Weighted average shares of common stock
outstanding
67,790
67,162
67,212
Weighted average shares of common stock
and convertible units outstanding
68,605
67,978
68,028
(1)
Conformed to current period
presentation.
ELLINGTON FINANCIAL INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(UNAUDITED)
As of
(In thousands, except share and per share
amounts)
September 30, 2023
June 30, 2023
December 31, 2022(1)
ASSETS
Cash and cash equivalents
$
174,664
$
194,595
$
217,053
Restricted cash
1,604
1,602
4,816
Securities, at fair value
1,502,049
1,500,863
1,459,465
Loans, at fair value
11,920,872
11,822,695
11,626,008
Loan commitments, at fair value
3,752
3,800
3,060
Mortgage servicing rights, at fair
value
29,653
7,473
8,108
Investments in unconsolidated entities, at
fair value
113,474
118,420
127,046
Real estate owned
23,570
21,076
28,403
Financial derivatives–assets, at fair
value
198,023
131,472
132,518
Reverse repurchase agreements
175,197
183,676
226,444
Due from brokers
38,870
33,118
36,761
Investment related receivables
167,447
183,222
139,413
Other assets
95,866
100,853
76,791
Total Assets
$
14,445,041
$
14,302,865
$
14,085,886
LIABILITIES
Securities sold short, at fair value
$
163,832
$
161,718
$
209,203
Repurchase agreements
2,573,043
2,557,864
2,609,685
Financial derivatives–liabilities, at fair
value
38,520
30,502
54,198
Due to brokers
80,180
46,421
34,507
Investment related payables
36,641
61,202
49,323
Other secured borrowings
301,131
242,900
276,058
Other secured borrowings, at fair
value
1,404,567
1,472,368
1,539,881
HMBS-related obligations, at fair
value
8,181,922
8,055,288
7,787,155
Senior notes, at fair value
189,735
185,325
191,835
Base management fee payable to
affiliate
4,890
4,913
4,641
Dividend payable
14,343
14,183
12,243
Interest payable
20,078
19,010
22,452
Accrued expenses and other liabilities
98,742
106,514
73,819
Total Liabilities
13,107,624
12,958,208
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, 200,000,000, and 100,000,000 shares authorized,
respectively; 68,234,160, 67,161,740, and 63,812,215 shares issued
and outstanding, respectively(2)
68
67
64
Additional paid-in-capital
1,323,124
1,308,158
1,259,352
Retained earnings (accumulated
deficit)
(333,622
)
(309,587
)
(290,881
)
Total Stockholders' Equity
1,313,490
1,322,558
1,195,967
Non-controlling interests
23,927
22,099
24,919
Total Equity
1,337,417
1,344,657
1,220,886
TOTAL LIABILITIES AND EQUITY
$
14,445,041
$
14,302,865
$
14,085,886
SUPPLEMENTAL PER SHARE
INFORMATION:
Book Value Per Common Share (3)
$
14.33
$
14.70
$
15.05
(1)
Derived from audited financial statements
as of December 31, 2022.
(2)
Common shares issued and outstanding at
September 30, 2023 includes 1,066,221 shares of common stock issued
under our ATM program.
(3)
Based on total stockholders' equity less
the aggregate liquidation preference of our preferred stock
outstanding.
Reconciliation of Net Income (Loss) to Adjusted Distributable
Earnings
We calculate 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 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, we include the relevant
components of net operating income in Adjusted Distributable
Earnings. The Catch-up Amortization Adjustment is a quarterly
adjustment to premium amortization or discount accretion triggered
by changes in actual and projected prepayments on our 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 our 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, we adjust Longbridge's contribution to
our net income in a similar manner, but we include 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. We believe that the presentation of Adjusted
Distributable Earnings provides information useful to investors,
because: (i) we believe 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 we believe are less useful in forecasting long-term
performance and dividend-paying ability; (ii) we use it to evaluate
the effective net yield provided by our 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) we believe that presenting Adjusted
Distributable Earnings assists investors in measuring and
evaluating our operating performance, and comparing our operating
performance to that of our residential mortgage REIT and mortgage
originator peers. Please note, however, that: (I) our calculation
of Adjusted Distributable Earnings may differ from the calculation
of similarly titled non-GAAP financial measures by our 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 our 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 we
have met the requirement to distribute at least 90% of our annual
REIT taxable income (subject to certain adjustments) to our
stockholders, in order to maintain our qualification as a REIT, is
not based on whether we distributed 90% of our Adjusted
Distributable Earnings.
In setting our dividends, our Board of Directors considers our
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 September 30, 2023 and June 30, 2023, our Adjusted
Distributable Earnings to the line on our Condensed Consolidated
Statement of Operations entitled Net Income (Loss), which we
believe is the most directly comparable U.S. GAAP measure:
Three-Month Period
Ended
September 30, 2023
June 30, 2023
(In thousands, except per share
amounts)
Investment Portfolio
Longbridge
Corporate/Other
Total
Investment Portfolio
Longbridge
Corporate/Other
Total
Net Income (Loss)
$
14,682
$
4,083
$
(5,685
)
$
13,080
$
32,530
$
2,476
$
(24,267
)
$
10,739
Income tax expense (benefit)
—
—
224
224
—
—
83
83
Net income (loss) before income tax
expense (benefit)
14,682
4,083
(5,461
)
13,304
32,530
2,476
(24,184
)
10,822
Adjustments:
Realized (gains) losses, net(1)
4,409
—
840
5,249
(547
)
—
(1,743
)
(2,290
)
Unrealized (gains) losses, net(2)
22,946
—
(8,230
)
14,716
2,695
—
8,261
10,956
Unrealized (gains) losses on MSRs, net of
hedging (gains) losses(3)
—
(7,974
)
—
(7,974
)
—
(1,888
)
—
(1,888
)
Negative (positive) component of interest
income represented by Catch-up Amortization Adjustment
(349
)
—
—
(349
)
483
—
—
483
Non-capitalized transaction costs and
other expense adjustments(4)
995
881
1,486
3,362
1,053
566
3,723
5,342
(Earnings) losses from investments in
unconsolidated entities
978
—
—
978
5,868
—
—
5,868
Adjusted distributable earnings from
investments in unconsolidated entities(5)
2,179
—
—
2,179
2,848
—
—
2,848
Total Adjusted Distributable Earnings
$
45,840
$
(3,010
)
$
(11,365
)
$
31,465
$
44,930
$
1,154
$
(13,943
)
$
32,141
Dividends on preferred stock
—
—
5,980
5,980
—
—
5,980
5,980
Adjusted Distributable Earnings
attributable to non-controlling interests
2,661
(12
)
318
2,967
138
5
301
444
Adjusted Distributable Earnings
Attributable to Common Stockholders
$
43,179
$
(2,998
)
$
(17,663
)
$
22,518
$
44,792
$
1,149
$
(20,224
)
$
25,717
Adjusted Distributable Earnings
Attributable to Common Stockholders, per share
$
0.64
$
(0.05
)
$
(0.26
)
$
0.33
$
0.67
$
0.02
$
(0.30
)
$
0.38
(1)
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.
(2)
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.
(3)
Represents net change in fair value of
HMBS MSR Equivalent and mortgage servicing rights related to
reverse 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.
(4)
For the three-month period ended September
30, 2023, includes $0.4 million of expenses related to our pending
merger with Arlington Asset Investment Corp., $1.0 million of
expenses related to our previously announced merger with Great Ajax
Corp. which was terminated in October 2023, $0.8 million of
non-capitalized transaction costs, $0.3 million of non-cash equity
compensation expense, and $0.9 million of various other expenses.
For the three-month period ended June 30, 2023, includes $2.1
million of expenses related to our pending merger with Arlington
Asset Investment Corp., $1.5 million of expenses related to our
previously announced merger with Great Ajax Corp. which was
terminated in October 2023, $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.
(5)
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/20231107366381/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
Ellington Financial (NYSE:EFC)
Historical Stock Chart
From Jun 2024 to Jul 2024
Ellington Financial (NYSE:EFC)
Historical Stock Chart
From Jul 2023 to Jul 2024