Ellington Financial Inc. (NYSE: EFC) (the "Company") today
reported financial results for the quarter ended March 31,
2023.
Highlights
- Net income attributable to common stockholders of $38.9
million, or $0.58 per common share.1
- $40.9 million, or $0.61 per common share, from the investment
portfolio.
- $35.5 million, or $0.53 per common share, from the credit
strategy.
- $5.3 million, or $0.08 per common share, from the Agency
strategy.
- $6.5 million, or $0.10 per common share, from Longbridge.
- Adjusted Distributable Earnings2 of $30.3 million, or $0.45 per
common share.
- Book value per common share as of March 31, 2023 of $15.10,
including the effects of dividends of $0.45 per common share for
the quarter.
- Dividend yield of 14.9% based on the May 5, 2023 closing stock
price of $12.05 per share, and monthly dividend of $0.15 per common
share declared on April 10, 2023.
- Recourse debt-to-equity ratio3 of 2.1:1 as of March 31, 2023.
Including all non-recourse borrowings, which primarily consist of
securitization-related liabilities, debt-to-equity ratio of
9.0:1.
- Cash and cash equivalents of $188.6 million as of March 31,
2023, in addition to other unencumbered assets of $429.1
million.
- Issued 4.0 million shares of Series C preferred stock.
First Quarter 2023 Results
"During the first quarter, we had strong performance in our
non-QM, residential transition loan, small-balance commercial
mortgage, and Agency MBS portfolios. Longbridge Financial also had
an excellent quarter, led by strong gain on sale margins on new
originations and mark-to-market gains on the HMBS MSR and
proprietary loan portfolios," said Laurence Penn, Chief Executive
Officer and President of Ellington Financial. "Despite the market
volatility in March, EFC generated an economic return of 3.3% for
the quarter, and sequentially increased both book value per share
and Adjusted Distributable Earnings, which covered our
dividend.
"In early February, we capitalized on a narrow window of market
stability by participating in our first non-QM securitization of
the year at attractive economics, and also by raising $100 million
of preferred equity, both of which positioned us well going into
the heightened volatility of March. So far, most of the capital
that we have put to work has been directed towards our loan
businesses; this included the secondary market purchase of a
portfolio of reverse mortgage loans at what we believe to be
distressed prices. In addition, with our share price trading at a
significant discount to book value per share in March, we
opportunistically repurchased our common shares at highly accretive
levels.
"We finished the first quarter with reduced leverage and a
meaningful amount of dry powder available to invest. However, given
the prospect of very significant asset sales from various troubled
regional banks, we are being patient with capital deployment. In
addition, while the credit performance of our loan portfolios
continues to be strong, with recession fears looming we continue to
tighten our underwriting criteria with an emphasis on keeping LTVs
low and being highly selective on geography and property type. I
believe that we are well positioned to take advantage of the
opportunities that we will find as the year unfolds."
Financial Results
Investment Portfolio Summary
The Company's investment portfolio generated net income
attributable to common stockholders of $40.9 million, consisting of
$35.5 million from the credit strategy and $5.3 million from the
Agency strategy.
Credit Performance
In the first quarter, the Company's total long credit portfolio,
excluding non-retained tranches of consolidated non-QM
securitization trusts, decreased by 5% sequentially to $2.426
billion as of March 31, 2023, driven by a smaller commercial
mortgage loan portfolio, as loan paydowns significantly exceeded
new originations in that portfolio, and a smaller non-QM loan
portfolio, following the completion of a non-QM securitization in
February in which the Company participated. A portion of the
decrease was offset by larger residential transition loan and
non-QM retained tranche portfolios quarter over quarter.
The Company benefited from strong results in its credit
strategy, driven by net interest income4 from its loan portfolios,
net gains on its non-QM loans, and low levels of credit losses. The
Company also had positive earnings from unconsolidated entities, as
net gains on certain equity investments in non-QM and commercial
mortgage loan-related entities exceeded net losses on strategic
equity investments in loan originators. A portion of these gains
were offset by net losses on the Company's interest rate hedges.
Finally, despite continued low levels of credit losses and strong
overall credit performance, the Company did see an uptick in
delinquencies on its residential and commercial mortgage loan
portfolios during the quarter.
The net interest margin5 on the Company's credit portfolio
increased quarter over quarter to 2.49% from 2.44%, as higher asset
yields more than offset a higher cost of funds.
Agency Performance
The Company's total long Agency RMBS portfolio decreased by 12%
quarter over quarter to $853.1 million, as net sales and principal
repayments exceeded net gains.
In January, interest rates and volatility declined and Agency
MBS yield spreads tightened, as the market anticipated a slower
pace of interest rate hikes by the Federal Reserve. In
mid-February, markets reversed course, with interest rates and
volatility rising and Agency yield spreads widening, on renewed
anxiety over inflation and what the Federal Reserve's response
would be. Then in March, turmoil in the banking system put further
pressure on Agency yield spreads. Overall for the first quarter,
Agency RMBS generated a negative excess return to U.S. Treasuries
of (0.50%), with the most pronounced underperformance coming on
low-coupon MBS due to concerns in March about future selling from
distressed regional banks.
The Company had a net gain in its Agency RMBS portfolio for the
quarter as net gains on its specified pools exceeded net losses on
its interest rate hedges and slightly negative net interest income,
which was driven by sharply higher financing costs.
Average pay-ups on the Company’s existing specified pool
portfolio decreased quarter over quarter, while its new purchases
during the quarter consisted of pools with lower pay-ups. As a
result, overall pay-ups on the Company's specified pools decreased
to 0.89% as of March 31, 2023, as compared to 0.96% as of December
31, 2022.
During the quarter, the Company's cost of funds on Agency RMBS
increased, driven by higher short-term interest rates and wider
repo financing spreads. However, its asset yields also increased,
and it continued to benefit from positive carry on its interest
rate swap hedges, where it net receives a higher floating rate and
pays a lower fixed rate. As a result, the net interest margin5 on
its Agency RMBS, excluding the Catch-up Premium Amortization
Adjustment, increased quarter over quarter to 1.14% from 0.98%.
Longbridge Summary
Longbridge's portfolio generated net income attributable to
common stockholders of $6.5 million.
Longbridge's portfolio increased by 35% sequentially to $442.5
million as of March 31, 2023 due to larger holdings of
unsecuritized HECM loans, primarily driven by an opportunistic
purchase from a third party of a portfolio of HECM buyout loans;
increased holdings of proprietary reverse mortgage loans; and a
larger HMBS MSR Equivalent quarter over quarter.
Quarter over quarter, yield spreads in the reverse mortgage
market tightened, despite weakness in the second half of March
related to concerns over the banking system. Tighter yield spreads
sequentially, combined with lower interest rates, generated net
gains on Longbridge's HMBS MSR Equivalent6 and proprietary reverse
mortgage loan portfolio in the first quarter. Longbridge also had a
net gain on originations for the quarter as higher gain-on-sale
margins more than offset lower origination volumes
sequentially.
_______________________________
1 Includes ($8.4) million of preferred
dividends accrued and certain corporate/other income and expense
items not attributed to either the investment portfolio or
Longbridge.
2 Adjusted Distributable Earnings is a
non-GAAP financial measure. See "Reconciliation of Net Income
(Loss) to Adjusted Distributable Earnings" below for an explanation
regarding the calculation of Adjusted Distributable Earnings.
3 Excludes repo borrowings at certain unconsolidated entities that
are recourse to us. Including such borrowings, the Company's
debt-to-equity ratio based on total recourse borrowings was 2.2:1
as of March 31, 2023.
4 Excludes any interest income and
interest expense items from interest rate hedges, net credit hedges
and other activities, net.
5 Net interest margin represents the
weighted average asset yield less the weighted average secured
financing cost of funds. It also includes the effect of actual and
accrued periodic payments on interest rate swaps used to hedge the
assets.
6 HMBS assets are consolidated for GAAP
reporting purposes, and HMBS-related obligations are accounted for
on the Company's balance sheet as secured borrowings. The fair
value of HMBS assets less the fair value of the HMBS-related
obligations approximate fair value of the HMBS MSR Equivalent.
Corporate/Other
The Company's results also reflected the reduction, driven by
credit spread widening, in the fair value of its unsecured
long-term debt, its "Senior Notes," for which the Company has
elected the fair value option.
Credit Portfolio(1)
The following table summarizes the Company's credit portfolio
holdings as of March 31, 2023 and December 31, 2022:
March 31, 2023
December 31, 2022
($ in thousands)
Fair Value
%
Fair Value
%
Dollar denominated:
CLOs(2)
$
31,044
0.8
%
$
29,930
0.7
%
CMBS
16,422
0.4
%
18,253
0.5
%
Commercial mortgage loans and
REO(5)(6)
455,114
11.5
%
492,648
12.1
%
Consumer loans and ABS backed by consumer
loans(2)
87,976
2.2
%
94,993
2.3
%
Corporate debt and equity and corporate
loans
18,882
0.5
%
18,084
0.4
%
Debt and equity investments in loan
origination entities(3)
40,906
1.0
%
42,581
1.1
%
Non-Agency RMBS
207,068
5.2
%
204,498
5.0
%
Non-QM loans and retained non-QM
RMBS(4)
2,122,561
53.7
%
2,216,843
54.3
%
Residential transition loans and other
residential mortgage loans and REO(5)
951,811
24.1
%
940,296
23.1
%
Non-Dollar denominated:
CLOs(2)
1,674
0.1
%
1,672
—
%
Corporate debt and equity
213
—
%
206
—
%
RMBS(7)
19,525
0.5
%
20,714
0.5
%
Total long credit portfolio
$
3,953,196
100.0
%
$
4,080,718
100.0
%
Less: Non-retained tranches of
consolidated securitization trusts
1,527,527
1,537,098
Total Long Credit Portfolio excluding
non-retained tranches of consolidated securitization trusts
$
2,425,669
$
2,543,620
(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)
Includes corporate loans to
certain loan origination entities in which the Company holds an
equity investment.
(4)
Retained non-QM RMBS represents
RMBS issued by non-consolidated Ellington-sponsored non-QM loan
securitization trusts, and interests in entities holding such
RMBS.
(5)
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.
(6)
Includes equity investments in
unconsolidated entities holding small balance commercial mortgage
loans and REO.
(7)
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 March 31, 2023 and December 31, 2022:
March 31, 2023
December 31, 2022
($ in thousands)
Fair Value
%
Fair Value
%
Long Agency RMBS:
Fixed rate
$
803,654
94.2
%
$
915,128
94.5
%
Floating rate
5,881
0.7
%
6,254
0.7
%
Reverse mortgages
28,638
3.4
%
29,989
3.1
%
IOs
14,939
1.7
%
16,892
1.7
%
Total long Agency RMBS
$
853,112
100.0
%
$
968,263
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 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 March 31, 2023
and December 31, 2022:
March 31, 2023
December 31, 2022
(In thousands)
HMBS assets(2)
$
8,083,845
$
7,882,717
Less: HMBS liabilities
(7,975,916
)
(7,787,155
)
HMBS MSR Equivalent
107,929
95,562
Unsecuritized HECM loans(3)
187,782
119,671
Proprietary reverse mortgage loans
138,234
103,602
MSRs related to proprietary reverse
mortgage loans
8,100
8,108
Unsecuritized REO
421
907
Total
$
442,466
$
327,850
(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 March 31, 2023, includes
$52.0 million of assignable HECM buyout loans, $16.4 million of
non-assignable HECM buyout loans, and $4.4 million of inactive HECM
tail loans.
The following table summarizes Longbridge's origination volumes
by channel for the three-month periods ended March 31, 2023 and
December 31, 2022:
($ In thousands)
March 31, 2023
December 31, 2022
Channel
Units
New Loan
Origination
Volume(1)
% of New
Loan
Origination
Volume
Units
New Loan
Origination
Volume(1)
% of New
Loan
Origination
Volume
Retail
375
$
52,765
23
%
321
$
51,248
15
%
Wholesale and correspondent
1,106
180,829
77
%
1,631
290,379
85
%
Total
1,481
233,594
100
%
1,952
341,637
100
%
(1)
Represents initial borrowed
amounts on reverse mortgage loans.
Financing
The Company's recourse debt-to-equity ratio2, adjusted for
unsettled purchases and sales, decreased to 2.0:1 at March 31, 2023
from 2.5:1 at December 31, 2022. This decrease was primarily the
result of a smaller investment portfolio, an increase in
unencumbered assets, and an increase in total equity. The Company's
overall debt-to-equity ratio, adjusted for unsettled purchases and
sales, also decreased during the quarter to 8.9:1 as of March 31,
2023, as compared to 10.1:1 as of December 31, 2022.
The following table summarizes the Company's outstanding
borrowings and debt-to-equity ratios as of March 31, 2023 and
December 31, 2022:
March 31, 2023
December 31, 2022
Outstanding
Borrowings(1)
Debt-to-
Equity Ratio(2)
Outstanding
Borrowings(1)
Debt-to-
Equity Ratio(2)
(In thousands)
(In thousands)
Recourse borrowings(3)(4)
$
2,859,538
2.1:1
$
3,095,743
2.5:1
Non-recourse borrowings(4)
9,510,508
6.9:1
9,327,036
7.7:1
Total Borrowings
$
12,370,046
9.0:1
$
12,422,779
10.2:1
Total Equity
$
1,374,763
$
1,220,886
Recourse borrowings net of unsettled
purchases and sales
2.0:1
2.5:1
Total borrowings net of unsettled
purchases and sales
8.9:1
10.1:1
(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 the Company.
Including such borrowings, the Company's debt-to-equity ratio based
on total recourse borrowings is 2.2:1 and 2.7:1 as of March 31,
2023 and December 31, 2022, respectively.
(4)
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 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
(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 the Company's operating results
by strategy for the three-month period ended December 31, 2022:
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)
$
75,864
$
9,594
$
85,458
$
4,737
$
1,158
$
91,353
$
1.47
Interest expense
(41,747
)
(8,500
)
(50,247
)
(4,628
)
(3,152
)
(58,027
)
(0.93
)
Realized gain (loss), net
(21,737
)
(32,084
)
(53,821
)
(196
)
—
(54,017
)
(0.87
)
Unrealized gain (loss), net
11,341
45,331
56,672
1,551
1,680
59,903
0.96
Net change from reverse mortgage loans and
HMBS obligations
—
—
—
36,808
—
36,808
0.59
Earnings in unconsolidated entities(2)
(1,398
)
—
(1,398
)
—
—
(1,398
)
(0.02
)
Interest rate hedges and other activity,
net(3)
(6,402
)
(2,511
)
(8,913
)
(106
)
(699
)
(9,718
)
(0.16
)
Credit hedges and other activities,
net(4)
(3,110
)
—
(3,110
)
—
—
(3,110
)
(0.05
)
Income tax (expense) benefit
—
—
—
—
2,850
2,850
0.05
Investment related expenses
(4,578
)
—
(4,578
)
(5,899
)
—
(10,477
)
(0.17
)
Other expenses
(1,152
)
—
(1,152
)
(17,775
)
(8,429
)
(27,356
)
(0.44
)
Net income (loss)
7,081
11,830
18,911
14,492
(6,592
)
26,811
0.43
Dividends on preferred stock
—
—
—
—
(3,824
)
(3,824
)
(0.06
)
Net (income) loss attributable to
non-participating non-controlling interests
74
—
74
(32
)
(3
)
39
0.00
Net income (loss) attributable to common
stockholders and participating non-controlling interests
7,155
11,830
18,985
14,460
(10,419
)
23,026
0.37
Net (income) loss attributable to
participating non-controlling interests
—
—
—
—
(292
)
(292
)
Net income (loss) attributable to common
stockholders
$
7,155
$
11,830
$
18,985
$
14,460
$
(10,711
)
$
22,734
$
0.37
Net income (loss) attributable to common
stockholders per share of common stock
$
0.12
$
0.19
$
0.31
$
0.24
$
(0.18
)
$
0.37
Weighted average shares of common stock
and convertible units(5) outstanding
62,295
Weighted average shares of common stock
outstanding
61,506
(1)
Other income primarily consists
of rental income on real estate owned, loan origination fees, and
servicing income.
(2)
Also includes bargain purchase
gain of $7.9 million related to the Company's acquisition of a
controlling interest in Longbridge.
(3)
Includes U.S. Treasury
securities, if applicable.
(4)
Other activities include certain
equity and other trading strategies and related hedges, and net
realized and unrealized gains (losses) on foreign currency.
(5)
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, May 9, 2023, to discuss its financial results for
the quarter ended March 31, 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 EFCQ123.
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, May 9, 2023, at approximately 2:00 p.m. Eastern Time
through Tuesday, May 16, 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 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
March 31, 2023
December 31, 2022
(In thousands, except per share
amounts)
NET INTEREST INCOME
Interest income
$
87,174
$
89,830
Interest expense
(59,617
)
(59,656
)
Total net interest income
27,557
30,174
Other Income (Loss)
Realized gains (losses) on securities and
loans, net
(36,767
)
(54,178
)
Realized gains (losses) on financial
derivatives, net
(25,447
)
31,380
Realized gains (losses) on real estate
owned, net
(56
)
17
Unrealized gains (losses) on securities
and loans, net
99,257
1,447
Unrealized gains (losses) on financial
derivatives, net
2,763
(44,191
)
Unrealized gains (losses) on real estate
owned, net
4
(112
)
Unrealized gains (losses) on other secured
borrowings, at fair value, net
(29,680
)
55,811
Unrealized gains (losses) on senior notes,
at fair value
6,510
1,680
Net change from reverse mortgage loans, at
fair value
163,121
199,189
Net change related to HMBS obligations, at
fair value
(131,534
)
(162,381
)
Bargain purchase gain
—
7,932
Other, net
3,504
4,356
Total other income (loss)
51,675
40,950
EXPENSES
Base management fee to affiliate, net of
rebates
4,956
4,641
Investment related expenses:
Servicing expense
4,807
4,543
Other
3,869
5,934
Professional fees
3,556
2,844
Compensation and benefits
14,670
14,271
Other expenses
6,044
5,600
Total expenses
37,902
37,833
Net Income (Loss) before Income Tax
Expense (Benefit) and Earnings from Investments in Unconsolidated
Entities
41,330
33,291
Income tax expense (benefit)
21
(2,850
)
Earnings (losses) from investments in
unconsolidated entities
3,444
(9,330
)
Net Income (Loss)
44,753
26,811
Net Income (Loss) Attributable to
Non-Controlling Interests
720
253
Dividends on Preferred Stock
5,117
3,824
Net Income (Loss) Attributable to
Common Stockholders
$
38,916
$
22,734
Net Income (Loss) per Common
Share:
Basic and Diluted
$
0.58
$
0.37
Weighted average shares of common stock
outstanding
66,672
61,506
Weighted average shares of common stock
and convertible units outstanding
67,488
62,295
ELLINGTON FINANCIAL INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(UNAUDITED)
As of
(In thousands, except share and per share
amounts)
March 31, 2023
December 31, 2022(1)
ASSETS
Cash and cash equivalents
$
188,555
$
217,053
Restricted cash
1,601
4,816
Securities, at fair value
1,389,547
1,459,465
Loans, at fair value
11,812,567
11,626,008
Loan commitments, at fair value
3,299
3,060
Mortgage servicing rights, at fair
value
8,100
8,108
Investments in unconsolidated entities, at
fair value
118,747
127,046
Real estate owned
26,717
28,403
Financial derivatives–assets, at fair
value
104,033
132,518
Reverse repurchase agreements
180,934
226,444
Due from brokers
24,291
36,761
Investment related receivables
163,029
139,413
Other assets
90,105
76,791
Total Assets
$
14,111,525
$
14,085,886
LIABILITIES
Securities sold short, at fair value
$
158,302
$
209,203
Repurchase agreements
2,285,898
2,609,685
Financial derivatives–liabilities, at fair
value
24,245
54,198
Due to brokers
35,431
34,507
Investment related payables
48,373
49,323
Other secured borrowings
363,640
276,058
Other secured borrowings, at fair
value
1,534,592
1,539,881
HMBS-related obligations, at fair
value
7,975,916
7,787,155
Senior notes, at fair value
185,325
191,835
Base management fee payable to
affiliate
4,956
4,641
Dividend payable
14,043
12,243
Interest payable
14,926
22,452
Accrued expenses and other liabilities
91,115
73,819
Total Liabilities
12,736,762
12,865,000
EQUITY
Preferred stock, par value $0.001 per
share, 100,000,000 shares authorized; 13,420,421 and 9,420,421
shares issued and outstanding, and $335,511 and $235,511 aggregate
liquidation preference, respectively
323,920
227,432
Common stock, par value $0.001 per share,
100,000,000 shares authorized; 67,185,076 and 63,812,215 shares
issued and outstanding, respectively(2)
67
64
Additional paid-in-capital
1,308,107
1,259,352
Retained earnings (accumulated
deficit)
(282,262
)
(290,881
)
Total Stockholders' Equity
1,349,832
1,195,967
Non-controlling interests
24,931
24,919
Total Equity
1,374,763
1,220,886
TOTAL LIABILITIES AND EQUITY
$
14,111,525
$
14,085,886
SUPPLEMENTAL PER SHARE
INFORMATION:
Book Value Per Common Share (3)
$
15.10
$
15.05
(1)
Derived from audited financial
statements as of December 31, 2022.
(2)
Common shares issued and
outstanding at March 31, 2023, includes 4,433,861 shares of common
stock issued during the quarter under the Company's at-the-market
common stock offering program, net of 1,061,000 shares repurchased
under the Company's share repurchase program.
(3)
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.
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 March 31, 2023 and December 31, 2022, 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
March 31, 2023
December 31, 2022
(In thousands, except per share
amounts)
Investment
Portfolio
Longbridge
Corporate/
Other
Total
Investment
Portfolio
Longbridge
Corporate/
Other
Total
Net Income (Loss)
$
41,101
$
6,498
$
(2,846
)
$
44,753
$
18,911
$
14,492
$
(6,592
)
$
26,811
Income tax expense (benefit)
—
—
21
21
—
—
(2,850
)
(2,850
)
Net income (loss) before income tax
expense (benefit)
41,101
6,498
(2,825
)
44,774
18,911
14,492
(9,442
)
23,961
Adjustments:
Realized (gains) losses, net(1)
65,741
—
—
65,741
30,279
—
—
30,279
Unrealized (gains) losses, net(2)
(64,020
)
—
(9,679
)
(73,699
)
(13,136
)
—
(2,378
)
(15,514
)
Unrealized (gains) losses on MSRs, net of
hedging (gains) losses(3)
—
(4,225
)
—
(4,225
)
—
(15,319
)
—
(15,319
)
Bargain purchase (gain)
—
—
—
—
(7,932
)
—
—
(7,932
)
Negative (positive) component of interest
income represented by Catch-up Premium Amortization Adjustment
482
—
—
482
(1,013
)
—
—
(1,013
)
Non-capitalized transaction costs and
other expense adjustments
457
2,059
95
2,611
1,235
1,485
680
3,400
(Earnings) losses from investments in
unconsolidated entities
(3,444
)
—
—
(3,444
)
9,330
—
—
9,330
Adjusted distributable earnings from
investments in unconsolidated entities(4)
3,752
—
—
3,752
3,055
—
—
3,055
Total Adjusted Distributable Earnings
$
44,069
$
4,332
$
(12,409
)
$
35,992
$
40,729
$
658
$
(11,140
)
$
30,247
Dividends on preferred stock
—
—
5,117
5,117
—
—
3,824
3,824
Adjusted Distributable Earnings
attributable to non-controlling interests
229
19
318
566
71
5
326
402
Adjusted Distributable Earnings
Attributable to Common Stockholders
$
43,840
$
4,313
$
(17,844
)
$
30,309
$
40,658
$
653
$
(15,290
)
$
26,021
Adjusted Distributable Earnings
Attributable to Common Stockholders, per share
$
0.66
$
0.06
$
(0.27
)
$
0.45
$
0.66
$
0.01
$
(0.25
)
$
0.42
(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 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.
(4)
Includes net interest income and
operating expenses for certain investments in unconsolidated
entities.
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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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