Ellington Financial Inc. Reports Third Quarter 2023 Results

OLD GREENWICH, Conn.--()--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.

 

Contacts

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

Contacts

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