Ellington Financial Inc. Reports First Quarter 2023 Results

OLD GREENWICH, Conn.–(BUSINESS WIRE)–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, 2023from 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			Longbridge			Corporate/ Other			Total			Per Share
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			Longbridge			Corporate/ Other			Total			Per Share
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.

Contacts

Investors:

Ellington Financial Inc.

Investor Relations

(203) 409-3575

info@ellingtonfinancial.com

Media:

Amanda Shpiner/Sara Widmann

Gasthalter & Co.

for Ellington Financial

(212) 257-4170

Ellington@gasthalter.com

Read full story here