Ellington Financial Inc. Reports Fourth Quarter 2022 Results

OLD GREENWICH, Conn.–(BUSINESS WIRE)–Ellington Financial Inc. (NYSE: EFC) (the “Company”) today reported financial results for the quarter ended December 31, 2022.

Highlights

Net income attributable to common stockholders of $22.7 million, or $0.37 per common share.¹
- $19.0 million, or $0.31 per common share, from the investment portfolio.
  - $7.2 million, or $0.12 per common share, from the credit strategy.
  - $11.8 million, or $0.19 per common share, from the Agency strategy.
- $14.5 million, or $0.24 per common share, from Longbridge.
Adjusted Distributable Earnings² of $26.0 million, or $0.42 per common share.
Book value per common share as of December 31, 2022 of $15.05, including the effects of dividends of $0.45 per common share for the quarter.
Dividend yield of 13.4% based on the February 22, 2023 closing stock price of $13.40 per share, and monthly dividend of $0.15 per common share declared on February 7, 2023.
Recourse debt-to-equity ratio³ of 2.5:1 as of December 31, 2022. Including all non-recourse borrowings, which primarily consist of securitization-related liabilities, debt-to-equity ratio of 10.2:1.
Cash and cash equivalents of $217.1 million as of December 31, 2022, in addition to other unencumbered assets of $277.9 million.

Fourth Quarter 2022 Results

“Excellent performance from Longbridge Financial and from our Agency RMBS strategy, in addition to another positive quarter from our loan portfolios, drove Ellington Financial’s results in the fourth quarter,” said Laurence Penn, Chief Executive Officer and President of Ellington Financial. “For Longbridge, our reverse mortgage platform that we now consolidate, tighter yield spreads benefited the value of our HECM loans and MSRs, and also expanded gain-on-sale margins on new HECM originations, which mostly offset the effect of lower origination volumes. In addition, a more benign outlook on inflation and Fed monetary policy drove a sharp rebound in the Agency mortgage basis in the fourth quarter.

“During the quarter, we opportunistically sold certain of our discount Agency RMBS and rotated the capital to further expand and diversify our credit portfolio, where we see strong earnings potential going forward. Our Adjusted Distributable Earnings did decline sequentially as an increased cost of funds was only partially offset by higher asset yields.

“In December, we completed our fourth non-QM securitization of the year. Several months earlier, our strong balance sheet enabled us to postpone launching this securitization when yield spreads were significantly wider, and that patience was rewarded, as we were able to take advantage of a more constructive market around year end to achieve stronger deal execution. The securitization market has continued to improve into the new year, and we were able to close another non-QM securitization earlier this month at even more attractive long-term financing costs.

“Finally, earlier this month we issued our Series C preferred equity, which along with our existing Series A and B, carries the only NAIC-1 preferred equity rating in our sector. I believe that this rating rightly reflects Ellington Financial’s effective risk management and protection of book value across market cycles, principles that are as important now as ever. This new capital should help us take advantage of the tremendous opportunities that we are seeing across our diversified set of investment strategies, including some new investment strategies that are now available to us as a direct consequence of our acquisition of Longbridge. Once the proceeds from this offering are fully deployed, and as we continue to rotate the portfolio into higher reinvestment yields, we believe that the offering will be accretive to both Net Income and Adjusted Distributable Earnings and that both will again cover the dividend.”

Financial Results

As previously announced, on October 3, 2022 the Company acquired a controlling interest in Longbridge Financial, LLC (the “Longbridge Transaction”). As a result of the Longbridge Transaction, beginning with fourth quarter results, the Company consolidates Longbridge.

Investment Portfolio Summary

The Company’s investment portfolio generated net income attributable to common stockholders of $19.0 million, consisting of $7.2 million from the credit strategy and $11.8 million from the Agency strategy.

Credit Performance

The Company’s total long credit portfolio decreased by 7% in the fourth quarter, to $2.544 billion as of December 31, 2022, driven by the successful completion of a non-QM loan securitization in December and significant paydowns in the Company’s small balance commercial mortgage portfolio, and also because the Company no longer includes its investment in Longbridge as part of its investment portfolio. This decrease was partially offset by a larger residential transition loan portfolio.

The positive results in the credit strategy were driven by net interest income⁴, primarily from its proprietary loan portfolios, and net realized and unrealized gains, most notably on its non-QM interest-only securities. Meanwhile, net losses on the Company’s interest rate hedges, credit hedges and consumer loan portfolio offset some of this income. In addition, the Company had negative earnings from unconsolidated entities, as unrealized losses on certain equity investments in loan origination and commercial mortgage loan-related entities exceeded a bargain purchase gain that resulted from the Longbridge Transaction, which occurred at a discount to Longbridge’s book value at the time of closing. The bargain purchase gain also reflected the fact that the Company’s existing minority stake in Longbridge had previously been valued at a discount to book value.

During the quarter, the Company’s cost of funds on credit investments increased significantly, driven by sharply higher short-term interest rates. The Company’s asset yields also increased over the same period, though by a lesser amount. As a result, the Company’s net interest margin⁵ on its credit portfolio declined quarter over quarter to 2.44% from 2.64%.

Agency Performance

The Company’s total long Agency RMBS portfolio decreased by 15% quarter over quarter, to $968.3 million, driven by net sales and principal repayments of $179.1 million, which exceeded net realized and unrealized gains of $13.2 million.

During the quarter, tighter Agency yield spreads and increased pay-ups drove significant net realized and unrealized gains on the Company’s Agency RMBS which, combined with net interest income, exceeded net realized and unrealized losses on its interest-rate hedges.

Pay-ups on the Company’s specified pools increased to 0.96% as of December 31, 2022, as compared to 0.76% as of September 30, 2022. During the quarter, the Company continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. The Company continued to hold a net short TBA position during the quarter.

During the quarter, the Company’s cost of funds on Agency RMBS increased significantly, driven by sharply higher short-term interest rates. The Company’s asset yields on Agency RMBS also increased over the same period, though by a lesser amount. As a result, the Company’s net interest margin⁵ on its Agency RMBS, excluding the Catch-up Premium Amortization Adjustment, declined quarter over quarter to 0.98% from 1.26%.

Longbridge Summary

The Company’s Longbridge portfolio totaled $327.9 million as of December 31, 2022. Longbridge generated strong performance for the quarter as tighter yield spreads led to net gains on the Company’s HECM loans and HMBS MSR Equivalent.⁶ On new originations, while Longbridge had improved gain-on-sale margins quarter over quarter, lower origination volumes led to a net loss in originations overall.

_______________________________
¹	Includes ($10.7) 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 2.7:1 as of December 31, 2022.
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.

Credit Portfolio⁽¹⁾

The following table summarizes the Company’s credit portfolio holdings as of December 31, 2022 and September 30, 2022:

	December 31, 2022				September 30, 2022
($ in thousands)	Fair Value		%		Fair Value		%
Dollar denominated:
CLOs⁽²⁾	$	29,930	0.7	%	$	29,533	0.7	%
CMBS		18,253	0.5	%		19,552	0.5	%
Commercial mortgage loans and REO⁽⁵⁾⁽⁶⁾		492,648	12.1	%		553,728	12.7	%
Consumer loans and ABS backed by consumer loans⁽²⁾		94,993	2.3	%		98,841	2.3	%
Corporate debt and equity and corporate loans		18,084	0.4	%		14,180	0.3	%
Debt and equity investments in loan origination entities⁽³⁾		42,581	1.1	%		87,340	2.0	%
Non-Agency RMBS		204,498	5.0	%		197,903	4.5	%
Non-QM loans and retained non-QM RMBS⁽⁴⁾		2,216,843	54.3	%		2,437,271	55.7	%
Residential transition loans and other residential mortgage loans and REO⁽⁵⁾		940,296	23.1	%		912,526	20.9	%
Non-Dollar denominated:
CLOs⁽²⁾		1,672	—	%		1,526	—	%
Corporate debt and equity		206	—	%		300	—	%
RMBS⁽⁷⁾		20,714	0.5	%		19,286	0.4	%
Total long credit portfolio	$	4,080,718	100.0	%	$	4,371,986	100.0	%
Less: Non-retained tranches of consolidated securitization trusts		1,537,098				1,630,001
Total Long Credit Portfolio excluding non-retained tranches of consolidated securitization trusts	$	2,543,620			$	2,741,985

(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 December 31, 2022 and September 30, 2022:

	December 31, 2022				September 30, 2022
($ in thousands)	Fair Value		%		Fair Value		%
Long Agency RMBS:
Fixed rate	$	915,128	94.5	%	$	1,078,496	95.0	%
Floating rate		6,254	0.7	%		6,498	0.6	%
Reverse mortgages		29,989	3.1	%		30,796	2.7	%
IOs		16,892	1.7	%		19,525	1.7	%
Total long Agency RMBS	$	968,263	100.0	%	$	1,135,315	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 has typically retained the associated MSRs. The following table summarizes Longbridge’s loan-related assets as of December 31, 2022:

	December 31, 2022
	(In thousands)
HMBS assets⁽²⁾	$	7,882,717
Less: HMBS liabilities		(7,787,155	)
HMBS MSR Equivalent		95,562
Unsecuritized HECM loans		119,671
Proprietary reverse mortgage loans		103,602
MSRs related to proprietary reverse mortgage loans		8,108
Unsecuritized REO		907
Total	$	327,850

(1)		This information does not include financial derivatives or loan commitments.
(2)		Includes HECM loans, related REO, and claims or other receivables.

The following table summarizes Longbridge’s origination volumes by channel for the fourth quarter:

($ In thousands)	Origination Volume
Channel	Units	New Loan Origination Volume⁽¹⁾		% of New Loan Origination Volume
Retail	321	$	51,248	15	%
Wholesale and correspondent	1,631		290,379	85	%
Total	1,952		341,637	100	%

(1)

Represents initial borrowing amounts on reverse mortgage loans.

Financing

The Company’s recourse debt-to-equity ratio², adjusted for unsettled purchases and sales, decreased to 2.5:1 at December 31, 2022from 2.6:1 at September 30, 2022. This decrease was primarily the result of a smaller investment portfolio as well as an increase in total equity. The Company’s overall debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 10.1:1 as of December 31, 2022, as compared to 4.0:1 as of September 30, 2022, driven by the Company’s consolidation of Longbridge’s HMBS-related obligations beginning in the fourth quarter, partially offset by the fact that the Company recognized true sale treatment on its fourth quarter non-QM securitization. At December 31, 2022, the fair value of these non-recourse HMBS-related obligations was $7.8 billion.

The following table summarizes the Company’s outstanding borrowings and debt-to-equity ratios as of December 31, 2022 and September 30, 2022:

	December 31, 2022			September 30, 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⁾	$	3,095,743	2.5:1	$	3,145,919	2.7:1
Non-recourse borrowings⁽⁴⁾		9,327,036	7.7:1		1,635,829	1.4:1
Total Borrowings	$	12,422,779	10.2:1	$	4,781,748	4.1:1
Total Equity	$	1,220,886		$	1,180,629
Recourse borrowings net of unsettled purchases and sales			2.5:1			2.6:1
Total borrowings net of unsettled purchases and sales			10.1:1			4.0:1

(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 2.7:1 and 2.8:1 as of December 31, 2022 and September 30, 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 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
Other interest income/expense		(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	)		0.00
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 Friday, February 24, 2023, to discuss its financial results for the quarter ended December 31, 2022. 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 EFCQ422. International callers should dial (203) 518-9708 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 Friday, February 24, 2023, at approximately 2:00 p.m. Eastern Time through Friday, March 3, 2023 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 839-7410. International callers should dial (402) 220-6067. 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. Actual results may differ from the Company’s 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. Examples of forward-looking statements in this press release include without limitation management’s beliefs regarding the current economic and investment environment and the Company’s ability to implement its investment and hedging strategies, performance of the Company’s investment and hedging strategies, the Company’s exposure to prepayment risk in its Agency portfolio, and statements regarding the drivers of the Company’s returns. The Company’s results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond the Company’s control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of the Company’s investments, 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 qualify and maintain its qualification as a real estate investment trust, or “REIT”; and other changes in market conditions and economic trends, including changes resulting from the ongoing spread and economic effects of the novel coronavirus (COVID-19) pandemic, and associated responses to the pandemic.

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

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