Ellington Financial Inc. Reports Third Quarter 2023 Results

OLD GREENWICH, Conn.–(BUSINESS WIRE)–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 1^st. 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, 2023from 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			Longbridge			Corporate/Other			Total			Per Share
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			Longbridge			Corporate/Other			Total			Per Share
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

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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