Ellington Financial Inc. Reports First Quarter 2019 Results

OLD GREENWICH, Conn.–(BUSINESS WIRE)–Ellington Financial Inc. (NYSE: EFC) (“Ellington Financial” or the
“Company”) today reported financial results for the quarter ended
March 31, 2019.


Highlights


Net income of $15.4 million, or $0.52 per basic and diluted share.


Book value per share as of March 31, 2019 of $18.90, including the
effect of dividends of $0.55 per share, which included the Company’s
final quarterly dividend of $0.41 per share and its first monthly
dividend of $0.14 per share.


Credit strategy gross income of $16.5 million for the quarter, or
$0.54 per share.


Agency strategy gross income of $5.4 million for the quarter, or $0.18
per share.


Core Earnings1 of $13.3 million, or $0.45 per share.


Dividend yield of 9.3% based on the May 6, 2019 closing stock price of
$18.08 per share.


Debt-to-equity ratio of 3.39:12 and total recourse
debt-to-equity ratio of 2.63:13 as of March 31, 2019.


Announced that the Company intends to be taxed as a REIT for U.S.
federal income tax purposes for tax year 2019, and announced the
conversion of the Company to a corporation under Delaware law.


1 Core Earnings is a non-GAAP financial measure. See
“Reconciliation of Net Income (Loss) to Core Earnings” below for an
explanation regarding the calculation of Core Earnings.


2 Excludes repo borrowings on U.S. Treasury securities.


3 Includes borrowings at certain unconsolidated entities
that are recourse to the Company.


 


First Quarter 2019 Results


“During the quarter, our first quarter as a REIT, Ellington Financial
grew net income and generated Core Earnings in excess of our newly
increased dividend run rate of $0.42 per quarter,” stated Laurence Penn,
Chief Executive Officer and President. “We had excellent results from
our diversified credit and Agency portfolios, and produced an annualized
economic return of 11.7%.


“We continued to benefit from the excellent performance of our
residential non-performing loans, small-balance commercial mortgage
loans, non-QM loans, and consumer loans. Our Agency portfolio also
performed very well this quarter. In addition, we successfully executed
on several notable transactions during the quarter, including a
securitization of re-performing Irish residential loans, and the fourth
Ellington-sponsored CLO, which was upsized due to strong investor
demand. At the same time, we participated in the asset ramp-up for two
additional planned CLOs, one in the U.S. and one in Europe.


“Also this quarter, we shifted to a monthly dividend, while at the same
time increasing our annualized dividend by 2.4%, reflecting the steady
growth of our net interest income and overall earnings power. Given that
we have always reported our book value on a monthly basis, we believe
that our shift to a monthly dividend was a natural one, and will further
enhance performance transparency. We believe that this will not only
benefit our existing shareholders, but increase the breadth of our
investor base as well.


“The year is off to a great start, and we believe that our performance
over the past several quarters demonstrates Ellington Financial’s
ability to generate strong and steady returns in a diversity of market
environments, including periods of volatility and of stability, rising
and falling interest rates, and widening and tightening yield spreads.
We attribute our consistent performance to our rigorous asset selection
and steady investment pipelines, which have resulted in a diversified
and high-yielding portfolio, and our commitment to protecting book
value, including through the use of dynamic and disciplined hedging
strategies.”


Corporate Structure Update


The Company intends to elect to be taxed as a REIT for U.S. federal
income tax purposes for the taxable year ending December 31, 2019. To
facilitate this election, the Company has elected to be taxed as a
corporation for U.S. federal income tax purposes effective as of January
1, 2019. The Company has also converted to a corporation under Delaware
law. In March 2019, the Company issued a final Schedule K-1 to those
shareholders who held shares in 2018. For 2019, the Company will issue a
Form 1099 to shareholders, reporting all dividends paid.


Financial Results


During the quarter, the Company continued to rotate capital from
non-REIT-qualifying assets to REIT-qualifying assets. As a result of
these efforts, the Agency RMBS portfolio grew significantly, while the
composition of the overall credit portfolio shifted somewhat,
highlighted by net purchases of small balance commercial mortgage loans,
non-QM loans, and residential transition loans, and net sales of UK
non-conforming RMBS and CLOs. The Company’s total long credit portfolio4
was $1.195 billion as of March 31, 2019, which was up slightly from
$1.185 billion as of December 31, 2018. The Company’s total long Agency
RMBS portfolio was $1.144 billion as of March 31, 2019, an increase of
approximately 17% from $975 million as of December 31, 2018. The Company
continues to see attractive risk-adjusted return opportunities in both
credit and Agency strategies.


The Company’s debt-to-equity ratio2 increased to 3.39:1 as of
March 31, 2019, from 3.35:1 as of December 31, 2018. In addition, as of
March 31, 2019 the Company had approximately $145.4 million of net
unsettled Agency RMBS purchases; had the anticipated financings of these
investments been included in borrowings as of March 31, 2019, the
Company’s debt-to-equity ratio2 would have been approximately
3.62:1.


During the first quarter, the Company’s credit strategy generated total
gross income of $16.5 million, or $0.54 per share, and its Agency
strategy generated total gross income of $5.4 million, or $0.18 per
share.


The Company’s credit portfolio continues to be the primary driver of its
earnings. Steady growth in the net interest income of this portfolio was
a key contributor to the Company’s strong first quarter results, along
with tighter yield spreads in many credit sectors and gains from
securitizations. During the first quarter, the Company’s credit strategy
generated net interest income5 of $18.2 million, net realized
and unrealized gains on credit assets of $7.4 million, net realized and
unrealized losses on interest rate hedges of $(0.8) million, net
realized and unrealized losses of $(6.6) million on credit hedges and
other activities, and other investment related expenses of $3.5 million.
The Company also had $1.8 million in earnings from investments in
unconsolidated entities. The Company’s strongest-performing credit
strategies for the quarter included residential non-performing loans,
retained tranches in Ellington-sponsored CLOs, European RMBS, and CMBS.
In addition, the Company continued to benefit from excellent performance
in small-balance commercial mortgage loans, non-QM loans, and consumer
loans. Investments in loan originators underperformed during the quarter.


The Company also benefited from excellent performance in its Agency RMBS
portfolio during the quarter. Declining interest rates and tightening
yield spreads on many Agency RMBS generated net realized and unrealized
gains of $13.3 million, while net interest income6 totaled
$1.6 million. Additionally, outperformance of specified pools compared
to TBAs, in the form of higher pay-ups for specified pools, also
contributed to results, as the Company continued to concentrate its long
investments in specified pools, as opposed to TBAs. Pay-ups are price
premiums for specified pools relative to their TBA counterparts.
Increasing prepayment expectations related to declining mortgage rates
were the key drivers of the expansion in specified pool pay-ups. Average
pay-ups on the Company’s specified pools increased to 0.94% as of March
31, 2019, from 0.64% as of December 31, 2018. Meanwhile, declining
interest rates during the quarter led to net realized and unrealized
losses of $(9.5) million on the Company’s interest rate hedges.


4 Includes REO at the lower of cost or fair value.
Excludes hedges and other derivative positions, as well as tranches
of the Company’s consolidated non-QM securitization trusts that were
sold to third parties, but that are consolidated for GAAP reporting
purposes. Including such tranches, the Company’s total long credit
portfolio was $1.473 billion and $1.480 billion, as of March 31,
2019 and December 31, 2018, respectively.


5 Excludes any interest income and interest expense items
from Interest rate hedges, net and Credit hedges and other
activities, net.


6 Excludes any interest income and interest expense items
from Interest rate hedges and other activities, net.


 


The following table summarizes the Company’s investment portfolio(1)
holdings as of March 31, 2019:




 


 


 




(In thousands)








Fair Value


Long:










Credit:










Dollar Denominated:










CLO(2)







$


98,497




CMBS








29,995




Commercial Mortgage Loans and REO(3)(4)







277,947




Consumer Loans and ABS backed by Consumer Loans(2)







218,027




Corporate Debt and Equity








3,867




Equity Investments in Loan Origination Entities








34,849




Non-Agency RMBS








130,372




Residential Mortgage Loans and REO(3)







584,779




Non-Dollar Denominated:










CLO(2)







4,332




CMBS








3,198




Consumer Loans and ABS backed by Consumer Loans








770




Corporate Debt and Equity








3,335




RMBS(5)







82,846




Agency:










Fixed-Rate Specified Pools








1,019,982




Floating-Rate Specified Pools








9,460




IOs








25,428




Reverse Mortgage Pools








89,345




Government Debt:










Dollar Denominated








16,601


 


Total Long








$


2,633,630


 


Short:










Credit:










Dollar Denominated:










Corporate Debt and Equity








$


(4,441


)


Government Debt:










Dollar Denominated








(2,910


)


Non-Dollar Denominated








(18,861


)


Total Short








$


(26,212


)














 


(1)


 


This information does not include financial derivatives.


(2)




Includes equity investment in securitization-related vehicles.


(3)




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 a limited liability companies holding
small balance commercial mortgage loans and REO.


(5)




Includes European RMBS secured by non-performing loans and REO,
and an investment in an unconsolidated entity holding European
RMBS.






 


The following table summarizes the Company’s operating results for the
quarter ended March 31, 2019:




 


 


 




 


 




 


 












Three-MonthPeriod EndedMarch 31, 2019






Per Share






% of AverageEquity


(In thousands, except per share amounts)






















Credit:






















Interest income and other income(1)







$


29,409








$


0.97








4.95


%


Realized gain (loss), net








(4,299


)






(0.14


)






(0.72


)%


Unrealized gain (loss), net








11,713








0.38








1.97


%


Interest rate hedges, net(2)







(822


)






(0.03


)






(0.14


)%


Credit hedges and other activities, net(3)







(6,556


)






(0.22


)






(1.10


)%


Interest expense(4)







(11,246


)






(0.37


)






(1.89


)%


Other investment related expenses








(3,476


)






(0.11


)






(0.59


)%


Earnings from investments in unconsolidated entities








1,797


 






0.06


 






0.30


%


Total Credit profit (loss)








16,520


 






0.54


 






2.78


%


Agency RMBS:






















Interest income








7,562








0.25








1.27


%


Realized gain (loss), net








(967


)






(0.03


)






(0.16


)%


Unrealized gain (loss), net








14,227








0.47








2.39


%


Interest rate hedges and other activities, net(2)







(9,484


)






(0.31


)






(1.59


)%


Interest expense








(5,981


)






(0.20


)






(1.01


)%


Total Agency RMBS profit (loss)








5,357


 






0.18


 






0.90


%


Total Credit and Agency RMBS profit (loss)








21,877


 






0.72


 






3.68


%


Other interest income (expense), net








346








0.01








0.06


%


Other expenses








(5,735


)






(0.19


)






(0.97


)%


Net income (loss) (before incentive fee)








16,488


 






0.54


 






2.77


%


Incentive fee








—


 






—


 






—


%


Net income (loss)








$


16,488


 






$


0.54


 






2.77


%


Less: Net income (loss) attributable to non-controlling interests








1,080


 














Net income (loss) attributable to common stockholders(5)







$


15,408


 






$


0.52








2.73


%


Weighted average shares and convertible
























units(6) outstanding








30,481
















Average equity (includes non-controlling interests)(7)







$


594,206
















Weighted average shares outstanding(8)







29,748
















Average stockholders’ equity (excludes non-controlling interests)(7)







$


563,492








































 


(1)


 


Other income primarily consists of rental income on real estate
owned and loan origination fees.


(2)




Includes U.S. Treasury securities, if applicable.


(3)




Includes equity and other relative value trading strategies and
related hedges and net realized and unrealized gains (losses) on
foreign currency.


(4)




Includes interest expense on the Company’s Senior Notes.


(5)




Per share information is calculated using weighted average common
shares outstanding. Percentage of average equity is calculated using
average stockholders’ equity, which excludes non-controlling
interests.


(6)




Convertible units include Operating Partnership units attributable
to non-controlling interests.


(7)




Average equity and average stockholders’ equity are calculated using
month end values.


(8)




Excludes Operating Partnership units attributable to non-controlling
interests.






 


About Ellington Financial


Ellington Financial invests in a diverse array of financial assets,
including residential and commercial mortgage-backed securities,
residential and commercial mortgage loans, consumer loans and
asset-backed securities backed by consumer loans, collateralized loan
obligations, non-mortgage and mortgage-related derivatives, 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 12:00 p.m. Eastern Time on
Wednesday, May 8, 2019, to discuss its financial results for the quarter
ended March 31, 2019. To participate in the event by telephone, please
dial (877) 241-1233 at least 10 minutes prior to the start time and
reference the conference ID number 9295259. International callers should
dial (810) 740-4657 and reference the same conference ID number. 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 Wednesday,
May 8, 2019, at approximately 3 p.m. Eastern Time through Wednesday,
May 22, 2019 at approximately 11:59 p.m. Eastern Time. To access this
replay, please dial (800) 585-8367 and enter the conference ID number
9295259. International callers should dial (404) 537-3406 and enter the
same conference ID number. 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, statements regarding the drivers of the
Company’s returns, statements regarding the Company’s planned REIT tax
election, and statements regarding the Company’s intended dividend
policy. 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 securities, 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. Furthermore,
forward-looking statements are subject to risks and uncertainties,
including, among other things, those described under Item 1A of the
Company’s Annual Report on Form 10-K filed on March 14, 2019 which can
be accessed through the Company’s website at www.ellingtonfinancial.com
or at the SEC’s website (www.sec.gov).
Other risks, uncertainties, and factors that could cause actual results
to differ materially from those projected or implied may be described
from time to time in reports the Company’s files with the SEC, including
reports on Forms 10-Q, 10-K and 8-K. The Company undertakes no
obligation to update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.




 


 


 




ELLINGTON FINANCIAL INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)










 










Three-MonthPeriod EndedMarch 31, 2019


(In thousands, except per share amounts)










NET INTEREST INCOME










Interest income








$


36,016




Interest expense








(17,618


)


Total net interest income








18,398


 


Other Income (Loss)










Realized gains (losses) on securities and loans, net








(5,322


)


Realized gains (losses) on financial derivatives, net








(11,570


)


Realized gains (losses) on real estate owned, net








(58


)


Unrealized gains (losses) on securities and loans, net








26,388




Unrealized gains (losses) on financial derivatives, net








(5,689


)


Unrealized gains (losses) on real estate owned, net








(247


)


Other, net








2,002


 


Total other income (loss)








5,504


 


EXPENSES










Base management fee to affiliate (Net of fee rebates of $447)








1,722




Investment related expenses:










Servicing expense








2,393




Other








1,083




Professional fees








1,956




Compensation expense








1,072




Other expenses








985


 


Total expenses








9,211


 


Net Income (Loss) before Earnings from equity method investments








14,691


 


Earnings from investments in unconsolidated entities








1,797


 


Net Income (Loss)








16,488


 


Net Income (Loss) Attributable to Non-Controlling Interests








1,080


 


Net Income (Loss) Attributable to Common Stockholders








$


15,408


 


Net Income (Loss) per Common Share:










Basic and Diluted








$


0.52




Weighted average shares outstanding








29,748




Weighted average shares and convertible units outstanding








30,481














 




 


 


 




ELLINGTON FINANCIAL INC.


CONDENSED CONSOLIDATED BALANCE SHEET


(UNAUDITED)










 










As of


(In thousands, except share amounts)








March 31, 2019


ASSETS










Cash and cash equivalents








$


55,876




Restricted cash








175




Securities, at fair value








1,529,485




Loans, at fair value








1,014,990




Investments in unconsolidated entities, at fair value








58,152




Real estate owned








31,003




Financial derivatives–assets, at fair value








15,356




Reverse repurchase agreements








25,381




Due from brokers








58,145




Investment related receivables








78,223




Other assets








3,779


 


Total Assets








$


2,870,565


 


LIABILITIES










Securities sold short, at fair value








$


26,212




Repurchase agreements








1,550,016




Financial derivatives–liabilities, at fair value








26,904




Due to brokers








4,820




Investment related payables








168,211




Other secured borrowings








117,315




Other secured borrowings, at fair value








282,124




Senior notes, net








85,100




Accounts payable and accrued expenses








6,167




Base management fee payable to affiliate








1,722




Dividend payable








4,267




Interest payable








4,995




Other liabilities








278


 


Total Liabilities








2,278,131


 










 


EQUITY










Common stock, par value $0.001 per share, 100,000,000 shares
authorized;












29,745,776 shares issued and outstanding








30




Additional paid-in-capital








664,654




Retained earnings (accumulated deficit)








(102,475


)


Total Stockholders’ Equity








562,209


 


Non-controlling interests








30,225


 


Total Equity








592,434


 


TOTAL LIABILITIES AND EQUITY








$


2,870,565


 


PER SHARE INFORMATION:










Common stock








$


18.90
















 


Reconciliation of Net Income (Loss) to Core Earnings


The Company calculates Core Earnings as U.S. GAAP net income (loss) as
adjusted for: (i) realized and unrealized gain (loss) on investments,
REO, financial derivatives (excluding net accrued periodic (payments)
receipts on interest rate swaps), other secured borrowings, at fair
value, and foreign currency transactions; (ii) incentive fee to
affiliate; (iii) Catch-up Premium Amortization Adjustment (as defined
below); (iv) non-cash equity compensation expense; (v) miscellaneous
non-recurring expenses; (vi) provision for income taxes; and (vii)
certain other income or loss items that are of a non-recurring nature.
For certain investments in unconsolidated entities, the Company includes
the relevant net operating income in core earnings. The Catch-up Premium
Amortization Adjustment is a quarterly adjustment to premium
amortization triggered by changes in actual and projected prepayments on
the Company’s Agency RMBS (accompanied by a corresponding offsetting
adjustment to realized and unrealized gains and losses). The adjustment
is calculated as of the beginning of each quarter based on the Company’s
then-current assumptions about cashflows and prepayments, and can vary
significantly from quarter to quarter.


Core Earnings is a supplemental non-GAAP financial measure. The Company
believes that the presentation of Core Earnings provides a consistent
measure of operating performance by excluding the impact of gains and
losses and other adjustments listed above from operating results. The
Company believes that Core Earnings provides information useful to
investors because it is a metric that the Company uses to assess its
performance and to evaluate the effective net yield provided by the
portfolio. In addition, the Company believes that presenting Core
Earnings enables its investors to measure, evaluate, and compare its
operating performance to that of its peers. However, because Core
Earnings is an incomplete measure of the Company’s financial results and
differs from net income (loss) computed in accordance with U.S. GAAP, it
should be considered as supplementary to, and not as a substitute for,
net income (loss) computed in accordance with U.S. GAAP.


The following table provides U.S. GAAP measures of net income (loss) and
details with respect to reconciling the aforementioned line items to
Core Earnings for the three-month period ended March 31, 2019:




 


 


 




(In thousands, except per share amounts)








Three-Month

Period Ended


March 31, 2019


Net income (loss)








$


16,488




Adjustments:










Realized (gains) losses on securities and loans, net








5,322




Reali