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-Month
Period Ended
March 31, 2019

Per Share

% of Average
Equity

(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-Month
Period Ended
March 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
Realized (gains) losses on financial derivatives, net(1) 12,289
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(2) 5,414
Unrealized (gains) losses on real estate owned, net 247
Other realized and unrealized (gains) losses, net(3) (386 )
Non-cash equity compensation expense 116
Catch-up Premium Amortization Adjustment 507
Miscellaneous non-recurring expenses(4) 1,075
(Earnings) losses from investments in unconsolidated entities(5) (364 )
Total Core Earnings $ 14,378  
Core Earnings attributable to non-controlling interests 1,029  
Core Earnings Attributable to Common Stockholders $ 13,349  
Core Earnings Attributable to Common Stockholders, per share $ 0.45  
 

Contacts

Investors:
Ellington Financial
Investor Relations
(203)
409-3575
[email protected]
or
Media:
Amanda
Klein or Kevin FitzGerald
Gasthalter & Co.
for Ellington
Financial
(212) 257-4170
[email protected]

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