Ellington Financial Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 29, 2024. This is an annual report, not a standalone fourth-quarter earnings release, and the filing text does not provide a clear set of standalone Q4 results.
Business context
Ellington Financial is an externally managed REIT investing across mortgage, consumer, corporate-credit and other financial assets. Its two reportable segments are the Investment Portfolio and Longbridge, a reverse-mortgage originator and servicer consolidated since October 2022. Ellington completed its Arlington Asset Investment Corp. merger on December 14, 2023, adding assets, borrowings and forward MSR-related investments.
Key financial metrics
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Interest income | $370.2 million | $282.2 million |
| Interest expense | $262.5 million | $141.8 million |
| Net interest income | $107.7 million | $140.4 million |
| Net income (loss) attributable to common stockholders | $60.9 million; $0.89 per share | $(85.3) million; $(1.43) per share |
| Adjusted Distributable Earnings attributable to common stockholders (non-GAAP) | $97.4 million; $1.44 per share | $100.6 million; $1.68 per share |
| Total assets / total liabilities | $15.32 billion / $13.78 billion | $14.09 billion / $12.87 billion |
| Total equity | $1.54 billion | $1.22 billion |
| Cash and cash equivalents | $228.9 million | $217.1 million |
| Operating cash flow | $(241.9) million | $42.7 million |
Net interest income fell despite higher interest income, as higher short-term rates drove financing costs up. Average secured financing cost rose to 5.45% from 4.43%; average cost including unsecured financing rose to 5.48% from 4.49%. Credit-portfolio net interest margin was 2.70% versus 2.74%; Agency RMBS margin, excluding the Catch-up Amortization Adjustment, was 1.03% versus 1.43%.
At year-end, recourse borrowings were $3.51 billion and recourse debt-to-equity was 2.3x, compared with 2.5x. Total recourse and non-recourse borrowings were $13.36 billion, including $8.42 billion of HMBS-related obligations; total debt-to-equity was 8.7x versus 10.2x. The company reported $297.7 million of unsecured borrowings, including senior notes due in 2025, 2026 and 2027 and $15 million of junior subordinated debt.
Cash from operating and investing activities combined was insufficient to fund activity and dividends: operating activities used $241.9 million, investing activities provided $174.9 million, and total cash, cash equivalents and restricted cash increased $8.7 million to $230.5 million, supported by financing and capital issuance. Common and preferred dividends declared totaled $148.0 million. Common book value per share was $13.83.
Material changes versus prior year
- Common-stockholder results turned positive from a 2022 loss, mainly reflecting a shift to other income, including fair-value gains, and substantially smaller losses from unconsolidated investments. Interest expense and operating expenses also increased.
- Arlington added a portfolio of forward MSR-related investments; its preliminary purchase accounting recorded a $28.2 million bargain-purchase gain. The merger issued 11.0 million common shares and new Series D and E preferred shares. Management said the transaction was approximately 1.1% dilutive to common shareholders overall.
- The credit portfolio excluding non-retained tranches of consolidated non-QM securitizations increased 8% to $2.74 billion. Residential transition loans and forward MSR-related investments grew; commercial mortgage loans and non-QM loans declined. Non-QM loans and retained non-QM RMBS remained the largest credit-portfolio category.
- Longbridge’s loan-related assets increased 69% to $552.4 million, primarily due to proprietary reverse-mortgage originations. Its reported segment profit was $9.7 million; results include fair-value movements on reverse mortgage loans and related HMBS obligations.
- The proposed Great Ajax merger was terminated in October. Ellington paid a $5.0 million termination fee and bought 1,666,666 Great Ajax shares for $11.0 million; the shares were valued at $8.8 million at year-end.
Outlook, risks and unusual items
- Management described an opportunistic strategy and expects to adjust asset allocation with market conditions; the filing gives no quantitative earnings or return guidance. Management reported a year-over-year uptick in residential and commercial mortgage delinquencies and is working through several non-performing commercial assets. At year-end, three non-performing commercial loans had $47.7 million unpaid principal and $33.3 million fair value.
- Management cited volatile interest rates, elevated financing costs, mortgage-market spread changes and low prepayment speeds. Key risks include repo renewal and margin calls, asset valuation uncertainty, credit losses, illiquid holdings, counterparty exposure, and the sensitivity of MSRs and mortgage assets to rates and prepayments.
- Longbridge had $1.9 billion of borrower commitments for future HECM draws. The filing highlights funding and securitization risks for these draws and HMBS tail pools; a tail-draw facility was due to mature in January 2024, and other Longbridge facilities had 2024 maturities.
- Common dividends were generally $0.15 per share monthly during 2023. The filing says management expected to recommend reducing the monthly dividend to $0.13 beginning in March 2024, but also reports a subsequent Board approval of $0.15 per share payable in March. This is an apparent inconsistency to verify.
- Other unusual items include the Arlington bargain-purchase gain and transaction expenses, the Great Ajax termination costs, and substantial Longbridge fair-value changes. FY2023 net income should be read alongside cash flow and the non-GAAP earnings measure; Adjusted Distributable Earnings is not GAAP net income, REIT taxable income, or cash available for distribution.
- The auditor issued an unqualified opinion and found internal control over financial reporting effective, while excluding Arlington from the 2023 control assessment during the first year after acquisition. Fair-value measurement and valuation of Arlington-acquired forward MSR investments were identified as critical audit matters. No legal proceedings were reported as material to the company.
Investor facts to verify
- Reconcile the disclosed March 2024 common-dividend reduction expectation with the subsequent $0.15-per-share Board approval.
- Review liquidity against short-term financing maturities, margin-call capacity, the $1.9 billion of HECM draw commitments and Longbridge facility renewals or maturities.
- Assess how much reported earnings depended on fair-value changes, the Arlington bargain-purchase gain and Longbridge’s reverse-loan/HMBS accounting, versus recurring cash generation.
- Track mortgage delinquencies, non-performing commercial loans, foreclosure balances and credit performance in non-QM and residential transition loans.
- Evaluate leverage, preferred-stock claims and financing costs, distinguishing recourse debt from non-recourse securitization and HMBS obligations.
- Review the final Arlington purchase-price allocation, acquired MSR valuation assumptions, and integration of Arlington into internal controls.