Ellington Financial Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 1, 2023. This is an annual report, not a standalone Q4 report. Results include Longbridge Financial only from its October 3, 2022 acquisition and consolidation.
Business context
Ellington is an externally managed REIT investing across mortgage, consumer, corporate and other financial assets, using leverage and derivatives. Its two reportable segments are the Investment Portfolio and, following the acquisition, Longbridge, a reverse-mortgage originator and servicer. Ellington acquired an additional 49.6% interest in Longbridge, taking ownership to approximately 99.5%.
Key financial metrics
| Metric | FY2022 / Dec. 31, 2022 | Comparable period |
|---|---|---|
| Interest income | $282.2 million | $175.5 million in 2021 |
| Net interest income | $140.4 million | $131.5 million in 2021 |
| Net income (loss) | $(70.9) million; common-stockholder loss $(85.3) million, or $(1.43) per share | Net income $140.6 million; common-stockholder income $125.3 million, or $2.58 per share, in 2021 |
| Adjusted Distributable Earnings | $1.68 per common share; non-GAAP measure | Not directly comparable as presented in the supplied filing text |
| Net cash from operating activities | $42.7 million | $51.3 million in 2021 |
| Cash and restricted cash | $221.9 million at year-end, including $217.1 million cash and cash equivalents | $92.8 million at year-end 2021 |
| Total assets / total liabilities / total equity | $14.1 billion / $12.9 billion / $1.2 billion | $5.2 billion / $3.9 billion / $1.3 billion at year-end 2021 |
| Borrowings | $12.4 billion total, including $7.8 billion HMBS-related obligations; $3.1 billion recourse borrowings | $3.6 billion total; HMBS obligations were not consolidated in 2021 |
| Debt-to-equity | 10.2:1 including recourse and non-recourse borrowings; recourse-only ratio 2.5:1 | 2.7:1 total; 2.0:1 recourse-only in 2021 |
| Financing cost and margins | Average cost of funds 4.49%, versus 1.32% in 2021. Credit-portfolio net interest margin 2.54%, versus 3.84%. | Company-wide net interest margin, excluding the catch-up premium adjustment and including specified swap costs, was 2.55%, versus 3.15% in 2021 |
| Common dividend | $0.15 per share monthly; $1.80 declared per share for 2022 | $1.64 declared per share for 2021 |
Material changes versus 2021
- Results swung to a loss as rising rates and wider spreads drove $581.3 million of net realized and unrealized losses on securities and loans. Derivatives produced $174.4 million of gains, while fair-value gains on certain secured borrowings partly offset losses.
- Net interest income increased, supported by larger credit holdings and higher asset yields, but financing costs rose sharply. Management reported compressed, and in some cases negative, margins on assets during 2022.
- The long credit portfolio excluding non-retained tranches in consolidated non-QM securitizations grew 23% to $2.54 billion. Agency RMBS declined 43% to $968.3 million.
- Longbridge consolidation expanded reported assets and liabilities substantially. Its reverse-mortgage loans had $8.10 billion fair value, matched in part by $7.79 billion of HMBS-related obligations. Its FY2022 contribution after acquisition was $14.5 million of net income.
- Equity decreased to $1.22 billion, reflecting the net loss and $124.9 million of common and preferred dividends, partly offset by $99.2 million of net common-stock issuance proceeds.
Liquidity, outlook and risks
- Management stated that available cash, investment cash flows and anticipated credit availability were expected to meet short- and long-term liquidity needs. Repo borrowings were $2.61 billion, with a weighted-average remaining term of 78 days; 46% matured within 30 days. Repo cost was 5.50% at year-end.
- Longbridge had $1.7 billion of commitments for future HECM borrower advances. Certain Longbridge warehouse and tail-draw facilities matured in April 2023; management highlighted dependence on renewal, cash or HMBS securitization to fund commitments.
- Market conditions were challenging: the Federal Reserve raised rates rapidly, mortgage rates rose, prepayments slowed, and Agency MBS and credit markets recorded negative full-year returns. Management described the strategy as opportunistic and adaptable but provided no quantified earnings or return guidance.
- Principal risks include interest-rate and spread volatility, borrower credit losses, leverage and short-term refinancing, margin calls and collateral haircuts, asset illiquidity and valuation uncertainty, and counterparty exposure. REIT qualification and maintaining exclusions from Investment Company Act registration constrain operations.
- Other notable exposures include Longbridge’s HMBS repurchase obligations when HECM balances reach 98% of maximum claim amounts, reliance on a single reverse-mortgage subservicer, and potential regulatory changes affecting FHA/HUD programs. No material legal proceedings were reported.
- Fair-value estimation is significant: many loans, reverse-mortgage assets and related liabilities are Level 3. The auditor identified valuation of investments and fair value of Longbridge loans acquired as critical audit matters. The audit opinion was unmodified; Longbridge was excluded from management’s and the auditor’s internal-control assessment because it was acquired during 2022.
Important facts for investors to verify
- Reconcile GAAP losses to the $1.68 per-share Adjusted Distributable Earnings measure, and review the adjustments and cash available to support distributions.
- Assess the composition and sensitivity of the $12.4 billion reported borrowings, distinguishing recourse debt from non-recourse HMBS and securitization obligations.
- Verify refinancing, facility renewal and liquidity capacity against near-term maturities, collateral requirements and the $1.7 billion HECM advance commitment.
- Review the assumptions behind Level 3 valuations, especially acquired reverse-mortgage loans, HMBS obligations and non-QM assets, and the effect of changing rates, prepayments and losses.
- Evaluate Longbridge’s origination performance, servicing costs, repurchase obligations and reliance on its subservicer; reported consolidation-period results cover only the period after acquisition.
- Consider dilution and preferred claims: common shares increased during 2022, and in February 2023 the company issued $96.5 million net proceeds of Series C preferred stock with an 8.625% initial dividend rate.