Ellington Financial Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Ellington is an externally managed REIT investing in mortgage and other credit assets, Agency RMBS, loans, derivatives, and originator interests. Its portfolio and results are substantially exposed to credit, interest-rate, prepayment, financing, and fair-value risks.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Interest income / interest expense | $51.1 million / $14.0 million | $40.1 million / $11.3 million |
| Net interest income | $37.1 million | $28.7 million |
| GAAP net income (loss) | $(6.5) million; $(9.9) million attributable to common stockholders; diluted EPS $(0.17) | $41.3 million; $37.9 million attributable to common stockholders; diluted EPS $0.86 |
| Core Earnings, non-GAAP | $27.2 million total; $23.2 million attributable to common stockholders, or $0.40 per share | $21.8 million total; $18.8 million attributable to common stockholders, or $0.43 per share |
| Yield and margin | Weighted average yield on yield-bearing assets 4.43%; net interest margin 3.21%, excluding the catch-up premium adjustment | 5.06% yield and 3.42% margin, respectively |
| Cash flow | Operating cash flow $32.9 million; investing cash use $592.5 million; financing cash flow $830.4 million. Cash, cash equivalents, and restricted cash ended at $363.7 million. | Cash and restricted cash increased $270.9 million during the quarter; the quarter-end balance included proceeds from $210 million of notes issued on March 31. |
| Balance sheet and liquidity | Total assets $5.83 billion; liabilities $4.50 billion; total equity $1.32 billion. Cash and cash equivalents $363.5 million; unencumbered assets $632.5 million. | Assets were $5.18 billion, liabilities $3.85 billion, and total equity $1.32 billion at December 31, 2021. |
| Debt and leverage | Total recourse and non-recourse borrowings $4.28 billion; debt-to-equity 3.2:1 and recourse debt-to-equity 2.3:1. Repo borrowings were $2.72 billion. | Total borrowings $3.64 billion; debt-to-equity 2.7:1 and recourse debt-to-equity 2.0:1 at December 31, 2021. |
| Book value and dividends | Book value per common share $17.74. Common dividends declared were $0.45 per share for the quarter. | Common dividends were $0.30 per share in Q1 2021. |
Material changes and operating performance
- Net interest income rose, mainly as the credit portfolio expanded; interest expense also increased with higher borrowings. Total interest income increased about 27% year over year, while interest expense increased about 24%.
- GAAP results reversed from profit to loss. Net realized and unrealized losses on securities and loans were $150.3 million, reflecting sharp declines in Agency RMBS and losses on unsecuritized non-QM loans, non-Agency RMBS, and consumer assets. Net derivative gains of $68.6 million and a $55.6 million fair-value gain on other secured borrowings partly offset these losses.
- Management reported the $55.6 million borrowing gain alongside $47.3 million of unrealized losses on securitized non-QM loans. These fair-value movements materially affected reported earnings.
- The long credit portfolio, excluding non-retained securitization tranches, increased 11% from year-end to $2.30 billion, led by residential and commercial mortgage lending strategies. Long Agency RMBS decreased 11% to $1.50 billion, reflecting sales, paydowns, and market-value declines.
- Cash available was unusually high at quarter end because the $210 million 5.875% senior notes were issued on the final day of the quarter. The company also issued 2.185 million common shares through its ATM program for $38.5 million net proceeds.
Outlook, management commentary, and risks
- The filing provides no formal numerical earnings guidance. Management said available capital resources were expected to meet short- and long-term liquidity needs, while noting that financing access, margin calls, asset values, and repo rollovers could materially affect liquidity.
- Management described a sharply more volatile rate environment: the Federal Reserve raised its target range in March 2022 and indicated further increases and balance-sheet reduction. Rising rates and wider spreads pressured Agency RMBS and loan valuations; management also cited lower refinancing and mortgage prepayment activity.
- On February 18, 2022, Ellington agreed to buy Home Point’s 49.6% interest in Longbridge Financial, subject to regulatory approval and customary conditions, with closing expected in Q2 2022. If completed, Ellington expected to own substantially all of Longbridge and consolidate its results. Longbridge reported a Q1 net loss, attributed primarily to a decline in its mortgage servicing rights portfolio.
- Material risks include leverage and repo refinancing or margin-call exposure; interest-rate, spread, credit, prepayment, and liquidity risk; concentration and valuation uncertainty in Level 3 assets; borrower and property losses; and REIT qualification and regulatory requirements. A 100-basis-point rate increase was estimated to reduce portfolio value by $16.1 million, or 1.22% of equity, under the filing’s static-portfolio assumptions.
- Common dividends of $0.15 per share were approved for May and June 2022. The company noted that dividends remain at the Board’s discretion. It reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of March 31, 2022.
Important facts for investors to verify
- Whether Longbridge’s acquisition closed, its purchase price and funding, and the subsequent impact of consolidation on earnings, leverage, and reporting segments.
- How much of the GAAP loss reflects market-value changes versus recurring portfolio income, and whether the reported non-GAAP Core Earnings measure remains representative of cash-generating performance.
- Current repo maturities, haircuts, counterparty exposure, collateral needs, and liquidity after the quarter-end note proceeds and subsequent portfolio activity.
- Performance and valuation assumptions for the large residential mortgage and Level 3 portfolios, including non-QM loans, and the offset between securitized assets and related fair-value borrowings.
- Common-share dilution from ATM issuance, the refinancing or repayment of the $86 million 5.50% notes due September 2022, and the sustainability of common and preferred dividends.