Ellington Financial Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Ellington is an externally managed REIT investing in mortgage assets, loans, structured credit, derivatives, and related businesses. Balance-sheet comparisons are with December 31, 2020.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $40.1 million | $52.1 million |
| Interest expense | $11.3 million | $22.1 million |
| Net interest income | $28.7 million | $30.0 million |
| Other income (loss) | $20.2 million | $(142.2) million |
| Net income (loss) | $41.3 million | $(128.3) million |
| Net income (loss) attributable to common stockholders | $37.9 million; $0.86 per share | $(129.4) million; $(3.04) per share |
| Core Earnings attributable to common stockholders (non-GAAP) | $18.8 million; $0.43 per share | $19.8 million; $0.46 per share |
| Net interest margin | 3.42%, excluding the catch-up premium amortization adjustment and including interest-rate swap costs as described by management | 3.11% on the same stated basis |
| Total assets / total liabilities | $4.11 billion / $3.16 billion | $3.41 billion / $2.49 billion |
| Total equity | $943.4 million | $921.6 million |
| Cash and cash equivalents | $149.4 million; unencumbered assets approximately $467.3 million | Cash of $111.6 million |
| Borrowings and leverage | Total recourse and non-recourse borrowings $2.97 billion; debt-to-equity 3.1:1; recourse debt-to-equity 2.0:1 | Borrowings $2.39 billion; debt-to-equity 2.6:1; recourse debt-to-equity 1.6:1 |
| Book value per common share | $18.16 | Not stated here as a comparable figure |
| Operating cash flow | $9.2 million provided | $28.9 million provided |
Material changes and management commentary
- GAAP earnings reversed from the pandemic-driven Q1 2020 loss, chiefly reflecting current-period realized and unrealized investment and derivative gains and positive results from unconsolidated investments. Q1 2021 other income included $16.5 million of net realized and unrealized derivative gains and $2.5 million of gains on securities and loans.
- Net interest income edged down despite interest expense falling substantially: lower interest income reflected lower portfolio yields and a smaller Agency RMBS portfolio on average. Management cited lower financing costs and larger credit-asset portfolios as offsets.
- Long Agency RMBS fair value rose 55% from year-end to $1.49 billion. Long credit investments excluding non-retained tranches of consolidated securitizations declined 9% to $1.30 billion, following asset sales and a February non-QM securitization. Total assets increased to $4.11 billion.
- Debt-to-equity increased to 3.1:1, primarily because of additional financing for the larger Agency RMBS portfolio. Average cost of funds declined to 1.52% from 1.88% in Q4 2020, according to management.
- Q1 investing activities used $590.3 million of cash, while financing activities provided $618.8 million; cash, cash equivalents, and restricted cash increased $37.7 million. These cash-flow totals reflect substantial investment purchases, sales, and financing transactions.
- Common dividends declared for Q1 totaled $0.30 per share, versus $0.45 in Q1 2020. Subsequent to quarter-end, the board approved common dividends of $0.14 per share payable in May and $0.15 per share payable in June; it also approved a $0.421875 per-share Series A preferred dividend payable in April.
Outlook, risks, and unusual items
- No specific earnings or return guidance is provided. Management said current capital resources are expected to be sufficient for short- and long-term liquidity needs, while noting dependence on financing availability and asset-sale proceeds.
- Management reported that there were no material incremental COVID-related effects from forbearance or deferment activity in its non-QM, residential transition, consumer, or small-balance commercial mortgage loan portfolios as of March 31, 2021. The filing nevertheless identifies pandemic-related economic effects as a continuing risk.
- Key exposures include credit losses and recoveries, mortgage prepayments, interest-rate and spread movements, liquidity and margin calls, refinancing or renewal of repo borrowings, counterparty risk, and fair-value estimates. A failure to finance Agency RMBS could create significant short-term liquidity strain; steep declines in collateral or derivatives could trigger margin calls.
- Valuations rely in part on Level 3 models and unobservable assumptions, including loan yields, defaults, recoveries, and prepayments. Actual proceeds may differ materially from estimated fair values.
- The company reported $2.0 million of income tax expense, primarily from higher deferred tax liabilities on gains in a domestic taxable REIT subsidiary, and $1.7 million of debt issuance costs related to fair-value-option borrowings. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile GAAP net income of $41.3 million with Core Earnings of $21.8 million, including adjustments for fair-value changes, derivatives, taxes, and debt issuance costs.
- Assess whether leverage, repo maturity and renewal needs, collateral haircuts, and margin-call exposure remain manageable; repo borrowings were $1.91 billion and had a weighted-average remaining term of 118 days at quarter-end.
- Review the sensitivity of earnings and book value to interest rates, credit spreads, prepayments, defaults, and Level 3 valuation assumptions.
- Monitor credit performance, including non-performing residential and commercial mortgage loans, consumer-loan delinquencies, foreclosure activity, and expected credit losses.
- Confirm REIT qualification, dividend coverage and sustainability, and the effects of related-party management fees, reimbursements, loan purchases, and financing arrangements.