Ellington Financial Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 16, 2021. This is an annual filing, not a standalone Q4 report. Ellington Financial is an externally managed mortgage and specialty-finance investor, with investments in residential and commercial mortgage assets, consumer and corporate credit, and Agency RMBS. It elected REIT tax treatment effective 2019.
Financial results and condition
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Interest income | $173.5 million | $159.9 million |
| Net interest income | $111.9 million | $81.4 million |
| Other income (loss) | $(65.2) million | $11.8 million |
| Net income | $28.4 million | $63.2 million |
| Net income attributable to common stockholders | $17.2 million; $0.39 per share | $56.5 million; $1.76 per share |
| Core Earnings attributable to common stockholders (non-GAAP) | $70.9 million; $1.63 per share | $58.2 million; $1.82 per share |
| Cash and cash equivalents | $111.6 million | $72.3 million |
| Total assets / total liabilities | $3.414 billion / $2.492 billion | $4.338 billion / $3.470 billion |
| Total equity | $921.6 million | $868.7 million |
| Book value per common share | $17.59 | $18.48 |
Net interest margin was 3.43% in 2020 versus 2.80% in 2019, excluding the catch-up premium-amortization adjustment and including specified interest-rate-swap costs. Average funding cost declined to 2.25% from 3.18%; weighted-average portfolio yield was 5.63% versus 5.74%. These are management-defined measures and do not capture all hedging costs.
Operating activities provided $119.5 million of cash and investing activities provided $507.3 million; financing activities used $587.4 million. Cash, cash equivalents and restricted cash increased $39.3 million. The company reported approximately $442.5 million of unencumbered assets at year-end.
Total debt-to-equity was 2.6:1, down from 3.8:1; recourse debt-to-equity was 1.6:1, down from 2.6:1. Repo borrowings were $1.497 billion. Senior Notes totaled $86 million, bear 5.50% interest and mature in September 2022. The company reported $2.3 billion of repo and other secured borrowings in its portfolio discussion.
Common dividends declared were $1.26 per share for 2020, compared with $1.81 in 2019. The monthly common dividend was reduced during 2020; the board subsequently approved $0.10 per share for February and March 2021.
Material changes and quarterly performance
- Common-stockholder earnings fell to $17.2 million from $56.5 million, principally because of realized and unrealized investment and derivative losses during the 2020 market disruption. Lower interest expense and higher earnings from unconsolidated entities partly offset those losses.
- Q4 2020 common-stockholder earnings were $63.2 million, or $1.44 per share, versus $11.1 million, or $0.31 per share, in Q4 2019. Q4 net interest income was $27.1 million versus $24.1 million. Q4 2020 results included $42.5 million of unrealized gains on securities, loans and real estate, partly offset by $9.6 million of realized losses in those categories.
- During March and April, the company reduced its Agency RMBS portfolio to lower leverage and protect liquidity, and temporarily curtailed new credit investments. It resumed investment activity as markets stabilized, while maintaining comparatively higher cash and lower leverage.
- Agency RMBS fair value declined to $959.4 million from $1.937 billion. Credit assets excluding non-retained securitization tranches were $1.434 billion versus $1.444 billion. Residential mortgage loans and REO were the largest credit-portfolio category.
- The company issued 5.29 million common shares in January 2020, generating $95.3 million of net proceeds, and repurchased 290,050 shares for $3.1 million during the year.
Financial statements for periods after January 1, 2019 are not directly comparable with 2018 because the company prospectively discontinued investment-company accounting following its REIT conversion. 2020 and 2019 use the newer presentation.
Outlook, commentary and risks
The filing gives no quantified earnings or return guidance. Management describes an opportunistic strategy that may shift asset allocation with market conditions, subject to REIT and Investment Company Act requirements. It expects to retain some Agency RMBS and emphasizes risk management, financing and liquidity; these are strategic statements, not performance guarantees.
- COVID-19 caused sharp first-quarter market dislocations, asset-price declines and unusually high margin calls. The company says it met all margin calls; funding haircuts remained higher at year-end than in 2019, although they had eased from early-2020 stress levels.
- Management anticipates eventual principal losses on certain credit assets from pandemic-related economic effects. Loan delinquencies, forbearances and modifications increased, then moderated in the second half. At year-end, non-QM loans in forbearance were $14.9 million (1.4% of that portfolio); commercial borrowers had $45.4 million of loans under deferment or modification agreements. Consumer-loan delinquencies also rose year over year.
- Key exposures include borrower defaults and property values, prepayment risk, interest-rate and spread movements, short-term repo funding and margin calls, counterparty risk, illiquid assets and valuation uncertainty. The company’s fair-value measurements include substantial Level 3 assets, and the auditor identified valuation of certain investments using management’s internal techniques as a critical audit matter.
- REIT qualification and the company’s Investment Company Act exclusions constrain asset selection and operations. Failure to maintain either could require taxes, asset sales or significant strategic changes. The filing also highlights conflicts associated with external management, related-party transactions and allocation of opportunities among Ellington accounts.
- Management reported no material legal proceedings. The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- How much of 2020 Core Earnings reflects recurring portfolio income versus items excluded from this non-GAAP measure; compare with GAAP common earnings and cash distributions.
- Whether the reported recovery in credit-asset values is supported by realizations and observable market prices, especially for Level 3 assets and unconsolidated investments.
- Subsequent performance of mortgage and consumer borrowers, including delinquencies, forbearance exits, modifications, charge-offs and expected principal losses.
- Current repo maturities, financing haircuts, collateral and margin-call capacity, unencumbered assets, and compliance with debt covenants.
- Dividend sustainability relative to taxable income, liquidity, leverage and preferred-stock obligations; the filing states future common dividends are discretionary.
- Effects of LIBOR transition, REIT asset and income tests, and Investment Company Act limits on hedging, financing and portfolio flexibility.