Ellington Financial Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited quarter ended March 31, 2023. Ellington Financial is an externally managed REIT investing across mortgage, consumer, and other credit assets, and operates Longbridge Financial, a reverse-mortgage originator and servicer acquired in October 2022. Results include two segments: Investment Portfolio and Longbridge. The prior-year comparison does not include Longbridge as a consolidated segment, so year-over-year comparisons are not fully like-for-like.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Interest income | $87.2 | $51.1 |
| Interest expense | $(59.6) | $(14.0) |
| Net interest income | $27.6 | $37.1 |
| Total other income (loss) | $51.7 | $(25.4) |
| Total expenses | $37.9 | $19.6 |
| Net income (loss) | $44.8 | $(6.5) |
| Net income (loss) attributable to common stockholders | $38.9 | $(9.9) |
| Basic and diluted EPS | $0.58 | $(0.17) |
- Adjusted Distributable Earnings, a non-GAAP measure, attributable to common stockholders was $30.3 million, or $0.45 per share, versus $23.2 million, or $0.40 per share. Management cautions that this measure is not GAAP income, REIT taxable income, or necessarily cash available for distribution.
- Reported net interest margin, excluding the catch-up premium amortization adjustment and including swap payments, was 2.32%, down from 3.21% a year earlier. Credit-portfolio net interest margin was 2.49%, up from 2.44% in Q4 2022; Agency RMBS margin was 1.42%, up from 0.98% in Q4.
- Operating cash flow was negative $48.7 million; investing cash flow was negative $18.7 million; financing cash flow was positive $35.7 million. Cash, cash equivalents, and restricted cash fell $31.7 million during the quarter to $190.2 million.
- At March 31, total assets were $14.11 billion, liabilities $12.74 billion, and total equity $1.37 billion. Stockholders’ equity excluding non-controlling interests was $1.35 billion; reported common book value per share was $15.10.
- Total recourse and non-recourse borrowings were $12.37 billion. Debt-to-equity was 9.0:1, down from 10.2:1 at year-end; recourse debt-to-equity was 2.1:1, down from 2.5:1. The filing reports total secured borrowings of approximately $12.2 billion, including $8.0 billion of HMBS-related obligations.
Material changes versus prior comparable period
- Common-stockholder results improved from a $9.9 million loss to $38.9 million of income, chiefly reflecting the swing in other income and gains from unconsolidated investments. Q1 2023 included $99.3 million of unrealized gains on securities and loans and a $163.1 million fair-value gain on reverse mortgage loans, partly offset by a $131.5 million fair-value loss on HMBS obligations.
- Net interest income fell $9.5 million year over year despite higher interest income: interest expense rose substantially as short-term rates and funding costs increased, and average secured borrowings were higher. Longbridge’s inclusion also affects comparability.
- Total expenses nearly doubled, including Longbridge operating and servicing costs, higher compensation and professional fees, and increased servicing expense. No incentive fee was accrued in either period.
- The credit portfolio, excluding non-retained tranches of consolidated non-QM securitizations, decreased about 5% sequentially to $2.43 billion. Agency RMBS fell about 12% sequentially to $853 million. Longbridge loan-related assets increased about 35% sequentially to $442 million.
- Common and preferred equity offerings raised $157.4 million net in Q1, including $96.5 million net from issuing Series C preferred stock. The company repurchased 1.061 million common shares for $12.1 million at an average $11.38 per share.
Outlook, commentary, risks, and unusual items
- Management provided no quantified earnings or portfolio guidance. It described an opportunistic, flexible investment strategy and said it expects existing capital resources to meet short- and long-term liquidity needs. The Board declared common dividends of $0.15 per share for May and June 2023.
- Management reported elevated first-quarter market volatility amid banking-sector stress, an inverted yield curve, and high but gradually easing inflation. Short-term SOFR and financing costs rose; mortgage rates and asset spreads were volatile. Management noted an uptick in residential and commercial mortgage delinquencies, although credit losses remained low and overall credit performance was described as strong.
- Liquidity and leverage are material risks. Repo borrowings were $2.29 billion, with a 6.18% weighted-average borrowing rate and $528 million maturing within 30 days. Repo financing is subject to rollover, margin-call, haircut, and collateral-value risks; unexpected inability to renew financing could force asset sales. Management noted that sharp asset or derivative value declines could materially reduce free cash.
- Other key exposures include interest-rate, prepayment, credit, real-estate, counterparty, and fair-value estimation risks. Much of the portfolio is Level 3 and valued using models and unobservable inputs; changes in assumptions can materially affect reported earnings and asset values. The filing’s sensitivity analysis estimates a 1% parallel rate increase would reduce portfolio value by about $15.1 million, before other risks and model limitations.
- Commitments include $1.8 billion of unfunded HECM borrower advances, $191.8 million of residential mortgage commitments, and guarantees and other lending commitments. The company was in compliance with disclosed financing covenants at quarter-end. No legal proceedings were identified as material, and management reported effective disclosure controls with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Adjusted Distributable Earnings and cash generation support the common dividend; ADE is non-GAAP and differs from GAAP income and REIT taxable income.
- Near-term repo maturities, renewal terms, haircuts, margin requirements, and access to liquidity, including the concentration of counterparty exposures.
- Delinquency, foreclosure, and credit-loss trends across residential and commercial mortgage assets, and the performance of Longbridge’s HECM buyout loans.
- Valuation assumptions and sensitivity for Level 3 assets and liabilities, particularly reverse mortgage loans, HMBS obligations, and non-QM securitizations.
- Effects of the Q1 common and preferred stock issuance and buybacks on per-share earnings, book value, leverage, and preferred dividend obligations; preferred dividends in arrears totaled $3.8 million at quarter-end.