Ellington Financial Inc. Reports Third Quarter 2023 Results

Rhea-AI Summary

Ellington Financial Inc. (NYSE: EFC) reported Q3 2023 financial results with net income of $6.6 million, or $0.10 per common share, and Adjusted Distributable Earnings of $22.5 million, or $0.33 per common share. The company's book value per common share as of September 30, 2023, was $14.33.

Positive

• Ellington Financial Inc. reported positive Q3 2023 financial results with net income of $6.6 million and Adjusted Distributable Earnings of $22.5 million.
• The company's dividend yield of 14.2% based on the November 6, 2023 closing stock price of $12.70 per share is notable.
• Ellington Financial Inc. experienced a net loss in the Agency strategy for the quarter due to elevated market volatility and rising long-term interest rates.

Negative

• None.

OLD GREENWICH, Conn.--(BUSINESS WIRE)-- Ellington Financial Inc. (NYSE: EFC) ("we," "us," or "our") today reported financial results for the quarter ended September 30, 2023.

Highlights

• Net income attributable to common stockholders of $6.6 million, or $0.10 per common share.¹
  • $14.2 million, or $0.21 per common share, from the investment portfolio.
    • $24.8 million, or $0.37 per common share, from the credit strategy.
    • $(10.5) million, or $(0.16) per common share, from the Agency strategy.
  • $4.1 million, or $0.06 per common share, from Longbridge.
• Adjusted Distributable Earnings² of $22.5 million, or $0.33 per common share.
• Book value per common share as of September 30, 2023 of $14.33, including the effects of dividends of $0.45 per common share for the quarter.
• Dividend yield of 14.2% based on the November 6, 2023 closing stock price of $12.70 per share, and monthly dividend of $0.15 per common share declared on October 6, 2023.
• Recourse debt-to-equity ratio³ of 2.3:1 as of September 30, 2023, adjusted for unsettled purchases and sales. Including all non-recourse borrowings, which primarily consist of securitization-related liabilities, debt-to-equity ratio of 9.4:1⁴.
• Cash and cash equivalents of $174.7 million as of September 30, 2023, in addition to other unencumbered assets of $394.6 million.
• Subsequent to quarter-end, we announced the mutual termination of our previously announced merger with Great Ajax Corp. We expect to close our pending merger with Arlington Asset Investment Corp. during the fourth quarter.

Third Quarter 2023 Results

“In the third quarter, Ellington Financial generated net income of $0.10 per share and Adjusted Distributable Earnings of $0.33 per share,” said Laurence Penn, Chief Executive Officer and President. “Our positive results, in an extremely volatile market, were driven by steady performance from our residential transition loan, non-QM, commercial mortgage bridge, and credit risk transfer portfolios, along with significant gains on our interest rate hedges, which exceeded net losses elsewhere in the portfolio.

“During the quarter, we took advantage of continued wide yield spreads by increasing our residential loan investments—most notably non-QM, residential transition, and proprietary reverse mortgage loans—as well as Agency RMBS, while continuing to ratchet down our commercial mortgage bridge loan portfolio. While our overall leverage ticked up incrementally, we still finished the quarter with additional borrowing capacity and ample liquidity.

“We have always endeavored to hedge EFC’s interest rate exposure. This positioning was critical in the third quarter, and with rates rising sharply, the profits on our hedges were substantial. If we are indeed in a ‘higher-for-longer’ interest rate environment, I believe that we are well positioned with our hedging expertise and short duration, high-yielding loan portfolios.

"As we look ahead, we continue to progress toward completing the Arlington Asset Investment Corp. merger, which we expect to close by year end. As a reminder, we have highlighted several strategic benefits to this transaction. First, we will be adding a sizable portfolio of low-coupon Agency mortgage servicing rights, which should perform well in a higher interest rate environment and further diversify Ellington Financial’s earnings stream. Second, we will be able to tap into Arlington's substantial dry powder to deploy in a market rich with opportunities, both by financing Arlington’s currently unlevered Agency MSR portfolio, and by monetizing Arlington’s liquid assets and rotating that capital into higher-yielding investments. Third, we will significantly increase our capital base in a highly efficient manner, not only with common equity, but also with low-cost preferred equity and unsecured debt.

“In addition, we expect that ongoing dislocations in the banking sector will continue to generate compelling opportunities for us, both to capitalize on distressed asset sales and to add market share at our originator affiliates. We have always focused on sectors where banks are less active and where there is less competition, and we have built up deep and experienced teams and strong track records in these businesses across market cycles.”

Financial Results

Investment Portfolio Summary

Our investment portfolio generated net income attributable to common stockholders of $14.2 million, consisting of $24.8 million from the credit strategy and $(10.5) million from the Agency strategy.

Credit Performance

Our total long credit portfolio, excluding non-retained tranches of consolidated non-QM securitization trusts, increased slightly to $2.48 billion as of September 30, 2023, from $2.45 billion as of June 30, 2023. Our non-QM and residential transition loan portfolios increased sequentially, as net purchases exceeded principal paydowns, and we also net purchased non-Agency RMBS during the quarter. Conversely, our commercial mortgage bridge loan portfolio continued to shrink, as loan paydowns in that portfolio again significantly exceeded new originations during the quarter.

Higher net interest income⁵ and significant net gains on our interest rate hedges drove the positive results in the credit strategy. A portion of this income was offset by net realized and unrealized losses on our consumer loans, non-QM loans, commercial mortgage bridge loans, and CMBS. Our residential and commercial mortgage loan portfolios continue to experience low levels of credit losses and strong overall credit performance, although we have seen an uptick in delinquencies in these portfolios recently and are monitoring developments closely.

During the quarter, borrowing costs on our credit investments increased, driven by higher short-term interest rates. At the same time, our asset yields also increased, and we continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate. As a result, the net interest margin⁶ on our credit portfolio increased slightly quarter over quarter to 2.95% from 2.91%.

Agency Performance

Our total long Agency RMBS portfolio increased by 5% quarter over quarter to $964.3 million, as opportunistic purchases exceeded sales, principal repayments, and net losses.

In the third quarter, Agency RMBS faced the significant headwinds of elevated market volatility and rising long-term interest rates. Yield spreads widened and Agency RMBS significantly underperformed U.S. Treasury securities and interest rate swaps for the quarter, with the most pronounced underperformance coming on lower coupon RMBS. Meanwhile, our delta-hedging costs, which are tied to interest rate volatility, remained high. Overall, net losses on our Agency RMBS and negative net interest income exceeded net gains on our interest rate hedges, resulting in a net loss in our Agency RMBS strategy for the quarter.

Average pay-ups on our specified pools decreased slightly to 0.75% as of September 30, 2023, as compared to 0.78% as of June 30, 2023.

In the Agency strategy, the increase in our cost of funds exceeded the increase in our asset yields; as a result, the net interest margin⁵ on our Agency RMBS, excluding the Catch-up Amortization Adjustment, decreased to 1.05% from 1.31%.

Longbridge Summary

Our Longbridge portfolio generated net income attributable to common stockholders of $4.1 million for the third quarter, driven primarily by net gains on interest rate hedges, partially offset by net losses on our HMBS MSR Equivalent⁷ and MSRs (collectively, our "MSR-related Net Assets"), net losses on proprietary loans, and a net loss in originations. In originations, the combination of higher interest rates and wider yield spreads negatively impacted gain-on-sale margins on both HECM and proprietary loans, which more than offset a modest uptick in overall origination volumes.

Net losses on our MSR-related Net Assets consisted primarily of an aggregate mark-to-market loss of $8.2 million, as a significant mark-to-market loss on our existing MSR-related Net Assets was partially offset by a significant mark-to-market gain on the MSR portfolio we acquired out of a bankruptcy proceeding on July 1^st. The mark-to-market loss on our existing MSR-related Net Assets resulted from our adoption of more conservative valuation assumptions in light of current market conditions. These revised assumptions included both higher NPV discount rates (reflecting higher market interest rates and reduced liquidity in the reverse mortgage sector) and reduced projected cash flows (reflecting upward adjustments to assumed sub-servicing expenses and downward adjustments to projected income from tail securitizations). The mark-to-market gain on the MSR portfolio we acquired out of bankruptcy resulted from our application of our revised, more conservative valuation assumptions to that portfolio, which we were able to purchase out of bankruptcy at a distressed price.

Our Longbridge portfolio increased by 14% sequentially to $488.2 million as of September 30, 2023, driven primarily by proprietary reverse mortgage loan originations and the July MSR portfolio acquisition. These increases were partially offset by the above-referenced mark-to-market loss on our existing MSR-related Net Assets.

Corporate/Other Summary

Our results for the quarter reflect a significant gain, driven by higher interest rates, on the fixed payer interest rate swaps that we held in connection with the then-pending merger with Great Ajax Corp.; partially offset by a net loss, also driven by higher interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt, or "Senior Notes," and our preferred equity. Our results for the quarter also reflect expenses related to our pending merger with Arlington Asset Investment Corp. and our then-pending merger with Great Ajax Corp.

On October 20, 2023, we announced the mutual termination of our previously announced merger with Great Ajax Corp. Including activity both in the third quarter and through October, the net gains on the hedges we held in connection with this transaction covered all of our costs associated with this transaction, including mark-to-market losses on our termination-related investment in the common shares of Great Ajax Corp. When the merger was mutually terminated, we neutralized the associated hedges.

We expect to close our pending merger with Arlington Asset Investment Corp. prior to year end.

____________________
1		Includes $(11.7) million of preferred dividends accrued and certain corporate/other income and expense items not attributed to either the investment portfolio or Longbridge segments.
2		Adjusted Distributable Earnings is a non-GAAP financial measure. See "Reconciliation of Net Income (Loss) to Adjusted Distributable Earnings" below for an explanation regarding the calculation of Adjusted Distributable Earnings.
3		Excludes U.S. Treasury securities and repo borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, our debt-to-equity ratio based on total recourse borrowings was 2.4:1 as of September 30, 2023.
4		Excludes U.S. Treasury securities.
5		Excludes any interest income and interest expense items from interest rate hedges, net credit hedges and other activities, net.
6		Net interest margin represents the weighted average asset yield less the weighted average secured financing cost of funds. It also includes the effect of actual and accrued periodic payments on interest rate swaps used to hedge the assets.
7		HMBS assets are consolidated for GAAP reporting purposes, and HMBS-related obligations are accounted for on the balance sheet as secured borrowings. The fair value of HMBS assets less the fair value of the HMBS-related obligations approximate fair value of the HMBS MSR Equivalent.

Credit Portfolio⁽¹⁾

The following table summarizes our credit portfolio holdings as of September 30, 2023 and June 30, 2023:

		September 30, 2023						June 30, 2023
($ in thousands)		Fair Value			%			Fair Value			%
Dollar denominated:
CLOs(2)		$	29,294		0.8	%		$	24,722		0.6	%
CMBS			20,587		0.5	%			20,752		0.5	%
Commercial mortgage loans and REO(3)(4)			365,329		9.4	%			419,915		10.7	%
Consumer loans and ABS backed by consumer loans(2)			90,474		2.3	%			93,116		2.4	%
Other ABS			1,285		—	%			—		—	%
Corporate debt and equity and corporate loans			21,836		0.6	%			21,907		0.6	%
Debt and equity investments in loan origination entities(5)			37,947		1.0	%			38,815		1.0	%
Non-Agency RMBS			259,543		6.7	%			224,075		5.7	%
Non-QM loans and retained non-QM RMBS(6)			2,060,036		53.0	%			2,077,870		53.2	%
Residential transition loans and other residential mortgage loans and REO(3)			975,667		25.1	%			963,772		24.7	%
Non-Dollar denominated:
CLOs(2)			1,578		0.1	%			1,738		0.1	%
Corporate debt and equity			177		—	%			238		—	%
RMBS(7)			19,608		0.5	%			20,979		0.5	%
Total long credit portfolio		$	3,883,361		100.0	%		$	3,907,899		100.0	%
Less: Non-retained tranches of consolidated securitization trusts			1,398,748						1,458,673
Total long credit portfolio excluding non-retained tranches of consolidated securitization trusts		$	2,484,613					$	2,449,226

(1)		This information does not include U.S. Treasury securities, securities sold short, or financial derivatives.
(2)		Includes equity investments in securitization-related vehicles.
(3)		In accordance with U.S. GAAP, REO is not considered a financial instrument and as a result is included at the lower of cost or fair value.
(4)		Includes equity investments in unconsolidated entities holding small balance commercial mortgage loans and REO.
(5)		Includes corporate loans to certain loan origination entities in which we hold an equity investment.
(6)		Retained non-QM RMBS represents RMBS issued by non-consolidated Ellington-sponsored non-QM loan securitization trusts, and interests in entities holding such RMBS.
(7)		Includes an equity investment in an unconsolidated entity holding European RMBS.

Agency RMBS Portfolio⁽¹⁾

The following table summarizes our Agency RMBS portfolio holdings as of September 30, 2023 and June 30, 2023:

		September 30, 2023						June 30, 2023
($ in thousands)		Fair Value			%			Fair Value			%
Long Agency RMBS:
Fixed rate		$	914,262		94.8	%		$	872,726		95.0	%
Floating rate			5,154		0.5	%			5,329		0.6	%
Reverse mortgages			33,529		3.5	%			26,928		2.9	%
IOs			11,341		1.2	%			13,511		1.5	%
Total long Agency RMBS		$	964,286		100.0	%		$	918,494		100.0	%

(1)

This information does not include U.S. Treasury securities, securities sold short, or financial derivatives.

Longbridge Portfolio⁽¹⁾

Longbridge originates reverse mortgage loans, including home equity conversion mortgage loans, or "HECMs," which are insured by the FHA and which are eligible for inclusion in GNMA-guaranteed HECM-backed MBS, or "HMBS." Upon securitization, the HECMs remain on our balance sheet under GAAP, and Longbridge retains the mortgage servicing rights associated with the HMBS, or "HMBS MSR Equivalent." Longbridge also originates "proprietary reverse mortgage loans," which are not insured by the FHA, and Longbridge has typically retained the associated MSRs. The following table summarizes Longbridge's loan-related assets as of September 30, 2023 and June 30, 2023:

		September 30, 2023				June 30, 2023
		(In thousands)
HMBS assets(2)		$	8,256,881			$	8,158,304
Less: HMBS liabilities			(8,181,922	)			(8,055,288	)
HMBS MSR Equivalent			74,959				103,016
Unsecuritized HECM loans(3)			135,061				132,845
Proprietary reverse mortgage loans			247,021				185,052
MSRs			29,653				7,473
Unsecuritized REO			1,484				1,417
Total		$	488,178			$	429,803

(1)		This information does not include financial derivatives or loan commitments.
(2)		Includes HECM loans, related REO, and claims or other receivables.
(3)		As of September 30, 2023, includes $7.3 million of assignable HECM buyout loans, $12.1 million of non-assignable HECM buyout loans, and $4.7 million of other inactive HECM loans. As of June 30, 2023, includes $9.9 million of assignable HECM buyout loans, $14.1 million of non-assignable HECM buyout loans, and $4.6 million of other inactive HECM loans.

The following table summarizes Longbridge's origination volumes by channel for the three-month periods ended September 30, 2023 and June 30, 2023:

($ In thousands)		September 30, 2023									June 30, 2023
Channel		Units			New Loan Origination Volume(1)			% of New Loan Origination Volume			Units			New Loan Origination Volume(1)			% of New Loan Origination Volume
Retail		384			$	55,576		18	%		397			$	62,037		21	%
Wholesale and correspondent		1,367				251,215		82	%		1,338				235,375		79	%
Total		1,751			$	306,791		100	%		1,735			$	297,412		100	%

(1)

Represents initial borrowed amounts on reverse mortgage loans.

Financing

Our recourse debt-to-equity ratio², excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, increased slightly to 2.3:1 at September 30, 2023 from 2.1:1 at June 30, 2023. Our overall debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, also increased during the quarter, to 9.4:1 as of September 30, 2023, as compared to 9.2:1 as of June 30, 2023.

The following table summarizes our outstanding borrowings and debt-to-equity ratios as of September 30, 2023 and June 30, 2023:

		September 30, 2023					June 30, 2023
		Outstanding Borrowings(1)			Debt-to-Equity Ratio(2)		Outstanding Borrowings(1)			Debt-to-Equity Ratio(2)
		(In thousands)					(In thousands)
Recourse borrowings(3)(4)		$	3,084,174		2.3:1		$	3,010,764		2.2:1
Non-recourse borrowings(4)			9,586,489		7.2:1			9,527,656		7.1:1
Total Borrowings		$	12,670,663		9.5:1		$	12,538,420		9.3:1
Total Equity		$	1,337,417				$	1,344,657
Recourse borrowings excluding U.S. Treasury securities, adjusted for unsettled purchases and sales					2.3:1					2.1:1
Total borrowings excluding U.S. Treasury securities, adjusted for unsettled purchases and sales					9.4:1					9.2:1

(1)		Includes borrowings under repurchase agreements, other secured borrowings, other secured borrowings, at fair value, and senior unsecured notes, at par.
(2)		Overall debt-to-equity ratio is computed by dividing outstanding borrowings by total equity. The debt-to-equity ratio does not account for liabilities other than debt financings.
(3)		Excludes repo borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, our debt-to-equity ratio based on total recourse borrowings is 2.4:1 and 2.3:1 as of September 30, 2023 and June 30, 2023, respectively.
(4)		All of our non-recourse borrowings are secured by collateral. In the event of default under a non-recourse borrowing, the lender has a claim against the collateral but not any of the other assets held by us or our consolidated subsidiaries. In the event of default under a recourse borrowing, the lender's claim is not limited to the collateral (if any).

The following table summarizes our operating results by strategy for the three-month period ended September 30, 2023:

		Investment Portfolio												Longbridge				Corporate/Other				Total				Per Share
(In thousands except per share amounts)		Credit				Agency				Investment Portfolio Subtotal
Interest income and other income (1)		$	77,809			$	10,490			$	88,299			$	9,593			$	1,581			$	99,473			$	1.45
Interest expense			(43,791	)			(11,619	)			(55,410	)			(7,540	)			(3,117	)			(66,067	)			(0.96	)
Realized gain (loss), net			(10,226	)			(6,007	)			(16,233	)			—				—				(16,233	)			(0.24	)
Unrealized gain (loss), net			(9,205	)			(33,034	)			(42,239	)			19,201				(4,410	)			(27,448	)			(0.40	)
Net change from reverse mortgage loans and HMBS obligations			—				—				—				(15,800	)			—				(15,800	)			(0.23	)
Earnings in unconsolidated entities			(978	)			—				(978	)			—				—				(978	)			(0.01	)
Interest rate hedges and other activity, net(2)			16,516				29,639				46,155				23,948				11,082				81,185				1.18
Credit hedges and other activities, net(3)			(1,141	)			—				(1,141	)			—				(235	)			(1,376	)			(0.02	)
Income tax (expense) benefit			—				—				—				—				(224	)			(224	)			—
Investment related expenses			(2,330	)			—				(2,330	)			(7,273	)			—				(9,603	)			(0.14	)
Other expenses			(1,441	)			—				(1,441	)			(18,046	)			(10,362	)			(29,849	)			(0.44	)
Net income (loss)			25,213				(10,531	)			14,682				4,083				(5,685	)			13,080				0.19
Dividends on preferred stock			—				—				—				—				(5,980	)			(5,980	)			(0.09	)
Net (income) loss attributable to non-participating non-controlling interests			(438	)			—				(438	)			12				(3	)			(429	)			(0.01	)
Net income (loss) attributable to common stockholders and participating non-controlling interests			24,775				(10,531	)			14,244				4,095				(11,668	)			6,671				0.10
Net (income) loss attributable to participating non-controlling interests			—				—				—				—				(80	)			(80	)
Net income (loss) attributable to common stockholders		$	24,775			$	(10,531	)		$	14,244			$	4,095			$	(11,748	)		$	6,591			$	0.10
Net income (loss) attributable to common stockholders per share of common stock		$	0.37			$	(0.16	)		$	0.21			$	0.06			$	(0.17	)		$	0.10
Weighted average shares of common stock and convertible units(4) outstanding																							68,605
Weighted average shares of common stock outstanding																							67,790

(1)		Other income primarily consists of rental income on real estate owned, loan origination fees, and servicing income.
(2)		Includes U.S. Treasury securities, if applicable.
(3)		Other activities include certain equity and other trading strategies and related hedges, and net realized and unrealized gains (losses) on foreign currency.
(4)		Convertible units include Operating Partnership units attributable to participating non-controlling interests.

The following table summarizes our operating results by strategy for the three-month period ended June 30, 2023:

		Investment Portfolio												Longbridge				Corporate/Other				Total				Per Share
(In thousands except per share amounts)		Credit				Agency				Investment Portfolio Subtotal
Interest income and other income (1)		$	73,544			$	7,816			$	81,360			$	6,305			$	1,195			$	88,860			$	1.31
Interest expense			(41,672	)			(9,645	)			(51,317	)			(6,117	)			(3,109	)			(60,543	)			(0.89	)
Realized gain (loss), net			(4,271	)			(14,794	)			(19,065	)			—				—				(19,065	)			(0.28	)
Unrealized gain (loss), net			(1,984	)			1,403				(581	)			5,611				—				5,030				0.07
Net change from reverse mortgage loans and HMBS obligations			—				—				—				7,544				—				7,544				0.11
Earnings in unconsolidated entities			(5,868	)			—				(5,868	)			—				—				(5,868	)			(0.09	)
Interest rate hedges and other activity, net(2)			14,787				18,877				33,664				14,949				(9,319	)			39,294				0.58
Credit hedges and other activities, net(3)			(1,798	)			—				(1,798	)			—				—				(1,798	)			(0.03	)
Income tax (expense) benefit			—				—				—				—				(83	)			(83	)			—
Investment related expenses			(1,830	)			—				(1,830	)			(7,560	)			—				(9,390	)			(0.14	)
Other expenses			(2,035	)			—				(2,035	)			(18,256	)			(12,951	)			(33,242	)			(0.49	)
Net income (loss)			28,873				3,657				32,530				2,476				(24,267	)			10,739				0.16
Dividends on preferred stock			—				—				—				—				(5,980	)			(5,980	)			(0.09	)
Net (income) loss attributable to non-participating non-controlling interests			(1,847	)			—				(1,847	)			25				(4	)			(1,826	)			(0.03	)
Net income (loss) attributable to common stockholders and participating non-controlling interests			27,026				3,657				30,683				2,501				(30,251	)			2,933				0.04
Net (income) loss attributable to participating non-controlling interests			—				—				—				—				(35	)			(35	)
Net income (loss) attributable to common stockholders		$	27,026			$	3,657			$	30,683			$	2,501			$	(30,286	)		$	2,898			$	0.04
Net income (loss) attributable to common stockholders per share of common stock		$	0.40			$	0.06			$	0.46			$	0.04			$	(0.45	)		$	0.04
Weighted average shares of common stock and convertible units(4) outstanding																							67,978
Weighted average shares of common stock outstanding																							67,162

(1)		Other income primarily consists of rental income on real estate owned, loan origination fees, and servicing income.
(2)		Includes U.S. Treasury securities, if applicable.
(3)		Other activities include certain equity and other trading strategies and related hedges, and net realized and unrealized gains (losses) on foreign currency.
(4)		Convertible units include Operating Partnership units attributable to participating non-controlling interests.

About Ellington Financial

Ellington Financial invests in a diverse array of financial assets, including residential and commercial mortgage loans, reverse mortgage loans, residential and commercial mortgage-backed securities, consumer loans and asset-backed securities backed by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, debt and equity investments in loan origination companies, and other strategic investments. Ellington Financial is externally managed and advised by Ellington Financial Management LLC, an affiliate of Ellington Management Group, L.L.C.

Conference Call

We will host a conference call at 11:00 a.m. Eastern Time on Wednesday, November 8, 2023, to discuss our financial results for the quarter ended September 30, 2023. To participate in the event by telephone, please dial (800) 343-4849 at least 10 minutes prior to the start time and reference the conference ID EFCQ323. International callers should dial (203) 518-9848 and reference the same conference ID. The conference call will also be webcast live over the Internet and can be accessed via the "For Our Shareholders" section of our web site at www.ellingtonfinancial.com. To listen to the live webcast, please visit www.ellingtonfinancial.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software. In connection with the release of these financial results, we also posted an investor presentation, that will accompany the conference call, on our website at www.ellingtonfinancial.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Wednesday, November 8, 2023, at approximately 2:00 p.m. Eastern Time through Wednesday, November 15, 2023 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (888) 562-3381. International callers should dial (402) 220-1189. A replay of the conference call will also be archived on our web site at www.ellingtonfinancial.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek" or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Forward-looking statements are based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in mortgage default rates and prepayment rates, our ability to borrow to finance our assets, changes in government regulations affecting our business, our ability to complete our pending merger with Arlington Asset Investment Corp. in a timely manner or at all and our ability achieve the cost savings and efficiencies, operating efficiencies, synergies and other benefits, including the increased scale, and avoid potential business disruption from such pending merger, our ability to maintain our exclusion from registration under the Investment Company Act of 1940, our ability to maintain our qualification as a real estate investment trust, or "REIT," and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K, which can be accessed through our website at www.ellingtonfinancial.com or at the SEC's website (www.sec.gov). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q, 10-K and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

ELLINGTON FINANCIAL INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	Three-Month Period Ended								Nine-Month Period Ended
	September 30, 2023				June 30, 2023(1)				September 30, 2023
(In thousands, except per share amounts)
NET INTEREST INCOME
Interest income	$	96,216			$	88,092			$	271,482
Interest expense		(68,702	)			(63,433	)			(191,752	)
Total net interest income		27,514				24,659				79,730
Other Income (Loss)
Realized gains (losses) on securities and loans, net		(17,362	)			(17,388	)			(71,518	)
Realized gains (losses) on financial derivatives, net		26,283				29,780				30,617
Realized gains (losses) on real estate owned, net		(155	)			(1,245	)			(1,456	)
Unrealized gains (losses) on securities and loans, net		(63,850	)			(11,383	)			24,024
Unrealized gains (losses) on financial derivatives, net		55,794				8,340				66,897
Unrealized gains (losses) on real estate owned, net		(1,712	)			1,174				(533	)
Unrealized gains (losses) on other secured borrowings, at fair value, net		18,660				12,152				1,133
Unrealized gains (losses) on senior notes, at fair value		(4,410	)			—				2,100
Net change from reverse mortgage loans, at fair value		99,929				32,120				295,170
Net change related to HMBS obligations, at fair value		(115,729	)			(24,576	)			(271,840	)
Other, net		28,772				5,689				37,965
Total other income (loss)		26,220				34,663				112,559
EXPENSES
Base management fee to affiliate, net of rebates		4,890				4,913				14,759
Investment related expenses:
Servicing expense		5,261				4,968				15,036
Other		4,342				4,422				12,633
Professional fees		3,847				6,351				13,753
Compensation and benefits		14,675				15,537				45,261
Other expenses		6,437				6,441				18,544
Total expenses		39,452				42,632				119,986
Net Income (Loss) before Income Tax Expense (Benefit) and Earnings from Investments in Unconsolidated Entities		14,282				16,690				72,303
Income tax expense (benefit)		224				83				328
Earnings (losses) from investments in unconsolidated entities		(978	)			(5,868	)			(3,403	)
Net Income (Loss)		13,080				10,739				68,572
Net Income (Loss) Attributable to Non-Controlling Interests		509				1,861				3,090
Dividends on Preferred Stock		5,980				5,980				17,077
Net Income (Loss) Attributable to Common Stockholders	$	6,591			$	2,898			$	48,405
Net Income (Loss) per Common Share:
Basic and Diluted	$	0.10			$	0.04			$	0.72
Weighted average shares of common stock outstanding		67,790				67,162				67,212
Weighted average shares of common stock and convertible units outstanding		68,605				67,978				68,028

(1)

Conformed to current period presentation.

ELLINGTON FINANCIAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
	As of
(In thousands, except share and per share amounts)	September 30, 2023				June 30, 2023				December 31, 2022(1)
ASSETS
Cash and cash equivalents	$	174,664			$	194,595			$	217,053
Restricted cash		1,604				1,602				4,816
Securities, at fair value		1,502,049				1,500,863				1,459,465
Loans, at fair value		11,920,872				11,822,695				11,626,008
Loan commitments, at fair value		3,752				3,800				3,060
Mortgage servicing rights, at fair value		29,653				7,473				8,108
Investments in unconsolidated entities, at fair value		113,474				118,420				127,046
Real estate owned		23,570				21,076				28,403
Financial derivatives–assets, at fair value		198,023				131,472				132,518
Reverse repurchase agreements		175,197				183,676				226,444
Due from brokers		38,870				33,118				36,761
Investment related receivables		167,447				183,222				139,413
Other assets		95,866				100,853				76,791
Total Assets	$	14,445,041			$	14,302,865			$	14,085,886
LIABILITIES
Securities sold short, at fair value	$	163,832			$	161,718			$	209,203
Repurchase agreements		2,573,043				2,557,864				2,609,685
Financial derivatives–liabilities, at fair value		38,520				30,502				54,198
Due to brokers		80,180				46,421				34,507
Investment related payables		36,641				61,202				49,323
Other secured borrowings		301,131				242,900				276,058
Other secured borrowings, at fair value		1,404,567				1,472,368				1,539,881
HMBS-related obligations, at fair value		8,181,922				8,055,288				7,787,155
Senior notes, at fair value		189,735				185,325				191,835
Base management fee payable to affiliate		4,890				4,913				4,641
Dividend payable		14,343				14,183				12,243
Interest payable		20,078				19,010				22,452
Accrued expenses and other liabilities		98,742				106,514				73,819
Total Liabilities		13,107,624				12,958,208				12,865,000
EQUITY
Preferred stock, par value $0.001 per share, 100,000,000 shares authorized; 13,420,421, 13,420,421 and 9,420,421 shares issued and outstanding, and $335,511, $335,511, and $235,511 aggregate liquidation preference, respectively		323,920				323,920				227,432
Common stock, par value $0.001 per share, 200,000,000, 200,000,000, and 100,000,000 shares authorized, respectively; 68,234,160, 67,161,740, and 63,812,215 shares issued and outstanding, respectively(2)		68				67				64
Additional paid-in-capital		1,323,124				1,308,158				1,259,352
Retained earnings (accumulated deficit)		(333,622	)			(309,587	)			(290,881	)
Total Stockholders' Equity		1,313,490				1,322,558				1,195,967
Non-controlling interests		23,927				22,099				24,919
Total Equity		1,337,417				1,344,657				1,220,886
TOTAL LIABILITIES AND EQUITY	$	14,445,041			$	14,302,865			$	14,085,886
SUPPLEMENTAL PER SHARE INFORMATION:
Book Value Per Common Share (3)	$	14.33			$	14.70			$	15.05

(1)		Derived from audited financial statements as of December 31, 2022.
(2)		Common shares issued and outstanding at September 30, 2023 includes 1,066,221 shares of common stock issued under our ATM program.
(3)		Based on total stockholders' equity less the aggregate liquidation preference of our preferred stock outstanding.

Reconciliation of Net Income (Loss) to Adjusted Distributable Earnings

We calculate Adjusted Distributable Earnings as U.S. GAAP net income (loss) as adjusted for: (i) realized and unrealized gain (loss) on securities and loans, REO, mortgage servicing rights, financial derivatives (excluding periodic settlements on interest rate swaps), any borrowings carried at fair value, and foreign currency transactions; (ii) incentive fee to affiliate; (iii) Catch-up Amortization Adjustment (as defined below); (iv) non-cash equity compensation expense; (v) provision for income taxes; (vi) certain non-capitalized transaction costs; and (vii) other income or loss items that are of a non-recurring nature. For certain investments in unconsolidated entities, we include the relevant components of net operating income in Adjusted Distributable Earnings. The Catch-up Amortization Adjustment is a quarterly adjustment to premium amortization or discount accretion triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. Non-capitalized transaction costs include expenses, generally professional fees, incurred in connection with the acquisition of an investment or issuance of long-term debt. For the contribution to Adjusted Distributable Earnings from Longbridge, we adjust Longbridge's contribution to our net income in a similar manner, but we include in Adjusted Distributable Earnings certain realized and unrealized gains (losses) from Longbridge's origination business ("gain-on-sale income").

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our investment portfolio, after the effects of financial leverage and by Longbridge, to reflect the earnings from its reverse mortgage origination and servicing operations; and (iii) we believe that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT and mortgage originator peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items that may impact the amount of cash that is actually available for distribution.

In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.

Furthermore, Adjusted Distributable Earnings is different from REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders, in order to maintain our qualification as a REIT, is not based on whether we distributed 90% of our Adjusted Distributable Earnings.

In setting our dividends, our Board of Directors considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Directors may deem relevant from time to time.

The following table reconciles, for the three-month periods ended September 30, 2023 and June 30, 2023, our Adjusted Distributable Earnings to the line on our Condensed Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable U.S. GAAP measure:

		Three-Month Period Ended
		September 30, 2023																June 30, 2023
(In thousands, except per share amounts)		Investment Portfolio				Longbridge				Corporate/Other				Total				Investment Portfolio				Longbridge				Corporate/Other				Total
Net Income (Loss)		$	14,682			$	4,083			$	(5,685	)		$	13,080			$	32,530			$	2,476			$	(24,267	)		$	10,739
Income tax expense (benefit)			—				—				224				224				—				—				83				83
Net income (loss) before income tax expense (benefit)			14,682				4,083				(5,461	)			13,304				32,530				2,476				(24,184	)			10,822
Adjustments:
Realized (gains) losses, net(1)			4,409				—				840				5,249				(547	)			—				(1,743	)			(2,290	)
Unrealized (gains) losses, net(2)			22,946				—				(8,230	)			14,716				2,695				—				8,261				10,956
Unrealized (gains) losses on MSRs, net of hedging (gains) losses(3)			—				(7,974	)			—				(7,974	)			—				(1,888	)			—				(1,888	)
Negative (positive) component of interest income represented by Catch-up Amortization Adjustment			(349	)			—				—				(349	)			483				—				—				483
Non-capitalized transaction costs and other expense adjustments(4)			995				881				1,486				3,362				1,053				566				3,723				5,342
(Earnings) losses from investments in unconsolidated entities			978				—				—				978				5,868				—				—				5,868
Adjusted distributable earnings from investments in unconsolidated entities(5)			2,179				—				—				2,179				2,848				—				—				2,848
Total Adjusted Distributable Earnings		$	45,840			$	(3,010	)		$	(11,365	)		$	31,465			$	44,930			$	1,154			$	(13,943	)		$	32,141
Dividends on preferred stock			—				—				5,980				5,980				—				—				5,980				5,980
Adjusted Distributable Earnings attributable to non-controlling interests			2,661				(12	)			318				2,967				138				5				301				444
Adjusted Distributable Earnings Attributable to Common Stockholders		$	43,179			$	(2,998	)		$	(17,663	)		$	22,518			$	44,792			$	1,149			$	(20,224	)		$	25,717
Adjusted Distributable Earnings Attributable to Common Stockholders, per share		$	0.64			$	(0.05	)		$	(0.26	)		$	0.33			$	0.67			$	0.02			$	(0.30	)		$	0.38

(1)		Includes realized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps), and foreign currency transactions which are components of Other Income (Loss) on the Condensed Consolidated Statement of Operations.
(2)		Includes unrealized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps), borrowings carried at fair value, and foreign currency transactions which are components of Other Income (Loss) on the Condensed Consolidated Statement of Operations.
(3)		Represents net change in fair value of HMBS MSR Equivalent and mortgage servicing rights related to reverse mortgage loans attributable to changes in market conditions and model assumptions. This adjustment also includes net (gains) losses on certain hedging instruments, which are components of realized and/or unrealized gains (losses) on financial derivatives, net on the Condensed Consolidated Statement of Operations.
(4)		For the three-month period ended September 30, 2023, includes $0.4 million of expenses related to our pending merger with Arlington Asset Investment Corp., $1.0 million of expenses related to our previously announced merger with Great Ajax Corp. which was terminated in October 2023, $0.8 million of non-capitalized transaction costs, $0.3 million of non-cash equity compensation expense, and $0.9 million of various other expenses. For the three-month period ended June 30, 2023, includes $2.1 million of expenses related to our pending merger with Arlington Asset Investment Corp., $1.5 million of expenses related to our previously announced merger with Great Ajax Corp. which was terminated in October 2023, $0.9 million of non-capitalized transaction costs, $0.4 million of non-cash equity compensation expense, and $0.4 million of various other expenses.
(5)		Includes net interest income and operating expenses for certain investments in unconsolidated entities.

 

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Investors:

Ellington Financial Inc.

Investor Relations

(203) 409-3575

info@ellingtonfinancial.com

or

Media:

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(212) 257-4170

Ellington@gasthalter.com

Source: Ellington Financial Inc.

FAQ

What were Ellington Financial Inc.'s Q3 2023 net income and Adjusted Distributable Earnings?

Ellington Financial Inc. reported Q3 2023 net income of $6.6 million, or $0.10 per common share, and Adjusted Distributable Earnings of $22.5 million, or $0.33 per common share.

What was the book value per common share as of September 30, 2023?

The book value per common share as of September 30, 2023, was $14.33.

What was Ellington Financial Inc.'s dividend yield based on the November 6, 2023 closing stock price?

The company's dividend yield was 14.2% based on the November 6, 2023 closing stock price of $12.70 per share.

What caused Ellington Financial Inc. to experience a net loss in the Agency strategy for the quarter?

Ellington Financial Inc. faced a net loss in the Agency strategy for the quarter due to elevated market volatility and rising long-term interest rates.