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OLD GREENWICH, Conn. –
Ellington Financial LLC (NYSE: EFC) (the "Company") today reported
financial results for the quarter ended December 31, 2018.
Highlights
| 1 Increase (decrease) in shareholders' equity from operations, or "net income (loss)." |
| 2 Adjusted net investment income is a non-GAAP financial measure. See "Reconciliation of Adjusted Net Investment Income to Net Income" below for an explanation regarding the calculation of Adjusted net investment income. |
| 3 Excludes repo borrowings on U.S. Treasury securities. |
Fourth Quarter 2018 Results
"Despite weakness in most equity and fixed income markets globally in the fourth quarter, Ellington Financial preserved its book value thanks to our disciplined hedging strategy and diversified portfolio," stated Laurence Penn, Chief Executive Officer and President. "Even though we sold certain non-real-estate-related assets in anticipation of our REIT conversion, we still were able to grow our adjusted net investment income, which covered our dividend for the quarter. We also took advantage of our discounted stock price by repurchasing more than $5.5 million of our common shares during the quarter.
"During the fourth quarter, we had strong results from several of our loan strategies, including consumer and non-QM, where we completed our second non-QM securitization in November. Our investments in loan originators also performed well during the quarter. We believe that many of our loan strategies, in addition to providing us a pipeline of investments over which we have greater control and visibility, have the additional benefit of being relatively insulated from interest rate movements and global macroeconomic events. I am pleased with our performance in 2018, having realized our primary objectives of prudently growing our credit portfolio and our adjusted net investment income, while delivering an economic return of 9.2%.
"Finally, I am excited that we completed our tax conversion from a publicly traded partnership. While we rotated a portion of the portfolio to enable us to qualify as a REIT, we have maintained all of our core investment strategies, including our highest-conviction non-real-estate-related strategies, as well as our core hedging strategies. Our tax reporting to investors will be greatly simplified as a REIT, which should expand our investor base and greatly improve the liquidity of our stock. At the same time, our investment objectives remain the same: generate a high-quality earnings stream while maintaining a strong balance sheet, moderate leverage, and a stable book value."
Corporate Structure Update
The Company plans to elect to be taxed as a REIT for U.S. federal income tax purposes for the taxable year ending December 31, 2019. To facilitate this planned election, it has elected to be taxed as a corporation for U.S. federal income tax purposes effective as of January 1, 2019. The Company will issue a final Schedule K-1 to those shareholders who held shares in 2018. For 2019, the Company will issue a Form 1099 to shareholders reporting all dividends paid.
Financial Results
The Company's total long credit portfolio4 was $1.185 billion as of December 31, 2018, a decrease of approximately 8.1% from $1.289 billion as of September 30, 2018. The Company's total long Agency RMBS portfolio was $975.4 million as of December 31, 2018, an increase of approximately 3.3% from $944.4 million as of September 30, 2018. Notable transactions during the quarter included the Company completing its second non-QM securitization, as well as the consummation of a strategic equity investment in a consumer loan originator with which the Company has a forward flow purchase agreement. Additionally, the Company continued to participate in the asset ramp-up for what would be its fourth Ellington-sponsored CLO.
The Company's borrowings increased during the quarter primarily as a result of the financing of new small balance commercial loan originations and non-QM loan purchases, while total equity declined primarily because of the Company's share repurchases and dividend. As a result, the Company's debt-to-equity ratio3 increased to 3.35:1 as of December 31, 2018, from 3.04:1 as of September 30, 2018.
During the fourth quarter, the Company's credit strategy generated total gross income of $8.1 million, or $0.26 per share, and its Agency strategy generated a gross loss of $(4.9) million, or $(0.16) per share.
The Company's credit portfolio continued to be the primary driver of its earnings. During the fourth quarter, the Company's credit strategy generated net interest income5 of $17.7 million, net realized and unrealized losses on credit assets of $(12.0) million, net realized and unrealized losses on interest rate hedges of $(0.6) million, and other investment related expenses of $5.5 million. Other investment related expenses included $1.6 million of issuance costs related to the non-QM securitization completed in November 2018.
The Company benefited from strong performance in several of its loan-related strategies, including consumer loans, non-QM loans, and investments in loan originators. The weakness in the credit markets caused many of the Company's securities strategies to underperform, including CLOs, European RMBS, and corporate credit relative value. However, much of this underperformance was offset by the Company's net credit hedges and other activities, which generated a gain of $8.4 million for the quarter.
In the Agency strategy, declining interest rates generated net realized and unrealized gains on the Company's Agency assets of $8.5 million, while net interest income6 totaled $2.6 million. Losses on the Company's interest rate hedges and other activities exceeded these gains, however, as declining interest rates and high levels of interest rate volatility generated net realized and unrealized losses of $(16.0) million.
| 4 Excludes hedges, other derivative, and corporate relative value trading positions. Also excludes tranches of the Company's consolidated non-QM securitization trusts that were sold to third parties, but that are consolidated for GAAP reporting purposes. Including such tranches, the Company's total long credit portfolio was $1.480 billion as of December 31, 2018 as compared to $1.379 billion as of September 30, 2018. |
| 5 Excludes any interest income and interest expense items from Net interest rate hedges and Net credit hedges and other activities. |
| 6 Excludes any interest income and interest expense items from Net interest rate hedges and other activities |
.
The following table summarizes the Company's investment portfolio holdings as of December 31, 2018 and September 30, 2018:
| December 31, 2018 | September 30, 2018 | |||||||||||||||||||
| (In thousands) | Fair Value | Cost | Fair Value | Cost | ||||||||||||||||
| Long: | ||||||||||||||||||||
| Credit: | ||||||||||||||||||||
| Dollar Denominated: | ||||||||||||||||||||
| CLO | $ | 123,893 | $ | 139,424 | $ | 156,087 | $ | 160,561 | ||||||||||||
| CMBS | 18,426 | 17,828 | 14,923 | 13,995 | ||||||||||||||||
| Commercial Mortgage Loans and REO(1) | 245,536 | 244,193 | 160,515 | 158,159 | ||||||||||||||||
| Consumer Loans and ABS Backed by Consumer Loans(2) | 209,922 | 218,895 | 209,848 | 218,183 | ||||||||||||||||
| Corporate Debt and Equity | 15,316 | 17,526 | 44,559 | 43,250 | ||||||||||||||||
| Equity Investment in Loan Origination Entities | 37,067 | 28,314 | 30,171 | 25,314 | ||||||||||||||||
| Non-Agency RMBS | 153,214 | 141,130 | 180,223 | 168,399 | ||||||||||||||||
| Residential Mortgage Loans and REO | 498,126 | 495,551 | 393,846 | 392,634 | ||||||||||||||||
| Non-Dollar Denominated: | ||||||||||||||||||||
| CLO | — | — | — | — | ||||||||||||||||
| CMBS | 15,482 | 16,510 | 16,250 | 16,774 | ||||||||||||||||
| Consumer Loans and ABS Backed by Consumer Loans | 884 | 761 | 919 | 825 | ||||||||||||||||
| Corporate Debt and Equity | 10,810 | 11,821 | 11,400 | 12,165 | ||||||||||||||||
| RMBS(3) | 160,342 | 168,289 | 199,108 | 200,416 | ||||||||||||||||
| Agency: | ||||||||||||||||||||
| Fixed-Rate Specified Pools | 884,870 | 904,048 | 850,453 | 877,590 | ||||||||||||||||
| Floating-Rate Specified Pools | 5,496 | 5,627 | 5,539 | 5,684 | ||||||||||||||||
| IOs | 29,516 | 30,399 | 33,050 | 34,134 | ||||||||||||||||
| Reverse Mortgage Pools | 55,475 | 56,799 | 55,396 | 57,552 | ||||||||||||||||
| TBAs | 474,860 | 473,115 | 303,552 | 304,331 | ||||||||||||||||
| Government: | ||||||||||||||||||||
| Dollar Denominated | 76 | 76 | 4,230 | 4,257 | ||||||||||||||||
| Total Long | 2,939,311 | 2,970,306 | 2,670,069 | 2,694,223 | ||||||||||||||||
| Repurchase Agreements | ||||||||||||||||||||
| Dollar Denominated | 41,530 | 41,530 | 140,352 | 140,352 | ||||||||||||||||
| Non-Dollar Denominated | 19,744 | 19,744 | 20,070 | 20,116 | ||||||||||||||||
| Total Repurchase Agreements | 61,274 | 61,274 | 160,422 | 160,468 | ||||||||||||||||
| Short: | ||||||||||||||||||||
| Credit: | ||||||||||||||||||||
| Dollar Denominated: | ||||||||||||||||||||
|
Corporate Debt and Equity |
(23,462 | ) | (23,872 | ) | (60,809 | ) | (60,965 | ) | ||||||||||||
| Agency: | ||||||||||||||||||||
| TBAs | (772,964 | ) | (766,777 | ) | (562,098 | ) | (564,232 | ) | ||||||||||||
| Government: | ||||||||||||||||||||
| Dollar Denominated | (34,817 | ) | (34,410 | ) | (52,809 | ) | (52,884 | ) | ||||||||||||
| Non-Dollar Denominated | (19,334 | ) | (19,545 | ) | (19,633 | ) | (19,605 | ) | ||||||||||||
| Total Short | (850,577 | ) | (844,604 | ) | (695,349 | ) | (697,686 | ) | ||||||||||||
| Net Total | $ | 2,150,008 | $ | 2,186,976 | $ | 2,135,142 | $ | 2,157,005 | ||||||||||||
| (1) | Includes equity investment in a limited liability company holding small balance commercial mortgage loans. | |
| (2) | Includes equity investment in a securitization-related vehicle. | |
| (3) | Includes RMBS secured by non-performing loans and REO, and an investment in an entity holding a securitization call right. | |
The following table summarizes the Company's operating results for the quarters ended December 31, 2018 and September 30, 2018 and the year ended December 31, 2018:
|
Quarter |
Per |
% of |
Quarter |
Per |
% of |
Year |
Per |
% of |
||||||||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||
| Credit: | ||||||||||||||||||||||||||||||||||||||||||
| Interest income and other income | $ | 27,335 | $ | 0.89 | 4.49 | % | $ | 26,522 | $ | 0.86 | 4.32 | % | $ | 97,455 | $ | 3.14 | 15.91 | % | ||||||||||||||||||||||||
| Net realized gain (loss) | 3,496 | 0.11 | 0.57 | % | 9,845 | 0.32 | 1.60 | % | 18,407 | 0.59 | 3.01 | % | ||||||||||||||||||||||||||||||
| Change in net unrealized gain (loss) | (15,482 | ) | (0.50 | ) | (2.54 | )% | (9,886 | ) | (0.32 | ) | (1.61 | )% | (6,642 | ) | (0.21 | ) | (1.08 | )% | ||||||||||||||||||||||||
| Net interest rate hedges(1) | (561 | ) | (0.02 | ) | (0.09 | )% | 468 | 0.02 | 0.08 | % | 115 | — | 0.02 | % | ||||||||||||||||||||||||||||
| Net credit hedges and other activities(2) | 8,416 | 0.27 | 1.38 | % | (3,250 | ) | (0.11 | ) | (0.53 | )% | 8,020 | 0.26 | 1.31 | % | ||||||||||||||||||||||||||||
| Interest expense(3) | (9,622 | ) | (0.31 | ) | ||||||||||||||||||||||||||||||||||||||
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