Ellington Financial Delivers Strong Results in Second Quarter

Ellington Financial, a diversified real estate investment trust (REIT), reported impressive financial results for the second quarter of 2024. The company’s net income attributable to common stockholders was $52.3 million, a significant increase from $2.9 million in the same period last year.

The strong performance was driven by growth across Ellington’s investment portfolio and its Longbridge reverse mortgage business. Interest income rose to $100.5 million, up from $88.1 million a year earlier, as the company benefited from higher yields on its credit investments and a larger reverse mortgage loan portfolio.

“We are very pleased with our results this quarter, which demonstrate the strength and resilience of our diversified investment strategy,” said the company’s CEO. “Our ability to generate consistent returns across market cycles is a testament to the skill and experience of our team.”

Investment Portfolio Thrives

Ellington’s investment portfolio, which includes residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), consumer loans, and other assets, generated $69.1 million in net income attributable to common stockholders, up from $30.7 million a year earlier.

The credit portfolio, which excludes Agency RMBS, saw interest income rise to $78.4 million, compared to $71.8 million in the prior-year period. This was driven by higher average yields and a slightly larger portfolio size. The company’s non-QM loans, commercial mortgage loans, and non-Agency RMBS were particularly strong performers, generating significant net realized and unrealized gains.

The Agency RMBS portfolio, which consists of government-backed mortgage securities, saw interest income decline to $6.9 million from $7.8 million a year earlier, due to a smaller portfolio size, partially offset by higher average yields. Ellington continued to use interest rate swaps and other hedging instruments to manage interest rate risk in this segment.

Overall, the investment portfolio generated $27.6 million in other income, a significant improvement from the $13.4 million in the prior-year period. This was primarily due to net gains on the company’s financial derivatives and securities and loans, which more than offset net unrealized losses on real estate owned and other secured borrowings.

Longbridge Reverse Mortgage Business Shines

Ellington’s Longbridge reverse mortgage business, which it acquired in 2022, also contributed significantly to the company’s strong results. Longbridge generated $4.2 million in net income, up from $2.5 million a year earlier.

Longbridge’s interest income rose to $9.8 million, compared to $3.8 million in the prior-year period, driven by growth in the average balance of proprietary reverse mortgage loans. The segment also benefited from net gains of $146.7 million on its HECM (Home Equity Conversion Mortgage) reverse mortgage loans, as well as $3.5 million in net gains on financial derivatives.

These gains were partially offset by a $127.7 million net change related to HMBS (HECM Mortgage-Backed Securities) obligations, which represent the liabilities associated with the HECM loans that Longbridge has securitized. Overall, Longbridge’s performance demonstrates the value of the acquisition and the company’s ability to capitalize on the growing reverse mortgage market.

Expenses and Financing

Ellington’s total expenses for the quarter were $43.0 million, compared to $42.6 million in the prior-year period. The increase was primarily due to higher other investment-related expenses, such as servicing fees and loan origination costs, which offset a decline in other operating expenses.

The company’s recourse debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, decreased to 1.6:1 as of June 30, 2024, down from 1.8:1 as of March 31, 2024. This improvement was driven by the completion of a non-QM securitization, a decline in borrowings on the Agency RMBS portfolio, and an increase in shareholders’ equity.

Ellington’s overall debt-to-equity ratio, including both recourse and non-recourse borrowings, also decreased during the quarter, from 8.3:1 to 8.2:1, as of June 30, 2024. The company’s secured financing costs, including repos and other secured borrowings, averaged 5.73% for the quarter, down slightly from 5.78% in the prior quarter. Its unsecured financing costs, which include interest on senior notes and junior subordinated debt, averaged 6.15%, up from 6.14% in the previous quarter.

Outlook and Conclusion

Ellington’s diversified investment strategy and strong performance across its business segments position the company well for the future. The company’s CEO noted that the team’s experience and flexibility in adapting to changing market conditions have been key to generating consistent returns.

Looking ahead, Ellington plans to continue targeting a range of asset classes, including Agency RMBS, non-Agency RMBS, CMBS, consumer loans, and reverse mortgage loans. The company will also maintain its focus on hedging interest rate, credit, and currency risks to mitigate volatility.

Overall, Ellington Financial’s second-quarter results demonstrate the strength and resilience of its business model. By leveraging its expertise in the mortgage and credit markets, the company has delivered impressive financial performance and positioned itself for continued success in the future.