Ellington Financial Delivers Solid Results in Second Quarter

Ellington Financial, a real estate investment trust (REIT), reported strong financial performance in the second quarter of 2024. The company’s net income attributable to common stockholders was $52.3 million, or $0.62 per share, compared to $2.9 million, or $0.04 per share, in the same period last year.

The increase in Ellington’s results was driven by several factors:

Increased Total Other Income: Ellington’s total other income, which includes realized and unrealized gains and losses on its investments and financial derivatives, rose to $57.6 million in the second quarter of 2024 from $34.7 million in the same period in 2023. This was primarily due to net gains on the company’s credit portfolio, including non-QM loans, commercial mortgage loans, and non-Agency residential mortgage-backed securities (RMBS), as well as gains on its interest rate hedging instruments.

Higher Net Interest Income: Net interest income, the difference between interest earned on Ellington’s investments and interest paid on its borrowings, increased to $33.6 million in the second quarter of 2024 from $24.7 million in the same period in 2023. This was driven by higher yields on the company’s credit portfolio, partially offset by higher financing costs.

Earnings from Unconsolidated Entities: Ellington recorded earnings of $12.0 million from its investments in unconsolidated entities, such as loan originators and entities holding commercial real estate loans, compared to losses of $5.9 million in the prior-year period.

These positive factors were partially offset by an increase in other operating expenses, which rose to $26.1 million in the second quarter of 2024 from $28.3 million in the same period in 2023, primarily due to higher compensation and benefits costs in the Longbridge segment.

Portfolio Composition and Performance

Ellington’s investment portfolio is diversified across several asset classes, including:

• Agency RMBS: The company’s Agency RMBS portfolio decreased by 31% quarter-over-quarter to $457.7 million, driven by net sales. The portfolio generated positive results, as net gains on interest rate hedges and net interest income exceeded net losses on the Agency RMBS holdings.

• Credit Portfolio: Ellington’s credit portfolio, excluding non-retained tranches of consolidated securitization trusts, decreased to $2.73 billion as of June 30, 2024, from $2.80 billion as of March 31, 2024. The decline was driven by the impact of a non-QM loan securitization and net sales of non-Agency and retained non-QM RMBS, and non-QM loans, partially offset by net purchases of commercial mortgage bridge loans, HELOCs, closed-end second lien loans, non-performing loan/re-performing loan (NPL/RPL) pools, commercial mortgage-backed securities (CMBS), and collateralized loan obligations (CLOs).

• Longbridge: Ellington’s Longbridge segment, which originates and services reverse mortgage loans, generated positive income in the second quarter, driven by net interest income and net gains on proprietary reverse mortgage loans, along with positive results from servicing. Longbridge’s portfolio, excluding non-retained tranches of a consolidated securitization trust, increased by 18% sequentially to $520.8 million as of June 30, 2024, primarily due to proprietary reverse mortgage loan originations.

Overall, Ellington’s investment portfolio performed well in the second quarter, with strong net interest income and net gains from non-QM loans, retained non-QM RMBS, non-Agency RMBS, and commercial mortgage loans. The company also benefited from mark-to-market gains on its equity investments in certain loan originators.

Financing and Leverage

Ellington uses a variety of financing arrangements to fund its investments, including repurchase agreements (repos), secured lines of credit, term financing through securitization markets, and unsecured borrowings. As of June 30, 2024, the company’s total recourse debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, was 1.6:1, down from 1.8:1 as of March 31, 2024. The decrease was primarily driven by the completion of a non-QM securitization, a decline in borrowings on the Agency RMBS portfolio, and an increase in shareholders’ equity.

The company’s overall debt-to-equity ratio, including both recourse and non-recourse borrowings and excluding U.S. Treasury securities, adjusted for unsettled purchases and sales, decreased to 8.2:1 as of June 30, 2024, compared to 8.3:1 as of March 31, 2024. Ellington’s non-recourse borrowings include $8.8 billion of HMBS-related obligations, which are secured by the company’s reverse mortgage loans.

Outlook and Risks

Looking ahead, Ellington’s flexible investment strategy and Ellington’s experience are expected to help the company generate more consistent returns on its capital throughout changing market cycles. The company continues to monitor developments in the credit and interest rate environments closely and is working diligently to manage any non-performing commercial mortgage assets.

Potential risks to Ellington’s business include:

• Interest rate risk: Changes in interest rates can significantly impact the fair value of the company’s investments and the cost of its borrowings.
• Credit risk: Deterioration in the credit quality of Ellington’s investments could lead to losses.
• Prepayment risk: Faster-than-expected prepayments on the company’s mortgage-related investments could negatively impact its returns.
• Regulatory and legislative changes: Alterations to the regulatory environment or tax laws could affect Ellington’s operations and financial performance.

Overall, Ellington Financial delivered a strong performance in the second quarter, driven by positive results across its investment portfolio and Longbridge segment. The company’s diversified strategy, experienced management team, and prudent risk management approach position it well to navigate the evolving market environment.