Ellington Financial Delivers Solid Performance in Third Quarter

Ellington Financial, a diversified real estate investment trust (REIT), reported strong financial results for the third quarter of 2024. The company’s net income attributable to common stockholders was $16.2 million, or $0.19 per share, up from $6.6 million, or $0.10 per share, in the same period last year.

The increase in Ellington’s profitability was driven by several factors. First, the company saw a significant rise in total other income, which jumped to $33.4 million from $26.2 million a year earlier. This was primarily due to net gains on the company’s securities and loan portfolio, as well as its reverse mortgage business.

Ellington’s investment portfolio, which includes a diverse array of assets like residential mortgage-backed securities (RMBS), commercial mortgage loans, consumer loans, and corporate debt, generated $6.5 million in other income during the quarter, compared to a loss of $12.0 million a year ago. The portfolio benefited from lower interest rates, which led to mark-to-market gains on the company’s non-QM loans, non-Agency RMBS, and commercial mortgage-backed securities (CMBS).

The company’s Longbridge segment, which originates and services reverse mortgage loans, also contributed significantly to Ellington’s performance. Longbridge reported $30.6 million in other income, driven by gains on its HECM (home equity conversion mortgage) reverse mortgage loans and related HMBS (HECM-backed mortgage-backed securities) obligations. This was partially offset by losses on Longbridge’s interest rate hedges.

In addition to the strong performance of its investment and reverse mortgage businesses, Ellington also saw an increase in net interest income, which rose to $33.6 million from $27.5 million a year earlier. This was due to higher yields on the company’s assets, which more than offset a slight increase in financing costs.

The company’s total expenses increased to $50.9 million from $39.5 million in the prior-year period, primarily due to higher investment-related expenses and operating costs associated with the growth of the Longbridge business.

“We are pleased with our strong third-quarter results, which reflect the continued success of our diversified investment strategy and the growth of our reverse mortgage platform,” said Michael Vranos, Ellington’s founder and Chief Executive Officer. “Our ability to generate consistent returns across market cycles is a testament to the expertise of our team and the flexibility of our approach.”

Diversified Investment Portfolio Delivers Solid Results

Ellington’s investment portfolio, excluding the Longbridge segment, generated $44.1 million in net income for the quarter, up from $14.7 million a year earlier. This performance was driven by net gains of $98.5 million on the company’s securities and loans, partially offset by losses on its interest rate hedges and other secured borrowings.

The credit portfolio, which includes non-Agency RMBS, commercial mortgage loans, consumer loans, and other credit-sensitive assets, was the primary driver of the investment portfolio’s strong results. The credit portfolio’s net interest income increased to $80.5 million, up from $75.4 million in the prior-year period, due to higher average yields and a larger asset base.

Ellington’s Agency RMBS portfolio, which consists of government-backed mortgage securities, saw a decline in interest income to $5.4 million from $10.5 million a year earlier, reflecting a smaller portfolio size. However, the Agency RMBS strategy generated positive results overall, as net gains on the portfolio exceeded losses on the company’s interest rate hedges.

The company’s net interest margin, excluding the impact of a one-time accounting adjustment, increased to 2.59% from 2.72% in the prior-year period. This decline was primarily due to higher financing costs, which offset the increase in asset yields.

Longbridge Segment Continues to Grow

Ellington’s Longbridge segment, which includes the company’s reverse mortgage business, reported a net loss of $2.5 million for the quarter, compared to a net gain of $4.1 million a year earlier. The loss was primarily driven by net losses on Longbridge’s interest rate hedges, which more than offset the positive results in the company’s reverse mortgage origination and servicing activities.

Longbridge’s reverse mortgage loan portfolio, excluding non-retained securitization tranches, decreased by 5% sequentially to $494.2 million as of September 30, 2024. This was due to the completion of a securitization of proprietary reverse mortgage loans, partially offset by new originations during the quarter.

Reverse mortgage origination volumes increased by 16% quarter-over-quarter, with the wholesale and correspondent channels accounting for 77% of new loan originations. Longbridge’s retail channel also saw a 36% increase in origination volumes compared to the prior quarter.

“The Longbridge business continues to be an important growth driver for Ellington,” said Vranos. “We are pleased with the strong origination volumes and the successful securitization of proprietary reverse mortgage loans during the quarter. As the reverse mortgage market evolves, we believe Longbridge is well-positioned to capitalize on the opportunities ahead.”

Solid Financing and Capital Position

As of September 30, 2024, Ellington had total assets of $16.0 billion and total liabilities of $14.3 billion. The company’s debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, increased to 1.8:1 from 1.6:1 at the end of the prior quarter, primarily due to an increase in borrowings on the credit portfolio.

Ellington’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, also increased to 8.3:1 from 8.2:1 in the previous quarter. This increase was driven by the growth in the company’s credit portfolio and the Longbridge segment.

The company’s secured financing costs, including repos and other secured borrowings, increased to an average of 5.94% from 5.73% in the prior quarter, reflecting the rise in market interest rates. Ellington’s unsecured financing costs, which include interest on its senior notes and junior subordinated debt, decreased to an average of 5.59% from 6.15% over the same period.

Ellington’s equity increased by $90.0 million during the quarter to $1.626 billion, primarily due to net income, the issuance of common stock, and contributions from non-controlling interests. The company’s book value per share of common stock was $13.66 as of September 30, 2024.

Outlook and Conclusion

Looking ahead, Ellington remains optimistic about the company’s prospects. The continued strength in the credit markets, the growth of the Longbridge business, and the company’s ability to adapt its investment strategies to changing market conditions are all expected to contribute to Ellington’s future performance.

“We are well-positioned to navigate the evolving market environment and continue delivering consistent returns for our shareholders,” said Vranos. “Our diversified investment approach, combined with the expertise of our team and the growth of our reverse mortgage platform, gives us confidence in our ability to capitalize on the opportunities ahead.”

Overall, Ellington Financial’s third-quarter results demonstrate the company’s ability to generate solid returns across its investment portfolio and reverse mortgage business. The company’s diversified strategy, prudent risk management, and focus on growth have positioned Ellington for continued success in the quarters and years to come.