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	Ellington Financial Inc	11.685	0.025	0.21%
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Ellington Financial Inc. Reports Fourth Quarter 2023 Results

• Net income attributable to common stockholders of $12.5 million, or $0.18 per common share.¹
  • $27.3 million, or $0.38 per common share, from the investment portfolio.
    • $12.7 million, or $0.18 per common share, from the credit strategy.
    • $14.6 million, or $0.20 per common share, from the Agency strategy.
  • $(3.4) million, or $(0.04) per common share, from Longbridge.
• Adjusted Distributable Earnings² of $18.9 million, or $0.27 per common share.
• Book value per common share as of December 31, 2023 of $13.83, including the effects of dividends of $0.45 per common share for the quarter.
• Management expects to recommend to our board of directors a reduction of the monthly dividend from $0.15 to $0.13 per share, beginning in March, which would imply a dividend yield of 12.8% based on the February 23, 2024 closing stock price of $12.16 per share.
• Recourse debt-to-equity ratio³ of 2.0:1 as of December 31, 2023, adjusted for unsettled purchases and sales. Including all non-recourse borrowings, which primarily consist of securitization-related liabilities, debt-to-equity ratio of 8.6:1⁴.
• Cash and cash equivalents of $228.9 million as of December 31, 2023, in addition to other unencumbered assets of $416.3 million.
• Closed the merger with Arlington Asset Investment Corp. ("Arlington") on December 14, 2023, which was approximately 1.1% dilutive to book value per share.

Fourth Quarter 2023 Results

"In the fourth quarter, we reported net income of $0.18 per share and adjusted distributable earnings of $0.27 per share. From an economic return perspective, strong performance from our residential transition loan portfolio and our Agency and non-Agency MBS didn't quite offset merger-related dilution and expenses, and net losses from Longbridge and other positions, leading to a small negative economic return overall for the quarter," said Laurence Penn, Chief Executive Officer and President.

"In December, we completed the merger with Arlington, immediately adding scale and further strengthening our balance sheet. We promptly got to work freeing up capital in the Arlington portfolio, both monetizing Arlington's liquid assets in a constructive market and adding modest leverage to the MSR portfolio. Since then, we have been rotating that capital into higher-yielding investments, which we expect to drive incremental value to shareholders in 2024. Despite incremental expansion of the portfolio in the fourth quarter, our recourse leverage ratio actually ticked down sequentially after absorbing Arlington's low-leverage capital structure. In addition, in recent months we've been choosing to sell much of our non-QM loan portfolio instead of securitizing it, to take advantage of strong whole loan bids in the marketplace.

"Our adjusted distributable earnings did drop during the quarter, but it should recover as Longbridge continues to build back towards profitability, as we work out a few nonperforming commercial mortgage loans and REO assets, and as we continue to deploy new capital and rotate capital into higher-yielding sectors. That said, management expects to recommend to the board a reduction of the monthly dividend from $0.15 to $0.13 per share, beginning in March. Notably, this is just $0.01 below the $0.14 per share monthly dividend level we set five years ago, when we first shifted from a quarterly to a monthly dividend.

"Looking ahead, our diversified capital base now includes the common equity, low-cost preferred equity and unsecured debt added through the merger. This diversified capital base, together with our ample liquidity and additional untapped borrowing capacity, should allow us to capitalize on the many attractive investment opportunities we are seeing, including high-yielding lending opportunities in our proprietary loan pipelines and distressed situations in commercial real estate debt."

Financial Results

Investment Portfolio Summary

Our investment portfolio generated net income attributable to common stockholders of $27.3 million, consisting of $12.7 million from the credit strategy and $14.6 million from the Agency strategy.

Credit Performance

Our total long credit portfolio, excluding non-retained tranches of consolidated non-QM securitization trusts, increased by 10% to $2.74 billion as of December 31, 2023, from $2.48 billion as of September 30, 2023. The increase was driven primarily by the addition of Arlington's MSR-related portfolio and a larger residential transition loan portfolio, where net purchases exceeded principal paydowns. A portion of the increase was offset by smaller commercial bridge loan and non-QM loan portfolios, as loan paydowns (and in the case of non-QM, loan sales) exceeded new originations during the quarter.

Strong net interest income⁵ and net gains on our non-agency RMBS investments drove positive results in the credit strategy, with net losses on consumer loans, interest rate and credit hedges being the primary detractors. Our investments in loan originators generated a net positive gain overall as well. We saw a further uptick in delinquencies on our residential and commercial mortgage loan portfolios, and while those portfolios continue to experience low levels of realized credit losses and strong overall credit performance, we are monitoring developments closely and diligently working out a handful of nonperforming commercial mortgage assets.

During the quarter, the net interest margin⁶ on our credit portfolio declined to 2.66% from 2.95%, driven by lower asset yields (which includes the drag from nonperforming loans) and a higher cost of funds. 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.

Agency Performance

Our total long Agency RMBS portfolio decreased by 12% quarter over quarter to $853.2 million, as principal repayments and net sales exceeded net gains.

In October, interest rates and volatility increased, which drove yield spreads wider in most fixed income sectors, including Agency RMBS. Markets then reversed course, however, with interest rates and volatility declining, and yield spreads tightening, through year end. Overall for the fourth quarter, Agency RMBS outperformed U.S. Treasury securities and interest rate swaps, with lower and intermediate coupon RMBS exhibiting the most pronounced outperformance. As a result, significant net gains on our Agency RMBS portfolio (which was concentrated in those coupons) exceeded net losses on our interest rate hedges, which drove strong performance from our Agency RMBS strategy for the quarter.

Average pay-ups on our specified pools increased to 0.84% as of December 31, 2023, as compared to 0.75% as of September 30, 2023.

During the quarter, an increase in asset yields on our Agency strategy only partially offset an increase in cost of funds, which caused the net interest margin⁵ on our Agency RMBS, excluding the Catch-up Amortization Adjustment, to decrease to 0.69% from 1.05%. 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, although the extent of this benefit declined quarter over quarter.

Longbridge Summary

Our Longbridge portfolio generated a net loss attributable to common stockholders of $(3.4) million for the fourth quarter as net losses in originations and on interest rate hedges exceeded net gains on proprietary loans, net gains on the HMBS MSR Equivalent⁷ and MSRs on reverse mortgage loans ("Reverse MSRs"), and servicing income. In originations, while lower volumes drove the net loss, tighter yield spreads and lower interest rates did improve gain-on-sale margins on both HECM and proprietary loans.

Our Longbridge portfolio increased by 13% sequentially to $552.4 million as of December 31, 2023, driven primarily by proprietary reverse mortgage loan originations.

Corporate/Other Summary

Our results for the quarter reflect a net gain, driven by the decline in interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity.

Our results for the quarter also include the bargain purchase gain associated with the closing of the merger with Arlington, partially offset by merger-related transaction expenses including certain compensation and severance costs that had been previously negotiated as part of the merger agreement. Although the bargain purchase gain, net of the related expenses, contributed positively to net income during the quarter, the common shares issued as consideration for the merger were issued at a discount to our book value per share, and the transaction was dilutive to common shareholders overall by approximately 1.1%.

Finally, our results include the additional costs associated with the termination of our previously announced merger with Great Ajax Corp in October, including the initial markdown on the Great Ajax common shares we purchased in connection with that termination, partially offset by net gains on the fixed payer interest rate swaps that we held as a hedge prior to termination of the merger.

Credit Portfolio⁽¹⁾

The following table summarizes our credit portfolio holdings as of December 31, 2023 and September 30, 2023:

Agency RMBS Portfolio⁽¹⁾

The following table summarizes our Agency RMBS portfolio holdings as of December 31, 2023 and September 30, 2023:

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 the "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 December 31, 2023 and September 30, 2023:

The following table summarizes Longbridge's origination volumes by channel for the three-month periods ended December 31, 2023 and September 30, 2023:

Financing

Our recourse debt-to-equity ratio², excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, decreased to 2.0:1 at December 31, 2023 from 2.3:1 at September 30, 2023. The decline was primarily driven by a significant increase in shareholders' equity upon closing of the Arlington merger, only partially offset by increased borrowings related to our larger portfolio. Our overall debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, also decreased during the quarter, to 8.4:1 as of December 31, 2023, as compared to 9.4:1 as of September 30, 2023.

The following table summarizes our outstanding borrowings and debt-to-equity ratios as of December 31, 2023 and September 30, 2023:

The following table summarizes our operating results by strategy for the three-month period ended December 31, 2023:

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

About Ellington Financial

Ellington Financial invests in a diverse array of financial assets, including residential and commercial mortgage loans and mortgage-backed securities, reverse mortgage loans, mortgage servicing rights and related investments, consumer loans, asset-backed securities, 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 Tuesday, February 27, 2024, to discuss our financial results for the quarter ended December 31, 2023. To participate in the event by telephone, please dial (800) 225-9448 at least 10 minutes prior to the start time and reference the conference ID EFCQ423. International callers should dial (203) 518-9708 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 Tuesday, February 27, 2024, at approximately 2:00 p.m. Eastern Time through Tuesday, March 5, 2024 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (800) 839-5103. International callers should dial (402) 220-2687. 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 achieve the cost savings and efficiencies, operating efficiencies, synergies and other benefits, including the increased scale, and avoid potential business disruption from our recently completed merger with Arlington Asset Investment Corp., 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.

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 December 31, 2023 and September 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: