Ellington Financial LLC Reports Second Quarter 2016 Results
Highlights
- Net increase (decrease) in shareholders' equity resulting from operations ("net income (loss)") for the second quarter was
$5.0 million , or$0.15 per basic and diluted share, as compared to net loss of$(23.2) million , or$(0.69) per basic and diluted share, for the quarter endedMarch 31, 2016 . - Book value per share as of
June 30, 2016 was$20.31 on a diluted basis, after payment of a quarterly dividend in the second quarter of$0.50 per share, as compared to book value per share of$20.63 on a diluted basis as ofMarch 31, 2016 . - Our Credit strategy generated gross income of
$6.8 million for the quarter endedJune 30, 2016 . - Our Agency strategy generated gross income of
$3.2 million for the quarter endedJune 30, 2016 . - During the second quarter and thereafter through
August 3, 2016 , we repurchased approximately 330,000 shares at an average price per share of$17.21 for a total cost of approximately$5.7 million . - Our Board of Directors declared a dividend of
$0.50 per share for the second quarter of 2016, equating to an annualized dividend yield of 11.5% based on theAugust 3, 2016 closing price of$17.39 ; dividends are paid quarterly in arrears.
Second Quarter 2016 Results
"For the second quarter of 2016, EFC had net income of
"Since the majority of our credit hedges continue to be concentrated primarily in short positions in high yield corporate bond indices, the continued credit spread tightening in high yield corporate bonds dampened the positive performance of the asset side of our portfolio. While the dislocations following the surprise Brexit vote initially gave our portfolio a boost in the form of widening corporate credit spreads, this quickly reversed as the prospect of coordinated central bank easing led investors back into credit products.
"So far in the third quarter, positive performance on the asset side of portfolio has continued to be dampened by the performance of our short positions in high yield corporate bond indices, as these indices continued to rally strongly in July. Nevertheless, we believe that much of the recent outperformance of many credit-sensitive sectors has been technically driven rather than fundamental in nature, and as a result we believe that maintenance of credit hedges is prudent. Maintaining a disciplined hedging strategy is a core tenet of our business and has served us well over many market cycles. Of course, we are continually re-evaluating both the extent to which we hedge credit, as well as the particular instruments that we use to hedge credit.
"In light of the discount to book value that our shares have traded, we have continued to repurchase our shares in the open market. However, given the recent improvement in the price of our shares relative to our book value, we have recently reduced the pace of our repurchases."
Market Overview
Over the first two months of the second quarter, interest rates generally trended slightly higher and volatility declined. However, during the month of June, as a result of the
Since its
The yield curve flattened significantly over the course of the second quarter, as the 10-year U.S. Treasury yield fell 30 basis points to 1.47%, while the 2-year U.S. Treasury yield fell 14 basis points to 0.58%. All of the yield declines, and most of the yield curve flattening, were concentrated in last week of June following the Brexit vote. The average rate for a fixed rate 30-year conventional mortgage fell 23 basis points over the course of the quarter, and ended the quarter at 3.48%, its lowest level since
Credit
Our Credit strategy generated gross income of
Non-Agency RMBS performed well during the second quarter, despite uncertainty and credit spread volatility brought on by the Brexit vote. As the case has been for some time, the fundamentals underlying non-Agency RMBS, led by a stable housing market, continue to be strong. Included in our non-Agency RMBS results for the quarter were strong net carry, appreciation from our held positions, and net realized gains from positions sold. We net sold non-Agency RMBS during the second quarter, mainly in order to redeploy the net proceeds into our other targeted Credit assets. While our non-Agency RMBS portfolio currently represents a much smaller portion of our total Credit portfolio than it ever has, it continues to be a core segment of our overall portfolio. We intend to continue to opportunistically increase and decrease the size of this portfolio as market conditions vary. As of June 30, 2016, our investments in U.S. non-Agency RMBS totaled
Our credit hedges are currently primarily in the form of credit default swaps, or "CDS," on high-yield corporate bond indices, as well as tranches and options on these indices, and we opportunistically overlay these positions with certain relative value long/short positions involving the same or similar instruments. High-yield corporate credit spreads tightened on a quarter-over-quarter basis. While these spreads had widened immediately following the Brexit vote in late June, they generally fully recovered within just a few days, and closed the quarter near the year-to-date highs. For the second quarter, the Markit CDX North American High Yield 5-year Index had a total return of 1.83%, or 7.52% annualized. The net tightening in high-yield corporate bond index spreads over the course of the quarter led to net losses on our credit hedges. We also had net losses on our interest rate hedges, as interest rates declined over the course of the quarter. Our interest rate hedges are principally in the form of interest rate swaps and, to a lesser extent, Eurodollar and U.S. Treasury futures. We had net gains on our foreign currency hedges, which offset foreign currency related transaction and translation losses from our holdings denominated in euros and British pounds. We continue to believe that the credit-sensitive sectors of the fixed income markets remain vulnerable to potential yield spread widening, and so we intend to continue to hedge credit risk in our portfolio using a variety of hedging instruments. We believe that our publicly traded partnership structure affords us valuable flexibility, especially with respect to our ability to reduce exposures nimbly through hedging both credit and interest rate risks. At the same time, we believe that any additional substantial yield spread widening will lead to attractive opportunities for us, especially given the many diverse sectors in which we are active.
Yield spreads for CMBS were volatile during the second quarter. In the early part of the quarter, yield spreads generally tightened amidst strong investor demand, only to widen in the latter part of the quarter, following the Brexit vote and a decline in crude oil prices. The CMBS new issue credit curve steepened over the course of the quarter, as yield spreads on higher rated tranches of CMBS tightened while those on lower rated tranches widened. Our CMBS portfolio continues to be comprised entirely of new issue "B-pieces" that we purchased at original issuance. B-pieces are the most subordinated (and therefore the highest yielding and riskiest) CMBS tranches. By purchasing new issue B-pieces, we believe that we are often able to effectively "manufacture" our risk more efficiently than what is generally available in the secondary market, and to better target the collateral profiles and structures we prefer. Recent CMBS yield spread volatility has reduced the pace of conduit commercial mortgage loan originations, and this led to lower CMBS conduit issuance in the first half of 2016. Conduit new issue volume in the first half of 2016 was
As of June 30, 2016, our portfolio of small balance commercial mortgage loans included 20 loans and one real estate owned, or "REO," property with an aggregate value of
Leading up to the Brexit vote, the European MBS/ABS and CLO sectors were generally characterized by an ongoing rally that had begun in mid-February. However, following the vote, these sectors reversed course and declined in light of concerns around the British economy in particular and the European economy more generally. The ongoing lack of liquidity provided by the dealer community remains a significant concern in these sectors, and this also contributed to the decline in the latter part of the quarter. We believe that this lack of liquidity has caused many market participants to remain sidelined, preferring to wait for the new issue market to provide attractive investment opportunities. While we continue to be active in European MBS, we are currently more focused on the European non-performing loan market. When we acquire assets in this market, they are typically in securitized form. We believe that non-performing loans in certain select markets, such as in
We remain active in non-performing and sub-performing U.S. residential mortgage loans, or "residential NPLs." During the second quarter, widely-distributed offerings of residential NPLs totaled approximately
During the second quarter, under flow agreements with multiple originators, we continued to add to our consumer loan portfolio, which primarily consists of unsecured loans, but also includes auto loans. Our U.S. consumer loan and ABS portfolio performed well in the second quarter, although this was somewhat offset by a small loss on our credit hedges. We expect the contribution from our consumer loan portfolio to continue to increase as the portfolio grows. We are currently purchasing consumer loans under multiple flow agreements, and we continue to evaluate new opportunities in the space. We expect that most of the near-to-medium-term growth in our portfolio will come from increased flow from our existing partnerships (as opposed to flow from new agreements with new originators), especially as we continue to be pleased with the collateral characteristics and performance of the loans sourced through these existing partnerships. We are financing most of our consumer loan portfolio through reverse repurchase agreements with a large financial institution. As of June 30, 2016, our investments in U.S. consumer loans and ABS totaled
The pace of our non-QM loan purchases continued to accelerate in the second quarter, and we expect that our investments in non-QM loans will continue to grow meaningfully over the medium to longer term. As of June 30, 2016, our non-QM mortgage loans totaled
In the distressed corporate debt markets, the second quarter of 2016 was characterized by a broad rally in leveraged loans and high yield bonds. This rally led to a meaningful rebound in the market prices of some of the more stressed/distressed names in our portfolio that had previously experienced declines. During the second quarter, we net sold certain of our distressed debt and related equity positions, capturing net gains as prices rallied. We have remained cautious by keeping our distressed book small and focusing on senior secured leveraged loans. We have also opportunistically established short positions in energy related companies where we deemed it prudent. During the second quarter, our distressed corporate debt portfolio, including credit hedges, performed well. As of June 30, 2016, our net long holdings of distressed corporate debt, including related equity and the underlying value of loans acquired through total return swap contracts, totaled
Within our U.S. CLO portfolio, we have historically focused on the legacy sector, where we have found opportunities in both mezzanine and equity tranches. We have focused our efforts on identifying those securities that we believe have experienced yield spread widening for liquidity reasons as opposed to fundamental reasons. During the second quarter, our U.S. CLO portfolio, net of hedges, generated a modest profit and the size of the portfolio declined to
Agency
Our Agency strategy generated gross income of
Consistent with past quarters, as of June 30, 2016, our Agency RMBS were principally comprised of "specified pools." Specified pools are fixed rate Agency pools with special characteristics, such as pools comprised of low loan balance mortgages, pools comprised of mortgages backed by investor properties, pools containing mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and pools containing mortgages with various other characteristics. Our Agency strategy also includes RMBS which are backed by ARMs or Hybrid ARMs, and reverse mortgages; and CMOs, including IOs, POs and IIOs. Our Agency strategy also includes interest rate hedges for our Agency RMBS, as well as certain relative value trading positions in interest rate-related and TBA-related instruments.
Prices of Agency RMBS increased over the course of the second quarter, and yield spreads on Agency RMBS relative to interest rate swaps and U.S. Treasury securities were relatively stable. While the 10-year interest rate swap spread to U.S. Treasury securities continued to be negative at the end of the second quarter, it was negative 11 basis points, or 2 basis points less negative than at
Specifically, for the quarter ended June 30, 2016, we had total net realized and unrealized gains of
During the second quarter, we continued to use short positions in TBAs to hedge interest rate risk, and these positions generated net losses as interest rates fell. However, TBAs generally underperformed specified pools, which benefited our results for the quarter because we hold a net short position in TBAs against a long position in specified pools. TBAs primarily underperformed specified pools as a result of increased investor demand for pools with better prepayment protection in a lower interest rate environment. Also contributing to TBA underperformance was a material weakening in dollar rolls, which was driven by both the increase in prepayment speeds and the slowly shrinking presence of the Federal Reserve in the market. As trading volumes for specified pools expand, and to the extent prepayments remain elevated, we believe that the underperformance of generic pools relative to specified pools will persist.
As of June 30, 2016, our long Agency RMBS portfolio was
Our net Agency premium as a percentage of our long Agency RMBS holdings is one metric that we use to measure our overall prepayment risk.
Financial Results
We prepare our financial statements in accordance with ASC 946, Financial Services—Investment Companies. As a result, our investments are carried at fair value and all valuation changes are recorded in the Consolidated Statement of Operations.
We also measure our performance based on our diluted net-asset-value-based total return, which measures the change in our diluted book value per share and assumes the reinvestment of dividends at diluted book value per share and the conversion of all convertible units into common shares at their issuance dates. Diluted net-asset-value-based total return was 0.84% for the quarter ended June 30, 2016. Based on our diluted net-asset-value-based total return of 156.0% from our inception (
The following table summarizes our operating results for the quarters ended
Quarter June 30, |
Per |
% of |
Quarter |
Per |
% of |
Six Month June 30, |
Per |
% of |
||||||||||||||||||
(In thousands, except per share amounts) |
||||||||||||||||||||||||||
Credit: |
||||||||||||||||||||||||||
Interest income and other income |
$ |
14,113 |
$ |
0.42 |
2.05 |
% |
$ |
13,571 |
$ |
0.40 |
1.88 |
% |
$ |
27,684 |
$ |
0.82 |
3.83 |
% |
||||||||
Net realized gain (loss) |
4,884 |
0.15 |
0.71 |
% |
2,681 |
0.08 |
0.37 |
% |
7,565 |
0.23 |
1.05 |
% |
||||||||||||||
Change in net unrealized gain (loss) |
(4,043) |
(0.12) |
(0.59) |
% |
(8,041) |
(0.24) |
(1.11) |
% |
(12,084) |
(0.36) |
(1.67) |
% |
||||||||||||||
Net interest rate hedges(1) |
(664) |
(0.02) |
(0.10) |
% |
(2,016) |
(0.06) |
(0.28) |
% |
(2,680) |
(0.08) |
(0.37) |
% |
||||||||||||||
Net credit hedges and other activities(2) |
(3,290) |
(0.10) |
(0.48) |
% |
(20,793) |
(0.62) |
(2.88) |
% |
(24,083) |
(0.71) |
(3.33) |
% |
||||||||||||||
Interest expense |
(2,214) |
(0.07) |
(0.32) |
% |
(1,682) |
(0.05) |
(0.23) |
% |
(3,896) |
(0.12) |
(0.54) |
% |
||||||||||||||
Other investment related expenses |
(1,945) |
(0.06) |
(0.28) |
% |
(1,627) |
(0.05) |
(0.23) |
% |
(3,572) |
(0.11) |
(0.50) |
% |
||||||||||||||
Total Credit profit (loss) |
6,841 |
0.20 |
0.99 |
% |
(17,907) |
(0.54) |
(2.48) |
% |
(11,066) |
(0.33) |
(1.53) |
% |
||||||||||||||
Agency RMBS: |
||||||||||||||||||||||||||
Interest income |
5,322 |
0.16 |
0.78 |
% |
7,556 |
0.22 |
1.05 |
% |
12,878 |
0.38 |
1.78 |
% |
||||||||||||||
Net realized gain (loss) |
1,570 |
0.04 |
0.23 |
% |
1,252 |
0.04 |
0.17 |
% |
2,822 |
0.08 |
0.39 |
% |
||||||||||||||
Change in net unrealized gain (loss) |
4,611 |
0.14 |
0.67 |
% |
9,361 |
0.28 |
1.30 |
% |
13,972 |
0.42 |
1.93 |
% |
||||||||||||||
Net interest rate hedges and other activities(1) |
(6,815) |
(0.20) |
(0.99) |
% |
(16,950) |
(0.50) |
(2.35) |
% |
(23,765) |
(0.70) |
(3.29) |
% |
||||||||||||||
Interest expense |
(1,499) |
(0.04) |
(0.22) |
% |
(1,427) |
(0.04) |
(0.20) |
% |
(2,926) |
(0.09) |
(0.40) |
% |
||||||||||||||
Total Agency RMBS profit (loss) |
3,189 |
0.10 |
0.47 |
% |
(208) |
— |
(0.03) |
% |
2,981 |
0.09 |
0.41 |
% |
||||||||||||||
Total Credit and Agency RMBS profit (loss) |
10,030 |
0.30 |
1.46 |
% |
(18,115) |
(0.54) |
(2.51) |
% |
(8,085) |
(0.24) |
(1.12) |
% |
||||||||||||||
Other interest income (expense), net |
41 |
— |
0.01 |
% |
(15) |
— |
0.00 |
% |
26 |
— |
0.00 |
% |
||||||||||||||
Other expenses |
(5,069) |
(0.15) |
(0.74) |
% |
(5,056) |
(0.15) |
(0.70) |
% |
(10,125) |
(0.30) |
(1.40) |
% |
||||||||||||||
Net increase (decrease) in equity resulting |
||||||||||||||||||||||||||
from operations |
$ |
5,002 |
$ |
0.15 |
0.73 |
% |
$ |
(23,186) |
$ |
(0.69) |
(3.21) |
% |
$ |
(18,184) |
$ |
(0.54) |
(2.52) |
% |
||||||||
Less: Net increase in equity resulting |
||||||||||||||||||||||||||
from operations attributable to non-controlling |
||||||||||||||||||||||||||
interests |
17 |
14 |
31 |
|||||||||||||||||||||||
Net increase (decrease) in shareholders' |
||||||||||||||||||||||||||
equity resulting from operations(6) |
$ |
4,985 |
$ |
0.15 |
0.73 |
% |
$ |
(23,200) |
$ |
(0.69) |
(3.24) |
% |
$ |
(18,215) |
$ |
(0.54) |
(2.60) |
% |
||||||||
Weighted average shares and convertible |
||||||||||||||||||||||||||
units(3) outstanding |
33,502 |
33,746 |
33,624 |
|||||||||||||||||||||||
Average equity (includes non-controlling |
||||||||||||||||||||||||||
interests)(4) |
$ |
687,784 |
$ |
722,402 |
$ |
722,468 |
||||||||||||||||||||
Weighted average shares and LTIP units |
||||||||||||||||||||||||||
outstanding(5) |
33,290 |
33,534 |
33,412 |
|||||||||||||||||||||||
Average shareholders' equity (excludes non- |
||||||||||||||||||||||||||
controlling interests)(4) |
$ |
682,466 |
$ |
715,845 |
$ |
700,557 |
||||||||||||||||||||
(1) Includes TBAs and U.S. Treasuries, if applicable. |
||||||||||||||||||||||||||
(2) Includes equity and other relative value trading strategies and related hedges. |
||||||||||||||||||||||||||
(3) Convertible units include Operating Partnership units attributable to non-controlling interests and LTIP units. |
||||||||||||||||||||||||||
(4) Average equity and average shareholders' equity are calculated using month end values. |
||||||||||||||||||||||||||
(5) Excludes Operating Partnership units attributable to non-controlling interests. |
||||||||||||||||||||||||||
(6) Per share information is calculated using weighted average shares and LTIP units outstanding. Percentage of average equity is calculated using |
||||||||||||||||||||||||||
average shareholders' equity, which excludes non-controlling interests. |
Portfolio
The following tables summarize our portfolio holdings as of June 30, 2016 and March 31, 2016:
Investment Portfolio
June 30, 2016 |
March 31, 2016 |
||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
Current |
Fair Value |
Average |
Cost |
Average |
|||||||||||||||||||
Non-Agency RMBS |
$ |
385,332 |
$ |
233,231 |
$ |
60.53 |
$ |
231,724 |
$ |
60.14 |
$ |
423,512 |
$ |
254,537 |
$ |
60.10 |
$ |
250,451 |
$ |
59.14 |
|||||||||
Non-Agency CMBS |
161,812 |
81,568 |
50.41 |
89,746 |
55.46 |
168,971 |
88,819 |
52.56 |
95,480 |
56.51 |
|||||||||||||||||||
ABS and Consumer |
175,320 |
175,056 |
99.85 |
177,942 |
101.50 |
167,292 |
166,555 |
99.56 |
168,194 |
100.54 |
|||||||||||||||||||
Total Non-Agency |
722,464 |
489,855 |
67.80 |
499,412 |
69.13 |
759,775 |
509,911 |
67.11 |
514,125 |
67.67 |
|||||||||||||||||||
Agency RMBS: |
|||||||||||||||||||||||||||||
Floating |
14,284 |
15,080 |
105.57 |
14,911 |
104.39 |
15,487 |
16,316 |
105.35 |
16,265 |
105.02 |
|||||||||||||||||||
Fixed |
688,728 |
747,771 |
108.57 |
732,384 |
106.34 |
770,443 |
831,233 |
107.89 |
819,643 |
106.39 |
|||||||||||||||||||
Reverse Mortgages |
59,814 |
66,358 |
110.94 |
65,130 |
108.89 |
60,897 |
66,899 |
109.85 |
66,500 |
109.20 |
|||||||||||||||||||
Total Agency |
762,826 |
829,209 |
108.70 |
812,425 |
106.50 |
846,827 |
914,448 |
107.99 |
902,408 |
106.56 |
|||||||||||||||||||
Total Non-Agency and |
1,485,290 |
1,319,064 |
88.81 |
1,311,837 |
88.32 |
1,606,602 |
1,424,359 |
88.66 |
1,416,533 |
88.17 |
|||||||||||||||||||
Agency Interest Only |
n/a |
20,506 |
n/a |
22,504 |
n/a |
n/a |
22,306 |
n/a |
24,171 |
n/a |
|||||||||||||||||||
Non-Agency Interest |
n/a |
20,048 |
n/a |
23,239 |
n/a |
n/a |
19,368 |
n/a |
23,352 |
n/a |
|||||||||||||||||||
TBAs: |
|||||||||||||||||||||||||||||
Long |
153,018 |
161,619 |
105.62 |
160,874 |
105.13 |
71,245 |
74,886 |
105.11 |
74,491 |
104.56 |
|||||||||||||||||||
Short |
(455,613) |
(488,151) |
107.14 |
(486,569) |
106.79 |
(535,080) |
(571,063) |
106.72 |
(569,273) |
106.39 |
|||||||||||||||||||
Net Short TBAs |
(302,595) |
(326,532) |
107.91 |
(325,695) |
107.63 |
(463,835) |
(496,177) |
106.97 |
(494,782) |
106.67 |
|||||||||||||||||||
Long U.S. Treasury |
371 |
374 |
100.78 |
372 |
100.32 |
13,975 |
13,672 |
97.83 |
13,465 |
96.35 |
|||||||||||||||||||
Short U.S. Treasury |
(30,028) |
(30,856) |
102.76 |
(30,101) |
100.24 |
(71,327) |
(72,071) |
101.04 |
(70,785) |
99.24 |
|||||||||||||||||||
Short European |
(54,785) |
(56,470) |
103.08 |
(57,455) |
104.87 |
(56,281) |
(57,727) |
102.57 |
(57,510) |
102.18 |
|||||||||||||||||||
Repurchase |
116,003 |
116,003 |
100.00 |
116,985 |
100.85 |
127,468 |
127,468 |
100.00 |
126,867 |
99.53 |
|||||||||||||||||||
Long Corporate Debt |
75,630 |
36,974 |
48.89 |
46,834 |
61.92 |
64,811 |
24,552 |
37.88 |
36,285 |
55.99 |
|||||||||||||||||||
Short Corporate Debt |
(10,654) |
(9,947) |
93.37 |
(9,616) |
90.27 |
(3,141) |
(3,029) |
96.44 |
(3,008) |
95.77 |
|||||||||||||||||||
Non-Exchange Traded |
n/a |
8,525 |
n/a |
8,835 |
n/a |
n/a |
14,988 |
n/a |
16,063 |
n/a |
|||||||||||||||||||
Non-Exchange Traded |
n/a |
10,893 |
n/a |
11,625 |
n/a |
n/a |
9,611 |
n/a |
10,274 |
n/a |
|||||||||||||||||||
Short Common Stock |
n/a |
(30,913) |
n/a |
(30,015) |
n/a |
n/a |
(8,238) |
n/a |
(7,827) |
n/a |
|||||||||||||||||||
Real Estate Owned |
n/a |
4,162 |
n/a |
4,225 |
n/a |
n/a |
21,843 |
n/a |
20,156 |
n/a |
|||||||||||||||||||
Total |
$ |
1,081,831 |
$ |
1,093,574 |
$ |
1,040,925 |
$ |
1,053,254 |
|||||||||||||||||||||
(1) Represents the dollar amount, per $100 of current principal, of the price or cost for the security. |
|||||||||||||||||||||||||||||
(2) Excludes non-Agency Interest Only and Principal Only MBS and Other. |
|||||||||||||||||||||||||||||
(3) Excludes Agency Interest Only RMBS. |
|||||||||||||||||||||||||||||
(4) Other includes equity tranches of CLOs, non-Agency residual MBS, and similar positions. |
Non-Agency RMBS and CMBS are generally securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. Disregarding TBAs, Agency RMBS consist primarily of whole-pool pass through certificates. We actively invest in the TBA market. TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced." Given that we use TBAs primarily to hedge the risk of rising interest rates on our long holdings, we generally carry a net short TBA position.
Derivatives Portfolio(1)
June 30, 2016 |
March 31, 2016 |
||||||||||
(In thousands) |
Notional Value |
Fair Value |
Notional Value |
Fair Value |
|||||||
Mortgage-Related Derivatives: |
|||||||||||
Long CDS on RMBS and CMBS Indices |
$ |
32,753 |
$ |
(5,817) |
$ |
8,958 |
$ |
(1,276) |
|||
Short CDS on RMBS and CMBS Indices |
(140,273) |
24,565 |
(146,886) |
21,257 |
|||||||
Short CDS on Individual RMBS |
(11,372) |
5,834 |
(11,813) |
6,007 |
|||||||
Net Mortgage-Related Derivatives |
(118,892) |
24,582 |
(149,741) |
25,988 |
|||||||
Long CDS referencing Corporate Bond Indices |
696,360 |
100,887 |
806,441 |
139,784 |
|||||||
Short CDS referencing Corporate Bond Indices |
(1,049,181) |
(35,773) |
(1,315,621) |
(50,612) |
|||||||
Long CDS on Corporate Bonds |
12,457 |
(1,763) |
3,212 |
(106) |
|||||||
Short CDS on Corporate Bonds |
(28,360) |
(1,376) |
(13,660) |
(556) |
|||||||
Written Put Options on CDS on Corporate Bond Indices(2) |
(155,500) |
(243) |
(51,000) |
(6) |
|||||||
Written Call Options on CDS on Corporate Bond Indices(3) |
— |
— |
(211,000) |
(6,338) |
|||||||
Long Total Return Swaps on Corporate Equities(4) |
— |
— |
21,277 |
— |
|||||||
Short Total Return Swaps on Corporate Equities(4) |
(78,839) |
(2) |
(31,491) |
(1) |
|||||||
Long Total Return Swaps on Corporate Debt(5) |
29,361 |
(192) |
53,019 |
400 |
|||||||
Short Total Return Swap on Corporate Bond Indices(6) |
— |
— |
(13,062) |
(129) |
|||||||
Interest Rate Derivatives: |
|||||||||||
Long Interest Rate Swaps |
527,824 |
13,929 |
497,180 |
17,298 |
|||||||
Short Interest Rate Swaps |
(949,730) |
(22,856) |
(899,859) |
(18,462) |
|||||||
Long U.S. Treasury Note Futures(7) |
2,000 |
2 |
16,800 |
2 |
|||||||
Long Eurodollar Futures(8) |
11,000 |
4 |
22,000 |
(2) |
|||||||
Short Eurodollar Futures(8) |
(266,000) |
(353) |
(366,000) |
(297) |
|||||||
Short U.S. Treasury Bond and Note Futures(9) |
(1,600) |
(3) |
(9,100) |
(72) |
|||||||
Purchased Payer Swaptions |
— |
— |
162,000 |
(96) |
|||||||
Written Payer Swaptions |
— |
— |
(49,100) |
102 |
|||||||
Interest Rate Caps |
23,200 |
1 |
23,200 |
1 |
|||||||
Total Net Interest Rate Derivatives |
(9,276) |
(1,526) |
|||||||||
Other Derivatives: |
|||||||||||
Short Foreign Currency Forwards(10) |
(74,782) |
1,578 |
(83,820) |
(1,922) |
|||||||
Warrants(11) |
1,554 |
100 |
1,554 |
100 |
|||||||
Mortgage Loan Purchase Commitments(12) |
2,330 |
8 |
13,570 |
43 |
|||||||
Total Net Derivatives |
$ |
78,530 |
$ |
105,119 |
|||||||
(1) In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial |
|||||||||||
statements separate derivative transactions as either assets or liabilities. As of June 30, 2016, derivative assets and derivative liabilities |
|||||||||||
were $152.6 million and $74.1 million, respectively, for a net fair value of $78.5 million, as reflected in "Total Net Derivatives" above. As of |
|||||||||||
March 31, 2016, derivative assets and derivative liabilities were $190.8 million and $85.7 million, respectively, for a net fair value of |
|||||||||||
$105.1 million, as reflected in "Total Net Derivatives" above. |
|||||||||||
(2) Represents the option on the part of a counterparty to enter into a CDS on a corporate bond index whereby we would receive a fixed |
|||||||||||
rate and pay credit protection payments. |
|||||||||||
(3) Represents the option on the part of a counterparty to enter into a CDS on a corporate bond index whereby we would pay a fixed rate |
|||||||||||
and receive credit protection payments. |
|||||||||||
(4) Notional value represents number of underlying shares times the closing price of the underlying security. |
|||||||||||
(5) Notional value represents outstanding principal balance on underlying corporate debt. |
|||||||||||
(6) Notional value represents notional of underlying reference index times the closing price of the underlying reference index. |
|||||||||||
(7) Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of June 30, 2016 and March 31, |
|||||||||||
2016, a total of 16 and 84 contracts were held, respectively. |
|||||||||||
(8) Every $1,000,000 in notional value represents one contract. |
|||||||||||
(9) Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of June 30, 2016 and |
|||||||||||
March 31, 2016, a total of 16 and 91 contracts were held, respectively. |
|||||||||||
(10) Notional amount represents U.S. Dollars to be received by us at the maturity of the forward contract. |
|||||||||||
(11) Notional amount represents number of warrants. |
|||||||||||
(12) Notional amount represents principal balance of mortgage loan purchase commitments. Actual loan purchases are contingent upon |
|||||||||||
successful loan closings in accordance with agreed-upon parameters. |
The mix and composition of our derivative instruments may vary from period to period.
The following table summarizes, as of June 30, 2016, the estimated effects on the value of our portfolio, both overall and by category, of hypothetical, immediate, 50 basis point downward and upward parallel shifts in interest rates.
Estimated Change in Value (1) |
|||||
(In thousands) |
50 Basis Point Decline in Interest Rates |
50 Basis Point Increase in Interest Rates |
|||
Agency RMBS - ARM Pools |
$ |
61 |
$ |
(81) |
|
Agency RMBS - Fixed Pools and IOs |
7,594 |
(12,143) |
|||
TBAs |
(1,078) |
3,437 |
|||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans |
2,712 |
(2,290) |
|||
Interest Rate Swaps |
(7,368) |
7,130 |
|||
U.S. Treasury Securities |
(668) |
650 |
|||
Eurodollar and U.S. Treasury Futures |
(316) |
315 |
|||
Mortgage-Related Derivatives |
(14) |
(16) |
|||
Corporate Securities and Derivatives on Corporate Securities |
(1,780) |
1,801 |
|||
Repurchase Agreements and Reverse Repurchase Agreements |
(570) |
559 |
|||
$ |
(1,427) |
$ |
(638) |
||
(1) Based on the market environment as of June 30, 2016. The preceding analysis does not include sensitivities to |
|||||
changes in interest rates for instruments for which we believe that the effect of a change in interest rates is |
|||||
not material to the value of the overall portfolio and/or cannot be accurately estimated.In particular, this |
|||||
analysis excludes certain corporate securities and derivatives on corporate securities, and reflects only |
|||||
sensitivity to U.S. interest rates. Results are based on forward-looking models, which are inherently |
|||||
imperfect, and incorporate various simplifying assumptions. Therefore, the table above is for illustrative |
|||||
purposes only and actual changes in interest rates would likely cause changes in the actual value of our |
|||||
overall portfolio that would differ from those presented above and such differences might be significant and adverse. |
Borrowed Funds and Liquidity
By Collateral Type
As of June 30, 2016 |
For the Quarter |
As of |
For the Quarter |
||||||||||||||
Collateral for Borrowing |
Outstanding Borrowings |
Average Borrowings |
Average Cost of Funds |
Outstanding |
Average |
Average |
|||||||||||
(In thousands) |
|||||||||||||||||
Credit |
$ |
267,222 |
$ |
283,775 |
3.14 |
% |
$ |
264,880 |
$ |
265,510 |
2.52 |
% |
|||||
Agency RMBS |
815,774 |
850,986 |
0.71 |
% |
893,758 |
896,475 |
0.64 |
% |
|||||||||
Total Excluding U.S. Treasury |
|||||||||||||||||
Securities |
1,082,996 |
1,134,761 |
1.32 |
% |
1,158,638 |
1,161,985 |
1.07 |
% |
|||||||||
U.S. Treasury Securities |
143 |
9,280 |
0.28 |
% |
13,664 |
20,397 |
0.20 |
% |
|||||||||
Total |
$ |
1,083,139 |
$ |
1,144,041 |
1.31 |
% |
$ |
1,172,302 |
$ |
1,182,382 |
1.06 |
% |
|||||
Leverage Ratio (1) |
1.59:1 |
1.69:1 |
|||||||||||||||
Leverage Ratio Excluding U.S. |
|||||||||||||||||
Treasury Securities (1) |
1.59:1 |
1.67:1 |
|||||||||||||||
(1) The leverage ratio does not account for liabilities other than debt financings. Our debt financings consist of reverse repurchase agreements |
|||||||||||||||||
("reverse repos") and securitized debt. |
The increase in our average cost of funds for our Credit portfolio was primarily the result of a shift in the mix of our borrowings, as more of our Credit-related borrowings now relate to our loan portfolios; also included in the cost of funds for our Credit portfolio was 22 basis points (annualized) of amortization expenses during the second quarter related to certain financing facility set-up costs. Nevertheless, borrowing rates for each of our various asset classes were relatively stable during the three month period ended
From time to time we may have outstanding reverse repos on our positions in long U.S. Treasury securities. As of June 30, 2016 and March 31, 2016 we had
Reverse Repurchase Agreements By Remaining Maturity (1)
(In thousands) |
As of June 30, 2016 |
As of March 31, 2016 |
||||||||||
Remaining Maturity (2) |
Outstanding Borrowings |
% of Borrowings |
Outstanding |
% of |
||||||||
30 Days or Less |
$ |
380,990 |
35.6 |
% |
$ |
453,151 |
39.4 |
% |
||||
31-60 Days |
272,586 |
25.5 |
% |
339,016 |
29.5 |
% |
||||||
61-90 Days |
272,479 |
25.5 |
% |
207,773 |
18.1 |
% |
||||||
91-120 Days |
4,518 |
0.4 |
% |
2,478 |
0.2 |
% |
||||||
121-150 Days |
9,669 |
0.9 |
% |
— |
— |
% |
||||||
151-180 Days |
12,021 |
1.1 |
% |
38,986 |
3.4 |
% |
||||||
181-360 Days |
85,671 |
8.0 |
% |
61,114 |
5.3 |
% |
||||||
> 360 Days |
32,171 |
3.0 |
% |
46,546 |
4.1 |
% |
||||||
$ |
1,070,105 |
100.0 |
% |
$ |
1,149,064 |
100.0 |
% |
|||||
(1) Reverse repos involving underlying investments that we had sold prior to the applicable period end for |
||||||||||||
reverse settlement following the applicable period end, are shown using their original maturity dates even |
||||||||||||
though such repos may be expected to be terminated early upon settlement of the sale of the underlying |
||||||||||||
investment. Not included are any reverse repos that we may have entered into prior to the applicable period |
||||||||||||
end for which delivery of the borrowed funds is not scheduled until after the applicable period end. |
||||||||||||
(2) Remaining maturity for a reverse repo is based on the contractual maturity date in effect as of the applicable |
||||||||||||
period end. Some reverse repos have floating interest rates, which may reset before maturity. |
The majority of our borrowed funds are in the form of reverse repos. The weighted average remaining term on our reverse repos as of June 30, 2016 decreased slightly to 78 days from 79 days as of March 31, 2016. In addition to borrowings under reverse repos, as of June 30, 2016 and March 31, 2016 we had outstanding securitized debt of
Our borrowings outstanding under reverse repos were with a total of twenty counterparties as of June 30, 2016. As of June 30, 2016, we held liquid assets in the form of cash and cash equivalents in the amount of
Other
Our expense ratio, which we define as our annualized base management fee and other operating expenses, but excluding interest expense, other investment related expenses, and incentive fees, over average equity, was 3.0% for the quarter ended June 30, 2016 and 2.8% for the quarter ended March 31, 2016. The increase in our expense ratio was principally due to a quarter-over-quarter decline in our average total equity. We did not incur incentive fee expense for either the second or first quarters of 2016.
Dividends
On
Share Repurchase Program
On August 3, 2015, our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.7 million common shares. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations.
During the three month period ended June 30, 2016, we repurchased 219,623 shares at an average price per share of
Through
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Friday, August 5, 2016, at approximately
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. 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. Examples of forward-looking statements in this press release include without limitation management's beliefs regarding the current economic and investment environment and our ability to implement our investment and hedging strategies, performance of our investment and hedging strategies, our exposure to prepayment risk in our Agency portfolio, statements regarding our net Agency premium, estimated effects on the fair value of our holdings of a hypothetical change in interest rates, statements regarding the drivers of our returns, our expected ongoing annualized expense ratio, and statements regarding our intended dividend policy including the amount to be recommended by management, and our share repurchase program. Our results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond our control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of our securities, 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 to maintain our exclusion from registration under the Investment Company Act of 1940 and other changes in market conditions and economic trends. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of the our Annual Report on Form 10-K filed on March 11, 2016 which can be accessed through our website at www.ellingtonfinancial.com or at the
ELLINGTON FINANCIAL LLC |
||||||||
Three Month Period Ended |
Six Month |
|||||||
(In thousands, except per share amounts) |
June 30, 2016 |
March 31, 2016 |
June 30, 2016 |
|||||
Investment income |
||||||||
Interest income |
$ |
18,990 |
$ |
20,427 |
$ |
39,417 |
||
Other income |
1,024 |
1,668 |
2,692 |
|||||
Total investment income |
20,014 |
22,095 |
42,109 |
|||||
Expenses |
||||||||
Base management fee |
2,553 |
2,611 |
5,164 |
|||||
Interest expense |
4,234 |
3,468 |
7,702 |
|||||
Other investment related expenses |
2,191 |
1,749 |
3,938 |
|||||
Other operating expenses |
2,515 |
2,445 |
4,962 |
|||||
Total expenses |
11,493 |
10,273 |
21,766 |
|||||
Net investment income |
8,521 |
11,822 |
20,343 |
|||||
Net realized gain (loss) on: |
||||||||
Investments |
1,226 |
(1,974) |
(748) |
|||||
Financial derivatives, excluding currency forwards |
(2,231) |
(10,054) |
(12,285) |
|||||
Financial derivatives—currency forwards |
(972) |
(332) |
(1,305) |
|||||
Foreign currency transactions |
(354) |
420 |
66 |
|||||
(2,331) |
(11,940) |
(14,272) |
||||||
Change in net unrealized gain (loss) on: |
||||||||
Investments |
3,386 |
(4,402) |
(1,016) |
|||||
Financial derivatives, excluding currency forwards |
(5,773) |
(18,838) |
(24,611) |
|||||
Financial derivatives—currency forwards |
3,500 |
(3,047) |
454 |
|||||
Foreign currency translation |
(2,301) |
3,219 |
918 |
|||||
(1,188) |
(23,068) |
(24,255) |
||||||
Net realized and change in net unrealized gain (loss) on |
||||||||
investments and financial derivatives |
(3,519) |
(35,008) |
(38,527) |
|||||
Net increase (decrease) in equity resulting from operations |
5,002 |
(23,186) |
(18,184) |
|||||
Less: Increase in equity resulting from operations attributable to |
||||||||
non-controlling interests |
17 |
14 |
31 |
|||||
Net increase (decrease) in shareholders' equity resulting from |
||||||||
operations |
$ |
4,985 |
$ |
(23,200) |
$ |
(18,215) |
||
Net increase (decrease) in shareholders' equity resulting from |
||||||||
operations per share: |
||||||||
Basic and diluted |
$ |
0.15 |
$ |
(0.69) |
$ |
(0.54) |
||
Weighted average shares and LTIP units outstanding |
33,290 |
33,534 |
33,412 |
|||||
Weighted average shares and convertible units outstanding |
33,502 |
33,746 |
33,624 |
ELLINGTON FINANCIAL LLC |
||||||||
As of |
||||||||
(In thousands, except share amounts) |
June 30, 2016 |
March 31, 2016 |
December 31, |
|||||
ASSETS |
||||||||
Cash and cash equivalents |
$ |
140,358 |
$ |
142,082 |
$ |
183,909 |
||
Restricted cash |
3,905 |
4,485 |
4,857 |
|||||
Investments, financial derivatives, and repurchase agreements: |
||||||||
Investments, at fair value (Cost – $1,590,345, $1,634,790, |
1,582,165 |
1,625,585 |
1,661,118 |
|||||
Financial derivatives–assets, at fair value (Net cost – $149,985, |
152,628 |
190,798 |
162,905 |
|||||
Repurchase agreements (Cost – $116,985, $126,867, and $105,329) |
116,003 |
127,468 |
105,700 |
|||||
Total Investments, financial derivatives, and repurchase agreements |
1,850,796 |
1,943,851 |
1,929,723 |
|||||
Due from brokers |
199,125 |
184,973 |
141,605 |
|||||
Receivable for securities sold and financial derivatives |
536,936 |
606,551 |
705,748 |
|||||
Interest and principal receivable |
19,085 |
18,289 |
20,444 |
|||||
Other assets |
2,886 |
2,664 |
5,269 |
|||||
Total assets |
$ |
2,753,091 |
$ |
2,902,895 |
$ |
2,991,555 |
||
LIABILITIES |
||||||||
Investments and financial derivatives: |
||||||||
Investments sold short, at fair value (Proceeds – $613,756, $708,403, |
$ |
616,337 |
$ |
712,128 |
$ |
728,747 |
||
Financial derivatives–liabilities, at fair value (Net proceeds – $43,032, |
74,098 |
85,679 |
60,472 |
|||||
Total investments and financial derivatives |
690,435 |
797,807 |
789,219 |
|||||
Reverse repurchase agreements |
1,070,105 |
1,149,064 |
1,174,189 |
|||||
Due to brokers |
94,715 |
124,940 |
114,797 |
|||||
Payable for securities purchased and financial derivatives |
197,164 |
103,376 |
165,365 |
|||||
Securitized debt (Proceeds – $13,034, $23,238, and $0) |
13,034 |
23,238 |
— |
|||||
Accounts payable and accrued expenses |
3,055 |
3,771 |
3,626 |
|||||
Base management fee payable |
2,553 |
2,611 |
2,773 |
|||||
Interest and dividends payable |
2,523 |
2,549 |
1,806 |
|||||
Other liabilities |
324 |
617 |
828 |
|||||
Total liabilities |
2,073,908 |
2,207,973 |
2,252,603 |
|||||
EQUITY |
679,183 |
694,922 |
738,952 |
|||||
TOTAL LIABILITIES AND EQUITY |
$ |
2,753,091 |
$ |
2,902,895 |
$ |
2,991,555 |
||
ANALYSIS OF EQUITY: |
||||||||
Common shares, no par value, 100,000,000 shares authorized; |
||||||||
(32,743,356, 32,962,979, and 33,126,012 shares issued and outstanding) |
$ |
664,109 |
$ |
679,557 |
$ |
722,360 |
||
Additional paid-in capital–LTIP units |
9,886 |
9,787 |
9,689 |
|||||
Total Shareholders' Equity |
673,995 |
689,344 |
732,049 |
|||||
Non-controlling interests |
5,188 |
5,578 |
6,903 |
|||||
Total Equity |
$ |
679,183 |
$ |
694,922 |
$ |
738,952 |
||
PER SHARE INFORMATION: |
||||||||
Common shares, no par value |
$ |
20.58 |
$ |
20.91 |
$ |
22.10 |
||
DILUTED PER SHARE INFORMATION: |
||||||||
Common shares and convertible units, no par value (2) |
$ |
20.31 |
$ |
20.63 |
$ |
21.80 |
||
(1) Derived from audited financial statements as of December 31, 2015. |
||||||||
(2) Based on total equity excluding non-controlling interests not represented by instruments convertible into common shares. |
Investor Contact:
Media Contact:
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