Ellington Financial LLC Reports Second Quarter 2018 Results
Highlights
-
Net income1 of
$21.2 million , or$0.69 per basic and diluted share. -
Book value per share as of June 30, 2018 of
$19.57 on a diluted basis, after payment of a quarterly dividend of$0.41 per share, as compared to book value per share of$19.25 on a diluted basis as of March 31, 2018. -
Credit strategy gross income of
$24.9 million for the quarter, or$0.80 per share. -
Agency strategy gross income of
$1.7 million for the quarter, or$0.06 per share. -
Net investment income of
$11.0 million for the quarter, or$0.36 per share; adjusted net investment income2 of$11.0 million for the quarter, or$0.36 per share. -
Announced a dividend of
$0.41 per share for the second quarter of 2018, equating to an annualized dividend yield of 10.0% based on theAugust 3, 2018 closing price of$16.34 per share; dividends are paid quarterly in arrears. -
Repurchased 242,161 common shares during the quarter, or approximately
1% of our outstanding common shares as of the beginning of the
quarter, at an average price of
$14.98 per share. - Debt-to-equity ratio, excluding repo borrowings on U.S. Treasury securities, of 2.77:1 as of June 30, 2018.
1 | Increase (decrease) in shareholders' equity from operations, or "net income (loss)." | |
2 | Adjusted net investment income for the quarter ended June 30, 2018 is equal to net investment income of $11.0 million, plus incentive fees accrued of $0.3 million, which reduced net investment income, less the quarterly adjustment to premium amortization 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) of $0.3 million, which increased interest income. We believe that adjusted net investment income provides information useful to investors because it is one of the metrics that we use to assess our performance and to evaluate the effective net yield provided by our portfolio. However, because adjusted net investment income is an incomplete measure of our financial results and differs from net investment income computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net investment income computed in accordance with GAAP. | |
Second Quarter 2018 Results
"In the second quarter,
"The growth and performance of our securitizations continues to be a key
driver of our results. This past quarter, we participated in our third
Ellington-sponsored corporate CLO, achieving tighter pricing and a
longer investment period than our previous issuances, even in the face
of a softer overall CLO new issue market. Meanwhile,
"Moving into the second half of the year, our primary focus is on executing our business plan, and in particular continuing to grow our credit portfolio, emphasizing high-yielding, short-duration assets, and thereby continuing to grow our net investment income to provide stability of earnings and dividend coverage. If the volatility that we saw earlier this year returns, we believe that we are well positioned to take advantage by adding assets at higher yields and trading out of some of the more liquid parts of the portfolio, while at the same time relying on our hedges and liquidity management to protect and preserve book value.
"In addition, as we've discussed previously, we continue to actively
evaluate possible changes to our tax status as a publicly traded
partnership. Our options include potential conversion to a
Market Overview
-
In June, the Federal Reserve raised the target range for the federal
funds rate by 0.25%, to 1.75%–2.00%, its seventh rate increase since
December 1, 2015 and its second rate increase so far in 2018. LIBOR rates, which drive many of our financing costs, increased in sympathy, with one-month LIBOR increasing 21 basis points to end the second quarter at 2.09%. -
In April and July, the Federal Reserve continued to increase the
amount of the tapering of its reinvestments in line with the schedule
it had laid out in
September 2017 . The tapering of Agency RMBS purchases increased to$12 billion per month in April and to$16 billion per month in July. The tapering of U.S. Treasury purchases increased to$18 billion per month in April and to$24 billion per month in July. - The yield curve flattened for the sixth consecutive quarter: the 2-year U.S. Treasury yield rose 26 basis points to end the second quarter at 2.53%, while the 10-year U.S. Treasury yield rose 12 basis points to 2.86%. The spread between the 2-year and 10-year tightened to just 33 basis points, as compared to 47 basis points at the end of the first quarter.
-
Mortgage rates increased in the second quarter, with the
Freddie Mac survey 30-year mortgage rate rising 11 basis points to end the quarter at 4.55%. -
Overall Agency RMBS prepayment rates continued to be muted during the
quarter.
The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, fell 11.9% quarter over quarter, dropping intra-quarter to its lowest seasonally-adjusted level in more than 17 years.
The second quarter of 2018 saw the extreme equity volatility of the
first quarter subside, but interest rate choppiness and yield curve
flattening continue. During the first part of the quarter, interest
rates continued their recent upward trend, with the 10-year U.S.
Treasury yield rising 37 basis points to an almost seven-year high of
3.11% on
Performance was mixed for the quarter across the various credit-sensitive sectors. Investment grade and high yield corporate credit spreads tightened during April but then widened in May and June, and finished the quarter approximately flat. Meanwhile, CMBS credit spreads generally tightened during the quarter (with especially strong demand for higher-yielding, non-investment grade CMBS securities), and the legacy non-Agency RMBS market continued to be well supported. The continued increase in LIBOR boosted coupons of floating-rate debt instruments, benefiting CLOs, leveraged loans, and other structured credit products.
Despite higher rates and the continued increase of Fed tapering, Agency
RMBS spreads generally held firm over the quarter, continuing to benefit
from a muted prepayment environment. As measured by the
Financial Results
Credit Summary
As of June 30, 2018, our total long Credit portfolio (excluding
corporate relative value trading positions, hedges, and other
derivatives) was
The growth of our Credit portfolio primarily came from net purchases in the following target strategies: consumer loans and ABS, residential mortgage loans and REO, European RMBS, and retained tranches in CLO securitizations. Our corporate debt and equity portfolio decreased in size during the quarter. We also sold a portion of our more liquid, lower-risk assets, such as certain U.S. non-Agency RMBS and CLO note investments, and rotated that capital into our higher-yielding strategies.
At the end of the second quarter, we held
Our Credit portfolio performed very well during the quarter and
continued to be the primary driver of our earnings. During the second
quarter, our Credit strategy generated gross investment income of
3 | For our consolidated non-QM securitization trust, only retained tranches are included in this figure (i.e., excludes tranches sold to third parties). | |
In the second quarter, our credit hedges modestly reduced profitability. The interest rate hedges in our Credit strategy, which currently consist primarily of interest rate swaps, had no material impact on our results. We had net losses on foreign currency-related transactions and translation, but these were more than offset by net gains on our foreign currency hedges.
In our corporate credit relative value strategy as of June 30, 2018, the
market value of our long corporate bonds was
Agency Summary
As of June 30, 2018, our long Agency RMBS portfolio increased
approximately 2% to
Average pay-ups on our specified pools were unchanged at 0.61% as of June 30, 2018 as compared to March 31, 2018. Pay-ups are price premiums for specified pools relative to their TBA counterparts. As of June 30, 2018, the weighted average coupon on our fixed-rate specified pools was 4.1%.
During the quarter we continued to hedge interest rate risk in our
Agency strategy, primarily through the use of short positions in TBAs,
and to a lesser extent interest rate swaps and short positions in U.S.
Treasury securities and futures. For the quarter, we had total net gains
of
Portfolio turnover for our Agency strategy was approximately 9.4% for
the quarter (as measured by sales and excluding paydowns), and we had
net realized losses of
4 | "10-year equivalents" for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. |
The following table summarizes our operating results for the quarters ended June 30, 2018 and March 31, 2018 and the six-month period ended June 30, 2018:
Quarter |
Per |
% of |
Quarter |
Per |
% of |
Six-Month |
Per |
% of |
||||||||||||||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||
Credit: | ||||||||||||||||||||||||||||||||||||||||||
Interest income and other income | $ | 23,053 | $ | 0.75 | 3.75 | % | $ | 20,545 | $ | 0.65 | 3.34 | % | $ | 43,598 | $ | 1.40 | 7.09 | % | ||||||||||||||||||||||||
Net realized gain (loss) | 105 | — | 0.01 | % | 4,961 | 0.16 | 0.81 | % | 5,066 | 0.16 | 0.82 | % | ||||||||||||||||||||||||||||||
Change in net unrealized gain (loss) | 11,046 | 0.36 | 1.80 | % | 7,680 | 0.24 | 1.25 | % | 18,726 | 0.60 | 3.05 | % | ||||||||||||||||||||||||||||||
Net interest rate hedges(1) | 29 | — | — | % | 179 | 0.01 | 0.03 | % | 208 | 0.01 | 0.03 | % | ||||||||||||||||||||||||||||||
Net credit hedges and other activities(2) | 1,659 | 0.05 | 0.27 | % | 1,195 | 0.04 | 0.19 | % | 2,854 | 0.09 | 0.46 | % | ||||||||||||||||||||||||||||||
Interest expense(3) | (7,680 | ) | (0.25 | ) | (1.25 | )% | (6,647 | ) | (0.21 | ) | (1.08 | )% | (14,327 | ) | (0.46 | ) | (2.33 | )% | ||||||||||||||||||||||||
Other investment related expenses | (3,288 | ) | (0.11 | ) | (0.53 | )% | (2,619 | ) | (0.08 | ) | (0.43 | )% | (5,907 | ) | (0.19 | ) | (0.96 | )% | ||||||||||||||||||||||||
Total Credit profit (loss) | 24,924 | 0.80 | 4.05 | % | 25,294 | 0.81 | 4.11 | % | 50,218 | 1.61 | 8.16 | % | ||||||||||||||||||||||||||||||
Agency RMBS: | ||||||||||||||||||||||||||||||||||||||||||
Interest income | 8,345 | 0.27 | 1.36 | % | 6,693 | 0.21 | 1.09 | % | 15,038 | 0.48 | 2.45 | % | ||||||||||||||||||||||||||||||
Net realized gain (loss) | (1,509 | ) | (0.05 | ) | (0.25 | )% | (1,187 | ) | (0.04 | ) | (0.19 | )% | (2,696 | ) | (0.09 | ) | (0.44 | )% | ||||||||||||||||||||||||
Change in net unrealized gain (loss) | (4,151 | ) | (0.14 | ) | (0.67 | )% | (12,591 | ) | (0.40 | ) | (2.05 | )% | (16,742 | ) | (0.54 | ) | (2.72 | )% | ||||||||||||||||||||||||
Net interest rate hedges and other activities(1) | 3,406 | 0.12 | 0.56 | % | 10,239 | 0.32 | 1.66 | % | 13,645 | 0.44 | 2.22 | % | ||||||||||||||||||||||||||||||
Interest expense | (4,439 | ) | (0.14 | ) | (0.73 | )% | (3,471 | ) | (0.11 | ) | (0.56 | )% | (7,910 | ) | (0.25 | ) | (1.29 | )% | ||||||||||||||||||||||||
Total Agency RMBS profit (loss) | 1,652 | 0.06 | 0.27 | % | (317 | ) | (0.02 | ) | (0.05 | )% | 1,335 | 0.04 | 0.22 | % | ||||||||||||||||||||||||||||
Total Credit and Agency RMBS profit (loss) | 26,576 | 0.86 | 4.32 | % | 24,977 | 0.79 | 4.06 | % | 51,553 | 1.65 | 8.38 | % | ||||||||||||||||||||||||||||||
Other interest income (expense), net | 497 | 0.02 | 0.09 | % | 399 | 0.01 | 0.06 | % | 896 | 0.03 | 0.15 | % | ||||||||||||||||||||||||||||||
Other expenses | (4,598 | ) | (0.15 | ) | (0.75 | )% | (4,052 | ) | (0.13 | ) | (0.66 | )% | (8,650 | ) | (0.28 | ) | (1.41 | )% | ||||||||||||||||||||||||
Net increase in equity resulting from operations (before incentive fee) | 22,475 | 0.73 | 3.66 | % | 21,324 | 0.67 | 3.46 | % | 43,799 | 1.40 | 7.12 | % | ||||||||||||||||||||||||||||||
Incentive fee | (291 | ) | (0.01 | ) | (0.05 | )% | — | — | — | % | (291 | ) | (0.01 | ) | (0.05 | )% | ||||||||||||||||||||||||||
Net increase (decrease) in equity resulting from operations | $ | 22,184 | $ | 0.72 | 3.61 | % | $ | 21,324 | $ | 0.67 | 3.46 | % | $ | 43,508 | $ | 1.39 | 7.07 | % | ||||||||||||||||||||||||
Less: Net increase (decrease) in equity resulting from operations attributable to non-controlling interests | 991 | 285 | 1,276 | |||||||||||||||||||||||||||||||||||||||
Net increase (decrease) in shareholders' equity resulting from operations(4) | $ | 21,193 | $ | 0.69 | 3.53 | % | $ | 21,039 | $ | 0.67 | 3.52 | % | $ | 42,232 | $ | 1.36 | 7.05 | % | ||||||||||||||||||||||||
Weighted average shares and convertible
units(5) outstanding |
30,907 | 31,534 | 31,219 | |||||||||||||||||||||||||||||||||||||||
Average equity (includes non-controlling interests)(6) | $ | 612,622 | $ | 615,433 | $ | 614,610 | ||||||||||||||||||||||||||||||||||||
Weighted average shares and LTIP units outstanding(7) | 30,695 | 31,322 | 31,007 | |||||||||||||||||||||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(6) | $ | 597,870 | $ | 598,498 | $ | 598,714 | ||||||||||||||||||||||||||||||||||||
(1) | Includes TBAs and U.S. Treasury securities, if applicable. | ||
(2) | Includes equity and other relative value trading strategies and related hedges. | ||
(3) | Includes interest expense on our Senior Notes. | ||
(4) | 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. | ||
(5) | Convertible units include Operating Partnership units attributable to non-controlling interests and LTIP units. | ||
(6) | Average equity and average shareholders' equity are calculated using month end values. | ||
(7) | Excludes Operating Partnership units attributable to non-controlling interests. | ||
Portfolio
The following tables summarize our portfolio holdings as of June 30, 2018 and March 31, 2018:
Investment Portfolio
June 30, 2018 | March 31, 2018 | |||||||||||||||||||
(In thousands) | Fair Value | Cost | Fair Value | Cost | ||||||||||||||||
Long: | ||||||||||||||||||||
Credit: | ||||||||||||||||||||
Dollar Denominated: | ||||||||||||||||||||
CLO(1) | $ | 210,935 | $ | 216,236 | $ | 226,403 | $ | 232,741 | ||||||||||||
CMBS | 16,927 | 16,890 | 11,666 | 13,015 | ||||||||||||||||
Commercial Mortgage Loans and REO(2) | 139,546 | 137,846 | 139,367 | 138,392 | ||||||||||||||||
Consumer Loans and ABS Backed by Consumer Loans(1) | 196,584 | 205,243 | 148,418 | 158,089 | ||||||||||||||||
Corporate Debt and Equity | 71,422 | 68,878 | 82,426 | 83,061 | ||||||||||||||||
Debt and Equity Investment in Mortgage-Related Entities | 30,823 | 25,314 | 30,215 | 25,314 | ||||||||||||||||
Non-Agency RMBS | 156,834 | 144,760 | 169,185 | 157,249 | ||||||||||||||||
Residential Mortgage Loans and REO | 294,366 | 292,994 | 241,651 | 239,954 | ||||||||||||||||
Non-Dollar Denominated: | ||||||||||||||||||||
CLO | 4,670 | 4,788 | 10,559 | 9,681 | ||||||||||||||||
CMBS | 16,309 | 16,468 | 21,500 | 20,336 | ||||||||||||||||
Consumer Loans and ABS Backed by Consumer Loans | 8,723 | 899 | 5,911 | 1,005 | ||||||||||||||||
Corporate Debt and Equity | 11,911 | 12,576 | 12,880 | 12,864 | ||||||||||||||||
RMBS(3) | 130,395 | 128,620 | 119,791 | 112,307 | ||||||||||||||||
Agency: | ||||||||||||||||||||
Fixed-Rate Specified Pools | 853,120 | 874,862 | 830,689 | 849,000 | ||||||||||||||||
Floating-Rate Specified Pools | 6,155 | 6,304 | 7,270 | 7,407 | ||||||||||||||||
IOs | 32,899 | 33,630 | 32,450 | 32,925 | ||||||||||||||||
Reverse Mortgage Pools | 56,371 | 58,104 | 57,825 | 59,107 | ||||||||||||||||
TBAs | 317,013 | 316,530 | 193,332 | 192,834 | ||||||||||||||||
Government: | ||||||||||||||||||||
Dollar Denominated | 70,468 | 70,467 | 2,200 | 2,178 | ||||||||||||||||
Total Long | 2,625,471 | 2,631,409 | 2,343,738 | 2,347,459 | ||||||||||||||||
Repurchase Agreements | ||||||||||||||||||||
Dollar Denominated | 194,230 | 194,229 | 94,060 | 94,059 | ||||||||||||||||
Non-Dollar Denominated | 20,181 | 20,117 | 38,478 | 38,671 | ||||||||||||||||
Total Repurchase Agreements | 214,411 | 214,346 | 132,538 | 132,730 | ||||||||||||||||
Short: | ||||||||||||||||||||
Credit: | ||||||||||||||||||||
Dollar Denominated: | ||||||||||||||||||||
Corporate Debt and Equity | (84,395 | ) | (85,280 | ) | (85,186 | ) | (86,587 | ) | ||||||||||||
Agency: | ||||||||||||||||||||
TBAs | (618,665 | ) | (616,872 | ) | (499,620 | ) | (497,379 | ) | ||||||||||||
Government: | ||||||||||||||||||||
Dollar Denominated | (159,220 | ) | (159,005 | ) | (69,156 | ) | (68,716 | ) | ||||||||||||
Non-Dollar Denominated | (19,866 | ) | (19,668 | ) | (38,000 | ) | (35,101 | ) | ||||||||||||
Total Short | (882,146 | ) | (880,825 | ) | (691,962 | ) | (687,783 | ) | ||||||||||||
Net Total | $ | 1,957,736 | $ | 1,964,930 | $ | 1,784,314 | $ | 1,792,406 | ||||||||||||
(1) | Includes equity investment in a securitization-related vehicle. | ||
(2) | Includes equity investment in a limited liability company holding small balance commercial mortgage loans. | ||
(3) | Includes RMBS secured by non-performing loans and REO, and an investment in an entity holding a securitization call right. | ||
Derivatives Portfolio(1)
As of June 30, 2018 | As of March 31, 2018 | |||||||||||||||||||||||||||||||||||||||
Notional |
Net |
Notional |
Net |
|||||||||||||||||||||||||||||||||||||
(In thousands) | Long | Short | Net | Long | Short | Net | ||||||||||||||||||||||||||||||||||
Mortgage-Related Derivatives: | ||||||||||||||||||||||||||||||||||||||||
CDS on MBS and MBS Indices | $ | 7,587 | $ | (25,047 | ) | $ | (17,460 | ) | $ | 5,348 | $ | 14,554 | $ | (26,971 | ) | $ | (12,417 | ) | $ | 5,138 | ||||||||||||||||||||
Total Mortgage-Related Derivatives | 7,587 | (25,047 | ) | (17,460 | ) | 5,348 | 14,554 | (26,971 | ) | (12,417 | ) | 5,138 | ||||||||||||||||||||||||||||
Corporate-Related Derivatives: | ||||||||||||||||||||||||||||||||||||||||
CDS on Corporate Bonds and Corporate Bond Indices | 142,955 | (392,947 | ) | (249,992 | ) | (9,850 | ) | 174,088 | (424,880 | ) | (250,792 | ) | (17,309 | ) | ||||||||||||||||||||||||||
Total Return Swaps on Corporate Equities(2) | 59 | (8,018 | ) | (7,959 | ) | — | 60 | (10,073 | ) | (10,013 | ) | 1 | ||||||||||||||||||||||||||||
Total Return Swaps on Corporate Bond Indices(3) | — | (56,140 | ) | (56,140 | ) | (314 | ) | — | (18,290 | ) | (18,290 | ) | 16 | |||||||||||||||||||||||||||
Total Corporate-Related Derivatives | 143,014 | (457,105 | ) | (314,091 | ) | (10,164 | ) | 174,148 | (453,243 | ) | (279,095 | ) | (17,292 | ) | ||||||||||||||||||||||||||
Interest Rate-Related Derivatives: | ||||||||||||||||||||||||||||||||||||||||
Interest Rate Swaps | 297,656 | (600,809 | ) | (303,153 | ) | 9,282 | 350,799 | (606,304 | ) | (255,505 | ) | 8,382 | ||||||||||||||||||||||||||||
U.S. Treasury Futures(4) | — | (95,900 | ) | (95,900 | ) | 634 | — | (95,900 | ) | (95,900 | ) | (931 | ) | |||||||||||||||||||||||||||
Total Interest Rate-Related Derivatives | 9,916 | 7,451 | ||||||||||||||||||||||||||||||||||||||
Other Derivatives: | ||||||||||||||||||||||||||||||||||||||||
Foreign Currency Forwards(5) | — | (25,495 | ) | (25,495 | ) | 11 | — | (25,097 | ) | (25,097 | ) | (89 | ) | |||||||||||||||||||||||||||
Foreign Currency Futures(6) | — | (38,125 | ) | (38,125 | ) | (115 | ) | — | (35,250 | ) | (35,250 | ) | (92 | ) | ||||||||||||||||||||||||||
Other(7) | n/a | n/a | n/a | (2 | ) | n/a | n/a | n/a | (3 | ) | ||||||||||||||||||||||||||||||
Total Other Derivatives | (106 | ) | (184 | ) | ||||||||||||||||||||||||||||||||||||
Net Total | $ | 4,994 | $ | (4,887 | ) | |||||||||||||||||||||||||||||||||||
(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, 2018, derivative assets and derivative liabilities were $30.7 million and $(25.7) million, respectively, for a net fair value of $5.0 million, as reflected in "Total Net Derivatives" above. As of March 31, 2018, derivative assets and derivative liabilities were $30.0 million and $(34.9) million, respectively, for a net fair value of $(4.9) million, as reflected in "Total Net Derivatives" above. | ||
(2) | Notional value represents number of underlying shares multiplied by the closing price of the underlying security. | ||
(3) | Notional value represents the number of underlying index units multiplied by the reference price. | ||
(4) | Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of both June 30, 2018 and March 31, 2018 a total of 959 short U.S. Treasury futures contracts were held. | ||
(5) | Short notional value represents U.S. Dollars to be received by us at the maturity of the forward contract. Long notional value represents U.S. Dollars to be paid by us at the maturity of the forward contract. | ||
(6) | Notional value represents the total face amount of currency futures underlying all contracts held. As of June 30, 2018 and March 31, 2018, a total of 371 and 348 short foreign currency futures contracts were held, respectively. | ||
(7) | As of both June 30, 2018 and March 31, 2018, includes interest rate caps and interest rate "basis" swaps whereby the Company pays one floating rate and receives a different floating rate. | ||
The mix and composition of our derivative instruments may vary from period to period.
The following table summarizes, as of June 30, 2018, 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 |
50 Basis Point Increase |
||||||||||||||
Market Value |
% of Total |
Market Value |
% of Total |
|||||||||||||
Agency RMBS—ARM Pools | $ | 30 | —% | $ | (38 | ) | (0.01)% | |||||||||
Agency RMBS—Fixed Pools and IOs | 16,890 | 2.75% | (21,674 | ) | (3.53)% | |||||||||||
TBAs | (8,003 | ) | (1.30)% | 9,000 | 1.47% | |||||||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans | 4,582 | 0.75% | (4,642 | ) | (0.76)% | |||||||||||
Interest Rate Swaps | (5,776 | ) | (0.94)% | 5,539 | 0.90% | |||||||||||
U.S. Treasury Securities | (2,369 | ) | (0.38)% | 2,281 | 0.37% | |||||||||||
U.S. Treasury Futures | (3,230 | ) | (0.53)% | 3,127 | 0.51% | |||||||||||
Mortgage-Related Derivatives | 18 | —% | (15 | ) | —% | |||||||||||
Corporate Securities and Derivatives on Corporate Securities | (235 | ) | (0.04)% | 256 | 0.04% | |||||||||||
Repurchase Agreements and Reverse Repurchase Agreements | (2,697 | ) | (0.44)% | 2,685 | 0.44% | |||||||||||
$ | (790 | ) | (0.13)% | $ | (3,481 | ) | (0.57)% | |||||||||
(1) | Based on the market environment as of June 30, 2018. 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
Reverse Repos and Other Secured Borrowings
Borrowings By Collateral Type
The following table summarizes our aggregate secured borrowings, including reverse repos and other secured borrowings, for the three-month period ended June 30, 2018 and March 31, 2018.
As of
|
For the Quarter Ended |
As of |
For the Quarter Ended |
|||||||||||||||||||||||||
Collateral for Secured Borrowing |
Outstanding |
Average |
Average |
Outstanding |
Average |
Average |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Credit(1) | $ | 702,523 | $ | 638,668 | 3.89 | % | $ | 630,644 | $ | 578,727 | 3.59 | % | ||||||||||||||||
Agency RMBS | 891,082 | 891,285 | 2.00 | % | 859,780 | 840,274 | 1.68 | % | ||||||||||||||||||||
Subtotal(1) | 1,593,605 | 1,529,953 | 2.79 | % | 1,490,424 | 1,419,001 | 2.46 | % | ||||||||||||||||||||
Corporate Credit Relative Value Trading Strategy | 21,992 | 23,309 | 2.20 | % | 23,971 | 14,279 | 1.88 | % | ||||||||||||||||||||
U.S. Treasury Securities | 2,639 | 8,561 | 1.85 | % | 2,203 | 4,694 | 1.45 | % | ||||||||||||||||||||
Total | $ | 1,618,236 | $ | 1,561,823 | 2.78 | % | $ | 1,516,598 | $ | 1,437,974 | 2.45 | % | ||||||||||||||||
(1) | Excludes U.S. Treasury Securities and investments in our corporate credit relative value trading strategy. | ||
LIBOR rose again during the second quarter, which increased the cost of funds for our Credit portfolio, our Agency RMBS portfolio, and overall. The overall cost of funds on our aggregate secured borrowings increased from 2.45% to 2.78% quarter over quarter. Consistent with recent quarters, the share of our overall borrowings represented by our higher-cost Credit-related secured borrowings continues to grow. As shown in the table above, the secured borrowings in our corporate credit relative value trading strategy have much lower costs of funds than most of our other Credit-related secured borrowings, because this strategy tends to involve more liquid assets, financed for shorter terms, as compared to our other credit strategies. In light of this large difference in borrowing costs, as well as the more short-term nature and varying overall size of our positions in this strategy, we have broken out in the above table the secured borrowings in that strategy from our other Credit-related secured borrowings. Our average cost of funds on our total Credit portfolio, including our corporate credit relative value trading strategy, was 3.83% and 3.55% for the three-month periods ended June 30, 2018 and March 31, 2018, respectively.
Reverse Repurchase Agreements By Remaining Maturity (1)
(In thousands) | As of June 30, 2018 | As of March 31, 2018 | ||||||||||||||||
Remaining Maturity (2) |
Outstanding |
% of |
Outstanding Borrowings |
% of Borrowings |
||||||||||||||
30 Days or Less | $ | 288,859 | 20.3 | % | $ | 318,439 | 23.9 | % | ||||||||||
31-60 Days | 550,717 | 38.7 | % | 468,382 | 35.2 | % | ||||||||||||
61-90 Days | 378,875 | 26.6 | % | 419,421 | 31.5 | % | ||||||||||||
91-120 Days | — | — | % | 3,563 | 0.3 | % | ||||||||||||
121-150 Days | 2,284 | 0.2 | % | 1,953 | 0.2 | % | ||||||||||||
151-180 Days | 12,241 | 0.9 | % | 11,008 | 0.8 | % | ||||||||||||
181-360 Days | 121,971 | 8.6 | % | 35,162 | 2.6 | % | ||||||||||||
> 360 Days | 66,559 | 4.7 | % | 73,015 | 5.5 | % | ||||||||||||
$ | 1,421,506 | 100.0 | % | $ | 1,330,943 | 100.0 | % | |||||||||||
(1) | Reverse repos involving underlying investments that we had sold prior to the applicable period end for settlement following the applicable period end, are shown using their original maturity dates even though such reverse 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 weighted average remaining term on our reverse repos as of June 30, 2018 decreased slightly to 104 days from 108 days as of March 31, 2018.
Our borrowings outstanding under reverse repos were with a total of 24
counterparties as of June 30, 2018. As of June 30, 2018, we held liquid
assets in the form of cash and cash equivalents in the amount of
Long-Term Debt
As of June 30, 2018, our outstanding borrowings included
Total Borrowed Funds
The following table details our borrowings outstanding and debt-to-equity ratios as of June 30, 2018 and March 31, 2018.
As of | ||||||||
June 30, 2018 | March 31, 2018 | |||||||
($ in thousands) | ||||||||
Recourse(1) Borrowings: | ||||||||
Reverse Repurchase Agreements | $ | 1,421,506 | $ | 1,330,943 | ||||
Other Secured Borrowings |
|
10,990 |
|
9,330 |
||||
Senior Notes, at par |
|
86,000 |
|
86,000 |
||||
Total Recourse Borrowings |
$ |
1,518,496 |
$ |
1,426,273 |
||||
Debt-to-Equity Ratio Based on Total Recourse Borrowings |
|
2.48:1 |
|
2.34:1 |
||||
Debt-to-Equity Ratio Based on Total Recourse Borrowings Excluding U.S. Treasury Securities |
|
2.47:1 |
|
2.33:1 |
||||
Non-Recourse(1) Borrowings: | ||||||||
Other Secured Borrowings |
$ |
84,640 |
$ |
62,550 |
||||
Other Secured Borrowings, at fair value(2) |
|
101,100 |
|
113,775 |
||||
Total Recourse and Non-Recourse Borrowings |
$ |
1,704,236 |
$ |
1,602,598 |
||||
Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse Borrowings |
|
2.78:1 |
|
2.63:1 |
||||
Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse Borrowings Excluding U.S. Treasury Securities |
|
2.77:1 |
|
2.62:1 |
||||
(1) | All of our non-recourse borrowings are secured by collateral. In the event of default under a non-recourse borrowing, the lender has a claim against the collateral but not any of our other assets. In the event of default under a recourse borrowing, the lender's claim is not limited to the collateral (if any). | |||
(2) | Relates to our non-QM loan securitization, where we have elected the fair value option on the related debt. | |||
The increase in our reverse repo borrowings on our
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, as a percentage of
average equity, increased to 3.0% for the quarter ended June 30, 2018,
from 2.7% for the prior quarter. The increase in our annualized expense
ratio resulted primarily from an increase in professional fees,
compensation expense, and other operating expenses for the quarter. We
incurred an incentive fee expense of
Dividends
On
Share Repurchase Program
On
During the three-month period ended June 30, 2018, we repurchased
242,161 common shares at an average price per share of
At-the-Market Program
We have entered into equity distribution agreements for an
"at-the-market" offering program whereby we are able to sell common
shares from time to time in the open market or in negotiated
transactions. Under the program, which is open-ended in duration, we can
sell common shares with a value of up to
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Tuesday,
August 7, 2018, 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, 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 15, 2018 which can be accessed
through our website at www.ellingtonfinancial.com
or at the
ELLINGTON FINANCIAL LLC CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) |
|||||||||||||||
Three-Month Period Ended |
Six-Month |
||||||||||||||
(In thousands, except per share amounts) | June 30, 2018 | March 31, 2018 | June 30, 2018 | ||||||||||||
Investment income | |||||||||||||||
Interest income | $ | 31,941 | $ | 28,092 | $ | 60,033 | |||||||||
Other income | 1,094 | 716 | 1,811 | ||||||||||||
Total investment income | 33,035 | 28,808 | 61,844 | ||||||||||||
Expenses | |||||||||||||||
Base management fee to affiliate (Net of fee rebates of $252, $275, and $527, respectively) | 2,021 | 1,978 | 4,000 | ||||||||||||
Incentive fee | 291 | — | 291 | ||||||||||||
Interest expense | 13,383 | 11,562 | 24,946 | ||||||||||||
Other investment related expenses: | |||||||||||||||
Servicing and other | 3,771 | 2,952 | 6,723 | ||||||||||||
Other operating expenses | 2,578 | 2,074 | 4,650 | ||||||||||||
Total expenses | 22,044 | 18,566 | 40,610 | ||||||||||||
Net investment income | 10,991 | 10,242 | 21,234 | ||||||||||||
Net realized gain (loss) on: | |||||||||||||||
Investments | (388 | ) | 12,584 | 12,196 | |||||||||||
Financial derivatives, excluding currency hedges | (3,632 | ) | 902 | (2,730 | ) | ||||||||||
Financial derivatives—currency hedges | 3,787 | (2,204 | ) | 1,584 | |||||||||||
Foreign currency transactions | (1,110 | ) | 1,769 | 658 | |||||||||||
(1,343 | ) | 13,051 | 11,708 | ||||||||||||
Change in net unrealized gain (loss) on: | |||||||||||||||
Investments | 7,457 | (6,851 | ) | 605 | |||||||||||
Other secured borrowings | 414 | 784 | 1,198 | ||||||||||||
Financial derivatives, excluding currency hedges | 6,553 | 3,197 | 9,749 | ||||||||||||
Financial derivatives—currency hedges | 76 | 800 | 877 | ||||||||||||
Foreign currency translation | (1,964 | ) | 101 | (1,863 | ) | ||||||||||
12,536 | (1,969 | ) | 10,566 | ||||||||||||
Net realized and change in net unrealized gain (loss) on investments, financial derivatives, and other secured borrowings | 11,193 | 11,082 | 22,274 | ||||||||||||
Net increase in equity resulting from operations | 22,184 | 21,324 | 43,508 | ||||||||||||
Less: Increase in equity resulting from operations attributable to non-controlling interests | 991 | 285 | 1,276 | ||||||||||||
Net increase in shareholders' equity resulting from operations | $ | 21,193 | $ | 21,039 | $ | 42,232 | |||||||||
Net increase in shareholders' equity resulting from operations per share: | |||||||||||||||
Basic and diluted | $ | 0.69 | $ | 0.67 | $ | 1.36 | |||||||||
Weighted average shares and LTIP units outstanding | 30,695 | 31,322 | 31,007 | ||||||||||||
Weighted average shares and convertible units outstanding | 30,907 | 31,534 | 31,219 | ||||||||||||
ELLINGTON FINANCIAL LLC CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES, AND EQUITY (UNAUDITED) |
||||||||||||
As of | ||||||||||||
(In thousands, except share amounts) |
June 30, |
March 31, 2018 |
December 31, 2017(1) |
|||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 22,071 | $ | 25,715 | $ | 47,233 | ||||||
Restricted cash | 425 | 425 | 425 | |||||||||
Investments, financial derivatives, and repurchase agreements: | ||||||||||||
Investments, at fair value (Cost–$2,631,409, $2,347,459, and $2,071,754) | 2,625,471 | 2,343,738 | 2,071,707 | |||||||||
Financial derivatives–assets, at fair value (Net cost–$24,510, $25,391, and $31,474) | 30,669 | 30,038 | 28,165 | |||||||||
Repurchase agreements (Cost–$214,346, $132,730, and $155,109) | 214,411 | 132,538 | 155,949 | |||||||||
Total Investments, financial derivatives, and repurchase agreements | 2,870,551 | 2,506,314 | 2,255,821 | |||||||||
Due from brokers | 84,196 | 95,549 | 140,404 | |||||||||
Receivable for securities sold and financial derivatives | 637,965 | 522,126 | 476,000 | |||||||||
Interest and principal receivable | 32,469 | 32,488 | 29,688 | |||||||||
Other assets | 24,399 | 13,729 | 43,770 | |||||||||
Total assets | $ | 3,672,076 | $ | 3,196,346 | $ | 2,993,341 | ||||||
LIABILITIES | ||||||||||||
Investments and financial derivatives: | ||||||||||||
Investments sold short, at fair value (Proceeds–$880,825, $687,783, and $640,202) | $ | 882,146 | $ | 691,962 | $ | 642,240 | ||||||
Financial derivatives–liabilities, at fair value (Net proceeds–$18,294, $22,202, and $27,463) | 25,675 | 34,925 | 36,273 | |||||||||
Total investments and financial derivatives | 907,821 | 726,887 | 678,513 | |||||||||
Reverse repurchase agreements | 1,421,506 | 1,330,943 | 1,209,315 | |||||||||
Due to brokers | 3,250 | 21,054 | 1,721 | |||||||||
Payable for securities purchased and financial derivatives | 431,024 | 225,519 | 202,703 | |||||||||
Other secured borrowings (Proceeds–$95,630, $71,880, and $57,909) | 95,630 | 71,880 | 57,909 | |||||||||
Other secured borrowings, at fair value (Proceeds–$102,298, $114,559, and $125,105) | 101,100 | 113,775 | 125,105 | |||||||||
Senior notes, net | 84,902 | 84,837 | 84,771 | |||||||||
Accounts payable and accrued expenses | 4,105 | 3,876 | 3,885 | |||||||||
Base management fee payable to affiliate | 2,021 | 1,978 | 2,113 | |||||||||
Incentive fee payable | 291 | — | — | |||||||||
Interest and dividends payable | 6,791 | 5,168 | 5,904 | |||||||||
Other liabilities | 360 | 479 | 441 | |||||||||
Total liabilities | 3,058,801 | 2,586,396 | 2,372,380 | |||||||||
EQUITY | 613,275 | 609,950 | 620,961 | |||||||||
TOTAL LIABILITIES AND EQUITY | $ | 3,672,076 | $ | 3,196,346 | $ | 2,993,341 | ||||||
ANALYSIS OF EQUITY: | ||||||||||||
Common shares, no par value, 100,000,000 shares authorized; | ||||||||||||
(30,149,880, 30,392,041, and 31,335,938, shares issued and outstanding) | $ | 589,000 | $ | 584,005 | $ | 589,722 | ||||||
Additional paid-in capital–LTIP units | 10,567 | 10,469 | 10,377 | |||||||||
Total Shareholders' Equity | 599,567 | 594,474 | 600,099 | |||||||||
Non-controlling interests | 13,708 | 15,476 | 20,862 | |||||||||
Total Equity | $ | 613,275 | $ | 609,950 | $ | 620,961 | ||||||
PER SHARE INFORMATION: | ||||||||||||
Common shares, no par value | $ | 19.89 | $ | 19.56 | $ | 19.15 | ||||||
DILUTED PER SHARE INFORMATION: | ||||||||||||
Common shares and convertible units, no par value (2) | $ | 19.57 | $ | 19.25 | $ | 18.85 | ||||||
(1) | Derived from audited financial statements as of December 31, 2017. | ||
(2) | Based on total equity excluding non-controlling interests not represented by instruments convertible into common shares. |
View source version on businesswire.com: https://www.businesswire.com/news/home/20180806005639/en/
Source:
Investor Contact: JR Herlihy, Chief Financial Officer, Ellington
Financial LLC, (203) 409-3575 or info@ellingtonfinancial.com;
or
Media
Contact: Amanda Klein or Kevin Fitzgerald, Gasthalter & Co., for
Ellington Financial, (212) 257-4170 or Ellington@gasthalter.com