Ellington Financial NYSE: EFC reported third-quarter adjusted distributable earnings of $0.45 per share, exceeding its $0.39 quarterly dividend, as hedges helped limit the impact of rising interest rates and wider credit spreads.
The mortgage investment company posted GAAP net income of $0.31 per share and an annualized economic return of 9.4%. Book value ended the quarter at $13.53 per share, down 0.6% after dividends.
Chief Executive Officer and President Larry Penn said interest rate and credit hedges cushioned a late-quarter sell-off. He cited retained interest-only investments from securitizations, commercial mortgage bridge loans, corporate credit and originator investments, particularly LendSure, among the quarter’s earnings contributors.
Chief Financial Officer JR Herlihy said the company expects quarterly adjusted distributable earnings of approximately $0.45 per share. That outlook assumes roughly one proprietary reverse mortgage securitization per quarter and remains sensitive to Longbridge’s origination margins and securitization timing.
Longbridge Originations Rise, but Earnings Contribution Falls
Longbridge, Ellington’s reverse mortgage business, originated $676 million of loans in the quarter, up 36% from a year earlier and approximately 15% from the second quarter. Herlihy said September was its strongest month ever for proprietary reverse mortgage submissions.
Longbridge contributed $0.07 per share to adjusted distributable earnings, down from $0.23 in the second quarter. The decline reflected narrower origination margins and one proprietary reverse securitization priced in the third quarter, compared with two in the preceding quarter, Herlihy said.
Penn said industry origination margins compressed after a competitor temporarily held offering rates down as interest rates rose. He said Longbridge’s margins were improving early in the fourth quarter as offering rates repriced higher.
Longbridge’s results also included a markdown on retained proprietary reverse mortgage tranches tied to revised home price projections. Penn said the revision largely reflected housing market weakness observed during the third quarter.
During the question-and-answer session, Penn said he expects further reverse mortgage growth into next year, citing favorable demographics and plans to broaden Longbridge’s product range. He did not provide details of the products under development.
Portfolio Growth and Credit Performance
Ellington’s adjusted long investment portfolio grew 4.5% from the prior quarter to $4.7 billion. Its residential loan portal generated $1.6 billion in purchases from 57 sellers, while the company also made opportunistic purchases of prime jumbo and scratch-and-dent residential loans.
Herlihy said the portfolio’s net interest margin rose to 3.55% from 3.36%, as higher asset yields more than offset increased funding costs. The investment portfolio contributed $0.60 per share to adjusted distributable earnings, unchanged from the prior quarter.
Across residential and commercial mortgage loans, the rate of loans at least 90 days delinquent fell 12 basis points during the quarter to 5.6%. Cumulative realized credit losses remained low, Herlihy said.
Co-Chief Investment Officer Mark Tecotzky said residential spreads widened sharply during the quarter without what the company saw as a corresponding deterioration in underlying fundamentals. He expressed greater concern about commercial borrowers facing floating-rate debt costs and pressure from expenses, although he noted that lower rates could ease some of that pressure.
Capital Management and Statebridge Acquisition
In September, Ellington issued $150 million in an add-on to its existing 7⅜% senior unsecured notes, increasing the series to $550 million outstanding. Penn said the offering was upsized from an initial $100 million and priced at a spread over Treasurys approximately 70 basis points tighter than the company’s issuance a year earlier.
Recourse leverage rose to 2.2 times from 1.9 times as the portfolio grew, while cash increased to $269 million from $247 million. Total unencumbered assets, including cash, reached $1.92 billion at quarter-end, Herlihy said.
Ellington raised approximately $34 million through its at-the-market equity program during the first two months of the quarter at approximately book value. After quarter-end, it repurchased just under $4 million of common stock at approximately 85% of its most recently reported book value.
Penn said the company expects to pursue similarly accretive repurchases if opportunities arise, subject to market conditions. He also said the current monthly dividend of $0.13 per share remains appropriate, while noting that fourth-quarter volatility could affect full-year taxable income and distribution requirements.
The company acquired a controlling interest in loan servicer Statebridge in September. Statebridge serviced approximately 15,000 loans with nearly $2 billion in unpaid principal balance at quarter-end. Penn said Ellington aims to develop it into a special servicer that can improve outcomes on delinquent loans and real estate owned, while Tecotzky said building the platform will take time.
About Ellington Financial (NYSE:EFC)
Ellington Financial Inc is a real estate investment trust (REIT) that acquires, invests in and manages a portfolio of mortgage-related and other financial assets. The company focuses primarily on residential and commercial mortgage loans, mortgage-backed securities and related investments.
Its investment activities may include agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, residential and commercial mortgage loans, mortgage servicing rights and consumer loans.
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