Ellington Financial Earns $0.45 per Share, Beats $0.39 Dividend

Ellington Financial (NYSE:EFC) earned $0.45 per share in adjusted distributable earnings in the third quarter, beating its $0.39 quarterly dividend, as interest rate and credit hedges absorbed a late-quarter sell-off driven by rising rates and wider credit spreads.

The mortgage REIT 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 credited the hedges for limiting damage. He also pointed to retained interest-only investments from securitizations, commercial mortgage bridge loans, corporate credit and originator investments — particularly LendSure — as earnings contributors.

Chief Financial Officer JR Herlihy set expectations near current levels. The company expects quarterly adjusted distributable earnings of approximately $0.45 per share going forward, assuming roughly one proprietary reverse mortgage securitization per quarter. That outlook, he cautioned, remains sensitive to Longbridge's origination margins and securitization timing.

What happened at Longbridge?

Longbridge, Ellington's reverse mortgage business, originated $676 million of loans in the quarter. That is up 36% from a year earlier and roughly 15% from the second quarter. Herlihy said September was its strongest month ever for proprietary reverse mortgage submissions.

Yet volume did not translate into earnings. 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 just one proprietary reverse securitization priced in the quarter, against two in the prior quarter.

Penn said industry origination margins compressed after a competitor temporarily held offering rates down as interest rates rose. Longbridge's margins were improving early in the fourth quarter as offering rates repriced higher, he said.

Longbridge also took 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.

On the call's 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 offered no details on the products under development.

How did the portfolio perform?

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, and the company made opportunistic purchases of prime jumbo and scratch-and-dent residential loans.

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.

Credit performance improved. 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%. Herlihy said cumulative realized credit losses remained low.

Co-Chief Investment Officer Mark Tecotzky said residential spreads widened sharply during the quarter without what the company saw as corresponding deterioration in underlying fundamentals. He expressed greater concern about commercial borrowers facing floating-rate debt costs and expense pressure, though he noted lower rates could ease some of that pressure.

What changed on capital and Statebridge?

In September, Ellington issued $150 million as an add-on to its existing 7⅜% senior unsecured notes, lifting 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 will pursue similarly accretive repurchases if opportunities arise, subject to market conditions. The current monthly dividend of $0.13 per share remains appropriate, he said, while noting fourth-quarter volatility could affect full-year taxable income and distribution requirements.

The company also 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. Tecotzky added that building the platform will take time.

Ellington Financial is a REIT that acquires and manages mortgage-related assets, focusing on residential and commercial mortgage loans, mortgage-backed securities and related investments. Its activities may include agency and non-agency RMBS, CMBS, mortgage servicing rights and consumer loans.