Ellington Financial LLC Reports Fourth Quarter 2014 Results
Highlights
- Net increase in shareholders' equity resulting from operations ("net income") for the fourth quarter was
$2.6 million , or$0.08 per basic and diluted share. - Book value per share as of
December 31, 2014 was$23.09 on a diluted basis, after payment of a quarterly dividend in the third quarter of$0.77 per share, as compared to book value per share of$23.79 on a diluted basis as ofSeptember 30, 2014 . - Our non-Agency strategy generated gross income of
$7.7 million for the quarter endedDecember 31, 2014 . - Our Agency strategy generated gross income of
$0.4 million for the quarter endedDecember 31, 2014 . - Our Board of Directors declared a dividend of
$0.65 per share for the fourth quarter of 2014, equating to an annualized dividend yield of 12.6% based on theFebruary 10, 2015 closing price of$20.62 ; dividends are paid quarterly in arrears.
Fourth Quarter 2014 Results
For the quarter ended December 31, 2014, net income was
"In the face of sharply lower interest rates and a flattening yield curve, both our non-Agency and Agency strategies generated positive net income during the fourth quarter, and we continued to diversify our revenue sources," said
"We are diversifying our revenue sources into adjacent sectors where we believe our analytical expertise, research, and systems give us an edge that enables us to capitalize on market inefficiencies and achieve attractive risk-adjusted returns. During the fourth quarter, we began purchasing U.S. consumer loans, where we are seeing very attractive opportunities and expect significant future portfolio growth. We also began purchasing distressed corporate debt, where in the current market environment we expect our purchases to be more opportunistic in nature. We also made a strategic investment in another mortgage originator. The strategic investment took the form of subordinated debt, and we expect to make additional debt and/or equity investments in mortgage originators over the coming quarters."
Non-Agency
Our non-Agency strategy generated gross income in the amount of
During the fourth quarter, the broader financial markets experienced a heightened level of volatility, most notably in connection with the steep drop in oil prices. However, prices of non-Agency RMBS exhibited relative stability, as support was provided by ongoing improvements in fundamental data, including mortgage delinquency and foreclosure rates, as well as by the drop in oil prices. Since crude oil prices directly and indirectly drive the price of gasoline, heating oil, and other significant budget items for homeowners, the decline in oil prices should free up significant disposable income for homeowners over the near term, and should therefore benefit the credit performance of non-Agency RMBS. In addition, recent declines in interest rates are translating into lower rate resets on adjustable rate mortgages, thereby freeing up additional disposable income for homeowners. The drop in interest rates, if sustained, could further benefit non-Agency RMBS credit performance by creating additional upward pressure on home prices, which slowed in 2014 after increasing sharply in 2012 and 2013. We increased our holdings of non-Agency RMBS over the course of the fourth quarter, as we continue to selectively find attractive buying opportunities, most notably in seasoned mezzanine tranches. However, as market yields for non-Agency RMBS have remained compressed, prudent and careful security selection, based on loan-level analysis performed on a security-by-security basis, continues to be of paramount importance. As of
During the fourth quarter, net losses from our credit and interest rate hedges partially offset the positive return from our non-Agency RMBS portfolio. A large component of our credit hedges are in the form of short credit default swaps, or "CDS," positions on high-yield corporate bond indices. In the early part of the quarter, the corporate bonds underlying these indices generally rallied, leading to net losses, although the impact of these losses was mitigated somewhat in the latter part of the quarter, when energy-related corporate bonds generally declined as oil prices fell. Going into the quarter, we also held as credit hedges short total return swaps referencing the equity of certain property REITs, but by the end of the quarter we had replaced these credit hedges, which also generated losses during the quarter, with additional CDS on corporate bond indices. The decline in interest rates led to net losses on our interest rate hedges over the course of the fourth quarter. Notwithstanding the recent decline in interest rates, we continue to believe that the entire non-Agency MBS market remains vulnerable, especially to a substantial unexpected increase in long-term interest rates. 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.
The CMBS market continued to be volatile in the fourth quarter. Credit spreads generally tightened in the early part of the fourth quarter, only to widen out again at the end of the quarter. Factors contributing to volatility in CMBS during the fourth quarter included the steep drop in oil prices, heavy new issue volume, and the steadily deteriorating credit quality and underwriting standards in new issue CMBS. The fourth quarter capped a year of loosening underwriting standards in the new issue CMBS market, including increased leverage and higher loan-to-value ratios. Nevertheless, our CMBS portfolio performed well during the quarter and we remain active in B-pieces. B-pieces are the most subordinated (and therefore the highest yielding and riskiest) CMBS tranches. Ellington has been highly active in this market, and we believe that these assets represent an attractive complement to our legacy CMBS holdings, which tend to be lower yielding, but more liquid than CMBS B-pieces. By purchasing new issue B-pieces, we believe that we are often able to effectively "manufacture" our risk more efficiently than what is broadly available in the secondary market, and better target the collateral profiles and structures we prefer. We have continued to find attractive acquisition opportunities in CMBS B-pieces, although at a slower pace compared to recent quarters. As CMBS credit spreads widened during the quarter, we covered some of our CMBX hedges while deploying capital opportunistically in select bonds and B-pieces. Our CMBS portfolio made a significant positive contribution to our net income for the fourth quarter. As of
We also continue to see compelling opportunities in distressed small balance commercial loans. As of
During the fourth quarter, we continued to expand our investing activities in European non-dollar denominated assets. Over the course of the quarter, we increased our holdings of European RMBS and CLOs, and we purchased our first mezzanine tranches of European CMBS. During the quarter, the market was heavily impacted by anticipated
We remained active in the U.S. CLO market, focusing on the legacy sector, where we continue to find value. In contrast, we have not found more recent CLO issuance to be particularly attractive, especially given that the underlying loans were generally originated with relaxed underwriting standards, or "covenant light" features. In fact, more recent vintage CLOs were particularly hard hit during the fourth quarter, as the perceived creditworthiness of many energy-related companies declined. Net of hedges, our CLO holdings generated positive net income during the quarter. Over the course of the fourth quarter, we increased our holdings of legacy CLOs, including our European non-dollar denominated CLOs, to
During the fourth quarter, we added to our portfolio of non-performing and sub-performing residential mortgage loans, or "residential NPLs." Sales volume of residential NPLs declined during the fourth quarter relative to the second and third quarters, and asset prices remained relatively firm. Given the continued high levels of competition in this sector, we remained focused on smaller, less competitive pools. We have found that these smaller transactions offer not only better potential returns, but also more attractive terms. Our income from residential NPL pools was modestly positive for the quarter. As of
We began investing in ABS backed by U.S. consumer loans in the third quarter. During the fourth quarter, we expanded our activities in this sector by investing directly in consumer whole loans. We have focused our consumer ABS and consumer whole loan activity on originators that have a long track record and that can provide extensive loan-level performance data for us to analyze, including historical default rates, prepayment rates, and recovery rates. We believe that our U.S. consumer loan investments offer attractive loss-adjusted yields and will serve to enhance as well as diversify our sources of non-Agency returns. As of
During the fourth quarter, we also we made our first purchases of distressed corporate loans. We were able to purchase assets at attractive prices as the unexpected drop in oil prices increased the fear of widespread energy sector defaults, helping drive corporate loan prices lower even for non-energy-related issuers. Our early focus has been on more senior secured positions, and we have hedged our portfolio with CDS on high-yield corporate bond indices. While we are currently cautious with respect to energy-related exposures, we anticipate that we may see attractive opportunities in this sub-sector in the future. During the fourth quarter, our distressed corporate loans generated a small net loss. As of
In
Agency
Our Agency strategy generated gross income of
Consistent with past quarters, as of
In
The yield curve flattened significantly during the fourth quarter. Ten-year interest rate swap rates declined approximately 36 basis points, while seven-year swap rates declined approximately 26 basis points. The ten-year U.S. Treasury yield ended the fourth quarter at 2.17%, as compared to 2.49% at the end of the third quarter. Meanwhile short-term interest rates remained relatively stable or increased slightly. Volatility in Agency RMBS increased in line with the volatility in the broader financial markets. During the fourth quarter, specified pools performed well, as the drop in interest rates increased the value of prepayment protection, although pay-ups for some coupons benefited more than others. Pay-ups are price premiums for specified pools relative to their TBA counterparts. Meanwhile, mortgage rates to the consumer declined during the quarter, dropping approximately 0.33% to 3.87% for a fixed rate 30-year conventional mortgage. However, this did not trigger substantial increases in refinancing activity during the quarter, with the exception of a temporary spike after the brief sharp drop in interest rates on
During the fourth quarter, we continued to focus our Agency RMBS purchasing activity primarily on specified pools, especially those with higher coupons. We also continued to be active participants in the reverse mortgage pool sector. As reverse mortgage pool spreads tightened over the course of the quarter, we actively sold certain more seasoned pools replacing them with new issue pools, which we believe currently offer better value. Our Agency RMBS portfolio also includes a small allocation to interest only securities, or "Agency IOs." With prepayment activity low, option-adjusted spreads on Agency IOs remained tight during the fourth quarter. As a result, we took the opportunity to execute selective sales. However, with interest rates having dropped substantially since year end and with prepayment activity therefore poised to increase substantially, we are ready to take advantage of possible upcoming dislocations in the Agency IO market. Our overall Agency RMBS portfolio increased in size to
With prepayment rates already increasing sharply after year end, pay-ups on many specified pools have also increased significantly. In addition, the impact of the Federal Reserve's reduction in asset purchases has finally begun to depress TBA roll prices, especially in higher coupons. We believe that there is a heightened risk of substantial interest rate and prepayment volatility in the near term, thus reinforcing the importance of our ability to hedge our risks using a variety of tools, including TBAs. We also believe that increased volatility can create opportunities for us, particularly given our active style of portfolio management.
Our net Agency premium as a percentage of our long Agency RMBS holdings is a 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 through net-asset-value-based total return. Net-asset-value-based total return measures the change in our book value per share and assumes the reinvestment of dividends at book value per share. For the quarter and year ended December 31, 2014, our net-asset-value-based total return was 0.30% and 8.77%, respectively. Our net-asset-value-based total return from our inception (
The following table summarizes our operating results for the quarters ended December 31, 2014 and September 30, 2014 and the year ended
Quarter December |
Per |
% of |
Quarter |
Per |
% of |
Year Ended December |
Per |
% of |
|||||||||||||||||||
(In thousands, except per share amounts) |
|||||||||||||||||||||||||||
Non-Agency MBS, mortgage loans, ABS, and other: |
|||||||||||||||||||||||||||
Interest income |
$ |
17,365 |
$ |
0.51 |
2.17 |
% |
$ |
14,523 |
$ |
0.52 |
2.15 |
% |
$ |
58,374 |
$ |
2.04 |
8.56 |
% |
|||||||||
Net realized gain |
7,442 |
0.22 |
0.93 |
% |
6,116 |
0.22 |
0.91 |
% |
50,719 |
1.77 |
7.44 |
% |
|||||||||||||||
Change in net unrealized gain (loss) |
(7,250) |
(0.21) |
(0.91) |
% |
(6,523) |
(0.23) |
(0.97) |
% |
(22,886) |
(0.80) |
(3.36) |
% |
|||||||||||||||
Net interest rate hedges(1) |
(5,460) |
(0.16) |
(0.68) |
% |
826 |
0.03 |
0.12 |
% |
(9,479) |
(0.33) |
(1.39) |
% |
|||||||||||||||
Net credit hedges and other activities(2) |
(1,598) |
(0.05) |
(0.20) |
% |
2,900 |
0.09 |
0.43 |
% |
(1,197) |
(0.04) |
(0.17) |
% |
|||||||||||||||
Interest expense |
(1,732) |
(0.05) |
(0.22) |
% |
(1,473) |
(0.05) |
(0.22) |
% |
(6,330) |
(0.22) |
(0.93) |
% |
|||||||||||||||
Other investment related expenses |
(1,092) |
(0.03) |
(0.13) |
% |
(497) |
(0.02) |
(0.07) |
% |
(2,241) |
(0.08) |
(0.33) |
% |
|||||||||||||||
Total non-Agency MBS, mortgage loans, ABS, and other profit |
7,675 |
0.23 |
0.96 |
% |
15,872 |
0.56 |
2.35 |
% |
66,960 |
2.34 |
9.82 |
% |
|||||||||||||||
Agency RMBS: |
|||||||||||||||||||||||||||
Interest income |
9,455 |
0.28 |
1.18 |
% |
7,804 |
0.28 |
1.16 |
% |
33,215 |
1.16 |
4.87 |
% |
|||||||||||||||
Net realized gain |
3,534 |
0.10 |
0.44 |
% |
572 |
0.02 |
0.08 |
% |
1,055 |
0.04 |
0.16 |
% |
|||||||||||||||
Change in net unrealized gain (loss) |
6,935 |
0.20 |
0.87 |
% |
(3,277) |
(0.12) |
(0.49) |
% |
30,139 |
1.05 |
4.42 |
% |
|||||||||||||||
Net interest rate hedges(1) |
(18,637) |
(0.55) |
(2.33) |
% |
(499) |
(0.02) |
(0.07) |
% |
(47,634) |
(1.67) |
(6.99) |
% |
|||||||||||||||
Interest expense |
(933) |
(0.03) |
(0.12) |
% |
(798) |
(0.03) |
(0.12) |
% |
(3,283) |
(0.11) |
(0.48) |
% |
|||||||||||||||
Total Agency RMBS profit |
354 |
— |
0.04 |
% |
3,802 |
0.13 |
0.56 |
% |
13,492 |
0.47 |
1.98 |
% |
|||||||||||||||
Total non-Agency and Agency MBS, mortgage loans, ABS, and other profit |
8,029 |
0.23 |
1.00 |
% |
19,674 |
0.69 |
2.91 |
% |
80,452 |
2.81 |
11.80 |
% |
|||||||||||||||
Other interest income (expense), net |
(12) |
— |
0.00 |
% |
— |
— |
0.00 |
% |
(19) |
— |
0.00 |
% |
|||||||||||||||
Other expenses (excluding incentive fee) |
(5,257) |
(0.15) |
(0.66) |
% |
(5,127) |
(0.18) |
(0.76) |
% |
(19,084) |
(0.67) |
(2.80) |
% |
|||||||||||||||
Net increase in equity resulting from operations (before incentive fee) |
2,760 |
0.08 |
0.34 |
% |
14,547 |
0.51 |
2.15 |
% |
61,349 |
2.14 |
9.00 |
% |
|||||||||||||||
Incentive fee |
— |
— |
— |
% |
(1,400) |
(0.05) |
(0.21) |
% |
(1,400) |
(0.05) |
(0.21) |
% |
|||||||||||||||
Net increase in equity resulting from operations |
$ |
2,760 |
$ |
0.08 |
0.34 |
% |
$ |
13,147 |
$ |
0.46 |
1.94 |
% |
$ |
59,949 |
$ |
2.09 |
8.79 |
% |
|||||||||
Less: Net increase in equity resulting from operations attributable to non-controlling interests |
123 |
199 |
782 |
||||||||||||||||||||||||
Net increase in shareholders' equity resulting from operations(6) |
$ |
2,637 |
$ |
0.08 |
0.33 |
% |
$ |
12,948 |
$ |
0.46 |
1.94 |
% |
$ |
59,167 |
$ |
2.09 |
8.76 |
% |
|||||||||
Weighted average shares and convertible units(3) outstanding |
34,078 |
28,066 |
28,587 |
||||||||||||||||||||||||
Average equity (includes non-controlling interests)(4) |
$ |
800,113 |
$ |
674,628 |
$ |
681,897 |
|||||||||||||||||||||
Weighted average shares and LTIP units outstanding(5) |
33,866 |
27,854 |
28,375 |
||||||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(4) |
$ |
793,442 |
$ |
667,630 |
$ |
675,201 |
(1) |
Includes TBAs and U.S. Treasuries, if applicable. |
(2) |
Includes equity 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 December 31, 2014 and September 30, 2014:
Investment Portfolio
December 31, 2014 |
September 30, 2014 |
|||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
||||||||||||||||||||
Non-Agency RMBS and Residential mortgage loans |
$ |
876,713 |
$ |
582,162 |
$ |
66.40 |
$ |
546,596 |
$ |
62.35 |
$ |
758,818 |
$ |
514,733 |
$ |
67.83 |
$ |
474,427 |
$ |
62.52 |
||||||||||
Non-Agency CMBS and Commercial mortgage loans |
163,180 |
80,386 |
49.26 |
80,902 |
49.58 |
165,451 |
75,256 |
45.49 |
76,257 |
46.09 |
||||||||||||||||||||
Other ABS and Loans |
126,238 |
123,765 |
98.04 |
125,485 |
99.40 |
91,985 |
89,697 |
97.51 |
90,555 |
98.45 |
||||||||||||||||||||
Total Non-Agency MBS, mortgage loans, and Other ABS and Loans |
1,166,131 |
786,313 |
67.43 |
752,983 |
64.57 |
1,016,254 |
679,686 |
66.88 |
641,239 |
63.10 |
||||||||||||||||||||
Agency RMBS: |
||||||||||||||||||||||||||||||
Floating |
16,002 |
16,974 |
106.07 |
17,049 |
106.54 |
17,290 |
18,360 |
106.19 |
18,430 |
106.59 |
||||||||||||||||||||
Fixed |
1,032,032 |
1,111,761 |
107.73 |
1,093,421 |
105.95 |
912,505 |
974,630 |
106.81 |
965,307 |
105.79 |
||||||||||||||||||||
Reverse Mortgages |
52,247 |
57,554 |
110.16 |
57,274 |
109.62 |
30,042 |
32,614 |
108.56 |
32,849 |
109.35 |
||||||||||||||||||||
Total Agency RMBS |
1,100,281 |
1,186,289 |
107.82 |
1,167,744 |
106.13 |
959,837 |
1,025,604 |
106.85 |
1,016,586 |
105.91 |
||||||||||||||||||||
Total Non-Agency and Agency MBS, mortgage loans, and Other ABS and Loans |
$ |
2,266,412 |
$ |
1,972,602 |
$ |
87.04 |
$ |
1,920,727 |
$ |
84.75 |
$ |
1,976,091 |
$ |
1,705,290 |
$ |
86.30 |
$ |
1,657,825 |
$ |
83.89 |
||||||||||
Agency Interest Only RMBS |
n/a |
$ |
31,385 |
n/a |
$ |
32,785 |
n/a |
n/a |
$ |
38,572 |
n/a |
$ |
37,379 |
n/a |
||||||||||||||||
Non-Agency Interest Only and Principal Only MBS and Other(2) |
n/a |
$ |
28,194 |
n/a |
$ |
28,542 |
n/a |
n/a |
$ |
24,852 |
n/a |
$ |
24,237 |
n/a |
||||||||||||||||
TBAs: |
||||||||||||||||||||||||||||||
Long |
$ |
71,598 |
$ |
72,410 |
$ |
101.13 |
$ |
71,672 |
$ |
100.10 |
$ |
112,448 |
$ |
111,624 |
$ |
99.27 |
$ |
111,806 |
$ |
99.43 |
||||||||||
Short |
(1,135,218) |
(1,209,539) |
106.55 |
(1,205,876) |
106.22 |
(1,101,218) |
(1,158,892) |
105.24 |
(1,158,171) |
105.17 |
||||||||||||||||||||
Net Short TBAs |
$ |
(1,063,620) |
$ |
(1,137,129) |
$ |
106.91 |
$ |
(1,134,204) |
$ |
106.64 |
$ |
(988,770) |
$ |
(1,047,268) |
$ |
105.92 |
$ |
(1,046,365) |
$ |
105.82 |
||||||||||
Long U.S. Treasury Securities |
$ |
1,560 |
$ |
1,636 |
$ |
104.89 |
$ |
1,550 |
$ |
99.36 |
$ |
546,083 |
$ |
545,340 |
$ |
99.86 |
$ |
544,853 |
$ |
99.77 |
||||||||||
Short U.S. Treasury Securities |
$ |
(24,485) |
$ |
(24,709) |
$ |
100.92 |
$ |
(24,602) |
$ |
100.48 |
$ |
(20,169) |
$ |
(19,939) |
$ |
98.86 |
$ |
(19,924) |
$ |
98.79 |
||||||||||
Short European Sovereign Bonds |
$ |
(28,118) |
$ |
(30,606) |
$ |
108.85 |
$ |
(32,008) |
$ |
113.83 |
$ |
(21,367) |
$ |
(23,707) |
$ |
110.95 |
$ |
(24,110) |
$ |
112.84 |
||||||||||
Repurchase Agreements |
$ |
172,002 |
$ |
172,001 |
$ |
100.00 |
$ |
172,001 |
$ |
100.00 |
$ |
47,040 |
$ |
47,039 |
$ |
100.00 |
$ |
47,192 |
$ |
100.32 |
||||||||||
Corporate Debt |
$ |
46,006 |
$ |
42,708 |
$ |
92.83 |
$ |
43,585 |
$ |
94.74 |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
||||||||||
Non-Exchange Traded Preferred and Common Equity Investment in Mortgage-Related Entities |
n/a |
$ |
11,652 |
n/a |
$ |
11,890 |
n/a |
n/a |
$ |
7,686 |
n/a |
$ |
7,924 |
n/a |
||||||||||||||||
Non-Exchange Traded Corporate Equity |
n/a |
$ |
2,860 |
n/a |
$ |
2,827 |
n/a |
n/a |
$ |
— |
n/a |
$ |
— |
n/a |
||||||||||||||||
Short Common Stock |
n/a |
$ |
(26,516) |
n/a |
$ |
(27,605) |
n/a |
n/a |
$ |
(19,356) |
n/a |
$ |
(20,838) |
n/a |
||||||||||||||||
Real Estate Owned |
n/a |
$ |
8,635 |
n/a |
$ |
8,748 |
n/a |
n/a |
$ |
7,464 |
n/a |
$ |
7,252 |
n/a |
||||||||||||||||
Total Net Investments |
$ |
1,052,713 |
$ |
1,004,236 |
$ |
1,265,973 |
$ |
1,215,425 |
(1) |
Represents the dollar amount, per $100 of current principal of the price or cost for the security. |
(2) |
Includes equity tranches and similar securities. |
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)
December 31, 2014 |
September 30, 2014 |
|||||||||||||||
Notional Value |
Fair Value |
Notional Value |
Fair Value |
|||||||||||||
(In thousands) |
||||||||||||||||
Mortgage-Related Derivatives: |
||||||||||||||||
Long CDS on RMBS and CMBS Indices(2) |
$ |
20,847 |
$ |
(4,187) |
$ |
16,559 |
$ |
(4,254) |
||||||||
Short CDS on RMBS and CMBS Indices(3) |
(71,031) |
1,658 |
(82,311) |
2,173 |
||||||||||||
Short CDS on Individual RMBS(3) |
(20,691) |
11,148 |
(21,892) |
12,410 |
||||||||||||
Net Mortgage-Related Derivatives |
(70,875) |
8,619 |
(87,644) |
10,329 |
||||||||||||
Long CDS referencing Corporate Bond Indices |
315,739 |
34,634 |
118,449 |
18,878 |
||||||||||||
Short CDS referencing Corporate Bond Indices |
(352,945) |
(27,357) |
(284,577) |
(22,463) |
||||||||||||
Long CDS on Corporate Bonds |
4,428 |
(2,706) |
5,005 |
(2,583) |
||||||||||||
Short CDS on Corporate Bonds |
(5,970) |
(247) |
(2,475) |
(112) |
||||||||||||
Purchased Options on CDS on Corporate Bond Indices(4) |
364,400 |
625 |
— |
— |
||||||||||||
Written Options on CDS on Corporate Bond Indices(5) |
(25,900) |
(146) |
(59,202) |
(158) |
||||||||||||
Long Total Return Swaps on Corporate Equities(6) |
72,950 |
(13) |
76,371 |
(40) |
||||||||||||
Short Total Return Swaps on Corporate Equities(6) |
— |
— |
(10,116) |
29 |
||||||||||||
Interest Rate Derivatives: |
||||||||||||||||
Long Interest Rate Swaps(7) |
1,247,477 |
22,565 |
1,121,888 |
7,305 |
||||||||||||
Short Interest Rate Swaps(8) |
(1,652,647) |
(23,316) |
(2,158,454) |
(3,107) |
||||||||||||
Long U.S. Treasury Note Futures(9) |
159,900 |
149 |
242,100 |
477 |
||||||||||||
Long Eurodollar Futures(10) |
11,000 |
7 |
109,000 |
(22) |
||||||||||||
Short Eurodollar Futures(10) |
(699,000) |
24 |
(329,000) |
26 |
||||||||||||
Short Equity Index Futures (11) |
— |
— |
(2,850) |
7 |
||||||||||||
Purchased Payer Swaptions(12) |
1,082,800 |
207 |
1,278,000 |
152 |
||||||||||||
Written Payer Swaptions(13) |
(10,200) |
— |
— |
— |
||||||||||||
Purchased Straddle Swaptions(14) |
— |
— |
30,000 |
(79) |
||||||||||||
Written Straddle Swaptions(15) |
— |
— |
(34,000) |
(25) |
||||||||||||
Purchased Options on U.S. Treasury Security Futures(16) |
11,000 |
20 |
— |
— |
||||||||||||
Purchased Options on Eurodollar Futures(17) |
— |
— |
150,000 |
31 |
||||||||||||
Written Options on Eurodollar Futures(18) |
— |
— |
(150,000) |
(6) |
||||||||||||
Total Net Interest Rate Derivatives |
(344) |
4,759 |
||||||||||||||
Other Derivatives: |
||||||||||||||||
Long Foreign Currency Forwards(19) |
9,518 |
(136) |
— |
— |
||||||||||||
Short Foreign Currency Forwards(20) |
(35,966) |
884 |
(21,265) |
396 |
||||||||||||
Warrants(21) |
1,554 |
100 |
— |
— |
||||||||||||
Total Net Derivatives |
$ |
13,913 |
$ |
9,035 |
||||||||||||
(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 December 31, 2014, derivative assets and derivative liabilities were $80.0 million and $66.1 million, respectively, for a net fair value of $13.9 million, as reflected in "Total Net Derivatives" above. As of September 30, 2014, derivative assets and derivative liabilities were $56.4 million and $47.3 million, respectively, for a net fair value of $9.0 million, as reflected in "Total Net Derivatives" above. |
(2) |
Long mortgage-related derivatives represent transactions where we sold credit protection to a counterparty. |
(3) |
Short mortgage-related derivatives represent transactions where we purchased credit protection from a counterparty. |
(4) |
Represents the option on our part to enter into a CDS on a corporate bond index whereby we would pay a fixed rate and receive credit protection payments. |
(5) |
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. |
(6) |
Notional value represents number of underlying shares times the closing price of the underlying security. |
(7) |
For long interest rate swaps, a floating rate is being paid and a fixed rate is being received. |
(8) |
For short interest rate swaps, a fixed rate is being paid and a floating rate is being received. |
(9) |
Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of December 31, 2014 and September 30, 2014, a total of 1,346 and 1,934 contracts were held, respectively. |
(10) |
Every $1,000,000 in notional value represents one Eurodollar future contract. |
(11) |
Notional value represents the number of contracts held times 50 times the Index price at September 30, 2014; as of September 30, 2014, 29 contracts were held. |
(12) |
Represents the option on our part to enter into an interest rate swap whereby we would pay a fixed rate and receive a floating rate. |
(13) |
Represents the option on the part of a counterparty to enter into an interest rate swap with us whereby we would receive a fixed rate and pay a floating rate. |
(14) |
Represents the combination of a purchased payer swaption and a purchased receiver swaption on the same underlying swap. |
(15) |
Represents the combination of a written payer swaption and a written receiver swaption on the same underlying swap. |
(16) |
Represents the option on our part to enter into a futures contract with a counterparty; as of December 31, 2014, 110 contracts were held. |
(17) |
Represents the option on our part to enter into a futures contract with a counterparty. Every $1,000,000 in notional value represents one contract. |
(18) |
Represents the option on the part of a counterparty to enter into a futures contract with the Company. Every $1,000,000 in notional value represents one contract. |
(19) |
Notional amount represents U.S. Dollars to be paid by us at the maturity of the forward contract. |
(20) |
Notional amount represents U.S. Dollars to be received by us at the maturity of the forward contract. |
(21) |
Notional amount represents number of warrants. |
Our net short positions in RMBS and CMBS indices reference underlying exposures in several vintage years, including 2005-2008 and 2012. Net long and net short total return swaps on corporate equities are principally comprised of long and short equity positions in certain publicly traded REITs. The mix and composition of our derivative instruments may vary from period to period.
The following table summarizes, as of December 31, 2014, 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 |
$ |
130 |
$ |
(160) |
||||
Agency RMBS - Fixed Pools and IOs |
19,235 |
(26,870) |
||||||
TBAs |
(18,297) |
24,466 |
||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans |
6,134 |
(5,865) |
||||||
Interest Rate Swaps |
(11,087) |
10,403 |
||||||
Options on Interest Rate Swaps and Futures |
(619) |
6,480 |
||||||
U.S. Treasury Securities |
(939) |
893 |
||||||
Eurodollar and U.S. Treasury Futures |
3,237 |
(3,237) |
||||||
Mortgage-Related Derivatives |
(354) |
604 |
||||||
Corporate Securities and Derivatives on Corporate Securities |
1,716 |
(3,902) |
||||||
Repurchase Agreements and Reverse Repurchase Agreements |
(732) |
924 |
||||||
$ |
(1,576) |
$ |
3,736 |
(1) |
Based on the market environment as of December 31, 2014. 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(1)
By Collateral Type
As of December 31, |
For the Quarter Ended |
As of |
For the Quarter Ended |
|||||||||||||||||||
Collateral for Borrowing |
Outstanding Borrowings |
Average Borrowings |
Average Cost of Funds |
Outstanding |
Average |
Average |
||||||||||||||||
(In thousands) |
||||||||||||||||||||||
Non-Agency RMBS, CMBS, and Other |
$ |
399,981 |
$ |
328,830 |
2.09 |
% |
$ |
266,195 |
$ |
306,160 |
1.91 |
% |
||||||||||
Agency RMBS |
1,145,821 |
1,064,154 |
0.35 |
% |
904,512 |
888,975 |
0.36 |
% |
||||||||||||||
Total Excluding U.S. Treasury Securities |
1,545,802 |
1,392,984 |
0.76 |
% |
1,170,707 |
1,195,135 |
0.75 |
% |
||||||||||||||
U.S. Treasury Securities |
123,631 |
489,645 |
(0.13)% |
224,425 |
19,418 |
(0.54)% |
||||||||||||||||
Total |
$ |
1,669,433 |
$ |
1,882,629 |
0.53 |
% |
$ |
1,395,132 |
$ |
1,214,553 |
0.73 |
% |
||||||||||
Leverage Ratio (2) |
2.12:1 |
1.72:1 |
||||||||||||||||||||
Leverage Ratio Excluding U.S. Treasury Securities (2) |
1.96:1 |
1.44:1 |
(1) |
Borrowed amounts exclude $0.8 million and $0.9 million in securitized debt as of December 31, 2014 and September 30, 2014, respectively, representing long term financing for the related asset. |
(2) |
The leverage ratio does not account for liabilities other than debt financings. Our debt financings consist solely of reverse repurchase agreements ("reverse repos") and a securitized debt financing in the amount of $0.8 million and $0.9 million as of December 31, 2014 and September 30, 2014, respectively. |
Our leverage ratio (excluding reverse repo borrowings on U.S. Treasury securities) increased to 1.96:1 as of
By Remaining Maturity (1)(2)
(In thousands) |
||||||||
As of December 31, 2014 |
As of September 30, 2014 |
|||||||
Remaining Maturity (3) |
Outstanding |
% of |
Outstanding |
% of |
||||
30 Days or Less |
$ 715,194 |
42.8% |
$ 609,777 |
43.7% |
||||
31-60 Days |
322,874 |
19.3% |
331,753 |
23.8% |
||||
61-90 Days |
289,276 |
17.3% |
284,665 |
20.4% |
||||
91-120 Days |
- |
0.0% |
36,338 |
2.6% |
||||
121-150 Days |
21,236 |
1.3% |
7,053 |
0.5% |
||||
151-180 Days |
123,484 |
7.4% |
67,134 |
4.8% |
||||
181-360 Days |
47,768 |
2.9% |
- |
0.0% |
||||
> 360 Days |
149,601 |
9.0% |
58,412 |
4.2% |
||||
$ 1,669,433 |
100.0% |
$ 1,395,132 |
100.0% |
(1) |
Borrowed amounts exclude $0.8 million and $0.9 million in securitized debt as of December 31, 2014 and September 30, 2014, respectively, representing long term financing for the related asset. |
(2) |
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. |
(3) |
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. |
Substantially all of our borrowed funds are in the form of reverse repos. Aside from borrowings under reverse repos, we also had securitized debt outstanding in the amount of
Our borrowings outstanding under reverse repos were with a total of sixteen counterparties as of December 31, 2014. As of December 31, 2014, we held liquid assets in the form of cash and cash equivalents in the amount of
Derivatives/Hedging and Other Investments Summary
The following table summarizes the components of our derivatives/hedging and other investment results for the quarters ended December 31, 2014 and September 30, 2014:
(In thousands) |
Quarter Ended December 31, 2014 |
Quarter Ended September 30, 2014 |
||||||||||
Hedges: |
Net |
Net Realized and |
Total |
Net |
Net Realized and |
Total |
||||||
Interest Rate Swaps |
$ (1,306) |
$ (15,933) |
$ (17,239) |
$ (1,124) |
$ 1,220 |
$ 96 |
||||||
Swaptions |
- |
(2,392) |
(2,392) |
- |
(99) |
(99) |
||||||
Futures |
- |
(38) |
(38) |
- |
244 |
244 |
||||||
Net TBAs Held Short |
- |
(9,272) |
(9,272) |
- |
(339) |
(339) |
||||||
Net U.S. Treasuries Held Short |
1,843 |
3,000 |
4,843 |
16 |
409 |
425 |
||||||
Total Interest Rate Hedges |
537 |
(24,635) |
(24,098) |
(1,108) |
1,435 |
327 |
||||||
Net Credit Hedges and other activities(2) |
(3,211) |
1,613 |
(1,598) |
(2,683) |
5,415 |
2,732 |
||||||
Total Hedges |
$ (2,674) |
$ (23,022) |
$ (25,696) |
$ (3,791) |
$ 6,850 |
$ 3,059 |
(1) |
Net interest expense represents fixed rate periodic payments made by us. |
(2) |
Net interest expense includes dividend expense related to common stock sold short. |
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 2.6% for the quarter ended December 31, 2014, as compared to 3.0% for the quarter ended September 30, 2014. We did not incur incentive fee expense for the fourth quarter.
Dividends
On
Share Repurchase Program
On August 4, 2011, our Board of Directors approved the adoption of a
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Thursday, February 12, 2015, 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 MBS and interest rate derivative 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 exemption 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 14, 2014 which can be accessed through our website at www.ellingtonfinancial.com or at the
ELLINGTON FINANCIAL LLC |
||||||
Three Month Period Ended |
Year Ended |
|||||
(In thousands, except per share amounts) |
December |
September |
December |
|||
Investment income |
||||||
Interest income |
$ 28,688 |
$ 22,353 |
$ 93,533 |
|||
Other investment income(1) |
150 |
168 |
318 |
|||
Total investment income |
28,838 |
22,521 |
93,851 |
|||
Expenses |
||||||
Base management fee |
2,963 |
3,056 |
10,751 |
|||
Incentive fee |
- |
1,400 |
1,400 |
|||
Interest expense |
2,705 |
2,179 |
9,927 |
|||
Other investment related expenses(1) |
1,810 |
1,217 |
4,689 |
|||
Other operating expenses(1) |
2,295 |
2,070 |
8,333 |
|||
Total expenses |
9,773 |
9,922 |
35,100 |
|||
Net investment income |
19,065 |
12,599 |
58,751 |
|||
Net realized gain (loss) on: |
||||||
Investments |
(28) |
2,449 |
16,859 |
|||
Financial derivatives |
(2,136) |
(9,477) |
(11,211) |
|||
Foreign currency transactions |
(283) |
(1,455) |
(1,486) |
|||
(2,447) |
(8,483) |
4,162 |
||||
Change in net unrealized gain (loss) on: |
||||||
Investments |
(838) |
(2,560) |
6,258 |
|||
Financial derivatives |
(12,118) |
12,056 |
(8,272) |
|||
Foreign currency translation |
(902) |
(465) |
(950) |
|||
(13,858) |
9,031 |
(2,964) |
||||
Net realized and change in unrealized gain (loss) on investments and financial derivatives |
(16,305) |
548 |
1,198 |
|||
Net increase in equity resulting from operations |
2,760 |
13,147 |
59,949 |
|||
Less: Increase in equity resulting from operations attributable to non-controlling interests |
123 |
199 |
782 |
|||
Net increase in shareholders' equity resulting from operations |
$ 2,637 |
$ 12,948 |
$ 59,167 |
|||
Net increase in shareholders' equity resulting from operations per share: |
||||||
Basic and diluted |
$ 0.08 |
$ 0.46 |
$ 2.09 |
|||
Weighted average shares and LTIP units outstanding |
33,866 |
27,854 |
28,375 |
|||
Weighted average shares and convertible units outstanding |
34,078 |
28,066 |
28,587 |
|||
(1) Prior period conformed to current period presentation. |
ELLINGTON FINANCIAL LLC CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES AND EQUITY (UNAUDITED) |
||||||
As of |
||||||
(In thousands, except share amounts) |
December 31, |
September 30, |
December 31, |
|||
ASSETS |
||||||
Cash and cash equivalents |
$ 114,140 |
$ 129,124 |
$ 183,489 |
|||
Investments, financial derivatives, and repurchase agreements: |
||||||
Investments, at fair value (Cost – $2,122,326, $2,391,276, and $1,688,257) |
2,172,082 |
2,440,828 |
1,730,130 |
|||
Financial derivatives–assets, at fair value (Net cost – $61,560, $45,074, and $50,533) |
80,029 |
56,366 |
59,664 |
|||
Repurchase agreements (Cost – $172,001, $47,192, and $27,943) |
172,001 |
47,039 |
27,962 |
|||
Total Investments, financial derivatives, and repurchase agreements |
2,424,112 |
2,544,233 |
1,817,756 |
|||
Due from brokers |
146,965 |
141,497 |
82,571 |
|||
Receivable for securities sold |
1,237,592 |
1,246,205 |
883,005 |
|||
Interest and principal receivable |
20,611 |
10,953 |
6,831 |
|||
Other assets |
1,935 |
2,525 |
1,546 |
|||
Total assets |
$ 3,945,355 |
$ 4,074,537 |
$ 2,975,198 |
|||
LIABILITIES |
||||||
Investments and financial derivatives: |
||||||
Investments sold short, at fair value (Proceeds – $1,290,091, $1,223,043, and $847,602) |
$ 1,291,370 |
$ 1,221,894 |
$ 845,614 |
|||
Financial derivatives–liabilities, at fair value (Net proceeds – $33,555, $33,950, and $29,746) |
66,116 |
47,331 |
44,791 |
|||
Total investments and financial derivatives |
1,357,486 |
1,269,225 |
890,405 |
|||
Reverse repurchase agreements |
1,669,433 |
1,395,132 |
1,236,166 |
|||
Due to brokers |
22,224 |
12,010 |
19,762 |
|||
Payable for securities purchased |
98,747 |
576,455 |
193,047 |
|||
Securitized debt (Proceeds – $749, $849, and $980) |
774 |
870 |
983 |
|||
Accounts payable and accrued expenses |
2,798 |
2,144 |
1,810 |
|||
Base management fee payable |
2,963 |
3,056 |
2,364 |
|||
Incentive fee payable |
- |
1,400 |
3,091 |
|||
Interest and dividends payable |
2,386 |
2,138 |
1,521 |
|||
Total liabilities |
3,156,811 |
3,262,430 |
2,349,149 |
|||
EQUITY |
788,544 |
812,107 |
626,049 |
|||
TOTAL LIABILITIES AND EQUITY |
$ 3,945,355 |
$ 4,074,537 |
$ 2,975,198 |
|||
ANALYSIS OF EQUITY: |
||||||
Common shares, no par value, 100,000,000 shares authorized; |
||||||
(33,449,678, 33,443,572, and 25,428,186 shares issued and outstanding) |
$ 772,811 |
$ 796,108 |
$ 611,282 |
|||
Additional paid-in capital–LTIP units |
9,344 |
9,269 |
9,119 |
|||
Total Shareholders' Equity |
782,155 |
805,377 |
620,401 |
|||
Non-controlling interests |
6,389 |
6,730 |
5,648 |
|||
Total Equity |
$ 788,544 |
$ 812,107 |
$ 626,049 |
|||
PER SHARE INFORMATION: |
||||||
Common shares, no par value |
$ 23.38 |
$ 24.08 |
$ 24.40 |
|||
DILUTED PER SHARE INFORMATION: |
||||||
Common shares and convertible units, no par value (2) |
$ 23.09 |
$ 23.79 |
$ 23.99 |
(1) |
Derived from audited financial statements as of December 31, 2013. |
(2) |
Based on total equity excluding non-controlling interests not represented by instruments convertible into common shares. |
Investor Contact:
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