Ellington Financial LLC Reports Fourth Quarter 2015 Results
Highlights
- Net increase in shareholders' equity resulting from operations ("net income") for the fourth quarter was
$1.8 million , or$0.05 per basic and diluted share, as compared to net income of$3.9 million , or$0.12 per basic and diluted share, for the quarter endedSeptember 30, 2015 . - Book value per share as of
December 31, 2015 was$21.80 on a diluted basis, after payment of a quarterly dividend in the fourth quarter of$0.50 per share, as compared to book value per share of$22.22 on a diluted basis as ofSeptember 30, 2015 . - Our Credit strategy generated gross income of
$6.8 million for the quarter endedDecember 31, 2015 . - Our Agency strategy generated gross income of
$0.7 million for the quarter endedDecember 31, 2015 . - In accordance with the guidance we provided last quarter, we repurchased approximately 291,000 shares during the quarter, at an average price per share of
$17.23 for a total cost of approximately$5.0 million . - Our Board of Directors declared a dividend of
$0.50 per share for the fourth quarter of 2015, equating to an annualized dividend yield of 12.2% based on theFebruary 12, 2016 closing price of$16.35 ; dividends are paid quarterly in arrears.
Fourth Quarter 2015 Results
"In the fourth quarter, EFC generated net income of
"During the fourth quarter, we had excellent contributions from our distressed small balance commercial mortgage loan business as well as our growing consumer loan business, where we have recently added yet another forward flow purchase agreement. These two particular businesses, in addition to providing us a pipeline of investments over which we have greater control and visibility, have the additional benefit of being less exposed to interest rate movements and global macroeconomic events. We remain focused on capitalizing on the wide array of opportunities presented by our broader base of asset classes, and the increasing diversity of our credit portfolio.
"Last quarter, we announced that in the event our shares continued to trade at a significant discount to book value, we planned to repurchase in the open market approximately
Market Overview
During the fourth quarter, fixed-income markets continued to be impacted by concerns over the health of the Chinese economy and the decline in commodity prices. In December, for the first time since
Credit
Our Credit strategy generated gross income of
Yield spreads on non-Agency RMBS were generally not immune to the broader fourth quarter market widening, although as in the third quarter this sector was somewhat less impacted than other credit sectors. A stable housing market continues to support the non-Agency RMBS sector, while on the technical side the sector continues to be supported by the absence of a robust new issue market (in contrast with the CMBS sector, where new issue supply has been heavy). Over the course of the year, we steadily sold down our legacy non-Agency RMBS, primarily in order to redeploy the net proceeds to our other targeted Credit assets, and more recently in order to increase our cash holdings. While our non-Agency RMBS portfolio currently represents a much smaller portion of our total Credit portfolio than it ever has, it continues to be a core segment of our overall portfolio. We intend to continue to opportunistically increase and decrease the size of this portfolio as market conditions vary. As of
Our credit hedges are primarily in the form of short positions on credit default swaps, or "CDS," on high-yield corporate bond indices, as well as tranches and options on these indices, and we opportunistically overlay these positions with certain relative value long/short positions involving the same or similar instruments. Toward the end of 2015, prices on high-yield corporate CDS indices increased, leading to net losses on our credit hedges. However, our relative value long/short overlay positions generated net gains, more than offsetting these losses. We had net gains on our interest rate hedges, as interest rates increased over the course of the fourth quarter. Our interest rate hedges are principally in the form of interest rate swaps and, to a lesser extent, Eurodollar and U.S. Treasury futures. Our foreign currency hedges offset the impact of foreign currency related transaction and translation losses from our holdings denominated in euros and British pounds. We believe that the credit markets remain vulnerable to potential additional yield spread widening, and so we intend to continue to hedge our portfolio using CDS indices and other credit hedging instruments. We believe that our publicly traded partnership structure affords us valuable flexibility, especially with respect to our ability to reduce exposures nimbly through hedging both credit and interest rate risks. At the same time, we believe that any additional substantial yield spread widening will lead to attractive opportunities for us, especially given the many diverse sectors in which we are active.
During the fourth quarter, volatile conditions in global financial markets and heavy CMBS new issuance continued to put substantial widening pressure on CMBS yield spreads. For the year ended
As of each of
During the fourth quarter, European MBS/ABS and CLOs were marked by a general ongoing lack of activity and liquidity. When the
During the fourth quarter, the effect of market volatility on U.S. CLOs continued to weigh heavily on more recently issued CLOs. While prices of legacy CLOs also declined during the quarter—albeit to a much lesser extent—we believe that their risk/reward profile has greatly improved as the underlying securitizations have continued to de-leverage. Meanwhile, more recently issued CLOs continued to be adversely impacted by aggressive selling by large banks in advance of quarter end, as they contended with the balance sheet limitations imposed by the "Volker Rule." Within our U.S. CLO portfolio, we have focused on the legacy sector, where we have found opportunities in both mezzanine and equity tranches. We have previously avoided more recently issued CLOs since we believed that they did not provide attractive risk-adjusted returns, particularly given that the underlying loans were generally originated with relaxed underwriting standards, or "covenant light" features. While we believe that more recently issued CLOs may fall much further in price, we also believe that this could present a promising buying opportunity over the near to medium term. During the fourth quarter, our total U.S. CLO portfolio declined to
We remain active in non-performing and sub-performing U.S. residential mortgage loans, or "residential NPLs." Year over year, the sales volume of widely distributed offerings of residential NPLs increased roughly 20% to approximately
During the fourth quarter, under flow agreements with multiple originators, we continued to add to our consumer loan portfolio, which includes unsecured loans as well as auto loans. Our U.S. consumer loan and ABS portfolio performed well in the fourth quarter, although our credit hedges in this portfolio partially offset gross income earned. We expect the contribution from our consumer loan portfolio to increase as the portfolio continues to ramp up in volume. In the fourth quarter we renewed an existing flow agreement for unsecured consumer loans for an additional one-year term, and we continue to actively evaluate other consumer loan originators with whom we may enter into flow arrangements. We are financing most of our consumer loan portfolio with a large investment bank. As of
The distressed debt market experienced a very weak fourth quarter, resulting in the worst annual performance of distressed debt securities since 2008 and, prior to that, 1989. This weakness was not just confined to the oil and gas space. Rather, broad declines were experienced across sectors including metals, mining, retail and telecom. By the way of illustration, for the year ended
During the fourth quarter, the pace of our non-QM loan purchases continued to accelerate, and we are hopeful that our investments in non-QM loans will grow meaningfully over the medium to longer term. As of
Agency
Our Agency strategy generated gross income of
Consistent with past quarters, as of
During the fourth quarter, yield spreads on Agency RMBS continued to widen relative to interest rate swaps. In addition, the 10-year interest rate swap spread to U.S. Treasury securities became even more negative during the fourth quarter than it had been in the third quarter, when this spread had become negative for the first time since 2010. These swap spread movements exacerbated the widening in yield spreads between Agency RMBS and interest rate swaps, and negatively impacted our results for the quarter. Specifically, for the quarter ended
During the fourth quarter, we continued to use short positions in TBAs to hedge interest rate risk, and these positions generated net gains. However, TBAs generally outperformed specified pools during the quarter, and as a result, the net gains from our short TBAs were outweighed by the net unrealized losses on our specified pools. We actively traded our Agency RMBS portfolio during the fourth quarter in order to take advantage of volatility and to harvest modest gains. Our portfolio turnover for the quarter was 43% (as measured by sales and excluding paydowns), and we captured net realized gains of
As of
During the fourth quarter, we continued to focus our Agency RMBS purchasing activity primarily on specified pools, especially those with higher coupons. As of
Our net Agency premium as a percentage of our long Agency RMBS holdings is one metric that we use to measure our overall prepayment risk.
Financial Results
We prepare our financial statements in accordance with ASC 946, Financial Services—Investment Companies. As a result, our investments are carried at fair value and all valuation changes are recorded in the Consolidated Statement of Operations.
We also measure our performance based on our diluted net-asset-value-based total return, which measures the change in our diluted book value per share and assumes the reinvestment of dividends at diluted book value per share and the conversion of all convertible units into common shares at their issuance dates. Diluted net-asset-value-based total return was 0.40% and 5.20% for the quarter and year ended December 31, 2015, respectively. Based on our diluted net-asset-value-based total return of 162.06% from our inception (
The following table summarizes our operating results for the quarter and year ended December 31, 2015 and the quarter ended September 30, 2015:
Quarter December |
Per |
% of |
Quarter Ended |
Per |
% of |
Year Ended December 31, 2015 |
Per |
% of |
|||||||||||||||||||||||||
(In thousands, except per share amounts) |
|||||||||||||||||||||||||||||||||
Credit: |
|||||||||||||||||||||||||||||||||
Interest income and other income |
$ |
15,459 |
$ |
0.45 |
2.07 |
% |
$ |
16,553 |
$ |
0.48 |
2.15 |
% |
$ |
67,455 |
$ |
1.98 |
8.76 |
% |
|||||||||||||||
Net realized gain (loss) |
1,223 |
0.04 |
0.16 |
% |
12,119 |
0.35 |
1.58 |
% |
35,425 |
1.04 |
4.60 |
% |
|||||||||||||||||||||
Change in net unrealized gain (loss) |
(10,257) |
(0.30) |
(1.37) |
% |
(19,060) |
(0.56) |
(2.48) |
% |
(44,494) |
(1.31) |
(5.78) |
% |
|||||||||||||||||||||
Net interest rate hedges(1) |
891 |
0.02 |
0.12 |
% |
(2,853) |
(0.08) |
(0.37) |
% |
(4,899) |
(0.14) |
(0.64) |
% |
|||||||||||||||||||||
Net credit hedges and other activities(2) |
2,723 |
0.08 |
0.36 |
% |
6,804 |
0.20 |
0.88 |
% |
10,671 |
0.31 |
1.38 |
% |
|||||||||||||||||||||
Interest expense |
(1,459) |
(0.04) |
(0.20) |
% |
(1,453) |
(0.04) |
(0.19) |
% |
(6,264) |
(0.18) |
(0.81) |
% |
|||||||||||||||||||||
Other investment related expenses |
(1,774) |
(0.05) |
(0.24) |
% |
(1,473) |
(0.04) |
(0.19) |
% |
(5,230) |
(0.15) |
(0.68) |
% |
|||||||||||||||||||||
Total Credit profit (loss) |
6,806 |
0.20 |
0.90 |
% |
10,637 |
0.31 |
1.38 |
% |
52,664 |
1.55 |
6.83 |
% |
|||||||||||||||||||||
Agency RMBS: |
|||||||||||||||||||||||||||||||||
Interest income |
7,974 |
0.23 |
1.07 |
% |
10,086 |
0.30 |
1.31 |
% |
35,272 |
1.03 |
4.58 |
% |
|||||||||||||||||||||
Net realized gain (loss) |
1,579 |
0.05 |
0.21 |
% |
900 |
0.03 |
0.12 |
% |
9,440 |
0.28 |
1.23 |
% |
|||||||||||||||||||||
Change in net unrealized gain (loss) |
(12,710) |
(0.37) |
(1.70) |
% |
4,848 |
0.14 |
0.63 |
% |
(16,332) |
(0.48) |
(2.12) |
% |
|||||||||||||||||||||
Net interest rate hedges and other activities(1) |
5,199 |
0.15 |
0.70 |
% |
(16,339) |
(0.48) |
(2.12) |
% |
(17,166) |
(0.50) |
(2.23) |
% |
|||||||||||||||||||||
Interest expense |
(1,391) |
(0.04) |
(0.19) |
% |
(1,272) |
(0.04) |
(0.17) |
% |
(4,751) |
(0.14) |
(0.62) |
% |
|||||||||||||||||||||
Total Agency RMBS profit (loss) |
651 |
0.02 |
0.09 |
% |
(1,777) |
(0.05) |
(0.23) |
% |
6,463 |
0.19 |
0.84 |
% |
|||||||||||||||||||||
Total Credit and Agency RMBS profit (loss) |
7,457 |
0.22 |
0.99 |
% |
8,860 |
0.26 |
1.15 |
% |
59,127 |
1.74 |
7.67 |
% |
|||||||||||||||||||||
Other interest income (expense), net |
10 |
— |
0.00 |
% |
4 |
— |
0.00 |
% |
(3) |
— |
0.00 |
% |
|||||||||||||||||||||
Other expenses |
(5,605) |
(0.17) |
(0.75) |
% |
(4,937) |
(0.14) |
(0.64) |
% |
(20,695) |
(0.61) |
(2.69) |
% |
|||||||||||||||||||||
Net increase in equity resulting from operations |
$ |
1,862 |
$ |
0.05 |
0.24 |
% |
$ |
3,927 |
$ |
0.12 |
0.51 |
% |
$ |
38,429 |
$ |
1.13 |
4.98 |
% |
|||||||||||||||
Less: Net increase in equity resulting from operations attributable to non-controlling interests |
82 |
31 |
340 |
||||||||||||||||||||||||||||||
Net increase in shareholders' equity resulting from operations(6) |
$ |
1,780 |
$ |
0.05 |
0.24 |
% |
$ |
3,896 |
$ |
0.12 |
0.51 |
% |
$ |
38,089 |
$ |
1.13 |
4.98 |
% |
|||||||||||||||
Weighted average shares and convertible units(3) outstanding |
34,001 |
34,080 |
34,066 |
||||||||||||||||||||||||||||||
Average equity (includes non-controlling interests)(4) |
$ |
746,091 |
$ |
769,780 |
$ |
770,462 |
|||||||||||||||||||||||||||
Weighted average shares and LTIP units outstanding(5) |
33,789 |
33,868 |
33,854 |
||||||||||||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(4) |
$ |
739,635 |
$ |
763,446 |
$ |
764,219 |
(1) |
Includes TBAs and U.S. Treasuries, if applicable. |
(2) |
Includes equity and other relative value trading strategies and related hedges. |
(3) |
Convertible units include Operating Partnership units attributable to non-controlling interests and LTIP units. |
(4) |
Average equity and average shareholders' equity are calculated using month end values. |
(5) |
Excludes Operating Partnership units attributable to non-controlling interests. |
(6) |
Per share information is calculated using weighted average shares and LTIP units outstanding. Percentage of average equity is calculated using average shareholders' equity, which excludes non-controlling interests. |
Portfolio
The following tables summarize our portfolio holdings as of December 31, 2015 and September 30, 2015:
Investment Portfolio
December 31, 2015 |
September 30, 2015 |
||||||||||||||||||||||||||||||||||||||
(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 |
$ |
450,262 |
$ |
272,117 |
$ |
60.44 |
$ |
265,855 |
$ |
59.04 |
$ |
505,560 |
$ |
317,076 |
$ |
62.72 |
$ |
303,798 |
$ |
60.09 |
|||||||||||||||||||
Non-Agency CMBS and Commercial Mortgage Loans |
169,422 |
98,668 |
58.24 |
103,578 |
61.14 |
190,393 |
95,234 |
50.02 |
99,481 |
52.25 |
|||||||||||||||||||||||||||||
ABS and Consumer Loans |
150,946 |
149,149 |
98.81 |
150,890 |
99.96 |
113,347 |
111,726 |
98.57 |
111,475 |
98.35 |
|||||||||||||||||||||||||||||
Total Non-Agency MBS, Mortgage loans, and ABS and Consumer Loans(2) |
770,630 |
519,934 |
67.47 |
520,323 |
67.52 |
809,300 |
524,036 |
64.75 |
514,754 |
63.60 |
|||||||||||||||||||||||||||||
Agency RMBS: |
|||||||||||||||||||||||||||||||||||||||
Floating |
15,777 |
16,615 |
105.31 |
16,610 |
105.29 |
16,232 |
17,226 |
106.12 |
17,114 |
105.43 |
|||||||||||||||||||||||||||||
Fixed |
800,391 |
854,178 |
106.72 |
850,775 |
106.29 |
1,035,035 |
1,113,616 |
107.59 |
1,099,464 |
106.22 |
|||||||||||||||||||||||||||||
Reverse Mortgages |
62,197 |
66,860 |
107.50 |
68,135 |
109.55 |
56,281 |
62,002 |
110.17 |
61,717 |
109.66 |
|||||||||||||||||||||||||||||
Total Agency RMBS(3) |
878,365 |
937,653 |
106.75 |
935,520 |
106.51 |
1,107,548 |
1,192,844 |
107.70 |
1,178,295 |
106.39 |
|||||||||||||||||||||||||||||
Total Non-Agency |
$ |
1,648,995 |
$ |
1,457,587 |
$ |
88.39 |
$ |
1,455,843 |
$ |
88.29 |
$ |
1,916,848 |
$ |
1,716,880 |
$ |
89.57 |
$ |
1,693,049 |
$ |
88.32 |
|||||||||||||||||||
Agency Interest Only RMBS |
n/a |
$ |
24,918 |
n/a |
$ |
26,237 |
n/a |
n/a |
$ |
28,355 |
n/a |
$ |
29,381 |
n/a |
|||||||||||||||||||||||||
Non-Agency Interest Only and Principal Only MBS and Other(4) |
n/a |
18,966 |
n/a |
22,768 |
n/a |
n/a |
29,245 |
n/a |
34,673 |
n/a |
|||||||||||||||||||||||||||||
TBAs: |
|||||||||||||||||||||||||||||||||||||||
Long |
$ |
94,602 |
$ |
98,009 |
$ |
103.60 |
$ |
97,914 |
$ |
103.50 |
$ |
53,868 |
$ |
55,116 |
$ |
102.32 |
$ |
54,709 |
$ |
101.56 |
|||||||||||||||||||
Short |
(580,992) |
(612,777) |
105.47 |
(612,749) |
105.47 |
(829,088) |
(882,650) |
106.46 |
(880,077) |
106.15 |
|||||||||||||||||||||||||||||
Net Short TBAs |
$ |
(486,390) |
$ |
(514,768) |
$ |
105.83 |
$ |
(514,835) |
$ |
105.85 |
$ |
(775,220) |
$ |
(827,534) |
$ |
106.75 |
$ |
(825,368) |
$ |
106.47 |
|||||||||||||||||||
Short U.S. Treasury Securities |
(90,120) |
(89,489) |
99.30 |
(89,735) |
99.57 |
(79,750) |
(79,953) |
100.25 |
(79,239) |
99.36 |
|||||||||||||||||||||||||||||
Short European Sovereign Bonds |
(23,907) |
(24,562) |
102.74 |
(26,010) |
108.80 |
(24,567) |
(25,152) |
102.38 |
(26,044) |
106.02 |
|||||||||||||||||||||||||||||
Repurchase Agreements |
105,702 |
105,700 |
100.00 |
105,329 |
99.65 |
109,591 |
109,591 |
100.00 |
110,060 |
100.43 |
|||||||||||||||||||||||||||||
Long Corporate Debt |
62,530 |
27,028 |
43.22 |
34,786 |
55.63 |
62,352 |
28,247 |
45.30 |
34,724 |
55.69 |
|||||||||||||||||||||||||||||
Short Corporate Debt |
(1,120) |
(448) |
39.96 |
(676) |
60.34 |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||||||
Non-Exchange Traded Preferred and Common Equity Investment in Mortgage-Related Entities |
n/a |
15,926 |
n/a |
16,251 |
n/a |
n/a |
16,055 |
n/a |
16,179 |
n/a |
|||||||||||||||||||||||||||||
Non-Exchange Traded Corporate Equity |
n/a |
6,162 |
n/a |
6,347 |
n/a |
n/a |
5,951 |
n/a |
5,819 |
n/a |
|||||||||||||||||||||||||||||
Short Common Stock |
n/a |
(1,471) |
n/a |
(1,878) |
n/a |
n/a |
— |
n/a |
— |
n/a |
|||||||||||||||||||||||||||||
Real Estate Owned |
n/a |
12,522 |
n/a |
12,254 |
n/a |
n/a |
14,830 |
n/a |
14,714 |
n/a |
|||||||||||||||||||||||||||||
Total Net Investments |
$ |
1,038,071 |
$ |
1,046,681 |
$ |
1,016,515 |
$ |
1,007,948 |
(1) |
Represents the dollar amount, per $100 of current principal, of the price or cost for the security. |
(2) |
Excludes non-Agency Interest Only and Principal Only MBS and Other. |
(3) |
Excludes Agency Interest Only RMBS. |
(4) |
Other includes equity tranches of CLOs, non-Agency residual MBS, and similar positions. |
Non-Agency RMBS and CMBS are generally securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. Disregarding TBAs, Agency RMBS consist primarily of whole-pool pass through certificates. We actively invest in the TBA market. TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced." Given that we use TBAs primarily to hedge the risk of rising interest rates on our long holdings, we generally carry a net short TBA position.
Derivatives Portfolio(1)
December 31, 2015 |
September 30, 2015 |
|||||||||||||||
(In thousands) |
Notional Value |
Fair Value |
Notional Value |
Fair Value |
||||||||||||
Mortgage-Related Derivatives: |
||||||||||||||||
Long CDS on RMBS and CMBS Indices |
$ |
5,926 |
$ |
(309) |
$ |
46,725 |
$ |
(4,481) |
||||||||
Short CDS on RMBS and CMBS Indices |
(95,589) |
5,354 |
(59,146) |
2,912 |
||||||||||||
Short CDS on Individual RMBS |
(12,176) |
6,111 |
(17,465) |
8,665 |
||||||||||||
Net Mortgage-Related Derivatives |
(101,839) |
11,156 |
(29,886) |
7,096 |
||||||||||||
Long CDS referencing Corporate Bond Indices |
793,824 |
135,752 |
377,478 |
34,580 |
||||||||||||
Short CDS referencing Corporate Bond Indices |
(1,017,121) |
(45,407) |
(603,856) |
(32,108) |
||||||||||||
Short CDS on Corporate Bonds |
(13,370) |
(673) |
(11,170) |
(452) |
||||||||||||
Purchased Put Options on CDS on Corporate Bond Indices(2) |
138,000 |
2,050 |
101,208 |
898 |
||||||||||||
Written Put Options on CDS on Corporate Bond Indices(3) |
(171,750) |
(720) |
(26,359) |
(150) |
||||||||||||
Written Call Options on CDS on Corporate Bond Indices(4) |
(273,100) |
(884) |
(722,700) |
(1,050) |
||||||||||||
Long Total Return Swaps on Corporate Equities(5) |
21,670 |
— |
25,983 |
4 |
||||||||||||
Short Total Return Swaps on Corporate Equities(5) |
(4,106) |
— |
(4,753) |
— |
||||||||||||
Long Total Return Swaps on Corporate Debt(6) |
45,051 |
(4,577) |
41,908 |
(2,879) |
||||||||||||
Interest Rate Derivatives: |
||||||||||||||||
Long Interest Rate Swaps |
675,207 |
6,976 |
1,086,418 |
24,313 |
||||||||||||
Short Interest Rate Swaps |
(1,126,600) |
(1,967) |
(1,543,661) |
(27,350) |
||||||||||||
Long U.S. Treasury Note Futures(7) |
44,000 |
(233) |
59,200 |
172 |
||||||||||||
Long Eurodollar Futures(8) |
23,000 |
17 |
14,000 |
38 |
||||||||||||
Short Eurodollar Futures(8) |
(396,000) |
(280) |
(734,000) |
(970) |
||||||||||||
Short U.S. Treasury Note Futures(9) |
— |
— |
(26,300) |
(232) |
||||||||||||
Purchased Payer Swaptions |
— |
— |
73,300 |
46 |
||||||||||||
Written Payer Swaptions |
— |
— |
(49,700) |
(44) |
||||||||||||
Purchased Receiver Swaptions |
— |
— |
118,000 |
316 |
||||||||||||
Written Receiver Swaptions |
— |
— |
(207,000) |
(221) |
||||||||||||
Purchased Straddle Swaptions |
8,400 |
(31) |
— |
— |
||||||||||||
Written Straddle Swaptions |
(13,100) |
(125) |
— |
— |
||||||||||||
Purchased Call Options on U.S. Treasury Futures(10) |
3,900 |
51 |
5,800 |
177 |
||||||||||||
Purchased Put Options on U.S. Treasury Futures(11) |
3,900 |
61 |
— |
— |
||||||||||||
Written Put Options on U.S. Treasury Futures(12) |
— |
— |
(5,800) |
(59) |
||||||||||||
Total Net Interest Rate Derivatives |
4,469 |
(3,814) |
||||||||||||||
Other Derivatives: |
||||||||||||||||
Long Foreign Currency Forwards(13) |
2,734 |
(13) |
33,615 |
(141) |
||||||||||||
Short Foreign Currency Forwards(14) |
(95,326) |
1,138 |
(99,922) |
974 |
||||||||||||
Warrants(15) |
1,555 |
150 |
1,554 |
100 |
||||||||||||
Mortgage Loan Purchase Commitments(16) |
7,713 |
(8) |
4,773 |
11 |
||||||||||||
Total Net Derivatives |
$ |
102,433 |
$ |
3,069 |
(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, 2015, derivative assets and derivative liabilities were $162.9 million and $60.5 million, respectively, for a net fair value of $102.4 million, as reflected in "Total Net Derivatives" above. As of September 30, 2015, derivative assets and derivative liabilities were $74.0 million and $70.9 million, respectively, for a net fair value of $3.1 million, as reflected in "Total Net Derivatives" above. |
(2) |
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. |
(3) |
Represents the option on the part of a counterparty to enter into a CDS on a corporate bond index whereby we would receive a fixed rate and pay credit protection payments. |
(4) |
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. |
(5) |
Notional value represents number of underlying shares times the closing price of the underlying security. |
(6) |
Notional value represents outstanding principal balance on underlying corporate debt. |
(7) |
Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of December 31, 2015 and September 30, 2015, a total of 343 and 307 contracts were held, respectively. |
(8) |
Every $1,000,000 in notional value represents one contract. |
(9) |
Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of September 30, 2015 a total of 263 contracts were held. |
(10) |
Represents the option on our part to enter into a futures contract with a counterparty; as of December 31, 2015 and September 30, 2015 39 and 58 call options contracts were held, respectively. |
(11) |
Represents the option on our part to enter into a futures contract with a counterparty; as of December 31, 2015 39 put options contracts were held. |
(12) |
Represents the option on the part of a counterparty to enter into a futures contract with us; as of September 30, 2015 58 put options contracts were held. |
(13) |
Notional amount represents U.S. Dollars to be paid by us at the maturity of the forward contract. |
(14) |
Notional amount represents U.S. Dollars to be received by us at the maturity of the forward contract. |
(15) |
Notional amount represents number of warrants. |
(16) |
Notional amount represents principal balance of mortgage loan purchase commitments. Actual loan purchases are contingent upon successful loan closings in accordance with agreed-upon parameters. |
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, 2015, 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 |
$ |
113 |
$ |
(136) |
||||
Agency RMBS - Fixed Pools and IOs |
16,190 |
(20,564) |
||||||
TBAs |
(7,799) |
10,499 |
||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans |
2,463 |
(2,529) |
||||||
Interest Rate Swaps |
(9,270) |
8,882 |
||||||
Options on Interest Rate Swaps and Futures |
39 |
(36) |
||||||
U.S. Treasury Securities |
(2,739) |
2,638 |
||||||
Eurodollar and U.S. Treasury Futures |
461 |
(435) |
||||||
Mortgage-Related Derivatives |
(108) |
132 |
||||||
Corporate Securities and Derivatives on Corporate Securities |
632 |
(1,483) |
||||||
Repurchase Agreements and Reverse Repurchase Agreements |
(849) |
849 |
||||||
$ |
(867) |
$ |
(2,183) |
(1) |
Based on the market environment as of December 31, 2015. 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) |
||||||||||||||||||||||
Credit |
$ |
240,869 |
$ |
231,259 |
2.50 |
% |
$ |
226,955 |
$ |
255,340 |
2.26 |
% |
||||||||||
Agency RMBS |
933,320 |
1,077,612 |
0.51 |
% |
1,145,839 |
1,107,020 |
0.46 |
% |
||||||||||||||
Total Excluding U.S. Treasury Securities |
1,174,189 |
1,308,871 |
0.86 |
% |
1,372,794 |
1,362,360 |
0.79 |
% |
||||||||||||||
U.S. Treasury Securities |
— |
26,489 |
0.11 |
% |
— |
16,461 |
(0.18) |
% |
||||||||||||||
Total |
$ |
1,174,189 |
$ |
1,335,360 |
0.85 |
% |
$ |
1,372,794 |
$ |
1,378,821 |
0.78 |
% |
||||||||||
Leverage Ratio (2) |
1.59:1 |
1.81:1 |
(1) |
Borrowed amounts exclude $0.5 million in securitized debt as of September 30, 2015, 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 $0.5 million as of September 30, 2015. |
Repo borrowing rates were generally higher for most of the fourth quarter. Market participants had widely anticipated that the Federal Reserve would raise its target interest rate at the December meeting, which in fact, did occur. This put upward pressure on repo funding costs. In light of the
From time to time we may have outstanding reverse repo on our positions in long U.S. Treasury securities. As of
By Remaining Maturity (1)(2)
(In thousands) |
As of December 31, 2015 |
As of September 30, 2015 |
||||||||||||
Remaining Maturity (3) |
Outstanding Borrowings |
% of Borrowings |
Outstanding |
% of |
||||||||||
30 Days or Less |
$ |
309,951 |
26.4 |
% |
$ |
412,953 |
30.1 |
% |
||||||
31-60 Days |
229,563 |
19.6 |
% |
297,818 |
21.7 |
% |
||||||||
61-90 Days |
321,723 |
27.4 |
% |
311,288 |
22.7 |
% |
||||||||
91-120 Days |
193,962 |
16.5 |
% |
225,834 |
16.4 |
% |
||||||||
121-150 Days |
— |
— |
% |
4,106 |
0.3 |
% |
||||||||
151-180 Days |
25,699 |
2.2 |
% |
22,469 |
1.6 |
% |
||||||||
181-360 Days |
23,877 |
2.0 |
% |
98,326 |
7.2 |
% |
||||||||
> 360 Days |
69,414 |
5.9 |
% |
— |
— |
% |
||||||||
$ |
1,174,189 |
100.0 |
% |
$ |
1,372,794 |
100.0 |
% |
(1) |
Borrowed amounts exclude $0.5 million in securitized debt as of September 30, 2015, 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 a de minimis amount of securitized debt outstanding as of
Our borrowings outstanding under reverse repos were with a total of eighteen counterparties as of December 31, 2015. As of December 31, 2015, we held liquid assets in the form of cash and cash equivalents in the amount of
Other
Our expense ratio, which we define as our annualized base management fee and other operating expenses, but excluding interest expense, other investment related expenses, and incentive fees, over average equity, was 3.0% and 2.6% for the quarters ended December 31, 2015 and September 30, 2015, respectively. The quarter-over-quarter increase in our expense ratio was principally related to professional fees incurred in connection with our new financing agreements as well as other transactional and corporate matters. For the year ended
Dividends
On
Share Repurchase Program
On August 3, 2015, our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.7 million common shares. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations.
During the three month period ended
We expect to continue to repurchase approximately
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Wednesday, February 17, 2016, at approximately
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Examples of forward-looking statements in this press release include without limitation management's beliefs regarding the current economic and investment environment and our ability to implement our investment and hedging strategies, performance of our investment and hedging strategies, our exposure to prepayment risk in our Agency portfolio, statements regarding our net Agency premium, estimated effects on the fair value of our holdings of a hypothetical change in interest rates, statements regarding the drivers of our returns, our expected ongoing annualized expense ratio, and statements regarding our intended dividend policy including the amount to be recommended by management, and our share repurchase program. Our results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond our control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of our securities, changes in mortgage default rates and prepayment rates, our ability to borrow to finance our assets, changes in government regulations affecting our business, our ability to maintain our exclusion from registration under the Investment Company Act of 1940 and other changes in market conditions and economic trends. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of the our Annual Report on Form 10-K filed on March 13, 2015 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 |
$ |
23,091 |
$ |
26,440 |
$ |
101,783 |
||||||
Other income |
932 |
565 |
2,813 |
|||||||||
Total investment income |
24,023 |
27,005 |
104,596 |
|||||||||
Expenses |
||||||||||||
Base management fee |
2,772 |
2,849 |
11,493 |
|||||||||
Interest expense |
3,186 |
3,073 |
12,112 |
|||||||||
Other investment related expenses |
1,774 |
1,473 |
5,612 |
|||||||||
Other operating expenses |
2,835 |
2,087 |
9,203 |
|||||||||
Total expenses |
10,567 |
9,482 |
38,420 |
|||||||||
Net investment income |
13,456 |
17,523 |
66,176 |
|||||||||
Net realized gain (loss) on: |
||||||||||||
Investments |
2,129 |
8,477 |
34,384 |
|||||||||
Financial derivatives, excluding currency forwards |
(1,512) |
1,943 |
(15,096) |
|||||||||
Financial derivatives—currency forwards |
2,847 |
415 |
4,738 |
|||||||||
Foreign currency transactions |
(1,981) |
(2,555) |
(3,073) |
|||||||||
1,483 |
8,280 |
20,953 |
||||||||||
Change in net unrealized gain (loss) on: |
||||||||||||
Investments |
(16,914) |
(20,772) |
(56,869) |
|||||||||
Financial derivatives, excluding currency forwards |
4,552 |
(3,354) |
9,498 |
|||||||||
Financial derivatives—currency forwards |
291 |
(153) |
377 |
|||||||||
Foreign currency translation |
(1,006) |
2,403 |
(1,706) |
|||||||||
(13,077) |
(21,876) |
(48,700) |
||||||||||
Net realized and change in net unrealized gain (loss) on investments and financial derivatives |
(11,594) |
(13,596) |
(27,747) |
|||||||||
Net increase in equity resulting from operations |
1,862 |
3,927 |
38,429 |
|||||||||
Less: Increase in equity resulting from operations attributable to non-controlling interests |
82 |
31 |
340 |
|||||||||
Net increase in shareholders' equity resulting from operations |
$ |
1,780 |
$ |
3,896 |
$ |
38,089 |
||||||
Net increase in shareholders' equity resulting from operations per share: |
||||||||||||
Basic and diluted |
$ |
0.05 |
$ |
0.12 |
$ |
1.13 |
||||||
Weighted average shares and LTIP units outstanding |
33,789 |
33,868 |
33,854 |
|||||||||
Weighted average shares and convertible units outstanding |
34,001 |
34,080 |
34,066 |
ELLINGTON FINANCIAL LLC |
||||||||||||
As of |
||||||||||||
(In thousands, except share amounts) |
December 31, 2015 |
September 30, 2015 |
December 31, 2014(1) |
|||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ |
183,909 |
$ |
139,395 |
$ |
114,140 |
||||||
Restricted cash |
4,857 |
5,580 |
— |
|||||||||
Investments, financial derivatives, and repurchase agreements: |
||||||||||||
Investments, at fair value (Cost – $1,672,400, $1,883,248, and $2,122,326) |
1,661,118 |
1,894,679 |
2,172,082 |
|||||||||
Financial derivatives–assets, at fair value (Net cost – $163,943, $60,525, and $61,560) |
162,905 |
73,994 |
80,029 |
|||||||||
Repurchase agreements (Cost – $105,329, $110,060, and $172,001) |
105,700 |
109,591 |
172,001 |
|||||||||
Total Investments, financial derivatives, and repurchase agreements |
1,929,723 |
2,078,264 |
2,424,112 |
|||||||||
Due from brokers |
141,605 |
163,066 |
146,965 |
|||||||||
Receivable for securities sold and financial derivatives |
705,748 |
909,106 |
1,237,592 |
|||||||||
Interest and principal receivable |
20,444 |
25,794 |
20,611 |
|||||||||
Other assets |
5,269 |
2,727 |
1,935 |
|||||||||
Total assets |
$ |
2,991,555 |
$ |
3,323,932 |
$ |
3,945,355 |
||||||
LIABILITIES |
||||||||||||
Investments and financial derivatives: |
||||||||||||
Investments sold short, at fair value (Proceeds – $731,048, $985,360, and $1,290,091) |
$ |
728,747 |
$ |
987,755 |
$ |
1,291,370 |
||||||
Financial derivatives–liabilities, at fair value (Net proceeds – $56,200, $48,316, and $33,555) |
60,472 |
70,925 |
66,116 |
|||||||||
Total investments and financial derivatives |
789,219 |
1,058,680 |
1,357,486 |
|||||||||
Reverse repurchase agreements |
1,174,189 |
1,372,794 |
1,669,433 |
|||||||||
Due to brokers |
114,797 |
2,831 |
22,224 |
|||||||||
Payable for securities purchased and financial derivatives |
165,365 |
121,645 |
98,747 |
|||||||||
Securitized debt (Proceeds – $0, $499, and $749) |
— |
503 |
774 |
|||||||||
Accounts payable and accrued expenses |
3,626 |
2,807 |
2,798 |
|||||||||
Base management fee payable |
2,773 |
2,849 |
2,963 |
|||||||||
Interest and dividends payable |
1,806 |
2,185 |
2,386 |
|||||||||
Other liabilities |
828 |
1,297 |
— |
|||||||||
Total liabilities |
2,252,603 |
2,565,591 |
3,156,811 |
|||||||||
EQUITY |
738,952 |
758,341 |
788,544 |
|||||||||
TOTAL LIABILITIES AND EQUITY |
$ |
2,991,555 |
$ |
3,323,932 |
$ |
3,945,355 |
||||||
ANALYSIS OF EQUITY: |
||||||||||||
Common shares, no par value, 100,000,000 shares authorized; |
||||||||||||
(33,126,012, 33,417,118, and 33,449,678 shares issued and outstanding) |
$ |
722,360 |
$ |
742,494 |
$ |
772,811 |
||||||
Additional paid-in capital–LTIP units |
9,689 |
9,591 |
9,344 |
|||||||||
Total Shareholders' Equity |
732,049 |
752,085 |
782,155 |
|||||||||
Non-controlling interests |
6,903 |
6,256 |
6,389 |
|||||||||
Total Equity |
$ |
738,952 |
$ |
758,341 |
$ |
788,544 |
||||||
PER SHARE INFORMATION: |
||||||||||||
Common shares, no par value |
$ |
22.10 |
$ |
22.51 |
$ |
23.38 |
||||||
DILUTED PER SHARE INFORMATION: |
||||||||||||
Common shares and convertible units, no par value (2) |
$ |
21.80 |
$ |
22.22 |
$ |
23.09 |
(1) |
Derived from audited financial statements as of December 31, 2014. |
(2) |
Based on total equity excluding non-controlling interests not represented by instruments convertible into common shares. |
Investor Contact:
Media Contact:
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