Ellington Financial LLC Reports Fourth Quarter 2016 Results
Highlights
-
Net increase in shareholders' equity resulting from operations ("net
income") for the fourth quarter was
$1.7 million , or$0.05 per basic and diluted share, as compared to net income of$0.5 million , or$0.02 per basic and diluted share, for the quarter ended September 30, 2016. -
Book value per share as of December 31, 2016 was
$19.46 on a diluted basis, after payment of a quarterly dividend in the fourth quarter of$0.45 per share, as compared to book value per share of$19.83 on a diluted basis as of September 30, 2016. -
Our Credit strategy generated gross income of
$5.0 million for the quarter ended December 31, 2016. -
Our Agency strategy generated gross income of
$1.8 million for the quarter ended December 31, 2016. -
Our Board of Directors declared a dividend of
$0.45 per share for the fourth quarter of 2016, equating to an annualized dividend yield of 11.1% based on theFebruary 10, 2017 closing price of$16.15 per share; dividends are paid quarterly in arrears.
Fourth Quarter 2016 Results
"For the fourth quarter,
"During the fourth quarter, we continued the shift in our credit portfolio away from certain securities such as non-Agency RMBS, and towards loan assets. As a result, we continued to shrink our high-yield corporate credit hedges during the quarter, and at this point our portfolio is no longer significantly exposed to the performance of those hedges. Despite our continued selling of non-Agency RMBS, our Credit portfolio and its leverage actually increased slightly during the quarter, finally reversing the trend from recent quarters.
"Expanding and enhancing our financing arrangements for our loan portfolios remains a high priority for us. Since executing our first financing facility for small balance commercial mortgage loans early last year, we've added facilities for non-QM mortgage loans, residential NPLs, and consumer loans and ABS. We're currently evaluating additional borrowing facilities for both our non-QM mortgage business and our consumer loan business, and gaining long-term financing through the securitization markets remains a strong possibility for us in 2017 in several of our loan businesses. We believe that investment opportunities remain attractive in all of our loan businesses, and as 2017 progresses we are hopeful that we will be able to meaningfully increase our leverage and portfolio size.
"During the fourth quarter we repurchased approximately 1.0% of our
outstanding shares, which was accretive to our diluted book value by
Market Overview
The fourth quarter of 2016 was characterized by sharply higher interest
rates and increased market volatility, especially in the aftermath of
the U.S. elections in November. The election of
In
Following the sharp increase in interest rates during the fourth
quarter, mortgage rates also increased significantly. The
Credit
Our Credit strategy generated gross income of
As the case has been for some time, the fundamentals underlying
non-Agency RMBS continue to be strong, led by a stable housing market.
As legacy non-Agency RMBS continue to amortize, the range of expected
outcomes on these assets has narrowed significantly; this trend,
together with the minimal level of new RMBS issuance generally, has
caused yield spreads on legacy non-Agency RMBS to compress
significantly, leading us to rotate much of our Credit portfolio into
higher-yielding assets. Our non-Agency RMBS portfolio, though much
smaller now, performed well in the fourth quarter, benefiting from
strong net interest margins, appreciation from our held positions, and
net realized gains from positions sold. For the full year however, the
positive effects of generally tighter spreads and profitable trading
activity in our non-Agency portfolio were offset by losses on our credit
hedges. While our non-Agency RMBS portfolio currently represents a much
smaller portion of our total Credit portfolio than it ever has, we
intend to continue to opportunistically increase and decrease the size
of this portfolio as market conditions vary. As of December 31, 2016,
our investments in U.S. non-Agency RMBS totaled
Throughout most of 2016, our credit hedges consisted primarily of
financial instruments tied to high-yield corporate credit, such as
credit default swaps, or "CDS," on high-yield corporate bond indices, as
well as tranches and options on these indices; short positions in and
CDS on corporate bonds; and positions involving exchange traded funds,
or "ETFs," of high-yield corporate bonds. We also opportunistically
overlaid these high-yield corporate credit hedges with certain relative
value long/short positions involving the same or similar instruments.
Throughout 2016, global central bank monetary policy was highly
accommodative, and even included central bank corporate bond buying
programs, first by the
Over the course of the fourth quarter, the high-yield corporate credit markets continued to rally, although not to the same degree as in prior quarters. This again resulted in overall net losses on our credit hedges for the quarter. For the full year, our credit hedges significantly adversely impacted our results. In addition to using credit hedges, we also use interest rate hedges in our Credit strategy in order to protect our portfolio against the risk of rising interest rates. The interest rate hedges in our Credit strategy are principally in the form of interest rate swaps and, to a lesser extent, Eurodollar futures. With the fourth quarter surge in long-term interest rates, our interest rate hedges generated net gains for the quarter. For the full year, we had a modest loss on our interest rate hedges. We also use foreign currency hedges in our Credit strategy, in order to protect our assets denominated in euros and British pounds against the risk of declines in those currencies against the U.S. dollar. We had net gains on our foreign currency hedges for both the quarter and the full year, but these were significantly offset by net losses on foreign currency-related transactions and translation. Despite the significant recent losses in our credit hedges, we believe that our publicly traded partnership structure affords us valuable flexibility, especially with respect to our ability to adjust our exposures nimbly by hedging many forms of risk, such as credit risk, interest rate risk, and foreign currency risk.
During the fourth quarter, yield spreads on CMBS tightened, especially
after the U.S. Presidential election. CMBS conduit issuance picked up in
the fourth quarter, reflecting a rush to finalize transactions before
risk retention regulations came into effect in late December. Total CMBS
conduit issuance totaled
As of December 31, 2016, our portfolio of small balance commercial
mortgage loans included 16 loans and one real estate owned, or "REO,"
property with an aggregate value of
For most of 2016, our activity in the European credit markets was
focused more on the non-performing loan market as compared to legacy MBS
and CLOs. Our European non-performing loans include non-performing
consumer loans, non-performing residential mortgage loans, and
non-performing commercial mortgage loans made to small and medium-sized
enterprises. We believe that non-performing loans in certain select
markets, such as in
We remain active in non-performing and sub-performing U.S. residential
mortgage loans, or "residential NPLs," and have continued to focus our
acquisitions on smaller, less-competitively-bid, and more
attractively-priced mixed legacy pools sourced from motivated sellers.
During the fourth quarter we closed two purchases of mixed NPL pools,
which contain a combination of performing and non-performing assets.
While relatively small, our residential NPL portfolio performed very
well both for the fourth quarter and the full year. As of December 31,
2016, we held
During the fourth quarter our consumer loan portfolio grew modestly in
size. This portfolio primarily consists of unsecured loans, but also
includes auto loans. For the fourth quarter, we had an overall loss on
our consumer loans. The loss resulted from our credit hedges, as well as
from write-downs recognized with respect to loans purchased under one
flow agreement where we have seen a greater persistence of default rates
than we had anticipated. During the quarter, we terminated that flow
agreement. We continue to purchase consumer loans under three existing
flow agreements that collectively have outperformed expectations. Apart
from the existing portfolio, we are in active negotiations to add a new
flow agreement, and are also evaluating other opportunities in the
space. For the year, our consumer loan portfolio was profitable
excluding our high-yield corporate credit hedges, but modestly
unprofitable after taking into account the effect of those credit
hedges. As of
As expected, the pace of our non-QM loan purchases continued to trend
upward in the fourth quarter, and our outlook for further growth in this
sector remains positive. As of December 31, 2016, our non-QM mortgage
loan portfolio totaled
Agency
Our Agency strategy generated gross income of
Consistent with past quarters, as of December 31, 2016, our Agency RMBS were principally comprised of "specified pools." Specified pools are fixed rate Agency pools with special characteristics, such as pools comprised of low loan balance mortgages, pools comprised of mortgages backed by investor properties, pools containing mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and pools containing mortgages with various other characteristics. Our Agency strategy also includes RMBS which are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs. Our Agency strategy also includes interest rate hedges for our Agency RMBS, as well as certain relative value trading positions in interest rate-related and TBA-related instruments.
The market for Agency RMBS changed dramatically during the fourth
quarter. At the beginning of the quarter, low mortgage rates provided
the potential for ongoing increases in refinancing activity, but by the
end of the quarter markedly higher mortgage rates eliminated the
incentive for many borrowers to refinance. As the quarter progressed,
Agency RMBS declined substantially in price and their durations
extended, exacerbating further price declines. For example, during the
quarter, TBA 30-year
Overall, Agency RMBS prepayment rates slowed over the course of the fourth quarter as mortgage rates increased, but the pace of the slowdown was much more gradual than most sell-side research had predicted. A variety of factors are helping to support prepayment activity, including the gradual loosening of mortgage credit underwriting standards relative to the immediate aftermath of the financial crisis; enhanced originator/servicer technology and infrastructure, which have streamlined the refinancing process and augmented refinancing capacity; employment in the mortgage industry, which remains at a post-financial crisis high; and increasing home prices and improvements in borrower credit profiles, both of which reflect continued improvement in the U.S. economy.
In light of the increase in interest rates over the course of the fourth
quarter, pay-ups on specified pools fell. Pay-ups are price premiums for
specified pools relative to their TBA counterparts. The decline in
pay-ups was actually quite modest given that specified pools were much
longer in duration than TBAs at the beginning of the fourth quarter.
Average pay-ups on our specified pools decreased to 0.76% as of
For the quarter ended December 31, 2016, we had total net realized and
unrealized losses of
During the fourth quarter, we continued to hedge interest rate risk, primarily through the use of interest rate swaps and short positions in TBAs. Net realized and unrealized losses from price declines of our specified pools were significantly countered by net realized and unrealized gains on our interest rate hedges. In our hedging portfolio, the relative proportion (based on 10-year equivalents1) of short TBA positions increased quarter over quarter relative to interest rate swaps. Overall, we believe that there remains a heightened risk of substantial interest rate and mortgage prepayment volatility in the near term, thus reinforcing the importance of our ability to hedge our Agency RMBS portfolio using a variety of tools, including TBAs.
As of December 31, 2016, our long Agency RMBS portfolio was
Our net Agency premium as a percentage of our specified pool holdings is
one metric that we use to measure the overall prepayment risk of our
specified pool portfolio.
1"10-year equivalents" for a group of positions represent the amount of 10-year U.S. Treasury securities that would experience a similar change in market value under a standard parallel move in interest rates. |
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 0.41% for the quarter ended
December 31, 2016. Based on our diluted net-asset-value-based total
return of 157.36% from our inception (
The following table summarizes our operating results for the quarters ended December 31, 2016 and September 30, 2016 and the year ended December 31, 2016:
Quarter
December |
Per |
% of |
Quarter |
Per |
% of |
Year
December |
Per |
% of |
||||||||||||||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||
Credit: | ||||||||||||||||||||||||||||||||||||||||||
Interest income and other income | $ | 11,902 | $ | 0.36 | 1.82 |
% |
$ | 11,822 | $ | 0.35 | 1.77 |
% |
$ | 51,408 | $ | 1.54 | 7.51 |
% |
||||||||||||||||||||||||
Net realized gain (loss) | (3,964 | ) | (0.12 | ) | (0.60 | )% | 1,999 | 0.06 | 0.30 |
% |
5,600 | 0.17 | 0.82 |
% |
||||||||||||||||||||||||||||
Change in net unrealized gain (loss) | (1,354 | ) | (0.04 | ) | (0.21 | )% | 7,182 | 0.22 | 1.07 |
% |
(6,256 | ) | (0.19 | ) | (0.91 | )% | ||||||||||||||||||||||||||
Net interest rate hedges(1) | 1,801 | 0.05 | 0.27 |
% |
508 | 0.02 | 0.08 |
% |
(371 | ) | (0.01 | ) | (0.05 | )% | ||||||||||||||||||||||||||||
Net credit hedges and other activities(2) | 257 | 0.01 | 0.04 |
% |
(16,722 | ) | (0.50 | ) | (2.50 | )% | (40,548 | ) | (1.21 | ) | (5.92 | )% | ||||||||||||||||||||||||||
Interest expense | (1,894 | ) | (0.06 | ) | (0.29 | )% | (1,875 | ) | (0.06 | ) | (0.28 | )% | (7,665 | ) | (0.23 | ) | (1.12 | )% | ||||||||||||||||||||||||
Other investment related expenses | (1,736 | ) | (0.05 | ) | (0.27 | )% | (1,576 | ) | (0.05 | ) | (0.24 | )% | (6,884 | ) | (0.21 | ) | (1.01 | )% | ||||||||||||||||||||||||
Total Credit profit (loss) | 5,012 | 0.15 | 0.76 |
% |
1,338 | 0.04 | 0.20 |
% |
(4,716 | ) | (0.14 | ) | (0.68 | )% | ||||||||||||||||||||||||||||
Agency RMBS: | ||||||||||||||||||||||||||||||||||||||||||
Interest income | 6,485 | 0.19 | 0.99 |
% |
4,659 | 0.14 | 0.70 |
% |
24,022 | 0.72 | 3.51 |
% |
||||||||||||||||||||||||||||||
Net realized gain (loss) | (1,328 | ) | (0.04 | ) | (0.20 | )% | 763 | 0.02 | 0.11 |
% |
2,257 | 0.07 | 0.33 |
% |
||||||||||||||||||||||||||||
Change in net unrealized gain (loss) | (17,216 | ) | (0.52 | ) |
(2.63 |
)% |
67 | — | 0.01 |
% |
(3,177 | ) | (0.10 | ) | (0.46 | )% | ||||||||||||||||||||||||||
Net interest rate hedges and other activities(1) | 15,480 | 0.47 | 2.36 |
% |
59 | — | 0.01 |
% |
(8,226 | ) | (0.25 | ) | (1.20 | )% | ||||||||||||||||||||||||||||
Interest expense | (1,597 | ) | (0.05 | ) | (0.24 | )% | (1,413 | ) | (0.04 | ) | (0.21 | )% | (5,936 | ) | (0.18 | ) | (0.87 | )% | ||||||||||||||||||||||||
Total Agency RMBS profit (loss) | 1,824 | 0.05 | 0.28 |
% |
4,135 | 0.12 | 0.62 |
% |
8,940 | 0.26 | 1.31 |
% |
||||||||||||||||||||||||||||||
Total Credit and Agency RMBS profit (loss) | 6,836 | 0.20 | 1.04 |
% |
5,473 | 0.16 | 0.82 |
% |
4,224 | 0.12 | 0.63 |
% |
||||||||||||||||||||||||||||||
Other interest income (expense), net | 150 |
— |
0.02 |
% |
(60 | ) | — | (0.01 | )% | 116 | — | 0.02 |
% |
|||||||||||||||||||||||||||||
Other expenses | (5,055 | ) | (0.15 | ) | (0.77 | )% | (4,863 | ) | (0.14 | ) | (0.73 | )% | (20,043 | ) | (0.60 | ) | (2.93 | )% | ||||||||||||||||||||||||
Net increase (decrease) in equity resulting from operations | $ | 1,931 | $ | 0.05 | 0.29 |
% |
$ | 550 | $ |
0.02 |
0.08 |
% |
$ | (15,703 | ) | $ | (0.48 | ) | (2.28 | )% | ||||||||||||||||||||||
Less: Net increase in equity resulting from operations attributable to non-controlling interests | 239 | 34 | 304 | |||||||||||||||||||||||||||||||||||||||
Net increase (decrease) in shareholders' equity resulting from operations(6) | $ | 1,692 | $ | 0.05 | 0.26 |
% |
$ | 516 | $ | 0.02 | 0.08 |
% |
$ | (16,007 | ) | $ | (0.48 | ) | (2.36 | )% | ||||||||||||||||||||||
Weighted average shares and convertible
units(3) outstanding |
33,140 | 33,306 | 33,422 | |||||||||||||||||||||||||||||||||||||||
Average equity (includes non-controlling interests)(4) | $ | 654,979 | $ | 669,935 | $ | 684,754 | ||||||||||||||||||||||||||||||||||||
Weighted average shares and LTIP units outstanding(5) | 32,928 | 33,094 | 33,210 | |||||||||||||||||||||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(4) | $ | 647,832 | $ | 659,205 | $ | 678,226 | ||||||||||||||||||||||||||||||||||||
(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, 2016 and September 30, 2016:
Investment Portfolio
December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average |
Cost |
Average Cost(1) |
Current |
Fair Value |
Average |
Cost |
Average |
|||||||||||||||||||||||||||||||||||||||
Non-Agency RMBS and Residential Mortgage Loans | $ | 354,219 | $ | 226,543 | $ | 63.96 | $ | 220,321 | $ | 62.20 | $ | 328,145 | $ | 198,320 | $ | 60.44 | $ | 191,897 | $ | 58.48 | |||||||||||||||||||||||||||||
Non-Agency CMBS and Commercial Mortgage Loans | 200,017 | 100,143 | 50.07 | 111,995 | 55.99 | 180,194 | 90,101 | 50.00 | 99,538 | 55.24 | |||||||||||||||||||||||||||||||||||||||
ABS and Consumer Loans | 141,079 | 145,326 | 103.01 | 155,359 | 110.12 | 137,457 | 135,837 | 98.82 | 139,980 | 101.84 | |||||||||||||||||||||||||||||||||||||||
Total Non-Agency MBS, Mortgage loans, and ABS and Consumer Loans(2) | 695,315 | 472,012 | 67.88 | 487,675 | 70.14 | 645,796 | 424,258 | 65.70 | 431,415 | 66.80 | |||||||||||||||||||||||||||||||||||||||
Agency RMBS: | |||||||||||||||||||||||||||||||||||||||||||||||||
Floating | 10,998 | 11,457 | 104.18 | 11,468 | 104.27 | 12,457 | 13,115 | 105.28 | 12,941 | 103.88 | |||||||||||||||||||||||||||||||||||||||
Fixed | 685,334 | 726,142 | 105.95 | 727,068 | 106.09 | 659,857 | 717,315 | 108.71 | 701,153 | 106.26 | |||||||||||||||||||||||||||||||||||||||
Reverse Mortgages | 55,910 | 60,221 | 107.71 | 61,174 | 109.41 | 52,013 | 57,571 | 110.69 | 56,887 | 109.37 | |||||||||||||||||||||||||||||||||||||||
Total Agency
RMBS(3) |
752,242 | 797,820 | 106.06 | 799,710 | 106.31 | 724,327 | 788,001 | 108.79 | 770,981 | 106.44 | |||||||||||||||||||||||||||||||||||||||
Total Non-Agency and Agency MBS, Mortgage loans, and ABS and Consumer Loans(2)(3) | 1,447,557 | 1,269,832 | 87.72 | 1,287,385 | 88.94 | 1,370,123 | 1,212,259 | 88.48 | 1,202,396 | 87.76 | |||||||||||||||||||||||||||||||||||||||
Agency Interest Only RMBS | n/a | 29,622 | n/a | 30,096 | n/a | n/a | 19,824 | n/a | 21,992 | n/a | |||||||||||||||||||||||||||||||||||||||
Non-Agency Interest Only and Principal Only MBS and Other(4) | n/a | 19,711 | n/a | 21,748 | n/a | n/a | 16,648 | n/a | 18,940 | n/a | |||||||||||||||||||||||||||||||||||||||
TBAs: | |||||||||||||||||||||||||||||||||||||||||||||||||
Long | 67,720 | 70,525 | 104.14 | 70,334 | 103.86 | 160,480 | 170,192 | 106.05 | 169,890 | 105.86 | |||||||||||||||||||||||||||||||||||||||
Short | (384,155 | ) | (404,728 | ) | 105.36 | (404,967 | ) | 105.42 | (478,255 | ) | (511,754 | ) | 107.00 | (511,170 | ) | 106.88 | |||||||||||||||||||||||||||||||||
Net Short TBAs | (316,435 | ) | (334,203 | ) | 105.62 | (334,633 | ) | 105.75 | (317,775 | ) | (341,562 | ) | 107.49 | (341,280 | ) | 107.40 | |||||||||||||||||||||||||||||||||
Long U.S. Treasury Securities | 5,620 | 5,419 | 96.43 | 5,635 | 100.27 | 5,362 | 5,373 | 100.20 | 5,379 | 100.31 | |||||||||||||||||||||||||||||||||||||||
Short U.S. Treasury Securities | (72,871 | ) | (69,762 | ) | 95.73 | (69,946 | ) | 95.99 | (41,437 | ) | (41,585 | ) | 100.36 | (41,199 | ) | 99.43 | |||||||||||||||||||||||||||||||||
Short European Sovereign Bonds | (61,016 | ) | (62,680 | ) | 102.73 | (66,800 | ) | 109.48 | (55,234 | ) | (57,019 | ) | 103.23 | (57,023 | ) | 103.24 | |||||||||||||||||||||||||||||||||
Repurchase Agreements | 184,819 | 184,819 | 100.00 | 185,205 | 100.21 | 165,048 | 165,048 | 100.00 | 164,669 | 99.77 | |||||||||||||||||||||||||||||||||||||||
Long Corporate Debt | 95,664 | 80,095 | 83.73 | 81,036 | 84.71 | 78,646 | 56,317 | 71.61 | 62,424 | 79.37 | |||||||||||||||||||||||||||||||||||||||
Short Corporate Debt | (40,807 | ) | (39,572 | ) | 96.97 | (39,664 | ) | 97.20 | (39,317 | ) | (39,187 | ) | 99.67 | (38,850 | ) | 98.81 | |||||||||||||||||||||||||||||||||
Non-Exchange Traded Preferred and Common Equity Investment in Mortgage-Related Entities | n/a | 18,090 | n/a | 17,243 | n/a | n/a | 10,544 | n/a | 9,877 | n/a | |||||||||||||||||||||||||||||||||||||||
Non-Exchange Traded Corporate Equity | n/a | 3,987 | n/a | 4,313 | n/a | n/a | 4,974 | n/a | 6,333 | n/a | |||||||||||||||||||||||||||||||||||||||
Long Common Stock | n/a | 4,396 | n/a | 4,381 | n/a | n/a | — | n/a | — | n/a | |||||||||||||||||||||||||||||||||||||||
Short Common Stock | n/a | (8,154 | ) | n/a | (8,052 | ) | n/a | n/a | (29,476 | ) | n/a | (29,044 | ) | n/a | |||||||||||||||||||||||||||||||||||
Real Estate Owned | n/a | 3,349 | n/a | 3,539 | n/a | n/a | 3,584 | n/a | 3,861 | n/a | |||||||||||||||||||||||||||||||||||||||
Total | $ | 1,104,949 | $ | 1,121,486 | $ | 985,742 | $ | 988,475 | |||||||||||||||||||||||||||||||||||||||||
(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, 2016 | September 30, 2016 | |||||||||||||||||||
(In thousands) | Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||||||
Mortgage-Related Derivatives: | ||||||||||||||||||||
Long CDS on RMBS and CMBS Indices | $ | 17,228 | $ | (2,887 | ) | $ | 28,936 | $ | (3,072 | ) | ||||||||||
Short CDS on RMBS and CMBS Indices | (112,999 | ) | 16,701 | (134,719 | ) | 20,959 | ||||||||||||||
Short CDS on Individual RMBS | (10,134 | ) | 5,070 | (10,675 | ) | 5,595 | ||||||||||||||
Net Mortgage-Related Derivatives | (105,905 | ) | 18,884 | (116,458 | ) | 23,482 | ||||||||||||||
Long CDS referencing Corporate Bond Indices | 40,611 | 2,744 | 157,716 | 15,849 | ||||||||||||||||
Short CDS referencing Corporate Bond Indices | (49,306 | ) | (2,840 | ) | (269,035 | ) | (9,594 | ) | ||||||||||||
Long CDS on Corporate Bonds | 59,637 | (1,408 | ) | 40,955 | (2,310 | ) | ||||||||||||||
Short CDS on Corporate Bonds | (83,108 | ) | (2,886 | ) | (65,880 | ) | (1,827 | ) | ||||||||||||
Purchased Put Options on CDS on Corporate Bond Indices(2) | 10,000 | — | — | — | ||||||||||||||||
Written Put Options on CDS on Corporate Bond Indices(3) | — | — | (29,000 | ) | (3 | ) | ||||||||||||||
Short Total Return Swaps on Corporate Equities(4) | (40,426 | ) | (55 | ) | (146,600 | ) | (83 | ) | ||||||||||||
Long Total Return Swaps on Corporate Debt(5) | 5,438 | (94 | ) | 13,564 | (1,027 | ) | ||||||||||||||
Interest Rate Derivatives: | ||||||||||||||||||||
Long Interest Rate Swaps | 376,074 | (2,122 | ) | 478,756 | 10,787 | |||||||||||||||
Short Interest Rate Swaps | (862,535 | ) | 5,062 | (926,030 | ) | (17,505 | ) | |||||||||||||
Long Eurodollar Futures(6) | 11,000 | (8 | ) | 11,000 | (3 | ) | ||||||||||||||
Short Eurodollar Futures(6) | (62,000 | ) | (51 | ) | (164,000 | ) | (76 | ) | ||||||||||||
Short U.S. Treasury Note Futures(7) | (7,000 | ) | 19 | — | — | |||||||||||||||
Interest Rate Caps | 61,908 | 2 | 61,908 | 2 | ||||||||||||||||
Purchased Equity Call Options(8) | 16 | 42 | — | — | ||||||||||||||||
Total Net Interest Rate Derivatives | 2,944 | (6,795 | ) | |||||||||||||||||
Other Derivatives: | ||||||||||||||||||||
Short Foreign Currency Forwards(9) | (54,787 | ) | (456 | ) | (53,422 | ) | (277 | ) | ||||||||||||
Warrants(10) | 1,639 | 106 | 1,647 | 7,586 | ||||||||||||||||
Mortgage Loan Purchase Commitments(11) | 20,601 | (31 | ) | — | — | |||||||||||||||
Total Net Derivatives | $ | 16,908 | $ | 25,001 | ||||||||||||||||
(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, 2016, derivative assets and derivative liabilities were $35.6 million and $18.7 million, respectively, for a net fair value of $16.9 million, as reflected in "Total Net Derivatives" above. As of September 30, 2016, derivative assets and derivative liabilities were $64.8 million and $39.8 million, respectively, for a net fair value of $25.0 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) | Notional value represents number of underlying shares times the closing price of the underlying security. | |||||
(5) | Notional value represents outstanding principal balance on underlying corporate debt. | |||||
(6) | Every $1,000,000 in notional value represents one contract. | |||||
(7) | Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of December 31, 2016, a total of 70 contracts were held. | |||||
(8) | Notional value represents the number of common shares we have the option to purchase multiplied by the strike price. | |||||
(9) | Notional value represents U.S. Dollars to be received by us at the maturity of the forward contract. | |||||
(10) | Notional value represents number of shares that warrants are convertible into. | |||||
(11) | Notional value represents principal balance of mortgage loan purchase commitments. Actual loan purchases are contingent upon successful loan closings in accordance with agreed-upon parameters. | |||||
The mix and composition of our derivative instruments may vary from period to period.
The following table summarizes, as of December 31, 2016, 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 |
|||||||
Agency RMBS - ARM Pools | $ | 72 | $ | (83 | ) | ||||
Agency RMBS - Fixed Pools and IOs | 12,871 | (16,692 | ) | ||||||
TBAs | (5,066 | ) | 6,923 | ||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans | 3,596 | (2,029 | ) | ||||||
Interest Rate Swaps | (6,664 | ) | 6,407 | ||||||
U.S. Treasury Securities | (2,750 | ) | 2,621 | ||||||
Eurodollar and U.S. Treasury Futures | (330 | ) | 321 | ||||||
Mortgage-Related Derivatives | 28 | (38 | ) | ||||||
Corporate Securities and Derivatives on Corporate Securities | (435 | ) | 446 | ||||||
Repurchase Agreements and Reverse Repurchase Agreements | (554 | ) | 544 | ||||||
$ | 768 | $ | (1,580 | ) | |||||
(1) | Based on the market environment as of December 31, 2016. 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
By Collateral Type
As of |
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 | $ | 261,927 | $ | 243,712 | 3.09 | % | $ | 228,696 | $ | 247,108 | 3.02 | % | |||||||||||||||
Agency RMBS | 790,312 | 768,137 | 0.83 | % | 770,138 | 781,539 | 0.72 | % | |||||||||||||||||||
Total Excluding U.S. Treasury Securities | 1,052,239 | 1,011,849 | 1.37 | % | 998,834 | 1,028,647 | 1.27 | % | |||||||||||||||||||
U.S. Treasury Securities | 5,428 | 6,208 | 0.54 | % | 15,751 | 15,974 | 0.38 | % | |||||||||||||||||||
Total | $ | 1,057,667 | $ | 1,018,057 | 1.37 | % | $ | 1,014,585 | $ | 1,044,621 | 1.26 | % | |||||||||||||||
Leverage Ratio (1) | 1.64:1 | 1.53:1 | |||||||||||||||||||||||||
Leverage Ratio Excluding U.S. Treasury Securities (1) | 1.63:1 | 1.50:1 | |||||||||||||||||||||||||
(1) | The leverage ratio does not account for liabilities other than debt financings. Our debt financings consist of reverse repurchase agreements ("reverse repos") and securitized debt. | |||||
Throughout the fourth quarter, reverse repo borrowing costs increased as LIBOR increased. In addition, as the end of the year approached, typical balance sheet constraints of lending banks further increased the cost of repo. Changes in the composition of our repo borrowings have also recently put upward pressure on the average cost of funds for our Credit portfolio, in that the amount of our securities-backed borrowings continues to decline relative to our loan-backed borrowings, which carry higher borrowing costs. We expect this trend to continue in 2017.
From time to time we may have outstanding reverse repos on our positions
in long U.S. Treasury securities. As of December 31, 2016 and
September 30, 2016 we had
Reverse Repurchase Agreements By Remaining Maturity (1)
(In thousands) | As of December 31, 2016 | As of September 30, 2016 | ||||||||||||||||
Remaining Maturity (2) |
Outstanding Borrowings |
% of Borrowings |
Outstanding |
% of |
||||||||||||||
30 Days or Less | $ | 506,002 | 49.0 | % | $ | 494,626 | 50.3 | % | ||||||||||
31-60 Days | 222,262 | 21.5 | % | 236,245 | 24.0 | % | ||||||||||||
61-90 Days | 191,487 | 18.5 | % | 107,290 | 10.9 | % | ||||||||||||
91-120 Days | 18,324 | 1.8 | % | 35,010 | 3.6 | % | ||||||||||||
121-150 Days | 13,037 | 1.2 | % | 1,406 | 0.1 | % | ||||||||||||
151-180 Days | 31,912 | 3.1 | % | 34,305 | 3.5 | % | ||||||||||||
181-360 Days | 50,557 | 4.9 | % | 11,723 | 1.2 | % | ||||||||||||
> 360 Days | — | — | % | 63,209 | 6.4 | % | ||||||||||||
$ | 1,033,581 | 100.0 | % | $ | 983,814 | 100.0 | % | |||||||||||
(1) | Reverse repos involving underlying investments that we had sold prior to the applicable period end for settlement following the applicable period end, are shown using their original maturity dates even though such reverse repos may be expected to be terminated early upon settlement of the sale of the underlying investment. Not included are any reverse repos that we may have entered into prior to the applicable period end for which delivery of the borrowed funds is not scheduled until after the applicable period end. | |||||
(2) | Remaining maturity for a reverse repo is based on the contractual maturity date in effect as of the applicable period end. Some reverse repos have floating interest rates, which may reset before maturity. | |||||
The majority of our borrowed funds are in the form of reverse repos. The
weighted average remaining term on our reverse repos as of December 31,
2016 decreased to 56 days from 63 days as of September 30, 2016. In
addition to borrowings under reverse repos, as of December 31, 2016 and
September 30, 2016 we had outstanding securitized debt of
Our borrowings outstanding under reverse repos were with a total of
twenty-one counterparties as of December 31, 2016. As of December 31,
2016, 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 3.1% for the quarter ended December 31, 2016 and 2.9% for the
quarter ended September 30, 2016. The increase in our expense ratio was
principally due to a quarter-over-quarter increase in professional fees.
We did not incur incentive fee expense for either the third or fourth
quarters, or for the full 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 December 31, 2016, we repurchased
324,357 shares at an average price per share of
Through
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Tuesday,
February 14, 2017, 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 11, 2016 which can be accessed through our website at www.ellingtonfinancial.com
or at the
ELLINGTON FINANCIAL LLC
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) |
|||||||||||||||
Three Month Period Ended | Year Ended | ||||||||||||||
(In thousands, except per share amounts) | December 31, 2016 | September 30, 2016 | December 31, 2016 | ||||||||||||
Investment income | |||||||||||||||
Interest income | $ | 18,265 | $ | 16,662 | $ | 74,344 | |||||||||
Other income | 2,342 | 807 | 5,841 | ||||||||||||
Total investment income | 20,607 | 17,469 | 80,185 | ||||||||||||
Expenses | |||||||||||||||
Base management fee | 2,416 | 2,485 | 10,065 | ||||||||||||
Interest expense | 4,461 | 4,143 | 16,306 | ||||||||||||
Other investment related expenses | 2,062 | 2,068 | 8,070 | ||||||||||||
Other operating expenses | 2,640 | 2,379 | 9,979 | ||||||||||||
Total expenses | 11,579 | 11,075 | 44,420 | ||||||||||||
Net investment income | 9,028 | 6,394 | 35,765 | ||||||||||||
Net realized gain (loss) on: | |||||||||||||||
Investments | 3,127 | 349 | 2,729 | ||||||||||||
Financial derivatives, excluding currency forwards | (5,143 | ) | (23,330 | ) | (40,758 | ) | |||||||||
Financial derivatives—currency forwards | 3,873 | 1,525 | 4,093 | ||||||||||||
Foreign currency transactions | (4,099 | ) | (1,564 | ) | (5,597 | ) | |||||||||
(2,242 | ) | (23,020 | ) | (39,533 | ) | ||||||||||
Change in net unrealized gain (loss) on: | |||||||||||||||
Investments | (14,396 | ) | 7,379 | (8,033 | ) | ||||||||||
Financial derivatives, excluding currency forwards | 9,185 | 9,462 | (5,964 | ) | |||||||||||
Financial derivatives—currency forwards | (178 | ) | (1,855 | ) | (1,580 | ) | |||||||||
Foreign currency translation | 535 | 2,190 | 3,643 | ||||||||||||
(4,854 | ) | 17,176 | (11,934 | ) | |||||||||||
Net realized and change in net unrealized gain (loss) on investments and financial derivatives | (7,096 | ) | (5,844 | ) | (51,467 | ) | |||||||||
Net increase (decrease) in equity resulting from operations | 1,932 | 550 | (15,702 | ) | |||||||||||
Less: Increase in equity resulting from operations attributable to non-controlling interests | 240 | 34 | 305 | ||||||||||||
Net increase (decrease) in shareholders' equity resulting from operations | $ | 1,692 | $ | 516 | $ | (16,007 | ) | ||||||||
Net increase (decrease) in shareholders' equity resulting from operations per share: | |||||||||||||||
Basic and diluted | $ | 0.05 | $ | 0.02 | $ | (0.48 | ) | ||||||||
Weighted average shares and LTIP units outstanding | 32,928 | 33,094 | 33,210 | ||||||||||||
Weighted average shares and convertible units outstanding | 33,140 | 33,306 | 33,422 | ||||||||||||
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 | $ | 123,274 | $ | 179,618 | $ | 183,909 | ||||||||
Restricted cash | 655 | 5,610 | 4,857 | |||||||||||
Investments, financial derivatives, and repurchase agreements: | ||||||||||||||
Investments, at fair value (Cost – $1,525,710, $1,501,092, and $1,672,400) | 1,505,026 | 1,499,715 | 1,661,118 | |||||||||||
Financial derivatives–assets, at fair value (Net cost – $40,724, $63,635, and $163,943) | 35,595 | 64,817 | 162,905 | |||||||||||
Repurchase agreements (Cost – $185,205, $164,669, and $105,329) | 184,819 | 165,048 | 105,700 | |||||||||||
Total Investments, financial derivatives, and repurchase agreements | 1,725,440 | 1,729,580 | 1,929,723 | |||||||||||
Due from brokers | 93,651 | 126,255 | 141,605 | |||||||||||
Receivable for securities sold and financial derivatives | 445,112 | 563,462 | 705,748 | |||||||||||
Interest and principal receivable | 21,704 | 17,377 | 20,444 | |||||||||||
Other assets | 3,359 | 29,907 | 5,269 | |||||||||||
Total assets | $ | 2,413,195 | $ | 2,651,809 | $ | 2,991,555 | ||||||||
LIABILITIES | ||||||||||||||
Investments and financial derivatives: | ||||||||||||||
Investments sold short, at fair value (Proceeds – $589,429, $677,286, and $731,048) | $ | 584,896 | $ | 679,021 | $ | 728,747 | ||||||||
Financial derivatives–liabilities, at fair value (Net proceeds – $12,012, $17,751, and $56,200) | 18,687 | 39,816 | 60,472 | |||||||||||
Total investments and financial derivatives | 603,583 | 718,837 | 789,219 | |||||||||||
Reverse repurchase agreements | 1,033,581 | 983,814 | 1,174,189 | |||||||||||
Due to brokers | 12,780 | 15,600 | 114,797 | |||||||||||
Payable for securities purchased and financial derivatives | 85,168 | 229,212 | 165,365 | |||||||||||
Securitized debt (Proceeds – $24,086, $30,771, and $0) | 24,086 | 30,771 | — | |||||||||||
Accounts payable and accrued expenses | 3,327 | 2,896 | 3,626 | |||||||||||
Base management fee payable | 2,416 | 2,485 | 2,773 | |||||||||||
Interest and dividends payable | 3,460 | 3,278 | 1,806 | |||||||||||
Other liabilities | 17 | 163 | 828 | |||||||||||
Total liabilities | 1,768,418 | 1,987,056 | 2,252,603 | |||||||||||
EQUITY | 644,777 | 664,753 | 738,952 | |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 2,413,195 | $ | 2,651,809 | $ | 2,991,555 | ||||||||
ANALYSIS OF EQUITY: | ||||||||||||||
Common shares, no par value, 100,000,000 shares authorized; | ||||||||||||||
(32,294,703, 32,619,060, and 33,126,012 shares issued and outstanding) | $ | 627,620 | $ | 645,961 | $ | 722,360 | ||||||||
Additional paid-in capital–LTIP units | 10,041 | 9,942 | 9,689 | |||||||||||
Total Shareholders' Equity | 637,661 | 655,903 | 732,049 | |||||||||||
Non-controlling interests | 7,116 | 8,850 | 6,903 | |||||||||||
Total Equity | $ | 644,777 | $ | 664,753 | $ | 738,952 | ||||||||
PER SHARE INFORMATION: | ||||||||||||||
Common shares, no par value | $ | 19.75 | $ | 20.11 | $ | 22.10 | ||||||||
DILUTED PER SHARE INFORMATION: | ||||||||||||||
Common shares and convertible units, no par value (2) | $ | 19.46 | $ | 19.83 | $ | 21.80 | ||||||||
(1) | Derived from audited financial statements as of December 31, 2015. | |||||
(2) | Based on total equity excluding non-controlling interests not represented by instruments convertible into common shares. | |||||
View source version on businesswire.com: http://www.businesswire.com/news/home/20170213006245/en/
Source:
Investors:
Ellington Financial LLC
Maria Cozine, Vice
President of Investor Relations
Lisa Mumford, Chief Financial
Officer
203-409-3575
info@ellingtonfinancial.com
or
Media:
Gasthalter
& Co., for Ellington Financial LLC
Amanda Klein
Kevin
Fitzgerald
212-257-4170
Ellington@gasthalter.com