Ellington Financial LLC Reports First Quarter 2017 Results
Highlights
-
Net increase in shareholders' equity resulting from operations ("net
income") for the first quarter was
$15.3 million , or$0.47 per basic and diluted share, as compared to net income of$1.7 million , or$0.05 per basic and diluted share, for the quarter ended December 31, 2016. -
Book value per share as of March 31, 2017 was
$19.50 on a diluted basis, after payment of a quarterly dividend in the first quarter of$0.45 per share, as compared to book value per share of$19.46 on a diluted basis as of December 31, 2016. -
Our Credit strategy generated gross income of
$18.2 million for the quarter ended March 31, 2017. -
Our Agency strategy generated gross income of
$1.9 million for the quarter ended March 31, 2017. -
Announced a dividend of
$0.45 per share for the first quarter of 2017, equating to an annualized dividend yield of 10.9% based on theMay 3, 2017 closing price of$16.56 per share; dividends are paid quarterly in arrears.
First Quarter 2017 Results
"For the first quarter,
"The quarter's results were driven by strong performance within our
Credit portfolio, in both loans and securities. We are benefiting from
the robust pipeline of high-yielding loan assets that we have developed,
and in addition we continue to opportunistically take advantage of the
value that we see in several sectors of the securities markets,
including selected CLO sectors. In the aggregate, the size of our long
Credit portfolio grew to
"To help continue to accommodate our loan pipelines, we added a non-mark-to-market term financing facility for our consumer loans during the quarter, and we also added a second financing facility for our non-QM mortgage loans. Our credit-related borrowings increased by approximately 20% quarter over quarter, and we plan to increase our assets and our leverage further as the year progresses. We believe that we are building a powerful and consistent earnings stream for shareholders, and we hope to continue to demonstrate the success of our transformation in the coming quarters."
Market Overview
For most of the first quarter, both interest rate volatility and overall
market volatility were low, but many measures of volatility increased
towards the end of the quarter. The yield curve flattened over the
course of the quarter as market participants ratcheted back their
post-election expectations of economic growth and inflation in the U.S.
economy. The 2-year U.S. Treasury yield rose 6 basis points to end the
quarter at 1.25%, whereas the 10-year U.S. Treasury yield fell 5 basis
points to 2.39%. Notably, global monetary policy has begun to diverge,
as an interest rate hiking cycle is underway in the U.S. while the
monetary policies of other major economies, including
Fixed-income credit spreads continued to tighten during the early part
of the first quarter, but began widening in early March following
intermeeting commentary from several Federal Reserve governors, who
expressed support for an imminent increase in the federal funds rate
(which did in fact come to pass at the
Mortgage rates declined over the course of the first quarter, with 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 many of 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 first quarter, benefiting from strong
net interest margins, appreciation from our held positions, and net
realized gains from positions sold. 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 March 31, 2017, our investments in U.S. non-Agency RMBS
totaled
Currently, our credit hedges consist 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. Our credit hedges also currently include CDS tied to individual MBS or an index of several MBS, such as CMBX. We also opportunistically overlay our high-yield corporate credit hedges and mortgage-related derivatives with certain relative value long/short positions involving the same or similar instruments. Our combined credit hedges and relative value trading strategies generated a modest net loss for the quarter. In addition to 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, which currently consist primarily of interest rate swaps, did not meaningfully impact our results for the quarter. 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 losses on our foreign currency hedges for the quarter, but these were more than offset by net gains on foreign currency-related transactions and translation. 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 first quarter, yield spreads on CMBS fluctuated. As a result
of the implementation of risk retention regulations and higher interest
rates, CMBS conduit issuance slowed during the first quarter, continuing
recent lower issuance trends. First quarter conduit issuance totaled
The CMBS risk retention regulations took effect on
As of March 31, 2017, our portfolio of small balance commercial mortgage
loans included thirteen loans and ten real estate owned, or "REO,"
properties with an aggregate value of
In
We remain active in non-performing and re-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 first quarter we closed on a purchase of a mixed residential
NPL pool, which contains a combination of re-performing and
non-performing assets. While relatively small, our residential NPL
portfolio performed well for the quarter. As of March 31, 2017, we held
During the first quarter, we continued to acquire consumer loans under
three existing flow agreements. Our portfolio primarily consists of
unsecured loans, but also includes auto loans, and it performed well in
the first quarter. During the quarter, we entered into a secured
borrowing facility with a major investment bank to finance a portfolio
of unsecured loans that we purchase under one of our flow agreements.
This facility features a term revolving period, during which we can vary
our borrowings based on the size of the portfolio, followed by an
amortization period, which we believe greatly reduces our financing risk
as compared to a sudden maturity. Some of our other consumer loans are
financed using reverse repurchase agreements, or through the
securitization markets. Apart from our existing flow agreements, we are
actively evaluating other opportunities in the space. As of March 31,
2017, our investments in U.S. consumer loans and ABS totaled
During the first quarter, we continued to purchase non-QM loans at a
steady pace, and our outlook for growth in this sector remains positive.
As of March 31, 2017, our non-QM mortgage loan portfolio totaled
Over the past few months, we have begun purchasing non-distressed
leveraged corporate loans. We are principally focused on senior secured
loans that trade near par, with shorter maturities and low loan-to-value
ratios. We believe that these assets offer excellent value in comparison
to most high-yield corporate bonds, with their generally higher yield
spreads and lower issue leverage. We are currently evaluating securing
long-term, non-recourse financing for these assets through the CLO
securitization market. While we are not currently making new
acquisitions of distressed leveraged loans, we continue to hold a small
portfolio of these assets. During the first quarter, our portfolio of
performing and distressed leveraged loans performed well. As of
We have also recently increased our purchase activity in U.S. CLOs.
While our previous CLO trading activity was almost entirely within the
legacy CLO space, our more recent activity has been primarily in 2012
and 2013 vintages. During the first quarter our U.S. CLO portfolio
performed well, reflecting strong contributions from both net interest
income and net realized and unrealized gains. As of
In the first quarter, we increased our investment in a reverse mortgage
originator in which we have been invested since
For the last few quarters, we have become more active in a corporate
credit relative value trading strategy, whereby we seek to identify and
capitalize on short-term pricing disparities in the corporate credit
markets. As a subset of this strategy, we often engage in "basis
trading," where we hold long or short positions in the bonds of a
corporate issuer and simultaneously hold offsetting positions in credit
default swaps referencing the same corporate issuer. In the overall
strategy, we typically use reverse repurchase agreements to finance the
long corporate bond positions that we hold. During the first quarter,
our corporate credit relative value trading strategy performed well. As
of
Agency
Our Agency strategy generated gross income of
Consistent with past quarters, as of March 31, 2017, our Agency RMBS consisted mainly of "specified pools." Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics. Our Agency strategy also includes RMBS that are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs. Finally, 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.
During the first quarter, both realized and implied volatility remained low, but yield spreads for Agency RMBS widened. Agency RMBS investors are becoming increasingly focused on the timing and mechanism of the Federal Reserve's discontinuation of its current policy of reinvesting principal payments from its Agency RMBS holdings. While the Federal Reserve has indicated that it expects to continue its reinvesting policy "until normalization of the level of the federal funds rate is well under way," uncertainty around when that condition would be satisfied weighed on asset valuations during the first quarter. Despite the anticipated reduced support from the Federal Reserve, we do not expect that Agency RMBS yield spreads will widen substantially, as they did during the 2013 "Taper Tantrum," largely because the investor base for Agency RMBS has changed substantially since then. Agency RMBS ownership has largely shifted away from investors such as the GSEs, certain money managers, and mortgage REITs whose activities, including delta-hedging and utilization of high degrees of leverage, tend to amplify price swings during periods of high volatility.
During the first quarter, mortgage rates remained relatively elevated from their pre-election levels, and prepayment rates declined, as many borrowers did have not an economic incentive to refinance their mortgages. The lower day count of the first quarter and the impact of winter seasonality were also factors contributing to the overall decline in prepayments. Since the generic pools that underlie TBAs tend to be more prepayment-sensitive than specified pools, the favorable decline in overall prepayment rates helped TBAs outperform specified pools over the course of the first quarter. This dampened our results for the first quarter, given that TBA short positions are a major component of our interest rate hedging portfolio.
Pay-ups on our specified pools decreased slightly quarter over quarter.
Pay-ups are price premiums for specified pools relative to their TBA
counterparts. Average pay-ups on our specified pools decreased to 0.66%
as of
During the quarter we continued to hedge interest rate risk in our Agency strategy, primarily through the use of interest rate swaps and short positions in TBAs, and to a lesser extent, short positions in U.S. Treasury securities. Within our hedging portfolio, our interest rate swaps generated net gains as swap rates increased across the yield curve, but those gains were offset by losses on our short positions in TBAs and U.S. Treasury securities. During the quarter, TBA roll prices increased and longer maturity U.S. Treasury yields declined, most notably in March, thereby leading to losses. In our hedging portfolio, the relative proportion (based on 10-year equivalents1) of TBA positions increased quarter over quarter relative to interest rate swaps. We believe that it is important to be able to hedge our Agency RMBS portfolio using a variety of instruments, including TBAs.
We actively traded our Agency RMBS portfolio during the quarter in order
to capitalize on sector rotation opportunities. Our portfolio turnover
for the quarter was approximately 10% (as measured by sales and
excluding paydowns), and we had net realized losses of
As of March 31, 2017, our long Agency RMBS portfolio was
Our net Agency premium as a percentage of the fair value 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 2.51% for the quarter ended
March 31, 2017. Based on our diluted net-asset-value-based total return
of 163.8% from our inception (
The following table summarizes our operating results for the quarters ended March 31, 2017 and December 31, 2016:
Quarter |
Per |
% of |
Quarter |
Per |
% of |
|||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||
Credit: | ||||||||||||||||||||||
Interest income and other income | $ | 13,133 | $ | 0.40 | 2.02 |
% |
$ | 11,902 | $ | 0.36 | 1.82 |
% |
||||||||||
Net realized gain (loss) | 2,259 | 0.07 | 0.35 |
% |
(3,964 | ) | (0.12 | ) | (0.60 | )% | ||||||||||||
Change in net unrealized gain (loss) | 10,277 | 0.31 | 1.58 |
% |
(1,354 | ) | (0.04 | ) | (0.21 | )% | ||||||||||||
Net interest rate hedges(1) | 146 | — | 0.02 |
% |
1,801 | 0.05 | 0.27 |
% |
||||||||||||||
Net credit hedges and other activities(2) | (3,920 | ) | (0.12 | ) | (0.60 | )% | 257 | 0.01 | 0.04 |
% |
||||||||||||
Interest expense | (2,199 | ) | (0.07 | ) | (0.34 | )% | (1,894 | ) | (0.06 | ) | (0.29 | )% | ||||||||||
Other investment related expenses | (1,496 | ) | (0.04 | ) | (0.23 | )% | (1,736 | ) | (0.05 | ) | (0.27 | )% | ||||||||||
Total Credit profit (loss) | 18,200 | 0.55 | 2.80 |
% |
5,012 | 0.15 | 0.76 |
% |
||||||||||||||
Agency RMBS: | ||||||||||||||||||||||
Interest income | 8,630 | 0.26 | 1.33 |
% |
6,485 | 0.19 | 0.99 |
% |
||||||||||||||
Net realized gain (loss) | (711 | ) | (0.01 | ) | (0.11 | )% | (1,328 | ) | (0.04 | ) | (0.20 | )% | ||||||||||
Change in net unrealized gain (loss) | (2,570 | ) | (0.08 | ) | (0.40 | )% | (17,216 | ) | (0.52 | ) | (2.63 | )% | ||||||||||
Net interest rate hedges and other activities(1) | (1,572 | ) | (0.05 | ) | (0.24 | )% | 15,480 | 0.47 | 2.36 |
% |
||||||||||||
Interest expense | (1,857 | ) | (0.06 | ) | (0.29 | )% | (1,597 | ) | (0.05 | ) | (0.24 | )% | ||||||||||
Total Agency RMBS profit (loss) | 1,920 | 0.06 | 0.29 |
% |
1,824 | 0.05 | 0.28 |
% |
||||||||||||||
Total Credit and Agency RMBS profit (loss) | 20,120 | 0.61 | 3.09 |
% |
6,836 | 0.20 | 1.04 |
% |
||||||||||||||
Other interest income (expense), net | 136 | — | 0.02 |
% |
150 | — | 0.02 |
% |
||||||||||||||
Other expenses | (4,526 | ) | (0.14 | ) | (0.70 | )% | (5,055 | ) | (0.15 | ) | (0.77 | )% | ||||||||||
Net increase in equity resulting from operations | $ | 15,730 | $ | 0.47 | 2.41 |
% |
$ | 1,931 | $ | 0.05 | 0.29 |
% |
||||||||||
Less: Net increase in equity resulting from operations attributable to non-controlling interests | 452 | 239 | ||||||||||||||||||||
Net increase in shareholders' equity resulting from operations(6) | $ | 15,278 | $ | 0.47 | 2.40 |
% |
$ | 1,692 | $ | 0.05 | 0.26 |
% |
||||||||||
Weighted average shares and convertible
units(3) outstanding |
32,930 | 33,140 | ||||||||||||||||||||
Average equity (includes non-controlling interests)(4) | $ | 649,113 | $ | 654,979 | ||||||||||||||||||
Weighted average shares and LTIP units outstanding(5) | 32,718 | 32,928 | ||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(4) | $ | 637,712 | $ | 647,832 |
(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 March 31, 2017 and December 31, 2016:
Investment Portfolio
March 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||||||||||
(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 | $ | 304,065 | $ | 228,124 | $ | 75.02 | $ | 220,325 | $ | 72.46 | $ | 354,219 | $ | 226,543 | $ | 63.96 | $ | 220,321 | $ | 62.20 | |||||||||||||||||||
Non-Agency CMBS and Commercial Mortgage Loans | 184,790 | 99,496 | 53.84 | 108,882 | 58.92 | 200,017 | 100,143 | 50.07 | 111,995 | 55.99 | |||||||||||||||||||||||||||||
ABS and Consumer Loans | 164,375 | 161,889 | 98.49 | 166,711 | 101.42 | 140,569 | 138,011 | 98.18 | 143,936 | 102.40 | |||||||||||||||||||||||||||||
Total Non-Agency MBS, Mortgage loans, and ABS and Consumer Loans(2) | 653,230 | 489,509 | 74.94 | 495,918 | 75.92 | 694,805 | 464,697 | 66.88 | 476,252 | 68.54 | |||||||||||||||||||||||||||||
Agency RMBS: | |||||||||||||||||||||||||||||||||||||||
Floating | 10,579 | 10,999 | 103.97 | 11,093 | 104.86 | 10,998 | 11,457 | 104.18 | 11,468 | 104.27 | |||||||||||||||||||||||||||||
Fixed | 702,323 | 742,563 | 105.73 | 746,273 | 106.26 | 685,334 | 726,142 | 105.95 | 727,068 | 106.09 | |||||||||||||||||||||||||||||
Reverse Mortgages | 54,138 | 58,301 | 107.69 | 59,185 | 109.32 | 55,910 | 60,221 | 107.71 | 61,174 | 109.41 | |||||||||||||||||||||||||||||
Total Agency
RMBS(3) |
767,040 | 811,863 | 105.84 | 816,551 | 106.45 | 752,242 | 797,820 | 106.06 | 799,710 | 106.31 | |||||||||||||||||||||||||||||
Total Non-Agency and Agency MBS, Mortgage loans, and ABS and Consumer Loans(2)(3) | 1,420,270 | 1,301,372 | 91.63 | 1,312,469 | 92.41 | 1,447,047 | 1,262,517 | 87.25 | 1,275,962 | 88.18 | |||||||||||||||||||||||||||||
Agency Interest Only RMBS | n/a | 29,425 | n/a | 29,671 | n/a | n/a | 29,622 | n/a | 30,096 | n/a | |||||||||||||||||||||||||||||
Non-Agency Interest Only and Principal Only MBS and Other(4) | n/a | 33,255 | n/a | 35,522 | n/a | n/a | 27,026 | n/a | 33,171 | n/a | |||||||||||||||||||||||||||||
TBAs: | |||||||||||||||||||||||||||||||||||||||
Long | 243,982 | 253,146 | 103.76 | 252,101 | 103.33 | 67,720 | 70,525 | 104.14 | 70,334 | 103.86 | |||||||||||||||||||||||||||||
Short | (502,617 | ) | (523,620 | ) | 104.18 | (521,631 | ) | 103.78 | (384,155 | ) | (404,728 | ) | 105.36 | (404,967 | ) | 105.42 | |||||||||||||||||||||||
Net Short TBAs | (258,635 | ) | (270,474 | ) | 104.58 | (269,530 | ) | 104.21 | (316,435 | ) | (334,203 | ) | 105.62 | (334,633 | ) | 105.75 | |||||||||||||||||||||||
Long U.S. Treasury Securities | 36,529 | 36,488 | 99.89 | 36,455 | 99.80 | 5,620 | 5,419 | 96.43 | 5,635 | 100.27 | |||||||||||||||||||||||||||||
Short U.S. Treasury Securities | (104,609 | ) | (101,820 | ) | 97.33 | (102,205 | ) | 97.70 | (72,871 | ) | (69,762 | ) | 95.73 | (69,946 | ) | 95.99 | |||||||||||||||||||||||
Short European Sovereign Bonds | (61,873 | ) | (63,260 | ) | 102.24 | (66,738 | ) | 107.86 | (61,016 | ) | (62,680 | ) | 102.73 | (66,800 | ) | 109.48 | |||||||||||||||||||||||
Repurchase Agreements | 293,802 | 293,802 | 100.00 | 294,468 | 100.23 | 184,819 | 184,819 | 100.00 | 185,205 | 100.21 | |||||||||||||||||||||||||||||
Long Corporate Debt | 173,688 | 154,819 | 89.14 | 155,130 | 89.31 | 95,664 | 80,095 | 83.73 | 81,036 | 84.71 | |||||||||||||||||||||||||||||
Short Corporate Debt | (91,367 | ) | (89,466 | ) | 97.92 | (89,598 | ) | 98.06 | (40,807 | ) | (39,572 | ) | 96.97 | (39,664 | ) | 97.20 | |||||||||||||||||||||||
Non-Exchange Traded Preferred and Common Equity Investment in Mortgage-Related Entities | n/a | 23,099 | n/a | 22,185 | n/a | n/a | 18,090 | n/a | 17,243 | n/a | |||||||||||||||||||||||||||||
Non-Exchange Traded Corporate Equity | n/a | 4,382 | n/a | 4,313 | n/a | n/a | 3,987 | n/a | 4,313 | n/a | |||||||||||||||||||||||||||||
Long Common Stock | n/a | 2,837 | n/a | 2,784 | n/a | n/a | 4,396 | n/a | 4,381 | n/a | |||||||||||||||||||||||||||||
Short Common Stock | n/a | (2,154 | ) | n/a | (2,223 | ) | n/a | n/a | (8,154 | ) | n/a | (8,052 | ) | n/a | |||||||||||||||||||||||||
Real Estate Owned | n/a | 25,390 | n/a | 25,475 | n/a | n/a | 3,349 | n/a | 3,539 | n/a | |||||||||||||||||||||||||||||
Total | $ | 1,377,695 | $ | 1,388,178 | $ | 1,104,949 | $ | 1,121,486 |
(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)
March 31, 2017 | December 31, 2016 | |||||||||||||||
(In thousands) | Notional Value | Fair Value | Notional Value | Fair Value | ||||||||||||
Mortgage-Related Derivatives: | ||||||||||||||||
Long CDS on RMBS and CMBS Indices |
$ | 14,971 | $ | (2,244 | ) | $ | 17,228 | $ | (2,887 | ) | ||||||
Short CDS on RMBS and CMBS Indices | (79,502 | ) | 10,642 | (112,999 | ) | 16,701 | ||||||||||
Short CDS on Individual RMBS | (10,005 | ) | 5,610 | (10,134 | ) | 5,070 | ||||||||||
Net Mortgage-Related Derivatives | (74,536 | ) | 14,008 | (105,905 | ) | 18,884 | ||||||||||
Long CDS referencing Corporate Bond Indices | 11,909 | 832 | 40,611 | 2,744 | ||||||||||||
Short CDS referencing Corporate Bond Indices | (62,821 | ) | (2,911 | ) | (49,306 | ) | (2,840 | ) | ||||||||
Long CDS on Corporate Bonds | 108,028 | 269 | 59,637 | (1,408 | ) | |||||||||||
Short CDS on Corporate Bonds | (146,391 | ) | (6,330 | ) | (83,108 | ) | (2,886 | ) | ||||||||
Purchased Put Options on CDS on Corporate Bond Indices(2) | — | — | 10,000 | — | ||||||||||||
Short Total Return Swaps on Corporate Equities(3) | (21,683 | ) | (11 | ) | (42,093 | ) | (55 | ) | ||||||||
Long Total Return Swaps on Corporate Debt(4) | — | — | 5,438 | (94 | ) | |||||||||||
Interest Rate Derivatives: | ||||||||||||||||
Long Interest Rate Swaps | 365,806 | (2,378 | ) | 376,074 | (2,122 | ) | ||||||||||
Short Interest Rate Swaps | (879,314 | ) | 5,605 | (862,535 | ) | 5,062 | ||||||||||
Long Eurodollar Futures(6) | 11,000 | (11 | ) | 11,000 | (8 | ) | ||||||||||
Short Eurodollar Futures(6) | (42,000 | ) | (39 | ) | (62,000 | ) | (51 | ) | ||||||||
Short U.S. Treasury Note Futures(5) | (6,800 | ) | (7 | ) | (7,000 | ) | 19 | |||||||||
Interest Rate Caps | 61,908 | 1 | 61,908 | 2 | ||||||||||||
Purchased Equity Call Options(7) | 23 | 28 | 16 | 42 | ||||||||||||
Purchased Equity Put Options(7) | 5 | 38 | — | — | ||||||||||||
Total Net Interest Rate Derivatives | 3,237 | 2,944 | ||||||||||||||
Other Derivatives: | ||||||||||||||||
Short Foreign Currency Forwards(8) | (63,223 | ) | (125 | ) | (54,787 | ) | (456 | ) | ||||||||
Warrants(9) | — | — | 1,639 | 106 | ||||||||||||
Mortgage Loan Purchase Commitments(10) | — | — | 20,601 | (31 | ) | |||||||||||
Total Net Derivatives | $ | 8,969 | $ | 16,908 |
(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 March 31, 2017, derivative assets and derivative liabilities were $29.9 million and $20.9 million, respectively, for a net fair value of $9.0 million, as reflected in "Total Net Derivatives" above. 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. | |||
(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) | Notional value represents number of underlying shares times the closing price of the underlying security. | |||
(4) | Notional value represents outstanding principal on underlying corporate debt. | |||
(5) | Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of March 31, 2017 and December 31, 2016 a total of 68 and 70 short U.S. Treasury note futures contracts were held, respectively. | |||
(6) | Every $1,000,000 in notional value represents one Eurodollar future contract. | |||
(7) | Notional value represents the number of common shares we have the option to purchase multiplied by the strike price. | |||
(8) | Notional value represents U.S. Dollars to be received by us at the maturity of the forward contract. | |||
(9) | Notional value represents number of shares that warrants are convertible into. | |||
(10) | 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 March 31, 2017, 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 |
||||||||||||
Market Value |
% of Total |
Market Value |
% of Total |
|||||||||||
Agency RMBS - ARM Pools | $ | 61 | 0.01 |
% |
$ | (77 | ) | (0.01 | )% | |||||
Agency RMBS - Fixed Pools and IOs | 13,115 | 2.00 |
% |
(17,153 | ) | (2.62 | )% | |||||||
TBAs | (4,968 | ) | (0.76 | )% | 6,862 | 1.05 |
% |
|||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans | 3,495 | 0.54 |
% |
(3,057 | ) | (0.47 | )% | |||||||
Interest Rate Swaps | (6,660 | ) | (1.02 | )% | 6,408 | 0.98 |
% |
|||||||
U.S. Treasury Securities | (3,118 | ) | (0.48 | )% | 2,960 | 0.45 |
% |
|||||||
Eurodollar and U.S. Treasury Futures | (298 | ) | (0.05 | )% | 290 | 0.05 |
% |
|||||||
Mortgage-Related Derivatives | 53 | 0.01 |
% |
(53 | ) | (0.01 | )% | |||||||
Corporate Securities and Derivatives on Corporate Securities | (98 | ) | (0.01 | )% | 157 | 0.02 |
% |
|||||||
Repurchase Agreements and Reverse Repurchase Agreements | (589 | ) | (0.09 | )% | 567 | 0.09 |
% |
|||||||
$ | 993 | 0.15 |
% |
$ | (3,096 | ) | (0.47 | )% |
(1) | Based on the market environment as of March 31, 2017. 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
Borrowings By Collateral Type
The following table summarizes our aggregate borrowings, including
reverse repos and other secured borrowings for the three month period
ended
As of
March 31, 2017 |
For the Quarter Ended |
As of December 31, 2016 |
For the Quarter Ended |
|||||||||||||||
Collateral for Borrowing |
Outstanding
Borrowings |
Average
Borrowings |
Average
Cost of Funds |
Outstanding Borrowings |
Average Borrowings |
Average Cost of Funds |
||||||||||||
(In thousands) | ||||||||||||||||||
Credit | $ | 318,561 | $ | 292,369 | 3.05% | $ | 261,927 | $ | 243,712 | 3.09% | ||||||||
Agency RMBS | 793,020 | 792,810 | 0.95% | 790,312 | 768,137 | 0.83% | ||||||||||||
Total Excluding U.S. Treasury Securities | 1,111,581 | 1,085,179 | 1.52% | 1,052,239 | 1,011,849 | 1.37% | ||||||||||||
U.S. Treasury Securities | 36,492 | 37,848 | 0.58% | 5,428 | 6,208 | 0.54% | ||||||||||||
Total | $ | 1,148,073 | $ | 1,123,027 | 1.48% | $ | 1,057,667 | $ | 1,018,057 | 1.37% | ||||||||
Leverage Ratio (1) | 1.75:1 | 1.64:1 | ||||||||||||||||
Leverage Ratio Excluding U.S. Treasury Securities (1) | 1.70:1 | 1.63:1 |
(1) | The leverage ratio does not account for liabilities other than reverse repurchase agreements ("reverse repos") and other secured borrowings. |
Throughout the first quarter, borrowing costs increased as LIBOR rose, which impacted our Agency-related as well as Credit-related borrowings. However, the cost of funds for our Credit-related borrowings decreased slightly quarter over quarter, primarily because we had an increase in the amount of reverse repo borrowings in our corporate credit relative value trading strategy; the reverse repo borrowings in this strategy have much lower costs of funds than most of our other Credit-related borrowings. Excluding reverse repo on corporate bonds held in this strategy, our Credit-related average cost of funds increased to 3.47% for the first quarter, as compared to 3.44% for the fourth quarter.
Our leverage ratio, excluding U.S. Treasury securities, increased to 1.70:1 as of March 31, 2017, as compared to 1.63:1 as of December 31, 2016. Our leverage ratio may fluctuate period over period based on portfolio management decisions, market conditions, and the timing of security purchase and sale transactions.
Reverse Repurchase Agreements By Remaining Maturity (1)
(In thousands) | As of March 31, 2017 | As of December 31, 2016 | ||||||||||
Remaining Maturity (2) |
Outstanding
Borrowings |
% of
Borrowings |
Outstanding Borrowings |
% of Borrowings |
||||||||
30 Days or Less | $ | 503,493 | 46.3% | $ | 506,002 | 49.0% | ||||||
31-60 Days | 187,720 | 17.3% | 222,262 | 21.5% | ||||||||
61-90 Days | 196,116 | 18.0% | 191,487 | 18.5% | ||||||||
91-120 Days | 2,987 | 0.3% | 18,324 | 1.8% | ||||||||
121-150 Days | 83,680 | 7.7% | 13,037 | 1.2% | ||||||||
151-180 Days | 34,536 | 3.2% | 31,912 | 3.1% | ||||||||
181-360 Days | 77,739 | 7.2% | 50,557 | 4.9% | ||||||||
$ | 1,086,271 | 100.0% | $ | 1,033,581 | 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 March 31,
2017 increased to 59 days from 56 days as of December 31, 2016. In
addition to borrowings under reverse repos, we had other secured
borrowings related to certain of our loan portfolios in the amount of
Our borrowings outstanding under reverse repos were with a total of
nineteen counterparties as of March 31, 2017. As of March 31, 2017, 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, as a percentage of average equity, was 2.8% for the quarter ended March 31, 2017 and 3.1% for the quarter ended December 31, 2016. The decrease in our expense ratio was principally due to a quarter-over-quarter decrease in professional fees. We did not incur incentive fee expense for either the first quarter of 2017 or fourth quarter of 2016.
Dividends
On
Share Repurchase Program
On
During the three month period ended March 31, 2017, we repurchased
130,488 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 Friday,
May 5, 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 16, 2017 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 | ||||||||
(In thousands, except per share amounts) | March 31, 2017 | December 31, 2016 | ||||||
Investment income | ||||||||
Interest income | $ | 22,886 | $ | 18,265 | ||||
Other income | 939 | 2,342 | ||||||
Total investment income | 23,825 | 20,607 | ||||||
Expenses | ||||||||
Base management fee | 2,410 | 2,416 | ||||||
Interest expense | 6,003 | 4,461 | ||||||
Other investment related expenses | 1,521 | 2,062 | ||||||
Other operating expenses | 2,116 | 2,640 | ||||||
Total expenses | 12,050 | 11,579 | ||||||
Net investment income | 11,775 | 9,028 | ||||||
Net realized gain (loss) on: | ||||||||
Investments | 594 | 3,127 | ||||||
Financial derivatives, excluding currency forwards | (1,581 | ) | (5,143 | ) | ||||
Financial derivatives—currency forwards | (822 | ) | 3,873 | |||||
Foreign currency transactions | 978 | (4,099 | ) | |||||
(831 | ) | (2,242 | ) | |||||
Change in net unrealized gain (loss) on: | ||||||||
Investments | 5,758 | (14,396 | ) | |||||
Financial derivatives, excluding currency forwards | (1,157 | ) | 9,185 | |||||
Financial derivatives—currency forwards | 330 | (178 | ) | |||||
Foreign currency translation | (145 | ) | 535 | |||||
4,786 | (4,854 | ) | ||||||
Net realized and change in net unrealized gain (loss) on investments and financial derivatives | 3,955 | (7,096 | ) | |||||
Net increase in equity resulting from operations | 15,730 | 1,932 | ||||||
Less: Increase in equity resulting from operations attributable to non-controlling interests | 452 | 240 | ||||||
Net increase in shareholders' equity resulting from operations | $ | 15,278 | $ | 1,692 | ||||
Net increase in shareholders' equity resulting from operations per share: | ||||||||
Basic and diluted | $ | 0.47 | $ | 0.05 | ||||
Weighted average shares and LTIP units outstanding | 32,718 | 32,928 | ||||||
Weighted average shares and convertible units outstanding | 32,930 | 33,140 | ||||||
ELLINGTON FINANCIAL LLC | |||||||
CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES AND EQUITY | |||||||
(UNAUDITED) | |||||||
As of | |||||||
March 31, | December 31, | ||||||
(In thousands, except share amounts) | 2017 |
2016(1) |
|||||
ASSETS | |||||||
Cash and cash equivalents | $ | 104,219 | $ | 123,274 | |||
Restricted cash | 655 | 655 | |||||
Investments, financial derivatives, and repurchase agreements: | |||||||
Investments, at fair value (Cost – $1,876,105 and $1,525,710) | 1,864,213 | 1,505,026 | |||||
Financial derivatives–assets, at fair value (Net cost – $37,658 and $40,724) | 29,907 | 35,595 | |||||
Repurchase agreements (Cost – $294,468 and $185,205) | 293,802 | 184,819 | |||||
Total Investments, financial derivatives, and repurchase agreements | 2,187,922 | 1,725,440 | |||||
Due from brokers | 57,873 | 93,651 | |||||
Receivable for securities sold and financial derivatives | 550,241 | 445,112 | |||||
Interest and principal receivable | 25,071 | 21,704 | |||||
Other assets | 5,264 | 3,359 | |||||
Total assets | $ | 2,931,245 | $ | 2,413,195 | |||
LIABILITIES | |||||||
Investments and financial derivatives: | |||||||
Investments sold short, at fair value (Proceeds – $782,395 and $589,429) | $ | 780,320 | $ | 584,896 | |||
Financial derivatives–liabilities, at fair value (Net proceeds – $16,024 and $12,012) | 20,938 | 18,687 | |||||
Total investments and financial derivatives | 801,258 | 603,583 | |||||
Reverse repurchase agreements | 1,086,271 | 1,033,581 | |||||
Due to brokers | 5,512 | 12,780 | |||||
Payable for securities purchased and financial derivatives | 310,535 | 85,168 | |||||
Other secured borrowings (Proceeds – $61,802 and $24,086) | 61,802 | 24,086 | |||||
Accounts payable and accrued expenses | 3,729 | 3,327 | |||||
Base management fee payable | 2,410 | 2,416 | |||||
Interest and dividends payable | 4,137 | 3,460 | |||||
Other liabilities | 1,136 | 17 | |||||
Total liabilities | 2,276,790 | 1,768,418 | |||||
EQUITY | 654,455 | 644,777 | |||||
TOTAL LIABILITIES AND EQUITY | $ | 2,931,245 | $ | 2,413,195 | |||
ANALYSIS OF EQUITY: | |||||||
Common shares, no par value, 100,000,000 shares authorized; | |||||||
(32,164,215 and 32,294,703, shares issued and outstanding) | $ | 626,116 | $ | 627,620 | |||
Additional paid-in capital–LTIP units | 10,135 | 10,041 | |||||
Total Shareholders' Equity | 636,251 | 637,661 | |||||
Non-controlling interests | 18,204 | 7,116 | |||||
Total Equity | $ | 654,455 | $ | 644,777 | |||
PER SHARE INFORMATION: | |||||||
Common shares, no par value | $ | 19.78 | $ | 19.75 | |||
DILUTED PER SHARE INFORMATION: | |||||||
Common shares and convertible units, no par value (2) | $ | 19.50 | $ | 19.46 |
(1) | Derived from audited financial statements as of December 31, 2016. | |||
(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/20170504006755/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