Ellington Financial LLC Reports Second Quarter 2014 Results
Highlights
- Net increase in shareholders' equity resulting from operations ("net income") for the second quarter was
$20.9 million , or$0.81 per basic and diluted share. - Book value per share as of
June 30, 2014 was$24.14 on a diluted basis, after payment of a quarterly dividend in the second quarter of$0.77 per share, as compared to book value per share of$24.10 on a diluted basis as ofMarch 31, 2014 . - Our non-Agency strategy generated gross income of
$20.3 million for the quarter endedJune 30, 2014 . - Our Agency strategy generated gross income of
$5.2 million for the quarter endedJune 30, 2014 . - Our Board of Directors declared a dividend of
$0.77 per share for the second quarter of 2014; dividends are paid quarterly in arrears.
Second Quarter 2014 Results
For the quarter ended June 30, 2014, net income was
"EFC's strong 2014 performance continued in the second quarter on multiple fronts," said
Non-Agency
Our non-Agency strategy generated gross income in the amount of
While we believe that fundamental factors, such as home price appreciation and a declining foreclosure inventory, remain relatively positive for non-Agency RMBS, we believe that on the technical side the non-Agency MBS market remains vulnerable, especially to a resumption of increases in long-term interest rates. The non-Agency MBS market has become dominated by large bond mutual funds, and is therefore now driven indirectly by the large-scale behavior of retail investors. This behavior tends to be much more momentum-driven, as evidenced in mid-2013 when the increase in U.S. Treasury yields was followed by substantial retail bond fund outflows, thereby putting downward pressure on prices as redemptions forced bond mutual fund managers to sell assets. This technical vulnerability has been heightened further by the fact that dealers, faced with regulatory requirements such as Basel III and the Volcker Rule, are no longer willing to hold large inventories of non-Agency MBS, and thus are no longer able to absorb large-scale selling by bond funds into their inventories. In the meantime, however, demand for non-Agency MBS assets remains strong.
During the second quarter, we turned over approximately 18% of the portfolio, as measured by sales, excluding paydowns. Active portfolio trading is a key component of our strategy. As a result of our trading activity, we generated net realized gains of
While CMBS new issuance volume declined approximately 3% to
We continue to see compelling opportunities in distressed small balance commercial loans. As of
Our European non-dollar denominated RMBS have also performed well, and during the second quarter we increased our holdings within this asset class. As of
We also continue to find attractive investment opportunities in collateralized loan obligations, or "CLOs," particularly legacy CLOs. We have been active in this sector since early 2013. The new issue CLO market has been very robust, with 2014 on pace to be a record year. As a result of this increased supply, yield spreads on mezzanine tranches of new issue CLOs widened significantly in the second quarter, despite general yield spread tightening in most other fixed income sectors. Meanwhile, investor and dealer selling of legacy CLOs, to make room for new issuance, has been quite heavy, thereby forcing spreads wider for legacy product. This has enabled us to acquire legacy CLOs, where we prefer the return profile, at attractive prices. Over the course of the second quarter, we significantly increased our holdings of CLOs to
During the second quarter, we purchased just one small pool of non-performing and sub-performing residential mortgage loans, or "residential NPLs." Given the run-up in prices of assets in this sector, we have acquired residential NPLs at a slower pace than we originally anticipated. However, with
Agency
Our Agency strategy generated gross income of
Our Agency RMBS are principally comprised of "specified pools." Specified pools are fixed rate Agency pools with special prepayment 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 prepayment characteristics.
During the second quarter, our Agency RMBS purchasing activity continued to focus primarily on higher coupon specified pools. As in the first quarter, pay-ups (price premiums for specified pools relative to their generic pool "TBA" counterparts) increased during the second quarter, thus continuing the reversal of the pay-up declines of the second half of 2013. Notwithstanding these increases of the past two quarters, pay-ups for many specified pool sectors remain well below their previous highs. Yield spreads on fixed rate reverse mortgage pools, which had tightened about 30 basis points during the first quarter, continued this trend and tightened an additional 10-15 basis points in the second quarter, as issuance of reverse mortgage pools continued to slow.
Prepayment rates increased only marginally in the second quarter, and they remain low by historical standards relative to the current level of mortgage rates. However, based on observations in the beginning of the third quarter, we believe that prepayments may soon begin to increase. As a result, we are still finding it attractive to buy pools with prepayment protection, particularly in those sectors that are more susceptible to increased prepayments. For the second consecutive quarter, and despite an approximate 25 basis point drop in mortgage rates during April and May, our Agency interest only securities performed well during the quarter, as prepayments increased but remained relatively low.
While Agency RMBS prices generally increased in the second quarter, over the near term we believe that the combined effects of continued Federal Reserve tapering and a potential rise in mortgage originations may ultimately put pressure on valuations of Agency RMBS. We also think it is unlikely that interest rate volatility will remain as subdued as it was in the first and second quarters. While both of these factors may weigh on the performance of Agency RMBS relative to U.S. Treasury securities, we believe that each of these factors should weigh more heavily on TBAs as compared to specified pools, so they should actually support specified pool pay-ups. As the Federal Reserve continues to taper its Agency RMBS purchases, which are concentrated in purchases of TBAs, specified pools should outperform TBAs. The effects of the taper can already be observed in the TBA roll market: TBA roll prices in early July were noticeably weaker than they were at the beginning of the second quarter. We have also noted that as dealer balance sheets contract in light of regulatory changes and risk appetite decreases, the depth of the Agency RMBS market has weakened somewhat. Essentially, this means that the amount of a particular asset that can be bought or sold without materially impacting its price has declined. At the same time, however, the decline in competition from dealers is helping us to find attractive opportunities to purchase assets.
Over the course of the second quarter and consistent with our strategy, we continued to hedge against the risk of rising interest rates, primarily with interest rate swaps and TBAs. Since long-term interest rates declined during the quarter, our interest rate hedges generated net losses, thereby partially reducing the impact of increasing asset prices. Notwithstanding the recent trend of declining interest rates and the relatively muted level of volatility, we believe the risk of higher near-term volatility in the Agency RMBS market remains. This reinforces the importance of our ability to hedge our risks using a variety of tools, including TBAs. Active trading of both assets and hedges has, and continues to be, a key element of our Agency RMBS strategy.
One metric that we use to measure our overall prepayment risk is our net Agency premium as a percentage of our long Agency RMBS holdings.
Financial Results
We prepare our financial statements in accordance with ASC 946, Financial Services—Investment Companies. As a result, our investments are carried at fair value and all valuation changes are recorded in the Consolidated Statement of Operations.
We also measure our performance through net-asset-value-based total return. Net-asset-value-based total return measures the change in our book value per share and assumes the reinvestment of dividends at book value per share. For the quarter ended June 30, 2014, our net-asset-value-based total return was 3.36%. Our net-asset-value-based total return from our inception (
The following table summarizes our operating results for the quarters ended June 30, 2014 and March 31, 2014 and the six months ended
Quarter |
Per |
% of |
Quarter |
Per |
% of |
Six Months |
Per |
% of |
||||||||||||||||||||
(In thousands, except per share amounts) |
||||||||||||||||||||||||||||
Non-Agency MBS, mortgage loans, ABS, and other: |
||||||||||||||||||||||||||||
Interest income |
$ |
12,970 |
$ |
0.50 |
2.05 |
% |
$ |
13,516 |
$ |
0.52 |
2.15 |
% |
$ |
26,486 |
$ |
1.02 |
4.20 |
% |
||||||||||
Net realized gain |
12,906 |
0.50 |
2.05 |
% |
24,255 |
0.93 |
3.85 |
% |
37,161 |
1.43 |
5.90 |
% |
||||||||||||||||
Change in net unrealized gain (loss) |
2,417 |
0.09 |
0.38 |
% |
(11,530) |
(0.44) |
(1.83) |
% |
(9,113) |
(0.35) |
(1.45) |
% |
||||||||||||||||
Net interest rate hedges(1) |
(2,418) |
(0.09) |
(0.38) |
% |
(2,427) |
(0.09) |
(0.39) |
% |
(4,845) |
(0.18) |
(0.77) |
% |
||||||||||||||||
Net credit hedges and other activities(2) |
(3,573) |
(0.14) |
(0.57) |
% |
1,074 |
0.04 |
0.17 |
% |
(2,499) |
(0.10) |
(0.40) |
% |
||||||||||||||||
Interest expense |
(1,478) |
(0.06) |
(0.23) |
% |
(1,647) |
(0.06) |
(0.26) |
% |
(3,125) |
(0.12) |
(0.49) |
% |
||||||||||||||||
Other investment related expenses |
(489) |
(0.02) |
(0.08) |
% |
(163) |
(0.01) |
(0.03) |
% |
(652) |
(0.03) |
(0.11) |
% |
||||||||||||||||
Total non-Agency MBS, mortgage loans, ABS, and other profit |
20,335 |
0.78 |
3.22 |
% |
23,078 |
0.89 |
3.66 |
% |
43,413 |
1.67 |
6.88 |
% |
||||||||||||||||
Agency RMBS: |
||||||||||||||||||||||||||||
Interest income |
8,009 |
0.31 |
1.27 |
% |
7,947 |
0.30 |
1.26 |
% |
15,956 |
0.61 |
2.53 |
% |
||||||||||||||||
Net realized gain (loss) |
2,005 |
0.08 |
0.32 |
% |
(5,056) |
(0.19) |
(0.80) |
% |
(3,051) |
(0.11) |
(0.48) |
% |
||||||||||||||||
Change in net unrealized gain (loss) |
14,031 |
0.54 |
2.22 |
% |
12,450 |
0.48 |
1.98 |
% |
26,481 |
1.02 |
4.20 |
% |
||||||||||||||||
Net interest rate hedges(1) |
(18,055) |
(0.70) |
(2.86) |
% |
(10,443) |
(0.40) |
(1.66) |
% |
(28,498) |
(1.10) |
(4.52) |
% |
||||||||||||||||
Interest expense |
(776) |
(0.03) |
(0.12) |
% |
(776) |
(0.03) |
(0.12) |
% |
(1,552) |
(0.06) |
(0.24) |
% |
||||||||||||||||
Total Agency RMBS profit |
5,214 |
0.20 |
0.83 |
% |
4,122 |
0.16 |
0.66 |
% |
9,336 |
0.36 |
1.49 |
% |
||||||||||||||||
Total non-Agency and Agency MBS, mortgage loans, ABS, and other profit |
25,549 |
0.98 |
4.05 |
% |
27,200 |
1.05 |
4.32 |
% |
52,749 |
2.03 |
8.37 |
% |
||||||||||||||||
Other interest income (expense), net |
(3) |
— |
0.00 |
% |
(4) |
— |
0.00 |
% |
(7) |
— |
0.00 |
% |
||||||||||||||||
Other expenses (excluding incentive fee) |
(4,342) |
(0.17) |
(0.69) |
% |
(4,358) |
(0.17) |
(0.69) |
% |
(8,700) |
(0.34) |
(1.38) |
% |
||||||||||||||||
Net increase in equity resulting from operations (before incentive fee) |
21,204 |
0.81 |
3.36 |
% |
22,838 |
0.88 |
3.63 |
% |
44,042 |
1.69 |
6.99 |
% |
||||||||||||||||
Incentive fee |
— |
— |
— |
% |
— |
— |
— |
% |
— |
— |
— |
% |
||||||||||||||||
Net increase in equity resulting from operations |
$ |
21,204 |
$ |
0.81 |
3.36 |
% |
$ |
22,838 |
$ |
0.88 |
3.63 |
% |
$ |
44,042 |
$ |
1.69 |
6.99 |
% |
||||||||||
Less: Net increase in equity resulting from operations attributable to non-controlling interests |
257 |
203 |
460 |
|||||||||||||||||||||||||
Net increase in shareholders' equity resulting from operations(6) |
$ |
20,947 |
$ |
0.81 |
3.36 |
% |
$ |
22,635 |
$ |
0.88 |
3.63 |
% |
$ |
43,582 |
$ |
1.69 |
6.99 |
% |
||||||||||
Weighted average shares and convertible units(3) outstanding |
26,065 |
26,059 |
26,062 |
|||||||||||||||||||||||||
Average equity (includes non-controlling interests)(4) |
$ |
630,443 |
$ |
629,306 |
$ |
629,846 |
||||||||||||||||||||||
Weighted average shares and LTIP units outstanding(5) |
25,853 |
25,847 |
25,850 |
|||||||||||||||||||||||||
Average shareholders' equity (excludes non-controlling interests)(4) |
$ |
623,433 |
$ |
623,021 |
$ |
623,259 |
(1) |
Includes TBAs and U.S. Treasuries, if applicable. |
(2) |
Includes equity strategies and related hedges. |
(3) |
Convertible units include Operating Partnership units attributable to non-controlling interests and LTIP units. |
(4) |
Average equity and average shareholders' equity are calculated using month end values. |
(5) |
Excludes Operating Partnership units attributable to non-controlling interests. |
(6) |
Per share information is calculated using weighted average shares and LTIP units outstanding. Percentage of average equity is calculated using average shareholders' equity, which excludes non-controlling interests. |
Portfolio
The following tables summarize our portfolio holdings as of June 30, 2014 and March 31, 2014:
Investment Portfolio
June 30, 2014 |
March 31, 2014 |
|||||||||||||||||||||||||||||
(In thousands) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
Current Principal |
Fair Value |
Average Price(1) |
Cost |
Average Cost(1) |
||||||||||||||||||||
Non-Agency RMBS and Residential mortgage loans |
$ |
747,911 |
$ |
504,864 |
$ |
67.50 |
$ |
459,362 |
$ |
61.42 |
$ |
767,960 |
$ |
509,668 |
$ |
66.37 |
$ |
468,771 |
$ |
61.04 |
||||||||||
Non-Agency CMBS and Commercial mortgage loans |
130,774 |
65,462 |
50.06 |
65,703 |
50.24 |
131,412 |
76,649 |
58.33 |
75,080 |
57.13 |
||||||||||||||||||||
Other ABS |
70,139 |
67,635 |
96.43 |
67,980 |
96.92 |
47,259 |
45,478 |
96.23 |
45,656 |
96.61 |
||||||||||||||||||||
Total Non-Agency MBS, mortgage loans, and Other ABS |
948,824 |
637,961 |
67.24 |
593,045 |
62.50 |
946,631 |
631,795 |
66.74 |
589,507 |
62.27 |
||||||||||||||||||||
Agency RMBS: |
||||||||||||||||||||||||||||||
Floating |
23,277 |
24,592 |
105.65 |
24,662 |
105.95 |
30,142 |
32,073 |
106.41 |
31,838 |
105.63 |
||||||||||||||||||||
Fixed |
783,461 |
841,489 |
107.41 |
828,252 |
105.72 |
755,401 |
794,498 |
105.18 |
796,013 |
105.38 |
||||||||||||||||||||
Reverse Mortgages |
54,328 |
59,473 |
109.47 |
59,855 |
110.17 |
54,605 |
59,765 |
109.45 |
60,459 |
110.72 |
||||||||||||||||||||
Total Agency RMBS |
861,066 |
925,554 |
107.49 |
912,769 |
106.00 |
840,148 |
886,336 |
105.50 |
888,310 |
105.73 |
||||||||||||||||||||
Total Non-Agency and Agency MBS, mortgage loans, and Other ABS |
$ |
1,809,890 |
$ |
1,563,515 |
$ |
86.39 |
$ |
1,505,814 |
$ |
83.20 |
$ |
1,786,779 |
$ |
1,518,131 |
$ |
84.96 |
$ |
1,477,817 |
$ |
82.71 |
||||||||||
Agency Interest Only RMBS |
n/a |
$ |
36,240 |
n/a |
$ |
35,538 |
n/a |
n/a |
$ |
41,375 |
n/a |
$ |
39,946 |
n/a |
||||||||||||||||
Non-Agency Interest Only and Principal Only MBS and Other(2) |
n/a |
$ |
18,089 |
n/a |
$ |
17,384 |
n/a |
n/a |
$ |
5,962 |
n/a |
$ |
5,313 |
n/a |
||||||||||||||||
TBAs: |
||||||||||||||||||||||||||||||
Long |
$ |
136,038 |
$ |
134,347 |
$ |
98.76 |
$ |
132,854 |
$ |
97.66 |
$ |
197,320 |
$ |
190,446 |
$ |
96.52 |
$ |
190,012 |
$ |
96.30 |
||||||||||
Short |
(750,647) |
(797,705) |
106.27 |
(792,172) |
105.53 |
(751,627) |
(782,747) |
104.14 |
(784,191) |
104.33 |
||||||||||||||||||||
Net Short TBAs |
$ |
(614,609) |
$ |
(663,358) |
$ |
107.93 |
$ |
(659,318) |
$ |
107.27 |
$ |
(554,307) |
$ |
(592,301) |
$ |
106.85 |
$ |
(594,179) |
$ |
107.19 |
||||||||||
Short U.S. Treasury Securities |
$ |
(5,000) |
$ |
(4,961) |
$ |
99.23 |
$ |
(4,977) |
$ |
99.55 |
$ |
(5,000) |
$ |
(4,920) |
$ |
98.40 |
$ |
(4,976) |
$ |
99.52 |
||||||||||
Short European Sovereign Bond |
$ |
(22,062) |
$ |
(24,457) |
$ |
110.85 |
$ |
(23,143) |
$ |
104.90 |
$ |
(22,208) |
$ |
(24,195) |
$ |
108.95 |
$ |
(23,481) |
$ |
105.73 |
||||||||||
Repurchase Agreements |
$ |
30,537 |
$ |
30,537 |
$ |
100.00 |
$ |
30,537 |
$ |
100.00 |
$ |
29,875 |
$ |
29,875 |
$ |
100.00 |
$ |
29,872 |
$ |
99.99 |
||||||||||
Short Common Stock |
n/a |
$ |
(25,723) |
n/a |
$ |
(25,925) |
n/a |
n/a |
$ |
(6,903) |
n/a |
$ |
(7,004) |
n/a |
||||||||||||||||
Real Estate Owned |
n/a |
$ |
1,641 |
n/a |
$ |
1,658 |
n/a |
n/a |
$ |
97 |
n/a |
$ |
101 |
n/a |
||||||||||||||||
Total Net Investments |
$ |
931,523 |
$ |
877,568 |
$ |
967,121 |
$ |
923,409 |
(1) |
Represents the dollar amount, per $100 of current principal of the price or cost for the security. |
(2) |
Includes equity tranches and similar securities. |
Non-Agency RMBS and CMBS are generally securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. Disregarding TBAs, Agency RMBS consist primarily of whole-pool pass through certificates. We actively invest in the TBA market. TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced." Given that we use TBAs primarily to hedge the risk of rising interest rates on our long holdings, we generally carry a net short TBA position.
Derivatives Portfolio(1)
June 30, 2014 |
March 31, 2014 |
|||||||||||||||
Notional Value |
Fair Value |
Notional Value |
Fair Value |
|||||||||||||
(In thousands) |
||||||||||||||||
Mortgage-Related Derivatives: |
||||||||||||||||
Long CDS on RMBS and CMBS Indices(2) |
$ |
17,763 |
$ |
(4,298) |
$ |
30,793 |
$ |
(7,023) |
||||||||
Short CDS on RMBS and CMBS Indices(3) |
(72,146) |
2,882 |
(82,134) |
5,025 |
||||||||||||
Short CDS on Individual RMBS(3) |
(23,524) |
13,812 |
(24,734) |
14,824 |
||||||||||||
Net Mortgage-Related Derivatives |
(77,907) |
12,396 |
(76,075) |
12,826 |
||||||||||||
Long CDS on Corporate Bond Indices |
116,034 |
20,700 |
102,314 |
17,963 |
||||||||||||
Short CDS on Corporate Bond Indices |
(271,561) |
(25,901) |
(245,050) |
(14,771) |
||||||||||||
Long CDS on Corporate Bonds |
4,395 |
(2,287) |
— |
— |
||||||||||||
Purchased Options on CDS on Corporate Bond Indices(4) |
— |
— |
22,588 |
86 |
||||||||||||
Written Options on CDS on Corporate Bond Indices(5) |
(20,790) |
(76) |
— |
— |
||||||||||||
Long Total Return Swaps on Corporate Equities(6) |
31,506 |
20 |
30,721 |
1 |
||||||||||||
Short Total Return Swaps on Corporate Equities(6) |
(13,450) |
(40) |
(12,229) |
(17) |
||||||||||||
Interest Rate Derivatives: |
||||||||||||||||
Long Interest Rate Swaps(7) |
633,640 |
11,497 |
629,350 |
3,407 |
||||||||||||
Short Interest Rate Swaps(8) |
(1,118,141) |
(4,851) |
(1,148,741) |
8,534 |
||||||||||||
Long U.S. Treasury Note Futures(9) |
33,700 |
200 |
82,100 |
(94) |
||||||||||||
Long Eurodollar Futures(10) |
4,000 |
— |
— |
— |
||||||||||||
Short Eurodollar Futures(10) |
(763,000) |
(321) |
(732,000) |
17 |
||||||||||||
Short U.S. Treasury Note Futures(11) |
(17,600) |
(15) |
(500) |
— |
||||||||||||
Purchased Payer Swaptions(12) |
8,300 |
(486) |
10,300 |
(328) |
||||||||||||
Written Payer Swaptions(13) |
(17,300) |
492 |
(21,600) |
307 |
||||||||||||
Purchased Receiver Swaptions(14) |
25,000 |
2 |
— |
— |
||||||||||||
Purchased Straddle Swaptions(15) |
30,000 |
(144) |
— |
— |
||||||||||||
Written Straddle Swaptions(16) |
(37,000) |
168 |
— |
— |
||||||||||||
Total Net Interest Rate Derivatives |
6,542 |
11,843 |
||||||||||||||
Other Derivatives: |
||||||||||||||||
Long Foreign Currency Forwards(17) |
8,640 |
52 |
— |
— |
||||||||||||
Short Foreign Currency Forwards(18) |
(40,900) |
(314) |
(27,869) |
125 |
||||||||||||
Total Net Derivatives |
$ |
11,092 |
$ |
28,056 |
(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 June 30, 2014, derivative assets and derivative liabilities were $59.5 million and $48.4 million, respectively, for a net fair value of $11.1 million, as reflected in "Total Net Derivatives" above. As of March 31, 2014, derivative assets and derivative liabilities were $57.6 million and $29.5 million, respectively, for a net fair value of $28.1 million, as reflected in "Total Net Derivatives" above. |
(2) |
Long mortgage-related derivatives represent transactions where we sold credit protection to a counterparty. |
(3) |
Short mortgage-related derivatives represent transactions where we purchased credit protection from a counterparty. |
(4) |
Represents our option to enter into a CDS on a corporate bond index whereby we would pay a fixed rate and receive credit protection payments. |
(5) |
Represents the option on the part of a counterparty to enter into a CDS on a corporate bond index whereby we would receive a fixed rate and pay credit protection payments. |
(6) |
Notional value represents number of underlying shares or par value times the closing price of the underlying security. |
(7) |
For long interest rate swaps, a floating rate is being paid and a fixed rate is being received. |
(8) |
For short interest rate swaps, a fixed rate is being paid and a floating rate is being received. |
(9) |
Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of June 30, 2014 and March 31, 2014, a total of 337 and 608 contracts were held, respectively. |
(10) |
Every $1,000,000 in notional value represents one Eurodollar future contract. |
(11) |
Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held. As of June 30 , 2014 and March 31, 2014 a total of 88 and 5 contracts were held, respectively. |
(12) |
Represents the option on our part to enter into an interest rate swap with a counterparty whereby we would pay a fixed rate and receive a floating rate. |
(13) |
Represents the option on the part of a counterparty to enter into an interest rate swap with us whereby we would receive a fixed rate and pay a floating rate. |
(14) |
Represents the option on our part to enter into an interest rate swap with a counterparty whereby we would receive a fixed rate and pay a floating rate. |
(15) |
Represents the combination of a purchased payer swaption and a purchased receiver swaption on the same underlying swap. |
(16) |
Represents the combination of a written payer swaption and a written receiver swaption on the same underlying swap. |
(17) |
Notional amount represents U.S. Dollars to be paid by us at the maturity of the forward contract. |
(18) |
Notional amount represents U.S. Dollars to be received by us at the maturity of the forward contract. |
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 June 30, 2014, the estimated effects on the value of our portfolio, both overall and by category, of hypothetical, immediate, 50 basis point downward and upward parallel shifts in interest rates.
Estimated Change in Value (1) |
||||||||
(In thousands) |
50 Basis Point Decline in Interest Rates |
50 Basis Point Increase in Interest Rates |
||||||
Agency RMBS - ARM Pools |
$ |
305 |
$ |
(365) |
||||
Agency RMBS - Fixed Pools and IOs |
13,337 |
(20,563) |
||||||
TBAs |
(9,331) |
13,378 |
||||||
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans |
6,265 |
(6,100) |
||||||
Interest Rate Swaps |
(11,232) |
10,689 |
||||||
Interest Rate Swaptions |
101 |
(213) |
||||||
U.S. Treasury Securities |
(105) |
103 |
||||||
Eurodollar and U.S. Treasury Futures |
(90) |
90 |
||||||
Mortgage-Related Derivatives |
(366) |
616 |
||||||
Corporate Securities and Derivatives on Corporate Securities |
896 |
(611) |
||||||
Repurchase Agreements and Reverse Repurchase Agreements |
(515) |
694 |
||||||
$ |
(735) |
$ |
(2,282) |
(1) |
Based on the market environment as of June 30, 2014. The preceding analysis does not include sensitivities to changes in interest rates for instruments for which we believe that the effect of a change in interest rates is not material to the value of the overall portfolio and/or cannot be accurately estimated. In particular, this analysis excludes certain corporate securities and derivatives on corporate securities, and reflects only sensitivity to U.S. interest rates. Results are based on forward-looking models, which are inherently imperfect, and incorporate various simplifying assumptions. Therefore, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual value of our overall portfolio that would differ from those presented above and such differences might be significant and adverse. |
Borrowed Funds and Liquidity(1)
By Collateral Type
As of |
For the Quarter Ended |
As of |
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) |
||||||||||||||||||||||
Non-Agency RMBS, CMBS, and Other |
$ |
297,837 |
$ |
307,964 |
1.92 |
% |
$ |
308,621 |
$ |
343,308 |
1.94 |
% |
||||||||||
Agency RMBS |
890,994 |
864,934 |
0.36 |
% |
867,286 |
824,216 |
0.38 |
% |
||||||||||||||
Total |
$ |
1,188,831 |
$ |
1,172,898 |
0.77 |
% |
$ |
1,175,907 |
$ |
1,167,524 |
0.84 |
% |
||||||||||
Leverage Ratio (2) |
1.89:1 |
1.87:1 |
(1) |
Borrowed amounts exclude $0.9 million and $1.0 million in securitized debt as of June 30, 2014 and March 31, 2014, respectively, representing long term financing for the related asset. |
(2) |
The leverage ratio does not account for liabilities other than debt financings. Our debt financings consist solely of reverse repurchase agreements ("reverse repos") and a securitized debt financing in the amount of $0.9 million and $1.0 million as of June 30, 2014 and March 31, 2014, respectively. |
Our borrowings under reverse repos increased slightly as of
By Remaining Maturity (1)(2)
(In thousands) |
As of June 30, 2014 |
As of March 31, 2014 |
||||||||||||
Remaining Maturity (3) |
Outstanding Borrowings |
% of Borrowings |
Outstanding Borrowings |
% of Borrowings |
||||||||||
30 Days or Less |
$ |
368,522 |
31.0 |
% |
$ |
339,211 |
28.8 |
% |
||||||
31-60 Days |
348,115 |
29.3 |
% |
353,914 |
30.1 |
% |
||||||||
61-90 Days |
292,692 |
24.6 |
% |
331,512 |
28.2 |
% |
||||||||
91-120 Days |
3,828 |
0.3 |
% |
21,484 |
1.8 |
% |
||||||||
121-150 Days |
28,875 |
2.4 |
% |
8,664 |
0.8 |
% |
||||||||
151-180 Days |
146,799 |
12.4 |
% |
121,122 |
10.3 |
% |
||||||||
$ |
1,188,831 |
100.0 |
% |
$ |
1,175,907 |
100.0 |
% |
(1) |
Borrowed amounts exclude $0.9 million and $1.0 million in securitized debt as of June 30, 2014 and March 31, 2014, respectively, representing long term financing for the related asset. |
(2) |
Reverse repos involving underlying investments that we had sold prior to the applicable period end for settlement following the applicable period end, are shown using their original maturity dates even though such reverse repos may be expected to be terminated early upon settlement of the sale of the underlying investment. Not included are any reverse repos that we may have entered into prior to the applicable period end for which delivery of the borrowed funds is not scheduled until after the applicable period end. |
(3) |
Remaining maturity for a reverse repo is based on the contractual maturity date in effect as of the applicable period end. Some reverse repos have floating interest rates, which may reset before maturity. |
Substantially all of our borrowed funds are in the form of reverse repos. Aside from borrowings under reverse repos, we also had securitized debt outstanding in the amount of
Derivatives/Hedging and Other Investments Summary
The following table summarizes the components of our derivatives/hedging and other investment results for the quarters ended June 30, 2014 and March 31, 2014:
(In thousands) |
Quarter Ended June 30, 2014 |
Quarter Ended March 31, 2014 |
||||||||||||||||||||||
Hedges: |
Net Interest Expense(1) |
Net Realized and Change in Net Unrealized Gain (Loss) |
Total |
Net Interest Expense(1) |
Net Realized and Change in Net Unrealized |
Total |
||||||||||||||||||
Interest Rate Swaps |
$ |
(1,353) |
$ |
(6,198) |
$ |
(7,551) |
$ |
(1,616) |
$ |
(7,295) |
$ |
(8,911) |
||||||||||||
Futures |
— |
(391) |
(391) |
— |
19 |
19 |
||||||||||||||||||
Net TBAs Held Short |
— |
(12,488) |
(12,488) |
— |
(3,752) |
(3,752) |
||||||||||||||||||
Net U.S. Treasuries Held Short |
(12) |
(31) |
(43) |
(43) |
(183) |
(226) |
||||||||||||||||||
Total Interest Rate Hedges |
(1,365) |
(19,108) |
(20,473) |
(1,659) |
(11,211) |
(12,870) |
||||||||||||||||||
Net Credit Hedges and other |
(2,008) |
(1,565) |
(3,573) |
(1,731) |
2,805 |
1,074 |
||||||||||||||||||
Total Hedges |
$ |
(3,373) |
$ |
(20,673) |
$ |
(24,046) |
$ |
(3,390) |
$ |
(8,406) |
$ |
(11,796) |
(1) |
Net interest expense represents fixed rate periodic payments made by us. |
(2) |
Net interest expense includes dividend expense related to common stock sold short. |
Other
Our base management fee and other operating expenses, but excluding interest expense, other investment related expenses and incentive fees, was 2.8%, on an annualized basis, of average equity for each of the quarters ended June 30, 2014 and March 31, 2014, respectively. There was no incentive fee expense incurred for the quarters ended
Dividends
On
Share Repurchase Program
On August 4, 2011, our Board of Directors approved the adoption of a
About
Conference Call
We will host a conference call at
A dial-in replay of the conference call will be available on Thursday, August 7, 2014, at approximately
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Examples of forward-looking statements in this press release include without limitation management's beliefs regarding the current economic and investment environment and our ability to implement our investment and hedging strategies, performance of our investment and hedging strategies, our exposure to prepayment risk in our Agency portfolio, statements regarding our net Agency premium, estimated effects on the fair value of our MBS and interest rate derivative holdings of a hypothetical change in interest rates, statements regarding the drivers of our returns, our expected ongoing annualized expense ratio, and statements regarding our intended dividend policy including the amount to be recommended by management, and our share repurchase program. Our results can fluctuate from month to month and from quarter to quarter depending on a variety of factors, some of which are beyond our control and/or are difficult to predict, including, without limitation, changes in interest rates and the market value of our securities, changes in mortgage default rates and prepayment rates, our ability to borrow to finance our assets, changes in government regulations affecting our business, our ability to maintain our exemption from registration under the Investment Company Act of 1940 and other changes in market conditions and economic trends. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of the our Annual Report on Form 10-K filed on March 14, 2014 which can be accessed through our website at www.ellingtonfinancial.com or at the
ELLINGTON FINANCIAL LLC |
||||||||||||
Three Month Period Ended |
Six Month |
|||||||||||
(In thousands, except per share amounts) |
June 30, 2014 |
March 31, 2014 |
June 30, 2014 |
|||||||||
Investment income |
||||||||||||
Interest income |
$ |
20,996 |
$ |
21,496 |
$ |
42,493 |
||||||
Expenses |
||||||||||||
Base management fee |
2,368 |
2,364 |
4,733 |
|||||||||
Incentive fee |
— |
— |
— |
|||||||||
Interest expense |
2,416 |
2,627 |
5,043 |
|||||||||
Other investment related expenses |
1,232 |
430 |
1,662 |
|||||||||
Other operating expenses |
1,974 |
1,994 |
3,968 |
|||||||||
Total expenses |
7,990 |
7,415 |
15,406 |
|||||||||
Net investment income |
13,006 |
14,081 |
27,087 |
|||||||||
Net realized gain (loss) on: |
||||||||||||
Investments |
4,596 |
9,843 |
14,439 |
|||||||||
Financial derivatives |
(817) |
1,218 |
402 |
|||||||||
Foreign currency transactions |
(95) |
347 |
252 |
|||||||||
3,684 |
11,408 |
15,093 |
||||||||||
Change in net unrealized gain (loss) on: |
||||||||||||
Investments |
9,803 |
(147) |
9,656 |
|||||||||
Financial derivatives |
(5,771) |
(2,439) |
(8,211) |
|||||||||
Foreign currency translation |
482 |
(65) |
417 |
|||||||||
4,514 |
(2,651) |
1,862 |
||||||||||
Net realized and change in unrealized gain (loss) on investments and financial derivatives |
8,198 |
8,757 |
16,955 |
|||||||||
Net increase in equity resulting from operations |
21,204 |
22,838 |
44,042 |
|||||||||
Less: Increase in equity resulting from operations attributable to non-controlling interests |
257 |
203 |
460 |
|||||||||
Net increase in shareholders' equity resulting from operations |
$ |
20,947 |
$ |
22,635 |
$ |
43,582 |
||||||
Net increase in shareholders' equity resulting from operations per share: |
||||||||||||
Basic and diluted |
$ |
0.81 |
$ |
0.88 |
$ |
1.69 |
||||||
Weighted average shares and LTIP units outstanding |
25,853 |
25,847 |
25,850 |
|||||||||
Weighted average shares and convertible units outstanding |
26,065 |
26,059 |
26,062 |
ELLINGTON FINANCIAL LLC |
||||||||||||
As of |
||||||||||||
(In thousands, except share amounts) |
June 30, |
March 31, |
December 31, |
|||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ |
145,032 |
$ |
170,362 |
$ |
183,489 |
||||||
Investments, financial derivatives, and repurchase agreements: |
||||||||||||
Investments, at fair value (Cost – $1,693,248, $1,713,189, and $1,688,257) |
1,753,832 |
1,756,011 |
1,730,130 |
|||||||||
Financial derivatives–assets, at fair value (Net cost – $54,200, $55,230, and $50,533) |
59,470 |
57,560 |
59,664 |
|||||||||
Repurchase agreements (Cost – $30,537, $29,872, and $27,943) |
30,537 |
29,875 |
27,962 |
|||||||||
Total Investments, financial derivatives, and repurchase agreements |
1,843,839 |
1,843,446 |
1,817,756 |
|||||||||
Due from brokers |
109,863 |
68,863 |
82,571 |
|||||||||
Receivable for securities sold |
813,166 |
832,841 |
883,005 |
|||||||||
Interest and principal receivable |
7,618 |
6,800 |
6,831 |
|||||||||
Other assets |
1,709 |
1,693 |
1,546 |
|||||||||
Total assets |
$ |
2,921,227 |
$ |
2,924,005 |
$ |
2,975,198 |
||||||
LIABILITIES |
||||||||||||
Investments and financial derivatives: |
||||||||||||
Investments sold short, at fair value (Proceeds – $846,217, $819,652, and $847,602) |
$ |
852,846 |
$ |
818,765 |
$ |
845,614 |
||||||
Financial derivatives–liabilities, at fair value (Net proceeds – $28,981, $18,821, and $29,746) |
48,378 |
29,504 |
44,791 |
|||||||||
Total investments and financial derivatives |
901,224 |
848,269 |
890,405 |
|||||||||
Reverse repurchase agreements |
1,188,831 |
1,175,907 |
1,236,166 |
|||||||||
Due to brokers |
27,479 |
30,860 |
19,762 |
|||||||||
Payable for securities purchased |
164,792 |
231,809 |
193,047 |
|||||||||
Securitized debt (Proceeds – $906, $963, and $980) |
925 |
983 |
983 |
|||||||||
Accounts payable and accrued expenses |
2,209 |
2,281 |
1,810 |
|||||||||
Base management fee payable |
2,368 |
2,364 |
2,364 |
|||||||||
Incentive fee payable |
— |
— |
3,091 |
|||||||||
Interest and dividends payable |
2,276 |
1,456 |
1,521 |
|||||||||
Total liabilities |
2,290,104 |
2,293,929 |
2,349,149 |
|||||||||
EQUITY |
631,123 |
630,076 |
626,049 |
|||||||||
TOTAL LIABILITIES AND EQUITY |
$ |
2,921,227 |
$ |
2,924,005 |
$ |
2,975,198 |
||||||
ANALYSIS OF EQUITY: |
||||||||||||
Common shares, no par value, 100,000,000 shares authorized; |
||||||||||||
(25,441,750, 25,441,750, and 25,428,186 shares issued and outstanding) |
$ |
614,862 |
$ |
613,822 |
$ |
611,282 |
||||||
Additional paid-in capital–LTIP units |
9,245 |
9,181 |
9,119 |
|||||||||
Total Shareholders' Equity |
624,107 |
623,003 |
620,401 |
|||||||||
Non-controlling interests |
7,016 |
7,073 |
5,648 |
|||||||||
Total Equity |
$ |
631,123 |
$ |
630,076 |
$ |
626,049 |
||||||
PER SHARE INFORMATION: |
||||||||||||
Common shares, no par value |
$ |
24.53 |
$ |
24.49 |
$ |
24.40 |
||||||
DILUTED PER SHARE INFORMATION: |
||||||||||||
Common shares and convertible units, no par value |
$ |
24.14 |
$ |
24.10 |
$ |
23.99 |
(1) |
Derived from audited financial statements as of December 31, 2013. |
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SOURCE
Investor Contact: Lisa Mumford, Chief Financial Officer, Ellington Financial LLC, (203) 409-3575; Media Contact: Steve Bruce or Taylor Ingraham, ASC Advisors, for Ellington Financial LLC, (203) 992-1230