Ellington Financial LLC Reports First Quarter 2012 Results

OLD GREENWICH, Conn., May 7, 2012 /PRNewswire/ -- Ellington Financial LLC (NYSE: EFC) (the "Company") today reported financial results for the quarter ended March 31, 2012.

Highlights

  • Net increase in shareholders' equity resulting from operations ("net income") for the first quarter was $32.1 million, or $1.90 per basic and diluted share. The Company benefited from strong performance in both its non-Agency and Agency MBS strategies.
  • Book value per share as of March 31, 2012 was $23.53 on a diluted basis after payment of a $0.40 per share fourth quarter dividend on March 15, 2012, as compared to book value per share of $22.03 on a diluted basis as of December 31, 2011.
  • The Company's non-Agency MBS strategy generated income of $28.7 million for the quarter ended March 31, 2012. Performance was driven by yield earned on assets, trading gains, and higher asset valuations, a portion of which was monetized through sales.
  • The Company's Agency RMBS strategy again performed well, generating $6.3 million in income during the quarter, driven by the Company's continued strategy to invest in and actively trade pools with prepayment-protection characteristics.
  • The Company announced a dividend for the first quarter of 2012 of $0.70 per share payable on June 15, 2012 to shareholders of record on June 1, 2012.

 

First Quarter 2012 Results

For the first quarter of 2012, the Company recognized net income of $32.1 million, or $1.90 per diluted share. This compares to net income of $1.7 million, or $0.10 per diluted share, for the quarter ended December 31, 2011. The Company's reported results reflected strong performance from both of its strategies—non-Agency MBS, including CMBS, as well as Agency RMBS.

The Company's non-Agency strategy generated income in the amount of $28.7 million, or $1.70 per diluted share. During the quarter, market appetite for non-Agency MBS improved (as highlighted by the successful Maiden Lane II sales), and many of the factors that had contributed to the downward valuation trend in non-Agency MBS in 2011 eased (such as large-scale selling by banks and dealers). As a result, the Company benefited from higher valuations broadly across its non-Agency MBS portfolio, including in the 2006 and 2007 subprime/Alt-A/Alt-B sectors into which the Company had rotated a significant portion of its portfolio in the second half of 2011. In addition, the confluence of positive market events led to opportunities for the Company to realize trading gains during the quarter. Of the $28.7 million of income from the non-Agency strategy, $6.5 million was related to realized trading gains arising from non-Agency MBS portfolio turnover during the quarter. For the quarter, portfolio turnover was approximately 31% on a non-annualized basis. Portfolio turnover is based on sales proceeds during the quarter as a percentage of average non-Agency MBS assets. The Company's non-Agency MBS strategy results for the quarter also included $1.5 million of income from its CMBS and commercial mortgage loan holdings. While representing a small portion of the portfolio, this sector performed well during the quarter as credit spreads tightened on recently issued CMBS and the Company took the opportunity to monetize some of these gains through portfolio sales.

In response to reverse inquiries from counterparties, the Company was also able to realize additional trading gains by terminating certain of its CDS on Individual RMBS contracts at what it believed to be very attractive levels.

The strong returns in the Company's non-Agency MBS strategy were augmented by strong returns in its Agency RMBS strategy, which generated $6.3 million in income for the quarter ended March 31, 2012. In this strategy, the Company continued to invest in pools with prepayment-protection characteristics (known as "prepayment-protected" pools) such as those comprised of low loan balance mortgages and those containing mortgages not eligible for one of the government-sponsored refinancing programs. The Company's Agency pools continued to prepay slowly, both on an absolute basis and relative to their generic TBA counterparts, which allowed the Company to capture greater net carry income on its Agency RMBS portfolio. Even more importantly, superior actual and forecast prepayment performance relative to TBAs led to significant price gains for these Agency pools. By actively trading and rotating between sectors, the Company monetized many of these gains. The Company's Agency RMBS activity in the first quarter of 2012 was a continuation of its Agency RMBS activity in the fourth quarter of 2011, with similarly strong results. However, as the price premiums for many prepayment-protected pools have increased recently, the Company continues to focus its research efforts on uncovering additional pool characteristics not fully valued by the market that would provide additional prepayment protection.

One gauge that the Company uses to measure its overall prepayment risk is the Company's net Agency premium as a percentage of its long Agency RMBS holdings. Net Agency premium represents the total premium (excess of market value over outstanding principal balance) on long Agency RMBS holdings less the total premium on net short (TBA) Agency RMBS positions. The lower its net Agency premium, the less the Company believes it is exposed to market-wide increases in Agency RMBS prepayments. As of March 31, 2012, net Agency premium as a percentage of fair value on long Agency RMBS holdings represents less than 2%.

The Company prepares its financial statements in accordance with ASC 946, Financial Services—Investment Companies. As a result, investments are carried at fair value and all valuation changes are recorded in the Consolidated Statement of Operations.

The Company also measures its performance through net-asset-value-based total return. Net-asset-value-based total return measures the change in the Company's book value per share, and assumes the reinvestment of dividends at book value per share. For the quarter ended March 31, 2012, net-asset-value-based total return was 8.66%. Net-asset-value-based total return from inception of the Company (August 17, 2007) through March 31, 2012 was 72.76%.

"We are pleased to report our financial results for the first quarter of 2012," said Laurence Penn, Chief Executive Officer and President of the Company. "Our non-annualized return on equity for the quarter was 8.4%, strong results by almost any measure. The non-Agency MBS market improved significantly during the quarter, as many of the technical factors that had depressed prices in 2011 began to show signs of abating. There was noticeably less selling by banks during the quarter, and the successful disposition by the Fed of assets held in the Maiden Lane II portfolio actually bolstered the market for non-Agency MBS. Meanwhile, the European debt crisis, while still a concern, weighed less on the market. We are reaping the benefits of the portfolio decisions we made in 2011, namely to add non-Agency MBS assets overall and to increase our exposure to some of the higher-yielding sectors within that asset class. Our strong performance was not confined to our non-Agency MBS strategy, as our Agency RMBS strategy – with its emphasis on prepayment-protected sectors, active trading, and tight interest rate risk management – continued to perform extremely well."

"Consistent with these results, and in light of the high-yielding portfolio that we have built along with our expectations for a continued excellent investment environment, our Board of Directors recently increased our dividend to $0.70 per share for the first quarter of 2012," Mr. Penn continued. "Subject to the ultimate discretion of our Board of Directors, management expects to continue to recommend this amount as a quarterly dividend until conditions warrant otherwise. In addition, at the end of any year the Board of Directors will take into account the Company's earnings and other factors and will consider whether to declare a special dividend."


The following table summarizes the Company's operating results for the quarters ended March 31, 2012 and December 31, 2011:





























Quarter


% of Average


Quarter


% of Average



Ended

Per

Shareholders'


Ended

Per

Shareholders'



3/31/12

Share

Equity


12/31/11

Share

Equity


(In thousands, except per share amounts)









Non-Agency MBS and Commercial Mortgage Loans:









Interest income

$ 9,565

$ 0.57

2.50%


$ 10,093

$ 0.60

2.71%


Net realized gain (loss)

6,545

0.39

1.71%


(157)

(0.01)

-0.04%


Net change in net unrealized gain (loss)

19,430

1.15

5.07%


(7,726)

(0.46)

-2.07%


Net interest rate hedges

138

0.01

0.03%


(89)

(0.01)

-0.02%


Net credit hedges

(5,825)

(0.35)

-1.52%


(3,120)

(0.18)

-0.84%


Interest expense

(1,179)

(0.07)

-0.31%


(1,194)

(0.07)

-0.32%


Total non-Agency MBS and Commercial Mortgage Loans
    profit (loss)

28,674

1.70

7.48%


(2,193)

(0.13)

-0.58%











Agency RMBS:









Interest income

6,082

0.36

1.59%


5,327

0.32

1.43%


Net realized gain

6,815

0.40

1.78%


12,854

0.76

3.45%


Net change in net unrealized loss

(3,925)

(0.23)

-1.02%


(6,055)

(0.36)

-1.62%


Net interest rate hedges

(2,066)

(0.12)

-0.54%


(5,123)

(0.30)

-1.37%


Interest expense

(572)

(0.03)

-0.15%


(583)

(0.04)

-0.16%


Total Agency RMBS profit

6,334

0.38

1.66%


6,420

0.38

1.73%











Total non-Agency and Agency MBS and Commercial
     Mortgage Loans profit

35,008

2.08

9.14%


4,227

0.25

1.15%











Other interest expense, net

(12)

-

0.00%


(4)

-

0.00%


Other expenses (excluding incentive fee)

(2,941)

(0.18)

-0.77%


(2,522)

(0.15)

-0.68%


Net increase in shareholders' equity









resulting from operations (before incentive fee)

32,055

1.90

8.37%


1,701

0.10

0.47%











Incentive fee

-

-

0.00%


-

-

0.00%


Net increase in shareholders' equity









resulting from operations

$ 32,055

$ 1.90

8.37%


$ 1,701

$ 0.10

0.47%











Weighted average shares & LTIP units outstanding

16,838




16,871




Average shareholder's equity(1)

$ 383,038




$ 373,084




(1) Average shareholders' equity is calculated using month end values.


Portfolio

The following tables summarize the Company's portfolio holdings as of March 31, 2012 and December 31, 2011:

Bond Portfolio


























March 31, 2012


December 31, 2011

(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(2)

$ 716,516

$ 407,197

$ 56.83

$ 416,520

$ 58.13


$ 736,869

$ 410,109

$ 55.66

$ 437,103

$ 59.32

Non-Agency CMBS and Commercial Mortgage
Loans

22,004

16,671

75.76

18,274

83.05


30,611

20,493

66.95

23,856

77.93


Total Non-Agency MBS and Commercial Mortgage
Loans

738,520

423,868

57.39

434,794

58.87


767,480

430,602

56.11

460,959

60.06

Agency RMBS: (3)














Floating

22,741

24,065

105.82

23,509

103.38


35,988

37,956

105.47

37,342

103.76



Fixed

708,867

753,353

106.28

747,803

105.49


643,215

689,018

107.12

679,168

105.59


Total Agency RMBS

731,608

777,418

106.26

771,312

105.43


679,203

726,974

107.03

716,510

105.49

Total Non-Agency and Agency MBS and
Commercial Mortgage Loans

$ 1,470,128

$ 1,201,286

$ 81.71

$ 1,206,106

$ 82.04


$ 1,446,683

$ 1,157,576

$ 80.02

$ 1,177,469

$ 81.39













Agency Interest Only RMBS

n/a

$ 6,016

n/a

$ 7,663

n/a


n/a

$ 5,337

n/a

$ 7,416

n/a

Non-Agency Interest Only RMBS and Other

n/a

$ 1,033

n/a

$ 1,102

n/a


n/a

$ 7,424

n/a

$ 7,482

n/a













TBAs:














Long

$ 16,500

$ 17,249

$ 104.54

$ 17,291

$ 104.79


$ 30,500

$ 32,033

$ 105.03

$ 31,845

$ 104.41



Short

(534,680)

(566,366)

105.93

(566,348)

105.92


(416,900)

(446,707)

107.15

(443,893)

106.47


Net Short TBAs

$ (518,180)

$ (549,117)

$ 105.97

$ (549,057)

$ 105.96


$ (386,400)

$ (414,674)

$ 107.32

$ (412,048)

$ 106.64














U.S. Treasury Securities:














Long

$ -

$ -

$ -

$ -

$ -


$ 10,000

$ 10,113

$ 101.13

$ 9,991

$ 99.91



Short

(13,000)

(13,486)

103.74

(13,099)

100.76


(15,000)

(15,687)

104.58

(15,120)

100.80


Net Short U.S. Treasury Securities

$ (13,000)

$ (13,486)

$ 103.74

$ (13,099)

$ 100.76


$ (5,000)

$ (5,574)

$ 111.48

$ (5,129)

$ 102.58














Repurchase Agreements

$ 13,650

$ 13,650

$ 100.00

$ 13,650

$ 100.00


$ 15,750

$ 15,750

$ 100.00

$ 15,750

$ 100.00













Total Net Investments


$ 659,382


$ 666,365




$ 765,839


$ 790,940


























(1) Represents the dollar amount, per $100 of current principal of the price or cost for the security.

(2) Excludes Interest Only and similar securities.

(3) Excludes Interest Only securities and TBAs.

 

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.

The Company actively invests 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 the Company uses TBAs primarily to hedge risks associated with its long Agency RMBS (and to a lesser extent long non-Agency MBS), the Company generally carries a net short TBA position.


Derivatives Portfolio
















March 31, 2012


December 31, 2011



Notional
Value

Fair Value


Notional
Value

Fair Value


(In thousands)







  Long Mortgage Related:(1)







    CDS on RMBS and CMBS Indices

$ 19,800

$ (11,508)


$ 22,615

$ (9,548)


  Total Long Mortgage Related Derivatives

19,800

(11,508)


22,615

(9,548)









  Net Short Mortgage Related:(2) (3)







    CDS on RMBS and CMBS Indices

(86,819)

36,195


(82,642)

40,303


    CDS on Individual RMBS

(57,875)

48,746


(74,787)

61,498


  Total Net Short Mortgage Related Derivatives

(144,694)

84,941


(157,429)

101,801


Net Mortgage Related Derivatives

(124,894)

73,433


(134,814)

92,253









  Short CDS on Corporate Bond Indices

(78,250)

(364)


(106,500)

963


  Short Total Return Swaps on Corporate Equities (4)

(22,446)

(249)


(20,571)

(274)









Interest Rate Derivatives:







    Net Interest Rate Swaps(2)

(205,700)

(6,010)


(300,900)

(17,123)


    Eurodollar Futures (5)

(126,000)

(52)


(147,000)

12


  Total Net Interest Rate Derivatives

(331,700)

(6,062)


(447,900)

(17,111)









Total Net Derivatives

$ (557,290)

$ 66,758


$ (709,785)

$ 75,831
















 

(1) Long mortgage-related derivatives represent transactions where the Company sold credit protection to a counterparty.

(2) In the table above, CDS transactions involving the same underlying security but with different counterparties are shown on a net basis. Additionally, long and short interest rate swaps are shown net. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of March 31, 2012, derivative assets and derivative liabilities were $94.1 million and $27.3 million, respectively, for a net fair value of $66.8 million, as reflected in "Total Derivatives" above. As of December 31, 2011, derivative assets and derivative liabilities were $102.9 million and $27.0 million, respectively, for a net fair value of $75.8 million, as reflected in "Total Derivatives" above.

(3) Short mortgage-related derivatives represent transactions where the Company purchased credit protection from a counterparty.

(4) Notional value represents number of underlying shares or par value times the closing price of the underlying security.

(5) Every $1 million in notional value represents one contract.

 

The Company's short positions in RMBS and CMBS indices remained concentrated in MBS vintage years 2006 and 2007 and short total return swaps on corporate equities are principally short equity positions in certain publicly traded, commercial property REITs.


The following table summarizes, as of March 31, 2012, 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 ARM Pools

$ 58


$ (99)

Agency Fixed Pools and IOs

10,391


(14,815)

TBAs

(7,274)


11,232

Non-Agency RMBS, CMBS and Commercial Mortgage Loans

5,654


(5,798)

Interest Rate Swaps

(5,023)


4,842

U.S. Treasury Securities

(275)


268

Eurodollar Futures

(156)


156

Mortgage-Related Derivatives

(1,072)


634

Repurchase Agreements and Reverse Repurchase Agreements

(308)


404


$ 1,995


$ (3,176)













(1)  Based on the market environment as of March 31, 2012. The preceding analysis does not include sensitivities to changes in interest rates for our derivatives on corporate securities (whether debt or equity-related), or other categories of 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. 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 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 March 31, 2012


For the Quarter Ended
March 31, 2012


As of December 31, 2011


For the Quarter Ended
December 31, 2011

Collateral for Borrowing


Outstanding Borrowings


Average Borrowings for the Quarter Ended

Average Cost of Funds


Outstanding Borrowings


Average Borrowings for the Quarter Ended

Average Cost of Funds

(In thousands)











Non-Agency RMBS, CMBS and Other


$ 224,280


$ 231,496

2.02%


$ 235,881


$ 229,450

2.08%

Agency RMBS


697,126


657,354

0.35%


660,329


686,363

0.34%

Total


$ 921,406


$ 888,850

0.78%


$ 896,210


$ 915,813

0.78%












Leverage Ratio (2)




2.33:1



2.42:1


























(1) Borrowed amounts exclude $1.5 million in securitized debt, representing long term financing for the related asset.

(2) The leverage ratio does not account for liabilities other than debt financings. The Company's debt financings consist solely of reverse repurchase agreements ("reverse repos") and a securitized debt financing in the amount of $1.5 million.


By Remaining Maturity (1)(2)








(In thousands)









As of March 31, 2012


As of December 31, 2011

Remaining Maturity (3)


Outstanding
Borrowings

% of
Borrowings


Outstanding
Borrowings

% of
Borrowings








30 Days or Less


$ 520,213

56.5%


$ 558,695

62.4%

31-60 Days


156,280

17.0%


249,961

27.9%

61-90 Days


99,058

10.7%


37,976

4.2%

91-120 Days


87,336

9.5%


-

0.0%

121-150 Days


-

0.0%


4,343

0.5%

151-180 Days


58,519

6.3%


45,235

5.0%

181-360 Days


-

0.0%


-

0.0%



$ 921,406

100.0%


$ 896,210

100.0%








(1) Borrowed amounts above exclude $1.5 million in securitized debt, representing long term financing for the related asset.

(2) Reverse repos involving underlying investments that the Company 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 the Company may have entered into prior to the applicable period end for which we will not take delivery of the borrowed funds 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.

 

The vast majority of the Company's borrowed funds are in the form of reverse repos. Aside from borrowings under reverse repos, as of March 31, 2012, the Company also had securitized debt outstanding in the amount of $1.5 million. The weighted average remaining term on the Company's reverse repos as of March 31, 2012 and December 31, 2011 were 43 and 33 days, respectively. The Company's borrowings outstanding under reverse repos were with a total of eleven counterparties as of March 31, 2012 as compared to nine as of December 31, 2011. As of March 31, 2012, the Company had liquid assets in the form of cash and cash equivalents in the amount of $51.5 million. In addition, at March 31, 2012, the Company held investments in unencumbered Agency pools on a settlement date basis in the amount of $75.3 million.

Hedging Summary

The following table summarizes the components of the Company's hedging results for the quarter ended March 31, 2012 and December 31, 2011: