Slide 1: Fourth Quarter 2018 Earnings Conference Call
Fourth Quarter 2018 Earnings Conference Call February 21, 2019
Slide 2: Important Notice
Important Notice Forward-Looking Statements This presentation 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. Our actual results may diff
Slide 3: Fourth Quarter Market Update
Fourth Quarter Market Update 3
Slide 4: Fourth Quarter Highlights
Fourth Quarter Highlights(1) Net loss: $(2.2) million or $(0.07) per share Overall NAV-based total return: (0.2)% for the quarter and 9.2% for the year ended 12/31/18(2) Results Net investment income of $10.2 million or $0.33 per share Adjusted net investment income(3) of $12.7 million or $0
Slide 5: Portfolio Summary as of December 31, 2018
Portfolio Summary as of December 31, 2018(1) Diversified sources of return to perform across market cycles Average Allocated Fair Value Price WAVG WAVG Equity and Asset Allocation by (2)(6) (4)(6) (5)(6) Strategy Equity ($K) (%) Life Mkt Yield Strategy CREDIT 16% CMBS and Commercial Mortgage Loans a
Slide 6: Consolidated Statement of Operations (Unaudited)
Consolidated Statement of Operations (Unaudited) Three-Month Period Ended Year Ended (In thousands, except per share data) December 31, 2018 September 30, 2018 December 31, 2018 Investment income Interest income $ 35,694 $ 35,300 $ 131,027 Other income 1,157 1,046 4,014 Total investment income 36,85
Slide 7: Operating Results by Strategy
Operating Results by Strategy Quarter Ended % of Quarter Ended % of Year Ended % of December 31, Per Average September 30, Per Average December 31, Per Average (In thousands, except per share amounts) 2018 Share Equity 2018 Share Equity 2018 Share Equity Credit: Interest income and other income $ 27
Slide 8: Long Credit Portfolio
Long Credit Portfolio 12/31/2018 (1 ) 9/30/2018 (1 ) Equity Corporate Equity Corporate Investment in Debt and Investment in Debt and Loan Equity Loan Equity Origination 1% Origination 1% Entities Entities CLO 3% CLO 2% 12% Residential 10% Loans and Residential CMBS & REO Loans & REO Commer cial 17%
Slide 9: Long Agency Portfolio
Long Agency Portfolio Agency Long Portfolio Agency Long Portfolio As of 12/31/2018: $975.4MM (1) As of 9/30/2018: $944.4MM (1) RM Fixed ARMs Fixed IOs RM Fixed ARMs Fixed IOs < 1% 3% 1% 4% 6% 6% 15-Year Fixed 15-Year 8% Fixed 8% 20-Year Fixed < 1% 20-Year Fixed 30-Year < 1% 30-Year Fixed Fixed 83% 8
Slide 10: Summary of Borrowings
Summary of Borrowings ($ in thousands) As of 12/31/2018Weighted For the Quarter Ended 12/31/2018 Outstanding Average Average Average Collateral Type Borrowings Borrowing Rate Borrowings Cost of Funds Credit(1) $993,363 3.80% $914,140 3.66% (1) (1) (1) Agency RMBS 917,262 2.59% 896,947 2.47% Subtotal
Slide 11: Diversified Credit Portfolio
Diversified Credit Portfolio Corporate Loans - Retained CLO Tranches - Secondary CLO Equity & Mezz - Distressed - Corporate Credit Relative Value 10% Commercial Mortgages Residential Mortgages - NPLs - Non-Agency / Non-Conforming RMBS - Bridge Loans - Non-QM Loans - CMBS B-Pieces & Credit Bonds - NP
Slide 12: Stable Economic Return
Stable Economic Return Standard Deviation of Quarterly Economic Returns of Hybrid REITs Standard Deviation of Q1-2011 – Q3 -2018(1)(2) Quarterly Economic 9.0% Returns of Hybrid REITs Q1-2011 – Q3-2018 8.0% Standard Company Deviation 7.0% EFC 2.4% Hybrid REIT #02 3.1% 6.0% Hybrid REIT #03 3.2% Hybrid
Slide 13: Interest Rate Sensitivity Analysis
Interest Rate Sensitivity Analysis(1) Estimated Change in Fair Value ($ in thousands) 50 Basis Point Decline in Interest Rates 50 Basis Point Increase in Interest Rates % of Total Market Value % of Total Equity Market Value Equity Agency RMBS - ARM Pools $ 19 0.00% $ (27) 0.00% Agency RMBS - Fixed P
Slide 14: REIT Conversion Overview
Ellington Financial REIT Conversion Overview
Slide 15: Summary Benefits of REIT Conversion
Summary Benefits of REIT Conversion 1 Expand investor base and Improve liquidity 2 Simplify tax reporting: Form 1099 instead of Schedule K-1 3 Benefit from 20% REIT tax deduction for domestic investors 4 Maintain core investment and hedging strategies 15
Slide 16: Benefits of REIT Conversion: Expand Investor Base and Improve Liquidity
Summary Benefits of REIT Conversion 1 Expand investor base and Improve liquidity REIT conversion should significantly expand the universe of potential shareholders of EFC, including possible inclusion in many indices Expanding our investor base should improve the liquidity of our shares over tim
Slide 17: Benefits of REIT Conversion: Simplify Tax Reporting
Summary Benefits of REIT Conversion 2 Simplify tax reporting: Form 1099 instead of Schedule K-1 When we were a publicly traded partnership, we reported taxable income via Schedule K-1. The K-1 limited our investor base and the liquidity of our shares. • Next month, we will issue a final Schedule K
Slide 18: Benefits of REIT Conversion: 20% REIT Tax Deduction
Summary Benefits of REIT Conversion 3 Benefit from 20% REIT tax deduction for domestic investors REIT ordinary dividends qualify for the 20% pass-through deduction for U.S. individuals • The 20% REIT deduction would provide an annual after-federal-tax benefit of $0.121/share to a shareholder in a
Slide 19: Benefits of REIT Conversion: Maintain Core Strategies
Summary Benefits of REIT Conversion 4 Maintain core investment and hedging strategies Core investment and hedging strategies should not change materially • The majority of our core investment strategies are already REIT-qualifying • Through taxable REIT subsidiaries, we intend to continue to inves
Slide 20: Expected Effect of Conversion on Investment Strategies
Expected Effect of Conversion on Investment Strategies Non-REIT Strategies to Shrink - Secondary CLO Equity/Notes - UK Non-Conforming RMBS Pro Forma Target Allocation Non-REIT Strategies to Shrink Non-REIT Non-REIT Strategies to Maintain Strategies to Maintain - Consumer Loans & ABS - Ellington-Spon
Slide 21: Supplemental Slides
Ellington Financial Supplemental Slides
Slide 22: Derivatives Summary as of December 31, 2018
Derivatives Summary as of December 31, 2018(1) Long Short Net ($ in thousands) Notional Notional Notional Fair Value Mortgage-Related Derivatives CDS on MBS and MBS Indices $ 15,527 $ (59,393) $ (43,866) $ 7,439 Total Net Mortgage-Related Derivatives 15,527 (59,393) (43,866) 7,439 Corporate-Related
Slide 23: Credit Hedging Portfolio
Credit Hedging Portfolio(1)(2) Corporate CDS Indices / Tranches / Single Name ABS CDS and ABX Corporate Bonds/Corporate Bond Options / Single Names Indices European Sovereign Debt ETFs/Equities CMBX HY CDX OTR Bond Equivalent Units Value(3)(4) Bond Equivalent Value(4) Market Value Market Value Bond
Slide 24: Agency Interest Rate Hedging Portfolio
Agency Interest Rate Hedging Portfolio(1) We deploy a dynamic and adaptive hedging strategy to preserve book value As of 12/31/2018 As of 9/30/2018 Short $424.3MM 10-yr equivalents(1) Short $461.4MM 10-yr equivalents(1) >5 Yr Treasuries, Eurodollar >5 Yr Treasury >5 Yr Treasuries, Eurodollar >5 Yr T
Slide 25: Agency Interest Rate Hedging Portfolio (continued)
Agency Interest Rate Hedging Portfolio (continued) Exposure to Agency Pools Based on Net Fair Value As of 12/31/2018 As of 9/30/2018 $1,000 $800 Long Agency RMBS $946 $600 $400 Net Long ($ in millions) Exposure to Agency RMBS $200 $475 $0 ($200) Net Short TBA Positions ($471) ($400) Net Agency pool
Slide 26: CPR Breakout of Agency Fixed Long Portfolio
CPR Breakout of Agency Fixed Long Portfolio Agency Fixed Long Portfolio Agency Fixed Long Portfolio Collateral Characteristics and Historical 3-Mo CPR: Collateral Characteristics and Historical 3-Mo CPR: Average for Quarter Ended 12/31/2018 (1) Average for Quarter Ended 9/30/2018 (1) Jumbo Other Jum
Slide 27: Repo Borrowings
Repo Borrowings(1) ($ in tho usands) Repo Borrowings as of December 31, 2018 Borrowings by Days to Maturity % of Total Remaining Days to Maturity Credit Agency U.S. Treasury Total Borrowings 9% 6% 19% 30 Days or Less $30,426 $245,956 $272 $276,654 18.5% 2% 31-90 Days 283,139 670,800 — 953,939 63.6%
Slide 28: Gross Profit and Loss
Gross Profit and Loss(1) Resilient profit generation through market cycles Years Ended ($ In thousands) 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Long: Credit $ 61,201 10.0% $ 61,136 9.6% $ 36,203 5.3% $ 46,892 6.1% $ 77,636 11.4% $ 109,536 18.5% $ 129,830 30.0% $ 1,505 0.4% $ 70,840 21
Slide 29: Diluted Book Value per Share
Total Return Since Inception EFC has successfully preserved book value through market cycles, while producing strong results for investors EFC life-to-date diluted net asset value-based total return from inception in August 2007 through Q4 2018 is approximately 198%, or 10.1% annualized(1) $45.00
Slide 30: Capital, Leverage & Portfolio Composition
Capital, Leverage & Portfolio Composition Capital Usage Across Entire Portfolio(1) Leverage by Strategy (Debt-to-Equity)(1) 11.00 9.71 10.06 4.00 10.00 9.24 12/31/18 9.45 9.00 3.50 3.35 3.04 3.00 2.77 2.62 9/30/18 2.50 2.17 2.00 6/30/18 1.85 1.50 1.53 1.65 1.00 3/31/18 0.50 0% 10% 20% 30% 40% 50% 60
Slide 31: Consolidated Statement of Assets, Liabilities and Equity
Consolidated Statement of Assets, Liabilities and Equity (Unaudited) As of December 31, September 30, December 31, (In thousands, except share amounts) 2018 2018 2017(1) ASSETS Cash and cash equivalents $ 44,656 $ 53,598 $ 47,233 Restricted Cash 425 425 425 Investments, financial derivatives, and re
Slide 32: Reconciliation of Adjusted Net Investment Income to Net Investment Income
Reconciliation of Adjusted Net Investment Income to Net Investment Income(1) Quarter Ended (In thousands, except per share amounts) December 31, 2018 Net investment income $10,214 Include: Net realized and unrealized gains (losses) from certain equity investments in partnerships (2) 103 Net accrued
Slide 33: About Ellington
About Ellington Ellington Profile As of 12/31/2018 Founded: 1994 $7.6 16 26 Years of average 12% Billion in Employee-partners Management’s Employees: >150 assets under industry own the firm(2) ownership of EFC, management as of experience of Investment Professionals: 65 representing 12/31/2018(1) se
Slide 34: Investment Highlights of EFC
Investment Highlights of EFC Diversified investment portfolio across residential mortgage, commercial mortgage, consumer loan, and corporate loan sectors • Diverse range of strategies designed to generate a high-quality earnings stream • Ability to shift capital allocation across asset classes as
Slide 35: Endnotes
Endnotes Slide 3 – Fourth Quarter Market Update (1) Source: Bloomberg (2) Source: Mortgage Bankers Association via Bloomberg (3) LIBOR-based OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embe
Slide 36: Endnotes
Endnotes Slide 7 – Operating Results by Strategy (1) Includes TBAs and U.S. Treasury securities, if applicable. (2) Includes equity and other relative value trading strategies and related hedges. (3) Includes interest expense on our Senior Notes. (4) Per share information is calculated using weighte
Slide 37: Endnotes
Endnotes Slide 22 – Derivative Summary (1) In the table, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of December 31, 2018, derivative assets and derivative liabiliti
Slide 38: Endnotes
Endnotes Slide 27 – Repo Borrowings (1) Included in the table, using the original maturity dates, are any reverse repos involving underlying investments we sold prior to December 31, 2018 for settlement following December 31, 2018 even though the company may expect to terminate such reverse repos ea
Slide 39: Investor Relations Contact
Investors: Investor Relations Ellington Financial LLC (203) 409-3575 Info@ellingtonfinancial.com Media: Amanda Klein or Kevin FitzGerald Gasthalter & Co. for Ellington Financial LLC (212) 257-4170 Ellington@gasthalter.com Ellington Financial LLC 53 Forest Ave Old Greenwich, CT 06870 www.ellingtonfin