Mortgage investment firm Ellington Financial LLC (NYSE: EFC) released its Q1 2021 earnings results, and has once more touted the success of top reverse mortgage lender Longbridge Financial, describing the lender’s performance as increasingly strong with positive growth trends helping to bolster its investment portfolio, which signifies to the firm the potential ongoing strength of the reverse mortgage product category as more seniors continue to entertain new ways of bolstering cash flow in retirement.
The company is also seeing broader benefits across its portfolio as the U.S. economy continues to open wider as a result of more widespread availability of vaccines for the COVID-19 coronavirus. Specifically in terms of loan growth, Ellington executives related an observation for that metric, saying it continues to move in a positive direction as more communities begin to open their economies wider.
Ellington again touts Longbridge
While company officials expected that the Federal Reserve might take more action to increase interest rates as the economy continued to show signs of improvement, but its strategy in compensating for that possibility may have slowed down positive growth, according to Mark Tecotzky, co-chief investment officer at Ellington Financial.
“We expected the Fed [to] taper gradually mean[ing] that they will continue buying, they’ll just be buying less,” Tecotzky explained on an earnings call. “We managed the interest rate and yield curve moves by dynamically hedging, but negative convexity and hedging costs were substantial, essentially netting out our positive carry. We had a very slight positive gain for the quarter in this strategy, agency MBS origination has been strong [as has our] reverse mortgage portfolio. Company Longbridge has continued to grow its volume, market share and profits.”
Ellington also touted Longbridge’s growth over the course of the pandemic, tying the mortgage portfolio’s success to Longbridge’s continued profitability according to Ellington CEO Larry Penn.
“[W]e’ve also had significant additional non-core earnings generated by our equity stakes in originators,” Penn explained. “And these originators are not only experiencing very strong earnings lately, but just as importantly, they are experiencing rapid earnings growth, and we think that growth is sustainable. Longbridge has increased its market share in the reverse mortgage business by over 50% compared to pre-COVID periods.”
Longbridge’s success along with another business involved in the non-QM mortgage market continues to have positive implications for Ellington’s bottom line, and while that has not meaningfully materialized for shareholders yet, there is reason to believe that both companies will contribute that way in the future, Penn explained.
“[B]oth companies are seeing excellent margins, and we think that’s sustainable. These two companies operate in non-commoditized markets with significant barriers to entry, namely reverse mortgage origination and non-QM origination,” Penn said. “The bottom line is that each of these companies is on pace in 2021, for over 50% year-over-year earnings growth.”
Reverse mortgage effects on dividends
While none of the stated results are necessarily captured in Ellington’s core earnings, strategic investments in Longbridge and the non-QM company do provide a path to recurrent, sustainable earnings growth because of each business’ strength regardless of the risks presented by operating businesses, Penn said.
“We view these as helping support earnings, earnings growth, and yes, even dividend growth in the future,” he explained.
In a question-and-answer portion of the earnings call, Penn was asked more specifically about how its dividends can be covered by core earnings, and Penn cited Longbridge mortgage servicing rights (MSRs) as benefitting Ellington’s stake in that company by further strengthening it.
“[A]s Longbridge’s book value grows through earnings, and otherwise, that’s going to increase value for us,” he said. “I think we absolutely see the new dividend as being covered by core [earnings] going forward. Otherwise, I don’t think we would have raised it to that level. But going forward, I think that […] we’ll be in a position to raise the dividend.”
Ellington most recently touted its investment in Longbridge previously late last year, with company executives saying that much of the confidence Ellington has in Longbridge also extends to the larger reverse mortgage industry, which has gone through difficulties in prior years but which is now more steadily recovering.
“Some of the reverse mortgage companies, as is widely known, have gone by the wayside over the past couple of years, it was a tough market,” Penn said in November, 2020. “Now, it’s not a tough market. Now it’s a great market and Longbridge is getting market share there. At some point, it could become a flow provider for us, for example, in getting direct exposure to servicing instead of indirect exposure. But for now we’re going to continue to do what we can to help those companies grow.”
Penn also said in November that exposure to reverse mortgage servicing is something that Longbridge will allow Ellington to have access to, accounting for an even more unique asset class in the future.
“We do buy Ginnie Mae HECMs, and I think having that investment in Longbridge definitely has an incremental benefit in terms of how we manage that portfolio, there’s no question about it,” he said in November. “But for now, that really is an investment [that] gives us exposure to reverse mortgage servicing, which is as you know which is a unique asset class obviously and that we’d really like.”
When previously reached for comment, representatives from Longbridge Financial told RMD that they were content with letting the comments from Ellington speak for themselves.
Read Ellington Financial’s financial results for Q1 2021.