Scott Kennedy’s mREIT Earnings Series: Ellington Financial’s And Chimera Investment’s Performance For Q1 2024
Summary
This earnings assessment article reviews EFC’s and CHMI’s BV and core earnings/EAD performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
EFC’s BV largely matched my/our expectations (well within range; minor decrease) while its core earnings/EAD was nearly an exact match (minor increase).
No change in EFC’s percentage recommendation ranges or risk/performance rating. EFC is currently deemed appropriately valued (HOLD).
CIM’s BV notably exceeded my/our expectations (OUTSIDE range; modest increase) while its core earnings was nearly an exact match (minor decrease). I believe CIM’s investment portfolio valuation fluctuations were aggressive.
CIM’s past due and non-accrual percentage remained above sub-sector averages. No change in CIM’s percentage recommendation ranges or risk/performance rating. For risk tolerant investors, CIM is currently deemed undervalued (BUY).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) EFC:
Commentary
Quarterly BV Fluctuation: Minor Outperformance (1.4% Variance).
Core Earnings/EAD: Nearly an Exact Match ($0.009 Variance).
A largely “as expected” quarter regarding Ellington Financial’s EFC 0.00%↑ BV in my opinion. EFC recorded a minor quarterly BV decrease which matched my expectations. Remember, even though EFC previously disclosed the company’s estimated BV as of 3/31/2024 in April 2024, I never go back and adjust prior period BV estimates (unlike some analysts which is unfortunate). I only adjust CURRENT BV estimates (for current/future periods) to maintain my/our credibility. Let us briefly discuss how EFC’s sub-portfolios performed when compared to my expectations.
First, EFC increased the company’s entire investment portfolio by 1% during Q1 2024 versus my projection of a mean increase of 2.5%. When broken out, EFC notably reduced the company’s agency MBS sub-portfolio (a bit surprised by the severity of this decrease) while slightly increasing its combined reverse mortgage and residential whole loan/non-QM sub-portfolios (amongst most other, smaller sub-portfolios). As noted in other sector assessment articles, a lower agency MBS sub-portfolio size directly equated to a less severe valuation loss due to MBS price declines during Q1 2024. This larger-than-anticipated reduction wound up being the vast majority of EFC’s minor BV outperformance during Q1 2024.
Second, EFC’s derivatives sub-portfolio basically performed as expected. EFC continued utilizing the company’s typical net (short) TBA MBS position during Q1 2024. In fact, this position increased a bit during the quarter. There was little net activity within EFC’s interest rate payer and receiver swaps, U.S. Treasury securities and futures, forward currency contracts, of credit default swaps.
Third, EFC’s operational performance within Longbridge and the company’s unconsolidated JVs/entities largely matched my expectations as well. If anything, a very minor outperformance. EFC’s assumptions/modeling regarding the company’s reverse mortgage MSR-related investments basically matched my projections for the 2nd straight quarter. I was also pleased by the improved net spread/operational performance of these sub-portfolios during Q1 2024 (even on reduced quarterly loan originations volume).
Moving on, EFC’s core earnings/EAD experienced a minor increase during Q1 2024 which matched my expectations. EFC’s net interest income was a minor underperformance when compared to my expectations. This was mainly due to the aforementioned notable decline in EFC’s agency MBS sub-portfolio during Q1 2024. This was partially offset by a notable improvement in operational expenses. While the vast majority of EFC’s operational expenses decline was correctly anticipated (large uptick during Q4 2023 was largely due to the Great Ajax Corp. AJX 0.00%↑ and AAIC events), the level of decline was slightly greater when compared to my expectations.
A risk/performance rating of 4 for EFC remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields) since this mREIT continues to employ high GAAP leverage (which is what drives FMV/BV fluctuations; though recourse leverage remains low). Overall credit risk remains low but this is something I expect to slightly increase during 2024 (which is always monitored/already factored into the modeling).