Longbridge parent to acquire AAIC, expanding its scale

Ellington Financial announced it would buy Arlington Asset Investment Corp. in a deal designed to boost liquidity and accelerate scale

Ellington Financial (EFC), parent company of reverse mortgage lender Longbridge Financial, announced on Tuesday that it is acquiring real estate investment trust Arlington Asset Investment Corp. (AAIC) in a deal that will boost the company’s liquidity and expand its scale, according to a joint statement from the companies.

Once the deal is complete, Ellington is expected to have an estimated equity capital base of $1.5 billion. The company is also acquiring roughly $13 billion in mortgage servicing rights (MSRs) with the acquisition.

The deal, valued at over $150 million, will be facilitated with stock options and a cash payment to current Arlington shareholders. Each share of Arlington common stock will be converted into roughly 0.4 shares of Ellington stock, while Arlington common stockholders will also receive $0.09 per share at $3 million in total.

Deal and leadership structure

According to statements and filings with the Securities and Exchange Commission (SEC), the offer price on Arlington equates to $4.77 per share, which Ellington estimates at a 73% premium of Arlington’s per-share price based on information from May 26, 2023.

“Upon the closing of the acquisition, Ellington Financial stockholders are expected to own approximately 85% of the combined company’s stock, while Arlington stockholders are expected to own approximately 15% of the combined company’s stock,” Ellington said in its announcement about the deal. “In addition, Ellington Financial will assume Arlington’s outstanding preferred equity, senior unsecured notes and trust preferred securities.”

Both entities will be folded into Ellington’s leadership structure and will do business under Ellington’s name. Shares will continue to trade under Ellington’s ticker symbol.

Of particular interest to Ellington’s leadership team is the portfolio of MSRs, according to Ellington CEO Laurence Penn.

“We are extremely excited about the opportunity to add a significant portfolio of assets – particularly low-coupon mortgage servicing rights – that align very well with our expertise and existing management platform,” he said. “We believe that the benefits of this acquisition include greater operating efficiencies, a larger market capitalization, and attractive long-term unsecured debt and preferred equity capital. Upon closing, we believe that we will be positioned well to drive accretive earnings growth and provide strategic and financial benefits to our stockholders.”

Arlington’s leadership expressed similar sentiments.

“We are thrilled to combine AAIC with the Ellington Financial team to make a combined company that we believe will be positioned to take advantage of opportunities into the future,” said J. Rock Tonkel, Jr., Arlington’s CEO. “This transaction combines two complementary portfolios, and we look forward to working closely with the Ellington Financial team to complete the acquisition and deliver value for our stockholders.”

Potential outcomes

The companies outline anticipated outcomes of the deal, including an increased capital position to fund further growth, “strategic alignment” between Arlington’s investment portfolio and Ellington’s portfolio and goals; and an anticipated increase in operating expense efficiencies stemming from fixed expenses spread over a larger equity base.

The deal is also expected to ease Ellington’s access to capital markets due to the higher market capitalization and the additional liquidity it’s expected to provide to Ellington’s stock, according to company statements.

In its Q1 2023 earnings report and conference call earlier this month, Ellington reported net income attributable to common stockholders of $38.9 million, or $0.58 per common share. In addition to returns from its other investments, Penn described the Q1 performance of Longbridge as “excellent.”

Reverse mortgage volume was down across the industry in Q1, but Longbridge saw a net gain in the reverse originations business due to margins, according to Ellington CFO J.R. Herlihy.

“During the first quarter, yield spreads in the reverse mortgage market actually tightened which, combined with lower interest rates, increased the value of our Home Equity Conversion Mortgage (HECM) MSRs and our proprietary reverse mortgage loan portfolio,” Herlihy said. “In addition, higher gain on sale margins more than offset lower origination volumes sequentially. So Longbridge also had a net gain on its origination business, which supports our adjusted distributable earnings.”

Ellington expressed optimism in the earnings presentation about the trajectory of the reverse mortgage business, according to company leaders.

RMD sent a request for comment to Longbridge on the potential impact the acquisition could have on the company’s operations and Ellington’s overall reverse mortgage posture but did not receive a response prior to publishing.

According to HECM endorsement data compiled by Reverse Market Insight (RMI), Longbridge’s total 2023 market share is 9.7% on the HECM side, an increase from 7.4% in 2022. This data does not include information related to proprietary loans, as lenders do not release substantive proprietary origination data.

Longbridge has originated 4,534 HECMs in the 12-month period ending in April 2023, according to RMI. Ellington first announced its intent to acquire Longbridge in February 2022 and closed the deal the following October.

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