$7.30
$25.00
bear $7.30
base $19.00
bull $25.00
margin of safety $7.50
market price* $11.65
Ellington Financial is a mortgage-focused finance company (a REIT) that borrows heavily to own residential and commercial mortgage loans, mortgage-backed securities, consumer and small-business loans and other credit assets. Since October 2024 it also owns Longbridge, an originator and servicer of reverse mortgages (HECMs). It is externally managed by an Ellington affiliate that receives a base and incentive fee. Because it holds most assets at fair value, its reported earnings swing with interest rates and credit spreads. HOW WE MEASURED EARNINGS. The usual cash-flow shortcut does not work here: buying and originating loans runs through operating cash flow, producing figures like an operating outflow of $925 million in 2025 against net income of $151 million. We therefore used net income attributable to common shareholders per diluted share, after preferred dividends and outside partners' shares. Stock compensation and depreciation are already expensed, and there is no meaningful capital spending. Because the portfolio is marked to market, gains and losses are treated as real. Per share, 2018 to 2025: $1.52, $1.76, $0.39, $2.58, $(1.43), $0.89, $1.36, $1.19. EARNING POWER. We used the median of all eight years, about $1.28 per share. That window spans the 2020 pandemic dislocation, the 2021 peak and the 2022 rate shock, so it covers a full cycle. The two years since the December 2023 Arlington Asset merger and the October 2024 Longbridge purchase ($1.36 and $1.19) average the same figure. Latest-year earnings fell about 12% ($1.19 vs $1.36). We start year one at the $1.28 normal level, not a growth rate, and credit no growth. Six-month 2026 results ($1.21 per share, $0.78 in the first quarter and $0.43 in the second, from the quarterly filing data) are strong but only two quarters, so we did not lift the level. Share count has roughly doubled since 2022 through the merger and offerings; we credit no benefit from future issuance. BASE CASE (about $19 per share). $1.28 a year for ten years, then $1.03 a year, the eight-year average including the loss years. The record of a portfolio that has earned in 6 of 8 years and survived two severe market shocks supports the level. The reason for the later step down is that leveraged spread earnings depend on funding markets, and the median understates the depth of loss years. Book value was $13.16 per common share at December 31, 2025, so this case implies about 1.4 times book. BEAR CASE (about $7 per share). Named risks: (1) Longbridge relies on annual Ginnie Mae waivers of a leverage-ratio requirement, and loss of that status or of its FHA approval would hurt earnings; (2) recourse borrowings of $3.6 billion (1.9 times equity, 9.1 times including non-recourse debt) with short-dated financing; (3) two market shocks like 2020 and 2022 in ten years. We model $0.90 a year in normal years (the 2023 level), losses of about $1.40 per share in years three and eight, and a long-run average of about $0.44. This is about 0.55 times book. BULL CASE (about $25 per share). Earnings of $1.75 a year for ten years, between the 2018-2019 level and the 2021 peak, if Longbridge contributes fully (its 2025 contribution was $0.35 per share, up from a lower base after the 2024 purchase) and the investment portfolio repeats its 2025 result ($2.04 per share before corporate costs), then back to $1.28. We left out further earnings growth from new products or capital raises, since neither is secured. CURRENT DIVIDEND. Common dividends of roughly $1.57 per share in 2025 exceeded earnings of $1.19, so part of the payout is return of capital and book value has drifted down over the years. That is why we do not treat the dividend as earning power. WHAT COULD MAKE THIS WRONG. Sustained rising funding costs or credit losses, a loss of Longbridge's Ginnie Mae or FHA standing, or valuation marks on illiquid loans that prove too generous (the filing itself warns that book value may overstate portfolio value). A $17.0 million settlement payment to Longbridge, agreed January 28, 2026, is small and not included. We could not reconcile the second-quarter 2026 filing text directly and used its tagged financial data only. MARGIN-OF-SAFETY PRICE. The margin-of-safety price is about $7.50, roughly the bear case and about 0.57 times book, because the business is highly leveraged, cyclical and complex; at that price a $1.28 normal year implies about a 17% yield on earnings.