Ellington Residential Announces Strategic Transformation
- Strategic shift towards corporate CLO investments to drive earnings growth
- Revocation of REIT election for tax year 2024 in favor of closed-end fund/RIC conversion
- Focus on secondary CLO mezzanine debt and equity tranches to capitalize on market inefficiencies
- Utilization of existing net operating loss carryforwards to offset taxable income
- Expectation of enhanced book value per share and shareholder value creation
- Low costs associated with the conversion due to high liquidity of Agency MBS pool portfolio
- None.
Insights
The shift in Ellington Residential Mortgage REIT's investment strategy to focus on corporate collateralized loan obligations (CLOs) is a significant move that will likely influence both its earnings and stock volatility. The emphasis on secondary CLO mezzanine debt and equity tranches suggests the company is aiming to exploit niche market inefficiencies, which may offer higher yields compared to more traditional investments. However, investors should be aware of the inherent risks associated with these types of securities, such as their sensitivity to economic downturns and the complexities of their payment structures.
Transitioning from a REIT to a closed end fund/RIC could have tax implications that may benefit the company by utilizing net operating loss carryforwards to offset federal taxable income. This strategic transformation could potentially attract a different investor base, as the company's investment profile will change significantly. It's also worth noting that the company's decision to retain its ticker symbol EARN might help maintain brand recognition and continuity for existing shareholders.
The CLO market has seen significant growth and Ellington's decision to focus on this area reflects a strategic pursuit of higher returns. The move to target secondary markets for CLO mezzanine debt and equity tranches could indicate a response to the current low-interest-rate environment, where investors are searching for yield. However, the complexity and lack of transparency in CLOs can be a hurdle for some investors. The company's expertise and track record in this space could be a competitive advantage, but it's essential to monitor how this strategy will be received by the market, especially considering the potential risks involved.
The announcement's timing is also critical as it comes when investors are reassessing their portfolios in light of potential changes in the economic landscape. The company's ability to pivot and adapt its investment strategy could be seen as a proactive measure to sustain growth and profitability in a changing market.
The revocation of the REIT status and the planned conversion to a closed end fund/RIC later this year will require careful legal navigation, including shareholder approval for certain matters. The legal processes involved in this transformation must be meticulously managed to ensure compliance with regulatory requirements and to minimize the risk of legal challenges or delays. Shareholders should pay close attention to the details of these changes, as they will have a direct impact on the company's governance and operational structure.
Furthermore, the legal implications of operating as a taxable C-Corp in the interim period before the conversion is completed should not be underestimated. The utilization of net operating loss carryforwards is a strategic tax move, but it requires precise execution to be effective. Shareholders should consider the legal expertise and track record of the company's management in executing such significant structural changes.
- Focus on CLO Investments Expected to Enhance Earnings, Reduce Volatility and Drive Book Value Growth, Utilizing Less Leverage -
- Company Revokes REIT Election and Intends to Convert to a Closed End Fund/RIC Later this Year -
- Expects to Change Name to Ellington Credit Corporation but will Retain Ticker EARN -
In connection with its strategic transformation, the Company has decided to revoke its REIT election for tax year 2024. Later this year, the Company intends to convert to a registered closed end fund to be treated as a regulated investment company (a “RIC”) and, in the meantime, will operate as a taxable C-Corp and plans to take advantage of its significant existing net operating loss carryforwards to offset the majority of its
“We are excited to pivot EARN’s investment strategy to what we believe is a highly attractive space,” said Laurence Penn, Chief Executive Officer and President. “Ellington has a longstanding and successful track record of investing in secondary CLOs, spanning more than a decade across a wide variety of market conditions, and EARN’s CLO investments to date have generated excellent returns. While the CLO market has grown significantly over the years, many parts of the market – particularly the secondary markets for CLO mezzanine debt and equity – remain highly inefficient. We expect that EARN’s differentiated approach to CLO investing will capitalize on these inefficiencies and drive earnings growth, all while utilizing lower leverage. We believe that this strategic transformation will greatly enhance our ability to grow book value per share over time and unlock additional value for our shareholders. Furthermore, thanks to the high liquidity of our Agency MBS pool portfolio, the conversion to a closed end fund/RIC, including the transitioning of the investment portfolio, should entail only modest costs. Finally, we are excited about the benefits of the closed end fund/RIC structure, which we believe will enhance our access to the capital markets, open more channels for growth, and – perhaps most importantly – expand our valuation multiple.”
“The Board of Trustees appreciates the work management has done to develop this important change in strategy for EARN,” said Barry Allardice, Chairman of the Board. “We are unanimous in our belief that this transformation is in the best interests of our shareholders.”
Cautionary Statement Regarding Forward-Looking Statements
This press release 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. Actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements or from our beliefs, expectations, estimates and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Examples of forward-looking statements in this press release include, without limitation, our intention to pivot our investment strategy to focus on CLOs, our intention to build upon our current CLO portfolio, our intention to convert to a registered closed end fund to be treated as a RIC, our beliefs regarding the current economic and investment environment, our ability to implement our investment and hedging strategies, volatility and its impact on us, the performance of our investment and hedging strategies, our ability to implement our new strategy following our decision to revoke our REIT election, our ability to use NOLs in the future to offset taxable income, our expectations regarding the CLO market generally and our CLO investments, including relating to the CLO market being inefficient and our ability to take advantage of these inefficiencies to drive earnings growth with lower leverage, our ability to grow book value per share over time and unlock additional value for our shareholders, our expectations regarding the costs associated with the conversion to a closed end fund/RIC, including the transitioning of the investment portfolio, our ability to expand our valuation multiple, open more channels for growth, and enhance our access to the capital markets, the expected returns from our CLO investments, and our intention to change our name to Ellington Credit Corporation. The following factors are examples of those that could cause actual results to vary from those stated or implied by our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in the default rates or corporate loans, our ability to borrow to finance our assets, changes in government regulations affecting our business, our ability to maintain our exclusion from registration under the Investment Company Act of 1940, our ability to pivot our investment strategy to focus on CLOs, a deterioration in the CLO market, our ability to utilize our NOLs, our ability to convert to a closed end fund/RIC, including our ability to obtain shareholder approval of our conversion to a closed end fund/RIC, and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, as stated above, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K, which can be accessed through the link to our SEC filings under "For Investors" on our website (at www.earnreit.com) or at the SEC's website (www.sec.gov). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected or implied may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q, 10-K and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
This release and the information contained herein do not constitute an offer of any securities or solicitation of an offer to purchase securities. In addition, the release is not a solicitation of votes or proxies. Any such solicitation will only be made pursuant to a proxy statement or other appropriate proxy materials filed with the SEC and labeled as such.
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Investors:
Ellington Residential Mortgage REIT
Investor Relations
(203) 409-3773
info@earnreit.com
or
Media:
Amanda Shpiner/Sara Widmann
Gasthalter & Co.
for Ellington Residential Mortgage REIT
(212) 257-4170
Ellington@gasthalter.com
Source: Ellington Residential Mortgage REIT
FAQ
What is Ellington Residential Mortgage REIT's (EARN) new focus for its investment strategy?
What is the company's plan regarding its REIT election for tax year 2024?
What parts of the CLO market will Ellington Residential Mortgage REIT focus on?
How does the company plan to offset its U.S. federal taxable income during the transition period?
What are the expected benefits of the strategic transformation for shareholders?
What is the reason behind the rescheduling of the 2024 annual meeting of shareholders?
