Ellington Residential Mortgage REIT(US:EARN)2025-03-31 19:57Part I Business Ellington Credit Company is undergoing a significant strategic transformation, shifting its focus from a residential mortgage REIT to a C-Corporation specializing in corporate Collateralized Loan Obligations (CLOs) - On March 29, 2024, the company initiated a "CLO Strategic Transformation," shifting its investment strategy to focus on corporate CLOs, revoking its REIT election, and planning to convert to a RIC on April 1, 2025161718 - The primary investment objective is to generate attractive yields and returns by managing a portfolio of corporate CLOs, with an emphasis on mezzanine debt and equity tranches1929 - The company is externally managed by an affiliate of Ellington Management Group, L.L.C., which had approximately $13.7 billion in assets under management as of December 31, 2024202223 - A new management agreement includes a 1.50% annual Base Management Fee on Net Asset Value and a Performance Fee of 17.5% above an 8% annual hurdle rate, with the Manager waiving all Performance Fees through March 31, 2025515556 - As of December 31, 2024, the company had a debt-to-equity ratio of 2.9 to 1, with approximately $563.0 million outstanding under repurchase agreements47 Risk Factors The company faces significant risks from its CLO investments, legacy Agency RMBS portfolio, financing and hedging activities, external manager relationship, and planned organizational changes - CLO Investment Risks: Investments in CLO mezzanine and equity tranches are highly subordinated and exposed to first-loss risk, with underlying corporate loans being typically below investment grade and sensitive to economic downturns99106114 - Agency RMBS Risks: The value of Agency RMBS is subject to changes in the status of Fannie Mae and Freddie Mac, prepayment rate volatility, and interest rate fluctuations141148155 - Financing and Hedging Risks: The use of leverage through short-term repurchase agreements magnifies potential losses and exposes the company to liquidity risk from margin calls or the inability to renew financing177183190 - Manager Relationship Risks: The company's dependence on its external manager creates conflicts of interest regarding fee structures and the allocation of investment opportunities216218224 - Organizational and Tax Risks: The company must maintain its 1940 Act exclusion until its RIC conversion, and its ability to use significant NOL carryforwards could be limited by Section 382 ownership changes247258266 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None303 Cybersecurity The company relies on its external manager's cybersecurity framework, which is overseen by the Audit Committee and has not experienced any material threats to date - The company is externally managed and relies on the information systems and cybersecurity processes of its manager, Ellington304 - Oversight is provided by the company's Board of Trustees through the Audit Committee, which receives regular reports on cybersecurity risks311 - Ellington's cybersecurity program is led by its CTO and focuses on technical safeguards, incident response, third-party risk management, and employee training309313 - To date, no risks from cybersecurity threats have materially affected the company, and recent minor incidents at the manager were not material308310 Properties The company does not own any real estate and uses office space provided by its external manager - The company does not own any properties and its principal offices are located in leased space provided by the Manager314 Legal Proceedings Neither the company nor its manager are currently subject to any material legal proceedings - The company and its affiliates are not currently subject to any material legal proceedings315 Mine Safety Disclosures This item is not applicable to the company's business - Not applicable318 Part II Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities The company's common shares trade on the NYSE under "EARN," with a share repurchase program in place but no shares repurchased in Q4 2024 - Common shares are listed on the NYSE under the symbol "EARN"320 - A share repurchase program is in place, with authorization to repurchase up to 725,808 common shares remaining as of December 31, 2024323 - No common shares were repurchased under the program during the three-month period ended December 31, 2024324 [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations The company is executing a strategic transformation to focus on corporate CLOs, reporting net income of $6.6 million and an economic return of 2.3% for 2024 Executive Summary and Market Developments The company is transforming to focus on CLOs amid a market environment of interest rate cuts and record leveraged loan issuance in 2024 - The company is undergoing a "CLO Strategic Transformation," revoking its REIT status as of 2024 and planning to convert to a RIC on April 1, 2025327328 - The Federal Reserve cut its target rate by a total of 100 basis points in the latter half of 2024, ending the year at a range of 4.25%-4.50%333 - The U.S. leveraged loan market saw record issuance of $1.5 trillion in 2024, with default rates declining to 0.91% by year-end348 - Book value per share decreased from $7.32 at year-end 2023 to $6.53 as of December 31, 2024332 Portfolio Overview and Outlook The company significantly expanded its CLO portfolio to $171.1 million while reducing Agency RMBS holdings and lowering its debt-to-equity ratio to 2.9:1 Portfolio Composition Change (Year-over-Year) | Asset Class | Dec 31, 2024 (in millions) | Dec 31, 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | CLO Portfolio | $171.1 | $17.4 | +883% | | Agency RMBS | $512.3 | $728.0 | -30% | - The debt-to-equity ratio, adjusted for unsettled trades, decreased to 2.9:1 as of Dec 31, 2024, compared to 5.3:1 as of Dec 31, 2023346 - As of year-end 2024, 89% of borrowings were secured by Agency RMBS and 11% by CLOs346 Performance by Asset Class The CLO strategy delivered strong results in 2024, while gains on interest rate hedges offset losses on the Agency RMBS portfolio - The CLO strategy had strong results, led by robust net interest income and net gains in the U.S. and European CLO debt portfolios355 - The Agency portfolio generated positive results for the year, with net gains on interest rate hedges of $24.1 million exceeding net losses on Agency MBS of $(16.1) million360367368 - The non-Agency RMBS and interest-only securities portfolios generated positive results from net interest income and profitable sales before being substantially liquidated356 Financing and Book Value The company's average borrowing cost rose to 5.48% while its debt-to-equity ratio fell, resulting in a 2.3% economic return for 2024 Financing and Book Value Metrics | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Average Repo Borrowing Cost | 5.48% | 5.18% | | Debt-to-Equity Ratio (Year-End) | 2.9:1 | 5.4:1 | | Book Value Per Share (Year-End) | $6.53 | $7.32 | | Economic Return | 2.3% | N/A | Critical Accounting Estimates The company's most critical accounting estimates involve the subjective valuation of financial instruments and the recognition of interest income based on assumptions - Valuation: The company uses third-party valuations and internal discounted cash flow models for financial instruments not traded in active markets, a process requiring significant judgment for Level 3 assets375376379 - Interest Income: Recognition is based on the effective interest method, which requires significant assumptions about future cash flows and can cause catch-up adjustments381382 - Income Taxes: As a new C-Corp, the company must make judgments regarding tax positions and the recoverability of deferred tax assets383 Financial Condition As of Dec 31, 2024, total assets decreased to $824.1 million, while shareholders' equity increased to $193.7 million due to share issuances Investment Portfolio Summary (Fair Value, in thousands) | Portfolio | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Credit Portfolio | $171,606 | $38,136 | | Total Agency Portfolio | $512,309 | $735,412 | | Total Securities, net | $684,337 | $773,548 | Financial Derivatives (Net Fair Value, in thousands) | Derivative Type | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Financial Derivatives | $36,186 | $66,950 | Repurchase Agreement Borrowings (in thousands) | Date | Borrowings Outstanding | Weighted Avg. Interest Rate | | :--- | :--- | :--- | | Dec 31, 2024 | $562,974 | 4.81% | | Dec 31, 2023 | $729,543 | 5.58% | - Shareholders' equity increased to $193.7 million as of Dec 31, 2024, from $136.2 million a year prior, mainly due to $73.6 million in net proceeds from share issuances399 Results of Operations For 2024, net income rose to $6.6 million from $4.6 million in 2023, driven by a shift to positive net interest income of $15.1 million Results of Operations Summary (in thousands) | Line Item | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Net Interest Income (Expense) | $15,069 | $(2,707) | | Total Expenses | $8,784 | $5,535 | | Total Other Income (Loss) | $811 | $12,801 | | Net Income (Loss) | $6,586 | $4,559 | | Net Income (Loss) Per Share | $0.28 | $0.31 | - The increase in net income was primarily due to positive net interest income in 2024, driven by a larger, higher-yielding credit portfolio401402 - Total interest expense decreased to $34.8 million from $45.3 million in 2023, due to lower overall borrowings405 - Other operating expenses increased to $6.2 million from $3.7 million, mainly due to costs associated with the CLO Strategic Transformation412 Adjusted Distributable Earnings Adjusted Distributable Earnings, a non-GAAP measure, increased to $27.7 million, or $1.17 per share, for the year ended December 31, 2024 Adjusted Distributable Earnings (Non-GAAP) | Metric | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Net Income (Loss) (GAAP) | $6,586 thousand | $4,559 thousand | | Adjusted Distributable Earnings | $27,668 thousand | $13,000 thousand | | Adjusted Distributable Earnings Per Share | $1.17 | $0.87 | - Adjusted Distributable Earnings is calculated by adjusting net income for items such as net realized and unrealized gains/losses on securities and derivatives418 Liquidity and Capital Resources The company maintains liquidity through cash, investment cash flows, and repo borrowings, and raised $73.6 million from its ATM program in 2024 - As of December 31, 2024, the company had $31.8 million in cash and $563.0 million outstanding under repurchase agreements423425 - During 2024, the company issued 10,964,023 common shares under its ATM program, raising $73.6 million in net proceeds442 - The company declared and paid monthly dividends totaling $0.96 per share for the year ended December 31, 2024434435 - Cash and cash equivalents decreased by $6.7 million during 2024, from $38.5 million to $31.8 million440 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are credit, interest rate, prepayment, and liquidity risk, with active hedging strategies in place to manage interest rate exposure - The primary components of market risk are identified as interest rate risk, prepayment risk, and credit risk453 - Credit risk is concentrated in non-Agency RMBS and corporate CLOs, which are backed by below-investment-grade loans454455 - Interest rate risk is managed through hedging instruments, including interest rate swaps and TBAs, to mitigate the mismatch between assets and liabilities461 Interest Rate Sensitivity Analysis (as of Dec 31, 2024) | Interest Rate Change | Estimated Market Value Change (in thousands) | % of Total Equity | | :--- | :--- | :--- | | +100 Basis Points | $(4,845) | (2.51)% | | +50 Basis Points | $(1,602) | (0.82)% | | -50 Basis Points | $(39) | (0.02)% | | -100 Basis Points | $(1,719) | (0.90)% | - Liquidity risk is managed by maintaining a prudent level of leverage, using hedges, and holding a cushion of cash and unpledged securities468469 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, which received an unqualified opinion with a critical audit matter related to Level 3 investment valuation - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements473 - A critical audit matter was identified concerning the valuation of certain Level 3 investments in securities, due to the significant management judgment required477478 Key Financial Data (in thousands) | Metric | As of/For Year Ended Dec 31, 2024 | As of/For Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Balance Sheet: | | | | Total Assets | $824,092 | $945,690 | | Total Liabilities | $630,366 | $809,452 | | Total Shareholders' Equity | $193,726 | $136,238 | | Statement of Operations: | | | | Total Net Interest Income (Expense) | $15,069 | $(2,707) | | Net Income (Loss) | $6,586 | $4,559 | | Net Income (Loss) Per Share | $0.28 | $0.31 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None663 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management concluded that disclosure controls and procedures were effective as of December 31, 2024664 - There were no material changes in internal control over financial reporting during the fourth quarter of 2024665 - Management concluded that internal control over financial reporting was effective as of December 31, 2024, based on the 2013 COSO framework668 Other Information The company reports no other information for this item - None669 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable670 Part III Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2025 annual shareholders' meeting672 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2025 annual shareholders' meeting675 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2025 annual shareholders' meeting676 Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2025 annual shareholders' meeting677 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2025 annual shareholders' meeting678 Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and key exhibits - Lists all documents filed with the report, including financial statements and exhibits679 - Key exhibits include the Sixth Amended and Restated Management Agreement, the 2023 Equity Incentive Plan, and the Rights Agreement from April 2024679680 Form 10-K Summary This item is noted as 'None', indicating no summary is provided in this section of the report - None681