Ellington Residential Mortgage REIT(EARN) - 2025 Q1 - Quarterly Results

Report Overview and Highlights Conversion Update The company completed its conversion to a Delaware-domiciled closed-end fund focused on corporate CLOs on April 1, 2025, intending to operate as a RIC for tax purposes, and changed its fiscal year end to March 31 - Completed conversion to a closed-end fund focused on corporate CLOs on April 1, 2025, and will operate as a Regulated Investment Company (RIC)[3] - Post-conversion, the company liquidated its entire long Agency RMBS and short TBA positions[3][6] - The fiscal year end has been changed to March 31, with the three-month period ended March 31, 2025, being a short fiscal year as a taxable C-Corporation[4] First Quarter 2025 Financial Highlights For Q1 2025, the company reported a net loss of $7.9 million and Adjusted Distributable Earnings of $9.0 million, while significantly increasing its CLO portfolio and reducing leverage Q1 2025 Key Financial Metrics | Metric | Value | Per Share | | :--- | :--- | :--- | | Net Income (Loss) | $(7.9) million | $(0.23) | | Adjusted Distributable Earnings | $9.0 million | $0.26 | | Book Value (as of Mar 31, 2025) | - | $6.08 | | Dividends (for the period) | - | $0.24 | Portfolio and Capital Allocation Changes (as of Mar 31, 2025 vs. Dec 31, 2024) | Metric | Mar 31, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | CLO Portfolio | $249.9 million | $171.1 million | | Capital Allocation to CLOs | 81% | 72% | - The debt-to-equity ratio decreased to 2.2:1, and the net mortgage assets-to-equity ratio was reduced to 0.0:1[8] Management Commentary Management attributed the net loss to macro-driven CLO price declines, expanded the CLO portfolio by 46% in preparation for conversion, and plans to deploy capital into dislocated credit markets - CEO Laurence Penn attributed the quarterly net loss to macro challenges causing CLO price declines, rather than credit-specific concerns[5] - The CLO portfolio was expanded by 46% during the quarter to $250 million, while the Agency RMBS portfolio was neutralized using net short TBA positions before being liquidated post-conversion[6] - The company's estimated net asset value per share as of April 30 was in the range of $5.85 to $5.91[6] - Management sees the timing of the conversion as advantageous, providing 'dry powder' to invest in a dislocated credit market with wider spreads and expanded opportunities[9] Financial Results and Portfolio Composition Portfolio of Long Investments As of March 31, 2025, the total long investment portfolio increased to $754.2 million, driven by significant expansion in the Credit Portfolio, particularly CLOs, while the Agency Portfolio slightly decreased Portfolio Fair Value Comparison ($ in thousands) | Portfolio Segment | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Credit | $250,347 | $171,606 | | Total Agency | $503,894 | $512,309 | | Total Investments | $754,241 | $683,915 | CLO Holdings The CLO portfolio grew by 46% to $249.9 million as of March 31, 2025, with capital allocation to CLOs increasing to 81%, composed of both equity and mezzanine debt tranches CLO Portfolio Composition (March 31, 2025) | CLO Tranche | Fair Value ($M) | | :--- | :--- | | Equity Tranches | $164.4 | | Mezzanine Debt Tranches | $85.5 | | Total | $249.9 | - The company aims to maintain a diversified portfolio of CLO equity and debt, with the majority expected to remain dollar-denominated[12] Agency RMBS Holdings Agency RMBS holdings slightly decreased to $503.9 million, with the company substantially increasing its net short TBA position to offset long holdings prior to conversion - Agency RMBS holdings decreased slightly from $512.3 million to $503.9 million quarter-over-quarter[13] - The company used a significantly increased net short TBA position to neutralize its Agency RMBS holdings prior to the conversion[13] Leverage and Hedging The company's leverage decreased, with the adjusted debt-to-equity ratio falling to 2.2:1, and all interest rate hedges shifted to short TBA positions by quarter-end Leverage Ratio Comparison | Ratio | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Debt-to-Equity Ratio | 2.2:1 | 2.9:1 | | Net Mortgage Assets-to-Equity Ratio | 0.0:1 | 2.6:1 | - As of March 31, 2025, all interest rate hedges consisted of short TBA positions; the company no longer held any interest rate swap hedges[14][15] Operating Results and Performance Analysis Net Interest Margin and Adjusted Distributable Earnings The credit portfolio's net interest margin significantly increased to 11.13%, while the Agency portfolio's decreased, and Adjusted Distributable Earnings per share slightly declined but covered dividends Net Interest Margin Comparison (Q1 2025 vs Q4 2024) | Portfolio | Q1 2025 | Q4 2024 | | :--- | :--- | :--- | | Credit | 11.13% | 8.54% | | Agency | 2.29% | 3.24% | - Adjusted distributable earnings per share was $0.26, a slight decrease from $0.27 in the previous quarter, but still exceeded dividends paid[16] Operating Results by Strategy (Total Profit/Loss, $ in thousands) | Strategy | Q1 2025 | Q4 2024 | | :--- | :--- | :--- | | Total CLO | $(8,477) | $2,821 | | Total Agency RMBS | $2,875 | $(3,335) | | Net Income (Loss) | $(7,870) | $(2,005) | CLO Performance The CLO strategy generated negative results due to mark-to-market losses and increased market volatility in March, with U.S. mezzanine tranches impacted by lower-quality loans and slower prepayments - The CLO strategy had negative results as mark-to-market losses surpassed net interest income and gains on credit hedges[22] - Market volatility increased in March, driven by concerns over tariffs and economic slowdown, which negatively pressured CLO prices in both the U.S. and Europe[19] - U.S. CLO mezzanine tranches were impacted by weakness in lower-quality loans and reduced deleveraging from slower prepayments[20] Agency Performance The company's Agency portfolio generated positive results throughout the quarter, successfully navigating widening Agency RMBS yield spreads in March due to rising volatility - EARN's Agency portfolio generated positive results during each month of the period[24] - Agency RMBS yield spreads widened in March due to rising volatility related to uncertain tariff policies, leading to a negative excess return of (0.07%) for the U.S. Agency MBS Index for the quarter[23] General and Administrative Expenses General and administrative expenses increased quarter-over-quarter due to higher professional fees, compensation related to the conversion, and increased management fees from a larger capital base - G&A expenses increased due to higher professional fees and compensation related to the conversion, and higher management fees from a larger capital base[25] Financial Statements Consolidated Statement of Operations (Unaudited) For Q1 2025, the company reported a net loss of $(7.9) million due to significant unrealized losses on securities and derivatives, despite $9.2 million in net interest income Statement of Operations Highlights (Q1 2025 vs Q4 2024, $ in thousands) | Line Item | Q1 2025 | Q4 2024 | | :--- | :--- | :--- | | Total Net Interest Income | $9,247 | $6,142 | | Total Expenses | $2,582 | $2,269 | | Total Other Income (Loss) | $(14,541) | $(6,059) | | Net Income (Loss) | $(7,870) | $(2,005) | | Net Income (Loss) Per Share | $(0.23) | $(0.07) | Consolidated Balance Sheet (Unaudited) As of March 31, 2025, total assets decreased to $783.6 million, total liabilities decreased to $555.1 million, while total shareholders' equity increased to $228.5 million, resulting in a book value per share of $6.08 Balance Sheet Summary (As of Mar 31, 2025 vs. Dec 31, 2024, $ in thousands) | Category | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $783,557 | $824,092 | | Total Liabilities | $555,056 | $630,366 | | Total Shareholders' Equity | $228,501 | $193,726 | | Book Value Per Share | $6.08 | $6.53 | - The increase in shareholders' equity was supported by the issuance of 8,075,118 common shares under the at-the-market offering program during the quarter[35] Reconciliation of Adjusted Distributable Earnings to Net Income (Loss) Adjusted Distributable Earnings (ADE), a non-GAAP measure, reconciles the $(7.9) million net loss to $9.0 million ADE for Q1 2025 by excluding unrealized gains/losses and non-recurring items - Adjusted Distributable Earnings is calculated by adjusting GAAP net income for items like net realized and unrealized gains/losses on securities and derivatives[36][37] ADE Reconciliation (Q1 2025, $ in thousands) | Line Item | Amount | | :--- | :--- | | Net Income (Loss) | $(7,870) | | Adjustments (subtotal) | $16,829 | | Adjusted Distributable Earnings | $8,953 | | Adjusted Distributable Earnings Per Share | $0.26 | Other Information About Ellington Credit Company Ellington Credit Company is a non-diversified, closed-end fund externally managed by Ellington Management Group, L.L.C., focused on investing primarily in CLO mezzanine debt and equity tranches - The Fund is a non-diversified closed-end fund investing primarily in CLO mezzanine debt and equity tranches[26] Conference Call Information A conference call to discuss Q1 2025 financial results is scheduled for 11:00 a.m. Eastern Time on May 21, 2025, with an investor presentation available online - A conference call to discuss financial results is scheduled for 11:00 a.m. Eastern Time on May 21, 2025[27] Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements subject to numerous risks and uncertainties, including changes in interest rates, market volatility, and regulatory changes, where actual results may vary materially - The release contains forward-looking statements subject to risks such as interest rate changes, market volatility, and our ability to adapt to the new regulatory regime post-conversion[28]