Ellington Residential Mortgage REIT(EARN) - 2025 Q4 - Annual Report

Part I Business Ellington Credit Company converted to a CLO-focused closed-end fund, managed by Ellington Credit Company Management LLC, targeting high yields from corporate CLOs - The company completed its CLO Strategic Transformation by converting from a REIT to a registered closed-end investment company effective April 1, 2025, focusing on mezzanine debt and equity tranches of corporate CLOs[22][24][26] - The company is externally managed by Ellington Credit Company Management LLC, an affiliate of Ellington Management Group, L.L.C., with approximately $14.9 billion in assets under management as of March 31, 2025[28][31] - The company uses leverage, primarily through repurchase agreements, with a debt-to-equity ratio of 2.3 to 1 as of March 31, 2025[62] - Post-conversion, a new Advisory Agreement includes a 1.50% annual base management fee on Net Asset Value and a 17.5% performance fee on pre-performance fee net investment income above an 8.00% annualized hurdle rate[69][70][71] Risk Factors The company faces significant risks from its CLO-focused strategy, including credit, leverage, market, and operational risks, alongside uncertainties from its recent fund conversion - The primary risk is exposure to the creditworthiness of underlying corporate borrowers in CLOs, with focus on subordinated mezzanine and equity tranches increasing loss exposure[143][146][198] - The Fund employs significant direct leverage and is exposed to substantial indirect leverage through CLO equity investments, with typical debt-to-equity ratios of 8 to 16 times, magnifying loss risk[143][224][225] - The Adviser's performance fee, based on pre-performance fee net investment income without considering capital losses, may incentivize higher-risk investments or increased leverage[144][251][252] - Failure to qualify and maintain Regulated Investment Company (RIC) status would subject the Fund to corporate-level U.S. federal income tax, significantly reducing net returns and distributions[144][313] - The recent conversion to a closed-end fund introduces material risks related to new operational processes, 1940 Act compliance, accounting changes, and tax year uncertainty, potentially delaying RIC qualification[143][189] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[348] Cybersecurity The company relies on its affiliate Ellington's cybersecurity processes, overseen by the Audit Committee, focusing on governance, technical safeguards, incident response, and employee education - The company is externally managed and relies on the information systems and cybersecurity processes of its affiliate, Ellington[349] - Ellington's cybersecurity strategy is a cross-functional approach focusing on governance, technical safeguards, incident response planning, third-party risk management, and employee training[350][351][358] - The Board, through its Audit Committee, oversees cybersecurity risk management, receiving regular presentations on the threat environment, vulnerability assessments, and technological trends[356] - To date, no cybersecurity threats have materially affected the company, despite two minor business email compromise incidents in recent years without material impact[355] Properties The company does not own properties, operating from leased office space in Old Greenwich, CT, provided by its Adviser - The company does not own any properties and operates from a leased office space in Old Greenwich, CT, provided by its Adviser[360] Legal Proceedings Neither the company nor its Adviser are currently subject to any material legal proceedings, though regulatory inquiries are expected - Neither the company nor its Adviser are currently subject to any material legal proceedings[361] - The company and its affiliates operate in a highly regulated market and expect to receive regulatory inquiries from time to time[361][362] Mine Safety Disclosures This item is not applicable to the company - Not applicable[363] 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 107 holders of record as of June 6, 2025, and 167,476 shares repurchased in Q1 2025 before the program's termination - The company's common shares trade on the NYSE under the ticker "EARN"[365] Issuer Purchases of Equity Securities (Q1 2025) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Jan 1 - Jan 31, 2025 | — | — | 725,808 | | Feb 1 - Feb 28, 2025 | — | — | 725,808 | | Mar 1 - Mar 31, 2025 | 167,476 | $5.84 | 558,332 | | Total | 167,476 | $5.84 | 558,332 | - The 2018 Share Repurchase Program is no longer usable following the company's conversion to a closed-end fund[367] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the company's financial condition and results, reporting a net loss of $(7.9) million for Q1 2025 due to mark-to-market losses, as its CLO portfolio grew to $249.9 million amid its strategic transformation - The company is executing its CLO Strategic Transformation, shifting from an Agency RMBS-focused REIT to a CLO-focused closed-end fund, with its CLO portfolio growing to $249.9 million as of March 31, 2025[370][384] Key Financial Metrics (as of March 31, 2025) | Metric | Value | | :--- | :--- | | Book Value per Share | $6.08 | | Debt-to-Equity Ratio (adjusted) | 2.2:1 | | CLO Portfolio (Fair Value) | $249.9 million | | Agency RMBS Portfolio (Fair Value) | $503.9 million | Results of Operations (Three Months Ended March 31) | (In thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Net Interest Income | $9,247 | $279 | | Total Other Income (Loss) | $(14,541) | $5,612 | | Net Income (Loss) | $(7,870) | $3,961 | | Net Income (Loss) Per Share | $(0.23) | $0.20 | - Adjusted Distributable Earnings for Q1 2025 were $9.0 million, or $0.26 per share, compared to $5.3 million, or $0.27 per share, for Q1 2024[461] - The company declared dividends of $0.24 per share for the three-month period ended March 31, 2025[493] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include credit risk from CLOs, interest rate risk managed by hedging, prepayment risk, and liquidity risk mitigated by diverse funding and unpledged assets - The company is subject to significant credit risk from its CLO investments, as the underlying corporate loans are typically below investment grade and carry greater default risk, especially in recessionary environments[514] - Interest rate risk is a key concern due to funding longer-term assets with shorter-term borrowings, managed using derivatives like interest rate swaps and TBAs[519][520] Interest Rate Sensitivity Analysis (as of March 31, 2025) | ($ In thousands) | Decrease 50 bps | Decrease 100 bps | Increase 50 bps | Increase 100 bps | | :--- | :--- | :--- | :--- | :--- | | Total Estimated Change in Portfolio Value | $ (26) | $ (57) | $ 20 | $ 36 | | % of Total Equity | (0.01)% | (0.02)% | 0.01% | 0.02% | - Liquidity risk is managed by maintaining diverse funding sources, monitoring counterparty stability, and holding a cushion of cash and unpledged securities to meet potential margin calls[527][528] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including balance sheets, statements of operations, and cash flows, along with detailed notes and the independent auditor's report Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified audit opinion on the financial statements, identifying Level 3 securities valuation as a critical audit matter due to significant judgment - PricewaterhouseCoopers LLP provided an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S. GAAP[531] - The valuation of Level 3 investments was identified as a Critical Audit Matter due to the significant management judgment and high degree of auditor subjectivity involved in determining their fair value[535][537] Consolidated Financial Statements The consolidated financial statements show total assets of $783.6 million and shareholders' equity of $228.5 million as of March 31, 2025, with a net loss of $(7.9) million for the quarter Consolidated Balance Sheet Summary (in thousands) | | Mar 31, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Assets | $783,557 | $824,092 | | Total Liabilities | $555,056 | $630,366 | | Total Shareholders' Equity | $228,501 | $193,726 | Consolidated Statement of Operations Summary (in thousands) | | Three Months Ended Mar 31, 2025 | Year Ended Dec 31, 2024 | | :--- | :--- | :--- | | Total net interest income | $9,247 | $15,069 | | Total other income (loss) | $(14,541) | $811 | | Net Income (Loss) | $(7,870) | $6,586 | Notes to Consolidated Financial Statements The notes detail accounting policies, the CLO Strategic Transformation, valuation methodologies for Level 2 and 3 assets, portfolio composition, repurchase agreement terms, related-party transactions, and subsequent events post-conversion - Note 1: Details the company's strategic transformation from a REIT to a CLO-focused closed-end fund, which was completed on April 1, 2025[557] - Note 4: As of March 31, 2025, the company held $133.9 million of Level 3 securities at fair value, primarily consisting of CLOs[641][536] - Note 6: As of March 31, 2025, the company had $517.5 million in outstanding borrowings under repurchase agreements with 13 counterparties, collateralized by $567.0 million of securities[682][683] - Note 9: Describes the new management agreement effective July 1, 2024, with a 1.50% annual base management fee and a performance fee (waived through Q1 2025)[701][703][705] - Note 13: Details significant subsequent events including the April 1, 2025 conversion, sale of remaining Agency RMBS for $500.9 million, adoption of a new Advisory Agreement and a Dividend Reinvestment Plan (DRP)[741] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[762] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2025, with no material changes during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2025[763] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2025, based on the COSO framework[768] - No material changes were made to the internal control over financial reporting during the quarter ended March 31, 2025[764] Other Information The company reports no other information under this item - None[769] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[770] Part III Directors, Executive Officers and Corporate Governance The Board of Trustees, with four independent members, oversees the company's business and risk management through its Audit and Nominating & Corporate Governance committees, while executive officers are provided by the Adviser - The Board is composed of six trustees, with four being independent, and Robert B. Allardice, III serving as the independent Chairman[772][774][796] - The Board has two standing committees, Audit and Nominating and Corporate Governance, both comprised solely of independent trustees[782][788] - All executive officers are provided by the Adviser, an affiliate of Ellington, including Laurence E. Penn (CEO & President), Michael W. Vranos (Portfolio Manager & Trustee), and Christopher Smernoff (CFO)[777][779] - The Board oversees risk management, with the Audit Committee specifically tasked with oversight of financial reporting, internal controls, and cybersecurity risks[797][798][799] Executive Compensation The company does not directly compensate its NEOs, who are employees of Ellington, but reimburses the Administrator for allocable compensation of certain staff, estimated at $0.4 million for Q1 2025 - The company does not directly compensate its NEOs, who are employees of Ellington and provided through the Adviser[808] - The company reimburses the Administrator for an allocable share of compensation for the CFO, COO, and support staff, with an estimated expense of approximately $0.4 million for Q1 2025[809] Trustee Compensation (Three Months Ended March 31, 2025) | Name | Fees Earned or Paid in Cash | Total Compensation | | :--- | :--- | :--- | | Robert B. Allardice, III | $27,500 | $27,963 | | David J. Miller | $19,375 | $19,838 | | Ronald I. Simon, Ph.D. | $19,375 | $19,838 | | Mary McBride | $17,500 | $17,963 | | Laurence E. Penn | — | — | | Michael W. Vranos | — | — | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters As of June 6, 2025, executive officers and trustees as a group beneficially owned 1.4% of outstanding common shares, with no individual holding 1% or more, and the 2023 Equity Incentive Plan was terminated post-conversion - As of June 6, 2025, all executive officers and trustees as a group beneficially owned 510,442 common shares, representing 1.4% of the outstanding shares[815] - No individual trustee or executive officer beneficially owned 1% or more of the company's common shares[815] - The company's 2023 Equity Incentive Plan was terminated upon conversion to a closed-end fund, but 39,577 previously granted restricted shares remain outstanding and subject to vesting[824][825] Certain Relationships and Related Transactions, and Director Independence Key related party transactions are governed by the Advisory and Administration Agreements with Ellington affiliates, stipulating management fees and expense reimbursements, with oversight by the Governance Committee and 1940 Act restrictions post-conversion - The primary related party relationships are with the Adviser and Administrator, both affiliates of Ellington, governed by the Advisory and Administration Agreements effective April 1, 2025[828][838] - The Advisory Agreement stipulates a 1.50% annual base management fee and a 17.5% performance fee on income above an 8% hurdle[829][830] - The Administration Agreement outlines the reimbursement by the Fund for its allocable portion of costs incurred by the Administrator, including compensation for the CFO and COO[838] - The Governance Committee reviews related party transactions, which are also subject to the prohibitions on principal and joint transactions under the 1940 Act since the conversion[826][827] Principal Accountant Fees and Services PricewaterhouseCoopers LLP serves as the independent auditor, with all services pre-approved by the Audit Committee, and total fees for Q1 2025 were $205,253, primarily for audit services - PricewaterhouseCoopers LLP (PwC) is the company's independent registered public accounting firm[841] PwC Fees | Fee Type | Three-Month Period Ended Mar 31, 2025 | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | :--- | | Audit Fees | $205,000 | $514,250 | $476,840 | | Audit-related Fees | — | $44,700 | $76,500 | | Tax Fees | — | — | — | | All Other Fees | $253 | $1,010 | $1,641 | | Total Fees | $205,253 | $559,960 | $554,981 | - All services provided by PwC were pre-approved by the Audit Committee in accordance with its established policies and procedures[846][847] Part IV Exhibits and Financial Statement Schedules This section lists key exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications, with financial statement schedules omitted as information is in Item 8 - Key exhibits filed with the report include: - Corporate governance documents (Declaration of Trust, Bylaws) - Material contracts (Advisory Agreement, Administration Agreement) - CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) - Insider Trading Policy and Recovery of Erroneously Awarded Compensation Policy[852][853] - Financial statement schedules have been omitted as the necessary information is contained within the Financial Statements and Notes to Financial Statements in Item 8[852] Form 10-K Summary The company reports no summary under this item - None[854]