Company bullish on corporate debt market potential
Ellington Residential Mortgage REIT announced a major shakeup on Tuesday, shifting its investment strategy to center on corporate collateralized loan obligations (CLOs).
The REIT’s board of trustees unanimously approved a plan to focus its investment strategy on buying secondary CLO mezzanine debt and equity tranches, building upon its existing $44 million CLO portfolio.
As part of this move, Ellington Residential will no longer operate as a real estate investment trust (REIT), instead converting into a closed-end fund categorized as a regulated investment company (RIC). The company said this will allow it to take advantage of existing net operating loss carryforwards to reduce its taxable income. Before finalizing the conversion later this year, it will function as a taxable C-Corp.
“We are excited to pivot EARN’s investment strategy to what we believe is a highly attractive space,” said Ellington CEO and president Laurence Penn. “Ellington has a longstanding and successful track record of investing in secondary CLOs, spanning more than a decade across various market conditions, and EARN’s CLO investments to date have generated excellent returns.”
Penn is confident that the switch will improve the company’s growth and shareholder value. He also highlighted the potential of the closed-end fund/RIC structure.
“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,” he said. “Thanks to the high liquidity of our agency MBS pool portfolio, the conversion to a closed-end fund/RIC, including transitioning 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.”
Read next: Ellington Financial-Great Ajax merger plan collapses
Ellington expects to finalize the conversion later this year, pending shareholder approval. Due to the transformation, the 2024 annual shareholder meeting will be rescheduled, the company said in its Press release.
“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.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
