Ellington Q1 2025 slides: completes CLO conversion amid $7.9M net loss

Ellington Residential Mortgage (NYSE:EARN) has completed its strategic transformation into a CLO-focused closed-end fund as of April 1, 2025, according to its Q1 2025 earnings presentation released on May 21. The company reported a net loss of $7.9 million for the quarter while significantly expanding its CLO portfolio.

Executive Summary

Ellington reported a net loss of $7.9 million or $0.23 per share for Q1 2025, compared to a loss of $2.0 million or $0.07 per share in the previous quarter. Despite the larger loss, adjusted distributable earnings increased to $9.0 million or $0.26 per share, up from $7.8 million or $0.27 per share in Q4 2024. The company’s book value per share declined to $6.08 from $6.53 at the end of December.

As shown in the following summary of financial results, Ellington’s total net interest income increased significantly to $9.25 million from $6.14 million in the previous quarter:

The company’s economic return for the quarter was negative at 3.2%, primarily due to unrealized losses in the CLO portfolio. However, Ellington maintained its dividend, with a current yield of 17.1% based on the May 19, 2025 closing price of $5.62.

Strategic Transformation

The most significant development in Q1 was Ellington’s completion of its strategic transformation from a mortgage REIT to a CLO-focused closed-end fund, effective April 1, 2025. This shift represents the culmination of a strategy that began in early 2024, when the company first started increasing its allocation to CLOs.

As illustrated in the portfolio summary below, Ellington significantly increased its allocation to CLOs to 81% of capital as of March 31, 2025, up from 72% at the end of 2024:

Following the conversion in early April, Ellington sold its entire Agency RMBS portfolio and covered related TBA hedges, completing its transition to a pure-play CLO investment vehicle. This strategic shift positions the company to focus exclusively on opportunities in the CLO market.

CLO Portfolio Expansion

Ellington’s CLO portfolio grew by 46% during the quarter to $249.9 million, up from $171.1 million at the end of 2024. The portfolio maintains a diversified mix of U.S. and European CLO investments across both equity and debt tranches.

The following chart shows the composition of Ellington’s CLO portfolio, with a significant allocation to U.S. CLO equity positions:

The company increased its allocation to U.S. CLO equity from 53.7% to 60.6% of the portfolio, while slightly increasing its European CLO equity exposure. This shift reflects management’s view of where the most attractive opportunities exist in the current market environment.

The underlying loans in Ellington’s CLO portfolio are predominantly first-lien floating rate leveraged loans (95%), with broad diversification across industries as shown in the following breakdown:

Financial Performance

Ellington’s Q1 financial results reflect the transitional nature of the quarter, with the company reporting a net loss primarily due to unrealized losses in its CLO portfolio. Total (EPA:TTEF) net realized and unrealized losses increased to $16.3 million from $9.5 million in the previous quarter.

The company’s operating results by strategy reveal that while the Agency RMBS portfolio contributed positively with $2.9 million in profit, the CLO portfolio experienced a loss of $8.5 million:

Despite these losses, Ellington’s net interest margin remained strong at 5.27% overall, with an impressive 11.13% on its credit investments. The company’s balance sheet shows total assets of $783.6 million as of March 31, 2025, down from $824.1 million at year-end 2024.

Risk Management

As part of its strategic shift, Ellington significantly reduced its exposure to interest rate risk by exiting its Agency RMBS positions. During the quarter, the company substantially increased its net short TBA position, which by quarter-end almost entirely offset its Agency RMBS holdings.

The following chart illustrates how Ellington reduced its net mortgage assets-to-equity ratio to effectively zero:

This positioning proved advantageous given the recent spike in interest rates and spread volatility. The company’s interest rate hedging portfolio at quarter-end consisted entirely of TBA short positions, compared to a mix of TBAs and interest rate swaps in the previous quarter:

Forward Outlook

With its transformation to a CLO-focused closed-end fund now complete, Ellington is positioned to capitalize on opportunities in the CLO market. The company maintains a debt-to-equity ratio of 2.2:1, adjusted for unsettled sales of Agency pools, which provides flexibility for future investments.

Ellington reported cash and cash equivalents of $17.4 million as of March 31, 2025, in addition to other unencumbered assets of $151.5 million. This liquidity position should enable the company to pursue attractive investment opportunities as they arise in the CLO market.

The company’s current dividend rate of $0.08 per share monthly represents an annualized yield of 17.1% based on the May 19, 2025 closing price of $5.62. This high yield reflects both the income-generating potential of CLO investments and the market’s current pricing of the stock, which closed at $5.59 on May 20, 2025, according to available market data.

Full presentation:

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