IPO Preview: Ellington Residential Mortgage REIT

| About: Ellington Residential (EARN)

Based in Old Greenwich, Conn., Ellington Residential Mortgage REIT (NYSE:EARN) scheduled a $130 million IPO with a market capitalization of $183 million, at a price range midpoint of $20 for Wednesday, May 1, 2013. EARN is one of five new IPOs scheduled for the week of April 29. The full IPO calendar is here.

  • S-11A filed April 23, 2013
  • Manager, Joint Managers: Credit Suisse; Deutsche; Citi; UBS
  • Co Managers: RBC Capital; JMP; Blackstone Capital; Sterne Agee; Tod's Point


EARN is a mortgage REIT focusing on residential mortgages. All five of the most recent mortgage REIT IPOs have IPO'ed at book value and have sold off the first day.

Organization Chart

EARN's organization chart is convoluted, which is not a plus.


Pass on the EARN IPO.

History and Business

EARN was formed through an initial strategic venture among affiliates of Ellington, an investment management firm and registered investment adviser with an 18-year history of investing in a broad spectrum of mortgage-backed securities and related derivatives, with an emphasis on the Agency and non-Agency RMBS (Residential Mortgage Backed Securities) market.

These initial investors made an aggregate investment of $31.5 million on Sept. 25, 2012, in connection with the formation and have additional capital commitments of $21.0 million. The initial investors have agreed to fund their remaining capital commitments through a private placement concurrent with this IPO. As of Dec. 31, 2012, EARN had deployed these funds in approximately $13.5 million of non-Agency RMBS.

As of April 17, 2013, EARN's portfolio was comprised of $230.7 million of Agency RMBS and $12.4 million of non-Agency RMBS. EARN is externally managed and advised by its manager, an affiliate of Ellington.


EARN will elect and intend to qualify to be taxed as a REIT for U.S. federal income tax purposes starting with the short taxable year ending Dec. 31, 2013. Accordingly, EARN will not be subject to U.S. federal income taxes on taxable income distributes to shareholders as long as we maintain our intended qualification as a REIT. The Blackstone Funds hold special non-voting membership interests in the Ellington affiliate that owns EARN's manager, which them to receive distributions equal to a percentage of the management fees EARN pays to its manager.

Use of Proceeds

EARN expects to net $149 million from its IPO. EARN intends to deploy the net proceeds from the IPO and the concurrent private placement as follows:

  • 55% to 65% in Agency RMBS backed by 30-year fixed rate mortgages;
  • 15% to 25% in Agency RMBS backed by 15-year fixed rate mortgages;
  • 0% to 10% in Agency RMBS backed by Hybrid/ARM mortgages; and
  • 10% to 20% in non-Agency RMBS backed by Subprime/Alt-A/Prime mortgages and in our other targeted assets.

EARN expects to deploy at least 80% of the net proceeds in Agency RMBS backed by 30-year and 15-year fixed rate mortgages. Taking into account the targeted leverage ratios and the targeted allocation of equity capital, EARN estimates, during the six month period following the completion of the IPO, EARN's assets will be allocated 0%-10% to non-Agency RMBS and 90%-100% to Agency RMBS.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This EARN IPO report is based on a reading and analysis of EARN's S-11A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.