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Organization and Investment Objective
 6 Months Ended
Jun. 30, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Investment Objective Organization and Investment Objective
Ellington Financial Inc. commenced operations on August 17, 2007 and is a Delaware corporation. Ellington Financial Operating Partnership LLC (the "Operating Partnership"), a 99.1% owned consolidated subsidiary of Ellington Financial Inc., was formed as a Delaware limited liability company on December 14, 2012 and commenced operations on January 1, 2013. All of Ellington Financial Inc.'s operations and business activities are conducted through the Operating Partnership. Ellington Financial Inc., the Operating Partnership, and their consolidated subsidiaries are hereafter collectively referred to as the "Company." All intercompany accounts are eliminated in consolidation.
The Company conducts its operations to qualify and be taxed as a real estate investment trust, or "REIT," under the Internal Revenue Code of 1986, as amended (the "Code"), and has elected to be taxed as a corporation effective January 1, 2019. In anticipation of the Company's intended election to be taxed as a REIT under the Code beginning with its 2019 taxable year (the "REIT Election"), the Company implemented an internal restructuring as of December 31, 2018. As part of this restructuring, the Company moved certain of its non-REIT-qualifying investments and financial derivatives to taxable REIT subsidiaries or, "TRSs," and disposed of certain of its investments in non-REIT-qualifying investments and financial derivatives.
Ellington Financial Management LLC (the "Manager") is an SEC-registered investment adviser that serves as the Manager to the Company pursuant to the terms of its Seventh Amended and Restated Management Agreement (the "Management Agreement"), which was approved by Ellington Financial Inc.'s Board of Directors (the "Board of Directors") effective March 13, 2018. The Manager is an affiliate of Ellington Management Group, L.L.C. ("Ellington"), an investment management firm that is registered as both an investment adviser and a commodity pool operator. In accordance with the terms of the Management Agreement, the Manager implements the investment strategy and manages the business and operations on a day-to-day basis for the Company and performs certain services for the Company, subject to oversight by the Board of Directors.
On October 3, 2022, the Company completed the acquisition of a controlling interest in Longbridge Financial, LLC ("Longbridge"), a reverse mortgage loan originator and servicer (the "Longbridge Transaction"). As a result of the Longbridge Transaction, the Company consolidates Longbridge's financial results.
As a result of the Longbridge Transaction, the Company has two reportable segments, the Investment Portfolio Segment and the Longbridge Segment. The Investment Portfolio Segment is focused on investing in a diverse array of financial assets, including residential and commercial mortgage loans, residential mortgage-backed securities, or "RMBS," commercial mortgage-backed securities, or "CMBS," consumer loans and asset-backed securities, or "ABS," including ABS backed by consumer loans, collateralized loan obligations, or "CLOs," non-mortgage- and mortgage-related derivatives, debt and equity investments in loan origination companies, and other strategic investments. The Longbridge Segment is focused on the origination and servicing of reverse mortgage loans. Longbridge acquires reverse mortgage loans both through its origination activities and through secondary market purchases. Historically, the majority of loans acquired by Longbridge have been home equity conversion mortgage loans, or "HECMs," which are insured by the Federal Housing Administration, or "FHA." Such loans are generally eligible for securitization into HECM-backed MBS, or "HMBS," which are guaranteed by the Government National Mortgage Association, or "GNMA." Longbridge is an approved issuer of HMBS, and it transfers HECM loans into HMBS, which it then sells in the secondary market while retaining the servicing rights on the underlying HECM loans. Longbridge also originates and purchases non-FHA-insured reverse mortgage loans originated under guidelines established by private lenders, which the Company refers to as "Proprietary reverse mortgage loans." Proprietary reverse mortgage loans typically carry loan balances or credit lines that exceed FHA limits or have other characteristics that make them ineligible for FHA insurance.
Pending Acquisition of Arlington Asset Investment Corp.
On May 29, 2023, the Company; EF Merger Sub Inc., a wholly-owned subsidiary of the Company; Arlington Asset Investment Corp., a Virginia corporation (“Arlington”); and, solely for the limited purposes set forth in the Arlington Merger Agreement (as defined below), the Manager, entered into an agreement and plan of merger (the “Arlington Merger Agreement”) under which Arlington will be merged with and into EF Merger Sub Inc.. EF Merger Sub Inc. will survive as a wholly-owned subsidiary of the Company (the “Arlington Merger”).
Under the terms of the Arlington Merger Agreement, at the effective time of the Arlington Merger, each outstanding share of Arlington's Class A common stock (other than shares held by the Company, EF Merger Sub Inc. or any wholly-owned subsidiary of the Company, EF Merger Sub Inc. or Arlington) will be converted into the right to receive: (i) from the Company,
shares of the Company’s common stock based on an exchange ratio of 0.3619, subject to adjustment as provided in the Arlington Merger Agreement, and (ii) from the Manager, $0.09 in cash (approximately $3.0 million in aggregate).
In addition, at the effective time of the Arlington Merger, each share of Arlington’s 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock, $0.01 par value per share, will be automatically converted into the right to receive one newly issued share of 7.00% Series D Cumulative Perpetual Redeemable Preferred Stock, $0.001 par value per share, of the Company; and each share of Arlington’s 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, will be automatically converted into the right to receive one newly issued share of 8.250% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.001 par value per share, of the Company.
Certain equity-based awards previously issued under Arlington's equity-incentive plans, including restricted shares of common stock, performance restricted stock units, stock price performance restricted stock units and deferred stock units, will, immediately prior to the consummation of the Arlington Merger, become fully vested (and, where applicable, vested as if all performance goals were achieved at maximum or actual performance levels) and be treated as shares of Arlington's Class A common stock for all purposes of the Arlington Merger Agreement.
At the consummation of the Arlington Merger, all assets, and all debts, obligations and liabilities of Arlington will become the assets, debts, obligations and liabilities of the Company (including Arlington’s outstanding trust preferred securities, 6.75% Senior Notes due 2025 and 6.000% Senior Notes due 2026).
The closing of the Arlington Merger is subject to the approval of Arlington's shareholders and other customary closing conditions set forth in the Arlington Merger Agreement.
Pending Acquisition of Great Ajax Corp.
On June 30, 2023, the Company; EF Acquisition I LLC, a wholly-owned subsidiary of the Company; and Great Ajax Corp., a Maryland corporation (“Great Ajax”) entered into an agreement and plan of merger (the “Great Ajax Merger Agreement”) under which Great Ajax will be merged with EF Acquisition I LLC. EF Acquisition I LLC will survive as a wholly-owned subsidiary of the Company (the “Great Ajax Merger”).
Under the terms of the Great Ajax Merger Agreement, at the effective time of the Great Ajax Merger, each outstanding share of Great Ajax common stock (other than shares held by the Company, EF Acquisition I LLC or any wholly-owned subsidiary of the Company, EF Acquisition I LLC or Great Ajax) will be converted into the right to receive: (i) shares of the Company’s common stock based on an exchange ratio of 0.5308, subject to adjustment as provided in the Great Ajax Merger Agreement, and (ii) if, applicable, any contingent cash consideration.
Additionally, certain shares of restricted stock previously issued under Great Ajax's equity-incentive plans will, immediately prior to the consummation of the Great Ajax Merger, become fully vested and considered outstanding for all purposes of the Great Ajax Merger Agreement.
At the consummation of the Great Ajax Merger, all assets, and all debts, obligations and liabilities of Great Ajax will become the assets, debts, obligations and liabilities of the Company (including those related to the 7.25% Convertible Senior Notes due 2024 of Great Ajax and the 8.875% Senior Unsecured Notes due 2027 of Great Ajax Operating Partnership L.P., a Delaware limited partnership).
The closing of the Great Ajax Merger is subject to the approval of Great Ajax 's stockholders, Great Ajax effectuating the repurchase of certain securities and other customary closing conditions set forth in the Great Ajax Merger Agreement.
The Company will account for each of the Arlington Merger and the Great Ajax Merger as a business combination in accordance with the provisions of ASC 805, “Business Combinations,” or “ASC 805.” In applying the acquisition method of accounting, the Company will be treated as the acquirer of both Arlington and Great Ajax for accounting purposes.