Ellington Financial (EFC) and Arlington Asset Investment Corp. (AAIC) Announce Definitive Merger Agreement

Ellington Financial Inc. (NYSE: EFC) (“Ellington Financial”), a real estate investment trust investing in a diverse array of financial assets including residential and commercial mortgage loans, and Arlington Asset Investment Corp. (NYSE: AAIC) (“Arlington”), a real estate investment trust that invests primarily in mortgage-related and other assets, announced today that they have entered into a definitive merger agreement pursuant to which Ellington Financial will acquire Arlington. Upon completion of the acquisition, Ellington Financial is expected to have a pro forma equity capital base of over $1.5 billion.

Under the terms of the merger agreement, (i) each share of Arlington common stock will be converted into 0.3619 shares1 of Ellington Financial common stock, or approximately 11.7 million shares of Ellington Financial common stock in the aggregate, and (ii) Arlington common stockholders will also receive $3 million in cash in the aggregate (or $0.09 per share) to be contributed by Ellington Financial’s external manager. The respective closing stock prices for Ellington Financial and Arlington on May 26, 2023 imply an offer price of $4.77 per Arlington share, representing a 73% premium to Arlington’s share price on May 26, 2023, and a 15% discount to diluted tangible book value per share2 as of March 31, 2023. Upon the closing of the acquisition, Ellington Financial stockholders are expected to own approximately 85% of the combined company’s stock, while Arlington stockholders are expected to own approximately 15% of the combined company’s stock. In addition, Ellington Financial will assume Arlington’s outstanding preferred equity, senior unsecured notes and trust preferred securities.

Based on the closing price of Ellington Financial’s common stock on May 26, 2023, the estimated pro forma market capitalization of the combined company would exceed $1.0 billion. The combined company will operate under the name “Ellington Financial Inc.” and its shares will continue to trade on the NYSE under the existing ticker symbol “EFC”. Ellington Financial Management LLC, an affiliate of Ellington Management Group, L.L.C., will continue to manage the combined company.

“We are extremely excited about the opportunity to add a significant portfolio of assets – particularly low-coupon mortgage servicing rights – that align very well with our expertise and existing management platform,” stated Laurence Penn, Ellington Financial’s Chief Executive Officer. “We believe that the benefits of this acquisition include greater operating efficiencies, a larger market capitalization, and attractive long-term unsecured debt and preferred equity capital. Upon closing, we believe that we will be positioned well to drive accretive earnings growth and provide strategic and financial benefits to our stockholders.”

“We are thrilled to combine AAIC with the Ellington Financial team to make a combined company that we believe will be positioned to take advantage of opportunities into the future,” said J. Rock Tonkel, Jr., Arlington’s Chief Executive Officer. “This transaction combines two complementary portfolios, and we look forward to working closely with the Ellington Financial team to complete the acquisition and deliver value for our stockholders.”

Anticipated Benefits to Ellington Financial and Arlington Stockholders from the Acquisition:

• Capital to Fund Growth Going Forward: Increased scale and liquidity to further capitalize on opportunistic investment environment.
• Strategically Compelling: Arlington’s investment portfolio aligns well with Ellington Financial’s portfolio, and its relatively low leverage should provide meaningful opportunity to enhance returns by deploying additional capital in EFC’s targeted assets classes.
• Accretive to Earnings and Long-Term Growth: Anticipated to be accretive to Ellington Financial’s earnings in 2023 and accretive to Ellington Financial’s book value within one year of closing, with enhanced long-term growth potential.
• Increases in Operational Efficiency: Anticipated increase in operating expense efficiencies as a result of fixed expenses spread over a larger equity base.
• Desirable Target Capital Structure: Arlington’s capital structure includes unsecured debt and preferred equity with attractive costs of capital.
• Increased Market Capitalization and Liquidity: Estimated pro forma market capitalization of approximately $1 billion (based on the closing price of EFC common stock on May 26, 2023) expected to enhance liquidity of EFC common stock and provide more efficient access to capital markets.

Additional information on the transaction and the anticipated effects on Ellington Financial can be found in Ellington Financial’s investor deck relating to the acquisition posted on Ellington Financial’s website. The investor deck is also being furnished by Ellington Financial in a Current Report on Form 8-K being filed by Ellington Financial with the Securities and Exchange Commission (the “SEC”) on the date hereof.

Management, Governance and Corporate Headquarters

Upon completion of the acquisition, Ellington Financial’s Chief Executive Officer and President, Laurence Penn, will continue to lead the combined company, and Ellington Financial executives Michael Vranos, Mark Tecotzky, and JR Herlihy will remain in their current roles. The combined company will remain headquartered in Old Greenwich, Connecticut. The Board of the combined company is expected to expand to six directors through the addition of one Arlington-designated director.

Timing and Approvals

The transaction has been unanimously approved by the Boards of Directors of Ellington Financial and Arlington. The transaction is expected to close in the fourth quarter of 2023, subject to the approval by Arlington’s stockholders and other customary closing conditions.

Advisors

Keefe, Bruyette & Woods, A Stifel Company is acting as exclusive financial advisor and Vinson & Elkins is acting as legal advisor to Ellington Financial. Wells Fargo Securities is acting as exclusive financial advisor and Hunton Andrews Kurth LLP is acting as legal advisor to Arlington.

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