Q1 2024 Ellington Credit Company Earnings Call
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Operator: Please stand by; your program is about to begin. If you need assistance during your conference today, please press star zero. Good morning, ladies and gentlemen. Thank you for standing by.
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Operator: Welcome to the Ellington Credit Company 2024 First Quarter Financial Results Conference Call. This call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press Star 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing Star 2. Finally, if you should require operator assistance, please press Star 0. It is now my pleasure to turn the floor over to Aladin Chalet, Associate General Counsel. Sir, you may begin.
Speaker Change: Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington Credit Company 2020 for first quarter Financial results Conference call. Today's call is being recorded at this time all participants have been placed on a listen only mode.
Speaker Change: And the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your telephone keypad at any time. If your question has been answered you may remove yourself from the queue by pressing star. Two lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to you all.
Speaker Change: The Dean Chalet Associate General Counsel, Sir you may begin.
Aladin Chalet: Before we begin, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K and Part 2, Item 1A of our quarterly report on Form 10-Q, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events.
Thank you before we begin I would like to remind everyone that certain statements made during this conference call may constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Reform Act.
Speaker Change: 1995 forward looking statements are not historical in nature as described under item one a of our annual report on Form 10-K, and part two item one a of our quarterly report on Form 10-Q forward looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs expectations.
Speaker Change: And projections, consequently should not rely on these forward looking statements as predictions of future events unless otherwise noted statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise joining me on the call today are Larry.
Aladin Chalet: Unless otherwise noted, statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellington Credit Company, Mark Tecotzky, our Co-Chief Investment Officer, and Chris Smernoff, our Chief As described in our earnings press release, our first quarter... First Quarter Earnings Conference Call Presentation is available on our website, which we've changed to ellingtoncredit.com. Our comments this morning will track to the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the notes at the back of the presentation. With that, I will now turn the call over to Larry. Thanks, Eladine.
Speaker Change: Penn Chief Executive Officer of contracted company, Mark Dekosky, Archie our co Chief investment Officer, and Christopher <unk>, Our Chief Financial Officer as described in our earnings press release, our first quarter.
First quarter earnings conference call presentation is available on our website, which will change the Arlington credit Dot com.
Speaker Change: Our comments. This morning are attracted to the presentation. Please note that any references to figures in this presentation are qualified in their entirety notes at the back of the presentation with that I will now turn the call over there.
Laurence Eric Penn: Thanks, Eladine, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company. Please turn to slide three of the presentation. I'll begin by reviewing Ernst & Young's Strategic Transformation, which we announced back on April 1st. In late March, our board approved a strategic transformation of Earns Investment Strategy to focus on corporate CLOs, and more specifically, CLO mezzanine debt and CLO equity. These are asset classes that we believe can provide greater risk-adjusted return potential for our shareholders over the long term, as compared to Agency RMVS, which had been our primary targeted asset class ever since our IPO in 2013.
Dana: Thanks, Alan Dana and good morning, everyone. We appreciate your time and interest in Ellington credit company.
Dana: Please turn to slide three of the presentation.
Speaker Change: I'll begin by reviewing our strategic transformation, which we announced back on April 1st.
Speaker Change: In late March our board approved our strategic transformation earns investment strategy to focus on corporate corporate Clo's and more specifically CLO mezzanine debt and CLO equity.
Speaker Change: These are asset classes that we believe can provide greater risk adjusted return potential for our shareholders over the long term as compared to agency MBS, which had been our primary targeted asset class ever since our IPO in 2013.
Laurence Eric Penn: To effectuate this transition, we have revoked our REIT election, and later this year, we plan to convert to a closed-end fund for SEC purposes and a regulated investment company, or RIC, for tax purposes. As a reflection of these fundamental changes, we have changed our company's name to Ellington Credit Company.
Speaker Change: To effectuate this transaction, we have resolved our REIT election, and later this year, we plan to convert to a closed end fund for FCC purposes, and a regulated investment company or Ric for tax purposes.
Speaker Change: As a reflection of these fundamental changes we have changed our company's name to Ellington credit company. We have also changed the name of our website from earn REIT dot com to Ellington credit Dot com.
Laurence Eric Penn: We have also changed the name of our website from EarnREIT.com to EllingtonCredit.com. We will continue to be listed on the New York Stock Exchange under our ticker symbol E-A-R-N or EARN. And we have maintained our 8 cents per share monthly dividend. By shifting to a CLO-focused strategy, we are leveraging Ellington's long-standing and successful track record of investing in secondary CLOs, which spans more than a decade across a wide variety of market conditions.
Speaker Change: We will continue to be listed on the New York stock exchange under our ticker symbol E. A R N or earn and we have maintained our eight cents per share monthly dividend.
Ellington: By shifting to a CLO focused strategy, we are leveraging ellington's longstanding and successful track record of investing in secondary CLO, which spans more than a decade across a wide variety of market conditions.
Laurence Eric Penn: Looking back, our transformation actually began in September of last year, as we saw a good entry point into the CLO model and first began rotating a portion of Ernst Capital into CLO. In late March, after seeing the CLO strategy performing at or above expectations, and after working out the details for the transformation, the EARN board approved the transformation.
Ellington: Looking back our transformation actually began in September of last year as we saw a good entry point in the CLO market and first began rotating a portion of earnings capital into CLS in.
Speaker Change: In late March after seeing the CLO strategy performing at or above expectations and after working out the details for the transformation you earn board approved the traffic the transformation.
Laurence Eric Penn: We plan to accomplish this over the coming months by selling our remaining agency pools, buying more CLOs, and obtaining shareholder approval of certain matters that would allow us to convert to a closed-end fund. Fortunately, since we've concentrated our agency investments in the liquid sector, the cost of liquidating agency pools to free up capital for CLOs has been very modest, and we expect that to continue to be.
Speaker Change: We plan to accomplish this over the coming months by selling our remaining agency pools buying more clo's and obtaining shareholder approval of certain matters that would allow us to convert to a closed end funds.
Speaker Change: Fortunately since we've concentrated our agency investments in liquid sectors. The cost of liquidating agency pools to free up capital for Cielo. So its been very modest and we expect that to continue to be the case.
Laurence Eric Penn: Then, after our transformation is complete, CLOs will become the sole focus of our investment strategy. To date, earned CLO investments have generated excellent returns, and we've now built a CLO portfolio of over $60 million. Please turn now to slide four, where we summarize the anticipated benefits of the transformation for shareholders.
Speaker Change: Then after our transformation is complete.
Speaker Change: <unk> will become the sole focus divestment strategy.
Speaker Change: To date earn CLO investments have generated excellent returns and we've now built the CLO portfolio of over $60 million.
Speaker Change: Please turn now to slide four where we summarize the anticipated benefits of the transformation to shareholders.
Laurence Eric Penn: I am confident that the strong earnings power of CLOs, combined with our particular focus on relative value and active trading, will drive attractive returns for our shareholders, but with less volatility. CLO mezzanine and equity investments typically have high current yields, which support high net interest margins and strong adjusted distributable earnings. These investments also require significantly less debt financing compared to the typical leveraged agency pool strategy. Furthermore, because CLOs are primarily backed by floating rate loans, they also require significantly less interest rate hedging than agency pools.
Speaker Change: I am confident that the strong earnings power of Cielo is combined with a particular focus on relative value and active trading will drive attractive returns for our shareholders, but with less volatility.
Speaker Change: CLO mezzanine and equity investments typically have high current yields which support high net net interest margins and strong adjusted distributable earnings.
Speaker Change: These investments also requires significantly less debt financing compared to the typical leverage agency pool strategy.
Speaker Change: Furthermore, because cielo is a primarily backed by floating rate loans. They also require significantly less interest rate hedging than agency pools.
Laurence Eric Penn: Finally, despite significant growth of the CLO market in recent years, many parts of the market remain highly inefficient, particularly the secondary markets for CLO mezzanine debt and equity, where our investment strategy is focused. We expect that our differentiated approach to CLO investing will enable EARN to capitalize on these inefficiencies. No two CLOs are alike, which, given Ellington's extensive CLO expertise, should create lots of relative value opportunities and trading opportunities for Earn2Capture. Additionally, some additional opportunities will come from credit hedging, which I believe is another differentiator of Ellington's approach to CLO investing. We are willing to take on risk when we believe it makes sense.
Speaker Change: Finally, despite significant growth of the CLO market in recent years, many parts of the market remain highly inefficient, particularly the secondary market for CLO mezzanine debt and equity where our investment strategy is focus.
Speaker Change: We expect that our differentiated approach to CLO investing will enable <unk> to capitalize on these inefficiencies.
Speaker Change: No two CLO or alike, which get given ellington's extensive CLO expertise should create lots of relative value opportunities and trading opportunities for them to capture.
Speaker Change: Some additional opportunities will come from credit hedging, which I believe is another differentiator of ellington's approach to CLO investing.
Speaker Change: We are willing to hedge credit when we believe it makes sense.
Laurence Eric Penn: There are many liquid instruments that are available to gain or reduce exposure to overall corporate credit, and CLO investments can often get someone disconnected from those other instruments. Over market cycles, we believe that our new focus... We believe that we can add significantly to EARN's total returns and reduce EARN's volatility by selectively and opportunistically hedging from time to time, as a result of all these factors. We anticipate that our new focus will provide a more stable book value and earnings profile for EARN going forward.
Speaker Change: There are many liquid instruments that are available to gain to reduce exposure to overall corporate credit.
Speaker Change: And CLO investments can often get somewhat disconnected from those other instruments.
Speaker Change: Over market cycles, we believe that our new focus.
Speaker Change: Sorry, we believe that we can add significantly to earns total returns and reduce reduce earnings volatility by selectively an opportunity opportunistically hedging from time to time.
Speaker Change: As a result of all these factors, we anticipate that our new focus will provide more stable book value and earnings profile for earn going forward.
Laurence Eric Penn: Accordingly, we believe that this new focus will also provide the ability for Earn to Grow book value per share over time with a high risk-adjusted return. This contrasts with the performance in recent years of most agency pass-through strategies, which have experienced book value per share erosion due to negative interest rates. As I mentioned earlier, in order to effectuate the tax component of our strategic transformation, we have revoked our REIT election for 2024.
Speaker Change: Accordingly, we believe that this new focus will also provide the ability for <unk> to grow book value per share over time with high risk adjusted returns.
Speaker Change: This contrast, with the performance in recent years, most agency pass through strategies, which have experienced book value per share erosion due to negative interest rate convexity.
Speaker Change: As I mentioned earlier in order to effectuate the tax component of our strategic transformation, we have revoked a reelection for 2024.
Laurence Eric Penn: Later this year, once you obtain shareholder approval of certain matters and convert to a closed-end fund, we will elect to be treated as a regulated investment company, or RIC, for tax purposes. Like REITs, RICs are also generally taxed as pass-through amounts, thereby avoiding corporate level tax.
Speaker Change: Later this year once you obtain shareholder approval of certain matters and convert to a closed end fund we will elect to be treated as a regulated investment company or Ric for tax purposes.
Speaker Change: Like Reits rigs are also generally taxes pass through entities, thereby avoiding corporate level tax.
Laurence Eric Penn: We are excited about the Closed End Fund slash RIC structure, which we also believe will enhance our access to the capital markets and open more channels for growth. Perhaps most importantly, we also see it as an opportunity to expand EARN's valuation, given the premiums to net asset value at which CLO-focused, closed-end funds are trading today and have traded historically. Please turn now to slide 5, where you can see the anticipated timeline for the transformation.
Speaker Change: We are excited about the closed end fund slash Rick structure, which we also believe will enhance our access to the capital markets and open more channels for growth.
Speaker Change: Perhaps most importantly, we also see it as an opportunity to expand earns valuation multiple given the premium to net asset value. Our CLO focused closed end funds are trading today and have traded historically.
Speaker Change: Please turn now to slide five where you can see the anticipated timeline for the transformation.
Laurence Eric Penn: With our REIT election revoked, we are currently situated in the second column on this slide, operating as a taxable C Corp. During this period, while we prepare for a closed-end fund-slash-rent conversion, we expect to grow the CLO portfolio above $100 million while maintaining a core portfolio of liquid agency MBS to maintain exemption from the 1940 Act. Furthermore, EARN came into the year with significant net operating loss tax carry forward, and we plan to take advantage of that to offset the majority of our U.S. federal taxable income until our conversion to a closed-end fund-slash-REC is complete.
Speaker Change: With our REIT election revoked we are currently situated in the second column on this slide operating as a taxable C Corp.
Speaker Change: During this period, while we prepare for our closed end funds slashed rig conversion, we expect to grow the CLO portfolio above $100 million.
Speaker Change: While maintaining our core portfolio of liquid agency MBS.
Speaker Change: To maintain an exemption from the 40 Act.
Speaker Change: Furthermore, earn came into the year with significant net operating loss tax carryforwards, and we plan to take advantage of those to offset the majority of our U S federal taxable income.
Speaker Change: Until our conversion to a closed end fund slash Recchi is complete.
Laurence Eric Penn: We remain on track to complete our conversion later this year, perhaps as soon as the third quarter. You can find additional information about the strategic transformation in the presentation section of the Ellington Credit website, which, as a reminder, is now located at www.ellingtoncredit.com. And please don't hesitate to reach out to us with any questions.
Speaker Change: We remain on track to complete our conversion later this year, perhaps as soon as the third quarter.
Speaker Change: You can find additional information about the strategic transaction transformation in the presentations section of the Arlington credit website, which as a reminder is now located at Www Dot Ellington credit Dotcom and please don't hesitate to reach out to us with any questions.
Laurence Eric Penn: Please turn now to slide 6 of the presentation for the market backdrop for the first quarter. In the first quarter, corporate credit, including CLOs, outperformed agency MBS. Toward the bottom of the slide, you can see that, first, corporate credit spreads, although tightened in high yield and investment grade. Second, prices on the Morningstar LSTA Leverage Loan Index rose for the sixth straight quarter. And third, CLO mezanine spreads were tighter across the board, with the most pronounced tightening on single B-rated trash.
Speaker Change: Please turn now to slide six of the presentation for the market backdrop for the first quarter.
Speaker Change: In the first quarter corporate credit, including Cielo has outperformed the agency MBS.
Speaker Change: Towards the bottom of the slide you can see that first corporate credit spreads.
Speaker Change: Tightened in high yield and investment grade.
Speaker Change: Second prices on the Morningstar <unk> leveraged loan index rose for the sixth straight quarter and third CLO mezzanine spreads were tighter across the board with the most pronounced tightening on single B rated tranches.
Laurence Eric Penn: This strengthened corporate credit reflected the continuation of trends we saw in the final months of 2020, driven by strong capital inflows, strengthening fundamentals, and declining interest rate volatility. Investor demand for leveraged loans remained particularly strong, with significant new-issue CLO volume and rapid repayments of existing leveraged loans driving much of the demand. This dynamic has especially benefited Ernst Holdings of discount dollar-priced CLO mezzanine trushes, where we've concentrated our CLO investments so far. Meanwhile, agency MBS lagged in the quarter, despite the lower interest rate volatility, as market consensus shifted to a higher-for-longer expectation for interest rates.
Speaker Change: This strength in corporate credit reflected the continuation of trends we saw in the final months of 2023, driven by strong capital inflows strengthening fundamentals and declining interest rate volatility.
Investor demand for leveraged loans remained particularly strong.
Speaker Change: With significant new issue CLO volume and rapid repayments of existing leveraged loans driving much of the demand.
Speaker Change: This dynamic is especially benefited earns holdings, a discount dollar price CLO mezzanine tranches, where we've concentrated our CLO investments so far.
Speaker Change: Meanwhile, agency MBS lagged in the quarter, despite the lower interest rate volatility as market consensus shifted to a higher for longer expectation for interest rates.
Laurence Eric Penn: You can see in the middle of the slide that option-adjusted spreads on Agency MBS widened across the coupons. Please turn now to slide 7 for a summary of earnings results for the first quarter. In the middle of the slide, you can see that strong performance from our CLO portfolio led the way, with CLOs contributing more than 40% of our investment portfolio income despite representing less than 20% of average invested capital during the quarter.
Speaker Change: You can see in the middle of the slide the option adjusted spreads on agency MBS widened across the coupon stack.
Laurence Eric Penn: That translated to an annualized return on capital on our CLO portfolio of north of 30% for the quarter. And we haven't even started employing significant leverage in that portfolio. That said, given that almost half of our CLO investment income was attributable to spread tightening, I don't want to give the impression that we can regularly expect that kind of quarterly performance. Moving down the slide, you can see that our small non-agency portfolio also contributed solidly to earnings, while agency finished positive as well. Our adjusted distributive earnings of $0.27 per share for the quarter again comfortably exceeded our dividends of $0.24.
Speaker Change: Please turn now to slide seven for a summary of earnings results for the first quarter.
Speaker Change: In the middle of the slide you can see that strong performance from our CLO portfolio led the way with Cielo is contributing 40% of our investment portfolio income, despite representing less than 20% of average invested capital during the quarter.
That translated to an annualized return on capital on our CLO portfolio north of 30% for the quarter.
Speaker Change: And we haven't even start employing significant leverage in that portfolio.
Speaker Change: That said given that almost half of our CLO investment income was attributable to spread tightening I don't want to give the impression that we can regularly expect that kind of quarterly performance.
Speaker Change: Okay moving down the slide you can see that our small non agency portfolio also contributed solidly to earnings while agency finished positive as well.
Speaker Change: Our adjusted distributable earnings of <unk> 27 per share for the quarter again comfortably exceeded our dividends of 24.
Laurence Eric Penn: Elsewhere on slide 7, you can also see the impact of our larger CLO portfolio and our other operating measures. Driven by the low leverage on our CLOs, the overall debt to equity ratio declined to 4.8 to 1 at quarter end, down from 5.3 to 1 at year end. VOTE TWO TURNS!
Elsewhere on slide seven you can also see the impact of our largest CLO portfolio.
Speaker Change: And our other operating metrics.
Speaker Change: Driven by the low leverage on our CLO.
Speaker Change: Overall debt to equity ratio declined to $4 eight to one at quarter end down from five three to one at year end.
Speaker Change: Two turns.
Laurence Eric Penn: of leverage lower than it was on September 30th, First started ramping up CLI. In addition, earnings overall net interest margin climbed above 3% for the first quarter. Not surprisingly, this was driven by the higher NIMS in our CLO portfolio. You can see here that the NIM on our credit investments, which are now mainly CLOs, climbed above 9.5%. And as we add more CLOs, the credit portfolio is representing a larger and larger percentage of our overall portfolio. Of course, higher NIMS require less leverage to drive strong ADE.
Speaker Change: We have leverage lower than it was at September 30th when we first started ramping up CLO.
In addition, <unk> overall net interest margin climbed above 3% for the first quarter.
Speaker Change: Not surprisingly this was driven by the higher nims in our CLO portfolio you can see here that the NIM on our credit investments, which are now mainly clo's climbed above nine 5%.
Speaker Change: And as we add more C allows the credit portfolio is representing a larger and larger percentage of our overall portfolio.
Speaker Change: Of course, higher nims required less leverage to drive strong TVE.
Laurence Eric Penn: Finally, I'll add that we were also able to reduce the size of our interest rate hedging portfolio in the first quarter given the lower interest rate duration of CLI. And with that, I'll now pass it over to Chris to review our financial results for the first quarter in more detail.
Speaker Change: Finally, I'll add that we were also able to reduce the size of our interest rate hedging portfolio in the first quarter, given the lower interest rate duration of CLS.
Speaker Change: With that I'll now pass it over to Chris to review, our financial results for the first quarter in more detail, Chris. Thank you Larry and good morning, everyone.
Christopher M. Smernoff: Thank you, Larry, and good morning, everyone. Please turn to slide 8 for a summary of Ellington Credit's first quarter financial results. For the quarter ended March 31st, we reported net income of $0.20 per share and adjusted distributable earnings of $0.27 per share. ADE excludes the catch-up amortization adjustment, which was negative $884,000 in the first quarter.
Speaker Change: Please turn to slide eight for a summary of the only thing credit first quarter financial results.
Chris: For the quarter ended March 31, we reported net income of <unk> 20 per share and adjusted distributable earnings of 27 per share.
Chris: It excludes the catch up amortization adjustment, which was negative 884000 in the first quarter.
Christopher M. Smernoff: On slide eight, you can see that our overall net interest margin expanded to 3.03 percent from 2.19 percent quarter over quarter, driven by the growth of CLOs, while our ADE remained at 27 cents per share. NIMS on both the agency and credit portfolios increased sequentially, driven by higher average asset yields and, for agency, a lower cost of funds. In the first quarter, we continued to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate, but we expect the impact of this benefit to decline in future quarters as some of these swaps expire and as we sell down the agency portfolio and take off the associated hedge.
Speaker Change: On slide eight you can see that our overall net interest margin expanded to three zero to 3% from $2, one 9% quarter over quarter driven by the growth of Clo's, while our <unk> remained at 27 2027 per share.
Speaker Change: Nims on both the agency and credit portfolios increased sequentially, driven by higher average asset yields and for agency a lower cost of funds.
Speaker Change: In the first quarter, we continued to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate, but we expect the impact of this benefit to decline in future quarters as some of these swaps expire and as we sell down the agency portfolio and take off the associated hedges.
Christopher M. Smernoff: On slide 9, you can see the attribution of income by strategy. The CLO strategy generated $0.12 per share of portfolio income in the quarter, driven by strong interest income and net realized and unrealized gains on our seasoned CLO mezzanine investments. Because we mostly own these mezzanine investments at discounts to par, they are benefiting from elevated loan prepayments.
On slide nine you can see the attribution of income by strategy.
Speaker Change: The CLO strategy strategy generated 12 per share our portfolio income in the quarter driven by strong interest income and net realized and unrealized gains on our seasoned CLO mezzanine investments.
Speaker Change: Because we mostly on these mezzanine investments at discounts to par.
Speaker Change: Our benefiting from elevated loan prepayments.
Christopher M. Smernoff: The positive net interest income from the CLO strategy also caused Earn's overall net interest income to be positive. Additionally, our agency strategy generated portfolio income of ten-tenths per share for the first quarter. Despite lower interest rate volatility during the quarter, Agency MBS lagged the broader rally in credit as market consensus for the timing of the first Federal Reserve cut was pushed back. This drove interest rates higher across the yield curve and pressured yield spreads on agency MBS, particularly in February, and particularly for lower coupon MBS where much of our portfolio is concentrated. While agency MBS yield spreads did recover meaningfully in March, driven by lower volatility and capital inflows, overall, for the quarter, agency MBS generated a modestly negative excess return to Treasury.
Speaker Change: The positive net interest income from the CLO strategy also caused earns overall net interest income to be positive.
Speaker Change: Our agency strategy generated portfolio income of <unk> 10 per share for the first quarter.
Speaker Change: Despite lower interest rate volatility during the quarter agency MBS lagged the broader rally in credit as market consensus for the timing of the first federal reserve cut was pushed back.
Speaker Change: This drove interest rates higher across the yield curve and pressured yields spreads on agency MBS, particularly in February and particularly for lower coupon MBS, where much of our portfolio is concentrated.
Speaker Change: While agency MBS yield spreads did recover meaningfully in March driven by lower volatility in capital inflows overall for the quarter agency MBS generated a modest modestly negative excess return to treasuries.
Christopher M. Smernoff: Despite the negative excess return, EARN's agency portfolio was profitable for the quarter as net gains on interest rate hedges exceeded net losses on our pools and negative net interest income. Finally, our non-agency portfolio performed well during the quarter, generating $0.06 per share driven by net interest income and marked market gains attributable to spread tightening. As Larry mentioned, in connection with our strategic transformation, we've revoked our REIT election effective January 1st of this year, and we are currently operating as a taxable C Corp. We came into the year with substantial net operating loss carry forwards, and in the first quarter, we used a portion of those to offset the majority of our federal taxable income as we intend to continue doing so for so long as we operate as a C-Cor Due to federal and state restrictions on NOL utilization, we cannot offset 100% of our taxable income.
Speaker Change: Despite the negative asset excess return Aaron's agency portfolio was profitable for the quarter as net gains on interest rate hedges exceeded net losses on our pools and negative net interest income.
Speaker Change: Finally.
Aaron: Our non agency portfolio performed well during the quarter generating <unk> <unk> per share driven by net interest income and mark to market gains attributable to spread tightening.
Aaron: As Larry mentioned in connection with our strategic transformation, we have revoked our REIT election effective January one of this year.
Aaron: Our currently operating as a taxable C Corp.
Larry: We came into the year with substantial net operating loss carryforwards and in the first quarter. We used a portion of those to offset the majority of our federal taxable income as we intend to continue doing so for so long as we operate as a C Corp.
Larry: For the first quarter, we accrued an income tax expense of 300000, which reflects the net tax liability accrued on our taxable income after the NOL offset.
Due to federal and state restrictions on NOL utilization, we cannot offset 100% of our taxable income.
Christopher M. Smernoff: Our utilization of NOLs reduced our effective tax rate from what would have been around 20.5% to 7.1% for the quarter. Please note that we did not book a deferred tax asset on our balance sheet related to the NOLs, so our reported book value remains fully tangible. Please turn now to our balance sheet on slide 10. Book value per share was $7.21 on March 31st compared to $7.32 per share at year-end. Including the $0.24 per share of dividends paid in the quarter, our economic return for the quarter was 1.8%.
Larry: Our utilization of Nols reduced our effective tax rate from what would have been around <unk>.
Speaker Change: 25% to seven 1% for the quarter.
Speaker Change: Please note that we did not book a deferred tax asset on our balance sheet related to the Nols. So when we report so our reported book value remains fully tangible.
Speaker Change: Please turn now to our balance sheet on slide 10.
Speaker Change: Book value per share was $7 21.
Speaker Change: At March 31, compared to $7 32 per share at year end.
Speaker Change: Including the 24 per share of dividends in the quarter, our economic return for the quarter was one 8%.
Christopher M. Smernoff: We ended the quarter with $79.5 million in cash and unencumbered assets, which represented approximately 56% of total equity. Next, please turn to slide 11 for a summary of our portfolio holdings. During the first quarter, our CLO portfolio increased to $45 million as of March 31st compared to $17 million as of year-end. Over this same period, the size of our agency MBS holdings increased slightly to $739 million as of March 31st compared to $728 million as of December 31st, and our aggregate holdings of interest-only securities and non-agency RMBS decreased modestly.
Speaker Change: We ended the quarter with $79 $5 million in cash and on the covered assets, which represented approximately 56% of total equity.
Speaker Change: Next please turn to slide 11 for a summary of our portfolio holdings.
Speaker Change: During the first quarter, our CLO portfolio increased to $45 million as of March 31, compared to $17 million as of year end.
Speaker Change: Over the same period the size of our agency MBS holdings increased slightly to $739 million as of March 31, compared to $728 million as of December 31.
Speaker Change: And our aggregate holdings of interest only securities and non agency MBS decreased modestly modestly.
Christopher M. Smernoff: The allocation of our deployed equity to CLOs increased to 25% at March 31st from 11% at year end, while the allocation to mortgage-related assets declined to 75% from 89%. Including activity through May 13th, our CLO portfolio currently stands at over $60 million, while our agency MBX holdings have declined to $621 million. Our debt-to-equity ratio adjusted for unsettled trades decreased to 4.9 times as of March 31st, as compared to 5.3 times at year-end.
Speaker Change: The allocation of our deployed equity to Cielo has increased to 25% at March 31 from 11% at year end, while the allocation to mortgage related assets declined to 75% from 89%.
Speaker Change: Including activity through May 13th our CLO portfolio currently stands at over $60 million, while our agency MBS holdings have declined to $621 million.
Our debt to equity ratio adjusted for unsettled trades decreased to four nine times as of March 31, as compared to five three times at year end.
Christopher M. Smernoff: The decline was driven by less leverage on our CLO investments as compared to agency RMBF, as well as higher shareholders' equity. Similarly, our net mortgage assets-to-equity ratio decreased over the same period to 5.4 times from 5.8 times, driven also by a net short TBA position at March 31st on a notional basis compared to a net long notional TBA position at year-end, partially offset by a Finally, on slide 13, you can see details of our interest rate hedging portfolio.
Speaker Change: The decline was driven by less leverage on our CLO investments as compared to agency MBS as well as higher shareholders' equity.
Speaker Change: Similarly, our net mortgage assets to equity ratio decreased over the same period to five four times from five eight times driven also by our net short TBA position at March 31 on a notional basis compared to a net long notional TBA position at year end partially.
Speaker Change: Set by a larger agency MBS portfolio.
Speaker Change: Finally on slide 13, you can see details of our interest rate hedging portfolio.
Christopher M. Smernoff: During the quarter, we continued to hedge interest rate risk primarily through the use of interest rate swaps. We ended the quarter with a small net short TBA position, both on a no-show basis and as measured by the 10-year equivalent. The overall size of our interest rate hedging portfolio declined quarter over quarter as the share of our portfolio in CLOs increased. On slide 15, you can see that nearly all the loans underlying our CLO portfolio are floating rate and, as such, have a much lower interest rate duration. I will now turn the presentation over to Mark.
Speaker Change: During the quarter, we continued to hedge interest rate risk primarily through the use of interest rate swaps.
Speaker Change: We ended the quarter with a small net short TBA position, both on a notional basis and as measured by 10 year equivalents.
Speaker Change: The overall size of our interest rate hedging portfolio declined quarter over quarter as the share of our portfolio and CLO increased.
Speaker Change: On slide 15, you can see that nearly all of the loans underlying our CLO portfolio are floating rate and as such have much lower interest rate duration.
Speaker Change: I will now turn the presentation over to Mark.
Mark Ira Tecotzky: Thanks, Chris. This was a solid quarter for EARN. It showed the benefits of the pivot we started implementing last September, adding significant corporate CLO exposure in place of a portion of our levered agency MBS portfolio. The market backdrop of lower volatility and relatively stable yields led to outperformance in most credit sectors of structured products. Markets transitioned this quarter from wondering about how high the Fed would hike rates to wondering about when the first cut would come. That change in Fed expectations was very significant for risk appetite.
Mark Dekosky: Thanks, Chris This was a solid quarter for earn it showed the benefits of the pivot. We started implementing last September adding significant corporate CLO exposure in place of a portion of our Levered agency MBS portfolio.
Speaker Change: The market backdrop of lower volatility and relatively stable yields led to outperformance in most credit sectors of structured products markets transition. This quarter from wondering about how high the fed would hike rates just wondering about when the first cut would come that change in fed expectations with very significant for risk appetite corporate credit.
Mark Ira Tecotzky: Corporate credit rallied pretty much across the board, and for agency MBS, that meant more bank participation, lower delta hedging costs, and a favorable demand picture as inflows from fixed income funds were strong. That said, Agency MBS actually lagged other spread products, basically with spreads chedding water versus hedging. But Earn was well-positioned to capture ADE against this market backdrop, and we were able to monetize spread income with limited drag from negative convection.
Speaker Change: Really pretty much across the board and for agency. It net more bank participation lower delta hedging costs and the favorable demand picture as inflows from fixed income funds were strong.
Speaker Change: That said agency MBS actually lagged other spread products.
Speaker Change: Basically with spreads heading water versus hedging instruments, but earned was well positioned to capture a D against this market backdrop, we were.
Speaker Change: We're able to monetize spread income with limited drag from negative convexity.
Mark Ira Tecotzky: For CLOs, we've seen strong prepayment activities. In the loans underlying our positions, corporate borrowers took advantage of benign market conditions to refinance debt, leading to welcome paydowns in excess of projections on our discount dollar-priced MES portfolio. This refinancing activity has also improved loan market fundamentals, as many corporate borrowers have been able to lower their debt costs and extend their debt maturity. Many CLO equity tranches are benefiting in a different way from the tightening in debt spreads, with many CLO deals now able to refinance their liability costs at lower rates. By lowering the coupons on the CLO debt tranches, more excess spread is available to flow to the CLO equity tranche.
Speaker Change: Clo's, we've seen strong prepayment activity.
Speaker Change: And the loans underlying our positions corporate borrowers took advantage of benign market conditions to refinance debt leading to welcome paydowns in excess of projections and our discount dollar price mezz portfolio.
Speaker Change: This refinancing activity has also improved loan market fundamentals as many corporate borrowers have been able to lower their debt costs and then the debt maturities.
Speaker Change: Many CLO equity tranches are benefiting in a different way from the tightening in debt spreads with many CLO deals now able to refinance their liability costs lower by lowering the coupons on the CLO debt tranches more excess spread is available to flow to the CLO equity tranche.
Mark Ira Tecotzky: Solid fundamentals in the loan market coupled with refi activity have reduced tail risk in the CLO market and reduced the percentage of distressed loans in most deals. This dynamic drove the outperformance of our CLOs relative to similarly rated corporate bonds for the quarter. Security Selection also contributed to our outperformance. We systematically pull over deal documentation to analyze deal-level tests and triggers that not only protect our investments but also give us a competitive edge. In addition, we work closely with our credit team to assess the credit quality of specific underlying loans to avoid future stresses and uncover potential upsides.
Speaker Change: Solid fundamentals in the loan market, coupled with refi activity have reduced tail risk in the CLO market and reduce the percentage of distressed loans in most deals.
Speaker Change: This dynamic drove our outperformance drove the outperformance of our CLO relative to similarly rated corporate bonds for the quarter Security selection also contributed to our outperformance we systematically pullover deal documentation to antibodies to analyze deal level person triggers that not only protect our investments, but also give us upside.
Speaker Change: <unk>.
Speaker Change: In addition, we worked closely with our credit team to assess the credit quality of specific underlying loans to avoid future stresses and uncover potential upside.
Mark Ira Tecotzky: That discipline, together with a market backdrop of strong credit performance, helps drive our outsized returns. We also had a nice contribution from our non-agency RMBS holdings. Home price appreciation continues to surprise to the upside, and the net supply of housing is quite low relative to demand.
Speaker Change: That discipline together with the market backdrop of strong credit performance helped drive our outsized returns.
Speaker Change: We also had a nice contribution from our non agency MBS Holdings home price appreciation continues to surprise to the upside and then that supply of housing is quite low relative to demand.
Mark Ira Tecotzky: While we transition our portfolio from being agency focused to shift over time, but overall, we are aiming to stay fully invested while maintaining our typical liquidity buffer. Second, we want to keep our agency portfolio liquid, and as our transition progresses, we will need to concentrate that agency portfolio a bit more in whole pools in order to continue to maintain our 40 Act exemption prior to the RIC conversion. That process has been underway, and it is ongoing.
Speaker Change: We transition our portfolio from being agency focused.
Speaker Change: To CLO focused we are managing the portfolio with a few goals in mind first this is it.
Speaker Change: Favorable environment for spread product like agency MBS and Cmos, we want to stay relatively fully invested the percentage of capital allocated between the two sectors will shift over time, but overall, we are aiming to stay fully invested while maintaining our typical liquidity buffers.
Speaker Change: We wanted to keep our agency portfolio liquid and as our transition progresses, we will need to concentrate that agency portfolio a bit more on whole pools in order to continue to maintain our 40 act exemption prior to the REIT conversion.
Speaker Change: That process has been underway and there's ongoing we had about 20% turnover in our agency portfolio in Q1, and additional activity post quarter and our disciplined approach pool selection has been helpful. Minimizing earnings drag during this transition.
Mark Ira Tecotzky: We had about 20% turnover in our agency portfolio in Q1 and additional activity post-quarter end. Our disciplined approach to pool selection has been helpful in minimizing earnings drag during this transition. To summarize, we are keeping up ADE, but the mix between pools and CLOs will continue to shift in favor of CLOs. Looking ahead, I am pleased with our returns for the quarter and the progress we have made with the portfolio transition. With the current market dynamics, we see upside in our current portfolio. Should Fed cuts materialize consistent with current market expectations, that could be a catalyst for additional outperformance. Now back to Larry.
To summarize we are keeping up but the mix between pools and CLO will continue to shift in favor of CLO.
Larry: Looking ahead I am pleased with our returns for the quarter and the progress we have made with the portfolio transition with the current market dynamics, we see upside in their current portfolio should fed cuts materialize consistent with market current expectations that could be a catalyst for additional outperformance now back to Larry.
Larry: Thanks Mark.
Laurence Eric Penn: CLO performance was definitely the bright spot in the first quarter for Earn, as it's been since Earn began investing in this sector last September. In hindsight, September was clearly an excellent entry point, especially given the yield spread tightening we've seen in corporate credits since. Despite the recent rally, I believe that the investment opportunity will continue to be attractive over the long term. The CLO market has demonstrated its ability to generate attractive returns over market cycles and over a long-term horizon.
Speaker Change: CLO performance was definitely the bright spot in the first quarter for earn as its been since <unk> began investing in this sector last September.
Speaker Change: In hindsight September was clearly an excellent entry point, especially given the yield spread tightening we've seen in corporate credit since then.
Larry: Despite the recent rally I believe that the investment opportunity, we will continue to be attractive over the long term.
Larry: CLO market has demonstrated its ability to generate attractive returns over market cycles and over a long term horizon.
Laurence Eric Penn: As just one data point, the Benchmark Leverage Loan Index has generated positive results in 24 years out of its 27-year performance history. Moreover, many portions of the CLO market remain highly inefficient, and so we believe that we can generate significant alpha above and beyond the already attractive benchmark index. Even after the yield spread tightening that boosted our returns in the first quarter, we still see returns on equity for our recent CLO investment.
Larry: As just one data point the benchmark leveraged loan index has generated positive results in 24 years out of its 27 year performance history.
Larry: Moreover, many portions of the CLO market remained highly inefficient and so we believe that we can generate significant alpha above and beyond the already attractive benchmark index.
Larry: Even after the yield spread tightening that boosted our returns in the first quarter, we still see returns on equity for our recent CLO investments, assuming a modest amount of leverage we plan to employ as a closed end fund in the high teens and low twenties.
Laurence Eric Penn: Assuming the modest amount of leverage we plan to employ as a closed-end fund in the high teens and low 20s. Meanwhile, the agency MBS sector continues to be volatile, especially due to renewed concerns about inflation and a more hawkish Fed, which in April resulted in Treasury yield volatility picking up and agency spreads widening yet again. Agency MBS underperformed our swap and treasury hedges in April, and the volatility also caused us to incur delta hedging costs.
Meanwhile, the agency MBS sector continues to be volatile, especially over a new concerns about inflation and a more hawkish fed which in April resulted in treasury yield volatility picking up an agency spreads widening yet again.
Larry: Agency MBS underperformed, our swap and treasury hedges in April and the volatility also caused us to incur delta hedging costs. Fortunately much of this agent agency MBS underperformance has reversed itself and met.
Laurence Eric Penn: Fortunately, much of this agency MBS underperformance has reversed itself in May, but this is just another example of the volatility we've seen in agency MBS over the past few years that we should be much less exposed to after our conversion to a CLO-focused, closed-end fund is complete. Our CLO portfolio has continued to perform well so far in the second quarter. Overall, we estimate that Ernst & Young's economic return so far in the second quarter is slightly positive.
Speaker Change: But this is just another example of the volatility we've seen in agency MBS over the past few years that we should be much less exposed to after our conversion to a CLO focused closed end fund is complete.
Speaker Change: Our CLO portfolio has continued to perform well so far in the second quarter.
Speaker Change: And overall, we estimate that arent economic returns so far in the second quarter is slightly positive.
Laurence Eric Penn: Since quarter end, we also have continued to make great progress transitioning the portfolio. As Chris mentioned, our agency portfolio is now down to about $621 million, and our CLO portfolio is now over $60 million. This continued shift has taken our debt-to-equity ratio down further to about 4.4 to 1, excluding repo and treasury. However, keep in mind that during this interim period, before we qualify as a closed-end fund, we need to maintain a core portfolio of agency holdpools for 1940-X.
Speaker Change: Since quarter end, we also have continued to make great progress transitioning the portfolio.
Speaker Change: As Chris mentioned, our agency portfolio is now down to about $621 million and our CLO portfolio is now over $60 million.
Speaker Change: This continued shift has taken our debt to equity ratio down further to about $4 four to one excluding repo on treasuries keep.
Speaker Change: Keep in mind that during this interim period before we qualify as a closed end fund you need to maintain a core portfolio of agency whole pools for 1940 Act purposes.
Laurence Eric Penn: I'm extremely excited about this new chapter for EARN. Ellington has a long-standing and successful track record of investing in CLOs, and I strongly believe that our transformation will generate high-risk adjusted returns with less volatility for Ellington Credit shareholders. Once our conversion to a closed-end fund-slash-REC is completed, our new structure should also enable us to access a more favorable cost of capital to support future growth. I believe that these factors will help drive adjusted distributable earnings and dividend growth from here. With that, we'll now open the call to questions. Operator, please go ahead.
Earnings Ellington: I am extremely excited about this new chapter for earnings Ellington has a long standing and successful track record of investing in CLO and I strongly believe that our transformation will generate high risk adjusted returns with less volatility for Ellington credit shareholders. Once our conversion to a closed end fund slash Rec is completed.
Earnings Ellington: Our new structure should also enable us to access a more favorable cost of capital to support future growth I believe that these factors will help drive adjusted distributable earnings and dividend growth from here.
Speaker Change: With that we'll now open the call to questions. Operator. Please go ahead.
Operator: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. We will pause for a moment to allow questions to queue, and we will take our first question from Crispin Love with Piper Sandler.
Speaker Change: Thank you.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star to you we will pause for a moment to allow questions to queue.
Speaker Change: And we will take our first question from Chris <unk> with Piper Sandler.
Crispin Elliot Love: Thanks. Good morning, everyone.
Christopher M. Smernoff: Thanks, Good morning, everyone.
Speaker Change: Just on the strategic transformation you announce its a meaningful shift.
Christopher M. Smernoff: The agency strategy that you've had historically, but just witnessed change would you expect a meaningful turnover in your current Investor Basin can you just speak to what conversations have been like with current investors regarding Michelle.
Crispin Elliot Love: Just on the strategic transformation you announced, it's a meaningful shift from the agency strategy that you've had historically. So just with this change, would you expect a meaningful turnover in your current investor base? And can you just speak to what your conversations have been like with current investors regarding the shift?
Speaker Change: Yes, sure I mean, so far do we have had a few conversations.
Speaker Change: Have been positive.
Speaker Change: And I think it's a pretty similar investor base rate if you look.
Speaker Change: If you look at earns current Investor base, just the due to institutional investor base.
Speaker Change: It's fairly small at this point.
Speaker Change: In some passive funds.
Speaker Change: It's mostly retail investor base, which is the same for the peer group of the CLO focused closing funds.
Speaker Change: So I do think we.
Speaker Change: Our.
Speaker Change: Going to get some I think even incoming calls from some institutional investors.
Speaker Change: Investors too.
<unk>.
Speaker Change: To potentially establish positions in the stock but I.
Speaker Change: I do think that overall, it's going to be a pretty similar retail oriented investor base.
Speaker Change: Great.
Speaker Change: That's helpful. And then can you just speak to the credit quality in the CLO book and how would you how would you expect it to trend over time as well as expected risk adjusted returns looking at your presentation and book looks to be very diversified no major concentrations. So just curious if there are specific industries, you're most excited about as you build out.
Speaker Change: The portfolio overtime.
Speaker Change: Well again, yes, each CLO.
Speaker Change: Generally diversified across industries.
Mark.
Mark Dekosky: Do you want to handle that or if I'm sure, yes im actually.
Laurence Eric Penn: Yeah, sure. I mean, so far, we've had a few conversations, and they've been positive.
Speaker Change: Going to Mexico to.
Speaker Change: We introduced a new voice to this earnings call that have Greg <unk>, who heads the CLO effort at Ellington.
Laurence Eric Penn: And I think it's a pretty similar investor base, right? If you look at the current investor base, just the, you know, the institutional investor base is fairly small at this point in some passive funds. It's a mostly retail investor base, which is the same for the peer group of the CLO-focused closing funds. So I do think we are going to get some, I think, even incoming calls from some institutional investors to potentially establish positions in the stock. But I do think that, overall, it's going to be pretty similar in retail-oriented.
Speaker Change: Hello.
Nice to meet everyone.
Speaker Change: So to take this question I think that.
Speaker Change: The portfolio will adapt as the market and the opportunity of apps I think.
Speaker Change: Over the long run Youll generally see a mix of Mezz and equity in the portfolio you can see generally triple b and below.
Crispin Elliot Love: Can you speak to the credit quality in the CLO book and how you would expect it to trend over time, as well as the expected risk-adjusted returns? Looking at your presentation, the book looks to be very diversified, with no major concentrations. So just curious if there are specific industries you're most excited about as you build out the portfolio over time.
Speaker Change: Where we're going to be.
Speaker Change: I think that in.
Laurence Eric Penn: Well again, yeah, each CLO is, you know, generally diversified across industries. Mark
Speaker Change: In September.
Speaker Change: We started to ramp this we found that measures at an extreme discount also with the rates dynamic where.
Speaker Change: You have a elevated sulfur.
Speaker Change: First what we've traditionally had.
Speaker Change: Over the last 10 years, we had more of a weighting towards mezz.
Speaker Change: The equity book.
Speaker Change: That way, we are seeing things trend now where.
Speaker Change: With the exception of some credit sensitive profiles much of the CLO Mezz market has rallied closer to par.
Speaker Change: We won't see the same total return coming from there, even though the credit quality continues to improve.
Speaker Change: I think when we think about this portfolio and.
Speaker Change: The dividend, we're looking to pay as well.
The risks, we will see a slight shift into equity.
Speaker Change: If this trend continues.
Speaker Change #100: Continues to keep up and we're seeing that equity liability spreads are continuing in Q.
Speaker Change #101: Keep tightening in the CLO market with it.
Laurence Eric Penn: I'm actually going to introduce a new voice to this earnings call, that of Greg Bornstein, who heads the CLO effort at Ellington.
Speaker Change #101: Refis and resets in issuance.
Speaker Change #101: Continuing to bear this out.
Greg Bornstein: Hello, nice to meet everyone.
Speaker Change #101: And overall I think that Youll see diversification.
Speaker Change #101: <unk> to improve as this grows I think right now as we're looking to ramp.
Greg Bornstein: So, to take this question, I think that... The portfolio will adapt as the market and the opportunity adapts, I think. Over the long run, you'll generally see a mix of MEZ and equity in the portfolio. You can generally see triple B, and below is where we're going to be.
Speaker Change #101: Mindful of liquidity, we don't want this to be filled with the odd lots, if we look Q trade and rotate.
Speaker Change #101: The opportunity changes and so as it continues to scale and grow.
Greg Bornstein: I think that, In September, when we started to ramp this, we found that Mez was at an extreme discount, also with the rates dynamic where you have an elevated sofa versus what we've traditionally had. Over the last 10 years, we had more of a weighting toward MES versus the equity book. I think that the way we're seeing things trend now, where, with the exception of some credit-sensitive profiles, much of the CLMS market has rallied closer to par.
Speaker Change #101: I think we will over time.
Speaker Change #101: We continue to see that more position as one of the book, but I think as we ramped.
You'll see us maybe with slightly larger position sizes, though even now I think it's still pretty diversified.
Greg: Great. Thank you Greg and thank you all for taking my questions.
Thanks Kristen.
Greg: Thank you and we will take our next question from Doug Harter with UBS.
Greg Bornstein: We won't see the same total return coming from there even though the credit quality continues to improve. I think when we think about this portfolio and the dividend we're looking to pay as well as managing the risk, we'll see a slight shift into equity if this trend continues to keep up, and we're seeing that equity liability spreads are continuing to keep tightening. The CLO market, with its refis and resets, and issuance, is continuing to bear this out.
Douglas Michael Harter: Hi, Thanks can you talk about the return profile.
Douglas Michael Harter: How much of it's kind of coming from from current coupon versus discount accretion.
How that differs between the mez pieces and the equity business.
Greg Bornstein: And overall, I think that you'll see diversification continue to improve as this grows. I think right now, as we're looking to ramp, we're mindful of liquidity. We don't want this to be filled with odd lots if we look to trade and rotate as the opportunity changes. And so, as it continues to scale and grow, I think we will, over time, continue to see more positions enter the book, but I think as we ramp up, you'll see us maybe with, Thank you.
Speaker Change #104: Well as I mentioned Doug.
Crispin Elliot Love: Great. Thank you, Greg, and thank you all for taking my question.
Speaker Change #104: In.
Speaker Change #104: The last the first quarter.
Speaker Change #106: We had a lot from spread tightening.
Speaker Change #104: In terms of how much is from coupon versus accretion.
Operator: Thank you. And we will take our next question from Doug Harter with UBS.
Speaker Change #105: I don't know if we have that.
Speaker Change #105: At our fingertips.
Speaker Change #105: But.
Speaker Change #105: As.
Speaker Change #107: I think first of all I think you're probably referring more to mezzanine debt tranches as opposed to equity tranches right with equity.
Douglas Michael Harter: Thanks. Can you talk about the return profile? How much of it's kind of coming from current coupon versus discount accretion? And, you know, how that differs between the Mez pieces and the equity pieces?
Laurence Eric Penn: Well, as I mentioned, Doug, in the first quarter, we had a lot from spread tightening. In terms of how much is from coupon versus accretion... I don't know if we have that at our fingertips, but, you know, as an aside, I think, first of all, I think you're probably referring more to mezzanine debt tranches as opposed to equity tranches. Right? With equity, you know, it's generally coming from an excess interest spread, right, in the deals themselves.
Speaker Change #107: It's generally coming from excess interest spread right in the deals themselves.
Laurence Eric Penn: So, now we do. You know, we can, you know, calculate obviously a projected yield on those, as we can on the mezzanine, but implicitly, you know, there's going to be some. You know, some amortization calculation there. The meds that we have currently do Greg, do you have sort of the average dollar price in those?
Speaker Change #107: So now we do.
Speaker Change #107: Yes, we can.
Speaker Change #107: Calculate obviously a projected yield on those as we can on the mezzanine, but implicitly there's going to be some.
Speaker Change #107: Some amortization calculation there.
Greg: The the message that we have currently just Greg do you do you have sort of the average dollar price of most Greg why don't you.
Laurence Eric Penn: Why don't you? Why don't you feel it?
Greg: Why don't you feel this.
Greg: Okay.
Laurence Eric Penn: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host. The opinions rendered herein are those of the guests and not necessarily those of Douglas. On the margin, we'll probably see MES probably start to come down a little bit versus equity as that price appreciation and total return have been captured.
Speaker Change #108: Hi, So I don't have the portfolio in front of me, but one thing I would note is in general over the period of time, we've talked about since we've been investing in <unk>, you've seen more price appreciation from the Mezz and I think you generally would.
Greg: Yes.
Greg: I think that you've seen most mezzanine pieces move up.
Speaker Change #109: Certainly into the $90 price range for us, maybe where we're sourcing more in the beginning of the eighties and in some cases, some very stress pieces.
Speaker Change #110: Beneath that and so over this period of time in particular.
Speaker Change #111: More price depreciation being and I think.
Speaker Change #112: A more normal market, which is why.
Speaker Change #113: On the margin will see mez, probably start Q.
Speaker Change #113: Come down a little bit versus equity as that.
Speaker Change #113: Price appreciation and total return to being captured.
Laurence Eric Penn: And I think actually... I was going to say if you look at the earnings deck, there's a Portfolio table on page 11, right, of the deck. And you can see that the average dollar price of our CLO REIT notes is currently, well, as of March 31st, I should say, 86 handle. So I think that can give you some indication. So, I would say, you know, Greg, correct me if I'm wrong, but that probably means that, you know, a good couple hundred basis points of the projected yield on those notes is going to be due to discount over time as opposed to coupon, so it's not, certainly not most of the return if that's sort of what you're saying or asking about. Yeah.
Speaker Change #113: And I think actually.
Speaker Change #114: I was going to say if you look.
Speaker Change #115: On the earnings deck.
Speaker Change #115: There's a pause.
Speaker Change #115: Portfolio table on page slide 11 of the deck.
Speaker Change #116: And you can see that the average dollar price of our <unk>.
Speaker Change #117: CLO right notes.
Speaker Change #117: Is currently well as at March 31st I should say was 86 handle.
Speaker Change #118: So I think that can give you.
Speaker Change #119: There is some indication.
Speaker Change #119: Of.
Greg: So I would say, Greg correct me, if I'm wrong, but that probably means that you have a good couple of hundred basis points.
Greg: The yield is.
Greg: The projected yield on those notes is going to be due to.
Greg: Accretion of discount over time as opposed to coupon. So it's not it's not certainly not most of the return if that's sort of what your what youre asking yes.
Douglas Michael Harter: Just trying to get comfort in, you know, I guess the predictability of the cash flow and, you know, as you go forward and as this
Speaker Change #120: Just trying to get comfort in I guess, the predictability of the cash flow and.
Speaker Change #121: As you go forward and as this grows as a percentage.
Speaker Change #121: It's the kind of support the monthly dividend.
Laurence Eric Penn: Yeah, Greg, what did you say? Oh, on the notes.
Speaker Change #121: Yeah, Gregg on the notes what's a typical.
Gregg: Spread on these floating rate notes would you stay in the portfolio roughly.
Very roughly.
Speaker Change #123: Spread over cell phone.
Speaker Change #123: Yeah.
Speaker Change #123: $800.
Laurence Eric Penn: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. Capturing that outsized prepayment, it was definitely part of the... [inaudible]
Laurence Eric Penn: Yes, Larry Martin those are like 800 to 1000, you Doug one way to think about it is the Mezz comes in a discount with a very big coupons. So kind of analogous to this kind of agency MBS. This was a quarter, where you had sort of outsized prepayments because a lot of alone three five but that cap.
Laurence Eric Penn: Capturing that outsized prepayments it was definitely part of the security selection process. When we started ramping the portfolio. We were looking for the Mezz pieces, where we thought you'd see.
Laurence Eric Penn: A lot of loan refinancing and then when you get to the equity and Greg will get into it on future calls there's different flavors of it theres some equity that sort of almost like premium MBS, where you're getting an above market coupon, but its paying down a little bit and then theres. Some equity that's almost more like IL.
Laurence Eric Penn: Yeah, and if you're so for plus 800, even to pick the low end of that range on mezzanine, just with us, you know, very small bit of leverage, you're covering your dividend with a coupon right there.
Laurence Eric Penn: Yes, if youre if youre so for plus 800, even take the low end of that range on mezzanine.
Laurence Eric Penn: Just with us very small bit of leverage you're covering your dividend with coupon right there.
Laurence Eric Penn: Sure.
Douglas Michael Harter: It's very helpful. Thank you.
Speaker Change #125: Got it that's very helpful. Thank you.
Operator: Thank you. And we will take our next question from Matthew Erdner with Jones Trading.
Matthew Erdner: Thank you and we will take our next question from Matthew <unk> with Jones trading.
Matthew Erdner: Hey guys, thanks for taking the question. Could you expand a little more on the pace of the transition out of the agency and into the CLOs? I think you mentioned 621 currently in MBS and then 660 in the CLO.
Hey, guys. Thanks for taking the question could you expand a little more on the pace of the transition out of the agency and into the <unk>. I think you mentioned 621 currently in and MBS and then 660 in the CLO.
Laurence Eric Penn: Yeah, look, I think if you say how much we've been kind of adding, it's really CLO that is driving it, right? We're selling MBS just as we buy CLO, not the other way around, right? The CLO is what's driving the pace of the transition.
Speaker Change #127: Yeah look I think.
Speaker Change #128: If you say how much we've been kind of add it's really cielo is driving it right where we're selling.
Selling MBS, just as we biopsy, although not the not the other way around right to see the CLO is what's driving the pace of the transition.
Laurence Eric Penn: So, you know, if you look, 20 million a month is kind of what we've been ramping recently. You know, I think that's You know, quite manageable, I don't, you know, I think sort of the low end of our expectations where we plan to be, so, you know, if we're at $60 million as of now, and, you know, two more months from today, so... You know, that'll put us, let's just say in July, where we're close to or above 100 million, you know, that's kind of, I think, what I mentioned in the, in the prepared remarks, as where we plan to get to.
Speaker Change #128: So.
Speaker Change #128: If you look $20 million a month is kind of what we've been ramping recently.
Speaker Change #129: I think thats.
Speaker Change #129: Manageable.
Speaker Change #129: I think sort of the low end of our expectations, where we planned to be so.
Speaker Change #129: If we're at $60 million.
Speaker Change #129: As of now and two more months from today so.
Laurence Eric Penn: And then really, at almost any point after that, or quite quickly after that, we would be able to complete the transition. So, you know, if I had to guess, I would say 120 million, give or take. And of course, you know, as we mentioned, we're going to, we will have a shareholder vote later this year, which we will need to, you know, to sort of authorize the transformation, the conversion to a closed end.
Speaker Change #129: That will put us, let's just say in July where we're close to or above $100 million.
Speaker Change #129: That's kind of I think what I mentioned in the in the prepared remarks.
Speaker Change #129: As where we plan to get to and then really at almost any point after that are quite quickly after that.
Speaker Change #129: Would be able to complete.
Speaker Change #129: Complete the transition so.
Speaker Change #129: If I had to guess I would say $120 million give or take.
Speaker Change #130: And of course, as we mentioned we're going to.
Speaker Change #130: We will have a shareholder vote later this year, which we will need to.
Speaker Change #132: Just sort of authorized the transformation the conversion to a closed end fund.
Matthew Erdner: Gotcha, that's helpful. And then, you know, with this conversion, should we expect, you know, any one-time expenses or stuff like that to happen?
Speaker Change #130: Yeah.
Speaker Change #131: Got you that's helpful. And then with this conversion should we expect any one time expenses or stuff like that.
Speaker Change #131: Happen.
Laurence Eric Penn: Yeah, but I think they'll, you know, they're going to be quite modest. I mean, I think we've mentioned that to liquidate, you know, sufficient agencies is really going to be quite modest. So, and has been. Not even noticeable, I think, so far. So, but, you know, we'll have, of course, some legal and professional fees as well, but nothing, you know, nothing extraordinary. I mean, I know there have been some other transitions like this where it's been quite costly, especially the liquid assets in the portfolio, but that just isn't going to be the case. So...
Speaker Change #133: Yes, but.
Speaker Change #133: I think.
Speaker Change #133: They're going to be quite modest.
Speaker Change #134: I think we've mentioned that to liquidate sufficient agencies is really going to be quite modest.
Speaker Change #134: And has been.
Speaker Change #134: Not even noticeable I think so far so.
Speaker Change #135: But yes, we will have of course, some legal and professional fees as well, but nothing.
Speaker Change #136: Nothing extraordinary I mean, I know there've been some other transitions like this.
Speaker Change #137: Where it's been quite costly, especially to liquidate the portfolio or is it just not going to be the case here.
Speaker Change #137: So.
Laurence Eric Penn: So I think, yeah, we, it's not something that we've put out so far. I think a number that we've put out so far, but it's really, you know, we, we'll put out a proxy. You know, a lot of that expense has occurred in the second quarter. It's not been anything to be concerned about, I think. So I think these are going to be, you know, quite modest and will kind of, almost, blend in with the rest of the returns on the portfolio.
Speaker Change #137: So I think.
Speaker Change #138: Yes, it's not something that we have.
Speaker Change #138: I think a number that we've put out so far.
Speaker Change #138: It's really.
Speaker Change #138: We.
Speaker Change #138: We will put out a proxy.
A lot of that.
Speaker Change #138: Expenses occurred in the second quarter it has not been anything.
Speaker Change #139: Two I think the concern about so I think these are going to be quite modest and well.
Speaker Change #139: Kind of the almost.
Speaker Change #139: Blend in with the rest of the of the returns on the portfolio.
Matthew Erdner: Yeah, that's great. Thank you, guys. Thank you. That was our final question.
Speaker Change #140: Yes, that's great. Thank you guys.
Speaker Change #141: Thank you.
Operator: That was our final question for today. We thank you for participating in the Ellington Credit Company first quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day.
Speaker Change #142: That was our final question for today, we thank you for participating in the Arlington Credit Company first quarter 2024 financial results Conference call. You may disconnect. Your lines at this time and have a wonderful day.
Speaker Change #142: Okay.
Speaker Change #142: [music].
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