Q2 2024 Ellington Credit Co Earnings Call

Speaker Change: music music music music

Speaker Change: Music

Operator: John Herlihy, John Herlihy, John Jason Weaver, Eric Hagen, Douglas Harter, Music IMPROVVELY, John Herlihy, John Herlihy, To all locations on hold, we appreciate your patience, and we ask that you please continue to stand by. Your program will begin momentarily. BF-WATCH TV 2021, Foolish Family John Hagen, Douglas Harter, Laurence Penn, Mark Tecotzky, Christopher Smernoff, [music] Put on standby. We are about to begin. Should you require operator assistance, simply press the star and zero on your telephone keypad.

Speaker Change: To all locations on hold, we appreciate your patience and we ask that you please continue to stand by. Your program will begin momentarily.

Speaker Change: [music]

Speaker Change: and my um...

Speaker Change: Stand by, we are about to begin, should you require operator assistance, simply press star and zero on your telephone keypad.

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ellington Credit Company 2024 Second Quarter Financial Results Conference Call. Today's call is being recorded, and 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 and one on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing star and two.

Speaker Change: Good morning ladies and gentlemen and thank you for standing by. Welcome to the Ellington Credit Company 2024 second quarter financial results conference call. Today's call is being recorded and at this time all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

Speaker Change: If you would like to ask a question at that time, please press star and 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing star and 2. Lastly, if you should require operator assistance, please press star and 0.

Operator: Lastly, if you should require operator assistance, please press star and zero. It is now my pleasure to turn the floor over to Aladine Chalet, Associate General Counsel. Sir, you may begin.

Speaker Change: It is now my pleasure to turn the floor over to Aladine Chalet, Associate General Counsel. Sir, you may begin.

Aladine 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 Litigation 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 a 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.

Aladine Chalet: 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 Litigation Reform Act of 1995.

Speaker Change: Poor looking statements are not historical in nature.

Aladine Chalet: 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.

Aladine 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 statements, 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 We are also joined by Greg Borenstein, Head of Corporate Credit at Ellington Mansion.

Aladine Chalet: Consequently, you should not rely on these forward-looking statements as predictions of future events.

Aladine 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 statements, whether as a result of new information, future events, or otherwise.

Speaker Change: Joining me on the call today are Larry Penn, Chief Executive Officer of Valentin Credit Company. Mark Tecotzky, our Co-Chief Investment Officer.

Speaker Change: and Chris Smernoff, our Chief Financial Officer. We are also joined by Greg Bornstein, Head of Corporate Credit at Ellington Management Group.

Aladine Chalet: Our second quarter earnings conference call presentation is available on our website, which we've recently changed to ellingtoncredit.com. Our comments this morning will follow that presentation. Please note that any references made on the call to figures in that presentation are qualified in their entirety by the notes at the back of the presentation. Furthermore, neither that presentation nor the call today should be construed as a solicitation of votes or proxies.

Speaker Change: Our second quarter earnings conference call presentation is available on our website, which we've recently changed to allentincredit.com. Our comments this morning will follow that presentation. Please note that any references made on the call to figures in that presentation are qualified in their entirety by the notes at the back of the presentation.

Speaker Change: Furthermore, neither that presentation nor the call today should be construed as a solicitation of votes or proxies. Any such solicitation will only be made pursuant to a proxy statement or other appropriate proxy materials filed with the SEC and labeled as such.

Larry Penn: Any such solicitation will only be made pursuant to a proxy statement or other appropriate proxy material filed with the SEC and labeled as such. As a reminder, during this call, we'll sometimes refer to Ellington Credit Company by its NICE ticker, E-A-R-N, or EARN for short. With that, I will now turn the call over to Larry. Thanks, Eladine, and good morning, everyone.

Speaker Change: As a reminder, during this call, we'll sometimes refer to Ellington Credit Company by its NYSE ticker, E-A-R-N, or ERN for short. With that, I will now turn the call over to Larry. Thanks, Eladine, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company.

Larry Penn: We appreciate your time and interest in Ellington Credit Company. The format of our call today will be a little different from that of previous calls. I'll start by discussing the highlights of the quarter, as I typically do.

Chris Smernoff: And then Chris will describe the quarterly financial results in more detail, but after that, Greg Borenstein, Ellington's Head of Corporate Credit, will join the call to discuss Earn's CLO portfolio composition and the outlook for the CLO portfolio from here. Then our Co-Chief Investment Officer, Mark Tecotzky, will provide a brief update on our rotation out of Agency MBF. Finally, I'll wrap things up and open the floor to Q&A. Greg Borenstein has been running Ellington's investing activities in the corporate CLO sector since joining Ellington in 2012, across a wide variety of market conditions and for a wide array of Ellington funds and accounts. We've included a short bio for Greg on slide three.

Greg Borenstein: Once ERM completes its conversion to a CLO-focused, closed-end fund, Greg and Mike Reynos, Ellington's founder and head of all portfolio management activities, will officially be designated as ERM's two portfolio managers. We are all very excited to have these two veteran credit investors leading Earns Investment Strategy going forward. As you can also see on slide three, the rest of Ernst's management team will remain intact.

Larry Penn: The format of our call today will be a little different from that of previous calls.

Larry Penn: I'll start by discussing highlights of the quarter as I typically do, and then Chris will describe the quarterly financial results in more detail.

Larry Penn: But after that, Greg Borenstein, Ellington's Head of Corporate Credit, will join the call to discuss Earn's CLO Portfolio Composition and the outlook for the CLO Portfolio from here.

Larry Penn: Then, our Co-Chief Investment Officer, Mark Tecotzky, will provide a brief update on our rotation out of agency MBS.

Larry Penn: Finally, I'll wrap things up and open the floor to Q&A.

Greg Borenstein: Greg Bornstein has been running Ellington's investing activities in the corporate CLO sector since joining Ellington in 2012 across a wide variety of market conditions and for a wide array of Ellington's funds and accounts.

Greg Bornstein: We've included a short bio for Greg on slide 3.

Speaker Change: Once EARN completes its conversion to a CLO-focused, closed-end fund, Greg and Mike Reynos, Ellington's founder and head of all portfolio management activities, will officially be designated as EARN's two portfolio managers.

Speaker Change: We are all very excited to have these two veteran credit investors leading EARNS investment strategy going forward.

Speaker Change: As you can also see on slide 3, the rest of Ernst's management team will remain intact.

Larry Penn: Please turn now to slide 4 of the presentation, and I'll begin with an update on EARN's strategic transformation into a CLO-focused closed-end fund. As a reminder, it was last September that we began rotating EARN's capital into CLOs. And since then, we've been steadily growing that portfolio as we approach our targeted conversion date later this year. Everything continues to go as planned, and in early July, we filed our preliminary proxy statement in anticipation of a shareholder vote at our annual meeting later this year.

Speaker Change: Please turn now to slide 4 of the presentation and I'll begin with an update on earned strategic transformation into a CLO focused closed end fund.

Speaker Change: As a reminder, it was last September that we began rotating Earns Capital into CLOs, and since then we've been steadily growing that portfolio as we approach our targeted conversion date later this year.

Speaker Change: Everything continues to go as planned and in early July we filed our preliminary proxy statement in anticipation of a shareholder vote at our annual meeting later this year.

Larry Penn: Subject to that shareholder vote, we will convert to a closed-end fund for SEC purposes and a regulated investment company, or RIC, for tax purposes, thus completing our transformation from an agency mortgage REIT to a CLO-focused closed-end fund. We remain on track to complete all of these steps prior to year end.

Speaker Change: Subject to that shareholder vote, we will convert to a closed-end fund for SEC purposes and a regulated investment company, or RIC, for tax purposes, thus completing our transformation from an agency mortgage REIT to a CLO-focused closed-end fund.

Speaker Change: We remain on track to complete all of these steps prior to year end.

Larry Penn: On slide five, we reiterate some of the anticipated benefits to shareholders of the transformation, which include better projected risk-adjusted returns over the long term and enhanced access to capital markets. On slide 6, we summarize Ellington's longstanding experience investing in CLOs and chart the ramp-up of the earned CLO portfolio. EARN acquired its first CLOs towards the end of last September, and by year-end, its portfolio stood at $17 million. By March 31st, it had grown to $45 million.

Speaker Change: On slide 5, we reiterate some of the anticipated benefits to shareholders of the transformation, which include better projected risk-adjusted returns over the long term and enhanced access to capital markets.

Speaker Change: On slide 6, we summarize Ellington's long-standing experience investing in CLOs and chart the ramp-up of earned CLO portfolio.

Speaker Change: EARN acquired its first CLOs towards the end of last September.

Speaker Change: By year end, the portfolio stood at $17 million, and by March 31st, it had grown to $45 million.

Larry Penn: In the second quarter of 2024, we nearly doubled that number to $85 million. As you can see on this slide, our Earned CLO Portfolio is now up to about $108 million as of last Friday. At that size, CLOs now account for roughly half of IRN's total capital allocation. Meanwhile, and as planned, we've shrunk our agency MBS portfolio significantly. $791 million last September to $531 million on June 30th, and we continue to downsize that portfolio as we acquire CLOs.

Speaker Change: In the second quarter of 2024, we nearly doubled that number to $85 million.

Speaker Change: As you can see on this slide, Earned CLO Portfolio is now up to about $108 million as of last Friday.

Speaker Change: At that size, CLOs now account for roughly half of IRN's total capital allocation.

Speaker Change: Meanwhile, and as planned, we've shrunk our agency MBS portfolio significantly, from $791 million last September to $531 million at June 30th, and we continue to downsize that portfolio as we acquire CLOs.

Larry Penn: With that said, until we actually complete our conversion process, we must continue to hold a core portfolio of liquid agency MBS in order to maintain our exemption from the 1940 Act. Fortunately, we've concentrated our agency investments in the liquid sector. The cost of liquidating our agency pools to free up capital for CLOs has been very modest so far.

Speaker Change: With that said, until we actually complete our conversion process, we must continue to hold a core portfolio of liquid agency MBS in order to maintain our exemption from the 1940 Act.

Speaker Change: Fortunately, since we've concentrated our agency investments in liquid sectors, the cost of liquidating our agency pools to free up capital for CLOs has been very modest so far. We expect that to continue to be the case.

Larry Penn: We expect that to continue to be the case. Mark will elaborate on that later in the call. Please turn now to slide 7 of the earnings presentation for the market backdrop for the second quarter. Despite some periods of market volatility, the CLL market continued to benefit from strengthening fundamentals, robust demand for leveraged loans, and continued capital investment. Corporate loan prepayment rates increased further, reaching their highest level on a trailing 12-month basis since February of 2022.

Speaker Change: Mark will elaborate on that later on the call.

Mark Tecotzky: Please turn now to slide 7 of the earnings presentation for the market backdrop for the second quarter.

Mark Tecotzky: Despite some periods of market volatility, the CLL market continued to benefit from strengthening fundamentals, robust demand for leveraged loans, and continued capital inflows.

Mark Tecotzky: Corporate loan prepayment rates increased further, reaching their highest level on a trailing 12-month basis since February of 2022.

Larry Penn: That drove further deleveraging in seasoned CLOs, which has continued to benefit earnings holdings of discount dollar-priced CLO mezzanine. However, as we illustrate towards the middle of this slide, the Morningstar LSTA Leverage Loan Index actually ticked down quarter over quarter following six consecutive quarters of increase. This was simply the result of those high corporate loan prepayment rates in the second quarter, and its many premium-priced corporate loans prepaid at par. Meanwhile, high-yield and IG credit indices tightened further, as depicted here as well.

Speaker Change: That drove further deleveraging in seasoned CLOs, which has continued to benefit earns holdings of discount dollar price CLO mezzanine trushes.

Speaker Change: However, as we illustrate towards the middle of this slide, the Morningstar LSTA Leverage Loan Index actually ticked down quarter over quarter following six consecutive quarters of increases.

Speaker Change: This was simply the result of those high corporate loan prepayment rates in the second quarter, since many premium-priced corporate loans prepaid at par.

Speaker Change: Meanwhile, high yield and IG credit indices tighten further, as depicted here as well.

Larry Penn: In the CLO market, you can see here that credit spreads on double B and single B CLO tranches tightened overall as well, but there was significant dispersion among deals with higher quality tranches generally tightening and lower quality tranches widely tightening. The European CLO market also saw spreads tighten, particularly in higher quality mezzanine tranches. For CLO Equity, tightening new issue mezzanine debt spreads are a double-edged sword. On the one hand, deals with better performing portfolios and higher debt costs were able to capitalize on those tighter spreads by refinancing or resetting their debt at cheaper levels.

Speaker Change: In the CLO market, you can see here that credit spreads on BB and single B CLO tranches tightened overall as well, but there was significant dispersion among deals with higher quality tranches generally tightening and lower quality tranches widening.

Speaker Change: The European CLL market also saw spreads tighten, particularly in higher quality mezzanine troshes.

Speaker Change: For CLO Equity, tightening new issue mezzanine debt spreads were a double-edged sword.

Speaker Change: On the one hand, deals with better performing portfolios and higher debt costs were able to capitalize on those tighter spreads by refinancing or resetting their debt at cheaper levels.

Larry Penn: This activity drove strong positive returns for CLO equity in these particular deals. On the other hand, the high volume of premium-priced loan collateral refinancing at par and at a lower coupon spread led, in many deals, to overall declines in net asset values and compressions in excess interest. These effects triggered mark-to-market losses for CLO equity in many deals.

Speaker Change: This activity drove strong positive returns for CLO equity in those particular deals.

Speaker Change: But on the other hand, the high volume of premium-priced loan collateral refinancing at par and at lower coupon spreads led in many deals to overall declines in net asset values and compressions in excess interest.

Speaker Change: These effects triggered mark-to-market losses for CLO equity in many deals, as both the interest payments on CLO equity, due to lower excess interest in the CLO, and underlying asset values declined in tandem.

Larry Penn: As both the interest payments on CLO equity, due to lower excess interest in the CLO, and underlying asset values declined in tandem, these dynamics led to mark-to-market losses on some of our earned CLO equity tranches during the second quarter. Meanwhile, in the agency MBS market, yield spreads were little changed quarter over quarter, and the U.S. Agency MBS Index generated a slightly negative excess return relative to U.S. Treasury. But those minor changes belied the significant negative impact of intracorporate interest rate volatility in generating delta hedging, which, for example, you've seen reflected in the weak overall performance of the agency mortgage REIT sector this past quarter.

Speaker Change: These dynamics led to mark-to-market losses on some of our earned CLO equity tranches during the second quarter.

Speaker Change: Meanwhile, in the agency MBS market, yield spreads were little changed quarter over quarter, and the U.S. agency MBS index generated a slightly negative excess return relative to U.S. Treasuries.

Speaker Change: But those minor changes belied the significant negative impact of inch-per-quarter interest rate volatility in generating delta hedging losses, which, for example, you've seen reflected in the weak overall performance of the agency mortgage REIT sector this past quarter.

Larry Penn: I'll turn now to Ern's quarterly results on slide 8, and I'll begin with GAPR. We had continued strong performance from our CLO mezzanine debt investments, both U.S. and European, driven by both opportunistic sales and some of our discount positions being called off. On the CLO Equity side, our U.S. CLO Equity investments had mark-to-market losses driven by that heightened loan refinancing activity that I mentioned earlier, but our European CLO Equity investments actually performed quite well.

Speaker Change: I'll turn now to Earns Quarterly Results on Slide 8, and I'll begin with Gap Earnings.

Speaker Change: We had continued strong performance from our CLO mezzanine debt investments, both U.S. and European, driven by both opportunistic sales and some of our discount positions being called at par.

Speaker Change: On the CLO equity side, our U.S. CLO equity investments had mark-to-market losses driven by that heightened loan refinancing activity that I mentioned earlier. But our European CLO equity investments actually performed quite well.

Larry Penn: Overall, CLOs contributed positively to our net income for the quarter. In contrast, our remaining MBS portfolio contributed a modest $0.05 per share net loss for the quarter, caused primarily by intra-quarter interest rate volatility. This drove our slight overall net loss for the court.

Speaker Change: Overall, CLOs contributed positively to our net income for the quarter.

Speaker Change: In contrast, our remaining MBS portfolio contributed a modest 5 cents per share net loss for the quarter, caused primarily by that intra-quarter interest rate volatility. This drove our slight overall net loss for the quarter.

Larry Penn: Our ongoing rotation from agency MBS into CLOs continues to drive our net interest margin wider, our leverage ratios lower, and our adjusted distributable earnings higher. You can see on slide 8 that our net interest margin expanded. 4.24% overall, while our debt-to-equity ratio declined to 3.7 to 1 at quarter end. The growth of the CLO portfolio, with those wide net interest margins, drove the sequential growth of our adjusted distributable earnings for the quarter. Ellington credits ADE, who charges $0.09 per share sequentially to $0.36 per share.

Speaker Change: Our ongoing rotation from agency MBS into CLOs continue to drive our net interest margin wider, our leverage ratios lower, and our adjusted distributable earnings higher.

Speaker Change: You can see on slide 8 that our net interest margin expanded to 4.24 percent overall, while our debt-to-equity ratio declined to 3.7 to 1 at quarter end.

Speaker Change: The growth of the CLO portfolio with those wide net interest margins drove the sequential growth of our adjusted distributable earnings for the core.

Speaker Change: Ellington credits ADE who 9 cents per share sequentially to 36 cents per share

Chris Smernoff: I'll note, however, that we expect our ADE to tick down in the near term as we continue to sell agency pools and as the associated interest rate swap hedges that we initiated in much lower interest rate environments are terminated or burn off. That said, we do anticipate that our ADE will continue to cover our dividend in the third quarter. With that said, I'll now pass it over to Chris to review our financial results for the second quarter in more detail. Thank you, Larry, and good morning, everyone.

Speaker Change: I'll note, however, that we expect our ADE to tick down in the near term as we continue to sell agency pools and as the associated interest rate swap hedges that we initiated in much lower interest rate environments are terminated or burn off.

Speaker Change: That said, we do anticipate that our ADE will continue to cover our dividend in the third quarter.

Chris Smernoff: With that, I'll now pass it over to Chris to review our financial results for the second quarter in more detail. Chris? Thank you, Larry, and good morning everyone. Please turn to slide 9 for a summary of Ellington Credit's second quarter financial results.

Chris Smernoff: Please turn to slide 9 for a summary of Ellington Credit's second quarter financial results. For the quarter ended June 30, we are reporting a net loss of $0.04 per share and adjusted distributable earnings of $0.36 per share. ADE excludes the catch-up amortization adjustment, which was positive $221,000 in the second quarter.

Chris Smernoff: For the quarter ended June 30th, we are reporting a net loss of $0.04 per share and adjusted distributable earnings of $0.36 per share.

Speaker Change: ADE excludes the catch-up amortization adjustment, which was positive 221,000 in the second quarter.

Chris Smernoff: Our overall net interest margin expanded to 4.24% from 3.03%, quarter over quarter, driven by the growth of CLOs and a natural sequential increase in ADR. In the second quarter, we continue to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate. But, as Larry mentioned, 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 hedging. Slide 10 shows the attribution of income by strategy.

Speaker Change: Our overall net interest margin expanded to 4.24% from 3.03% quarter over quarter driven by the growth of CLOs and natural sequential increase in ADE.

Speaker Change: In the second quarter, we continue to benefit from positive carry on our interest rate swaps.

Speaker Change: where we receive a higher floating rate and pay a lower fixed rate. But as Larry mentioned, 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.

Chris Smernoff: In the second quarter, the CLO strategy generated $0.05 per share of portfolio income driven by strong interest income, which increased sequentially due to the accelerated amortization of market discounts on several discount positions. Further, neckings on our CLL mezzanine portfolio were supported by both opportunistic sales and discount positions being called. This income was partially offset by mark-to-market losses on certain CLO equity positions where rapid prepayments drove mark-to-market losses as well as reduced floating rate spreads on the underlying loan collateral. Our agency strategy, meanwhile, generated a portfolio loss of five cents per share for the second quarter.

Speaker Change: Slide 10 shows the attribution of income by strategy.

Speaker Change: In the second quarter, the CLO strategy generated $0.05 per share of portfolio income driven by strong interest income, which increased sequentially due to the accelerated amortization of market discount on several discount positions.

Speaker Change: Further, neckings on our CLL mezzanine portfolio were supported by both opportunistic sales and discount positions being called.

Speaker Change: This income was partially offset by mark-to-market losses on certain CLO equity positions where rapid prepayments drove mark-to-market losses as well as reduced floating rate spreads on the underlying loan collateral.

Speaker Change: Our agency strategy, meanwhile, generated a portfolio loss of five cents per share for the second quarter.

Chris Smernoff: In April, interest rates and volatility increased over renewed concerns about inflation in a more hawkish Federal Reserve, which pushed agency RMBSEO spreads wider. In May and June, however, interest rates and volatility generally declined, and agency RMVS yield spreads reversed most of their April-wide... Overall, for the second quarter, the U.S. MBS index generated an excess return of negative nine basis points to the Treasury.

Speaker Change: In April, interest rates and volatility increased over renewed concerns about inflation and a more hawkish Federal Reserve, which pushed agency RMBSEO spreads wider.

Speaker Change: In May and June, however, interest rates and volatility generally declined and agency RMBS yield spreads reversed most of their April widening.

Speaker Change: Overall, for the second quarter, the U.S. MBS index generated an excess return of negative 9 basis points to treasuries.

Chris Smernoff: Against this backdrop, EARN's agency portfolio generated a small net loss for the quarter as net losses on our agency RMBS exceeded net gains on our interest rate hedges, and that drove EARN's overall net loss for the quarter. Our non-agency portfolio performed well during the quarter, generating $0.04 per share, driven by net interest income and net gains associated with several profitable sales. In connection with our strategic transformation, we revoked the REIT election effective January 1st of this year and are currently operating as a taxable C Corp. We came into the year with substantial net operating losses carried forward, and in the first quarter, we used a portion of them to offset the majority of our federal taxable income. In the second quarter, our overall net loss generated a modest tax benefit and did not require the utilization of any of our NOL

Speaker Change: Against this backdrop, EARN's agency portfolio generated a small net loss for the quarter as net losses on our agency RMBS exceeded net gains on our interest rate hedges, and that drove EARN's overall net loss for the quarter.

Speaker Change: Our non-agency portfolio performed well during the quarter, generating $0.04 per share, driven by net interest income and net gains associated with several profitable sales.

Speaker Change: In connection with our strategic transformation, we revoked the re-election effective January 1st of this year and are currently operating as the taxable C-Corp.

Speaker Change: We came into the year with substantial net operating loss carried forward, and in the first quarter we used a portion of those to offset the majority of our federal taxable income.

Speaker Change: In the second quarter, our overall net loss generated a modest tax benefit and did not require the utilization of any of our NOLs.

Speaker Change: Please note that we are not booking a deferred tax asset on our balance sheet related to the NOLs, so our reported book value remains fully tangible.

Speaker Change: After our conversion to a closed-end fund regulated investment company, we will generally not be subject to corporate income tax.

Chris Smernoff: Please note that we are not booking a deferred tax asset on our balance sheet related to the NOLs, so our reported book value remains fully tangible. After our conversion to a closed-end fund regulated investment company, we will generally not be subject to corporate income tax. Please turn now to our balance sheet on slide 11. Book value per share was $6.91 at June 30th compared to $7.21 at March 31st, including the $0.24 per share of dividends in the quarter. Our economic return for the quarter was a negative $0.85.

Speaker Change: Please turn now to our balance sheet on slide 11.

Speaker Change: Book value per share was $6.91 at June 30th compared to $7.21 at March 31st. Including the $0.24 per share of dividends in the quarter, our economic return for the quarter was a negative 0.8%.

Chris Smernoff: We ended the quarter with $163 million in cash and unencumbered assets, of which $90 million was in U.S. Treasury bills held on March. Next, please turn to slide 12 for a summary of your portfolio holdings. During the second quarter, our CLL portfolio increased to $85 million as of June 30, compared to $45 million as of March 31. At June 30th, CLO equity comprised 47% of our total CLO holdings, up from 25% at March 3rd.

Speaker Change: We ended the quarter with $163 million in cash and unencumbered assets, of which included $90 million of U.S. Treasury bills held on margin.

Speaker Change: Next, please turn to slide 12 for a summary of your portfolio holdings.

Speaker Change: During the second quarter, our CLL portfolio increased to $85 million as of June 30, compared to $45 million as of March 31.

Speaker Change: At June 30th, CLO Equity comprised 47% of our total CLO holdings, up from 25% on March 31st.

Speaker Change: Meanwhile, European CLO investments comprised 17% of our total CLO holdings at June 30th, up from 10% at March 31st.

Chris Smernoff: Meanwhile, European CLO investments comprised 17% of our total CLO holdings at June 30, up from 10% at March. Also, during the second quarter, the size of our agency RMBS holdings decreased to $531 million as compared to $739 million as of March 31st, and our aggregate holdings of interest-only securities and non-agency RMBS decreased as well.

Speaker Change: Also, during the second quarter, the size of our agency RMVS holdings decreased to

Speaker Change: $531 million as compared to $739 million as of March 31st and our aggregate holdings of interest-only securities and non-agency RMBS decreased as well.

Chris Smernoff: Including activity through August 9th, our agency RMBS portfolio has now declined to $518 million, while our CLO portfolio has grown to approximately $108 million. As measured by allocated equity as opposed to gross assets, our capital allocation to CLOs increased to 45% at June 30th from 25% at March 31st and 11% at. Our debt-to-equity ratio adjusted for unsettled trades decreased to 3.7 times as of June 30th, compared to 4.9 times as of March 31st. The decline was driven by less leverage on our CLO investment, as well as higher shareholder expectations. Similarly, our net mortgage assets-to-equity ratio decreased over the same period to four times from 5.2%.

Speaker Change: including activity through August 9th our agency RMDS portfolio have now declined to 518 million dollars while our CLO portfolio has grown to approximately 108 million dollars

Speaker Change: As measured by allocated equity as opposed to gross assets, our capital allocation to CLOs increased to 45% at June 30th from 25% at March 31st and 11% at year-end.

Speaker Change: Our debt-to-equity ratio adjusted for unsettled trades decreased to 3.7 times as of June 30th, compared to 4.9 times as of March 31st.

Speaker Change: The decline was driven by less leverage on our CLO investments, as well as higher shareholders' equity.

Speaker Change: Similarly, our net mortgage assets to equity ratio decreased over the same period to four times from 5.4 times.

Greg Borenstein: Finally, on slide 14, we provide details of our interest rate hedging portfolio. During the quarter, we continue to hedge interest rate risk primarily through the use of interest rate swaps. The overall size of our interest rate hedging portfolio declined quarter over quarter as a share of our portfolio in CLOs. As shown on slide 15, we ended the quarter with a net long TBA position both on a notional basis and as measured by 10-year equivalence as compared with a small net short TBA position in the prior quarter.

Speaker Change: Finally, on slide 14, we provide details of our interest rate hedging portfolio.

Speaker Change: During the quarter, we continue to hedge interest rate risk primarily through the use of interest rate swaps.

Speaker Change: The overall size of our interest rate hedging portfolio declined quarter over quarter as the share of our portfolio in CLOs increased.

Speaker Change: As shown on slide 15, we ended the quarter with a net long TBA position both on a notional basis and as measured by 10-year equivalence as compared with a small net short TBA position in the prior quarter.

Greg Borenstein: On slide 16, you can see that nearly all of the loans underlying our CLO portfolio are floating rate and, as such, have a much lower interest rate to rate. I will now turn the presentation over to Greg. Thanks, Chris.

Speaker Change: On slide 16 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 Greg.

Greg Borenstein: I'm happy to be speaking to Earn's shareholders today, and I'm very excited to become your co-portfolio manager with Mike Franos going forward. I'll first talk about how we've ramped up CLOs in Earn over the last 10 months, and then give some thoughts about how we see the portfolio evolving from here, including some thoughts on the recent volatility. Back in September, when EARN first began acquiring CLOs, CLO credit spreads were very wide.

Speaker Change: Thank you.

Greg: Thanks, Chris. I'm happy to be speaking to earned shareholders today, and I'm very excited to become your co-portfolio manager with Mike Franos going forward.

Greg: I'll first talk about how we've ramped up CLOs in earn over the last 10 months and then give some thoughts about how we see the portfolio evolving from here, including some thoughts on the recent volatility.

Greg Borenstein: They significantly lagged the recovery in the high-yield corporate bond market, and credit spreads on certain CLO Mez tranches available in the secondary market had backed up to levels we hadn't seen since mid-2020. Meanwhile, credit fundamentals were strong and getting stronger. We saw a great risk-adjusted return opportunity in CLO Mez and started building a portfolio. Through March 31st, the majority of our CLO investments were in CLO Mez. Credit spreads for C. L. O. Mez have since tightened considerably, and we've actively traded some positions to monetize gains. We've been called out of others that we held at significant discounts to par.

Speaker Change: Back in September, when EARN first began acquiring CLOs, CLO credit spreads were very wide. They had significantly lagged the recovery in the high-yield corporate bond market, and credit spreads on certain CLO Mez tranches available in the secondary market had backed up to levels we hadn't seen since mid-2020.

Speaker Change: Meanwhile, credit fundamentals were strong and getting stronger. We saw a great risk-adjusted return opportunity in CLO Mez and started building a portfolio. Through March 31st, the majority of our CLO investments were in CLO Mez.

Speaker Change: Credit spreads for C. L. O. Mez have since tightened considerably. We've actively traded some positions to monetize gains. We've been called out of others that we held at significant discounts to par. And we also have mark-to-market gains on numerous positions that we still hold.

Greg Borenstein: And we also have mark-to-market gains on numerous positions that we still hold. This dynamic has driven strong returns and earnings on overall CLO strategies so far. Fast forward to the second quarter, and those tighter CLO debt spreads really enhance the attractiveness of CLO equity. Tighter new-issue debt spreads lower the implied financing cost of CLO equity, and they also enable certain CLO equity holders to refinance or reset their liability, which further enhances the cash flow profile of those deals from the equity perspective.

Speaker Change: This dynamic has driven strong returns and earns overall CLO strategies so far.

Speaker Change: Fast forward to the second quarter and those tighter CLO debt spreads really enhance the attractiveness of CLO equity.

Speaker Change: Tighter new issue debt spreads lower the implied financing cost of CLO equity, and they also enable certain CLO equity holders to refinance or reset their liabilities, which further enhances the cash flow profile of those deals from the equities perspective.

Greg Borenstein: For those reasons, you saw the majority of our new CLO purchases in the second quarter were in equity as opposed to MEZ. And at quarter end, this split is just about 50-50 between Mez and equity. Going forward, I expect our portfolio to continue to be a blend of Mez and equity, with the mix fluctuating based on market opportunity. We've also supplemented our core U.S. CLO portfolio with European CLO medicine equity investments.

Speaker Change: For those reasons, you saw the majority of our new CLO purchases in the second quarter were in equity as opposed to MEZ. And at quarter end, this led us just about 50-50 between MEZ and equity.

Speaker Change: Going forward, I expect our portfolio to continue to be a blend of meth and equity, with the mix fluctuating based on market opportunities.

Speaker Change: We've also supplemented our core U.S. CLO portfolio with European CLO medicine equity investments.

Greg Borenstein: We've often found investment opportunities in European CLOs offer compelling relative value versus what we see in the U.S., and having an allocation to the European sector also provides some valuable portfolio diversification. Ellington has been investing in European CLOs for a decade, and they work with our dedicated investment professionals in our London office, who analyze and trade the product day to day. Our investment teams in the U.S. and Europe follow the same investment processes and risk management principles and are ultimately overseen by Mike Branos and me. In both markets, we are systematic in our evaluation of potential investment opportunities, including deep dives into credit analysis and detailed review of deal documentation and structure.

Speaker Change: We've often found investment opportunities in European CLOs offer compelling relative value versus what we see in the U.S., and having an allocation to the European sector also provides some valuable portfolio diversification.

Speaker Change: Ellington has been investing in European CLOs for a decade and they work with our dedicated investment professionals in our London office who analyze and trade the product day-to-day.

Speaker Change: Our investment teams in the U.S. and Europe follow the same investment processes and risk management principles and are ultimately overseen by Mike Branos and me.

Speaker Change: In both markets, we are systematic in our evaluation of potential investment opportunities, including deep dives on credit analysis and detailed review of deal documentation and structure.

Greg Borenstein: Mike Vranos and I plan to continue to allocate earned capital to Europe opportunistically based on where we see relative value, but I expect, by and large, the majority of our CLO investments to continue to be in the U.S. As for the volatility of the past couple of weeks, while credit spreads have certainly widened overall, I'll note that markets for CLOs have, by and large, been orderly even on The volatility has created some attractive trading opportunities, as it typically does, and we were able to play offense during the sell-off and deploy some of our dry powder at an attractive spread. We've also had some credit hedges in place through the recent period, which we use to help stabilize book value per share and protect against tail events.

Mike Vranos: Mike Vranos and I plan to continue to allocate earned capital to Europe opportunistically based on where we see relative value But I expect by and large the majority of our CLO investments to continue to be in the US

Speaker Change: As for the volatility of the past couple of weeks, while credit spreads have certainly widened overall, I'll note that markets for CLOs by and large have been orderly, even on the most volatile days, as compared to some of the acute periods of panic we saw in other sectors, other than the small...

Speaker Change: The volatility has created some attractive trading opportunities, as it typically does, and we were able to play offense during the sell-off and deploy some of our dry powder at attractive spreads.

Speaker: It's different from its beliefs, expectations, estimates, and projections.

Speaker Change: We've also had some credit hedges in place through the recent period, which we used to help stabilize book value per share and protect against tail events.

Mark Tecotzky: Since there is often a lag between price action on our credit hedges and price action on our assets, being able to dial up and down our credit hedges adds another dimension to potentially enhance returns. On the balance, while the recent volatility might lead to some third-quarter mark-to-market losses in part of Earns' portfolio, I also see this volatility as recharging an opportunity set and providing an exciting environment for trading, which plays into Ellington's strength. With that, I will turn the presentation over to Mark. Thanks, Greg.

Speaker Change: Since there is often a lag between price action on our credit hedges and price action on our assets, being able to dial up and down our credit hedges adds another dimension to potentially enhance returns.

Speaker Change: On the balance, while the recent volatility might lead some third-quarter mark-to-market losses in part of Earn's portfolio, I also see this volatility as recharging an opportunity set and providing an exciting environment for trading, which plays into Ellington's strengths.

Speaker: Consequently, you 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 statements, whether as a result of new information, future events or otherwise.

Speaker Change: With that, I will turn the presentation over to Mark.

Mark Tecotzky: While Q2 is generally a good quarter for spread products, it was actually a weak quarter for agency MBS. There was a lot of interest rate volatility to manage, and continued bank portfolio restructurings added MBS supply to the market, which exacerbated volatility further. As we mentioned on last quarter's earnings call, we've laid out a clear set of priorities as we manage our investment transition from an agency MBS focus to a CLO focus.

Mark Tecotzky: Thanks, Greg.

Mark Tecotzky: While Q2 was generally a good quarter for spread product, it was actually a weak quarter for agency MBS. There was a lot of interest rate volatility to manage, and continued bank portfolio restructurings added MBS supply to the market, which exacerbated volatility further.

Larry Penn: Joining me out in the call today are Larry Penn, Chief Executive Officer of the balancing credit company, Mark Tecotzky, our Co-Chief Investment Officer, and Christopher Smernoff, our Chief Financial Officer. We are also joined by Greg Borenstein, head of corporate credit at Ellington Management Group. Our second quarter earnings conference call presentation is available on our website which we've recently changed to EllingtonPreddit.com. Our comments this morning will follow that presentation. Please note that any references made on the call to figures in that presentation are qualified in their entirety by the notes at the back of the presentation.

Mark Tecotzky: As we mentioned on last quarter's earnings call, we've laid out a clear set of priorities as we manage our investment transition from an agency MBS focus to a CLO focus.

Mark Tecotzky: During the quarter, we stuck to our plan and made very good progress with that transition. During the transition, while we have been focusing on acquiring attractive CLO investments, we have also been focusing on minimizing the cost of liquidating our pool, all while staying invested in a combination of agency MBS and CLO investments that we expect to generate strong total returns and ADE in excess of our dividends. During the quarter, we shrunk our agency portfolio by nearly 30%.

Speaker Change: During the quarter, we stuck to our plan and made very good progress with that transition.

Speaker Change: During the transition, while we have been focusing on acquiring attractive CLO investments, we have also been focusing on minimizing the cost of liquidating our pools, all while staying invested in the combination of agency MBS and CLO investments that we expect to generate strong total returns and ADE in excess of our dividend.

Larry Penn: Furthermore, needed that presentation nor the call today should be construed as a solicitation of votes or proxies. Any set solicitation will only be made pursuant to a proxy statement or other appropriate proxies materials filed with the SEC and labeled as such. As a reminder, during this call will sometimes refer to Ellington Credit Company by its Nike ticker, EARN, or EARN for short.

Speaker Change: During the quarter, we shrunk our agency portfolio by nearly 30%.

Mark Tecotzky: As we continue to sell off MBS, we are maintaining a focus on liquidity for our remaining MBS portfolio. That has meant, for example, that we no longer own 15-year pools, which are typically much less liquid than 30-year pools. We also have very few Ginnie Mae pools for a similar reason.

Speaker Change: As we continue to sell off MBS, we are maintaining a focus on liquidity for our remaining MBS portfolio. That has meant, for example, that we no longer own 15-year pools, which are typically much less liquid than 30-year pools.

Larry Penn: With that, I will now turn the call over to Larry. Thanks, LSD, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company.

Mark Tecotzky: We've also reduced our pay-up risk by shedding higher pay-up pools. Our average pay-up declined by over 25% in the second quarter, and that has also improved liquidity of the remaining portfolio. Meanwhile, prepayment risk is higher now than it was earlier in the year, so we need to manage our MBS investments with that in mind as well.

Larry Penn: The format of our call today will be a little different from that of previous calls. I'll start by discussing highlights of the quarter as I typically do, and then Chris will describe the quarterly financial results in more detail.

Speaker Change: We also have very few Ginnie Mae pools for a similar reason. We've also reduced our pay-up risk by shedding higher pay-up pools. Our average pay-up declined by over 25% in the second quarter, and that has also improved liquidity of the remaining portfolio.

Greg Borenstein: But after that, Greg Borenstein, Ellington's head of corporate credit, will join the call to discuss EARN's CLO portfolio composition and the outlook for the CLO portfolio from here.

Speaker Change: Meanwhile, prepayment risk is higher now than it was earlier in the year so we need to manage our MBS investments with that in mind as well.

Mark Tecotzky: Despite some weak agency MBS performance, we picked our spots, sold a meaningful part of the agency pool portfolio, and yet, our MBS portfolio still almost broke even in what was a down quarter for the sector. We continue to focus on raising cash for new CLO investments while minimizing book value impairment. This process is ongoing in Q3, but things are a little different. In the second quarter, credit spreads generally got tighter, and Greg discussed how that impacted our CLO holdings. More loans trading above par, higher voluntary loan prepayment speeds, more refinancings, and more receipts.

Mark Tecotzky: Then our Co-Chief Investment Officer, Mark Takatsky, will provide a brief update on our rotation out of agency MBS.

Speaker Change: Like many things, the key to the plan has been execution. Despite some weak agency MBS performance, we picked our spots, sold a meaningful part of the agency pool portfolio, and yet our MBS portfolio still almost broke even in what was a down quarter for the sector.

Larry Penn: Finally, I'll wrap things up and open the floor to Q&A.

Greg Borenstein: Greg Borenstein has been running Ellington's investing activities in the corporate CLO sector since joining Ellington in 2012 across a wide variety of market conditions and for a wide array of Ellington's funds and accounts.

Speaker Change: We continue to focus on raising cash for new CLO investments while minimizing book value impairment.

Speaker Change: This process is ongoing in Q3, but things are a little different now.

Larry Penn: We've included a short bio for Greg on slide three. Once EARN completes its conversion to a CLO focused close and fun, Greg and Mike Rainos, Ellington's founder and head of all portfolio management activities, will officially be designated as EARN's two portfolio managers. We are all very excited to have these two veteran credit and the credit investors leading EARN's investment strategy going forward. As you can also see on slide three, the rest of EARN's management team will remain intact.

Greg: In the second quarter, credit spreads generally ground tighter, and Greg discussed how that impacted our CLO holdings.

Speaker Change: More loans trading above par, higher voluntary loan prepayment speeds, more refinancings, and more resets.

Mark Tecotzky: In the last two weeks, we got a real jolt of volatility and some meaningful yield spread widening in many parts of the credit universe. I think that's generally good news for us. We have dry powder and are aggressively looking to add to our holdings.

Greg: But in the last two weeks, we got a real jolt of volatility and some meaningful yield spread widening in many parts of the credit market.

Speaker Change: I think that's generally good news for us. We have dry powder and are aggressively looking to add to our holdings.

Mark Tecotzky: A relative value approach to CLO investing often finds the best investments when the market is repricing quickly. Looking ahead, I think both portfolios are set up to deliver strong returns. This steeper yield curve and the prospect of September rate cuts is generally a good backdrop for agency MBS, and the recent widening in CLO spreads should create an attractive entry point as we continue to grow our portfolio. Now, back to Larry.

Speaker Change: A relative value approach to CLO investing often finds the best investments when the market is repricing quickly.

Larry Penn: Please turn out as slide four of the presentation, and I'll begin with an update on EARN's strategic transformation into a CLO focused, closed and fun. As a reminder, it was last September that we began rotating Ernst Capital into CLOs, and since then, we've been steadily growing that portfolio as we approach our targeted conversion date later this year. Everything continues to go as planned, and in early July, we filed our preliminary proxy statement, an anticipation of a shareholder vote at our annual meeting later this year.

Speaker Change: Looking ahead, I think both portfolios are set up to deliver strong returns.

Speaker Change: A steeper yield curve and the prospect of September rate cuts is generally a good backdrop for agency MBS, and recent widening in CLO spreads should create an attractive entry point as we continue to grow our portfolio.

Larry Penn: Subject to that shareholder vote, we will convert to a closed end fund for SEC purposes and a regulated investment company, Eric, protects purposes, thus completing our transformation from an agency mortgage read to a CLO focused closed end fund. We remain on track to complete all of these steps prior to year end.

Larry Penn: Thanks, Mark. The CLO strategy again outperformed H&C MBS in the second quarter, as it consistently has done since Earn began investing in the sector last September. In particular, I'm pleased to have sold several CLO Mez positions and to have several discounted positions pay off at par, all ahead of the recent market volatility we've seen this past week or so. These moves locked in gains when spreads were tighter, and they also freed up additional liquidity. We finished the quarter with plenty of cash and borrowing capacity to drive portfolio and earnings growth. That dry powder is particularly valuable, given recent spread widening, especially in CLOX.

Speaker Change: Thanks, Mark.

Speaker Change: The CLO strategy again outperformed agency MBS in the second quarter, as it's consistently done since EARN began investing in the sector last September.

Larry Penn: On slide five, we reiterate some of the anticipated benefits to shareholders of the transformation, which include better projected risk adjusted returns over the long-term and enhanced access to capital markets.

Speaker Change: In particular, I'm pleased to have sold several CLO Mez positions and to have several discounted positions pay off at par, all ahead of the recent market volatility we've seen this past week or so.

Speaker Change: These moves locked in gains when spreads were tighter, and they also freed up additional liquidity.

Speaker Change: We finish the quarter with plenty of cash and borrowing capacity to drive portfolio and earnings growth.

Speaker Change: That dry powder is particularly valuable given recent spread widening, especially in CLO equity.

Larry Penn: I really like having a targeted asset roster that includes both CLO mezzanine debt and CLO equity. Those two markets don't always perform in sync. As Greg described, we saw that in the second half of 2023, when we thought there was especially good value in mezzanine debt, more so than in equity. Therefore, when we started accumulating CLOs back then, most of our acquisitions were in mezzanine debt.

Larry Penn: On slide six, we summarize Ellington's long-standing experience investing in CLOs and chart the ramp up of Ernst CLO portfolio. Ern acquired its first CLOs towards the end of last September. By year end, the portfolio stood at $17 million, and by March 31st, it had grown to $45 million. In the second quarter of 2024, we nearly doubled that number to $85 million. As you can see on this slide, Ernst CLO portfolio is now up to about $108 million as of last Friday.

Speaker Change: I really like having a targeted asset roster that includes both CLO mezzanine debt and CLO equity.

Speaker Change: Those two markets don't always perform in sync.

Larry Penn: At that size, CLOs now account for roughly half of Ernst total capital allocation. Meanwhile, and as planned, we've shrunk our agency MBS portfolio significantly, from $791 million last September to $531 million at June 30th, and we continue to downsize that portfolio as we acquire CLOs. With that said, until we actually complete our conversion process, we must continue to hold a core portfolio of liquid agency MBS in order to maintain our exemption from the 1940 Act.

Speaker Change: As Greg described, we saw that in the second half of 2023, when we thought there was especially good value in mezzanine debt, more so than in equity.

Speaker Change: Therefore, when we started accumulating CLOs back then, most of our acquisitions were in mezzanine debt.

Larry Penn: And we saw this kind of dispersion again this past quarter when, as we've mentioned a few times earlier today, heightened refi activity in the corporate loan market led to stronger performance from discounted mezzanine debt but weaker performance from CLO equity. That disparate performance leads us now to see better current relative value opportunities in CLO equity rather than CLO mezzanine debt. So we've been focusing our acquisitions recently on CLO equity. Both sectors have offered high-risk adjusted returns over time, but I believe that we are able to enhance those returns even further by rotating between sectors so as to pick better entry and exit points at each step along the way. I also like having a small but flexible allocation to European CLOs. As you can imagine, that market, with its geographically distinct investor base, has technical forces that can be quite disconnected from the U.S. CLO market.

Speaker Change: And we saw this kind of dispersion again this past quarter, when, as we've mentioned a few times earlier today, heightened refi activity in the corporate loan market led to stronger performance from discount mezzanine debt, but weaker performance from CLO equity.

Speaker Change: That disparate performance leads us now to see better current relative value opportunities in CLO equity rather than CLO mezzanine debt. So we've been focusing our acquisitions recently in CLO equity.

Speaker Change: Both sectors have offered high-risk adjusted returns over time, but I believe that we are able to enhance those returns even further by rotating between sectors so as to pick better entry and exit points at each step along the way.

Speaker Change: I also like having a small but flexible allocation to European CLOs.

Larry Penn: Fortunately, since we've concentrated our agency investments in liquid sectors, the cost of liquidating our agency pools to free up capital for CLOs has been very modest so far, and we expect that to continue to be the case. Mark will elaborate on that later on the call.

Speaker Change: As you can imagine, that market, with its geographically distinct investor base, has technical forces that can be quite disconnected from the U.S. CLO market.

Larry Penn: Again, this gives us the opportunity to further enhance returns by opportunistically deploying and rotating a portion of our capital into the European sector to both capture better relative value and improve portfolio diversification, as Greg described. We remain energized as we look forward to a successful shareholder vote at our annual meeting later this year, after which we can complete our conversion to a CLO-focused, closed-end fund slash REC. I strongly believe that our strategic transformation will generate superior risk-adjusted returns for Ellington Credit shareholders. I am particularly pleased with how positive our conversations with investors and analysts have been following the announcement of the transformation earlier this year.

Speaker Change: Again, this gives us the opportunity to further enhance returns by opportunistically deploying and rotating a portion of our capital into the European sector to both capture better relative value and improve portfolio diversification, as Greg described.

Larry Penn: Please turn out to slide seven of the earnings presentation for the market backdrop for the second quarter. Despite some periods of market volatility, the CLO market continued to benefit from strengthening fundamentals, robust demand for leverage loans, and continued capital inflows. Corporate loan prepayment rates increased further, reaching their highest level on a trailing 12-month basis since February of 2022. That drove further de-leveraging in season CLOs, which has continued to benefit Ernst's holdings of discount dollar price CLO mezzanine tranches.

Speaker Change: We remain energized as we look forward to a successful shareholder vote at our annual meeting later this year.

Speaker Change: after which we can complete our conversion to a CLL-focused closed-end fund slash REC.

Speaker Change: I strongly believe that our strategic transformation will generate superior risk-adjusted returns for Ellington Credit shareholders.

Speaker Change: I'm particularly pleased with how positive our conversations with investors and analysts have been following the announcement of the transformation earlier this year.

Operator: With that, we'll now open the call to questions. Operator, please go ahead. Gentlemen, thank you for your remarks, and to our phone audience joining us today. At this time, if you would like to ask a question, it is star and one on your telephone keypad. Pressing star and one will place your line into a queue, and will open your lines for questions one at a time.

Larry Penn: However, as we illustrate towards the middle of this slide, the Morningstar LSTA leverage loan index actually took down quarter over quarter following six consecutive quarters of increases. This was simply the result of those high corporate loan prepayment rates in the second quarter. Since many premium-priced corporate loans prepayed at par. Meanwhile, high yield and IG credit indices tighten further, as depicted here as well. In the CLO market, you can see here that credit spreads on double B and single BCO low trotches tightened overall as well, but there were significant dispersion among deals with higher quality trotches, generally tightening, and lower quality trotches widening. The European CLO market also saw spreads tightened, particularly in higher quality mezzanine trotches.

Speaker Change: With that, we'll now open the call to questions. Operator, please go ahead.

Speaker Change: Gentlemen, thank you for your remarks. And to our phone audience joining today, at this time if you would like to ask a question, it is star and one on your telephone keypad. Pressing star and one will place your line into a queue and will open your lines for questions one at a time. Once again, ladies and gentlemen, that is star and one for questions today, and we'll hear first from Jason Weaver at Jones Trading.

Operator: Once again, ladies and gentlemen, that is star and one for questions today, and we'll hear first from Jason Weaver at Jones Trading. Hi, good morning. Thanks for taking my question. First of all, I was curious about the dispersion in CLO performance that you noticed and mentioned in your prepared remarks, and obviously noting the refi activity. Is there anything else material that you can point to that's driving that performance dispersion, whether it's due to sponsor, asset class, or sector concentration?

Speaker Change: Hi, good morning. Thanks for taking my question.

Speaker Change: First of all, I was curious on the dispersion on CLO performance that you noticed and you mentioned in your prepared remarks and obviously noting the refi activity. Is there anything else material that you can point to that's driving that performance dispersion, whether it's due to sponsor, asset class, or sector concentration?

Larry Penn: For CLO equity, tightening new issue mezzanine debt spreads were a double-edged sword. On the one hand, deals with better performing portfolios and higher debt costs were able to capitalize on those tighter spreads by refinancing or resetting their debt at cheaper levels. This activity drove strong positive returns for CLO equity in those particular deals. But on the other hand, the high volume of premium price loan collateral refinancing at par and at lower coupon spreads led in many deals to overall declines in an asset values and compressions in excess interest.

Greg Borenstein: Sure. So, I think you touched upon dispersion in the assets, and if you take a look, I think you certainly see that continue to play out this year. Equity being a first loss tranche is going to be exposed to whatever happens in the tails. And you've seen this not only in leveraged loans but in high yield, where throughout the year, you've generally seen more and more of the spread of the overall portfolio and the risk come from the widest, most credit-sensitive names. Just this morning, several series of the high yield index had a names start heading down the default path.

Speaker Change: Greg?

Speaker Change: Sure, so I think you touch upon...

Speaker Change: dispersion in the assets and if you take a look, I think you certainly see that continue to play out this year.

Speaker Change: Equity being a first loss tranche is going to be exposed to whatever happens in the tails And you've seen this not only in leveraged loans, but in high yield where

Larry Penn: These effects triggered mark-to-market losses for CLO equity in many deals, as both the interest payments on CLO equity due to lower excess interest in the CLO and underlying asset values declined in tandem. These dynamics led to mark-to-market losses on some of earned CLO equity trotches during the second quarter.

Speaker Change: throughout the year you've generally seen.

Speaker Change: more and more of the spread of the overall portfolio and the risk.

Speaker Change: from the widest most credit sensitive names. Just this morning several series of the high L index had a name start heading down the default path. And so I think that as much as you've seen

Greg Borenstein: And so, I think that as much as you've seen sort of macro systemic moves where liability prices have come in, which have helped improve cash flows to COO equity and loan prices tightening where prices have moved up, you still see a bit of dispersion deal-to-deal in what's going on in the tails of these portfolios. Okay, thank you. And then, you know, we appreciate the update on the quarter-to-date CLO additions through last Friday. But I was wondering, can you provide a similar update on liquidity and leverage quarter to date? Looking for that; I'm not sure we have it.

Speaker Change: sort of macro systemic moves where liability prices have come in which have helped

Speaker Change: improve cash flows to CLO equity and...

Speaker Change: loan prices tightening, where prices have moved up, you still see a bit of dispersion deal-to-deal in what's going on in the tails of these portfolios.

Larry Penn: Meanwhile, in the agency MBS market, yield spreads were little-changed quarter over quarter. On the US agency MBS index, generated a slightly negative excess return relative to US treasuries. But those minor changes belive the significant negative impact of intra-quarter interest rate volatility in generating delta hedging losses. Which, for example, you've seen reflected in the week overall performance of the agency mortgage rate sector this past quarter.

Speaker Change: to

Speaker Change: Got it. Okay, thank you. And then, you know, we appreciate the update on the quarter-to-date CLO additions through last Friday, but I was wondering, can you provide a similar update on liquidity and leverage quarter-to-date?

Larry Penn: I'll turn now to Ernst quarterly results on slide 8, and I'll begin with gap earnings. We had continued strong performance from our CLO mezzanine debt investments, both US and European, driven by both opportunistic sales and some of our discount positions being called at par. On the CLO equity side, our US CLO equity investments had marked-to-market losses driven by that heightened loan refinancing activity that I mentioned earlier. But our European CLO equity investments actually performed quite well.

Chris Smernoff: Leverage is ticked out. As of July 31st, our debt-to-equity ratio was down to around three times. Okay, fair enough. Thank you for that. I appreciate the color.

Speaker Change: Looking for that, I'm not sure we have it.

Speaker Change: Yeah, go ahead Chris. Sure. Yeah, so as of July 31st You know our death equity ratio was down to around three times

Speaker Change: Okay, fair enough. Thank you for that. I appreciate the color.

Operator: Our next question today comes from Eric Hagen at BTIG. Please go ahead. Hey, good morning.

Speaker Change: Thank you.

Speaker Change: Our next question today comes from Eric Hagen at BTIG. Please go ahead.

Operator: I have a couple of questions here. I mean, how are you thinking about the dividend as you rotate more capital into the CLOs, and then how much more capital do you expect to maybe rotate into CLOs just between now and the call at the end of the third quarter? Thank you, guys. I'll take the first part.

Eric Hagen: Hey, good morning. Thank you. A couple of questions here. I mean, how are you thinking about the dividend as you rotate more capital into the CLOs? And then how much more capital do you expect to maybe rotate into CLOs just between now and call it the end of the third quarter? Thank you, guys.

Larry Penn: Overall, CLOs contributed positively to our net income for the quarter. In contrast, a remaining MBS portfolio contributed to modest 5 cents per share net loss for the quarter, caused primarily by that intra-quarter interest rate volatility. This drove Ernst slight overall net loss for the quarter. Our ongoing rotation from agency MBS into CLOs continued to drive our net interest margin wider, our leverage ratios lower, and our adjusted distributable earnings higher. You can see on slide 8 that our net interest margin expanded to 4.24% overall, while our debt to equity ratio declined to 3.7 to 1 at quarter at.

Larry Penn: Yeah, I mean, as we mentioned, the rotation is actually supporting our net interest margin, our ADE. So, we feel good about maintaining the dividend through the conversion and thereafter. So, you know, really don't have any concerns. Now, as far as your second question. JR, do you want to take that?

Speaker Change: I'll have I'll take the first part yeah I mean I think as we mentioned the rotation is actually supporting our you know our net interest margin our ADE so

Larry Penn: The growth of the CLO portfolio with those wide net interest margins drove the sequential growth of our adjusted distributable earnings for the quarter. Ellington credits ADE who 9 cents per share sequentially to 36 cents per share. I'll note however that we expect our ADE to tick down in the near term as we continue to sell agency pools and as the associated interest rate swap hedges that we initiated in much lower interest rate environments are terminated or burn off. That said, we do anticipate that our ADE will continue to cover our dividend in the third quarter.

Speaker Change: We feel good about maintaining the dividend, you know, through the conversion and thereafter. So, you know, really don't have any concerns there.

Speaker Change: Now, as far as your second question.

Chris Smernoff: Sure. So, you know, when we're in this interim period as a C-Corp, we need to abide by the 40-Act exemption, as I think you know, so we have to maintain a core portfolio of agency MBS, which are good assets for the 40-Act test. You know, we updated that capital was about 50-50 between CLOs and agency as of the end of last week. We also gave the gross asset amount updates. We're getting closer to the point.

Speaker Change: JR, you want to take that?

Jr: Sure, so when we're in this interim period as a C-Corp, we need to abide by the 40-Act exemption, as I think you know, so we have to maintain a core portfolio of agency MDS, which are good assets for the 40-Act test.

Speaker Change #101: We updated that capital was about 50-50 between CLOs and agency as of the end of last week. We gave the gross asset amount updates.

Chris Smernoff: We're not giving exact numbers, but I think it's fair to say that we said a few months ago that we plan to take CLOs over $100 million, which we've now accomplished. We're getting close to the point where we can add more on the margin, and, you know, we've been able to lower leverage, as Chris mentioned, and we've also added some more liquidity in July through asset sales, so we have more room, but certainly the pace of adding to the CL portfolio needs to subside at this point until we, you know, effectuate, Yeah, I think we've been adding I mean, this is really rough, but maybe 20 a little over 20 million a month, something like that.

Speaker Change #102: Right, we're getting closer to the point. We're not giving exact numbers, but I think it's fair to say that we said a few months ago that we plan to take CLOs over 100 million, which we've now accomplished.

Christopher Smernoff: With that, I'll now pass it over to Chris to review our financial results for the second quarter in more detail. Chris, thank you Larry and good morning everyone.

Speaker Change #103: We're getting close to the point where we can add more on the margin, and we've been able to lower leverage, as Chris mentioned, and we've also added some more liquidity in July through asset sales. So we have more room, but certainly the pace of—

Christopher Smernoff: Please turn to slide 9 for a summary of Ellington credits, second quarter financial results. For the quarter ended June 30th, we are recording a net loss of 4 cents per share and adjust the distributive earnings of 36 cents per share. ADE excludes the catch-up immunization adjustment which was positive 221,000 in the second quarter. Our overall net interest margin expanded to 4.24% from 3.03% quarter of a quarter driven by the growth of CLOs and that drove the sequential increase in ADE.

Speaker Change #104: of adding to the CO portfolio needs to subside at this point until we effectuate the conversion.

Speaker Change #105: Yeah, I think we've been adding, I mean, this is really rough, but maybe 20, a little over 20 million a month, something like that. And could we do that for two more months? Maybe.

Chris Smernoff: Yeah. And could we do that for two more months? Maybe But hopefully, this will all coincide with our conversion. So let's just say it could be, it could, the timing could have to be very, well, but that gives you sort of an idea of where we could be heading right before the conversion. But it, it sort of depends on a few things structurally, and it depends a little bit on how much we finance those assets.

Speaker Change #105: but hopefully this will all coincide with our conversion so let's just

Speaker Change #106: It could be, it could, the timing could not be very well, but that gives you sort of an idea, I think, of where.

Christopher Smernoff: In the second quarter, we continue to benefit from positive carry on our interest rate swaps where we receive a higher floating rate and pay a lower fixed rate. But as Larry mentioned, 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.

Speaker Change #106: we could be heading right before the conversion. But it sort of depends on...

Chris Smernoff: So there's a bunch of complexities, and JR mentioned that whole pools are key in maintaining our 40-act exemption law in the meantime, so we're going to continue to have that court. Okay, that's helpful, and I appreciate the outlook for the dividend to be stable. But, I mean, shouldn't investors maybe expect the dividend to go higher at some point once the conversion is complete, just given the return outlook for CLOs right now?

Speaker Change #107: A few things structurally, and it depends a little bit on how much we finance those assets. So there's a bunch of complexities. And J.R. mentioned...

Speaker Change #108: Whole pools are key in maintaining our 40-act exemption law in the meantime so we're going to continue to have that core portfolio of whole pools.

Christopher Smernoff: Slide 10 shows the attribution of income by strategy. In the second quarter, the CLO strategy generated 5 cents per share of portfolio income driven by strong interest income, which increased sequentially due to the accelerated amersation of market discount on several discount positions. Further, neckings on our CLO messaging portfolio were supported by both. Opportunistic sales and discount positions being called. This income was partially assessed by market losses on certain CLO equity positions where rapid prepayments drove market losses as well as reduced floating rate spreads on the underlying loan collateral.

Speaker Change #109: Okay that's helpful and appreciate the outlook for the dividend to be stable but I mean shouldn't investors maybe expect the dividend to go higher at some point once the conversion is complete just given the return outlook for CLOs right now?

Larry Penn: I love the question. I think we like to under-promise and over-deliver if we can, so we're just going to say, for now, let's think in terms of maintaining. Okay, I appreciate you guys. Thank you. And that was our final question for today. We thank you for your participation in Ellington Credit Company's second quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day. The Ultimate Parody Site! All rights reserved. Thank you. Thanks for watching, and don't forget to like, share, and subscribe to our channel.

Speaker Change #110: Love the question. I think we like to under promise and over deliver if we can. So we're just going to say for now, let's think in terms of maintaining.

Speaker Change #110: Okay, appreciate you guys. Thank you

Speaker Change #111: And that was our final question for today. We thank you for your participation in Ellington Credit Company's second quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day.

Christopher Smernoff: Our agency strategy, meanwhile, generated a portfolio loss of 5 cents per share for the second quarter. In April, interest rates and volatility increase over renewed concerns about inflation and a more hawkish federal reserve, which pushed agency R&BS yield spreads wider. In May and June, however, interest rates and volatility generally declined and agency R&BS yield spreads reversed most of their April widening. Overall, for the second quarter, the U.S. MBS index generated an excess return of negative 9 basis points to treasuries.

Christopher Smernoff: Against this backdrop, earned agency portfolio generated a small net loss of the quarter as net losses on our agency R&BS exceeded neckings on our interest rate hedges and that drove earned overall net loss for the quarter.

Speaker Change #111: Thanks for watching, and don't forget to like, share, and subscribe to our channel.

Christopher Smernoff: Our non-agency portfolio performed well during the quarter, generating 4 cents per share driven by net interest income and neckings associated with several profitable sales.

Christopher Smernoff: In connection with our strategic transformation, we revoke the reelection effective January 1st of this year and are currently operating as the taxable sea court. We came into the year with substantial net operating loss carried forward, and in the first quarter we used the portion of those to assess the majority of our federal taxable income. In the second quarter, our overall net loss generated a modest tax benefit and did not require the utilization of any of our NOLs.

Christopher Smernoff: Please note that we are not booking a deferred tax asset on our balance sheet related to the NOLs, so a reported book value remains fully tangible. After our conversion to a closed-end fund regulated investment company, we will generally not be subject to corporate income tax.

Christopher Smernoff: Please turn now to our balance sheet on slide 11. Book value for share was $6.91 at June 30th compared to $7.21 at March 31st, including the 24 cents per share of dividends in the quarter.

Christopher Smernoff: Our economic return for the quarter was a negative 0.8%. We ended the quarter with $163 million in cash and unencumbered assets of which included $90 million of U.S. Treasury bills held on margin.

Christopher Smernoff: Next, please turn to slide 12 for summary for folio holdings. During the second quarter, our CLO portfolio increased to $85 million as of June 30th compared to $45 million as of March 31st. At June 30th, CLO equity comprised of 47% of our total CLO holdings up from 25% at March 31st. Meanwhile, European CLO investments comprise 17% of our total CLO holdings at June 30th up from 10% at March 31st. Also during the second quarter, the size of our agency R&BS holdings decreased to $531 million as compared to $739 million as of March 31st and our aggregate holdings of interest only and securities and non-agency R&BS decreased as well.

Christopher Smernoff: Including activity through August 9th, our agency R&BS portfolio have now declined to $518 million while our CLO portfolio has grown to approximately $108 million. As measured by allocated equity as opposed to gross assets, our capital allocation to CLO has increased to 45% at June 30th from 25% at March 31st and 11% at your end. Our debt to equity ratio adjusted for unsettled trades decreased to $3.7 times as of June 30th compared to $4.9 times as of March 31st. The decline was driven by less leverage on our CLO investments as well as higher shareholder's equity.

Christopher Smernoff: Similarly, our net mortgage assets to equity ratio decreased over the same period to 4 times from 5.4 times.

Christopher Smernoff: Finally, on 5.14, we provide details of our interest rate hedging portfolio. During the quarter, we continue to hedge interest rate risk primarily through the use of interest rate swaps.

Christopher Smernoff: The overall size of our interest rate hedging portfolio declined quarter to quarter to quarter as the share of our portfolio and CLOs increased. As shown on 5.15, we ended the quarter with a net long TBA position both on a nocial basis and as measured by 10-year equivalents as compared with a small net short TBA position in the park.

Speaker: On slide 16, you can see that nearly all of our, all of the loads in the line our COLO portfolio are floating rate and as such have much lower interest rates duration.

Greg Borenstein: I will now turn the presentation over to Greg. Thanks, Chris.

Greg Borenstein: I'm happy to be speaking to Earn shareholders today and I'm very excited to become your co-portfolio manager with Mike Frano's going forward. I'll first talk about how we ramped up COLO's in Earn over the last 10 months and then get some thoughts about how we see the portfolio evolving from here, including some thoughts on the recent volatility. Back in September when Earn first began acquiring a COLO's, COLO credit spreads were very wide.

Greg Borenstein: They had significantly lagged the recovery in the high old corporate bomb market and credit spreads on certain COLO meds branches available in the secondary market had backed up to levels we hadn't seen since mid-2020. Meanwhile, credit fundamentals were strong and getting stronger. We saw a great risk of just return opportunity in COLO meds and started building a portfolio. Through March 31st the majority of our COLO investments were in COLO meds. Credit spreads for COLO meds have since tightened considerably.

Greg Borenstein: We've actively traded some positions to monetize gains. We've been called out of others that we held at significant discounts to par and we also have marked market gains on numerous positions that are still that we still hold. This dynamic has driven strong returns and earns overall COLO strategies so far. Fast forward to the second quarter and those tighter COLO debt spreads really enhance the attractiveness of COLO equity. Tighter new issue debt spreads lower the implied financing cost of COLO equity and they also enable certain COLO equity holders to re-finance or reset their liabilities, which further enhances the cashflow profile of those deals from the equity's perspective.

Greg Borenstein: For those reasons, you saw the majority of our new COLO purchases in the second quarter were in equity as opposed to meds. And at quarter end this lets just about 50-50 between meds and equity. Going forward I expect our portfolio to continue to be a blend of meds and equity with the mixed fluctuating based on market opportunities.

Greg Borenstein: We've also supplemented our COLO portfolio with European COLO meds and equity investments. We've often found investment opportunities in European COLO's offer compelling relative value versus what we see in the U.S. And having an allocation to the European sector also provides invaluable portfolio diversification. Allington has been investing in European COLO's for a decade and they work with our dedicated investment professionals in our London office who analyze and trade the product day-to-day. Our investment teams in the U.S, and Europe follow the same investment processes and risk management principles and are ultimately overseen by Mike Reino for me.

Greg Borenstein: In both markets we are systematic in our evaluation of potential investment opportunities including deep dives on credit analysis and detailed review of deal documentation and structure. Mike Reino and I plan to continue to allocate earned capital to Europe opportunistically based on where we see relative value but I expect by and large the majority of our COLO investments to continue to be in the U.S. As for the volatility of the past couple weeks, while credit spread is certainly widened overall I'll note that markets for COLO's by and large have been orderly even on the most volatile days.

Greg Borenstein: As compared to some of the acute periods panic we saw in other sectors or other areas. The volatility has created some attractive trading opportunities, as it typically does, and we were able to play offense during the sell-off and deploy some of our drive powder at attractive spreads. We've also had some credit hedges in place through the recent period, which we used to help stabilize book value per share and protecting and tail events.

Greg Borenstein: Since there's often a lag between price action on our credit hedges and price action on our assets, being able to dial up and down our credit hedges as another dimension to potentially enhance returns. On the balance, while the recent volatility might lead some of the third quarter market losses in part of our portfolio, I also see this volatility is recharging the opportunity set to providing an exciting environment for trading, which plays into Ellington's strengths.

Mark Tecotzky: With that, I will turn the presentation over to Mark. Thanks, Greg. While Q2 is generally a good quarter for spread product, it was actually a week quarter for agency MBS. There was a lot of interest rate volatility to manage and continued bank portfolio restructurings added MBS supply to the market, which exacerbated volatility further.

Mark Tecotzky: As we mentioned on last quarter's earnings call, we've laid out a clear set of priorities as we manage our investment transition from an agency MBS focus to a CLO focus. During the quarter, we stuck to our plan and made very good progress with that transition. During the transition, while we have been focusing on acquiring attractive CLO investments, we have also been focusing on minimizing the cost of liquidating our pools, all while staying invest in the combination of agency MBS and CLO investments that we expect to generate strong total returns and ADE and excess of our dividend.

Mark Tecotzky: During the quarter, we shrunk our agency portfolio by nearly 30%. As we continue to sell off MBS, we are maintaining the focus on liquidity for our remaining MBS portfolio. That has meant, for example, that we no longer own 15-year pools, which are typically much less liquid than 30-year pools. We also have very few Jenny May pools for a similar reason. We've also reduced our payup risk by shedding higher payup pools, our average payup to climb by over 25% in the second quarter, and that has also improved liquidity of the remaining portfolio. Meanwhile, payment risk is higher now than it was earlier in the year, so we need to manage our MBS investments with that in mind as well.

Mark Tecotzky: Like many things, the key to the plan has been execution. Despite some weak agency MBS performance, we picked our spots, sold a meaningful part of the agency pool portfolio, and yet our MBS portfolio still almost broke even in what was a down quarter for the sector. We continue to focus on raising cash for new CLO investment while minimizing book value impairment. This process is ongoing in Q3, but things are a little different now. In the second quarter, credit spreads generally ground tighter, and Greg discussed how that impacts our CLO holdings. More loans trading above par, higher voluntary loan prepayment speeds, more refinancing and more resets.

Mark Tecotzky: In the last two weeks, we got a real jolt of volatility and some meaningful yield spread widening in many parts of the credit market. I think that's generally good news for us. We have dry powder and are aggressively looking to add to our hold. A relative value approach to COLO investing often finds the best investments from the market is reprising quickly.

Mark Tecotzky: Looking ahead, I think both portfolios are set up to deliver strong returns. A steeper yield curve and the prospect of September rate cuts is generally a good backdrop for ADNCMBS. And recent widening COLO spreads should create an attractive entry point as we continue to grow our portfolio.

Larry Penn: Now back to Larry. Thanks, Mark. The COLO strategy again outperformed ADNCMBS in the second quarter, as it's consistently done since Ern began investing in the sector last September. In particular, I'm pleased to have sold several COLO mes positions and do several discounted positions pay off at par. All ahead of the recent market volatility we've seen this past week or so. These moves locked in gains when spreads were tighter and they also freed up additional liquidity.

Larry Penn: We finished the quarter with plenty of cash and borrowing capacity to drive portfolio and earnings growth. That drive pattern is particularly valuable given recent spread widening especially in COLO equity. I really like having a targeted asset roster that includes both COLO mesonine debt and COLO equity. Those two markets don't always perform in sync. As Greg described, we saw that in the second half of 2023. When we thought there was especially good value in mesonine debt, more so than an equity.

Larry Penn: Therefore, when we started accumulating COLO's back then, most of our acquisitions were in mesonine debt. And we saw this kind of dispersion again this past quarter. When, as we've mentioned a few times earlier today, heightened refi activity in the corporate loan market led to stronger performance from discount mesonine debt, a weaker performance from COLO equity. That disparate performance leads us now to see better current relative value, opportunities in COLO equity rather than COLO mesonine debt.

Larry Penn: So we've been focusing our acquisitions recently in COLO equity. Both sectors have offered high risk adjusted returns over time. But I believe that we are able to enhance those returns even further by rotating between sectors so as to pick better entry and exit points at each step along the way. I also like having a small but flexible allocation to European COLOs. As you can imagine, that market, with its geographically distinct investor base, has technical forces that can be quite disconnected from the US COLO market. Again, this gives us the opportunity to further enhance returns by opportunistically deploying and rotating a portion of our capital into the European sector to both capture better relative value and improve portfolio diversification, as Greg described.

Larry Penn: We remain energized as we look forward to a successful shareholder voter at our annual meeting later this year, after which we can complete our conversion to a COLO focused closed and fund slash REC. I strongly believe that our strategic transformation will generate superior risk adjusted returns for Ellington credit shareholders. I particularly pleased with how positive our conversations with investors and analysts have been following the announcement of the transformation earlier this year.

Speaker: With that, we now open the call to questions. Operator, please go ahead.

Speaker: Thank you for your remarks and to our phone audience joining today at this time if you would like to ask a question, it is star and one on your telephone keypad. Pressing star and one will place your line into a queue and will open your lines for questions one at a time.

Jason Weaver: Once again, ladies and gentlemen, that is star and one for questions today and we'll hear first from Jason Weaver at Jones Trading. Good morning, thanks for taking my question. First of all, I was curious on the dispersion on CLO performance that you mentioned in your prepared remarks and obviously noting the refi activity. Is there anything else material that you can point to that's just driving that performance dispersion, whether it's due to a sponsor, asset class or sector concentration?

Jason Weaver: Sure, so I think you touch upon dispersion in the assets and if you take a look, I think you certainly see that continue to play out this year. Equity being a first-loss trance is going to be exposed to whatever happens in the tails and you've seen it's not only in leverage loans but in high yield where throughout the year you've generally seen more and more of the spread of the overall portfolio.

Jason Weaver: When the risk comes from the widest most credit sensitive names, just this morning several series of the high yield index had a name start heading down the default path. And so I think that as much as you've seen sort of macro systemic moves where liability prices have come in which it helped improve cash flows to CLO equity and the loan prices tightening where prices have moved up, you still see a bit of dispersion yield a deal in what's going on in the tails of these portfolios. Got it. Okay, thank you.

Greg Borenstein: And then, you know, we appreciate the update on the quarter-day CLO additions through last Friday, but I was wondering, can you provide a similar update on liquidity and leverage quarter-day? Looking for that, I'm not sure we added, leverage is ticked down. Sure. Yeah, so as of July 31st, you know, our death equity ratio was down to around three times. Okay, fair enough. Thank you for that. Appreciate the color.

Eric Hagen: Our next question today comes from Eric Hagen at BTIG.

Eric Hagen: Please go ahead. Hey, good morning. Thank you. A couple questions here. I mean, how are you thinking about the dividend? Did you rotate more capital into the CLOs? And then how much more capital do you expect to maybe rotate into CLOs just between now and call at the end of the third quarter? Thank you.

Larry Penn: I'll take the first part. Yeah, I mean, I think as we mentioned, the rotation is actually supporting our net interest margin, our ADE, so we feel good about maintaining the dividend through the conversion and thereafter. So, you know, really don't have any concerns there.

Mark Tecotzky: Now as far as your second question. Jay, you want to take that? Sure, so when we're in this interim period as a C-Corp, we need to abide by the 40 act exemption, as you know, so we have to maintain a core portfolio of agency MBS, which are good assets for the 40 act tests. We updated that capital was about 50-50 between CLOs and agency as of the end of last week. We gave the gross asset amount updates.

Mark Tecotzky: We're getting closer to the point, we're not giving exact numbers, but I think it's fair to say that we've said a few months ago that we plan to take CLOs over 100 million, which we've now accomplished. We're getting close to the point where we can add more on the margin, you know, we've been able to lower leverage, as Chris mentioned, and we've also added some more liquidity in July throughout that sale.

Mark Tecotzky: So we have more room, but certainly the pace of adding the CLO portfolio needs to subside at this point until we, you know, effectuate the conversion. Yeah, I think we've been adding, I mean, this is really rough, but maybe 20, a little over 20 million a month, something like that. And could we do that for two more months? Maybe, but hopefully this will all coincide with our conversion. So let's just, it could be, it could, the timing could not be very well, but that's, give you sort of an idea, I think of where we could be heading right before the conversion, but it, but it sort of depends on a few things structurally, and it depends a little bit on how much we finance those assets. So there's a bunch of complexities. And JR mentioned, whole pools are T in maintaining our 40 act exemption all in the meantime. So we're going to continue to have that core portfolio of whole pools.

Larry Penn: Okay, that's helpful, and I appreciate the outlook for the dividend to be stable, but I mean, shouldn't investors maybe expect the dividend to go higher at some point once the conversion is complete, just given the return outlook for the CLOs right now? Love the question. I think we, we like to under promise and over deliver if we can. So we're just going to say, for now, let's think in terms of maintaining. Okay, appreciate you guys. Thank you.

Speaker: And that was our final question for today. We thank you for your participation in Ellington's Credit Company second quarter, 2024 Financial Results Conference call.

Speaker: You may disconnect your line at this time and have a wonderful day.