Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ellington Credit Co (EARN, Financial) has successfully ramped up its CLO portfolio to $108 million, accounting for roughly half of its total capital allocation.
- The company's net interest margin expanded to 4.24%, driven by the growth of CLOs.
- Ellington Credit Co (EARN) reported adjusted distributable earnings (ADE) of $0.36 per share, an increase of $0.09 per share sequentially.
- The strategic transformation into a CLO-focused closed-end fund is on track, with anticipated benefits including better projected risk-adjusted returns and enhanced access to capital markets.
- The company has maintained a strong liquidity position with $163 million in cash and unencumbered assets.
Negative Points
- Ellington Credit Co (EARN) reported a net loss of $0.04 per share for the second quarter.
- The remaining MBS portfolio contributed a modest $0.05 per share net loss for the quarter due to intra-quarter interest rate volatility.
- The company expects the impact of positive carry on interest rate swaps to decline in future quarters as some swaps expire.
- Book value per share decreased to $6.91 at June 30 from $7.21 at March 31, resulting in a negative economic return of 0.8% for the quarter.
- The recent market volatility has led to mark-to-market losses on some of EARN's CLO equity tranches.
Q & A Highlights
Q: Hi, good morning. Thanks for taking my question. First of all, I was curious on the dispersion on CLO performance that you noticed in your -- 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 your sponsor asset class or sector concentration?
A: Sure. So I think you touched upon dispersion in the assets, and if you take a look, I think you've certainly seen 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 that not only 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 name, you'll 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 loan prices tightening where prices have moved up, you still see a bit of dispersion in the deal and what's going on in the tails of these portfolios.
Q: Got it. Thank you. And then we appreciate the update on the quarter-to-date sale additions through last Friday. But I was wondering, can you provide a similar update on liquidity and leverage quarter-to-date?
A: Leverage is ticked down. Yeah, sure. So as of July 31, our debt-to-equity ratio was down to around three times.
Q: 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 rotating to CLOs just between now and call it the end of the third quarter? Thank you.
A: I'll take the first part. 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 really don't have any concerns there. And now as far as your second question, JR, you want to take that? Sure. So when we're in this interim period as a C-Corp when you divide 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 test. And we updated that capital is about 50-50 between CLOs and the agency as of the end of last week. We gave the gross asset amount updates, but 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 on. 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 more liquidity in July as our asset sales. So we have more room, but certainly the pace of adding the CLO portfolio needs to passive side at this point until we effectuate the conversion.
Q: Okay, that's helpful. And I appreciate the outlook for the dividend to be stable. But I mean, should 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?
A: Love the question. I think we are we like to under-promise and over-deliver free cash that we're just going to say for now, let's think in terms of maintaining.
Q: Hi, good morning. Thanks for taking my question. First of all, I was curious on the dispersion on CLO performance that you noticed in your -- 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 your sponsor asset class or sector concentration?
A: Sure. So I think you touched upon dispersion in the assets, and if you take a look, I think you've certainly seen 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 that not only 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 name, you'll 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 loan prices tightening where prices have moved up, you still see a bit of dispersion in the deal and what's going on in the tails of these portfolios.
Q: Got it. Thank you. And then we appreciate the update on the quarter-to-date sale additions through last Friday. But I was wondering, can you provide a similar update on liquidity and leverage quarter-to-date?
A: Leverage is ticked down. Yeah, sure. So as of July 31, our debt-to-equity ratio was down to around three times.
Q: 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 rotating to CLOs just between now and call it the end of the third quarter? Thank you.
A: I'll take the first part. 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 really don't have any concerns there. And now as far as your second question, JR, you want to take that? Sure. So when we're in this interim period as a C-Corp when you divide 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 test. And we updated that capital is about 50-50 between CLOs and the agency as of the end of last week. We gave the gross asset amount updates, but 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 on. 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 more liquidity in July as our asset
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
