OLD GREENWICH, Conn.--(BUSINESS WIRE)--Ellington Credit Company (NYSE: EARN) ("we", "us," or "our") today reported financial results for the quarter ended September 30, 2024.

Highlights

• Net income (loss) of $5.4 million, or $0.21 per share.
• Adjusted Distributable Earnings¹ of $7.2 million, or $0.28 per share.
• Book value of $6.85 per share as of September 30, 2024, which includes the effects of dividends of $0.24 per share for the quarter.
• Net interest margin² of 9.65% on credit, 3.52% on Agency, and 5.22% overall.
• CLO portfolio increased to $144.5 million as of September 30, 2024, as compared to $85.1 million as of June 30, 2024.
• Capital allocation³ to corporate CLOs was 58% as of September 30, 2024, as compared to 45% as of June 30, 2024.
• Weighted average constant prepayment rate ("CPR") for the fixed-rate Agency specified pool portfolio of 7.5⁴.
• Net mortgage assets-to-equity ratio of 3.0:1⁵ as of September 30, 2024.
• Dividend yield of 14.5% based on the November 8, 2024 closing stock price of $6.62, and monthly dividend of $0.08 per common share declared on November 7, 2024.
• Debt-to-equity ratio of 2.5:1 as of September 30, 2024.
• Cash and cash equivalents of $25.7 million as of September 30, 2024, in addition to other unencumbered assets of $95.8 million.

Third Quarter 2024 Results

"Our results in the third quarter reflect excellent performance from our CLO debt portfolio, where robust loan prepayments continued to trigger deleveraging in our seasoned mezzanine positions, and where low default rates boosted demand for junior mezzanine tranches, which drove yield spreads tighter. We also enhanced returns in this portfolio through opportunistic trading and by driving the liquidation of a CLO where we owned discount mezzanine debt. In our CLO equity portfolio, we had positive performance that was also enhanced by opportunistic trading as well as our completion of two deal refinancings. Finally, we had positive performance from our remaining RMBS investments as well, and our overall annualized economic return for the quarter was 10.8%,” said Laurence Penn, Chief Executive Officer and President.

"As with prior quarters, our ongoing shift to CLOs continued to lower our leverage ratios. The wide net interest margins on our CLOs enabled our adjusted distributable earnings to continue to cover our dividends during the quarter, even as we terminated, in conjunction with selling agency pools, several interest rate swap hedging positions that had been supporting ADE, and even as our leverage declined significantly.

"As we look to the remainder of the year, we currently see better relative value and ample opportunities in CLO equity, where tighter debt spreads are improving economics for both new and existing deals. In addition, continued heavy issuance in the CLO market is creating inefficiencies and relative value opportunities in both the CLO debt and the CLO equity markets. Given our strong systems and deep experience in both primary and secondary markets, EARN is well positioned to capitalize on these inefficiencies."

Strategic Transformation Update

On March 29, 2024, our Board of Trustees approved a strategic transformation of our investment strategy to focus on corporate CLOs, with an emphasis on mezzanine debt and equity tranches. In connection with this transformation, we revoked our election to be taxed as a REIT effective January 1, 2024, rebranded as Ellington Credit Company, and updated our web address to www.ellingtoncredit.com. We continue to be listed on the New York Stock Exchange under our ticker symbol EARN.

In connection with our annual meeting later this year, on August 16, 2024, we filed a definitive proxy statement (as amended, supplemented or otherwise modified from to time, the “Proxy Statement”) that includes proposals on certain matters related to the strategic transformation (the “Conversion Proposals”). On October 1 and October 23, 2024, we filed amendments to the Proxy Statement with supplemental information about the Conversion Proposals. The leading independent proxy advisory firms, ISS and Glass Lewis, along with our Board of Trustees, recommend that EARN’s shareholders vote “FOR” the Conversion Proposals. Subject to such shareholder approval, we intend to convert to a closed-end fund registered under the Investment Company Act of 1940, as amended (the "1940 Act") that would be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended, and complete our transition from an MBS-focused company to a CLO-focused company.

In the meantime, we are operating as a taxable C-Corp and taking advantage of our significant existing net operating loss carryforwards to offset the majority of any U.S. federal taxable income we may generate pending our conversion to a closed-end fund/RIC. During this interim phase, we continue to hold a core portfolio of liquid Agency MBS pools to maintain our exemption from the 1940 Act. Once we convert to a closed-end fund/RIC, we would generally not be subject to corporate tax.

During the third quarter, we increased the size of the CLO portfolio to $144.5 million, from $85.1 million as of the prior quarter end.

Financial Results

The following table summarizes our portfolio of long investments as of September 30, 2024 and June 30, 2024:

1. Expressed as a percentage of the current principal balance.
2. Excludes IOs.

During the third quarter, the size of our CLO holdings increased by 70% to $144.5 million as of September 30, 2024, compared to $85.1 million as of June 30, 2024, as we continued to rotate investment capital into CLOs. As of September 30, 2024, our CLO portfolio consisted of $74.8 million of CLO equity tranches, of which $66.5 million were dollar-denominated and $8.3 million were non-dollar denominated; and $69.7 million of CLO notes, specifically mezzanine debt tranches, of which $52.9 million were dollar-denominated and $16.8 million were non-dollar denominated. We expect our CLO holdings to continue to be a blend of CLO equity and CLO debt investments, with the capital allocations fluctuating over time based on market opportunities. In addition, we intend to continue to invest in both dollar-denominated and non-dollar denominated CLO investments based on relative value opportunities, but expect the majority of our CLO investments will continue to be dollar-denominated.

Also during the quarter, the size of our Agency RMBS holdings decreased by 13% to $462.1 million as of September 30, 2024, compared to $531.1 million as of June 30, 2024, as we continued to net sell Agency RMBS. Costs to liquidate our Agency RMBS continue to be low. Meanwhile, our aggregate holdings of interest-only securities and non-Agency RMBS decreased by 44% quarter over quarter to $11.3 million.

Our debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 2.5:1 as of September 30, 2024, as compared to 3.7:1 as of June 30, 2024. The decline was driven by higher shareholder equity and less leverage on our CLO investments, which constituted a significantly larger proportion of our overall portfolio as of September 30, 2024, compared to June 30, 2024. Our net mortgage assets-to-equity ratio also decreased over the same period, to 3.0:1 from 4.0:1, driven by the increase in shareholder equity and a smaller Agency RMBS portfolio, partially offset by a larger net long TBA position as of September 30, 2024.

During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in U.S. Treasury securities and futures. We ended the quarter with a net long TBA position. We also selectively hedge the credit risk of our corporate CLO and non-Agency RMBS investments; as of September 30, 2024, our credit hedge portfolio was relatively small.

In the third quarter, the net interest margin on our credit portfolio was 9.65%, as compared to 13.41% in the second quarter and 9.65% in the first quarter. The higher net interest margin in the second quarter had been the result of accelerated prepayments on the loans underlying several discounted CLO positions, which resulted in high payoff activity and increased asset yields for those CLO positions. Prepayment activity was less significant in the third quarter in our portfolio, which drove asset yields and NIM in the credit portfolio more in line with first quarter results. The net interest margin on our Agency portfolio, on the other hand, increased to 3.52% from 2.85% over the same period, driven by higher asset yields and a lower cost of funds. Our cost of funds and net interest margin continued to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate. Our overall net interest margin increased to 5.22% as of September 30, 2024, as compared to 4.24% as of June 30, 2024, which reflected a higher allocation of capital to the credit strategy and the higher NIM on our Agency portfolio.

Despite the increased NIM overall, our adjusted distributable earnings declined primarily due to (i) significantly lower leverage quarter over quarter, and (ii) the termination during the quarter, in conjunction with the sale of Agency pools, of interest rate swap hedging positions that were initiated in lower interest rate environments. Despite the decline, our adjusted distributable earnings continued to exceed our dividends paid in the third quarter.

The following table summarizes our operating results by strategy for the three-month periods ended September 30, 2024 and June 30, 2024:

1. Costs associated with the strategic transformation may not be indicative of our ongoing operating results.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity, and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.