Ellington Credit (NYSE:EARN) held its first-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

Access the full call at https://edge.media-server.com/mmc/p/gjzqzu3o/

Summary

Ellington Credit reported an economic return of 8.1% for the quarter, with a GAAP net income of $0.33 per share and net investment income of $0.16 per share.

The company strategically repositioned its portfolio, taking advantage of market volatility to expand and enhance its CLO investments, resulting in higher projected yields.

Future growth is expected to be driven by deploying excess liquidity, adding leverage, and rotating into higher-yielding investments, while maintaining credit quality.

Ellington Credit plans to increase net investment income, evidenced by a 20% higher run rate in July compared to the second quarter.

Management expressed confidence in the current dividend level and highlighted the company's flexible balance sheet and active trading strategy as key strengths.

Full Transcript

OPERATOR

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ellington Credit First Fiscal Quarter Ended June 30, 2026 Results Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star 2.

Lastly, if you should require operator assistance, please press star 1. It is now my pleasure to turn the floor over to Aladdin Shillay, Associate General Counsel. Sir, you may begin.

Aladdin Shillay, Associate General Counsel

Thank you. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our registration statement on Form N-2. Actual results may differ materially from these statements; they should not be considered to be predictions of future events.

The company undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Credit; Greg Borenstein, Portfolio Manager; and Chris Smirnoff, Chief Financial Officer. Our earnings presentation is available on our website, ellingtoncredit.com. Today's call will track that presentation, and all statements and references to figures are qualified by the important notice and endnotes at the back of the presentation.

With that, I'll turn the call over to Larry.

Larry Penn, CEO

Thanks, Aladdin, and good morning, everyone. We appreciate your time and interest in Ellington Credit, which we often refer to by its New York Stock Exchange ticker EARN, or EARN for short. Please turn to Slide 3. The second calendar quarter marked an important inflection point for EARN's portfolio. The market sell-off earlier in the year widened credit spreads and significantly expanded the CLO opportunity set, and we moved quickly, issuing unsecured debt in late March, rapidly deploying the proceeds in April, and actively repositioning the portfolio throughout.

Those actions proved to be well timed. As the second quarter progressed, credit fundamentals improved and active trading and rotation allowed us to further upgrade portfolio quality. For the quarter, we generated an economic return of 8.1%, non-annualized, increased our NAV per share, and strengthened the portfolio's long-term return profile. Even as we reduced leverage, total equity also grew, adding to our balance sheet capacity and financial flexibility.

We believe that we are well positioned to grow net investment income in the months ahead, as our NII for the full quarter did not yet fully reflect the earnings power of our expanded and repositioned portfolio. As of the end of the quarter, the second quarter was about building earnings capacity, and the upcoming quarters are about converting that capacity into higher net investment income and earnings, while maintaining our discipline around credit quality, liquidity, and NAV preservation.

We see three primary drivers of net investment income growth. First, deploying our excess liquidity. Greg will discuss the attractive investment opportunities we're seeing, and that's where we're putting our excess liquidity to work. Second, prudently adding leverage. Our strong balance sheet, larger equity base, and meaningful remaining borrowing capacity give us the flexibility to further expand the portfolio beyond its current size. We also have the ability to issue common equity above NAV when market conditions permit, providing another source of accretive growth capital.

And third, portfolio rotation. We expect to continue rotating capital into higher-yielding investments, pursuing attractive CLO refinancings and resets, and actively trading across the CLO capital structure. These three drivers, all of which are largely within our control, give us a clear path to grow earnings in the coming months. To be clear, we do not need to reach for yield in order to grow earnings. As Greg will explain, the portfolio repositioning we completed during the second quarter allowed us to increase income potential while actually improving credit quality and, in many cases, reducing risk.

With that, I'll turn it over to Chris, who will walk through the quarter's financial results in more detail, including how our balance sheet and portfolio are positioned to support NII growth.

Chris Smirnoff, CFO

Thanks, Larry, and good morning, everyone. Please turn to Slide 4. For the quarter ended June 30, 2026, we reported GAAP net income of $0.33 per share and net investment income of $0.16 per share. Adjusted net investment income was $0.15 per share. Our NAV increased to $4.18 per share at June 30, which, together with the $0.24 per share of distributions during the quarter, produced an economic return of 8.1%. As Larry discussed, significant capital deployment and portfolio repositioning occurred during the quarter, so the resulting increase in earnings capacity was not yet fully reflected in second-quarter NII.

Please turn to Slide 6 for a breakdown of our quarterly results by investment category. Our CLO portfolio generated strong results across both debt and equity. NII was complemented by substantial net unrealized gains in U.S. and European CLO debt and U.S. CLO equity as credit spreads tightened and underlying loan performance improved. We also generated trading gains on mezzanine debt and benefited from calls on several discounted positions. These gains were partially offset by losses on our corporate credit hedges as broader credit spreads tightened during the quarter.

Most of that hedge drag occurred in April when the credit markets rebounded sharply and during the same period in which our long CLO portfolio generated substantial mark-to-market gains. Let's go over a few different yield measures since each tells us something different. The weighted average GAAP yield on the entire CLO portfolio was 11.9% during the quarter, while the weighted average yield on our incremental purchases during the quarter was higher at approximately 14.9%.

As of June 30, the weighted average yield projected on the portfolio, measured using fair value rather than cost, was approximately 16.6%, reflecting the stronger forward return profile of our repositioned portfolio. Meanwhile, attractive reinvestment yields have continued, with our weighted average purchase yield so far in the third quarter at approximately 16.8%. Importantly, these higher reinvestment yields do not come from taking on more risk; rather, they reflect, in large part, improving fundamentals in the underlying loan market as well as attractive entry points created by technical selling and capital outflows. As these higher yields work their way through the portfolio, they should provide a tailwind for NII. Please turn to Slide 7. We purchased $64.8 million of CLO investments and sold $35.1 million, growing the CLO portfolio to $334.1 million at June 30 from $307.9 million at March 31.

That 8.5% net portfolio growth actually understates the level of activity during the quarter. Significant cash distributions, calls, and paydowns provided additional capital for reinvestment, while active portfolio rotation further increased turnover, including sales of positions where we believed much of the remaining upside had been realized. As you can see on this slide, our portfolio rotation mostly happened within sectors as opposed to cross sectors, with CLO equity representing approximately 54% of the overall CLO portfolio at quarter-end, up only slightly from 53%, and with the European investments remaining at approximately 10% of the overall CLO portfolio. Slides 8 and 9 provide additional detail on the corporate loans underlying our CLO investments. Our CLO collateral remains overwhelmingly first-lien, floating-rate leveraged loans, representing roughly 95% of the underlying assets. These loans are well diversified across industries and issuers, led by technology, financial services, and healthcare, with no single sector exceeding 11%. Loan maturities are spread over several years, with the largest concentrations in 2031 and 2032, and minimal near-term maturities, resulting in a weighted average loan maturity of 4.4 years.

Facility sizes skew toward larger borrowers, with a weighted average size of $1.9 billion, which supports secondary market liquidity. Please turn to Slide 10 for an overview of our credit hedges. At June 30, our credit hedge portfolio represented approximately $132 million of high-yield CDX notional equivalents, down from approximately $188 million at March 31. Greg will discuss the drivers of that reduction. We also continue to maintain foreign currency hedges associated with our European CLO investments.

Turning to Slide 11, total net asset value was $159.7 million at June 30, up from $153.8 million at March 31, and NAV per share increased to $4.18 from $4.09. Cash and cash equivalents totaled $23.5 million. Reverse repo borrowings declined by nearly 9% to $151.9 million from $166.3 million, while unsecured notes outstanding remained unchanged at $54 million. Lower borrowing and a higher net asset value brought our leverage ratios down. Our debt-to-equity declined to 1.29x at June 30 from 1.43x at March 31, leaving us with a stronger, more flexible balance sheet and additional borrowing capacity entering the third quarter.

Together with the higher reinvestment yields I mentioned earlier, that additional balance sheet capacity reinforces our ability to grow NII. With that, I'll turn the call over to Greg to discuss the CLO market environment, portfolio positioning, and outlook.

Greg Borenstein, Portfolio Manager

Thanks, Chris. It's a pleasure speaking with everyone again. As Larry and Chris described, Q2 was a great quarter for EARN and provided a particularly attractive opportunity set. Sharp CLO market volatility in Q1, driven first by weakness in software loans and followed by disruption from the Iran war, drove an increase in actionable trading opportunities, and our debt issuance put us in a stronger position to capitalize on them. As always, we weighed opportunities across CLO mezz and equity and actively maneuvered the book with 64 trades during the quarter, not including hedges or deal calls.

In particular, we found CLO equity in the secondary market, specifically in the U.S., to be a compelling opportunity. CLO equity NAVs were depressed entering the quarter, but defaults were not meaningfully elevated. In fact, default rates and distressed debt exchange activity both declined modestly in the quarter, and loan prices recovered further. Despite the recovery in loan prices, the share of loans trading above par remained relatively low and much of the strength in loans came from discounted names.

With fewer loans trading above par, par erosion and excess spread compression posed less of a risk, benefiting longer-tenor equity profiles with robust interest cash flow streams. This was a welcome change from prior quarters when loan repricing rates were extremely high and reinvestment opportunities for CLO collateral managers were limited. In response to these developments, we continued shifting toward longer-tenor, higher cash flow structures during the quarter while reducing exposure to shorter-tenor positions with greater sensitivity to loan price volatility.

Meanwhile, as the quarter marched on and CLO debt spreads recovered, CLO equity in deals that were approaching or passing their first call dates saw meaningful benefits from the opportunity to refinance liabilities that had originally been set at wider spreads. EARN's CLO equity profile benefited from several of these refinancings and resets during the quarter. This favorable dynamic has persisted so far in Q3, with CLO debt spreads remaining resilient.

By contrast, the new-issue market for CLO equity remains unattractive in our view, and we again purchased no new-issue equity during the quarter. CLO mezz has been a relatively steady performer for EARN, and that trend continued into the second quarter. We rotated out of lower-coupon, shorter spread-duration positions trading near or above par and into higher-coupon, wider-spread investments with stronger underlying credit fundamentals. Mezz currently offers an attractive combination of yield, downside protection, and liquidity.

Our mezz portfolio had a great quarter, led by high net interest margins, and we also continued to benefit from calls of shorter-dated mezz bonds. We turn over the mezz portfolio quite actively, and with high-yield corporate bond spreads continuing to trade around 300 basis points, CLO double Bs at roughly two to three times that spread continue to offer compelling relative value. Furthermore, these are spreads to maturity, while many of these bonds offer additional upside from deal calls or resets.

As a result, higher-quality, higher-coupon double Bs at discounts to par have been one of our favorite areas for incremental investments. In Europe, we remain underweight, particularly in equity, which represented less than 1% of the portfolio at quarter-end. Concerns about a tightening loan market on the back of increased CLO issuance make us wary of a repeat of what U.S. CLO equity experienced in 2025, with NIM compression and reduced equity cash flows.

Between our active repositioning in both CLO equity and mezzanine and the favorable tailwinds in both sectors, I believe our portfolio's long-term earnings power is substantially stronger than it was three months ago. Lastly, I'd like to highlight the role of our hedges. We trade our portfolio actively, but it can take time to source CLO positions that meet our investment criteria. When we completed our debt deal in March, one of our biggest risks was whether we could deploy the proceeds at wider spread levels before the market potentially tightened back.

Given that the cost of the debt was already locked in, this motivated us to hold a smaller hedge portfolio while we were still deploying the proceeds, and this was the primary driver of the decline in hedge notional amount that Chris referenced earlier. This reduced the run-rate drag from our hedges during the quarter, and meanwhile we continued to carry the CLO positions we'd previously acquired at wider yield spread levels. Combined with our deployment of the proceeds during the quarter, this all helped minimize the earnings drag associated with the new capital.

Looking forward, we're more cautious now that the market has returned to somewhat tighter levels, but loan fundamentals are improving and the CLO equity market looks as attractive as it has in some time. We will continue to value liquidity and the ability to maneuver the book. Now back to Larry.

Larry Penn, CEO

As Greg's comments make clear, we continue to see plenty of opportunities to actively manage and improve the portfolio. We are already seeing the benefits in our third-quarter results. I encourage investors to review the July portfolio update that we posted last night to our website. As reflected in that update, EARN's positive momentum continued into July. We generated an economic return of approximately 3.1% for the month, or $0.13 per share. This more than covered our $0.08 monthly distribution and enabled NAV per share to increase by approximately $0.05 in July, using the midpoint of the NAV range reported in that update.

I can also report that adjusted NII for July was approximately $0.06 per share, representing a monthly run rate that's about 20% higher than our second-quarter figure. This shows that the earnings capacity we built during the second quarter is beginning to translate into incremental NII, and as mentioned, we still see significant upside from there as we deploy our remaining balance sheet capacity and continue to rotate the portfolio. On the topic of rotation, we have remained highly active in the third quarter, executing 38 CLO trades in just the past six weeks.

This activity reflects the same portfolio discipline we've applied consistently. We've exited positions where we believe we've already captured most of the value, and we've redeployed that capital into investments that we believe offer better yields, stronger structures, and better risk-adjusted returns. Our overall portfolio size is roughly unchanged so far in the third quarter, as new investment activity has roughly offset stronger-than-projected deal call activity, natural return of investment on CLO equity, and opportunistic sales.

In conclusion, we believe that the current investment environment is ideally suited for EARN to keep growing net investment income and generating attractive total returns, even if volatility returns. We believe that our active trading, flexible balance sheet, and disciplined hedging strategy will once again allow us to capitalize on market dislocations and create value for shareholders. In either case, we believe that EARN is well positioned to generate attractive long-term, risk-adjusted returns across a wide range of market environments.

Thank you again for your continued interest and support of Ellington Credit. Operator, please open the line for questions.

OPERATOR

Thank you. If you'd like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star 1 to ask a question. And our first question today comes from Crispin Love with Piper Sandler. Your line is now open.

Crispin Love, Analyst at Piper Sandler

Thank you. Good morning, everyone. So you definitely took advantage of some of the dislocation in the prior quarter, and you did comment that the June quarter didn't fully reflect the expanded, repositioned portfolio. And Larry, you just called out the $0.06 run rate in adjusted net investment income in July. Can you just discuss a potential trajectory as you look forward? As you talked about, you could add some leverage, could continue to tap the ATM, and then, with all that in mind, how comfortable you are with the current dividend level?

Larry Penn, CEO

Yeah, start with the dividend. Comfortable with the level. And I'm going to reiterate what I think I said on last earnings call, which is we see us getting into the low 20s on net investment income, adjusted net investment income.

Crispin Love, Analyst at Piper Sandler

Okay, so getting to the low 20s over the next couple of quarters.

Larry Penn, CEO

Yes, sure. Okay.

Crispin Love, Analyst at Piper Sandler

And then just looking at the July update, the CLO portfolio is down a little relative to June, the debt portfolio down, CLO equity up slightly. Can you just share some of the thinking there, some of the drivers of the portfolio? Is that more timing of selling more than anything else? You did call out some recent caution. And then just how close are you to being fully invested today?

Larry Penn, CEO

Greg, you want to talk about our sort of timing strategy there?

Greg Borenstein, Portfolio Manager

Sure. I mean, some of it might just be a function of July was a good month and how much of it comes from distributions, and if there's a little bit of P&L slippage there. I think overall, when we take a look, I think we see—kind of going forward, are you asking about just what's going on in the market and where we want to deploy and just strategy going forward, I guess, or just from a performance basis? Yeah. I mean, listen, I think it was clearly a very good opportunity coming out of a lot of the volatility earlier in the year to buy secondary cash flows with very strong CLO equity profiles that had been oversold.

I think as we move forward, we're going to start to rotate things that maybe we played for more of a total return, that were maybe at more of a price discount, rotating out of things that have tightened to a degree that had more total return upside. I think one thing to remember with this portfolio is, obviously, we referenced it on the mezz end. Not everything is just to buy a strong carry coupon. There's total return that we put in from trading that has to be a large part of our portfolio return.

I think that as we see some just limited total return on positions that have realized and gone up, we're probably going to rotate into—I think I mentioned where we do like equity—into stronger, higher cash flow, good fundamental, longer-dated positions, and I think on the mezz side, cleaner, longer-dated double Bs. I think that we were probably getting paid more to take advantage of maybe, we'll call it, third quartile-type names in the mezz market for a lot of Q2.

Crispin Love, Analyst at Piper Sandler

Great, thank you. And if I could just kind of squeeze in one last one just on leverage: you did comment a couple of times on potentially selectively adding leverage. I think you've been in the 1.3 to 1.4 times range in recent quarters. Can you just share a little bit more color there—just where you could be comfortable getting to on the leverage side?

JR

Sure. Hey, Kristen, it's JR. So leverage is also a function of what kind of credit hedges we have in place, as they all kind of go together. We mentioned debt-to-equity was 1.43x at March 31 and it was 1.29x at June 30. Debt-to-equity, I could see it getting back closer to the March 31 level, as we have ability to grow the portfolio another 5–10% from the June 30 numbers.

Greg Borenstein, Portfolio Manager

Yeah, I would just add a little bit on what I was talking about then to JR's point. With a lot of the distributions that you get in July and some of these deal calls and sales, there's a healthy amount of capacity to be able to keep reinvesting into here, and so that'll kind of play into it as well.

Larry Penn, CEO

Yeah, and those are lumpy things like deal calls. You know, spreads will tighten. We'll have an opportunity. So, you know, I think you're going to see—it's going to be the kind of two steps forward, one step back. So this is just going to be some natural variation. We see it on a daily basis, obviously, but just when you're looking at the month-end snapshots. But we think we're definitely headed in that direction. We mentioned we have excess liquidity, so that's obviously the first source of increasing the portfolio size and leverage.

Crispin Love, Analyst at Piper Sandler

Perfect. Thank you, and appreciate you taking my questions.

Larry Penn, CEO

Thanks, Krista.

OPERATOR

Thank you. That was our final question for today. We thank you for participating in the Ellington Credit First Fiscal Quarter Ended June 30, 2026 Results Conference Call.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.