Ellington Credit (EARN) Q1 2026 earnings call transcript

It is now my pleasure to turn the floor over to Aladin Shillet, Associate General Counsel. Sir, you may begin.

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. The Ellington Credit Crippie is a new project of the Ellington Credit Crippie, and the Ellington Crippie, and the Ellington Crippie. 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 end notes at the back of the presentation.

With that, I'll turn the call over to Larry. Thanks, Aladine, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company, which we often refer to by its New York Stock Exchange ticker, EARN, or EARN for short. Please turn to slide three. 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 net 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. We'll walk through the quarter's financial results in more detail, including how our balance sheet and portfolio are positioned to support NII growth.

Thanks, Larry, and good morning, everyone. Please turn to slide four. For the quarter ended June 30, 2026, we reported gap net income of $0.33 per share and net investment income of $0.16 per share. The adjusted net investment income was $0.15 per share. Our NAV increased to $4.18 per share at June 30th, 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 six for a breakdown of our quarterly results by investment category.

Our CLO portfolio generated strong results across both debt and equity. NIA 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 gains Let's go over a few different yield measures since each tells us something different.

The weighted average gap 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 30th, 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 CELO investments and sold $35.1 million, growing the CELO portfolio to $334.1 million at June 30th from $307.9 million at March 31st. 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 believe 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 the minimal near-term maturities, resulting in a weighted average loan maturity of 4.4 years.

Facility sizes skew towards 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 30th, our credit hedge portfolio represented approximately $132 million of high-yield CDX notional equivalents, down from approximately $188 million at March 31st. 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 NAPR share increased to $4.18 from $4.09. Cash and cash equivalents totaled $23.5 million. Reversed 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 1.29 times at June 30th from 1.43 times at March 31st, 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 will turn the call over to Greg to discuss the CLO market environment, portfolio positioning, and outlook. Greg?

Thanks, Chris. It is a pleasure speaking with everyone again. As Larry and Chris described, Q2 is a great quarter for earned and provided a particularly attractive opportunity set. But sharp Celo 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 Celo, Mez, 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 coming 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 Celo collateral managers were limited.

In response to these developments, we continued shifting towards 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 date saw meaningful benefits from the opportunity to refinance liabilities that had originally been set at wider spreads.

Earnings 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 CIO equity remains unattractive in our view, and we again purchased no new issue equity during the quarter.

CIO OMEZ 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. Mez currently offers an attractive combination of yield, downside protection, and liquidity. Our Mez portfolio had a great quarter, led by high net interest margins, and we also continued to benefit from calls of shorter-dated Mez bonds. We turn over the Mez portfolio quite actively. And with high-yield corporate bond spreads continuing to trade around 300 basis points, Celo double visa 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 visa 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 low market on the back of increased CLO issuance make us wary of a repeat of what U. S. CLO equity experienced in 2025, with an incompression and reduced equity cash flows. Between our active repositioning in both Celo 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 Celo 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 Celo 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. 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 build 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 earned 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 Company.

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.

Yes, sure.

You did call out some recent caution. And then just how close are you to being fully invested today?

Okay. Greg, you want to talk about our sort of tying strategy there? Sure. I mean, some of it might just be a function of, you know, July was a good month and, you know, how much of it comes from distributions and if there's a little bit of, you know, PO slippage there.

Yes. Rotating out of things that have tightened to a degree, you know, that had more total return upside. You know, I think one thing to remember with this portfolio is obviously we referenced it on the MES end. Not everything is just to buy a, you know, strong carry coupon. There's total return that we put in from trading, you know, that has to be a large part of our, you know, portfolio return. And so 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 MES side, cleaner, longer dated, you know, 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 MES market for a lot of Q2.

I think you've been in the one three to one four times range in recent quarters. Can you just share a little bit more color there just how where you could be comfortable getting to on a leverage side? 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 equity was 143 at March 31, and it was 129 at June 30, debt equity. I could see it getting back closer to the March 31st level as we take – we have the ability to grow the portfolio another 5, 10 percent from the June 30 numbers.

Yeah, I would just add a little bit on what I was sort of 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.

Yeah, and those are lumpy. Things like deal calls, spreads will tighten, will have an opportunity. So I think you're going to see, it's going to be the kind of two steps forward, one step back, right? 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. And we mentioned we have excess liquidity, so that's obviously the first source of increasing the portfolio size and leverage.