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. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

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. 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 the 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. 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 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 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. 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. As a reminder, during this call, we'll sometime refer to Ellington Credit Company by its NYSE ticker, E-A-R-N, or EARN for short. With that, I will now turn the call over to Larry.

Thanks, Alaael-Deen, and good morning, everyone. 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 highlights of the quarter as I typically do, 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 MBS. 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 CLOs sector since joining Ellington in 2012 across a wide variety of market conditions and for a wide array of Ellington's funds and accounts. We've included a short bio for Greg on Slide 3. Once EARN completes its conversion to a CLO-focused closed end fund, Greg and, Mike Vranos, 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 investors leading EARN's investment strategy going forward. As you can also see on Slide 3, the rest of EARN's management team will remain intact. 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…

Thank you, Larry, and good morning, everyone. 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 catchup amortization adjustment, which was positive $221,000 in the second quarter. Our overall net interest margin expanded to 4.24% from 3.03% quarter-over-quarter, driven by the growth of CLOs and that drove the sequential increase in ADE. In the second quarter, we continued 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. Slide 10 shows the attribution of income by strategy. 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 discompositions. Further, net gains on our CLO 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 $0.05 per share for the second quarter. In April, interest rates and volatility increased over renewed concerns about inflation in a more hawkish Federal Reserve, which pushed Agency RMBS yield spreads wider. In May and June, however, interest rates and volatility generally declined and Agency RMBS yield spreads reversed…

Thanks, Chris. I'm happy to be speaking to EARN's shareholders today, and I'm very excited to become your Co-Portfolio Manager with Mike Vranos 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. They had significantly lagged the recovery in the high yield corporate bond market and credit spreads on certain CLO mezz 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 mezz and started building a portfolio. Through March 31, the majority of our CLO investments were in CLO mezz. Credit spreads for CLO mezz 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 are still -- that we still hold. This dynamic has driven strong returns in EARN's overall CLO strategy so far. Fast forward to the second quarter, and those tighter CLO debt spreads really enhanced the attractiveness of CLO equity. Tighter new issue debt spreads lowered the implied financing costs of CLO equity and they also enabled certain CLO equity holders to refinance or reset their liabilities, which further enhances the cash flow profile of those deals from the equities' perspective. For those reasons, you saw the majority of our new CLO purchases in the second quarter were in equity as opposed to mezz. And at quarter end, the split is…

Thanks, Greg. Well, Q2 is 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. 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 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. During the quarter, we shrunk our agency portfolio by nearly 30%. 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. 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 the 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. 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 investments, 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 impacted our CLO holdings, more loans trading above par, higher voluntary loan prepayment speeds, more re-financings and more resets. 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 holdings. 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, 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. Now, back to Larry.

Thanks, Mark. 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. In particular, I'm pleased to have sold several CLO mezz 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 CLO equity. 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. 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. 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. 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. 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 improved 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/RIC. I strongly believe that our strategic transformation will generate superior risk-adjusted returns for Ellington Credit shareholders. I'm particularly pleased with how positive our conversations with investors and analysts have been following the announcement of the transformation earlier this year. With that, we'll now open the call to questions. Operator, please go ahead.

Gentlemen, thank you for your remarks. [Operator Instructions] And we'll hear first from Jason Weaver at JonesTrading.

Hi. Good morning. Thanks for taking my question. 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 or asset class or sector concentration?

Greg?

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 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 have helped improve cash flows to CLO 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.

Got it. Okay. Thank you. And then -- 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.

Leverage has ticked down. Can you go ahead, Chris?

Sure. Yes. So, as of July 31, our debt to equity ratio was down to around 3 times.

Okay, fair enough. Thank you for that. Appreciate the color.

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

Hi. 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 at the end of the third quarter? Thank you, guys.

I'll take the first part. Yes. 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. Now, as far as your second question, JR, do 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 I think 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 is about 50-50 between CLOs and agency as of the end of last week. We gave the gross asset amount updates. Right? 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. 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 adding to the CLO portfolio needs to subside at this point until we effectuate the conversion.

Yes. I think we've been adding -- I mean, this is really rough, but maybe $20 million -- a little over $20 million a month, something like that.

Yes.

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 gives you sort of an idea, I think, of where we could be heading right before the conversion. 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 a key in maintaining our '40 Act exemption all in the meantime. So, we're going to continue to have that core portfolio of whole pools.

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?

Love the question. I think, we like to underpromise and overdeliver, 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.

Thank you 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. You may disconnect your line at this time and have a wonderful day.