Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company 2024 Third Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. [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. 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 again joined by Greg Borenstein, Head of Corporate Credit at Ellington Management Group. Following the completion of our conversion to a CLO closed-end fund, Greg, along with Ellington's Founder, Mike Vranos, will officially be designated as EARN's two portfolio managers. Our third-quarter earnings conference call presentation is available on our website, ellingtoncredit.com. Our comments this morning will follow that presentation. Please note that any references made on this call to figures in that presentation are qualified in their entirety by the notes at the back of the presentation. Any figures relating to the current status of the shareholder vote are made as of this morning. Such figures are subject to change based on a variety of factors, including the ability of shareholders to change or revoke their votes, which they are entitled to do at any time prior to the annual meeting and our tabulator finalizing its report. As a reminder, during this call, we'll sometimes 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. I'll start with an update on the shareholder vote related to our strategic transformation. As you've seen, we have postponed the Annual Shareholder Meeting as we work to accumulate the required votes to approve the conversion of EARN to a Delaware closed-end fund. Shareholder support for the conversion has been overwhelmingly positive. Based on voting results, as of this morning, the three conversion-related proposals have approval rates above 92% and over 95% if you don't include abstentions. However, in order to pass two of the three proposals, we need four votes from a majority of all shares outstanding, not just votes cast. And as of this morning, we are still short of that threshold. On those proposals, we currently have about 10.5 million four votes, but we still need a little more than 2 million additional four votes in order for them to pass. I should note that these approval rates are unofficial and preliminary, and shareholders can change their vote at any time prior to the annual meeting. Both ISS and Glass Lewis, the leading independent proxy advisory services, have unanimously recommended four votes on all the conversion-related proposals as they recognize the benefits to earned shareholders of the conversion. On Slide 4, we highlight some of the anticipated benefits to shareholders of the transformation, which include better projected risk-adjusted returns over the long term and enhanced access to the capital markets, while also affording shareholders with the additional protections provided by the 1940 Act. Furthermore, as a registered investment company, we would generally not be subject to corporate income tax. With our current status as a Taxable C Corp, we are subject to a small level of corporate income tax, but we…

Thank you, Larry, and good morning, everyone. Please turn to Slide 8 for a summary of Ellington Credit's third-quarter financial results. For the quarter ended September 30, we are reporting net income of $0.21 per share and adjusted distributable earnings of $0.28 per share. ADE excludes the catch-up amortization adjustment which was positive $173,000 in the third quarter. Our debt-to-equity ratio adjusted for unsettled trades decreased to 2 5x at September 30 compared to 3.7x at June 30. The decline was driven by higher shareholders' equity and the less leverage we employ on our growing CLO investment portfolio as compared to the leverage we employ on our legacy Agency MBS portfolio. Similarly, our net mortgage assets to equity ratio decreased over the same period to 3x from 4x. Our overall net interest margin increased to 5.22% from 4.24% in the prior quarter, which reflects a higher allocation of capital to the credit strategy and a higher NIM on our agency portfolio driven by higher asset yields and a lower cost of funds. Despite the overall increase, the net interest margin on our credit portfolio actually declined sequentially finishing more in line with our first quarter NIM. As we highlighted last quarter, the higher NIM in the second quarter has been the result of accelerated prepayments on the loans underlying several discounted CLO positions, which resulted in high payoff activity and high asset yields for those CLOs positions. Prepaid payment activity was less significant in the third quarter in our CLO mezz portfolio, which drove asset yields and NIM in the credit portfolio, more in line with our first quarter results. In the third quarter, we continue to benefit from positive carry on our interest rate swaps, where we receive a higher floating rate and pay a lower fixed rate. But…

Thanks, Chris. It's a pleasure speaking to everyone again today. As Larry mentioned, performance of our CLOs in Q3 was led foremost by our debt portfolio, where tightening mezz spreads offered opportunities to monetize gains and also drove positive price action on assets that we continue to hold. As the market has continued to tighten, we have looked to trade out of debt positions where we think the total return upside is largely played out. We are still selectively finding opportunities in mezz paper, but some of the low-hanging fruit is gone and we are very focused on appropriate risk-adjusted returns and avoiding reaching for yield by taking on undue risks. We also had positive performance in our CLO equity portfolio in the quarter, albeit with a lower ROE than our mezz portfolio. Overall, in the market, the performance of CLO equity was more of a mixed bag, as tightening credit spreads on both leveraged loans on the asset side and CLO debt tranches on the liability side produced some more nuanced results. On one hand, tightening debt spreads allowed some deals to refinance or reset their debt, including extending the reinvestment periods and that drove strong returns from many CLO equity profiles in deals with better-performing portfolios and higher debt costs. On the other hand, higher prepayment speeds in the loan market led to both price declines for loans trading above par and compression in loan floating rate spreads as large volumes of loans trading at premiums to par were refinanced at par and replaced with lower-spread loans. These effects triggered mark-to-market losses in some CLO equity profiles as both their interest payments due to lower excess interest in the CLO and underlying asset values declined in tandem. We saw a similar dynamic play out in Europe, although with slower prepayment speeds, the negative impact of the prepayment of premium loans was less pronounced. 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. Early signs post-election are showing general spread tightening in the credit markets, which, accompanied with higher rates, have continued to improve demand for floating-rate CLO liabilities. In addition, continued heavy issuance in the CLO market is creating inefficiencies and relative value opportunities in both CLO debt and equity. Given our strong systems and deep experience in both primary and secondary markets, EARN is well-positioned to capitalize on these inefficiencies. With that, I turn the presentation over to Mark.

Thanks, Greg. Q3 was generally a strong quarter for spread products. Both CLO debt and Agency MBS performed well relative to benchmarks as the Fed kicked off its interest rate-cutting cycle in September. Looking at agency prepayments, we are predicting that -- we have been predicting that newly issued non-call-protected pools could have elevated prepayment rates if they get in the money, and that is exactly what happened in the third quarter when rates fell. We saw CPRs north of 60 for certain Fannie Mae pools with mid-7s WACC. Fortunately for EARN, we have largely protected our agency portfolio from that type of exposure. Looking back over the past 12 months, I am really happy that we were able to put so much money to work in the CLO market at wider spreads than current levels. In the third quarter, we stayed invested in our core holdings of Agency MBS, while also selling down that portfolio as needed to free up cash for additional CLO purchases. By quarter end, nearly 60% of our capital was allocated to CLOs. However, until we complete EARN's conversion to a RIC, I'll note that our ability to increase our CLO capital allocation much above that 60% level is limited by the requirement to stay exempt from the 1940 Act, which requires us to maintain that core portfolio of agency pools. So from here, we will stay largely invested in the current MBS portfolio until the conversion occurs, capturing the available agency NIM, and we'll only really be net-selling MBS to add CLOs to the extent we have room. Meanwhile, we've continued to make our Agency MBS portfolio incrementally more liquid. And once we obtain the requisite approvals for the conversion, we will sell down our remaining Agency MBS portfolio and complete the rotation to CLOs. We've seen long-term interest rates, including mortgage rates rise substantially since quarter end. That has had a chilling effect on origination volumes, which are also poised for the typical seasonal slowdowns. In addition, the third quarter brought the first Fed rate cut in 4 years, and we just had another cut last week. So we should soon see our first non-inverted yield curve in a while. All these factors should increase demand for MBS from banks and CMO arbitrages and create a favorable supply-demand technical for Agency MBS going into year-end. Now back to Larry.

Thanks, Mark. I'm pleased with the continued ramp-up and strong performance of the CLO strategy in EARN and how we've pivoted our CLO portfolio composition as the market opportunity has evolved. I'm particularly pleased with the active approach we've taken to enhance our returns. Our active approach not only includes the opportunistic trading that is a core tenet of our portfolio management philosophy, but it also can include driving refinancing and/or liquidation of the deals we're invested in when beneficial and achievable. All these steps have added alpha to our results. So far in the fourth quarter, we've continued to see the benefits of the portfolio rotation away from Agency MBS and towards CLOs, with CLOs returning positive returns in October even as volatility and interest rates rose. Those market movements drove agency spreads quite a bit wider in October, but they've somewhat retightened in November post-election. We very much look forward to completing our RIC conversion. I strongly believe that our strategic transformation will generate superior risk-adjusted returns for Ellington Credit shareholders. If you haven't voted yet, please do so. And as always, we are happy to answer any questions. I continue to be encouraged by how positive our conversations with investors and analysts have been following the announcement of the transformation earlier this year. And with that, we'll now open the call to questions. Operator, please go ahead.

Thank you [Operator Instructions] And we will take our first question from Crispin Love with Piper Sandler. Please go ahead

This is Brack Buzzi on for Crispin. Just kind of high level, can you speak on the credit quality and the CLL book and how you expect that to trend over time? Kind of what are your delinquency and loss expectations as well as risk-adjusted returns?

Sure. I think overall, longer term, if rates -- if we go through, for example, it's scenario-dependent, a very high rate environment for a long time that will clearly stress corporate credit in some of these companies' ability to be able to service their debt. I think, in general, you see the current trailing 12-month default rate is below 1%, historically, it may sit 2 north above that. If you take a look at COVID, this got to at the peak a little over 4%. And so that gives you a sense of some of the things that we've seen in both benign and stressed environments. We don't have a crystal ball, but I would say that you could certainly see them elevate from where we are now into that more traditional average if we stay in a higher-rate environment. And how we think about the credit quality, I think, overall, if things get tighter in the market and spreads are tighter, it allows more companies to have access to financing and perhaps you see looser documentation, which is something we look at. If things start to get more stressed, you're going to see the market be a little bit more buyer-friendly with perhaps tighter language, more covenants, and only better quality companies coming to market. And so it's a little bit of balance in terms of how we see that progressing if that answers it.

Yes. I appreciate the commentary. And then just a last question for me. How do you guys think about the dividend, especially as you rotate more capital on the CLOs and leverage continues to tick down?

Yes. Well, as we rotate I can take that. I mean yes, as we're rotating into CLOs, yes, the leverage is ticking down, but our net interest margin is going up quite quickly. So our -- and as I mentioned, our adjusted distributable earnings for the third quarter were in line, maybe even a penny higher than they were back in the fourth quarter. So we don't see, at this point, we see good support for the dividend through our adjusted distributable earnings, and we've already rotated going from basically 0% if you go back a little over a year of CLOs to now, I think, as we mentioned before, over half of our capital is -- risk capital is now in CLO. So less leverage, but greater net interest margin, and the two seem to be balancing out pretty well. So our dividend is still well supported as we continue this rotation.

Thank you. And we will take our next question from Douglas Harter with UBS. Please go ahead.

You guys were active in raising capital through the ATM during the quarter. Can you talk about kind of your continued appetite to do that?

Yes. I mean, Chris, do you want to talk about kind of our execution there in terms of was there a dilution?

Sure. Yes. During the quarter, there was $0.04 of dilution. We also expect that slight dilution will reflect in better G&A ratios going forward.

Right. So that will be -- at those levels, it's very accretive to earnings because we raised a fair amount of capital -- so I would say, look, our stock price now is not in a place where we would tap the ATM. But when we were trading much higher in the third quarter, we took advantage of it. And so it's going to be very price-dependent at this point. And if we're raising capital as we did, net very close to book, that is -- given that we're a small company and that we do have fixed expenses. I mean it's -- I think it's a no-brainer.

And we will take our next question from Jason Weaver with Jones Trading.

Maybe one for Greg, just on the visibility. I think you touched on this in your prepared remarks. Would you expect the strong issuance trend to remain in place if pricing remains supportive any sort of nuance or cadence implications over the next few quarters ahead that you can suss out?

So I think on the trend we're heading and what we see in the market right now, I this was a very large issuance year. You saw a lot of resets. I think you will continue to see that. Taking a step back, have come in, they're starting to get close to levels that were close to the post-financial crisis types. I think with demand for floating rate products, especially from maybe some traditional places that didn't wait CLOs as much. I think with what happened in 2022, you see places very focused on rate duration with perhaps where that is headed. That, in addition to the growth of the CLO ETF space at the top of the capital structure, this should keep putting demand pressure on CLO liabilities. As that happens, as deals will exit their non-call, you will see the equity investors, which control the option, continue to come to market and you may also see actual new issuance deals continue to pick up with loan creation also turning back on. That was a bit of a that's sort of what sold things down last year. It was hard for people to simply source the loans. That's why it was a lot of recycling or resetting if you will. But just talking to a lot of the banks that we work with and actually bank these transactions. Everyone seems like they have a busy pipeline ahead and getting to these levels, which we have not seen since a couple of years before COVID in that '17, '18 time frame, a lot of deals will still find it additive to come in and reset their liabilities.

And then maybe related to it exactly, assuming today, if you had certainty about the shareholder vote being supportive, to liquidate the agency portfolio seems relatively straightforward. But what does the timeline look like to move that capital into new CLO equity?

Sure. So I think we're obviously watching it carefully. And so as we see the probability increase there, we will behave accordingly in terms of how much dry powder we want to keep in terms of leaning into that a little bit. I think that overall, be realistic, the tighter the market is the more patient and selective we are about our investments. If things were dislocated, that would obviously present a real opportunity, and we could go into secondary and purchase CUSIPs pretty quickly. That said, I think with -- EARN is left in a very diversified place right now. And so we're fortunate to not be too worried about concentration risk. And so I think that if we start to see that move forward, as noted in the prepared remarks, we really see the value in new issue. And so I think we would simply be more active with where we see that opportunity. coming in a new issue and sort of setting up those types of transactions to rotate the rest of the portfolio and get going on that. And as we said, it's very, very busy. And so with all the banks working on deals and all the volumes coming out, I think we would just lean into that more.

Excellent. That's very helpful.

Yes. I mean, I think, just sorry to follow up on that. At the end of the quarter, we had $145 million of CLO investments, up from $85 million a quarter before, and that's without having the push of the shareholder vote already done and sort of ready, as you said, to liquidate the remaining pools and reinvest. So -- and our -- so that's -- in one quarter, that's $60 million, and that's without pedal to the metal. And our equity capital, as you can see, is under $200 million. So we could be invested certainly in a quarter or less equal to our total capital base, our total equity base and I think we could do it even faster. Now, of course, we want to have some leverage in the portfolio. So I think 90 days is a very reasonable target. But, of course, we're not there yet, we need the votes.

Perfect. That makes the clarity quite a bit better. I appreciate it.

Thank you. That was our final question for today. We thank you for participating in the Ellington Credit Company third quarter 2021 financial results conference call. You may now disconnect your line at this time, and have a wonderful day.