Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company 2024 First 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. If you would like to ask a question at that time, please press star 1 on your telephone keypad. At any time, 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 zero. It is now my pleasure to turn the floor over to Aladin Chalet, 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 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 Takotsky, our Co-Chief Investment Officer, and Chris Murnoff, our Chief Financial Officer. As described in our earnings press release, our first quarter First quarter earnings conference call presentation is available on our website, which we've changed to ellingtoncredit.com. Our comments this morning will track to the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Aladin, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company. Please turn to slide three of the presentation. I'll begin by reviewing EARN's strategic transformation, which we announced back on April 1st. In late March, our board approved a strategic transformation of EARN's investment strategy to focus on corporate CLOs, and more specifically, CLO mezzanine debt and CLO equity. These are asset classes that we believe can provide greater risk-adjusted return potential for our shareholders over the long term, as compared to agency RMVs, which had been our primary targeted asset class ever since our IPO in 2013. To effectuate this transaction, we have revoked our re-election, and later this year, we plan to convert to a closed-end fund for SEC purposes and a regulated investment company, or RIC, for tax purposes. As a reflection of these fundamental changes, we have changed our company's name to Ellington Credit Company, and we have also changed the name of our website, from earnreit.com to ellingtoncredit.com. We will continue to be listed on the New York Stock Exchange under our ticker symbol, E-A-R-N, or EARN, and we have maintained our $0.08 per share monthly dividend. By shifting to a CLO-focused strategy, we are leveraging Ellington's longstanding and successful track record of investing in secondary CLOs, which spans more than a decade across a wide variety of market conditions. Looking back, Our transformation actually began in September of last year, as we saw a good entry point in the CLO market and first began rotating a portion of EARN's capital into CLOs. In late March, after seeing the CLO strategy performing at or above expectations, and after working out the details for the transformation, the EARN board approved the transformation. We plan to accomplish this over the coming months by selling our remaining agency pools, buying more CLOs, and obtaining shareholder approval of certain matters that would allow us to convert to a closed-end fund. Fortunately, since we've concentrated our agency investments in liquid sectors, the cost of liquidating agency pools to free up capital for CLOs has been very modest, and we expect that to continue to be the case. Then, after our transformation is complete, CLOs will become the sole focus of Earned Investment Strategy. To date, Earned CLO investments have generated excellent returns. and we've now built a CLO portfolio of over $60 million. Please turn now to slide four, where we summarize the anticipated benefits of the transformation to shareholders. I am confident that the strong earnings power of CLOs, combined with our particular focus on relative value and active trading, will drive attractive returns for our shareholders, but with less volatility. CLO mezzanine and equity investments typically have high current yields. which support high net interest margins and strong adjusted distributable earnings. These investments also require significantly less debt financing compared to the typical leveraged agency pool strategy. Furthermore, because CLOs are primarily backed by floating rate loans, they also require significantly less interest rate hedging than agency pools. Finally, despite significant growth of the CLO market in recent years, many parts of the market remain highly inefficient. particularly the secondary markets for CLO mezzanine debt and equity, where our investment strategy is focused. We expect that our differentiated approach to CLO investing will enable Earn to capitalize on these inefficiencies. No two CLOs are alike, which, given Ellington's extensive CLO expertise, should create lots of relative value opportunities and trading opportunities for Earn to capture. Some additional opportunities will come from credit hedging, which I believe is another differentiator of Ellington's approach to CLO investing. We are willing to hedge credit when we believe it makes sense. There are many liquid instruments that are available to gain or reduce exposure to overall corporate credit. And CLO investments can often get somewhat disconnected from those other instruments. Over market cycles, we believe that our new focus, sorry, we believe that we can add significantly to Earns total returns and reduce earns volatility by selectively and opportunistically hedging from time to time. As a result of all these factors, we anticipate that our new focus will provide more stable book value and earnings profile for earn going forward. Accordingly, we believe that this new focus will also provide the ability for earn to grow book value per share over time with high risk adjusted returns. This contrasts with the performance in recent years of most agency pass-through strategies, which have experienced book value per share erosion due to negative interest rate convexity. As I mentioned earlier, in order to effectuate the tax component of our strategic transformation, we have revoked our re-election for 2024. Later this year, once you obtain shareholder approval of certain matters and convert to a closed-end fund, we will elect to be treated as a regulated investment company, or RIC, for tax purposes. Like REITs, RICs are also generally taxed as pass-through entities, thereby avoiding corporate-level tax. We are excited about the closed-end fund slash RIC structure, which we also believe will enhance our access to the capital markets and open more channels for growth. Perhaps most importantly, we also see it as an opportunity to expand EARN's valuation multiple, given the premiums to net asset value at which CLO-focused closed-end funds are trading today and have traded historically. Please turn now to slide five, where you can see the anticipated timeline for the transformation. With our read election revoked, we are currently situated in the second column on this slide, operating as a taxable C-Corp. During this period, while we prepare for our closed-end fund slash RIC conversion, we expect to grow the CLO portfolio above $100 million, while maintaining a core portfolio of liquid agency MBS to maintain exemption from the 1940 Act. Furthermore, EARN came into the year with significant net operating loss tax carry-forwards, and we plan to take advantage of those to offset the majority of our U.S. federal taxable income until our conversion to a closed-end fund slash RIC is complete. We remain on track to complete our conversion later this year, perhaps as soon as the third quarter. You can find additional information about the strategic transformation in the presentation section of the Ellington Credit website, which as a reminder is now located at www.ellingtoncredit.com. And please don't hesitate to reach out to us with any questions. Please turn now to slide six of the presentation for the market backdrop for the first quarter. In the first quarter, corporate credit, including CLOs, outperformed agency MBS. Toward the bottom of the slide, You can see that, first, corporate credit spreads tightened in high yield and investment grade. Second, prices on the Morningstar LSTA Leverage Loan Index rose for the sixth straight quarter. And third, CLO mezzanine spreads were tighter across the board, with the most pronounced tightening on single B-rated tranches. This strength in corporate credit reflected the continuation of trends we saw in the final months of 2023, driven by strong capital inflows, strengthening fundamentals, and declining interest rate volatility. Investor demand for leveraged loans remain particularly strong, with significant new issue CLO volume and rapid repayments of existing leveraged loans driving much of the demand. This dynamic has especially benefited Earns Holdings of discount dollar price CLO mezzanine tranches, where we've concentrated our CLO investments so far. Meanwhile, agency MBS lagged in the quarter. despite the lower interest rate volatility, as market consensus shifted to a higher-for-longer expectation for interest rates. You can see in the middle of the slide that option-adjusted spreads on agency MBS widened across the coupon stack. Please turn now to slide 7 for a summary of earns results for the first quarter. In the middle of the slide, you can see that strong performance from our CLO portfolio led the way. with CLOs contributing more than 40 percent of our investment portfolio income, despite representing less than 20 percent of average invested capital during the quarter. That translated to an annualized return on capital on our CLO portfolio north of 30 percent for the quarter, and we haven't even started employing significant leverage in that portfolio. That said, given that almost half of our CLO investment income was attributable to spread tightening, I don't want to give the impression that we can regularly expect that kind of quarterly performance. Okay, moving down the slide, you can see that our small non-agency portfolio also contributed solidly to earnings, while agency finished positive as well. Our adjusted distributable earnings of 27 cents per share for the quarter, again, comfortably exceeded our dividends of 24 cents. Elsewhere on slide seven, you can also see the impact of our larger CLO portfolio on our other operating metrics. Driven by the low leverage on our CLOs, EARN's overall debt-to-equity ratio declined to 4.8 to 1 at quarter end, down from 5.3 to 1 at year end, and a full two turns of leverage lower than it was on September 30th, when we first started ramping up CLOs. In addition, EARN's overall net interest margin climbed above 3% for the first quarter. Not surprisingly, this was driven by the higher NIMs in our CLO portfolio. You can see here that the NIM on our credit investments, which are now mainly CLOs, climbed above 9.5%. And as we add more CLOs, the credit portfolio is representing a larger and larger percentage of our overall portfolio. Of course, higher NIMs require less leverage to drive strong ADE. Finally, I'll add that we were also able to reduce the size of our interest rate hedging portfolio in the first quarter given the lower interest rate duration of CLOs. And with that, I'll now pass it over to Chris to review our financial results for the first quarter in more detail. Chris?