Ellington Credit projects full dividend coverage starting September while expanding CLO portfolio to $400M

Earnings Call Insights: Ellington Credit Company (EARN) Q2 2025

MANAGEMENT VIEW

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Laurence Eric Penn, CEO, opened by highlighting "an excellent quarter, which technically was the first fiscal quarter of our new fiscal year. In this, our first full quarter as a registered closed-end fund, we generated an annualized economic return of nearly 20% net and grew NAV per share." He credited performance to CLO equity and mezzanine investments, as well as the redeployment of capital after selling the legacy mortgage-related holdings in April.

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Penn stated, "We successfully completed the disposition of our remaining mortgage-related investments with minimal NAV impact and then proceeded to grow our CLO portfolio by 27% quarter-over-quarter to $317 million."

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He emphasized, "At our current rate of deployment, we project that starting with September, our monthly net investment income will cover our $0.08 monthly distribution. At that point, we'll consider ourselves to be close to fully invested."

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Christopher Max Smernoff, CFO, reported, "For calendar Q2, we reported GAAP net income of $0.27 per share and adjusted net investment income of $0.18 per share. The weighted-average GAAP yield for the quarter on our CLO portfolio was 15.6%."

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Smernoff added, "We disposed of all of our remaining mortgage positions shortly after our RIC conversion, which was -- which had an effective date of April 1. The net impact of the dispositions on our NAV was only about $0.01 per share."

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Gregory Borenstein, Portfolio Manager, explained, "We have been focused lately on increasing our portfolio's relative concentration to CLO mezz. We believe that increasing exposure to these up in credit positions, along with adding credit hedges, helps to protect the portfolio and serve as nice complements to our CLO equity positions."

OUTLOOK

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Penn stated, "At our current rate of deployment, we project that starting with September, our monthly net investment income will cover our $0.08 monthly distribution."

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Penn said, "As of now, our CLO portfolio stands at around $360 million, up from $320 million coming into Q3. Looking ahead, we see multiple ways to continue to drive performance and expand net investment income. Deploying our remaining dry powder is one way."

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He added, "We expect to increase our CLO portfolio by another $40 million to $400 million or so."

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Penn also noted plans to issue long-term unsecured debt later this year, stating, "The additional leverage supplied by long-term unsecured debt should be accretive to both GAAP earnings and net investment income."

FINANCIAL RESULTS

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Smernoff reported, "For calendar Q2, we reported GAAP net income of $0.27 per share and adjusted net investment income of $0.18 per share."

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The weighted-average GAAP yield for the quarter on the CLO portfolio was 15.6%.

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Smernoff detailed that "CLO equity comprised 53% of our total CLO holdings down from 58% and European CLO investments constituted 14% of our total CLO holdings, roughly unchanged from the prior quarter."

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The CLO portfolio grew by 27% to $317 million, with $91 million in new purchases and $16 million in sales.

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NAV was $6.12 per share at quarter end, and cash and cash equivalents totaled $36.6 million.

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NAV-based total return for the quarter was 19.7% annualized.

Q&A

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Douglas Michael Harter, UBS: "You just talked a little bit about the -- talk about the dynamic where -- why AAA spreads haven't fully retraced while the underlying loan spreads have?" Gregory Borenstein responded, "I think that it is simply, AAAs are not receiving relatively maybe the same demand that they were earlier in the year... it's just a little bit less demand for a variety of reasons."

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Harter: "Assuming that dynamic doesn't change, would you expect your allocation to be kind of similar to what it was in the June quarter, more towards debt and equity?" Borenstein responded, "If the [ ARB ] continues to stay challenged to this point... it's hard to see why we would allocate more to it. So I would tend to agree with that."

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Jason Price Weaver, JonesTrading: "Would you expect that trend [in muted issuance] to reverse into calendar year-end?" Borenstein said, "It's really hard to say... I think that the market has seen much more resets and refis... But if you see AAAs come in, assets move out, it's just hard to say exactly how those components will change."

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Weaver: "Any sort of perception of an increased risk to equity tranches?" Penn replied, "Tariffs are going to create winners and losers. There's uncertainty around different sectors around different companies. And so I think that we see equity as having more risk and exposure to tariffs being that they're a first loss tranche."

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Weaver: "Do you have an updated quarter-to-date NAV estimate?" Penn stated, "We posted July 31 last night, a range around... $6 to plus or minus $0.03." Borenstein added, "$6.16."

SENTIMENT ANALYSIS

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Analysts expressed a neutral to slightly cautious tone, focusing on technical market dynamics, issuance trends, and risk allocation questions.

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Management maintained a confident and optimistic tone in prepared remarks, with Penn stating, "I am confident that our new structure and strategy will support earnings growth and help us capitalize on the compelling opportunities we continue to see in the CLO market." In the Q&A, management remained measured and factual, providing detailed explanations without defensive language.

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Compared to the previous quarter, management's tone shifted from cautious optimism about portfolio ramp-up and redeployment to increased confidence about dividend coverage and portfolio growth. Analysts maintained a consistent focus on risk and market conditions.

QUARTER-OVER-QUARTER COMPARISON

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Guidance shifted from expectations of resuming dividend coverage in Q3 to a specific projection of full coverage beginning in September.

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Strategic focus moved from initial asset redeployment post conversion to active portfolio expansion, targeting $400 million in CLO assets and increased mezzanine allocation.

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Analysts continued to focus on deployment pace, risk management, and market technicals, but the nature of questions shifted toward the sustainability of returns and evolving risk in equity tranches.

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Key metrics shifted from a net loss of ($0.23) per share and NAV per share of $6.08 last quarter to GAAP net income of $0.27 per share and NAV per share of $6.12 in Q2.

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Management tone was more confident this quarter, emphasizing growth, while last quarter it was focused on navigating volatility and the transition to a closed-end fund.

RISKS AND CONCERNS

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Management cited ongoing macroeconomic uncertainty, including tariff impacts and market volatility, as ongoing risks.

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Borenstein explained, "Increasing exposure to these up in credit positions, along with adding credit hedges, helps to protect the portfolio."

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Penn noted, "Tariffs are going to create winners and losers. There's uncertainty around different sectors around different companies... we see equity as having more risk and exposure to tariffs."

FINAL TAKEAWAY

Ellington Credit Company management emphasized that strong Q2 results, driven by CLO portfolio growth and active capital redeployment, have positioned the company to fully cover its dividend starting in September. With a diversified and expanding portfolio, a focus on risk-adjusted returns, and plans to increase leverage through unsecured debt, management is confident in the company’s ability to capitalize on opportunities in the CLO market while maintaining a high level of liquidity and risk discipline.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/earn/earnings/transcripts]

MORE ON ELLINGTON CREDIT COMPANY

* Ellington Credit Company (EARN) Q2 2025 Earnings Call Transcript [https://seekingalpha.com/article/4815345-ellington-credit-company-earn-q2-2025-earnings-call-transcript]
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* Historical earnings data for Ellington Credit Company [https://seekingalpha.com/symbol/EARN/earnings]