Ellington Credit Company - Q1 2024

Transcript

Operator (participant)

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

Alaael-Deen Shilleh (Associate General Counsel)

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 II, 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. 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.

Larry Penn (CEO)

Thanks, Alaael-Deen, 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 our 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, 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 RMBS, which had been our primary targeted asset class ever since our IPO in 2013. To effectuate this transition, we have revoked our REIT 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. 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 EARN's investment strategy. To-date, EARN's 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 leverage 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 will. Sorry, we believe that we can add significantly to EARN's total returns and reduce EARN's 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 a 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 REIT election for 2024. Later this year, once we obtain shareholder approval of certain matters and convert to a closed-end fund, we will elect to be treated as a regulated investment company, a 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/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 REIT 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/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 carryforwards, 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/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 this 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 Leveraged Loan Index rose for the sixth straight quarter. 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 remained 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 EARN's holdings of discount dollar-priced 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 seven for a summary of EARN's 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% of our investment portfolio income, despite representing less than 20% of average invested capital during the quarter. That translated to an annualized return on capital on our CLO portfolio north of 30% 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 $0.27 per share for the quarter again comfortably exceeded our dividends of $0.24. 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 2 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?

Chris Smernoff (CFO)

Thank you, Larry, and good morning, everyone. Please turn to slide eight for a summary of Ellington Credit's first quarter financial results. For the quarter ended March 31st, we reported net income of $0.20 per share and adjusted distributable earnings of $0.27 per share. ADE excludes the catch-up amortization adjustment, which was -$884,000 in the first quarter. On slide eight, you can see that our overall net interest margin expanded to 3.03% from 2.19% quarter-over-quarter, driven by the growth of CLOs, while our ADE remained at $0.27 per share. NIMs on both the Agency and credit portfolios increased sequentially, driven by higher average asset yields for-- and for Agency, a lower cost of funds.

In the first 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 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. On slide nine, you can see the attribution of income by strategy. The CLO strategy generated $0.12 per share of portfolio income in the quarter, driven by strong interest income and net realized and unrealized gains on our seasoned CLO mezzanine investments. Because we mostly own these mezzanine investments at discounts to par, they are benefiting from elevated loan prepayments. The positive net interest income from the CLO strategy also caused EARN's overall net interest income to be positive.

Our Agency strategy generated portfolio income of $0.10 per share for the first quarter. Despite lower interest rate volatility during the quarter, Agency MBS lagged the broader rally in credit as market consensus for the timing of the first Federal Reserve cut was pushed back. This drove interest rates higher across the yield curve and pressured yield spreads on Agency MBS, particularly in February, and particularly for lower coupon MBS, where much of our portfolio is concentrated. While Agency MBS yield spreads did recover meaningfully in March, driven by lower volatility and capital inflows, overall for the quarter, Agency MBS generated a modestly negative excess return to Treasuries. Despite the negative excess return, EARN's Agency portfolio was profitable for the quarter, as net gains on interest rate hedges exceeded net losses on our pools and negative net interest income.

Finally, our Non-Agency portfolio performed well during the quarter, generating $0.06 per share, driven by net interest income and mark-to-market gains attributable to spread tightening. As Larry mentioned, in connection with our strategic transformation, we've revoked our REIT election effective January 1st of this year, and we are currently operating as a taxable C-Corp. We came into the year with substantial net operating loss carryforwards, and in the first quarter, we used a portion of those to offset the majority of our federal taxable income, as we intend to continue doing so for so long as we operate as a C-Corp. For the first quarter, we accrued an income tax expense of $300,000, which reflects the net tax liability accrued on our taxable income after the NOL offset.

Due to federal and state restrictions on NOL utilization, we cannot offset 100% of our taxable income. Our utilization of NOLs reduced our effective tax rate from what would have been around 28.5% to 7.1% for the quarter. Please note that we did not book a deferred tax asset on our balance sheet related to the NOLs, so our recorded book value remains fully tangible. Please turn now to our balance sheet on slide 10. Book value per share was $7.21 at March 31st, compared to $7.32 per share at year-end. Including the $0.24 per share of dividends in the quarter, our economic return for the quarter was 1.8%.

We ended the quarter with $79.5 million in cash and unencumbered assets, which represented approximately 56% of total equity. Next, please turn to slide 11 for a summary of our portfolio holdings. During the first quarter, our CLO portfolio increased to $45 million as of March 31st, compared to $17 million as of year-end. Over the same period, the size of our Agency MBS holdings increased slightly to $739 million as of March 31st, compared to $728 million as of December 31st, and our aggregate holdings of interest-only securities and Non-Agency RMBS decreased modestly. The allocation of our deployed equity to CLOs increased to 25% at March 31st from 11% at year-end, while the allocation to mortgage-related assets declined to 75% from 89%.

Including activity through May 13th, our CLO portfolio currently stands at over $60 million, while our Agency MBS holdings have declined to $621 million. Our debt-to-equity ratio, adjusted for unsettled trades, decreased to 4.9x as of March 31st, as compared to 5.3x at year-end. The decline was driven by less leverage on our CLO investments as compared to Agency RMBS, as well as higher shareholders' equity. Similarly, our net mortgage assets to equity ratio decreased over the same period to 5.4x from 5.8x, driven also by a net short TBA position at March 31st on a notional basis, compared to a net long notional TBA position at year-end, partially offset by a larger Agency RMBS portfolio. Finally, on slide 13, you can see details of our interest rate hedging portfolio.

During the quarter, we continued to hedge interest rate risk primarily through the use of interest rate swaps. We ended the quarter with a small net short TBA position, both on a notional basis and as measured by 10-year equivalents. The overall size of our interest rate hedging portfolio declined quarter-over-quarter as the share of our portfolio in CLOs increased. On slide 15, you can see that nearly all the loans underlying our CLO portfolio are floating rate, and as such, have much lower interest rate duration. I will now turn the presentation over to Mark.

Mark Tecotzky (Co-Chief Investment Officer)

Thanks, Chris. This was a solid quarter for EARN. It showed the benefits of the pivot we started implementing last September, adding significant corporate CLO exposure in place of a portion of our levered Agency MBS portfolio. The market backdrop of lower volatility and relatively stable yields led to outperformance in most credit sectors of structured products. Markets transitioned this quarter from wondering about how high the Fed would hike rates to wondering about when the first cut would come. That change in Fed expectations was very significant for risk appetite. Corporate credit rallied pretty much across the board, and for Agency, it meant more bank participation, lower delta hedging costs, and a favorable demand picture as inflows from fixed income funds were strong. That said, Agency MBS actually lagged other spread products, basically with spreads treading water versus hedging instruments.

But EARN was well positioned to capture ADE against this market backdrop. We were able to monetize spread income with limited drag from negative convexity. For CLOs, we've seen strong prepayment activity in the loans underlying our positions. Corporate borrowers took advantage of benign market conditions to refinance debt, leading to welcome paydowns in excess of projections on our discount dollar price mezz portfolio. This refinancing activity has also improved loan market fundamentals, as many corporate borrowers have been able to lower their debt costs and extend their debt maturities. Many CLO equity tranches are benefiting in a different way from the tightening in spread in debt spreads, with many CLO deals now able to refinance their liability costs lower. By lowering the coupons on the CLO debt tranches, more excess spread is available to flow to the CLO equity tranche.

Solid fundamentals in the loan market, coupled with refi activity, have reduced tail risk in the CLO market and reduced the percentage of distressed loans in most deals. This dynamic drove the outperformance of our CLOs relative to similarly rated corporate bonds for the quarter. Security selection also contributed to our outperformance. We systematically pour over deal documentation to analyze deal level tests and triggers that not only protect our investments, but also give us upside. In addition, we work closely with our credit team to assess the credit quality of specific underlying loans to avoid future stresses and uncover potential upside. That discipline, together with the market backdrop of strong credit performance, helped drive our outsized returns. We also had a nice contribution from our Non-Agency RMBS holdings.

Home price appreciation continues to surprise to the upside, and the net supply of housing is quite low relative to demand. While we transition our portfolio from being Agency-focused to CLO-focused, we are managing the portfolio with a few goals in mind. First, this is a favorable environment for spread product like Agency MBS and CLOs, so we want to stay relatively fully invested. The percentage of capital allocated between the two sectors will shift over time, but overall, we are aiming to stay fully invested while maintaining our typical liquidity buffers. Second, we want to keep our Agency portfolio liquid, and as our transition progresses, we will need to concentrate that Agency portfolio a bit more in whole pools in order to continue to maintain our 1940 Act exemption prior to the RIC conversion. That process has been underway and is ongoing.

We had about 20% turnover in our Agency portfolio in Q1 and additional activity post-quarter end. Our disciplined approach to pool selection has been helpful in minimizing earnings drag during this transition. To summarize, we are keeping up ADE, but the mix between pools and CLOs will continue to shift in favor of CLOs. Looking ahead, I am pleased with our returns for the quarter and the progress we have made with the portfolio transition. With the current market dynamics, we see upside in our current portfolio. Should Fed cuts materialize consistent with market current expectations, that could be a catalyst for additional outperformance. Now back to Larry.

Larry Penn (CEO)

Thanks, Mark. CLO performance was definitely the bright spot in the first quarter for EARN, as it's been since EARN began investing in this sector last September. In hindsight, September was clearly an excellent entry point, especially given the yield spread tightening we've seen in corporate credit since then. Despite the recent rally, I believe that the investment opportunity will continue to be attractive over the long term. The CLO market has demonstrated its ability to generate attractive returns over market cycles and over a long-term horizon. As just one data point, the benchmark leveraged loan index has generated positive results in 24 years out of its 27-year performance history. Moreover, many portions of the CLO market remain highly inefficient, and so we believe that we can generate significant alpha above and beyond the already attractive benchmark index.

Even after the yield spread tightening that boosted our returns in the first quarter, we still see returns on equity for our recent CLO investments, assuming the modest amount of leverage we plan to employ as a closed-end fund in the high teens and low 20s. Meanwhile, the Agency MBS sector continues to be volatile, especially over renewed concerns about inflation and a more hawkish Fed, which in April, resulted in Treasury yield volatility picking up and Agency spreads widening yet again. Agency MBS underperformed our swap and Treasury hedges in April, and the volatility also caused us to incur delta hedging costs. Fortunately, much of this Agency MBS underperformance has reversed itself in May.

But this is just another example of the volatility we've seen in Agency MBS over the past few years, that we should be much less exposed to after our conversion to a CLO-focused closed-end fund is complete. Our CLO portfolio has continued to perform well so far in the second quarter, and overall, we estimate that EARN's economic return so far in the second quarter is slightly positive. Since quarter end, we also have continued to make great progress transitioning the portfolio. As Chris mentioned, our Agency portfolio is now down to about $621 million, and our CLO portfolio is now over $60 million. This continued shift has taken our debt-to-equity ratio down further to about 4.4 to 1, excluding repo on Treasuries.

Keep in mind that during this interim period, before we qualify as a closed-end fund, we need to maintain a core portfolio of Agency whole pools for 1940 Act purposes. I'm extremely excited about this new chapter for EARN. Ellington has a long-standing and successful track record of investing in CLOs, and I strongly believe that our transformation will generate high risk-adjusted returns with less volatility for Ellington Credit shareholders. Once our conversion to a closed-end fund RIC is completed, our new structure should also enable us to access a more favorable cost of capital to support future growth. I believe that these factors will help drive adjusted distributable earnings and dividend growth from here. With that, we'll now open the call to questions. Operator, please go ahead.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. We will pause for a moment to allow questions to queue. We will take our first question from Crispin Love with Piper Sandler.

Crispin Love (Director in Equity Research)

Thanks. Good morning, everyone. First, just on the strategic transformation you announced, it's a meaningful shift from the Agency strategy that you've had historically. So just with this change, would you expect a meaningful turnover in your current investor base? And can you just speak to what conversations have been like with current investors regarding the shift?

Larry Penn (CEO)

Yeah, sure. I mean, so far we've had a few conversations. They've been positive, and I think it's a pretty similar investor base, right? If you look, if you look at EARN's current investor base, just the, you know, the institutional investor base, is, it's fairly, small at this point, you know, in some passive funds. It's a mostly retail investor base, which is the same for the peer group, of, you know, the CLO-focused closed-end funds. So I do think we, you know, we are, going to get some, I think, even incoming calls from some institutional, investors to, you know, to see, you know, to potentially establish positions, you know, in the stock. But, I, I do think that overall, it's gonna be a pretty similar retail-oriented investor base.

Crispin Love (Director in Equity Research)

Great. Thanks, Larry, that's helpful. And then can you speak to the credit quality in the CLO book and how you'd expect it to trend over time, as well as expected risk-adjusted returns? Looking at your presentation, the book looks to be very diversified, no major concentrations. So just curious if there are specific industries you're most excited about, as you build out the portfolio over time.

Larry Penn (CEO)

Well, again, yeah, each CLO is, you know, generally diversified across industries. Mark, do you want to handle that? Or if-

Mark Tecotzky (Co-Chief Investment Officer)

Sure. Yeah, I'm actually going to introduce a new voice to this earnings call, that of Greg Borenstein, who heads the CLO effort at Ellington.

Greg Borenstein (Head of CLO Investments)

Well, nice to meet everyone. So to take this question, I think that the portfolio will adapt as the market and the opportunity adapts. I think over the long run, you'll generally see a mix of mezz and equity in the portfolio. You can see generally triple B and below is where we're going to be. I think that in September, when we started to ramp this, we found that mezz was at an extreme discount. Also with the rates dynamic where, you know, you have an elevated SOFR versus what we've traditionally had over the last 10 years, we had more of a weighting towards mezz versus the equity book. I think that the way we're seeing things trend now, with the exception of some credit sensitive profiles, much of the CLO mezz market has rallied closer to par.

We won't see the same total return coming from there, even though the credit quality continues to improve. I think when we think about this portfolio and the dividend we're looking to, you know, pay as well as, you know, managing the risk, we'll see a slight shift into equity if this trend, you know, continues to keep up. And we're seeing that equity liability spreads are continuing to, you know, keep tightening in. The CLO market with its refis and resets and issuance is continuing to bear this out. And overall, I think that you'll see diversification continue to improve as this grows. I think right now, as we're looking to ramp, we're mindful of liquidity. We don't want this to be filled with odd lots if we look to trade and rotate as the opportunity changes.

So as it continues to scale and grow, I think we will, over time, continue to see that more positions will enter the book. But I think as we ramp, you know, you'll see us, you know, maybe with slightly larger position sizes, though even now, I think it's still pretty diversified.

Crispin Love (Director in Equity Research)

Great. Thank you, Greg, and thank you all for taking my questions.

Larry Penn (CEO)

Thanks, Crispin.

Operator (participant)

Thank you. We will take our next question from Doug Harter with UBS.

Doug Harter (Equity Research Analyst)

Thanks. Can you just talk about the return profile? How much of it's kind of coming from current coupon versus discount accretion and you know, how that differs between the mezz pieces and the equity pieces?

Larry Penn (CEO)

Well, as I mentioned, Doug, in the first quarter, you know, we had a lot from spread tightening. You know, in terms of how much is from coupon versus accretion, I don't know if we have that at our fingertips. But, you know, as, you know... I think you-- first of all, I think you're probably referring more to mezzanine debt tranches as opposed to equity tranches, right? With equity, you know, it's generally coming from excess interest spread, right, in the deals themselves. So, now we do-- you know, we can, you know, calculate obviously a projected yield on those as we can on the mezzanine, but implicitly, you know, there's gonna be some, you know, some amortization calculation there.

The mezz that we have currently, does Greg, do you have sort of the average dollar price on those? Greg, why don't you field this?

Greg Borenstein (Head of CLO Investments)

Hi. So I don't have the portfolio in front of me, but one thing I would note is, in general, over the period of time we've talked about since we've been investing in CLOs, you've seen more price appreciation from the mezz than I think you generally would. I think that you've seen most mezzanine pieces move up, you know, certainly into the 90s dollar price range, whereas maybe we were sourcing more in the beginning in the 80s, but in some cases, some very stressed pieces, you know, beneath that. And so over this period of time, in particular, more price appreciation than in, I think, you know, a more normal market.

Which is why, on the margin, you know, we'll see mezz probably start to come down a little bit versus equity, you know, as that price appreciation and total return has been captured.

Larry Penn (CEO)

I think actually, I was gonna say, if you look on the, on the earnings deck, there's a portfolio table on slide 11, right, of the deck. And you can see that the average dollar price of our CLO notes is currently, well, as of March 31st, I should say, was, you know, $86 handle. So I think that can give you, you know, some indication of, you know... So, so I, I would say, you know, Greg, correct me if I'm wrong, but that probably means that, you know, a good couple hundred basis points of, of the yield is, you know, the projected yield on those notes is, is gonna be due to, you know, accretion of discount over time as opposed to coupon.

So it's not, it's not, certainly not most of the return, if that's sort of what you're, what you're asking about.

Doug Harter (Equity Research Analyst)

Yeah, I guess just trying to get comfort in, you know, I guess, the predictability of the cash flow and the, you know, as you go forward and as this grows as a percentage to kind of support the monthly dividends.

Larry Penn (CEO)

Yeah. Yeah, Doug, Greg, what's your typical on the notes, what's the typical, you know, spread on these floating rate notes, would you say, in the portfolio? You know, roughly, very roughly, spread over SOFR.

Greg Borenstein (Head of CLO Investments)

800 to 1,000.

Mark Tecotzky (Co-Chief Investment Officer)

Yeah, Larry, it's Mark. Those are like 800-1,000. Yeah, Doug, one way to think about it is the mezz comes in a discount with a very big coupon. So kind of analogous to discount Agency MBS. This was a quarter where you had sort of outsized prepayments because a lot of loans refinanced. But that, capturing that outsized prepayments, it was definitely part of the security selection process when we started ramping the portfolio. We were looking for the mezz pieces where we thought you'd see, a lot of loan refinancing. And then when you get to the equity, and Greg will get into it on future calls, there's different flavors of it.

There's some equity that is sort of almost like premium MBS, where you're getting an above market coupon, but it's paying down a little bit, and then there's some equity that's almost more like IO.

Larry Penn (CEO)

Yeah, and if you're, if you're SOFR plus 800, even to pick the low end of that range on mezzanine, just with a very small bit of leverage, you're covering your dividend with coupon right there.

Doug Harter (Equity Research Analyst)

Got it. It's very helpful. Thank you.

Operator (participant)

Thank you. We will take our next question from Matthew Erdner with JonesTrading.

Matthew Erdner (VP in Equity Research)

Hey, guys. Thanks for taking the question. Could you expand a little more on the pace of the transition out of the Agency and into the CLOs? I think you mentioned 621 currently in MBS, and then 660 in the CLO.

Larry Penn (CEO)

Yeah, look, I think, if you say how much we've been kind of adding, it's really CLO is driving it, right? We're selling MBS, just as we buy CLO, not the other way around, right? The CLO is what's driving the pace of the transition. So, you know, if, if you look, $20 million a month is kind of what we've been ramping recently. I, you know, I think that's, you know, quite manageable. I don't... You know, I, I, I think, sort of the low end of our expectations where we plan to be. So, you know, if we're at $60 million as of now, and, you know, two more months from today, so, you know, that'll put us, let's just say in July, where we're close to or above $100 million.

You know, that's kind of, I think, what I mentioned in the, in the prepared remarks as where we plan to get to. And then really at almost any point after that, quite quickly after that, we would be, you know, able to complete the transition. So, you know, if I had to guess, I would say $120 million, give or take. And of course, you know, we're, as we mentioned, we're gonna, we will have a shareholder vote later this year, which we will need to, you know, to sort of authorize the transformation, the conversion to a Closed-End Fund.

Matthew Erdner (VP in Equity Research)

Gotcha, that's helpful. And then, you know, with this conversion, should we expect, you know, any one-time expenses or stuff like that to happen?

Larry Penn (CEO)

Yeah, but I think they'll, you know, they're gonna be quite modest. I mean, I think we've mentioned that to liquidate, you know, sufficient agencies is really gonna be quite modest, so, and has been not even noticeable, I think, so far. So, but yeah, we'll have, of course, some legal and professional fees as well, but nothing, you know, nothing extraordinary. I mean, I know there have been some other transitions like this, where it's been quite costly, especially to liquidate the portfolio, but it's just not gonna be the case here. So, so I think, yeah, we I--

It's not something that we've I think a number that we've put out so far, but it's really, you know, we'll put out a proxy, you know, a lot of that expense has, you know, been incurred in the second quarter. It's not been anything, you know, to I think be concerned about. So I think these are gonna be, you know, quite modest and will kind of be almost, you know, blend in with the rest of the returns on the portfolio.

Matthew Erdner (VP in Equity Research)

Yeah, that's great. Thank you, guys.

Operator (participant)

Thank you. That was our final question for today. We thank you for participating in the Ellington Credit Company first quarter 2024 financial results conference call. You may disconnect your line at this time and have a wonderful day.