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Ellington Credit Co (EARN)·Q1 2026 Earnings Summary
Executive Summary
- First fiscal quarter as a closed-end fund delivered strong results: GAAP net income was $10.2M ($0.27 per share), Adjusted Net Investment Income (ANII) was $6.6M ($0.18 per share), and NAV/share increased to $6.12; CLO portfolio ramped 27% sequentially to $316.9M and the quarter’s NAV-based total return was 19.7% annualized .
- Against S&P Global consensus, Primary EPS (which tracks ANII/share) missed (actual $0.18 vs $0.23 est*), while “Revenue” (proxied by total investment income) slightly beat ($11.67M actual vs $11.60M est*) .
- Management reiterated the pivot to a balanced CLO equity/mezz strategy, emphasized active trading, and stated “at our current rate of deployment, we project that, starting with September, NII will cover the monthly distribution” ($0.08) .
- Next quarter (Q2 FY26) validated the trajectory: ANII/share rose to $0.23 with full dividend coverage in September; NAV/share was $5.99 as of 9/30/25; CLO portfolio further grew to $379.6M .
- Potential stock catalysts: accelerating NII from portfolio deployment and mix shift toward mezz tranches, sustained high GAAP yields (~15–16%), and possible unsecured debt issuance later in 2025 to add accretive leverage .
What Went Well and What Went Wrong
What Went Well
- Rapid redeployment and performance: “we…completed the disposition of our legacy mortgage-related investments with minimal impact on NAV, and aggressively scaled our CLO portfolio by another 27%…Our excellent results…were driven by strong performance across both CLO equity and mezzanine debt, as well as timely and opportunistic deployment” .
- Active trading added alpha: performance “was enhanced by active trading,” including “deal calls of two mezzanine positions owned at discounts to par, and a beneficial reset of a CLO equity position” .
- Strong total return and yield backdrop: 19.7% annualized NAV total return; weighted average GAAP yield of 15.6% on the CLO portfolio in the quarter .
What Went Wrong
- NII lagged during the rotation: “our net investment income lagged during the quarter as a result of the capital rotation,” with NII at $6.5M ($0.17/share) while deployment ramped .
- Europe and hedges modestly detracted: “small net losses on our European CLO equity and on credit hedges” offset part of gains .
- Technical pressure in CLO equity arb: management noted AAA CLO spreads hadn’t fully retraced even as loans rallied, pressuring new-issue equity arbitrage; this favored a tilt toward mezz tranches over new equity .
Financial Results
Income Statement Comparison (post-conversion, comparable quarters)
Selected KPIs and Balance Sheet
Notes: Q4 2025 reflects pre-/at-conversion transition; comparability is limited versus post-conversion periods.
Segment Breakdown (Investment Income and P&L Contributions)
Guidance Changes
Earnings Call Themes & Trends
Management Commentary
- “We…completed the disposition of our legacy mortgage-related investments with minimal impact on NAV, and aggressively scaled our CLO portfolio by another 27%…Our excellent results…were driven by strong performance across both CLO equity and mezzanine debt, as well as timely and opportunistic deployment” — Laurence Penn, CEO .
- “While our net investment income lagged during the quarter as a result of the capital rotation, our current ample dry powder for deployment should boost NII in the coming months. At our current rate of deployment, we project that, starting with September, NII will cover the monthly distribution.” — Laurence Penn, CEO .
- “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%.” — Christopher Smernoff, CFO .
- “At June 30, our NAV was $6.12 per share and cash and cash equivalents totaled $36.6 million. Our NAV-based total return for the quarter was 19.7% annualized.” — Christopher Smernoff, CFO .
- “Calendar Q3 is off to a strong start…our CLO portfolio stands at around $360,000,000…Another way [to drive earnings] is by issuing long term unsecured debt, which we hope to do later this year.” — Laurence Penn, CEO .
Q&A Highlights
- CLO AAA vs. loans dynamic: AAA spreads hadn’t fully retraced even as loans rallied; technical demand mix cited (ETF growth, rotation expectations), keeping AAAs ~10–15 bps wider vs earlier tights .
- Allocation implications: Given equity arb pressure, management expects allocation to remain skewed toward mezz unless secondary equity value improves; less appetite for new-issue equity if math doesn’t change .
- Issuance outlook: New-issue CLO activity depends on asset-liability spread; resets/refis were more active; potential monetary easing could improve new-issue economics, but timing uncertain .
- Tariff risk and tranche selection: Equity tranches bear greater first-loss exposure to sector-specific tariff shocks; mezz tranches provide more downside protection in a dispersion-heavy regime .
- NAV update: Management referenced a July 31 NAV range around ~$6.16 (+/– $0.03) on the call .
Estimates Context
- S&P Global consensus vs. actual (Q1 FY2026):
- Primary EPS (tracks ANII/share): Estimate $0.228*, Actual $0.18* → Miss (~$0.05). Note: GAAP EPS was $0.27, but consensus appears to reference ANII/share, not GAAP EPS .
- Revenue (proxy: Total Investment Income): Estimate $11.604M*, Actual $11.670M → Slight beat (~$0.066M) .
Values marked with an asterisk were retrieved from S&P Global.
Key Takeaways for Investors
- Rapid, high-quality portfolio ramp with a balanced mezz/equity mix, supported by a robust GAAP yield (~15–16%) and alpha from active trading, positioned EARN for improving run-rate NII .
- The near-term pivot toward mezzanine debt and reliance on secondary opportunities reflect constrained new-issue equity arbitrage and should provide resilience amid credit dispersion .
- Guidance for NII to cover the $0.08 monthly dividend starting in September was achieved in Q2 FY26, de-risking the payout and strengthening income visibility .
- Incremental leverage via prospective unsecured debt issuance later in 2025 could be accretive to GAAP earnings and NII; execution timing is a watch item and potential catalyst .
- European CLO exposures and credit hedges are controlled sources of tracking error; modest losses there in Q1 underscore the value of mix management and selective hedging .
- Consensus appears tied to ANII/share rather than GAAP EPS; despite an ANII/share miss in Q1, momentum into Q2 (ANII/share $0.23) suggests upward estimate revisions could follow sustained deployment .
- Macro sensitivities (tariffs, loan repricing, AAA spreads) will dictate the equity vs. mezz opportunity set; active rotation remains central to sustaining returns .