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Ellington Credit Co (EARN)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 produced an overall net loss of $2.0M (−$0.07 EPS), driven by Agency RMBS underperformance amid rate and spread volatility, while Adjusted Distributable Earnings (ADE) were $7.8M ($0.27/share), covering the $0.24/share dividend .
  • CLO portfolio grew 18% sequentially to $171.1M, with capital allocation to CLOs rising to 72%; overall net interest margin was 5.07% (credit NIM 8.54%, agency NIM 3.24%), down modestly vs Q3 from 5.22% .
  • Management confirmed conversion to a Delaware registered closed-end fund (RIC) effective April 1, 2025; book value was $6.53/share at year-end (economic return −1.2% in Q4) .
  • Guidance: management expects Q1 ADE near $0.27/share, but Q2 ADE likely below dividends while redeploying ~28% of capital freed by selling Agency pools; return to dividend coverage expected by Q3; leverage target “half a turn” post-conversion with potential unsecured notes thereafter .
  • Stock catalysts: April 1 conversion and rapid CLO deployment (notional ~28% of equity freed), plus elevated CLO market inefficiencies amid recent credit volatility create near-term trading opportunity and medium-term earnings ramp .

What Went Well and What Went Wrong

What Went Well

  • CLO strategy delivered positive results, especially mezzanine debt, with net gains from opportunistic sales, tighter credit spreads, and redemptions of discount seasoned tranches; “our CLO mezzanine debt portfolio continued its excellent performance” .
  • ADE of $0.27/share again covered dividends; CEO: “portfolio growth and wide net interest margins on our CLOs continued to support our adjusted distributable earnings” .
  • Liquidity robust with cash + unencumbered assets of ~$111M (>50% of equity) at year-end, providing “dry powder” for deployment post-conversion .
  • Strategic milestone secured: shareholders approved conversion; management: “positioning us to drive strong earnings and unlock greater value for shareholders” .

What Went Wrong

  • Agency RMBS underperformed hedges amid rising rates and volatility, producing a negative Agency contribution (−$0.12/share); overall net loss (−$0.07/share) for the quarter .
  • Net interest margins declined sequentially in both credit and agency books (credit NIM to 8.54% from 9.65%; agency NIM to 3.24% from 3.52%) as asset yields fell faster than cost of funds (credit) and cost of funds rose faster than asset yields (agency) .
  • Book value per share fell to $6.53 (from $6.85 in Q3), with economic return −1.2%; agency spread volatility and mark-to-market effects weighed on equity .

Financial Results

MetricQ2 2024Q3 2024Q4 2024
Interest Income ($USD Millions)$14.132 $12.504 $12.849
Net Interest Income ($USD Millions)$3.897 $4.752 $6.142
Net Income ($USD Millions)$(0.815) $5.445 $(2.005)
Diluted EPS ($)$(0.04) $0.21 $(0.07)
Adjusted Distributable Earnings ($USD Millions)$7.273 $7.241 $7.842
ADE per Share ($)$0.36 $0.28 $0.27
Dividend per Share ($)$0.24 $0.24 $0.24
Net Interest Margin (%)Q2 2024Q3 2024Q4 2024
Credit NIM13.41% 9.65% 8.54%
Agency NIM2.85% 3.52% 3.24%
Overall NIM4.24% 5.22% 5.07%
Strategy Contribution (per share)Q2 2024Q3 2024Q4 2024
CLOs$0.05 $0.12 $0.10
Non-Agency RMBS$0.04 $0.03 $0.00
Agency RMBS$(0.05) $0.17 $(0.12)
Other interest income (expense), net$0.02 $0.01 $0.02
Income tax (expense) benefit$0.00 $(0.02) $0.01
G&A$(0.10) $(0.10) $(0.08)
Net Income per Share$(0.04) $0.21 $(0.07)
CLO Portfolio Breakdown ($USD Millions)Q2 2024Q3 2024Q4 2024
Total CLO Portfolio$85.1 $144.5 $171.1
CLO Equity$40.0 $74.8 $99.1
CLO Notes (Mezz)$45.1 $69.7 $72.0
KPIsQ2 2024Q3 2024Q4 2024
Book Value per Share ($)$6.91 $6.85 $6.53
Debt-to-Equity Ratio (adjusted)3.7x 2.5x 2.9x
Net Mortgage Assets-to-Equity4.0x 3.0x 2.6x
Capital Allocation to CLOs45% 58% 72%
Agency RMBS FV ($USD Millions)$531.1 $462.1 $512.3
CPR (specified pools)6.74 7.54 9.55
Cash ($USD Millions)$118.8 (incl. T‑bills) $25.7 $31.8
Unencumbered Assets ($USD Millions)$43.9 $95.8 $79.2
Combined Liquidity ($USD Millions)—$121.5 ~$111
Dividend Declared ($/mo)$0.08 $0.08 $0.08

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
ADE per ShareQ1 2025Not previously quantified“No reason… much different from $0.27” (informal) Maintained (near $0.27)
ADE vs DividendsQ2 2025Not previously quantifiedLikely miss “by a few pennies” vs dividend, due to ~28% undeployed capital at start of Q2 Lowered
Capital DeploymentQ2 2025Ongoing CLO rampRedeploy ~28% freed by selling Agency pools post-conversion; fully ramped by midyear Raised (deployment)
Book Value Impact from Agency unwindEarly Q2 2025N/AEstimated ~$0.01 BV impact from selling pools and covering TBA shorts Minimal
LeveragePost-conversionN/ATarget “half a turn” (≈0.5x) initially; potential unsecured notes later New framework
Dividend PolicyOngoing$0.08/month$0.08/month declared March 7; ADE expected to cover again by Q3 Maintained near term

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2, Q3)Current Period (Q4)Trend
CLO mezzanine strengthGains from calls and opportunistic sales; mezz spread tightening Continued strong mezz results; net gains and redemptions Positive, sustained
CLO equity crosscurrentsPrepay-driven mark-to-market pressure and spread compression Mixed returns; NAV pressure easing as fewer loans above par; Europe outperformed Stabilizing, improving
Agency RMBS underperformanceModest loss in Q2; gains in Q3 as spreads tightened Loss in Q4 due to volatility; derisked via larger short TBA Reducing exposure; de-risked
Conversion to RIC/CEFStrategy outlined; shareholder vote pending Shareholder approval secured; April 1 conversion date Completed approvals; execution
Leverage & liquidityLeverage down; liquidity high D/E 2.9x; liquidity ~$111M; post-conversion lower leverage Lower leverage ahead
Macro/volatilityTightening credit spreads, robust loan demand Recent credit volatility widens some spreads; more inefficiencies Volatility ↑; opportunity set ↑
Tariffs/macro risksNot highlightedTariffs could create winners/losers; watch loan fundamentals Emerging risk factor

Management Commentary

  • CEO on CLO expansion and equity opportunity: “we grew [the CLO] portfolio by another 18%… most of this growth came in CLO equity… spreads tightening… improving economics” .
  • CFO on results composition: “net loss of $0.07 per share and adjusted distributable earnings of $0.27 per share… $0.10 per share from CLOs and −$0.12 from Agency” .
  • CEO on conversion impact: “estimate… sales of remaining agency pools… will have just a $0.01 effect on book value per share” .
  • CIO on CLO equity: “benign credit environment… strong leveraged loan prices… equity generally held in… headwinds from coupon spread compression” .
  • Co-CIO on de-risking: “short TBA position essentially offsets all of our Agency MBS basis exposure… last step… sell pools and buy back TBA shorts” .

Q&A Highlights

  • Capital freed at conversion: ~28% of capital can be redeployed into CLOs post-April 1; timing likely favorable given volatility .
  • CLO market reaction to volatility: equity down several points even for stronger profiles; mezz eased off; pronounced tiering; market remains functional .
  • ADE trajectory: Q1 near $0.27; Q2 likely below dividends while ramping; back to covering in Q3 .
  • Portfolio mix & sourcing: Equities favored unless mezz dislocates; greater use of secondary if new issue markets tough; maintain diversification .
  • Leverage framework: Target ~0.5x initially; explore unsecured notes to optimize financing as a closed-end fund .

Estimates Context

  • Wall Street consensus (S&P Global) EPS and revenue estimates for Q4 2024 were unavailable due to data access limits at this time; as a result, beats/misses vs consensus cannot be assessed today. Values would typically be pulled from S&P Global; note explicitly that they were unavailable in this session.
  • Given EARN’s business model, interest income and ADE are more relevant operating metrics than “revenue” in the traditional sense; ADE covered dividends in Q4, which would generally support near-term estimate stability, with a temporary Q2 dip expected per guidance .

Key Takeaways for Investors

  • Conversion catalyst: April 1 RIC/CEF conversion is a structural pivot and potential re-rating catalyst; expect lower leverage, better access to capital, and tax efficiency .
  • Deployment setup: ~28% of capital to redeploy into CLOs in Q2; near-term ADE dip likely but recovery by Q3 as portfolio ramps; monitor new issue vs secondary sourcing .
  • CLO alpha drivers: Mezzanine debt remains strong; equity crosscurrents easing as fewer loans trade above par; Europe equity showing relative strength—expect continued opportunistic trading .
  • Risk management: Agency exposure effectively hedged via short TBAs; expected full exit post-conversion with minimal BV impact (~$0.01) .
  • Liquidity: ~$111M cash + unencumbered assets gives significant flexibility to capitalize on volatility-driven inefficiencies in CLOs .
  • Dividend: $0.08/month maintained; ADE covered in Q4; temporary Q2 shortfall likely; management targets re-cover by Q3, aligning with midyear full ramp .
  • Watch macro: Elevated credit volatility and tariff risk could pressure lower-quality loans and widen spreads; portfolio positioned to exploit dislocations while maintaining diversification .