EARN Reports Results

Ellington Credit Company (NYSE:EARN) reported its first quarter 2025 earnings on May 7, 2025, highlighting a net loss of $0.23 per share in calendar Q1 2025 and adjusted distributable earnings (ADE) of $0.26 per share, with a strategic shift to CLO (Collateralized Loan Obligation) investments following its conversion to a closed-end fund. Management executed a complete divestment of agency mortgage assets, increased CLO holdings by 46% to $250 million as of March 31, 2025, and maintained a robust liquidity position with $59 million in cash at April 30, 2025. Insights from the call reveal impactful portfolio repositioning, market-driven capital deployment, and evolving risk management practices.

Closed-end fund conversion reshapes EARN’s balance sheet

Ellington Credit Company transitioned from a REIT to a registered closed-end fund on April 1, 2025, triggering a full-sale of agency mortgage pools and a rapid redeployment of capital to CLOs. The shift prompted a fiscal calendar reset and changed quarterly reporting requirements from 10-Qs/10-Ks to 1940 Act filings, such as N-PORT and N-CSR.

"I am very pleased to report that on April 1st, we successfully completed our conversion to a registered closed-end fund. As planned, within days of the conversion, we quickly and efficiently sold our remaining agency mortgage pools and covered our TBA short positions, all with minimal impact on our net asset value. In fact, even with all the market gyrations in early April, we estimate that these pool liquidations had only about a $0.01 per share effect on earns that net asset value."

The seamless transition minimized NAV volatility and enhances flexibility in deploying capital into higher-yielding credit assets during periods of market dislocation.

CLO portfolio rapidly expands amid volatility

During calendar Q1 2025, CLO holdings surged by 46% to $250 million, and portfolio allocation to CLOs rose to 81% of total assets, reflecting deliberate acceleration in risk-weighted credit deployment, even as CLO market spreads widened in March. CLO equity holdings increased from 58% to 66% of the CLO book, and European CLO exposure remained steady at 14%.

"During calendar Q1, in preparation for the conversion, we increased our CLO portfolio by 46% to $250 million, while we kept the size of our long agency mortgage portfolio stable in order to maintain our exemption from the 1940 Act right up to the point of conversion. Also, starting in January, we aggressively ramped up our TBA short mortgage hedges. And so when volatility began to spike in March, we had already completely neutralized our exposure to the mortgage basis, thus saving us from the losses that we would have incurred when spreads widened later in the quarter."

This decisive reallocation demonstrates management's ability to anticipate and mitigate adverse market moves.

Risk and liquidity management remain at the forefront

At April 30, 2025, 18.8% of the portfolio ($59 million) was held in cash and cash equivalents, with debt leverage at less than half a turn at April 2025 and significant room to take on additional CLO investments under current risk protocols. Management also plans to use unsecured corporate debt issuance to lengthen liability duration and further optimize portfolio growth, while monitoring leverage via the use of derivatives and repo agreements.

"With the mortgage pools gone, our debt leverage now stands at less than half a turn. We started April with a net asset value of $6.08 per share. While additional credit spread widening in April did drive further CLO price declines, the effect on our portfolio was contained and we ended the month of April with an estimated net asset value in the range of $5.85 per share to $5.91 per share. I am pleased to announce that similar to what most other CLO focused closed end funds do, we have started posting on our Web site a brief tearsheet, where you can find updates of many of our portfolio metrics as of month end."

EARN’s enhanced cash reserves, flexible leverage structure, and transparent disclosures position the company to act opportunistically amid volatility, supporting both risk control and future earnings growth.

Looking Ahead

Management maintained guidance that adjusted distributable earnings (non-GAAP) coverage of the dividend may fall short in Q2 2025 due to the timing of redeployment following the agency asset sale, but forecasts dividend coverage resuming in Q3. As of May 7, 2025, the CLO portfolio had reached $284 million, with sufficient capacity and dry powder for further expansion, potentially above $300 million in the CLO portfolio, depending on risk positioning and leverage use, as discussed in the Q1 2025 earnings call. Plans are underway to issue unsecured debt later in 2025, which is expected to be accretive to net investment income and support an increased allocation to CLO assets later this year.

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