Ellington Residential Mortgage REIT (NYSE:EARN) Q1 2024 Earnings Call Transcript

Ellington Residential Mortgage REIT (NYSE:EARN) Q1 2024 Earnings Call Transcript May 15, 2024

Operator: Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company 2024 First Quarter Financial Results Conference Call. Today’s call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Alaael-Deen Shilleh: 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 2 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 Chief — our Co-Chief Investment Officer; and Chris Smernoff, our Chief Financial Officer. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website, which we 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: Thanks, Alaael-Deen, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company. Please turn to Slide 3 of the presentation. I will begin by reviewing our strategic transformation which we announced back on April 1. In late March, our Board approved a strategic transformation of EARN’s investment strategy to focus on 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 transaction, 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 long standing 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 our investment strategy. To date, EARN CLO investments have generated excellent returns. And we’ve now built a CLO portfolio of over $60 million. Please turn now to Slide 4, where we summarize the anticipated benefits of the transformation to shareholders.

I’m confident that the strong earnings power of CLOs, combined with a 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 get 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 — we believe that we can add significantly to EARN’s total returns, and reduce EARN’s volatility by selectively an opportunity — opportunistically hedging from time to time.

As a result of all these factors, we anticipate that our new focus will provide 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 reelection for 2024. Later this year, once you obtained shareholder approval of certain matters, and convert to a closed end fund, we will elect to be treated as a regulated investment company or RIC for tax purposes.

Like REITs, RICs are also generally taxes 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 5, where you can see the anticipated timeline for the transformation. With our REIT election revote, we are currently situated in the second column on this slide, operating as a taxable C-Corp. During this period, while we prepare for a 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 a 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 the strategic transaction 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 6 of the presentation for the market backdrop for the first quarter. In the first quarter, corporate credit including CLOs outperform the 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. And third, CLO mezzanine spreads were tighter across the board with the most pronounced tightening on single D rated tranches. This strengthen corporate credit reflected the continuation of trends we saw in the final months of 2023, driven by strong capital inflows, strengthening fundamentals and declining and strait volatility. Investor demand for leveraged loans remain particularly strong, with significant new issued 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 price, 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 wide and across the coupon stack. Please turn now to Slide 7 for 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 7, you can also see the impact of our larger CLO portfolio and 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 30 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 [ph] 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 to credit portfolio as representing to larger and larger percentage of our overall portfolio. Of course, higher NIMs require less leverage to drive strong TDE. 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: Thank you, Larry, and good morning, everyone. Please turn to Slide 8 for a summary of Ellington Credit first quarter financial results. For the quarter ended March 31, 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 negative 884,000 in the first quarter. On Slide 8, 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 [indiscernible] for agency, a lower cost of funds. In the first quarter, we continue to benefit from positive carry on our interest rate swaps, where we received 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 9 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 [indiscernible] 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, on 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 reelection effective January 1 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 20.5% to 7.1% for the quarter. Please note that we did not book a deferred tax asset on our balance sheet related to the NOL. So we record — so our reported book value remains fully tangible. Please turn now to our balance sheet on Slide 10. Book value per share was $7.21 at March 31 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 approximate only 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 31, 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 31, compared to $728 million as of December 31, 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 31 from 11% at year-end, while the allocation to mortgage related assets declined to 75% from 89%. Including activity through May 13, 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 31, 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 31 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’ll now turn the presentation over to Mark.

Mark Tecotzky: 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 transition 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 [indiscernible] 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 pay downs 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 expect then their debt maturities. Many CLO equity tranches are benefiting in a different way from the tightening 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 reduce the percentage of distressed loans in most deals. This dynamic drove our outperform — 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, help 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 then that 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 40 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’m pleased [indiscernible] return to the quarter and the progress we have made with the portfolio transition. With the current market dynamics, we see upside in their current portfolio should fed cuts materialized consistent with market current expectations, that could be a catalyst for additional outperformance. Now, back to Larry.

Larry Penn: Thanks, Mark. CLO performance was definitely the bright spot in the first quarter for EARN, as it’s been since EARN began investing in the 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 returns 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 was now over $60 million. This continued shift has taken our debt to equity ratio down further to about 4.4 to 1, excluding refi and 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 will now open the call to questions. Operator, please go ahead.

Q&A Session

Operator: [Operator Instructions] And we will take our first question from Crispin Love with Piper Sandler.

Crispin Love: Thanks. Good morning, everyone. 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: Yes, 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 at EARN’s current investor base, just the institutional investor base, is — it’s fairly small at this point in some passive funds. It’s mostly retail investor base, which is the same for the peer group of the CLO focused close end funds. So I do think we are going to get some I think even incoming calls from some institutional investors to see — to potentially establish positions in the stock, but I do think that overall, it’s going to be a pretty similar retail oriented investor base.

Crispin Love: Great. Thanks, Larry. That’s helpful. And then can you speak to the credit quality in the CLO book and how would you 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: Again, yes, each CLO is generally diversified across industries. Mark, do you want to handle that, or if …

Mark Tecotzky: Sure. Yes, I’m actually going to Mexico to introduce a new voice to these earnings call that have Greg Borenstein, who heads the CLO effort [ph] at Ellington.

Gregory Borenstein: Well, nice to meet everyone. So to take this question, I think that the portfolio will adapt as the market of 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 BBB and below is where we’re going to be. I think that in September, when we started [indiscernible], we found that mezz was at an extreme discount. Also with the rates dynamic where you have a 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 where — with the exception of some credit sensitive profiles, much of the CLO mezz marketers rally 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 pay as well as managing the risk, we’ll see a slight shift into equity, if this trend continues to keep up, and we’re seeing that equity liability spreads are continuing to keep tightening in the CLO market with its refis and resets in 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. And so as it continues to scale and grow, I think we will over time, continue to see that more positions under the book, but I think as we ramped you’ll see us maybe with slightly larger [indiscernible] sizes though even now, I think it’s still pretty diversified.

Crispin Love: Okay. Thank you, Greg, and thank you all for taking my questions.

Larry Penn: Thanks, Crispin.

Operator: Thank you. And we will take our next question from Doug Harter with UBS.

Doug Harter: Thanks. Can you just talk about the return profile? How much of its kind of coming from current coupon versus discount accretion? And how that differs between the mezz pieces and the equity pieces?

Larry Penn: Well, as I mentioned, Doug, in the last — the first quarter, we had a lot from spread tightening. In terms of how much is from coupon versus accretion, I don’t know if we have that at our fingertips. But as you know, I think you’re — first of all, I think you’re probably referring more to mezzanine debt tranches as opposed to equity tranches, right. With equity, it’s generally coming from excess interest spread right in the deals themselves. So, now we do — we can calculate, obviously, a projected yield on those as we can on the mezzanine, but implicitly, there’s going to be some amortization calculation there. The mezz that we have currently just, Greg, do you have sort of the average dollar price in those? Greg, why don’t you field this?

Gregory Borenstein: 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 certainly into the 90s dollar price range whereas maybe we were sourcing more in the beginning in the 80s. And in some cases, some very stressed pieces beneath that. And so, over this period of time, in particular, more price appreciation than I think a more normal market, which is why on the margin we’ll see mezz probably start to come down a little bit versus equity as that price appreciation in total return is being captured.

Mark Tecotzky: And I think actually — I was going to say if you look at the — on the earnings deck, there’s a portfolio table on Page Slide 11, right, of the deck. And you can see that the average dollar price of our CLOs write notes is currently well as of March 31, I should say was 86 handle. So I think that can give you some indication of — so I would say, Greg, correct me if I’m wrong, but that probably means that you have a good couple of 100 basis points of the yield is — the projected yield on those notes is going to be due to accretion of discount over time as opposed to coupon. So it’s not certainly not most of the return, if that’s sort of what you’re asking about.

Doug Harter: Yes, I guess, just trying to get comfort in — I guess the predictability of the cash flow. And as you go forward and as this grows as a percentage to kind of support the monthly dividend.

Larry Penn: Yes. Greg, what’s [indiscernible] what’s the typical spread on these floating rate notes, would you say in the portfolio?

Gregory Borenstein: Roughly, very roughly.

Larry Penn: Spread over SOFR.

Mark Tecotzky: Yes, Larry, it’s Mark. Those are like 800 to 1,000. Yes, 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 reified, 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, we’ll get into 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: Yes, and if you’re SOFR plus 800 even [indiscernible] the low end of that range on mezzanine just with us, very small bit of leverage, you’re covering your dividend with coupon right there.

Doug Harter: Got it. It’s very helpful. Thank you.

Operator: Thank you. And we will take our next question from Matthew Erdner with JonesTrading.

Matthew Erdner: Yes, 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: Yes, look, I think if you say how much we’ve been kind of adding, it’s really CLO is driving, right, where 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, if you look 20 million a month, that’s kind of what we’ve been ramping recently. I think that’s quite manageable. I don’t — I think, sort of the low end of our expectations where we planned to be so, if we’re at 60 million as of now, and two more months from today. So, that’ll put us, let’s just say in July, where we’re close to or above 100 million. That’s kind of I think, what I mentioned in the prepared remarks, as where we plan to get to. And then really at almost any point after that, or quite quickly after that, we would be able to complete the transition.

So if I had to guess, I would say 120 million give or take. And, of course as we mentioned, we’re going to — we will have a shareholder vote later this year, which we will need to sort of authorize the transformation, the conversion to a closed end fund.

Matthew Erdner: Got you. That’s helpful. And then with this conversion, should we expect any one-time expenses or stuff like that to happen?

Larry Penn: Yes, but I think they’ll — they’re going to be quite modest. I mean, I think we’ve mentioned that to liquidate sufficient agencies is really going to be quite modest. So and has been not even noticeable, I think so far. So, but, yes, we’ll have, of course, some legal and professional fees as well, but 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 going to be the case here. So, I think, yes, we — it’s not something that we’ve, I think, a number that we’ve put out so far, but it’s really we will put out a proxy, a lot of that expenses then occurred in the second quarter, it’s not been anything, to, I think be concerned about. So I think these are going to be quite modest and will kind of be almost blend in with the rest of the other returns on the portfolio.

Matthew Erdner: Yes, that’s great. Thank you guys.

Operator: 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.