Earnings Conference Call Q4 2024 March 13, 2025 Q4 2024 EARNINGS Important Notice Forward-Looking Statements Certain statements in this presentation constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking s ...

Financial Performance - Estimated book value per common share is in the range of $6.52 to $6.54 as of December 31, 2024, including dividends of $0.24 per common share declared during the quarter[6] - Estimated net income (loss) per common share for the quarter ended December 31, 2024, is in the range of $(0.08) to $(0.06)[6] - Estimated Adjusted Distributable Earnings per common share for the quarter ended December 31, 2024, is in the range of $0.26 to $0.28[6] - Total shareholders' equity is estimated to be $195 million as of December 31, 2024[6] Portfolio Composition - CLO portfolio increased to approximately $170 million and MBS portfolio increased to approximately $510 million as of December 31, 2024[6] - Capital allocation to CLOs was approximately 72% as of December 31, 2024, compared to 58% as of September 30, 2024[6] Strategic Initiatives - The company expects to complete the conversion to a closed-end fund on or before April 1, 2025[2] - The strategic transformation to focus on corporate CLOs was approved by shareholders on January 17, 2025[15] - The conversion will allow the company to operate as a regulated investment company under the Internal Revenue Code[2] Financial Reporting - The preliminary financial results are subject to completion and may differ materially from actual results[3]

Core Insights - The article discusses the importance of understanding past performance in relation to future investment results, emphasizing that historical data does not guarantee future outcomes [1][2] - It highlights the role of analysts in providing insights and opinions on various investment opportunities, while noting that these views may not represent the entire platform [1][3] Group 1 - The article mentions that analysts may hold beneficial positions in the stocks they discuss, indicating a potential alignment of interests [2] - It emphasizes the need for investors to conduct their own research and due diligence before making investment decisions [1][3] - The content reflects a focus on innovation, disruption, and growth within the financial sector, particularly in high-tech and early growth companies [3]

Financial Performance and Metrics - The company's book value per share was $6.85 as of September 30, 2024, compared to $6.91 and $7.32 as of June 30, 2024, and December 31, 2023, respectively[190] - Book value per share decreased to $6.85 as of September 30, 2024, from $6.91 as of June 30, 2024, with an economic return of 2.6% for the three-month period ended September 30, 2024[218] - Book value per share decreased from $7.32 in December 2023 to $6.85 in September 2024, despite the increase in total shareholders' equity[248] - Net income for the three-month period ended September 30, 2024, was $5.4 million, compared to a net loss of $11.4 million for the same period in 2023[250] - Net income for Q3 2024 was $5.4 million, a significant improvement from a net loss of $11.4 million in Q3 2023[250] - Net income (loss) for the nine-month period ended September 30, 2024 was $8.6 million, compared to $(7.9) million for the same period in 2023[267] - Net income for the nine-month period ended September 30, 2024 was $8.6 million, compared to a net loss of $7.9 million for the same period in 2023, driven by positive net interest income and total other income[267] - Net Income (Loss) for the three-month period ended September 30, 2024 was $5.445 million, compared to a loss of $11.420 million in the same period in 2023[287] - Net Income (Loss) for the nine-month period ended September 30, 2024 was $8.591 million, compared to a loss of $7.880 million in the same period in 2023[287] - Adjusted Distributable Earnings for the nine-month period ended September 30, 2024 were $19.827 million, up from $8.442 million in 2023[287] - Adjusted Distributable Earnings for the three-month period ended September 30, 2024 were $7.241 million, up from $3.239 million in the same period in 2023[287] - Adjusted Distributable Earnings for the nine-month period ended September 30, 2024 were $19.827 million, up from $8.442 million in the same period in 2023[287] - Adjusted Distributable Earnings Per Share for the three-month period ended September 30, 2024 was $0.28, up from $0.21 in the same period in 2023[287] - Adjusted Distributable Earnings Per Share for the nine-month period ended September 30, 2024 was $0.91, up from $0.59 in the same period in 2023[287] - Weighted Average Shares Outstanding increased to 25,591,607 for the three-month period ended September 30, 2024, compared to 15,199,837 in 2023[287] - Weighted Average Shares Outstanding increased to 25,591,607 for the three-month period ended September 30, 2024, compared to 15,199,837 in the same period in 2023[287] Interest Rates and Yields - The U.S. Federal Reserve reduced the federal funds rate by 50 basis points to 4.75%–5.00% in September 2024[191] - The 2-year U.S. Treasury yield decreased by 111 basis points to 3.64%, and the 10-year U.S. Treasury yield declined by 62 basis points to 3.78% in Q3 2024[192] - The Freddie Mac survey 30-year mortgage rate decreased from 6.86% at the end of June to 6.08% on September 26, 2024[193] - Weighted average yield of the overall portfolio was 7.21% for the three-month period ended September 30, 2024, compared to 4.25% for the same period in 2023[252] - The weighted average yield of the company's overall portfolio increased from 4.25% in Q3 2023 to 7.21% in Q3 2024[252] - Weighted average yield of the overall portfolio for the nine-month periods ended September 30, 2024 and 2023 was 6.29% and 3.95%, respectively[269] - Weighted average yield of the overall portfolio for the nine-month periods ended September 30, 2024 and 2023 was 6.29% and 3.95%, respectively, excluding Catch-up Amortization Adjustments[269] - Average repo borrowing cost was 5.59% for the three-month period ended September 30, 2024, compared to 5.60% for the three-month period ended June 30, 2024[219] - Weighted average borrowing rate on repurchase agreements was 5.37% as of September 30, 2024, compared to 5.54% as of June 30, 2024[219] - Average cost of funds for CLO and Non-Agency RMBS in the three-month period ended September 30, 2024 was 6.29% and 6.80%, respectively[256] - Total adjusted cost of funds for the three-month period ended September 30, 2024 was 1.99%, compared to 2.87% for the same period in 2023[259] - Net interest margin for the three-month period ended September 30, 2024 was 5.22%, compared to 1.38% for the same period in 2023[260] - Net interest margin for the three-month period ended September 30, 2024 was 5.22%, compared to 1.38% for the same period in 2023, due to higher weighted average yield on Agency RMBS and credit portfolios[260] - Total adjusted cost of funds for the nine-month periods ended September 30, 2024 and 2023 was 2.17% and 2.76%, respectively, reflecting the impact of interest rate swaps and net short U.S. Treasury securities[275] - Net interest margin for the nine-month period ended September 30, 2024 was 4.12%, compared to 1.19% for the same period in 2023[276] - The CLO portfolio contributed to an increase in the average cost of funds, with CLO borrowing costs at 6.44% in 2024 compared to no CLO borrowing in 2023[272] - Adjusted cost of funds for the nine-month period ended September 30, 2024 was 2.17%, compared to 2.76% in 2023, driven by interest rate swaps and net short U.S. Treasury securities[275] Portfolio and Investments - The company's CLO portfolio increased by 70% to $144.5 million as of September 30, 2024, compared to $85.1 million as of June 30, 2024[195] - The company's CLO portfolio consisted of $74.8 million in CLO equity tranches and $69.7 million in CLO mezzanine debt tranches as of September 30, 2024[194] - The U.S. CLO market saw $41 billion of new CLO issuance in Q3 2024, compared to $53 billion in Q2 2024[193] - The company's Agency RMBS holdings decreased by 13% to $462.1 million as of September 30, 2024, compared to $531.1 million as of June 30, 2024[197] - Aggregate holdings of interest-only securities and non-Agency RMBS decreased by 44% quarter over quarter to $11.3 million[197] - The fair value of CLO Notes decreased from $63,090 thousand to $52,892 thousand, a decline of 16.2% from December 31, 2023 to September 30, 2024[234] - The fair value of Agency RMBS increased from $454,407 thousand to $462,146 thousand, a growth of 1.7% over the same period[234] - The company's total investment portfolio fair value stood at $618,797 thousand as of September 30, 2024, compared to $611,236 thousand at the end of 2023[234] - The weighted average price of 30-year fixed-rate mortgages in the Agency RMBS portfolio increased from 98.42 to 100.09, reflecting a 1.7% rise[234] - Reverse mortgages in the Agency RMBS portfolio showed a fair value decrease from $37 thousand to $34 thousand, a decline of 8.1%[234] - 58% of the company's invested capital is allocated to corporate CLOs, while 42% is allocated to mortgage-related securities as of September 30, 2024[234] - The company's credit portfolio average holdings increased from $121.7 million in Q3 2023 to $520.0 million in Q3 2024, with yields increasing from 11.24% to 15.98%[254] - Total net realized and unrealized gains on Agency securities were $15.5 million for the three-month period ended September 30, 2024[215] - Total net realized and unrealized losses on the interest rate hedging portfolio were $(18.4) million, or $(0.72) per share, driven by a decrease in interest rates quarter over quarter[216] - Net realized and unrealized gains on long TBAs held for investment were $7.2 million, or $0.28 per share[216] - Other income (loss) for the three-month period ended September 30, 2024 was $3.9 million, primarily due to net realized and unrealized gains of $14.7 million on securities, partially offset by losses on financial derivatives[263][264] - Other income (loss) for the nine-month period ended September 30, 2024 was $6.9 million, primarily from net realized and unrealized gains on financial derivatives[279] - The U.S. Agency MBS Index generated an excess return of 0.76% in the third quarter of 2024[208] - Average pay-ups on the specified pool portfolio decreased to 0.25% as of September 30, 2024, compared to 0.63% as of June 30, 2024[209] - Three-month constant prepayment rates for fixed-rate specified pools increased to 7.5% as of September 30, 2024, compared to 6.7% as of June 30, 2024[212] - The trailing-twelve-month default rate for the Morningstar LSTA U.S. Leveraged Loan Index declined to 78 basis points in August 2024[201] Debt and Leverage - The company had outstanding borrowings under repurchase agreements of $486.9 million as of September 30, 2024, with 90% collateralized by Agency RMBS[189] - The debt-to-equity ratio decreased to 2.5:1 as of September 30, 2024, compared to 3.7:1 as of June 30, 2024[198] - Debt-to-equity ratio was 2.5:1 as of September 30, 2024, compared to 4.0:1 as of June 30, 2024, driven by higher shareholders' equity and less leverage on CLO investments[221] - Total debt-to-equity ratio decreased to 2.5:1 as of September 30, 2024, from 5.4:1 as of December 31, 2023[246] - The company's total debt-to-equity ratio improved significantly from 5.4:1 in December 2023 to 2.5:1 in September 2024[246] - Total outstanding liabilities under repurchase agreements decreased to $486.92 million as of September 30, 2024, from $729.54 million as of December 31, 2023[246] - Total borrowings outstanding under repurchase agreements decreased from $729.5 million in December 2023 to $486.9 million in September 2024[246] - Outstanding repurchase agreements decreased to $486.9 million as of September 30, 2024, from $729.5 million as of December 31, 2023[290] - Weighted average contractual haircut on repo borrowings increased to 8.6% as of September 30, 2024, from 5.7% as of December 31, 2023[292] - Aggregate amount at risk under repurchase agreements decreased to $43.3 million as of September 30, 2024, from $50.1 million as of December 31, 2023[294] - Aggregate amount at risk under derivative contracts decreased to $23.6 million as of September 30, 2024, from $26.0 million as of December 31, 2023[296] - Aggregate amount at risk under forward settling TBA and Agency pass-through certificates increased to $2.7 million as of September 30, 2024, from $1.7 million as of December 31, 2023[298] - The weighted average lives of RMBS and CLOs are generally much longer than the short-term repos used to finance them, creating a maturity mismatch[236] - Changes in interest rates may cause financing costs for RMBS and CLOs to increase relative to the income on these assets over the investment term[236] - Fluctuations in the fair value of RMBS and CLO investments may trigger changes in margin requirements, potentially requiring additional collateral[236] - Changes in fair value of RMBS and CLO investments may trigger margin requirements, potentially requiring additional collateral for repurchase agreements[236] - The company faces interest rate risk due to the mismatch between short-term repo financing (average maturity <364 days) and longer-term RMBS/CLO investments[236] Liquidity and Capital Resources - Cash and cash equivalents were $25.7 million as of September 30, 2024, compared to $28.8 million as of June 30, 2024[200] - Cash and cash equivalents stood at $25.7 million as of September 30, 2024[299] - Shareholders' equity increased to $191.6 million as of September 30, 2024, from $136.2 million as of December 31, 2023[248] - Shareholders' equity increased from $136.2 million in December 2023 to $191.6 million in September 2024, driven by $62.5 million from share issuance and $8.6 million net gain[248] - The company's liquidity and capital resources are expected to be sufficient to meet short-term and long-term needs, including repayment of borrowings, funding assets, and paying dividends[288] - Capital resources include cash on hand, cash flow from investments, borrowings under repurchase agreements, and proceeds from equity offerings[288] - Short-term liquidity requirements include acquisition costs, management fees, margin requirements, and repayment of repurchase agreements[288] - The company believes its capital resources, including free cash on hand and current and anticipated availability of credit, will be sufficient to meet short-term and long-term liquidity requirements[310] - For the nine-month period ended September 30, 2024, the company's operating activities provided net cash of $4.7 million, while investing activities provided net cash of $190.4 million[306] - The company's repo activity used net cash of $255.3 million for the nine-month period ended September 30, 2024, resulting in a net cash usage of $60.2 million when combined with operating and investing activities[306] - The company issued 9,308,793 common shares during the nine-month period ended September 30, 2024, providing net proceeds of $62.5 million after commissions and offering costs[308] - As of September 30, 2024, the company had $22.4 million of common shares available to be issued under the 2023 ATM program[308] - The company repurchased 474,192 common shares through November 8, 2024 at an average price of $9.21 per share, with an aggregate cost of $4.4 million[309] - As of September 30, 2024, the company had $486.9 million of outstanding borrowings with 18 counterparties[315] Expenses and Costs - Total interest expense for the three-month periods ended September 30, 2024 and 2023 was $7.8 million and $12.3 million, respectively, primarily due to repo borrowings[255] - Interest expense decreased from $12.3 million in Q3 2023 to $7.8 million in Q3 2024[249] - Total interest expense for the nine-month periods ended September 30, 2024 and 2023 was $28.1 million and $33.7 million, respectively, primarily due to repo borrowings[271] - Management fee expense for the three-month periods ended September 30, 2024 and 2023 was $0.7 million and $0.4 million, respectively[261] - Management fee expense for the three-month periods ended September 30, 2024 and 2023 was $0.7 million and $0.4 million, respectively, driven by higher shareholders' equity[261] - Other operating expenses for the three-month periods ended September 30, 2024 and 2023 were $2.0 million and $0.9 million, respectively[262] - Other operating expenses for the three-month periods ended September 30, 2024 and 2023 were $2.0 million and $0.9 million, respectively, primarily due to increases in professional fees and compensation expense[262] - Management fee expense for the nine-month periods ended September 30, 2024 and 2023 was $1.8 million and $1.3 million, respectively, driven by higher shareholders' equity[277] - Other operating expenses for the nine-month periods ended September 30, 2024 and 2023 were $4.7 million and $2.9 million, respectively, due to increases in professional fees and compensation[278] - Other operating expenses for the nine-month periods ended September 30, 2024 and 2023 were approximately $4.7 million and $2.9 million, respectively, primarily due to increases in professional fees and compensation expense[278] - Income tax expense for the nine-month period ended September 30, 2024 was $0.7 million, with no such expense recorded in 2023 due

Financial Data and Key Metrics Changes - The company reported net income of $0.21 per share and adjusted distributable earnings (ADE) of $0.28 per share for Q3 2024, with ADE exceeding the first quarter level of $0.27 per share [21][22] - The debt-to-equity ratio decreased to 2.5:1 at quarter end from 3.7:1 at June 30, driven by higher shareholders' equity and reduced leverage on the growing CLO investment portfolio [19][22] - The overall net interest margin increased to 5.22% from 4.24% in the prior quarter, reflecting a higher allocation of capital to the credit strategy [22][23] Business Line Data and Key Metrics Changes - The CLO strategy generated $0.12 per share of portfolio income, supported by strong net interest income and net gains from opportunistic sales [27] - The Agency strategy performed well, generating $0.18 per share of portfolio income, driven by falling interest rates and tightening agency MBS spreads [29][30] - The CLO portfolio increased to $144.5 million at September 30 from $85 million at June 30, with CLO equity comprising 52% of total CLO holdings [36] Market Data and Key Metrics Changes - The CLO market benefited from strengthening loan fundamentals and robust demand for leveraged loans, with declining default rates in both the U.S. and Europe [13][14] - Agency MBS spreads tightened, and the U.S. Agency MBS Index generated an excess return of 76 basis points for the quarter [15] - The Federal Reserve reduced the target range for the federal funds rate by 50 basis points in September, with expectations for further cuts later in 2024 [30] Company Strategy and Development Direction - The company is in the process of converting to a Delaware closed-end fund, with shareholder support for the conversion being overwhelmingly positive [9][11] - The strategic transformation aims to enhance risk-adjusted returns and provide better access to capital markets while reducing corporate income tax exposure [11][34] - The company plans to continue shifting its portfolio from Agency MBS to CLOs, with nearly 60% of capital allocated to CLOs by quarter end [36][52] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the continued ramp-up and strong performance of the CLO strategy, highlighting the active approach taken to enhance returns [55] - The company anticipates that the strategic transformation will generate superior risk-adjusted returns for shareholders [57] - Management noted that the current market conditions, including rising long-term interest rates, may impact origination volumes but could also create favorable supply-demand dynamics for Agency MBS [53] Other Important Information - The company accrued an income tax expense of $463,000 for the third quarter, resulting in an effective tax rate of about 7.8% due to the utilization of net operating losses [33][34] - The company is currently operating as a taxable C-Corp after revoking its REIT election effective January 1 of the year [32] Q&A Session Summary Question: Can you speak on the credit quality and the CLL book and how you expect that to trend over time? - Management indicated that the current trailing 12-month default rate is below 1%, with potential elevation in a high-rate environment, but overall credit quality remains stable [59][60] Question: How do you think about the dividend as you rotate more capital into CLOs? - Management stated that despite lower leverage, the increasing net interest margin supports the dividend, which remains well covered by adjusted distributable earnings [62] Question: Can you talk about your continued appetite to raise capital through the ATM? - Management confirmed that slight dilution occurred during the quarter, but raising capital at favorable prices is seen as accretive to earnings [64][65] Question: Would you expect the strong issuance trend to remain in place if pricing remains supportive? - Management expects continued strong issuance in the CLO market, driven by demand for floating-rate products and a busy pipeline ahead [67][68] Question: What does the timeline look like to move capital into new CLO equity? - Management indicated that they are prepared to act quickly to reinvest capital into new CLO equity once the shareholder vote is supportive, with a realistic target of 90 days for full rotation [70][75]

Company Performance - Ellington Credit (EARN) reported quarterly earnings of $0.28 per share, exceeding the Zacks Consensus Estimate of $0.27 per share, and up from $0.21 per share a year ago, representing an earnings surprise of 3.70% [1] - The company posted revenues of $4.75 million for the quarter ended September 2024, which missed the Zacks Consensus Estimate by 37.06%, compared to revenues of -$1.1 million a year ago [2] - Over the last four quarters, Ellington Credit has surpassed consensus EPS estimates four times but has not beaten consensus revenue estimates [2] Stock Outlook - The stock has added about 8% since the beginning of the year, underperforming the S&P 500's gain of 25.8% [3] - The current consensus EPS estimate for the coming quarter is $0.27 on revenues of $7.49 million, and for the current fiscal year, it is $1.16 on revenues of $19.88 million [7] - The estimate revisions trend for Ellington Credit is mixed, resulting in a Zacks Rank 3 (Hold), indicating expected performance in line with the market in the near future [6] Industry Context - The REIT and Equity Trust industry, to which Ellington Credit belongs, is currently in the bottom 42% of over 250 Zacks industries, suggesting potential challenges ahead [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which could impact investor sentiment [5]

Financial Performance - Net income for the third quarter of 2024 was $5.4 million, or $0.21 per share, with adjusted distributable earnings of $7.2 million, or $0.28 per share[2]. - Net income for the three-month period ended September 30, 2024, was $5,445,000, a significant recovery from a loss of $815,000 in the previous quarter[32]. - Adjusted Distributable Earnings were $7,241,000, slightly down from $7,273,000 in the previous quarter[40]. - The company experienced a net income (loss) before income taxes of $5,908,000, compared to a loss of $(890,000) in the previous quarter[40]. - Interest income for the three-month period ended September 30, 2024, was $12,504,000, a decrease from $14,132,000 in the previous quarter[32]. - Total net interest income for the same period was $4,752,000, compared to $3,897,000 in the prior quarter, reflecting a 22% increase[32]. - The company declared cash dividends of $0.24 per share for the three-month period, consistent with the previous quarter[32]. - The accumulated deficit increased to $146,174,000 as of September 30, 2024, from $145,196,000 in the previous quarter[33]. Asset and Liability Management - Total assets decreased to $752,303,000 as of September 30, 2024, down from $933,457,000 at the end of the previous quarter[33]. - Total liabilities decreased to $560,674,000, compared to $787,328,000 in the prior quarter, indicating a reduction of approximately 29%[34]. - The book value per share was $6.85 as of September 30, 2024, down from $6.91 in the previous quarter[33]. - Weighted average shares outstanding increased to 25,591,607 as of September 30, 2024, compared to 20,354,062 in the previous quarter[32]. Investment Strategy and Portfolio - The CLO portfolio increased by 70% to $144.5 million as of September 30, 2024, compared to $85.1 million as of June 30, 2024[10]. - The company is strategically transforming its investment focus towards corporate CLOs, emphasizing mezzanine debt and equity tranches[6]. - The company underwent a strategic transformation to focus on corporate CLOs, revoking its REIT status effective January 1, 2024[27]. - The CLO strategy yielded strong results, driven by higher net interest income and net gains in U.S. and European CLO debt portfolios[23]. Interest and Economic Returns - The net interest margin was 9.65% on credit, 3.52% on Agency, and 5.22% overall[2]. - The net interest margin (NIM) on the credit portfolio was 9.65% in Q3 2024, down from 13.41% in Q2 2024, while the NIM on the Agency portfolio increased to 3.52% from 2.85%[16]. - Overall NIM increased to 5.22% as of September 30, 2024, compared to 4.24% as of June 30, 2024, due to a higher allocation of capital to the credit strategy[16]. - The overall annualized economic return for the quarter was 10.8%[3]. Market and Economic Conditions - The trailing-twelve-month default rate for the U.S. leveraged loan index declined to 80 basis points by the end of Q3 2024, the lowest since December 2022[20]. - The U.S. Agency MBS Index generated an excess return of 0.76% in Q3 2024, supported by falling interest rates and tightening yield spreads[25]. Operational Costs - General and administrative expenses increased quarter over quarter due to costs related to the strategic transformation and higher management fees[26]. - The company incurred Strategic Transformation costs of $106,000, down from $464,000 in the previous quarter[40].

Group 1 - The recent Federal Reserve interest rate cut is expected to positively impact Real Estate Investment Trusts (REITs) [1] - REITs have been facing challenges due to high interest rates, as indicated in their official risk disclosures [1]

Financial Position - As of June 30, 2024, the company had outstanding borrowings under repurchase agreements amounting to $578.5 million, with 93% collateralized by Agency RMBS[157]. - The company's book value per share decreased to $6.91 as of June 30, 2024, down from $7.21 and $7.32 as of March 31, 2024, and December 31, 2023, respectively[157]. - The debt-to-equity ratio decreased to 3.7:1 as of June 30, 2024, compared to 4.9:1 as of March 31, 2024, driven by higher shareholder's equity and less leverage on CLO investments[167]. - The size of the Agency RMBS holdings decreased by 28% to $531.1 million as of June 30, 2024, from $739.3 million as of March 31, 2024[166]. - The net mortgage assets-to-equity ratio declined during the quarter, reflecting an increase in shareholders' equity and a smaller Agency RMBS portfolio[176]. - The debt-to-equity ratio improved to 4.0:1 as of June 30, 2024, down from 4.8:1 as of March 31, 2024, due to higher shareholders' equity and reduced leverage on CLO investments[186]. - The fair value of collateral transferred with respect to outstanding repo borrowings was $0.6 billion as of June 30, 2024, down from $0.8 billion as of December 31, 2023[206]. - The average remaining days to maturity for borrowings outstanding was 32 days as of June 30, 2024, compared to 16 days for the previous period[206]. - As of June 30, 2024, total borrowings outstanding under repurchase agreements amounted to $578.5 million, with a weighted average interest rate of 5.54%[206]. - The weighted average contractual haircut applicable to the assets serving as collateral for outstanding repo borrowings increased to 7.4% as of June 30, 2024, from 5.7% as of December 31, 2023[248]. Market Conditions - The Federal Reserve maintained its target range for the federal funds rate at 5.25%–5.50% during its April/May and June 2024 meetings, with only one interest rate cut projected by the end of 2024[158]. - The yield on the 2-year U.S. Treasury increased by 13 basis points quarter over quarter to 4.75%, while the yield on the 10-year U.S. Treasury increased by 20 basis points to 4.40%[159]. - The Freddie Mac survey indicated that the 30-year mortgage rate increased from 6.79% at the end of March to 7.22% on May 2, before declining to 6.86% at June 27[159]. - Overall prepayment speeds remained low, with Fannie Mae 30-year RMBS registering CPRs of 6.0 in April, 6.6 in May, and 6.0 in June[160]. - The unemployment rate increased to 4.1% in June 2024, up from 3.9% in April and 4.0% in May[1]. - The 12-month percentage change in the Consumer Price Index (CPI-U) registered 3.0% in June 2024, down from 3.4% in April[1]. - The NASDAQ rose by 8.3% and the S&P 500 increased by 3.9% in the second quarter, both indices setting record highs during the quarter[1]. Strategic Changes - The company approved a strategic transformation to focus on corporate collateralized loan obligations (CLOs) and revoked its REIT election for tax year 2024[149]. - The company plans to convert to a closed-end fund to be treated as a regulated investment company (RIC), subject to shareholder approval[151]. - The company operates as a taxable C-Corp after revoking its REIT election for tax year 2024[194]. - The company may face unrecorded tax liabilities if tax regulators challenge its positions on certain tax issues[194]. Income and Expenses - Net income for the three-month period ended June 30, 2024, was $(0.8) million, a decline from $1.2 million for the same period in 2023, attributed to total other loss and increased expenses[210]. - Interest income for the three-month period ended June 30, 2024, was $14.1 million, compared to $10.1 million for the same period in 2023, driven by higher asset yields[211]. - Total interest expense for the three-month periods ended June 30, 2024, and 2023 was $10.2 million and $11.7 million, respectively, reflecting a decrease due to lower overall borrowings[214]. - Other income (loss) for the three-month period ended June 30, 2024, was $(2.6) million, primarily due to net realized and unrealized losses on securities[222]. - Management fee expense increased to approximately $0.6 million for the three-month period ended June 30, 2024, compared to $0.4 million for the same period in 2023, attributed to a larger capital base[220]. - Other operating expenses rose to approximately $1.6 million for the three-month period ended June 30, 2024, from $1.1 million in the same period in 2023, mainly due to increased professional fees and compensation[221]. - Net income for the six-month period ended June 30, 2024, was $3.1 million, a slight decrease from $3.5 million for the same period in 2023[225]. - Other income for the six-month period ended June 30, 2024, was $3.0 million, driven by net realized and unrealized gains of $17.9 million on financial derivatives, partially offset by losses of $(14.9) million on securities[237]. Portfolio Performance - The weighted average yield of the overall portfolio was 6.55% for the three-month period ended June 30, 2024, compared to 3.95% for the same period in 2023[211]. - The net interest margin for the three-month period ended June 30, 2024, was 4.24%, compared to 1.08% for the same period in 2023, reflecting improved portfolio yields[219]. - The weighted average yield on the Agency RMBS and credit portfolios for the three-month period ended June 30, 2024, was 6.55%, compared to 3.95% for the same period in 2023[219]. - The weighted average yield on the Agency RMBS and credit portfolios for the six-month period ended June 30, 2024, was 5.87%, compared to 3.81% for the same period in 2023[234]. Cash Flow and Liquidity - The company expects its liquidity sources, including cash flow from investments and borrowings, to be sufficient to meet both short-term and long-term liquidity needs[245]. - For the six-month period ended June 30, 2024, operating activities provided net cash of $1.5 million, while investing activities provided net cash of $144.1 million, resulting in a total net cash of $73.4 million after financing activities[257]. - Cash and cash equivalents increased by $80.2 million, from $38.5 million as of December 31, 2023, to $118.8 million as of June 30, 2024[257]. - The company had cash and cash equivalents of $118.8 million as of June 30, 2024, which included $89.9 million of U.S. Treasury Bills held on margin[253]. - The company anticipates that its capital resources will be sufficient to meet both short-term and long-term liquidity requirements[263]. Shareholder Activities - The Board of Trustees declared a monthly dividend of $0.08 per share, with a total dividend amount of $1,691,000 for the period ending June 30, 2024[254]. - The company issued 2,533,512 common shares during the six-month period ended June 30, 2024, generating net proceeds of $16.4 million after commissions and offering costs[261]. - The company has repurchased 474,192 common shares at an average price of $9.21, with an aggregate cost of $4.4 million, and has authorization to repurchase an additional 725,808 common shares[262]. - The weighted average shares outstanding increased to 20,354,062 for the three-month period ended June 30, 2024, compared to 13,935,821 for the same period in 2023, reflecting a growth of 46.1%[244].

Financial Data and Key Metrics Changes - The company reported a net loss of $0.04 per share for Q2 2024, with adjusted distributable earnings (ADE) of $0.36 per share, reflecting a sequential increase of $0.09 per share [13][14] - The net interest margin expanded to 4.24% from 3.03% quarter-over-quarter, driven by the growth of CLOs [12][14] - The debt to equity ratio decreased to 3.7 times as of June 30, compared to 4.9 times at March 31 [19] Business Line Data and Key Metrics Changes - The CLO portfolio increased to approximately $108 million as of August 9, 2024, up from $85 million at June 30 [19] - The agency MBS portfolio decreased significantly from $791 million last September to $531 million at June 30, and further to $518 million by August 9 [7][19] - The capital allocation to CLOs increased to 45% at June 30 from 25% at March 31 [19] Market Data and Key Metrics Changes - The CLO market benefited from strengthening fundamentals and robust demand for leveraged loans, with corporate loan prepayment rates reaching their highest level since February 2022 [8][9] - Credit spreads on BB and B CLO tranches tightened overall, although there was significant dispersion among deals [9][10] - The U.S. MBS Index generated a slightly negative excess return relative to U.S. treasuries, reflecting the impact of intra-quarter interest rate volatility [11][16] Company Strategy and Development Direction - The company is in the process of transforming into a CLO-focused closed-end fund, with a targeted conversion date later this year [6][7] - The anticipated benefits of this transformation include better projected risk-adjusted returns and enhanced access to capital markets [7] - The company plans to maintain a core portfolio of liquid agency MBS until the conversion is complete, while continuing to grow its CLO portfolio [8][19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining the dividend through the conversion to a CLO-focused fund, citing the positive impact of the rotation into CLOs on net interest margin and ADE [37] - The recent market volatility is seen as an opportunity for attractive trading, with management prepared to deploy capital at favorable spreads [25][29] - The company expects to continue to see strong returns from both CLO and agency MBS portfolios, with a favorable backdrop for agency MBS due to a steeper yield curve and potential rate cuts [29][32] Other Important Information - The company revoked its REIT election effective January 1, 2024, and is currently operating as a taxable C-Corp [17] - Book value per share was reported at $6.91 at June 30, down from $7.21 at March 31, with an economic return of negative 0.8% for the quarter [18] Q&A Session Summary Question: What is driving the dispersion in CLO performance? - Management noted that dispersion is influenced by asset quality and credit sensitivity, with equity being more exposed to tail risks [34] Question: Can you provide an update on liquidity and leverage? - As of July 31, the debt to equity ratio was down to around 3 times, indicating improved leverage [35] Question: How is the dividend outlook as capital rotates into CLOs? - Management indicated confidence in maintaining the dividend, with expectations for potential increases post-conversion based on CLO returns [37][41]