Ellington Credit Revenue Jumps 23% in Q1

Key Points

• Revenue (GAAP) exceeded expectations in Q1 FY2026, with $15.9 million reported versus a $12.91 million estimate.

• The company completed its strategic shift to a nearly all-CLO portfolio, increasing total managed CLO assets by 27% from the prior quarter ended March 31, 2025.

• Adjusted net investment income missed analyst estimates, coming in at $0.18 per share versus $0.24 expected.

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Ellington Credit (NYSE:EARN), a specialist closed-end investment company focused on collateralized loan obligations (CLOs), reported mixed results for the period ended Aug. 19, 2025. This period marked the company’s first after fully converting to a registered closed-end fund, completing a rapid transition out of mortgage investments. Revenue (GAAP) reached $15.9 million, beating expectations by $3.0 million or 23.2%. Adjusted net investment income, the preferred profit measure for this type of company, fell short at $0.18 per share compared with the $0.24 per share analyst consensus, largely due to capital redeployment lag after shifting the portfolio.

Overall, the quarter showcased strong portfolio growth and asset returns but left investors waiting for a rebound in core income and dividend coverage.

Business Overview and Strategic Focus

Ellington Credit invests primarily in CLOs, which are financial products that bundle together pools of loans -- often corporate loans -- and repackage the cash flows for different types of investors. CLOs are structured in “tranches” with varying levels of risk and return, from senior debt down to the riskiest equity layer. The company now manages a portfolio that is almost exclusively CLOs, following the full exit from mortgage-related assets in April 2025.

It operates as a closed-end fund, meaning it cannot issue or redeem shares on a continuous basis but instead trades on the public market. Success depends on sourcing quality CLO investments, actively managing risk through credit hedges, and efficiently deploying capital, all guided by Ellington Management’s experience in structured credit. Regulatory compliance and the ability to adapt its investment mix are also key for maintaining the company’s competitive edge and tax-advantaged status.

Quarterly Highlights and Key Developments

This period marked the effective completion of the company’s pivot from mortgage securities to a focused CLO strategy. The company completed the disposition of its legacy mortgage-related investments with minimal impact on NAV and aggressively scaled its CLO portfolio by 27% sequentially to $317 million as of June 30, 2025. The shift followed guidance in Q1 FY2025 that anticipated modest income undercoverage and a focus on deploying available capital into newly sourced CLO opportunities.

GAAP revenue outpaced analyst estimates in the quarter ended June 30, 2025. Performance within the CLO portfolio was strong, with a weighted average GAAP yield of 15.6% on an amortized cost basis and a weighted fair market value yield of 15.0% for the quarter ended June 30, 2025. European holdings made smaller but growing contributions. Net realized and unrealized gains in the investment portfolio totaled $4.0 million, supporting a GAAP net income of $10.2 million or $0.27 per share. Net asset value per share rose to $6.12 as of June 30, 2025, from $6.08 as of March 31, 2025, despite distributions of $0.24 per share paid during the period.

Dividend policy remained unchanged, with the company paying a recurring $0.08 per share monthly, totaling $0.24 for the quarter. However, adjusted net investment income did not cover the full dividend, delivering 0.75 times coverage, a shortfall management attributed to the transitional ramp-up in deploying fresh capital. Management commented, “At our current rate of deployment, we project that starting in September, net investment income (NII) will cover the monthly distribution,” suggesting this undercoverage is likely temporary and expected as part of the planned transition. The regular cash distribution continues, with an annualized yield of 17.2% based on the August 18, 2025, closing stock price.

Portfolio, Risk Management, and Competitive Drivers

The core business is now 99.9% invested in CLOs, with $317 million in CLO assets as of June 30, 2025, split nearly evenly between equity and debt tranches (47.0% debt, 52.9% equity). Equity holdings -- representing the highest risk and return -- grew only slightly, while debt tranches saw significant expansion as management moved to enhance risk diversification during the period. The company ended the period with $36.6 million in cash and equivalents, providing flexibility for further investment.

Risk management remains a central focus, with the company layering on credit hedges—financial contracts designed to protect against credit losses -- at points when management saw attractive pricing. Minor net losses on certain hedges and some exposures to European CLOs offset but did not overwhelm the core position gains. Management pointed out that “Active trading throughout the quarter further enhanced our returns,” referencing their ability to react quickly to changing credit spreads.

Compliance with the regulatory framework as a closed-end investment company under the Investment Company Act remains a high priority. The company intends to qualify as a regulated investment company (RIC) to benefit from tax advantages that generally avoid corporate-level federal income tax on distributed income, provided certain requirements are met. External management by Ellington Management continues to provide both expertise and competitive access to desirable CLO investments.

One-time events in the quarter included the rapid completion of non-CLO asset sales, with management emphasizing that this had only a “minimal impact on NAV.” Leverage rose meaningfully, as indicated by total liabilities increasing from $81.9 million to $134.2 million, supporting the scaling of the investment book but also raising monitoring points for future market volatility or changes in funding costs.

Looking Ahead: Guidance and Investor Watchpoints

Management projects that starting in September, net investment income (NII) will cover the monthly distribution. This guidance follows through on previous signals from the prior quarter, when management anticipated a temporary period of undercoverage during the portfolio transition. No additional quantitative guidance was provided for subsequent quarters or for the full fiscal year.

For investors, key areas to watch include the pace at which remaining cash balances are put to work, trends in CLO market returns and credit spreads, and ongoing coverage of the dividend from operating income rather than one-time gains. The company’s nearly exclusive focus on CLOs increases concentration risk, meaning future results will be closely tied to conditions in the corporate loan and structured credit markets. The dividend policy was maintained, with a monthly $0.08 per share payout. No changes to the dividend rate were announced.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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