Q1 2020 Earnings Call

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Ladies and gentlemen, this is the operator today's conference is scheduled to begin in approximately two.

Until that time your lines, where they can be placed on music called thank you for your patience.

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Good morning, ladies and gentlemen, thank you for standing by welcome to be Ellington financial first quarter 2020 earnings Conference call.

Today's call is being recorded.

At this time, all participants have been placed in listen only mode.

The floor will be open for questions following the presentation.

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It is now my pleasure trying to call over to Jason Frank Deputy General Counsel that Secretary, Sir you may begin.

Thank you before we start 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 Onea, Brad Annual report on form 10-K filed on March 13, 2020 forward looking statements are subject to a variety of risks and uncertainties caused the companys actual results to differ from its beliefs expectations estimates and projections. Consequently, you should not rely on these forward looking statements those predictions.

A few true but.

Payments made during this call is car made out of the data this call and the company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information and future events or otherwise I'm joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark Tecotzky Co Chief investment officer, or do you see in jail early here.

Chief Financial Officer, you'll see that described in earnings press release, our first quarter earnings Conference call presentation is available on our website Ellington financial Dotcom management's prepared remarks, we'll track. The presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end of the back of the presentation with that I'll now turn.

The call over to Larry.

Thanks, Jay and good morning, everyone as always thank you for your time, an interesting Ellington financial.

After a quite start to the year to covert 19 pandemic and the associated measures to contain the pandemic brought the global economy to a virtual stand still in March.

Resulted an extreme volatility and widespread market dislocations, including a collapse of asset values and liquidity.

Economic activity plunged as countries around the world implemented social disgusting restrictions.

Unemployment claims surged consumer spending plummeted and GDP growth rates turned negative.

In March equity sold off across the globe as the 11 year Bull market ended in spectacular fashion.

Yield spreads on most fixed income assets widen sharply and a flight to safety drove record drove record low yields on long term U.S. treasuries.

Portions of the yield curve inverted and interest rate volatility searched on slide three you can see the extraordinary quarter over quarter declines and treasury yields.

Repo financing stresses alongside a drop an asset prices severely reduced liquidity and prompted forced selling across virtually all credit sensitive fixed income asset classes.

Many leverage mortgage investors and respond to in response to margin calls from the lenders had to unwind portfolios quickly and add an opportune times and their fire sale prices while at the same time, many mutual funds and eat yes that offer daily liquidity also had to seller gently and their case to meet mounting investor redemption requests.

Yes.

Vicious cycle ensued as these four sales put additional pressure on prices, which prompted further stressing liquidations and so on.

The selling pressure extended even to perceive safe havens like agency, RMBS, where yield spread skyrocketed to levels not seen since the 2008 2009 financial crisis.

The downward spiral finally started to subside. So it Didnt then right away when the federal reserve stepped in to restore some stability.

The fed slash short term interest rates nearly to zero injected liquidity into the repo markets launch several credit facility similar to what had implemented during the financial crisis and stepped in with unprecedented levels of quantitative easing all of which provide a meaningful support, especially the more liquid sectors of the market.

The U.S. Congress passed three rounds of stimulus packages during March culminating in the two trillion dollar cares Act on March 27th largest emergency spending bill in history.

These actions were married by central banks and governments around the globe and the rollout of stimulus programs continued into April.

As the federal reserve deployed its full crisis playbook, we saw was an effect almost a full market cycle compressed into just a few weeks.

You S. equities bounce back sharply from their March 23rd lows as what had been a 34% drop in the S&P 500 in less than five weeks was immediately followed by an 18% rise in just three days.

The federal reserves injections of capital East liquidity stresses and yield spreads in the sectors targeted by the federal reserves asset purchase programs tighten sharply, particularly in agency RMBS, which recovered strongly during the last two weeks or the month.

In the credit space yield spreads in some sectors such as investment grade corporate bonds also tightened significantly following the feds actions, while other sectors, including non investment grade CMBS and see a lows noticeably lacked.

Many measures of market volatility subsided from their highs, but still remain greatly elevated at quarter end.

What made Mark unique were made March uniquely challenging was the magnitude and speed of the risk off moves and during the peak of the frenzy. The high degree of correlation across virtually all asset classes irrespective of their out of their actual underlying risks.

As March progressed, with the asset markets and financing markets looking more and more fragile we proactively reduced the size of our agency portfolio in an orderly and measured way, which bolstered our liquidity and lowered our leverage.

Most of the agency assets that we sold in March were sold either early early in the month before yield spreads at their wives or later in the month after yield spreads it already recovered strongly.

In this way, we were able to avoid forced asset sales entirely which would have exacerbated losses.

During periods of acute distress like what we saw in March the performance of a leveraged portfolio can vary widely based not just on what you own but also how you financed it and how you adjusted to quickly changing market environment.

So the crisis in March, but a spotlight on our risk management, our liquidity and the structure of our liabilities and our leverage.

Ellington financial entered in March with a strong balance sheet and prudent leverage ratios on the asset side, we have lots of liquid agency RMBS to help provide liquidity and the credit we had deliberately built a relatively short duration highly diversified portfolio with an emphasis on first liens.

In times of distress, whether it be distressed and the financial markets or broader macroeconomic distress, maintaining a shorter asset duration can help a fixed income portfolio portfolio in two very important ways.

First asset prices tend to be less volatile and second principal pay downs and come in faster, thereby de risking your per your position faster.

In fact during March alone, we receive proceeds from principal repayments of about $55 million on our small balance commercial mortgage loan consumer loan and residential transition loan portfolios, which represented about 8.5% of the aggregate aggregate size coming into the month of those portfolios.

On the liability side lessons learned from past market crises have taught us to limit our leverage to diversify our sources of funding infrastructure, our financing arrangements to help us better withstand shocks in times of financial distress.

Over the past few years, we have issued investment grade rated senior unsecured notes and I've completed several securitizations all of which provide locked in term non mark to market financing.

Several of our secured financing facilities are committed and non mark to market and have repayment schedules that more closely matched the repayment schedules of the financed assets as compared to typical right though.

Also our objective is always been to stagger the role dates of a repo financings and to roll. These financings in advance of maturity dates as a standard practice.

Our discipline the interest rate hedging an opportunistic credit hedging has also provided additional book value protection and volatile markets.

All of these measures combined with our strong liquidity management practices help lessen the impact of the March distress in our portfolio's granting us sufficient time to stay ahead of the curve. Unlike many other market participants who became for sellers at distressed prices in March.

With that I'll turn the call over to Jr. To go through our first quarter financial results in more detail.

Thank Larry and good morning, everyone. Please turn to slide seven per summary of our income statement.

For the quarter ended March 31st Yes, He reported a net loss of $3.04 per common share compared to net income of 31 cents per share for the fourth quarter 2019.

Core earnings for the first quarter with 46 cents per share up from 44 cents per share in the fourth quarter 2019, and covered the common stock dividends declared during the first quarter 45 cents per share.

While total net interest income increased 24% sequentially and gains on our credit hedges were meaningful significant net loss for the quarter was driven by losses on our long investment portfolio as the market dislocation in March led to wider yield spreads across virtually all asset classes.

Now please turn to slide eight for the attribution of earnings between our credit agency strategy.

During the first quarter the credit strategy generated a total gross loss of $2.47 per share while the agency strategy generated a total gross loss of 38 cents per share.

Compared to gross income of 28 cents per share in the credit strategy and 32 cents per share in the agency strategy in the prior quarter.

Most of our credit strategies generated net losses during the quarter.

The largest losses occurred and feel a CMBS non agency RMBS and non QM loans, all markets, where there was substantial distressed selling done the core.

Our long strategies with shorter durations had better performance, including small balance commercial mortgage loans consumer loans and residential transition loans well, we received significant proceeds from principal payments and the pace of small balance commercial mortgage loans several profitable asset resolutions.

The fact that most of our commercial mortgage loans have LIBOR floors. All was also valuable in the quarter as LIBOR declined sharply.

We also had net realized and unrealized losses on the interest rate hedges and the credit portfolio as interest rates declined sharply during the quarter and we're highly volatile and the net loss from investments in unconsolidated that Steve.

On many of our credit investments, we are anticipating some degree of eventual principal losses as a consequence of the economic impacts of coded 19, especially in a prolonged shutdown scenario.

As has been widely reported there's been a significant nationwide increase and loan delinquencies and Forbearances and we're seeing these back some of this on our own portfolios.

And the agency strategy, the precipitous decline in interest rates and high levels of interest rate volatility generated net losses on our hedges and while our agency RMBS assets did appreciate and price during the quarter they significantly underperformed our hedges.

As a result, we experienced a net loss for the quarter and the agency strategy.

Furthermore, TV A's outperformed specified pools during the quarter depressing payouts on our specified pool portfolio.

The underperformance a specified pools relative to TV A's can be largely attributed to market wide liquidity problems exacerbated by quarter end balance sheet pressures as well as to the implementation of the federal reserves amplified asset purchase program during the quarter, which was driving generally limited the TV A's and generic pools as opposed to specified pools.

Payoff.

That said, while TV A's outperformed specified pools during the quarter, they severely underperformed interest rate swaps and U.S. Treasury securities. So we benefited by having a significant portion of our interest rate hedges and TV, a short positions as opposed to interest rate swaps.

Turning next to slide nine you can see the size of our long credit portfolio was essentially unchanged quarter over quarter.

We grew our credit portfolio in January and February deploying the capital raised in our January offering, but these new purchases were offset by asset paydown payoff and that reductions in asset values related to the mark to market dislocations in March.

In light of the market volatility, we substantially suspended new investments in our credit strategies in March and as Larry mentioned, it with our agency portfolio not our credit portfolio that we use as a source of liquidity.

On slide 10, you can see that we strategically reduce the size of our agency portfolio by 48% to $1 billion as of March 30, Onest compared to $1.9 billion at the end of the prior quarter.

These sales were orderly and enabled us to reduce leverage and bolster liquidity.

Now please turn to slide 11 summary of our borrowing.

As a result of the agency sales our debt to equity ratio declined 3.1 to one as of March 30, Onest from 3.8 to one at December 30, Onest adjusting for unsettled purchases purchases and sales.

Similarly, our recourse debt equity ratio also adjusted front settled person sales decreased over the same period.

[music] 0.1 to one from 2.6 to one.

Our weighted average cost of funds decreased sequentially during the quarter, 2.58% from 2.86%.

Driven by lower short term interest rate.

As a result of the significant price declines in general price volatility we received margin calls under our financing arrangements that were higher than typical historical levels. We satisfied all of these margin calls.

At quarter end, we had cash and cash equivalents of approximately $137 million along with other unencumbered assets of approximately $279 billion.

For the first quarter, our total gene expenses declined to 14 cents per share from 16 cents per share in the prior quarter, primarily due to our higher share count following the raise in January.

Other investment related expenses declined quarter over quarter to nine cents per share from 16 cents per share mainly because we incurred non QM securitization issuance costs in Q4, but not in Q1.

We had a small income tax benefit related to him a decrease in deferred tax liabilities.

That's the taxable REIT subsidiaries.

Our book value per common share at March 31st with was $50 and fix them.

On a more technical note as of January Onest 2020, we applied the new credit loss standard known as Cecil because we have always fair valued our portfolio through the income statement diesel had no net impact on our earnings or book value This quarter.

The final note.

In response to the challenges presented by Copel 19, the FCC has granted public companies and extension for certain filing obligation this quarter with everything going on we intend to take advantage of this option and plan to file our 10-Q on or before may 22nd.

Now over to Mark.

Thank you Jr.

The markets for securitized products in the second half of marching throughout much of April was challenging as I've ever seen in my career, including even 2008.

Larry I already gave some of the blow by blow through I won't repeat it all now, but essentially cobot 19 created such a sudden and dramatic change to the outlook for U.S. economic growth unemployment that almost overnight, both lenders and investors repriced virtually all credit assets to both much higher yields a much higher loss expectations.

Sitting off a wave of forced selling for mutual funds returned to hedge fund.

If you had a portfolio that was highly leveraged even with seen new assets well. If you had a portfolio that was only modestly leverage but with subordinated bonds.

Either way your balance sheet was under siege and if he became a four seller the prices you realize we're quite distressed.

The policy response from the fed with fast an enormous massive buying of agency MBS.

TALF program lending program and the carries that all went a long way towards stabilizing the market as we see it the two big beneficiary from the government intervention or the consumer and the residential housing market, which are both sectors, we have long favorites.

Ellington financial with its diversified less levered portfolio, which included a lots of liquid agency assets and which in credit included a concentration of lower LTV loans was able to weather the storm.

While we absolutely have worked to resolving assets.

Either the borrower or the property are experiencing a lots of income we're pleased with the performance of most parts of our portfolio and while the agency MBS market did not escape unscathed, our disciplined approach kept our net loss in our agency portfolio under 10% on allocated capital for the quarter.

I Wonder if you how the team managed the portfolio and the crisis hit Firstly, we recognize relatively early on that the spread of Cove. It represented the kind of scary unpredictable news the market really struggle through rationally priced this is not a string of <unk> terrible GDP reports or even massive flooding in Houston as bad as those events can.

Be they're much more quantifiable and contrast, nobody has a crystal ball to accurately predict when and what progress in the economy will reopen.

As you can see on slide nine we did not sell we've not net sell credit assets into the distressed market in March and the portfolio was essentially unchanged quarter over quarter that flight doesn't really tell the whole picture.

Because we grew the portfolio in January and February falling or capital raise and these purchases were offset by a lot of paydowns in March specifically small balance commercial loans residential transition loans and consumer loans all had a lot of principal paydowns in the quarter as Larry Jerry mentioned.

As you can see on slide 10 coming into the quarter, you'll see that a large portfolio of liquid agency pools lots of urgency specified pools had low pay up that we can efficiently turned into cash and that's exactly what we did as much progress.

You can see on this slide that we cut our agency portfolio in half. Most importantly, we did this and the deliberate opportunistic way in particular by selling early in March before spreads hit their wide or later in the month, thereby taking advantage of the strong agency MBS rebound driven by the fed unprecedented buying spree.

Just like with other periods of Q, We agency MBS recover first and then other structured product sectors follow the market volatility struck our view was the most prudent way to raise cash with to sell them more generic MBS securities, especially our low pep specified pools.

No the markets become more stable our focus has shifted more towards managing our credit exposure and taking advantage of tremendous opportunities available take into account to potential long term consequences of covance for some sectors, such as credit risk transfer securities and our opinion the uncertainty seems to great to have sufficient comfort.

And in asset values, well for others, it seems pretty clear to us that even with conservative assumptions yields are still very high.

Turning now to non QM business.

In response to March as volatility, we temporarily stopped new originations, what we're now planning to restart of lending programs with updated guidelines that take into account potentially weaker economy with higher levels of unemployment and lower income levels and including the effects of these factors on real estate prices.

The reason nonqm living with performing so well between 2015 and February 2020 is that there was a big borrower demand for that product so capital providers like us could be disciplined on credit and still generate volume.

The geographies with their automated underwriting system or the low cost low rate mortgage producer for most borrowers were W. Twos and IRS form 10, forties and give a close to complete picture of the income as an ability to repay repay.

Probably coverage about 85% of residential mortgage applications for the other 50%. The Nonqm business line makes a lot of sense and cobot does nothing to change that.

If anything we think it makes nonqm opportunity, even more compelling and then demand. This other 15% of mortgage applicant includes many self employed borrowers many bars with lot of K one the rental income.

And many borrowers who might be retired with substantial financial assets, but limited and no 10 99 income.

It also includes many highly qualified borrowers who might want to buy in investment property through an LLC. These are the borrowers that non QM response, we served and the very strong credit performance in our non QM Securitizations to date is a testament to the fact that win.

Non QM loans to thoughtfully underwritten their high quality loans. Meanwhile, at the same time that we're predicting continued demand from the traditional nonqm borrower base. We also think that we'll see additional demand for some non QM loans from another segment of the residential mortgage borrowers.

Specifically I'm trying to large number of quite creditworthy borrowers who happen to have certain characteristics that put them toward the edges of the T.S. These current credit box faced with uncertainty about the future of credit risk transfer market did you see seem to be tightening their credit box and we expect this.

That this will potentially exclude some very creditworthy borrowers who may have made become strong conde candidates for non QM loans.

Will there be headaches, no nonqm portfolio, absolutely will there be borrowers that need forbearance, yes, well they'd be it delinquency spike yes, you can already see that in the data.

So our focus right now and documents two pronged first in partnership with our services, we're working with those borrowers who need time to pause there payment obligations, because they're experiencing lots of income.

Secondly, we are playing to resume originating high quality loans with guidelines appropriate for the current more uncertain economic environment.

[noise], although nonqm performance will be affected by the economic slowdown that cobot triggered what's the price movements in the non QM market in March relate to market wide financing issues, especially as the securitization market seized up.

The fundamental it's with alone.

The good news is that the nonqm market seems to be slowly returning to more normal state. We expect the nonqm securitization market to reopen later this month, we hope feedback in the market with our next securitization as soon as market conditions permit.

We are thinking about residential transition loans and in a similar way. The reason we entered the RTL market was because it made sense. The median age the U.S. home is now 37 years and many borrowers don't want to buy a home with a lot of deferred maintenance to deal with.

So if we pick the right partners picked the right geographic area picked direct renovation project and be disciplined about ltvs and underwriting standards. We believe that we can up strong performance in a very high levered yield.

On that portfolio amazingly between March 1st in April Thirtyth about a quarter of RTL portfolio paid off at par.

It was the kind of outcome, we were hoping for them, we underwrote those loans and it really shows the benefit of having shorten duration assets during the credit shock could be of filled those loans at par during the panic in March I highly doubt it but the combination of our experienced team and our careful underwriting got us that outcome, it's a far better outcome than being a forced sellers in the third week of March.

Will that be some headaches net portfolio, yes, do we expect to see some credit losses, we do.

But from the market color, we have gotten it looks like our portfolio is performing much better than many other RTL portfolios. So moves nonqm, we temporarily shut off new originations in March we want to start buying again, we're reform living or guidelines and looking for a secondary packages to buy.

The same thought presses guiding our consumer loan portfolio. Despite the covert dislocation we have continued to see a substantial velocity of par pay off.

We are working with our partners to appropriately helped borrowers in need until we have more visibility we have cut way back on new purchases, but so far the performance numbers are very encouraging.

Our small balance commercial strategy also had some great resolutions in the quarter. It will also have at Sears headaches as their outlook for the next six months is for things to get a lot messier in commercial real estate than in residential real estate, but again, our low ltvs and shorter duration should help this should help in the strategy as well.

All that said <unk>.

We certainly took our lumps this quarter as always losses in the credit portfolio took one of two formed first mark to market losses on investments, we don't expect the big change and the cash flows, but the prices went down because the market yields wide.

And second we had some mark to market losses on investment there were not just due to wider market yield spreads but are also because you have witnessed well we project. Some degree of fundamental cashflow impairment that kind of low loss is likely to be permanent.

What do we learn from the crisis in March and how will that shape the direction of ft going forward.

Notable difference between what happened in March in previous financial crises, it's the speed at which prices dropped in the fourth selling occurred we did not anticipate that over the course of just a week yield spreads on Fannie fours for example could wide from a normal Oh, yes to the why this level since the 2008 financial crisis.

Cobrand is proving to be unpredictable, we have to expect more the unexpected next shot could be weather related there could be another wave of public health crises related to cobot or do something else or there could be more tensions around global trade or something else geopolitical.

Well, what wherever they shop comes from we need to be prepared to withstand volatility and hopefully drive from it. So how do you do that.

I think the experience of the past couple of months gives us even stronger incentive to do securitizations as a way to transform repo financing into non mark to market term financing.

Plenty of times in the cost and time commitment.

Securitizations make it seems like they may not be worth it in times like March 2020, having done them was well worth it.

All non QM loans that we had securitized over the past two years I've been sitting on our balance sheet financed with repo really pedal, we would've had to reserve a lot more cash for potential margin calls.

Secondly, so far the loan can source from origination channels, where we carefully chosen their partners and helped shape the underwriting guidelines seems to be performing but well relative to their peer group.

We are more inclined to continue to look for partnerships, where we aligned and work in tandem with the originator to make credit decision.

Thirdly, reaffirms that liquidity of in agency MBS portfolio can be a great balance for credit portfolio Agency MBS is the primary sector structured products that benefit from direct fed buying and this has been an important governor on spreads in time to stress.

Well agency MBS liquidity was absolutely awful at times in March we still much better than in any fixed income sector without government guaranteed we're able to efficiently wave cashed in that market. So like the balance you see had between agencies in credit.

Looking forward I indirectly own can portfolio management team and very focused on navigate in these markets and doing the best to earn back loss will be sustained in March now back to Larry.

Thanks Mark.

Well in economic return of negative 16% for a quarter, it's painful to say the least I'm extremely proud of how Archie manage.

Through the unprecedented challenges of the quarter, especially given that leveraged credit portfolios went across areas of the distress in the financial markets.

Our liquidity management risk management and hedges did what they're designed to do.

They protected book value and they protected our shareholders.

This past quarter.

That meant protecting our shareholders not only by avoiding any forced asset sales, but it also meant protecting our shareholders by avoiding any expensive are highly dilutive capital raises.

In addition to a GAAP loss for the quarter. We also estimated taxable loss for the period.

For re purposes, a first quarter taxable loss with technically lower our distribution requirement for the full year.

The board has set the two most recently announced dividends at eight cents per share.

Well our outlook for future core earnings for Ellington financial a strong.

These reduced dividend levels balance that optimistic outlook on core earnings against our now east redistribution requirement and our desire to preserve liquidity.

Liquidity, both to take advantage of investment opportunities and liquidity just to be prudent and these continued uncertain times.

The board will continue to assess the dividend rate on an ongoing basis as market conditions, and our financial position continue to evolve.

Financial crises can also create opportunities and as we look ahead, the diversified credit sensitive sectors, which Ellington financial has deep experience.

Finally in many of our loan businesses are facing a severe supply demand imbalance with net interest margins that are as wide as we've seen in years.

We believe that this imbalance will present highly attractive asset acquisition opportunities for Ellington financial for some time to come.

All that said well the global government and Central Bank responses have provided a booster liquidity and meaningfully improved market performance in the short term the path forward for the economy remains unclear.

We don't know what the length and severity of the economic downturn will be what the ultimate path to recovery will look like and what the exact effects of all this will be on our current portfolio or are on or on future investments.

And on the liability side, it's unclear what the exact terms and availability of financing for these assets will be.

In light of this uncertainty our goal will be to balance defects that is building in a margin of safety to absorb additional market shocks with all fats that is the ability to capture what we see is great opportunities.

Ellingtons core risk management principles has served us well over many market cycles, including during Ellington Financial's very first years from 2007 through 2009.

When Ellington financial not only maintained book value stability through the financial crisis, but then absolutely thrived and its aftermath.

We believe that these same risk management principles continued to be critical now.

Both in protecting you have ceased book value and keeping you have see well position to capitalize me opportunities that we are seeing and that we are anticipating.

And as always management remains strongly aligned with our shareholders with a significant coinvestment any F.C.

Before we open the floor to questions I would like to take this opportunity to affect the numerous members of the entire Ellington team for their hard work over the past weeks despite difficult circumstances.

And for all of those listening on the call today and to all of those in our communities and around the globe impacted we hope to you and your family stay healthy and safe.

With that we'll now open the call to your questions. Operator. Please go ahead.

At this time I would like to remind everyone. If you would like to ask a question. Please press star and the number one on your telephone keypad.

Your first question comes on the line of Trevor Cranston JMP Securities.

Hi, guys. Thanks.

However.

Hey, how are you guys are doing well I'm actually too.

Couple of questions on the financing side and are you guys talked about the uncertainty that they're there remains about you know the terms and availability of financing for for new asset purchases.

I was wondering if you grew closer boat.

How much of the a you know credit repo you guys have was actually rolled up between sort of the middle in March and today.

And have a repo that hasn't yet ruled who sort of what's your level of confidence is that the lenders are gonna be continuing <unk> continue to be willing to finance the assets going forward. Thanks.

Yeah, I don't want do you know I first of all I don't have obviously, all those figures at our fingertips, but but I can tell you that.

You know we're feeling good we did we did extend actually some some repo I as I think I mentioned, we not just stagger maturities, but we also we also role kind of you know a head in advance of refund maturities not just waiting to the low.

Last minute jewellery bell so.

We did take some proactive steps up I'm, not going to be too specific with which counterparties and with in which markets, but there was some significant.

Credit repo that we it's actually extended.

Well in advance.

Of.

Its maturity.

During March we have after quarter end we've also.

Significantly extended some other or some other very large amounts of our CRE of our lawn and I'm talking now about loan repo, which is perhaps what you were focusing on and securities I would say that.

The situation is definitely clearer and that securities repo.

We've I don't want to say that it's been business as usual, but we really have not had a significant issues rolling securities repo loan repo again, we've been ahead of the game staying ahead of the game.

But the availability in terms exactly what we're going to see in the future well, let's just take Nonqm for example, right. So we have some nice term repo a non QM right now.

So we've got we think Apple.

Runway, there, but nobody can predict exactly where that repo market is going to settle in north and it's going to be related to the securitization market as well right. So.

There are still non QM out there in the marketplace sitting on lines awaiting securitization.

And there have been some distressed sales as you may or may not have heard about especially in March. So you know so we have to see how that will play out and that's going to affect.

The you know the rates that the non QM borrowers are going to pay right at all sort of is a.

Cycle, if you will so so again to summarize on the loan side I think we've been very proactive about that even you know even during the.

The the depth of the crisis.

It's going to be more expensive to finance loans, there's no question about it.

But the rates that we're going to be able to get.

From borrowings under the yields are going to be I'll be able to earn on our loans are gonna be significantly higher. So we think that all told this is gonna be a great opportunity you talked about that supply demand imbalance.

Between borrowers and lenders.

So I hope that answers your question.

Yeah that was very helpful. Thank you for that.

And then next question remark talks a little bit about sort of the differentiation in the types of price movements among assets like some.

Where you do expect a meaningful change in the actual cash flows in credit performance in some assets, where there isn't necessarily so bigger change.

I guess as some liquidity returns to the credit markets.

How are you guys thinking about the composition of the portfolio are there certain sectors, where you might like to sell assets to the extent you feel that you can do that and reallocated into something else or I'm not sure. How should we think about the mix at the asset classes. Yeah. So that mid month, yeah, I'm going to let me take.

That question first and then going to pass it tomorrow, because I'm sure. He is going to want to supplement so.

During.

During March, especially right. The markets were so illiquid that for credit product that rotation you know wasn't really an option right. It was you know traversing the bids bid ask spread was just too expensive.

Going forward I think you're you're right now we're always though going to have to look at what are we selling right versus what are we buying or where are we reallocating.

And so what I would say as that I think that when you when we think about Ellington financial and what kind of company. It is and how the market in the past has rewarded us for for building the types of a of of sustainable core earnings.

For example.

And.

I think so I do believe that as the year progresses.

We will.

At the right time.

You know sell certain of our securities portfolios.

When again, we think that it makes sense on a relative value basis and redeploy.

More into.

Some of these asset classes, where I think the supply demand imbalance is going to be more sustained there's currently supply demand imbalance still you know in a lot of securities markets right, even non agency RMBS, which you know was the.

Star performer right after the financial crisis of 2008 2009.

And you know, which is obviously much smaller market than it was back then.

Even that market you know it is trading at at very wide level. So yeah, we're not saying that we're just going to be selling things.

Right away, but as those markets continue to fall, which we believe they will as the security marks can get a thought and is more clarity comes to the market. We absolutely will be looking at rotating out of some of those I'll just call them more noncore assets for us at this point.

And.

Getting good total returns, making sure that we have the right we're selling at the right time and redeploying probably into more of the loan businesses, where we think that the opportunity is going to be sustainable really for a long time. So we want to build those businesses. There Mark is there anything you want to supplement.

I guess I would just say that.

Our interest is in sectors, where.

The outcomes aren't binary and the outcomes aren't contingent upon guessing right on.

Potential policy move.

So.

You know, we think about hotels, who we think about student housing.

The outcomes on those kinda loans are highly dependent on when the economy reopens once it reopens, what's cool consumer psychology is when universities reopened and so.

I think we have a great research effort here.

Ported by vast amount of data purchase.

But.

That effort in that data isn't doesn't give us an edge in predicting.

The sort of things that are going to drive outcomes for those two sectors, where I think it is very good in understanding for different levels of unemployment.

What income loss is how the care is acting more generous unemployment benefits.

Offsetting cum loss and translating all that into what might happen with home prices and so I.

I'd say sectors, where you don't the outcomes aren't binary and it's not really contingent upon.

Getting a policy response right.

You sort of where we think.

Not only do you get very attractive yields.

But your downside is much more limited.

Okay, Great that's helpful.

And then you guys talked about or the amount of principal repayments you've had in March which was obviously very helpful to to have a during that time period I'm.

Anyway, you can provide sort of an estimate of what's your expectation would be for the average amount of monthly principal repayments I'm looking forward.

Yeah, I. Unfortunately, I don't think that's something that we can provide with enough enough confidence.

The portfolio.

Is you know whether it be our small balance commercial portfolio residents transition loan portfolio.

Those are less statistical right those are more individual loan based and certainly hard to predict even enduring you know times of stability pre covered those are hard to predict but you know the maturities are short right. So we're certainly hopeful that we will still have a steady stream of repayments there.

In terms of the you know more statistical parts of our portfolio.

Whether that be consumer loans nitrogen loans et cetera, we.

Mark I don't know a few won't want to.

You know say I don't think we can be due to quantitative but if there's something anything qualitative you could say that about those portfolios. You know there you probably have you know we have a little more data and again I think we remarked on the call that so far.

We're very pleased with how those continue to pay down marks anything you want to add there.

Just you know there's always.

There's two factors one is that.

The portfolio.

Some of those sectors say like Archeo, it's smaller now than what it was two months ago. So just because it's smaller there I would expect probably.

Or slow down in repayments and also to you know as I said on the call you know, we're gonna have headache to work through and so.

You know.

Some of the easier loans result pay off done on a percentage basis, the headache for a little bit higher percentage. This will be those either I expect it to come down a little bit but you know there's also the consumer loan portfolios is fair, but if it's straight amortization so.

You know if the portfolio where does it stay where it is.

And without without substantial new purchases.

Acted to come down a little bit overtime.

Okay Gotcha.

And then if the last question for me.

Yeah, you guys talked about.

Good thing on the on the sort of core businesses going forward along with origination partners.

Event of the investments you've made in the origination companies. So far can you comment on.

Sort of how those companies or you know broadly probably fairing in how they were able to.

Come through sort of the March or April time period, a third you know still reasonably healthy you're continuing to operator or what their status.

Yeah, I don't think we're going again into too many specifics share.

I think that.

Our.

As you as you May know our primary investment.

In terms of.

No equity investment.

As in a reverse mortgage originator.

We think that there's.

Tremendous demand for that product now I mean, it's an agency product side I mean, there's private label as well as demand for both.

And so.

In terms of the.

Ability to securitize that there's no question there.

And it's a product where you can imagine the opportunity to basically borrow money with no requirement to.

To make monthly payments thereafter, as looking quite attractive right now.

Okay for people. So yeah. So we feel we feel very optimistic about that business.

In terms of our other investments are much smaller in terms of.

Our investment in.

You know in inland sure.

Again, we've talked about how the non QM market I think we said Mark said it a couple of times.

Where we're getting ready we're planning to get out there again, and you know and start seeing where are the right balances between.

No rates that will be attractive to borrowers and well work.

For us.

After leverage whether to be after repo leverage or after securitization leverage. So so we think that the competition.

In both of those spaces has been severely hobbled I mean, I think theres no question there.

And so.

You know where again very optimistic about about the opportunities in that market.

I'll just leave it at that.

Okay. Appreciate the comments like you guys.

Your next question comes on line of Kristen up at Piper Sandler.

Good morning, guys hope, you're doing well and then say.

Yes, Thank you Chris when you too.

Thank you.

Can you talk a little bit at some of the at risk areas.

That you might have in your portfolio right now I guess first kind of what percent of your loans are currently in Port Barents and then also what percent of loans are in certain sectors, whether its retail hotels restaurants small business loans are kind of any other areas you'd like to point out.

Yeah, we're not yeah, we have not historically given that type of transparency are on the commercial side commercial mortgage side. Its diversified right. So we have exposure at all sectors.

And.

Obviously some of those sectors like.

Hotel in lodging are going to be at least in the short term certainly more.

Challenge than others I might multifamily.

But its diversified.

In terms of the you know.

Actual figures on watching forbearance and all that again.

I think all we can say is that when we put out our Q, which.

We'll see.

As Jr, said I'm going to put that out.

You know probably a couple of weeks later than we might have otherwise without the yes see relief. So it can take our time.

You'll you'll see you'll see it some information there.

And you'll see also information in you know in the valuations right and we as Mark said.

There were two components to the valuations right and some of those are just yield spread widening and some of that will be disclosed in the Q.

And they'll be some of it due to and you know kind of projected future credit impairments.

And but we're not dot, but like you know up to date information about Watson forbearance, right, now et cetera, where I'm, sorry, but we're not we're not providing.

But it's very carefully but it well I will say that we do believe and I think we sort of implied.

That you know for example in non QM mean RTL.

Certainly we believe in area, we don't Theres no.

Theres no almanac to go to for me to prove this but we believe anecdotally based upon what we've seen in what we've seen reported to us that our portfolios are holding up very well relative to you know the those sectors at large.

Okay. Thanks, that's a that's helpful. One last one for me what are your views on a on buying back shares right. Now are you more focused on preserving liquidity to buy other assets or you get good opportunity here to be buying back with the stock I think it's around 70% of book I know in the past you talked about the.

80% to 85% level as a threshold, but but definitely different times here just sort of curious about what your focus is right now whether its buying back or indefinitely idle plant or any other color.

Yeah, that's that's a great question so.

And it is.

It's one that is you're right you know pre crisis, 80% was kind of a level that made sense and.

We are trading lower than that.

Obviously, we just put out book value.

But our threshold now will be lower.

I don't want to again predict exactly how much lower will be.

And you know our our window you know obviously for well my maybe not obviously, but our window for repurchases typically happens. After we've had these calls right. We also have to consider although we have acute coming out with more information as well. So we haven't made any decisions yet as to whether we'll be.

You know restarting our repurchases but.

You know the threshold has to be higher because the investment opportunities are are so considerable right now and it's a lot different when you're buying back at 80% of book.

When the credit markets are pretty frothy and and versus now so that's something that we'll be looking at very closely and trying to be a scientific about as we can at the same time.

Liquidity preservation I think I mentioned is always going to be a balancing factor as well I'm just like.

No.

We lowered the dividend, but we didnt lower to zero, it's got to be a balancing act.

And and I'm, sorry, I can't give more visibility there other than to say that I'm I'm sure the threshold will be lower than it was before.

Okay. Thanks for taking my questions.

Thank you.

Your next question comes on line of Doug Harter with credit Suisse.

Hey, guys. This is actually Josh on for Doug. Thanks for taking the questions first on the agency portfolio seemed like a great source of liquidity for you guys in the first quarter curious, how you're thinking about that portfolio going forward and if you could just talk a little bit about how you're thinking.

About the agency strategy in general fitting into the broader portfolio mix of the company. Thanks.

Mark.

Sure. So you know I mentioned in my prepared remarks that.

There is a real benefit to having that.

Balance between agency portfolio and a credit portfolio.

For you really thought in this quarter right. The agency portfolio provides a lot of liquidity at times when it's the credit mark can be less liquid.

And the other benefit I mentioned the prepared remarks is that.

It's really only agency MBS until much you know to a lesser extent CMBS.

Benefit from direct fed buying at a time, but feel stress and you saw that in Q1.

And we availed ourselves that opportunity and I think.

It was it was a thoughtful way for us to manage the.

The portfolio So you know.

Dork Lee if you take the longer view of how Lincoln financial has partition capital between agency and credit it's typically been somewhere between the low and 15% of our capital and agency strategy update at the high end, maybe 23, 24% in an agency strategy. So why.

I don't see those guardrails.

Changing that dramatically I will say that now you have seen.

Really if you include April a.

Pretty material.

Oh you.

Performance.

Pretty material you know performance reversal in the agency market. So initially you saw TB ace turned around and rebound from the substantial widening in March two I'm very strong performance second at you know what's the fit.

Buying we took advantage of that and sort of sort of the next leg of.

A few performance, which you saw in April and depending on the first become a.

It's very very strong performance specified pools relative to T.D.A. fill with both those legs of agency performance the TV A's versus swaps and then the pool versus TV, a having recovered a lot of ground from the wide level of second after March.

The agency market to our way of looking at thing, it's still a very attractive our OE.

But it has its recovery has proceeded a recovery we think is likely to happen should the economy reopened on so the projected path.

You can see into credit markets at the right now.

I don't see being in a rush to rebuild the agency portfolio back to the size it was.

<unk> coated but you know over the long we view I think we'll get back to sort of the capital range is that weve you've seen historically.

For U.S.C. and you know it still provide even given the recovery of the you've seen through may you're very meaningful or are we just doesn't have that distressed component to it that you can see in some of the credit sectors, where you can get not only cap.

Sure potentially very high yield, but also capture additional total return should asset prices on the credit side, we trade some of the precipitous decline you saw in March and April.

And.

If I could just and if I can just add now that was great. Mark. Thanks, If I could just to add I'm just keep in mind that we have those extra levers of how much we I'd.

Dial up and down our TV a shorts against are specified pools, and you know even whether we want to replace.

The specified pools with TV, a longs right. So we have those extra levers, especially on the TV a short side that really I think.

Makes.

Ellington financial you know at Ellington residential stand out in the marketplace, the extent that which we can vary those levers. So for example, and look things continue to move around a lot right.

As Mark said OAS is.

Got as wide as they've ever gotten since the financial crisis and then.

You know if you look at some of the materially we provided you can see that.

Oh, yes is by some measures got incredibly tight on on agency pools. When you got to the end of them under them on so.

These things are still moving around a lot.

If we see an opportunity in specified pools, where we can buy stuff at extremely low pay ups.

And hedge with TV Ace.

Even if the overall agency RMBS market is tied at that point.

Perhaps because of volatility is high for example, and the market is not.

Adequately taking that into account. These are trade. So we can put on their necessarily take a lot of capital.

But.

But I I agree wholeheartedly with mark that longer term right, we see the more extraordinary opportunities.

That's right.

Great appreciate the details guys. Thank you.

Your next question comes in a line of Eric Hagen with KBW.

Hey, Hey, good morning, guys I'm just following up on.

Morning, just following up on some of the commentary here I mean I guess.

Yeah, we heard about some firming up in the market over the last couple of weeks on the credit side to inspect pools to your point done very well relative to TB isn't in any detail on what drove the book value a little.

Weaker in April and then.

With any unrealized loss bucket, where do you guys think things are most likely to.

Bounce back.

You know some sort of recovery. Thanks.

Joe you want to take that one.

Sure.

[music].

So in the well sorry that the unrealized part.

A significant portion of that in the application of C.. So this quarter actually.

So I mentioned in the earnings script that for yes seat was it was mainly a non event because we have always fair valued our portfolio through the income statement and Csos I think more design for companies that don't do that.

So part of the impacts of Cecil is that.

Expected credit losses are appearing in unrealized rather than realized they what I previously with impairments.

Think that we have talked about and the earnings release.

And the script comments prepared remarks. This morning that some of these sectors, we expect to.

You know incurred losses overtime some of them. We don't I don't know Mark you want to get into more specifics I think we mentioned that siloed and CMBS a blog.

In the in the recovery, partly for technical reasons with the fed purchasing.

Other sectors and not those but I think in those probably expect some some credit impairments overtime.

You want to elaborate on those points.

Yeah, those were certainly the sectors.

I guess, our expectation is and this will change as we get new information that the.

The full cycle, you're going to see in commercial real estate is gonna be you know a little bit more attenuated and we'll take a little bit more time to sort through what we currently expect to see and the residential market.

And I do think.

That view is.

Partially informed.

Pricing some of those assets. So it's interesting that if you look at some of the CMBX indices, which are.

The you know.

The they function like the old IBX indices that with a reference the different tranche is on a basket of CMBS conduit deals.

Certain sectors of those indices are is low now is that they were in the depth of March and if you look on sort of residential non agency securities.

I don't think there's any sectors that are treating now where they were in March so I think that.

Well, yeah, we expect great opportunities on the commercial side.

And it's been historically.

One of the highest.

Or are we.

Ah sector, it's really for F C.

There's going to be a little bit more unpredictability. There. If you think about retail you think by hotels student housing and you know I think that unpredictable. The unpredictability is factored into prices right now but.

I think that predictability is going to create some fantastic opportunity. So if you ask me.

Where do you think going to be the best opportunities to deploy a marginal dollar three months from now it may well be in.

Some part of the commercial real estate world either loans with CMBS securities, but it was it was the commercial side and closed that where the detracted somewhat from our April performance.

Yeah, and I think just to add on April I mean of course, it's just one month.

We also sold down you know about half of our agency book during March So we didn't get the same pop on the agency recoveries, we otherwise would have especially if specified pool pay ups. The another point an important one as we had much larger cash holdings going into quarter end than we typically.

Yep.

And have obvious reasons, we had de levered and and built upon our liquidity. So that gives us dry powder going forward. It helps us balance playing offense and playing defense as Larry mentioned in his remarks, we think it's the right place to be so I'd encourage you to.

Just a month and well what kind of give you. The a continued given the updates as the go long.

Yeah, and I was just you know.

And I, just sorry, I just want to add one more thing which is.

Yeah, you've seen you know just amplify what Jr. Just said you've seen the agency some of the agency mortgage rates.

That report you know have reported a an April and book value book value per share you've seen some pretty big increases right. There so that sort of falls on Jay ours point about how our agency portfolio.

His eyes, notably smaller and it was before so we didn't get that same pop plus of course, it's it was always a.

I, a smaller part of our capital allocation.

You know for a long time now.

The you know the other thing I just want to mention is that there are some markets.

For example, a non agency RMBS, which I mentioned before which.

Where are you know clearly very distressed in March.

And.

But a lot of that was you know we mentioned I think I mentioned, the you know mutual fund selling for example that really exacerbated that she had extreme distress in March.

And.

You had a I mean, they're still cheap and you're one of the sectors that would certainly we think could be attractive or you know from total return perspective.

And corning's perspective, but.

You know that's going to be a more short lived.

Opportunity perhaps.

But you know you.

The valuations on that at the end of April clearly higher than at the end of March.

You know a lot of other sectors.

And especially our loan box you know just until we get more visibility.

We're not going to be just marking that book up just because we feel better so.

I think that.

There is good.

Yeah, I think that explains a lot of as well I'm. In addition to some of the sectors that are.

You know that marketshare Mitch.

That was like what caused the I think thank you.

Your next question comes from the lineup, Tim Hayes with B Riley FBR.

Hey, good afternoon, guys hope, they're all doing well and now thanks for taking my question and just have a quick ones. Since most have been asked you know I know you meaningfully reduce your non repeat compliant strategies over the past year, but just curious if you feel the need to further reduce exposure there to give you give yourself a little bit more cushion.

Now that the agency portfolio has been meaningfully reduced.

Yeah, we think we have a lot of flexibility there I'm actually so I don't think we feel pressure.

From a re testing perspective.

But I.

I think I mentioned earlier that.

Yeah, we're not going to sell at the wrong time, and we're going to make sure if we sell the non requalifying assets.

That it makes sense versus what we can replace that you know that capital Wes.

But but I you know I think when you think about again, what businesses, we see as having longer term opportunities in terms of supply demand imbalance in terms of the competition being hobbled.

You know it's in a lot of those loan strategy. So I don't want to make prediction in a short term, but in the long term certainly I would think that that's where we would ultimately be having the company and I think thats consistent frankly, with where we were pre coated.

Yeah. Okay is there anything maybe I was just got fired just add real quick I am sorry, Yeah, I'll, just add to what Larry I mean, the majority of our assets are now requalifying.

Even away from just the agency. So we think about the size of our non QM portfolio and small balance commercial and residential transition loves those are all out of Levered have some leverage and they're all real estate qualifying.

Assets, so that that helps as well.

Right, Yeah fair enough appreciate the color there guys.

Thank you.

Your next question comes from the line isn't that.

Right.

Hey, guys are they stick my question Uplisting safe.

First I Gotta cringe at any one of them more upbeat bullish calls that I've been on here. The earnings season, you seem to know exactly what you want.

And your actually where you're going with the company. My question is you have all these originators.

That you get proprietary for product, what's the trade off between signed that are finding something that you want that's in the secondary market that may be a more distressed price and I've a follow up.

Oh, Yeah, no, we we want to do that to Mark.

You want to take that we're all for looking at good opportunities in the secondary market. If the prices right Mark you want to talk about what you're getting no. That's a very good question.

I think we want to do both.

And I think we've worked very hard through March.

And through April.

Getting ourselves in a position where it's prudent for us to.

Take advantage of these opportunities so I think.

No.

We talked about restarting nonqm origination, but in the short one we expect volumes to be significantly smaller than where they were running you know January and February so well, we start that we don't anticipate that being.

A big capital drain so.

I think we'll be in a position to be able to do both.

And I think that we can place appropriately you know, we when we look at Tennessee secondary packages non QM loans.

We have to.

Really carefully analyze.

The underwriting standards that we're used to originate those loans and compare that to the underwriting standards that.

We haven't fourth Lin sure.

And you know think about the consequences for potential performance, if we see gap, India underwriting guidelines. So you know.

Well, we can do all that.

So I think both opportunities are compelling right. If there is.

Secondary packages from people that needs to raise cash.

And it looks like they're well underwritten or we can get a subset of that are well underwritten that's a very high loss.

To deal.

I don't make sense, we also think.

Restarting our own nonqm origination with guidelines that are.

Similar to what they were like a couple of years ago and pricing to reflect generally higher credit yields in the marketplace makes sense as well so.

I think they're both good opportunities and I don't I don't think we have to choose one or the other I just think we need to.

You know priced appropriately and take into account in old sort of relevant factors, but.

That's a good question and they're both good opportunities for this company.

Yeah, and if I could I just add I think the small balance commercial mortgage space for us is really interesting there too.

For for years, you know, we've been doing that strategy for long time here at Arlington.

And for years.

Especially after the financial crisis, we started at shortly after the financial crisis. It was mostly a secondary market NPL business I'm you know as you can imagine after financial crisis. There were a lot of of loans that were hitting maturity defaults and things like that.

And so.

That ended up slowly evolving.

And in recent years became more of a bridge loan business, where we were seeing less of the distressed NPS product develop in the secondary market, which would typically be an NPL right or.

We were seeing more opportunities to originate bridge loans, and that's sort of that that's a business. That's kind of always they are well now I think I'm not saying that the balance is going to swing completely back npls, but I'm going to say, but I do believe.

That again longer term you know a lot of commercial properties in specific sectors in specific regions right are going to get distressed and our strategy in small balance commercial NPL space has always been in our thoughts have always been that most banks.

They want to focus on working out bigger loans, so 50 million dollar loans and bigger loans.

And smaller loans.

They get pressure from their regulators, it's a headache for them.

We have a lot of we have built up a lot of sourcing providers over the years, whether it be brokers partners joint venture partners et cetera.

Where we.

Ken sourced it this product. So I'm also really looking forward to seeing more in the secondary market in npls and small balance commercial.

And that historically has been a very profitable business for us because you're you're really taking a headache off of someone else's.

You know somebody else's plate and you are you have an opportunity also to work with the borrowers they are you're buying loans at a discount.

A lot of banks don't like to take discount to pay offs they'd rather you know, it's sort of pre it's almost like a moral hazard.

For their borrower base, rather sell the loan at a discount and now that gives us a lot more flexibility to work with the borrower on a discounted pay off ultimately.

And so anyway. So that's a business in terms of your question about looking for things in the secondary market.

You know as opposed to origination we're absolutely hopeful that that this will be now another sustained opportunity after financial crisis [noise].

Just like it was after the 2008 2009 crisis.

Yeah, certainly with the with the G. I agree with you as you're going to be come out with stuff the banks as well it did just getting back to Mark's comments on either getting tightening.

Standard they could even raise the G T.

Interesting to you guys in taking.

Another state funding originator I'm sure there's a lot of cheap stuff out there taking bigger stakes and what your own getting ready for maybe you know what I did you see window and being on that new origination burned down the road kick it bigger piece of it.

Yeah, I can't I can't make any predictions, but I can tell you that.

You know your.

Your thinking how why it would how were thinking and we're seeing a lot of I'm seeing a lot of opportunities out there to do exactly that and I I can't predict whether any of them will come through but.

You know where I think around the same wavelengths.

Great. Thanks, everyone.

That concludes today's conference you may now disconnect.

[music].

[music].

[music].

[noise] good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington Financial first quarter 2020 earnings Conference call.

Today's call is being recorded.

At this time, all participants have been placed and I listen only mode.

It's not will be open for questions. Following the presentation.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

At any time. Your question has been answered you maybe move yourself from the Q by pressing the pound.

Lastly, if you shouldn't require assistance please press star zero.

It is now my pleasure to turn the call over to Jason Frank Deputy General Counsel that Secretary, Sir you may begin.

Thank you before we start 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 them. There I'm wondering if our annual report on form 10-K filed on March 13, 2020 forward looking statements are subject to a variety of risks and uncertainties that caused the companys actual results to differ from its beliefs expectations estimates and projections.

Currently you should not rely on these forward looking statements as convictions about future about statements made during this crop as car made out 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 and future events or otherwise I am joined on the call today by Larry Penn Chief Executive Officer of Ellington financial.

Mark Tecotzky co Chief investment officer of the Xcede and Jerre Herlihy, Chief Financial Officer, you have seen as described in earnings press release, our first quarter earnings Conference call presentation is available on our website Ellington financial that Bob.

Management's prepared remarks, we'll track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end of the back of the presentation.

With that I will now turn the call over to Larry.

Thanks, Jay and good morning, everyone as always thank you for your time in interest in Ellington financial.

After a quiet start to the year to covert 19 pandemic and the associated measures to contain the pandemic brought the global economy to a virtual stand still in March.

Resulted an extreme volatility and widespread market dislocations, including a collapse of asset values and liquidity.

Economic activity plunged as countries around the world implemented social disgusting restrictions unemployment claims surged consumer spending plummeted and GDP growth rates turned negative.

In March equity sold off across the globe as the 11 year Bull market ended in spectacular fashion.

Yield spreads on most fixed income assets widen sharply and a flight to safety drove record drove record low yields on long term us treasuries.

Portions of the yield curve inverted and interest rate volatility searched on slide three you can see the extraordinary quarter over quarter declines and treasury yields.

Repo financing stresses alongside a drop in asset prices severely reduced liquidity unprompted forced selling across virtually all credit sensitive fixed income asset classes.

Many leverage mortgage investors and respond to in response to margin calls from the lenders had to unwind portfolios quickly at an opportune times and a fire sale prices while at the same time, many mutual funds any t. apps that offer daily liquidity also had to seller gently and their case to meet mounting investor redemption requests.

Yes.

Vicious cycle ensued as these four sales put additional pressure on prices, which prompted further stressing liquidations and so on.

The selling pressure extended even to perceive safe havens like agency, RMBS, where yield spread skyrocketed to levels not seen since the 2008 2009 financial crisis.

The downward spiral finally started to subside so it didnt end right away when the federal reserve stepped into restore some stability.

The fed slash short term interest rates nearly to zero injected liquidity into the repo markets launch several credit facility similar to what had implemented during the financial crisis and stepped in with unprecedented levels of quantitative easing all of which provide a meaningful support, especially the more liquid sectors of the market.

The U.S. Congress passed three rounds of stimulus packages during March culminating in the two trillion dollar cares Act on March 27th largest emergency spending going history.

These actions were mirrored by central banks and governments around the globe and the rollout of stimulus programs continued into April.

As the federal reserve deployed its full crisis playbook, we saw was an effect almost a full market cycle compressed into just a few weeks.

US equities bounce back sharply from their March 23rd lows as what had been a 34% drop in the S&P 500, and less than five weeks was immediately followed by an 18% rise in just three days.

Federal reserves injections of capital East liquidity stresses and yield spreads in the sectors targeted by the federal reserves asset purchase programs tighten sharply, particularly in agency RMBS, which recovered strongly during the last two weeks or the month.

In the credit space yield spreads in some sectors such as investment grade corporate bonds also tightened significantly following the feds actions, while other sectors, including non investment grade CMBS and see a lows noticeably lacked.

Many measures of market volatility subsided from their highs, but still remain greatly elevated at quarter end.

What made Mark unique were made March uniquely challenging what's the magnitude and speed of the risk off moves and during the peak of the frenzy. The high degree of correlation across virtually all asset classes irrespective of their out of their actual underlying risks.

As March progressed, with the asset markets and financing markets looking more and more fragile we proactively reduced the size of our agency portfolio in an orderly and measured way, which bolstered our liquidity and lowered our leverage.

Most of the agency assets that we sold in March were sold to either early early in the month before yield spreads at their wives or later in the month after yield spreads it already recovered strongly.

In this way, we were able to avoid forced asset sales entirely which would've exacerbated losses.

During periods of acute distressed like what we saw in March the performance of a leveraged portfolio can vary widely based not just on what you own but also how you financed it and how you adjusted to quickly changing market environment.

So the crisis in March, but a spotlight on our risk management, our liquidity and the structure of our liabilities and our leverage.

Ellington financial entered March with a strong balance sheet and prudent leverage ratios on the asset side, we have lots of liquid agency RMBS to help provide liquidity any credit we had deliberately built a relatively short duration highly diversified portfolio with an emphasis on first liens.

In times of distress, whether it be distress in the financial markets or broader macroeconomic distress, maintaining a shorter asset duration can help a fixed income portfolio portfolio in two very important ways.

First asset prices tend to be less volatile and second principal pay downs and come in faster, thereby de risking your per your position faster.

Fact during March alone, we receive proceeds from principal repayments of about $55 million on our small balance commercial mortgage loan consumer loan and residential transition loan portfolios, which represented about 85% of the average aggregate size coming into the month of those portfolios.

On the liability side lessons learned from past market crises have taught us to limit our leverage to diversify our sources of funding infrastructure, our financing arrangements to help us better withstand shocks in times of financial distress.

Over the past few years, we have issued investment grade rated senior unsecured notes and if completed several securitizations all of which provide locked in term non mark to market financing.

Several of our secured financing facilities are committed and non mark to market and have repayment schedules that more closely matched the repayment schedules of the financed assets as compared to typical right though.

Also our objective is always been to stagger the role dates of a repo financings and to roll. These financings in advance of maturity dates as a standard practice.

Our discipline interest rate hedging an opportunistic credit hedging has also provided additional book value protection and volatile markets.

All of these measures combined with our strong liquidity management practices helped lessen the impact of the March distress in our portfolio's granting us sufficient time to stay ahead of the curve. Unlike many other market participants who became forced sellers at distressed prices in March.

With that I'll turn the call over to Jr. To go through our first quarter financial results in more detail.

Thanks, Larry and good morning, everyone.

Please turn to slide seven per summary of our income statement.

The quarter ended March 30, Onest FC reported a net loss of $3.04 per common share compared to net income of 31 cents per share for the fourth quarter 2019.

Core earnings for the first quarter with 46 cents per share up from 44 cents per share in the fourth quarter of 2019 and covered the common stock dividends declared during the first quarter 45 cents per share.

Total net interest income increased 24% sequentially.

Gains on our credit hedges were meaningful.

Significant net loss for the quarter was driven by losses on our long investment portfolio as the market dislocation in March led to wider yield spreads across virtually all asset classes.

Now please turn to slide eight for the attribution of earnings between our credit agency strategy.

During the first quarter the credit strategy generated a total gross loss of $2.47 per share while the agency strategy generated a total gross loss of 38 cents per share.

These compared to gross income of 28 cents per share in the credit strategy and 32 cents per share in the agency strategy and the prior quarter.

Most of our credit strategies generated net losses during the quarter.

The largest losses occurred and Siloed CMBS non agency RMBS and non QM loans, all markets, where there was substantial distressed selling during the quarter.

Our long strategies with shorter durations had better performance, including small balance commercial mortgage loans consumer loans and residential transition loans, where we received significant proceeds from principal payments and the K for small balance commercial mortgage loans several profitable asset resolutions.

The fact that most of our commercial mortgage loans have LIBOR floors. All was also valuable in the quarter as LIBOR declined sharply.

We also had net realized and unrealized losses on the interest rate hedges and the credit portfolio as interest rates declined sharply during the quarter and we're highly volatile and in that loss from investments in unconsolidated that Steve.

On many of our credit investments, we are anticipating some degree of eventual principal losses as a consequence of the economic impacts of Cobot 19.

Especially in a prolonged shutdown scenario.

As has been widely reported there's been a significant nationwide increase and loan delinquencies and Forbearances and we're seeing these back some of this on our own portfolios.

And the agency strategy, the precipitous decline and interest rates and high levels of interest rate volatility generated net losses on our hedges and while our agency RMBS assets did appreciate and price during the quarter they significantly underperformed our hedges.

As a result, we experienced a net loss for the quarter and the agency strategy.

Furthermore, TV has outperformed specified pools during the quarter depressing payoffs on our specified pool portfolio.

The underperformance a specified pools relative to TV as can be largely attributed to market wide liquidity problems exacerbated by quarter end balance sheet pressures as well as to the implementation of the federal reserves amplified asset purchase program during the quarter, which was driving generally limited the TV AIDS and generic pools as opposed to specified pools.

Payoff.

With that said, while TV has outperformed specified pools during the quarter. They severely underperformed interest rate swaps and U.S. Treasury securities. So we benefited by having a significant portion of our interest rate hedges and TV, a short positions as opposed to interest rate swaps.

Turning next to slide nine you can see the size of our long credit portfolio was essentially unchanged quarter over quarter. We grew our credit portfolio in January and February deploying the capital raised in our January offering, but these new purchases were offset by asset paydowns payoff and that reductions in asset values related to the mark to market dislocation.

As of March.

In light of the market volatility, we substantially suspended new investments in our credit strategies in March and as Larry mentioned it was our agency portfolio not our credit portfolio that we use as a source of liquidity.

On slide 10, you can see that we strategically reduced the size of our agency portfolio by 48% to $1 billion as of March 30, Onest compared to $1.9 billion at the end of the prior quarter.

These sales were orderly and enabled us to reduce leverage and bolster liquidity.

Please turn to slide 11 for a summary of a borrowing.

As a result of the agency sales our debt equity ratio declined 3.1 to one as of March 30, Onest from 3.8 to one at December 30, Onest adjusting for unsettled purchases purchases and sales.

Similarly, our recourse debt equity ratio also adjusted funds that will person sales decreased over the same period.

2.1 to one from 2.6 to one.

Our weighted average cost of funds decreased sequentially during the quarter, 2.58% from 2.86%.

Driven by lower short term interest rate.

As a result of the significant price declines in general price volatility, we we see margin calls under our financing arrangements that were higher than typical historical levels. We satisfied all of these margin calls.

At quarter end, we had cash and cash equivalents of approximately $137 million along with other unencumbered assets of approximately $279 billion.

For the first quarter, our total gene expenses declined by 14 cents per share some 16 cents per share in the prior quarter, primarily due to our higher share count following the race in January.

Other investment related expenses declined quarter over quarter to nine cents per share from 16 cents per share mainly because we incurred nonqm securitization issuance costs in Q4, but not in Q1.

We had a small income tax benefit related to and a decrease in deferred tax liabilities in our domestic taxable REIT subsidiaries.

Our book value per common share at March 31st what was $50 and fix them.

On a more technical note as of January Onest 2020, we applied the new credit loss standard known as Cecil because we have always fair valued our portfolio through the income statement Cecil had no net impact on our earnings or book value This quarter.

The final note.

In response to the challenges presented by token 19, the FCC have granted public companies and extension for certain filing obligation this quarter with everything going on we intend to take advantage of this option and plan to file our 10-Q on or before may 22nd.

Now over to Mark.

Thank you Jr.

The markets for securitized products and the second half of marching throughout much of April was challenging as I've ever seen in my career, including even 2008.

Larry I already gave some of the blow by blow through I won't repeat it all now, but essentially cobot 19 created such a sudden and dramatic change to the outlook for U.S. economic growth and employment that almost overnight, both lenders and investors reprice virtually all credit assets to both much higher yields a much higher loss expectations.

Sitting off a wave of forced selling for mutual funds returned hedge fund.

You had a portfolio that was highly leveraged even with seen new assets or a few of the portfolio that was only modestly leverage but with subordinated bond.

Either way your balance sheet was under siege and if he became a four seller the prices you realize we're quite distressed.

The policy response from the fed with fast an enormous massive buying of agency MBS.

TALF programs lending program and the carries act all went a long way towards stabilizing the market as we see it the two big beneficiary from the government intervention or the consumer and the residential housing market, which are both sectors, we have long favored.

Ellington financial with its diversified less levered portfolio, which included a lots of liquid agency assets and which in credit included a concentration of lower LTV loans was able to weather the storm.

While we absolutely have worked to resolving assets.

Either the borrower or the property are experiencing a lots of income we're pleased with the performance of most parts of our portfolio and while the agency MBS market did not escape unscathed, our disciplined approach kept our net loss our agency portfolio under 10% than allocated capital for the quarter.

I Wonder if you how the t. manage the portfolio in the crisis hit Firstly, we recognize relatively early on that the spread of Cove. It represented the kind of scary unpredictable news the market really struggled through rationally priced this is not a student <unk> terrible GDP reports or even massive flooding in Houston as bad as those events can.

Be they're much more quantifiable in contrast, nobody has a crystal ball to accurately predict when and what progress and the economy will reopen.

As you can see on slide nine we did not sell we've not net sell credit assets into the distressed market in March and the portfolio was essentially unchanged quarter over quarter, that's like doesn't really tell the whole picture.

Because we grew the portfolio in January and February falling or capital raise and these purchases were offset by a lot of paydowns in March specifically small balance commercial loans residential transition loans in consumer loans, all had a lot of principal paydowns in the quarter as Larry and Jerry mentioned.

As you can see on slide 10 coming into the quarter, you'll see that a large portfolio of liquid agency pools lots of urgency specified pools had low pay up that we can efficiently turned into cash and that's exactly what we did as much progress.

You can see on this slide that we cut our agency portfolio in half. Most importantly, we did this in a deliberate opportunistic way in particular by selling early in March before spreads hit their wide or later in the month and thereby taking advantage of the strong agency MBS rebound driven by the fed unprecedented buying spree.

Just like with other periods of Q, We agency MBS recover first and then other structured product sectors follow because the market volatility struck our view was the most prudent way to raise cash was to sell the more generic MBS securities, especially our low pep specified pools.

No the markets become more stable our focus has shifted more towards managing our credit exposure and take advantage of tremendous opportunities available take into account to potential long term consequences of covance for some sectors, such as credit risk transfer securities and our opinion the uncertainty seemed to great to have sufficient confidence.

It's an asset values, while for others, it seems pretty clear to us that even with conservative assumptions yields are still very high.

Turning now to non QM business.

In response to marches volatility, we temporarily stopped new originations well, we're now planning to restart of lending programs with updated guidelines that take into account potentially weaker economy with higher levels of unemployment and lower income levels and including the effects of these factors on real estate prices.

The reason uncombed lending with performing so well between 2015 and February 2020 is that there was a big borrower demand for the product so capital providers like us could be disciplined on credit and still generate volume.

The geographies with their automated underwriting system or the low cost low rate mortgage producer for most borrowers were W. Twos and IRS form 10, forties and give a close to complete picture of the income in the ability to repay repaid.

Probably covers about 85% of residential mortgage applications for the other 50%. The Nonqm business line makes a lot of sense and cobot does nothing to change that.

If anything we think it makes nonqm opportunity, even more compelling and in demand. This other 15% of mortgage applications include many sell from foot borrowers many bars with lot of K, one or rental income and.

And many both who might be retired with substantial financial assets, but limited and no 10 99 income.

It also includes many highly qualified borrowers might want to buy and investment property through an LLC. These are the borrowers that nonqm responsibly serves and the very strong credit performance in our non QM Securitizations to date is a testament to the fact that win.

Non QM loans at thoughtfully underwritten their high quality loans. Meanwhile, at the same time that we're predicting continued demand from the traditional nonqm borrower base. We also think that we'll see additional demand for some non QM loans from another segment of the residential mortgage borrowers.

Specifically I'm, we're trying to large number of quite creditworthy borrowers, who happened up certain characteristics that put them toward the edges of the G.S. He's current credit box.

Faced with uncertainty about the future of credit risk transfer market, the GRC seemed to be tightening their credit box and we expect that this.

That this will potentially exclude some very creditworthy borrowers who may have made become strong conde candidates for non QM loans.

Will there be headaches, not uncommon portfolio, absolutely will there be borrowers that need forbearance, yes, well to be delinquency spiked, yes, you can already see that in the data.

So our focus right now and not become a two pronged first in partnership with our services, we're working with those borrowers who need time to pause there payment obligations, because they're experiencing lots of income.

Secondly, we're playing to resume originating high quality loans with guidelines appropriate for the current more uncertain economic environment.

Although noncomp performance will be affected by the economic slowdown that cobot triggered much of the price movements in the non QM market in March related to market wide financing issues, especially as the securitization market seized up.

The fundamental with alone.

The good news is that the nonqm market seems to be slowly returning to more normal state. We expect the noncompete securitization market to reopen later this month, we hopefully back in the market with our next securitization as soon as market conditions permit.

We are thinking about residential transition loans and in a similar way. The reason we entered the RTL market was because it made sense. The median age the U.S. home is now 37 years and many borrowers don't want to buy a home with a lot of deferred maintenance to deal with.

So if we pick the right partners pick the right geographic area pick the right renovation projects and be disciplined about LTV and underwriting standards. We believe that we can up strong performance a very high leverage yield.

On that portfolio amazingly between March 1st in April Thirtyth about a quarter of RTL portfolio paid off at par.

It was the kind of outcome, we were hoping for when we underwrote those loans and it really shows the benefit of having shorter duration assets. During the credit shock could we have sold those loans at par during the panic in March I highly doubt it but the combination of our experience team and our careful underwriting got us that outcome, it's a far better outcome than being a forced sellers in the third week of March.

Will that be some headaches net portfolio, yet do you expect to see some credit losses, we do.

But from the market color, we have gotten it looks like our portfolio is performing much better than many of the RTL portfolios. So moves nonqm, we temporarily shut off new originations in March we want to start buying again, we're reform living or guidelines and looking for secondary packages to buy.

The same thought presses guiding our consumer loan portfolio. Despite the cobot dislocation, we have continued to see a substantial velocity of par pay off.

We are working with our partners to appropriately helped borrowers in need until we have more visibility we have cut way back on new purchases, but so far the performance numbers are very encouraging.

Our small both commercial strategy also had some great resolutions in the quarter. It will also have at Sears headaches as their outlook for the next six month, it's for things to get a lot messier in commercial real estate than in residential real estate, but again, our low ltvs and shorter duration should help the should help and the strategy as well.

All that said.

We certainly took our lumpy this quarter as always losses in the credit portfolio took one of two forms first mark to market losses on investment we don't expect the big change in the cash flows, but the prices went down because the market yields widen.

And second we had some mark to market losses on investments that were not just do the wider market yield spreads, but it also because you have witnessed we project. Some degree of fundamental cash flow impairment that kind of blood loss is likely to be permanent.

So what do we love from the crisis in March and how will that shape the direction of ft going forward.

Notable difference between what happened in March and previous financial crises, it's the speed at which prices dropped in the fourth selling occurred we did not anticipate that over the course of just a week yield spreads on Fannie fours for example could wide from a normal way up to the why this level since the 2008 financial crisis.

Kobin prudently unpredictable, we have to expect more the unexpected nextseq could be weather related there could be another wave of public health crises related to cobot or to something else or there could be more tensions around global trade or something else geopolitical.

Well, what wherever the south comes from need to be prepared to withstand volatility hopefully drive from it. So how do you do that.

I think the experience of the past couple of months gives us even stronger incentive to do securitizations as a way to transform repo financing into non mark to market term financing.

Plenty of times in the cost and time commitment doing securitizations make it seems like they may not be worth.

In times like March 2020, having done them was well worth it.

All non QM loans that we had securitized over the past two years have been sitting on our balance sheet plants with repo. We've had a little we would've had to reserve a lot more cash or potential margin calls.

Secondly, so for the loan from source from origination channels, where we carefully chosen our partners and helps if the underwriting guidelines seems performing but well relative to their peer group.

You are more inclined to continue to look for partnership where we aligned and what can tandem with the originator to make credit decision.

Thirdly, reaffirms that liquidity of it and agency MBS portfolio can be a great balance for credit portfolio Agency MBS is the primary sector structure products that benefit from direct fed buying and this has been an important governor on spreads and time to stress.

Well agency MBS liquidity was absolutely awful at times in March we still much better than in any fixed income sector without a government guaranteed we're able to efficiently wave cash net market. So I like the balance you see had between agencies and credit looking forward I have the rest of the Ellington portfolio management team and very focused on that.

Navigate in these markets and doing the best to earn back loss will be sustained in March now back to Larry.

Thanks Mark.

Well in economic return of negative 16% for a quarter is painful to say the least.

I'm extremely proud of how to manage through.

Through the unprecedented challenges of the quarter, especially given that leveraged credit portfolios were in across areas of the distress in the financial markets.

Our liquidity management risk management and hedges did what they're designed to do.

They protected book value and they protected our shareholders.

This past quarter.

That men protecting our shareholders not only by avoiding any forced asset sales, but it also meant protecting our shareholders by avoiding any expensive are highly dilutive capital raises.

In addition to a GAAP loss for the quarter. We also estimated taxable loss for the period.

For re purposes, a first quarter taxable loss with technically lower our distribution requirement for the full year.

The board has set the two most recently announced dividends at eight cents per share.

Well our outlook for future core earnings for Ellington financial as strong these reduce dividend levels balance that optimistic outlook on core earnings against our now east redistribution requirement and our desire to preserve liquidity.

Liquidity, both to take advantage of investment opportunities and liquidity just to be prudent in these continued uncertain times.

The board will continue to assess the dividend rate on an ongoing basis as market conditions, and our financial position continue to evolve.

Financial crises can also create opportunities and as we look ahead, the diversified credit sensitive sectors, which Ellington financial has deep experience.

Finally in many of our loan businesses are facing a severe supply demand imbalance with net interest margins that are as wide as we've seen in years.

We believe that this imbalance will present highly attractive asset acquisition opportunities for Ellington financial for some time to come.

All that said, while the global government in Central Bank responses have provided a booster liquidity and meaningfully improved market performance in the short term.

The path forward for the economy remains unclear.

We don't know what the length and severity of the economic downturn will be what the ultimate path to recovery will look like and what the exact effects of all this will be on our current portfolio or are on or on future investments.

And on the liability side, it's unclear what the exact terms and availability of financing for these assets will be.

In light of this uncertainty our goal will be to balance defense that is building into margin of safety to absorb additional market shocks with off assets that is the ability to capture what we see as great opportunities.

Ellingtons core risk management principles has served us well over many market cycles, including during Ellington Financial's very first years from 2007 through 2009, when Ellington financial not only maintained book value stability through the financial crisis, but then absolutely thrive than its aftermath.

We believe that these same risk management principles continued to be critical now.

Both in protecting the FCC book value and keeping you FC well position to capitalize any opportunities that we are seeing and that we are anticipating.

And as always management remains strongly aligned with our shareholders with a significant coinvestment any F.C.

Before we open the floor to questions I would like to take this opportunity to thank the numerous members of the entire Ellington team for their hard work over the past weeks despite difficult circumstances.

And for all of those listening on the call today and to all of those in our communities and around the globe impacted we hope to you and your family stay healthy and safe.

With that we'll now open the call to your questions. Operator. Please go ahead.

At this time I would like to remind everyone. If you'd like to ask a question. Please press star and the number one on your telephone keypad.

Your first question comes on line of Trevor Cranston JMP Securities.

Hi, guys. Thanks.

However.

I Hope you guys are doing well.

I'm actually too.

Couple of questions on the financing side and are you guys talked about the uncertainty that they're there remains about the terms and availability of financing for her new asset purchases.

I was wondering if you could tell us your boat.

How much of the a you know credit repo you guys have was actually rolled between sort of the middle in March and today.

And have a repo that hasn't yet ruled who sort of what's your level of confidence is that the lenders are going to be continuing to continue to be willing to finance the assets going forward. Thanks.

Yeah, I don't want do you know I first of all I don't have obviously, all those figures at our fingertips, but but I can tell you that.

You know we're feeling good we did we did extend actually some some rebound I as I think I mentioned.

Just stagger maturities, but we also.

We also role kind of you know I head in advance of repo maturities not just waiting till the last minute to roll repo. So we did take some proactive steps up I'm not going to be too specific with which counterparties and with in which markets, but there was some significant.

Credit repo that we ex actually extended.

Well in advance.

Of.

Its maturity.

During March we have after quarter end we've also.

Significantly extended some other some other very large amounts of our crowd our law and I'm talking now about loan repo, which is perhaps what you were focusing on and securities I would say that.

The situation is definitely clearer and that securities repo.

We've.

I want to say that it's been business as usual, but we really have not had.

Significant issues Rolling Securities Repo loan repo again, we've been ahead of the game staying ahead of the game.

But.

The availability in terms exactly what we're going to see in the future well, let's just take Nonqm. For example, right. So we have some nice term repo and non QM right now.

So we've got.

We think Apple.

Runway, there, but nobody can predict exactly where that repo market is going to settle the north and it's going to be related to the securitization market as well right. So.

There are still non QM out there in the marketplace sitting on lines.

Awaiting securitization and there've been some distressed sales as you may or may not have heard about especially in March. So you know so we have to see how that will play out and that's going to affect.

The you know the rates that the non QM borrowers are going to pay right. It all sort of is a.

Cycle as you well so so again to summarize on the loan side I think we've been very proactive about that even even during the.

The the depth of the crisis.

It's going to be more expensive to finance loans, there's no question about it.

But the rates that we're going to be able to get.

From borrowings under the yields are going to be I'll be able to earn on our loans are going to be significantly higher. So we think that all told this is going to be a great opportunity talked about that supply demand imbalance.

Between borrowers and lenders.

So I hope that answers your question.

Yeah that was very helpful. Thank you for that.

And then next question Mark talked a little bit about sort of the differentiation in the types of price movements among assets like some.

Where you do expect meaningful change in the actual cash flows and credit performance in some assets, where there isn't necessarily so bigger change.

I guess as some liquidity returns to the credit markets.

How are you guys thinking about the composition of the portfolio are there certain sectors, where you might like to sell assets to the extent you feel that you can do that and reallocated into something else or on your harsher how should we think about the mix at the asset classes. Yeah. So that mid month, yeah, I'm going to let me take.

That question first and I'm going to pass it tomorrow, because I'm sure. He is going to want to supplement so.

During.

During March, especially right. The the markets were so illiquid that I'm for credit product that rotation wasn't really an option right. It was you know traversing the bids bid ask spread was just too expensive.

Going forward I think you're you're right now we're always do though going to have to look at what are we selling right versus what are we buying or where are we reallocating.

And so what I would say as that I think that when you when we think about Ellington financial and what kind of company. It is and how the market in the past has rewarded us for for building the types of of of sustainable core earnings.

For example.

And.

I think so I do believe that as the year progresses.

We will at the right time.

Sell certain of our securities portfolios.

When again, we think that it makes sense on a relative value basis and redeploy.

More into.

Some of these asset classes, where I think the supply demand imbalance is going to be more sustained there's currently supply demand imbalance still you know in a lot of securities markets right, even non agency RMBS, which was the.

Star performer right after the financial crisis of 2008 2009.

And you know, which is obviously much smaller market than it was back then.

Even that market you know it is trading at at very wide level. So we're not saying that we're just going to be selling things.

Right away, but as those markets continue to fall, which we believe there well as the security marks can get a thought and as more clarity comes to the market. We absolutely will be looking at rotating out of some of those I'll just call them more noncore assets for us at this point.

And you know getting good total returns, making sure that we have the right we're selling at the right time and redeploying probably into more of the loan businesses, where we think that the opportunity is going to be sustainable really for a long time. So we want to build those businesses. There Mark is there anything you want to supplement.

I guess I would just say that.

Our interest is in sectors, where.

The outcomes aren't binary and the outcomes aren't.

Engine upon guessing right on.

Potential policy move.

So.

No we think about hotels, who we think about student housing.

The outcomes and those kind of loans.

Highly dependent on when the economy reopened once it reopens, what's cool consumer psychology is when universities reopened and so.

I think we have a great research effort here.

Ported by investment day to be purchase.

But.

That effort in that data.

Isn't.

It doesn't give us an edge in predicting.

The sort of things that are going to drive outcomes for those two sectors, where I think it is very good in understanding for different levels of unemployment.

What income loss is how the cares act and more generous unemployment benefits.

Offsetting cum loss and translating all that into what might happen with home prices and so.

I'd say sectors, where you don't the outcomes aren't binary and it's not really contingent upon.

Getting a policy response right.

You sort of where we think.

Not only do you get very attractive yield.

But your downside is much more limited.

Okay, Great that's helpful.

And then you guys talked about or the amount of principal repayments you've had in March which was obviously very helpful to to have a during that time period.

So anyway, you can provide sort of an estimate of what's your expectation would be for the average amount to monthly principal repayments I'm looking forward.

Yeah, I. Unfortunately, I don't think that's something that we can provide with enough enough confidence.

You know the portfolio.

Is whether it be our small balance commercial portfolio residents transition loan portfolio.

These are less statistical right those are more individual loan based and certainly hard to predict even in during times of stability pre covered those are hard to predict.

But you know the maturities are short right. So we're certainly hopeful that we will still have a steady stream of repayments there.

In terms of the you know more statistical parts of our portfolio.

Whether that be consumer loans nitrogen loans et cetera.

We.

Mark I don't know if you won't want to.

Say I don't think we can be due to quantitative but if there's something anything qualitative you could say that about those portfolios. You know there you probably have you know we have a little more data and again I think we.

Remarked on the call that so far.

We're very pleased with how those continue to pay down March then if you want to add there.

You know there's always.

There's two factors one is that.

The portfolio.

The sector say like Archeo smaller now than what it was two months ago. So just because the smaller there I would expect probably.

A slowdown in repayments and also to you know as I said on the call you know, we're going to have headache to work through and so.

You know.

Some of the easier loan to resolve pay off then a percentage basis, the headache for a little bit higher percentage. This though we those either I expect it to come down a little bit but you know there's also.

Tumor loan portfolios is fair, but at the straight amortization so.

You know if the portfolio where does it stay where it is.

And without without substantial new purchases.

Acted to come down a little bit overtime.

Okay got it.

And then critical last question for me.

Yeah, you guys talked about.

Focusing on the on the sort of core businesses going forward along with origination partners.

Our view of the investments you've made in the origination companies. So far can you comment on.

Sort of how those companies or broadly probably fairing in how they were able to.

Come through sort of the March or April time period at their you know still reasonably healthy and continuing to operator or what their status is.

Yeah, I don't think we're going to get into too many specifics share.

I think that on.

Our.

As you as you May now our primary investment.

In terms of.

Equity investment.

As in a reverse mortgage originator.

We think that there's.

Tremendous demand for that product now.

It's an agency product side, I mean, there's private label as well as demand for both.

And so.

In terms of the.

Ability to securitize that Theres no question there.

And it's a product where you can imagine the opportunity to basically borrow money with no requirement to.

To make monthly payments thereafter, as looking quite attractive right now.

Okay for people. So yeah. So we feel we feel very optimistic about that business.

In terms of our other investments are much smaller in terms of.

Our investment in.

And then sure.

Again, we've talked about how the non QM market I think we said Mark said at a couple times.

Where we're getting ready we're planning to get out there again.

And.

And start seeing where the right balances between.

No rates that will be attractive to borrowers and well work.

For us.

After leverage rather to be after repo leverage thereafter securitization leverage so so we think that the competition.

In both of those spaces has been severely hobbled I mean, I think there's no question there.

And so.

Where again very optimistic about.

About.

The opportunities in that market.

I'll just leave it at that.

Okay. Appreciate the comments like you guys.

Your next question comes from the line of Kristen up at Piper Sandler.

Good morning, guys hope, you're doing well and staying safe.

Yes, Thank you Chris when you too.

Thank you.

Talk a little bit at some of the.

At risk areas.

That you might have in your portfolio right now I guess first kind of what percent of your loans are currently in Port Barents and then also what percent of loans are in certain sectors, whether its retail hotels restaurants small business loans are kind of any other areas you'd like to point out.

Yeah, we're not yeah, we have not historically given that type of transparency.

Our on the commercial side commercial mortgage side its diversified right. So we have exposure in all sectors.

And.

Obviously some of those sectors like.

Hotel in lodging are going to be at least in the short term certainly more.

Challenge than others I might multifamily.

But its diversified.

In terms of.

The.

Actual figures on watching forbearance and all that again.

I think all we can say is that when we put out our Q, which.

We'll see.

As Jr, said I'm going to put that out.

Probably a couple of weeks later than we might have otherwise without the the see relief. So it can take our time.

You'll you'll see you'll see some information there.

And you will see also.

Information in you know when the valuations right and we as Mark said.

There are two components to the valuations right and some of those are just yield spread widening and some of that will be disclosed in the queue and they'll be some of it due to and you know kind of projected future credit impairments.

And but we're not but like you know up to date information about Watson forbearance, right, now et cetera, where I'm, sorry, but we're not we're not providing guy.

But it isn't usually but it well I will say that we do believe and I think we sort of implied.

That for example in non QM in RTL.

Certainly we believe you we don't Theres no.

Theres no almanac to go to for me to prove this but we believe anecdotally based upon what we've seen and what we've seen reported to us that our portfolios are holding up very well relative to.

The those sectors at large.

Okay. Thanks, that's that's helpful. One last one for me what are your views on on buying back shares right. Now are you more focused on preserving liquidity to buy other assets or you see a good opportunity here to be buying back with the stock I think it's around 70% of book I know in the past you've talked about the.

80% to 85% level.

The threshold, but but definitely different times here just curious.

Curious about what your focus is right now whether its buying back or investing elsewhere or any other color.

Yeah, that's that's a great question so and.

It is you know it's one that is you're right you know precrisis, 80% was kind of a level that made sense.

And.

We are trading lower than that.

Obviously, we just put out book value.

But.

Our threshold now will be lower.

I don't want to again predict exactly how much lower will be.

And.

Our our window.

Mostly for well my maybe not obviously, but our window for repurchases typically happens. After we've had these calls right on we also have to consider.

Q coming out with more information as well so we haven't made any decisions yet as to whether we'll be.

You know restarting our repurchases but.

The the threshold has to be higher because the investment opportunities are are so.

Considerable right now and it's a lot different when you're buying back at 80% of book when the credit markets are pretty frothy and and versus now. So that's something that we'll be looking very closely and trying to be a scientific about as we can at the same.

Time.

Liquidity preservation I think I mentioned is always going to be a balancing factor as well just.

Just like.

You know we lowered the dividend.

But we didnt lower to zero, it's got to be a balancing act.

And.

And I'm, sorry, I can't give more visibility there other than to say that I'm I'm sure the threshold will be lower than it was before.

Okay. Thanks for taking my questions.

Thank you.

Your next question comes on line of Doug Harter with credit Suisse.

Hey, guys. This is actually Josh on for Doug. Thanks for taking the questions first on the agency portfolio seemed like a great source of liquidity for you guys in the first quarter curious, how you're thinking about that portfolio going forward and if you could just talk a little bit about how you're thinking.

About the agency strategy in general fitting into the broader portfolio mix of the company. Thanks.

Mark.

Sure. So you know I mentioned in my prepared remarks that.

There is a real benefit to having that.

Balance between agency portfolio and a credit portfolio.

For you really thought in this quarter right. The agency portfolio provides a lot of liquidity at times when the credit Mark can be less liquid.

And the other benefit.

I mentioned the prepared remarks is that.

It's really only agency MBS until much you know to a lesser extent CMBS that benefit from direct fed buying.

At a time, we feel stress and you saw that in Q1.

And we availed ourselves that opportunity and I think.

It was a thoughtful way for us to manage the.

The portfolio So you know.

Dork Lee if you take the longer view of how Ellington financial as partition capital between agency in credit it typically been somewhere between the low end, 15% of our capital and agency strategy update at the high end, maybe 23, 24% in an agency strategy. So I don't.

See those guardrails.

Changing that dramatically I will say that now you have seen.

Really if you include April.

Pretty material.

You.

Performance.

Pretty material you know performance reversal in the agency market. So initially you saw TB ace turned around and rebound from the substantial widening in March two I'm very strong performance second how you know when the fed started buying we took advantage of that and sort of sort of the next leg of.

If you performance, which you saw in April and depending on the first week of May.

It's very very strong performance specified pools relative to TV a deal with both those legs of agency performance the TV A's versus swaps and then the pool first the TV a having recovered a lot of ground from the wide level second after March.

The agency market to our way of looking at thing, it's still a very attractive our OE.

But it has its recovery has proceeded a recovery we think is likely to happen should the economy reopened on so the projected path that you can see into credit markets at the right now.

Yeah, I don't see us being in a rush to rebuild the agency portfolio back to the side it was.

For you see and you know it still provide even given the recovery of both you've seen through may very meaningful or was it just doesn't have that distressed component to it that you can see in some of the credit sectors, where you can get not only caps.

Sure potentially very high yield, but also capture additional total return should asset prices on the credit side, we trade some of the precipitous decline you saw in March and April.

And.

And if I could just and if I could just add now that was great. Mark. Thanks, If I could just add I'm just keep in mind that we have.