Q2 2020 Ellington Financial Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed I mean, the cold. Thank you for your patience.
[music].
Today's call is being recorded.
At this time, all participants have been placed in listen only mode.
Before we open for your questions following the presentation.
If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
It's anytime your question has been answered you may or may be yourself from the Q by pressing the pound key.
Lastly, if you should require operator assistance, please press star zero.
It is now my pleasure to turn the call over to Jason Frank Deputy General Counsel in Secretary, Sir you may begin.
Thank you before we start and we'd 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.
Described under item Onea <unk> annual report on form 10-K filed on March 13, 2020, and under part two item one a up our quarterly report on form 10-Q as amended the three month period ended March 31st 2020.
Statements are subject to a variety of risks and uncertainties that could cause the companys actual results to differ from its beliefs expectations.
But some productions. Consequently, you should not rely on these forward looking statements as predictions of future events.
Maintenance made during this conference call are made as of the state of this call and the company undertakes no obligation to update or revise any forward looking statements whether as a result of new information future events or otherwise I'm joined on the call today by Larry Penn Chief Executive Officer Ellington financial.
Mark Tecotzky co Chief investment officer of U.S.T., and chair Herlihy, Chief financial officer or the upstate.
As described in the earnings press release, our second quarter earnings Conference call presentation is available on our website Ellington financial Dot com.
He's got his 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 notes at 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 in interest and Ellington financial.
Over the course of the second quarter, we saw significant rebound across most credit sensitive fixed income assets following that violent sell off in March in early April.
Thanks to our risk and liquidity management, you have see had avoided forestar distressed asset sales during the market turmoil and so we avoided locking in losses, a depressed prices.
If you recall from a previous earnings call. We explained that would when we had strategically sold agency MBS in March in early April be focused though sales in our most generic lower pay ups that specified pools, keeping our deep value pools with higher pay ups and then in anticipation of an eventual market rebound.
Just selective selling an agency MBS enabled us to get through the market crisis, but our credit portfolio, when Chuck and our liquidity solid.
After the worst of past, we at first resumed only very limited purchase and sales and credit.
Moving into May and June markets. It stabilized enough that we fully resumed new investments both in credit and agency.
With many specialty finance company still hobbled in the aftermath of the market wide deleveraging events of March in early April.
We are seeing compelling net interest margins on new loan originations and are exploring some exciting potential strategic investments in loan originators.
As of today, our agency portfolio is about back to where it was at March 31st.
But more importantly, our credit portfolio is already about 5% large today than it was on June Thirtyth, just a little over a month ago.
To summarize all the steps we talked during the depths of the market's dresses have not only enabled us to participate in the market rebound in our existing credit assets, but since then we've been able to add we continue to add credit assets at highly attractive prices.
As you can see on slide four we had 85 cents per share of net income and 39 cents per share core earnings.
Since these both easily covered up 25 cents of dividends declared for the quarter, we rebuilt a nice amount of book value during the quarter, we're demonstrating that there's ample room for us to grow our dividend.
Our economic return for the quarter was 5.7%, which is around 25% annualized.
Importantly, we had excellent performance from alone businesses.
Our non QM business, we completed our 50 securitization in June with strong investor demand and a non QM loan production has now come Roaring back.
Our short duration loan portfolios, especially our residential transition loan and consumer loan portfolios generated great are always this quarter.
As with previous quarters are short duration loan portfolios have continued to return principal quickly.
During the second quarter, we receive proceeds from principal repayments of about $70 million or small balance commercial mortgage loan consumer loan residential transition loan portfolios, which represented more than 11% of the aggregate size, if those portfolios coming into the core.
When the opportunity set for new investments is changing quickly like it has this year for our long businesses short duration can be a huge benefit as we can redeploy our incoming stream of principal payments exactly in those sub sectors, where we see the best opportunities.
Additionally, longbridge financial reverse mortgage originator in which we hold the minority stake at one of its strongest quarters, yet driven by strong borrower demand in the current environment and higher origination margins.
Because the reverse mortgage business provides liquidity to borrowers without the need for them to make monthly principal and interest payments that business has a counter cyclical component to it and not surprisingly bar demand for the product has soared in recent months amidst the economic pain and uncertainty brought on by Cove. It.
Finally, the also had an exceptional quarter in or agency RMBS portfolio, which mark will discuss in more detail.
On the liability side of the balance sheet, we took substantial steps during the second quarter to further improve and extend our sources of financing and leverage the non QM securitization deal. We completed add yet another term non mark to market facility to our balance sheet.
We also extended the terms of several ARPU several of our credit facilities and obtained term financing for numerous loan assets that were previously unfinanced.
Furthermore, the market for standard repo financing of Securities has now largely returns pretty March levels.
We finished the second quarter was lower leverage and more cash even though we held at March 30, Onest. So we continue to maintain ample dry powder to capitalize on opportunities and to withstand any future shocks.
With that I'll turn the call over to Jr. To go through our second quarter financial results in more detail.
Thanks, Larry and good morning, everyone.
Please turn to slide six for a summary of our income statement.
For the quarter ended June Thirtyth.
Yes. He reported net income of 85 cents per common share compared to a net loss of $3.04 per share for the first quarter.
As Larry mentioned prices in many credit sensitive fixed income sectors rebounded in the second quarter generating significant net realized and unrealized gains on our credit assets, which reversed a portion of our losses from the first quarter.
Core and core earnings for the second quarter was 39 cents per share compared to 46 cents per share in the first quarter and exceeded the common stock dividends declared during the second quarter of 25 cents per share.
The sequential decline in core earnings per share was primarily due to lower average holding period over period.
Next please turn to slide seven for the attribution of earnings between our credit an agency strategies.
During the second quarter, the credit strategy generated a total total gross profit of 76 cents per share while the agency strategy generated a total gross profit of 33 cents per share. These compare to gross loss of $2.47 per share in the credit strategy and a total gross loss of 38 cents per share in the agency strategy in the prior.
Quarter.
Most of our credit strategies performed well during the second quarter.
We recorded large gains on non QM loans.
Non agency RMBS and CMBS all sectors that have had experienced substantial distressed selling during the first quarter, followed by a sharp rebound in prices and liquidity in the second quarter. Our loan strategy has also performed well led by strong performance in a consumer loan and residential transition loan portfolios. In addition aren't.
Cements in loan originators generated solid returns during the quarter driven by an excellent quarter by Longbridge financial.
Conversely, our CLL holdings, and Euro denominated RMBS portfolio generated net losses for the quarter and credit hedges were a drag to performance.
Despite the partial market recovery and the second quarter prices for many of our credit investments remain below pre cobot levels and we are still anticipating some principal losses in our credit portfolio as has been widely reported there has been a significant nationwide increase in loan delinquencies forbearances deferments and modifications.
And we are seeing effects of this on our own portfolios.
Our agency strategy performed exceptionally well during the second quarter, driven by significantly higher pay ups on specified pools and the first quarter pay ups had declined due to market wide liquidity problems as well as the implementation of the Federal reserve asset purchase program, which was focused on TV A's and generic pull pools as opposed to spud.
Specified pools.
And the second quarter asset purchases by the Federal reserve continued to be significant and the liquidity threats as the previous quarter subsided.
At the same time mortgage rates declined an actual and projected prepayment rates rose significantly which drove the expansion of pay ups on our prepayment protected specified pools.
Average pay ups center specified pools increased to 3.3% as of June Thirtyth from 1.47% as at March 30 Onest.
Also in or agency portfolio, a reverse mortgage portfolio performed well with much of the yield spread widening from March reversing during the second quarter.
Turning next to fight eight you can see that the size of our long credit portfolio decreased approximately 14% to 1.26 billion at June Thirtyth.
The decrease in the credit portfolio was mainly due to the completion of our non QM securitization in June otherwise sales in principle repayments, roughly offset purchases and net realized and unrealized gains during the quarter.
As Larry mentioned, we've continued making new credit investments into the third quarter and as of today the credit portfolios back above 1.3 billion.
On slide nine you can see the agency portfolio as Larry mentioned, we continue selling agency RMBS since April as markets remain choppy, but moving into May and June market stabilized and we began building the agency portfolio back up again.
Overall, the sales in April and principal repayments during the quarter exceeded the new purchases and the portfolio declined in size by 10% quarter over quarter did 913 million.
As of today the agency portfolio is back up to about 1 billion.
Next please turn to slide 10 for summary of our borrowings.
Primarily primarily as a result of agency sales our debt to equity ratio declined to 2.7 to one as of June Thirtyth from 3.1 to one at March 30, Onest adjusting for unsettled purchases and sales are recourse debt equity ratio also adjusted for unsettled purchases and sales decreased over the same period to 1.5 to one.
On from 2.1 to one.
The decline in our recourse debt to equity ratio was also driven by the completion of our non Q1 securitization in June which converted about $215 million a repo borrowings into non recourse term financing.
Our weighted average cost of funds continued to decrease in sympathy were short term rates decreasing sequentially to 2.35% at June Thirtyth from 2.58% at March 30 Onest.
At quarter end, we had cash and cash equivalents of approximately 147 million along with other unencumbered assets of approximately 312 million.
For the second quarter, our total DNA expenses were 15 cents per share up slightly from 14 cents per share in the prior quarter.
Their investment related expenses increase quarter over quarter to 12 cents per share from nine cents, mainly because we incurred non QM securitization issuance costs into Q2, but not in Q1.
For the second quarter, we'd accrued income tax expenses of 1.5 million as net taxable income in our domestic taxable REIT subsidiaries led to an increase in deferred tax liabilities.
Finally, our book value per common share at June Thirtyth was $15.67 up 4.1% from 15 of six at the end of the first quarter now over to Mark.
Thanks, Jay our.
Q2 was a strong quarter for U.S.C. with broad based contributions from many strategies and strong core earnings. This was a quarter where focus changed since the quarter progressed early in April markets were still volatile credit performance was uncertain and many investors for still being forced to sell assets.
If he was able to avoid having to sell to weakness helped by our high credit quality short duration portfolio and low leverage that we brought into the cobot crisis.
Even in March and April we were still getting substantial loan pay offs at par across our various loan strategies, which is the best way to de lever a portfolio in early may we're starting to see green shoots of a recovery we began to focus on growing our portfolio and being an opportunistic buyer of distress securities and loans.
One of the first sectors, we added with seasoned non agency RMBS you can see the growth of that strategy on slide eight.
The legacy non agency market, where the brunt of relentless read and mutual fund selling in March and April.
<unk> was pushed prices to very distressed levels.
Against the backdrop of aggressive fed intervention, we're confident that housing would fare relatively well, which would support non agency fundamentals. So that sector made a lot of says to us early in the quarter and indeed has subsequently we priced higher since.
When the recovery started in earnest, we're a little surprised by how quickly the credit markets rebounded that really any material. Good news about either containment through the virus or about any economic turned around.
It seemed that within a matter of weeks to market went from too many sellers to too many buyers. The Q. We play book was working is designed.
The fed was buying more than what was being produced in treasuries and agency MBS.
Which was driving down yields investors were selling these low yielding safe assets to the fed and receiving cash that pays them literally zero.
And so they were using that cash to buy riskier assets that still have some yield.
Well, we were confident about the resiliency of housing during the pandemic, we believed that the impact of cobot on commercial real estate who's going to be more significant and longer lasting.
Was the residential housing markets being helped by record low mortgage rates in general generous for Barents programs.
There are simply not the same amount of government program that directly support commercial lending or offer relief distressed commercial borrowers that said, our CMBS and small balance commercial loan portfolios performed extremely well in the second quarter.
Please turn to slide 12, you can see that we've expanded our small balance commercial loan disclosure in this quarter's earnings presentation.
Well, our commercial mortgage portfolio will have some challenges we optimistic that these challenges will be limited and Meanwhile, you can see that we are well diversified among property types geography, and all our loan to first liens.
Huge positive development for the commercial real estate sector. This quarter was the return of an active securitization market.
After the global financial crisis of 2008 2009, it took years for the securitization markets to reopen and this crisis. The securitization market. We opened in a matter of weak and this is so significant because securitization less capital to flow.
It means that real estate can be financed so it can be bought and sold commercial bridge loans can get termed out into conduit CMBS loans property owners can take advantage of record low interest rates.
And in fact, if he is continuing to have favorable revenue resolutions on a small balance commercial loan portfolio.
Moving to the residential market aggressive fed intervention lowered mortgage rates below 3%, which is very supportive of home prices. In addition, the widespread availability of forbearance is keeping any possible distressed mortgage supply off the market and the should continue for a while.
Given the economic uncertainty you see the marginal tightening of the GRC credit box. MS result, we expect to non couldn't sector to continue to fulfill unimportant role in the mortgage origination landscape for homebuyers. It don't fit into what is now would never do you see box.
Residential securitization markets also reopened this quarter, allowing you see the price its fifth non couldn't securitization.
Because of the tremendous support from the fed into tier seats for the housing market, we're very aggressive about restarting our non QM lending programs and being an early mover is paying off for US now our non QM volumes in June and July surprises with their stride.
And as with many origination business is right now margins are healthy.
Like Larry mentioned with respect to reverse mortgage sector as well.
Well, we do expect the non QM origination market to become more competitive overtime right. Now we are enjoying strong market share and benefiting from being one of the first platforms started originating again after the market stress in March.
The non QM business looks very attractive to US right now it's rates on new originations are similar or higher than prior to cope with but both deal execution and financing rates have improved.
Well the federal reserve support to help their mortgage strategies government stimulus to the carriers Act help the performance of our consumer strategies.
You mean stimulus checks and enhanced unemployment benefits.
Many consumers to have suffered a covert related loss had been come I've been able to remain current on the debt obligations.
Of course, we're closely monitoring the ongoing negotiations for continuation of these benefits.
I've seen strong collections across the board and or consumer loan portfolio. We have worked very closely with our partners on different strategies and the realize the fault that we are seeing have actually been quite modest.
Another boosting that strategy is lower LIBOR rates, our repo rates have dropped over 150 basis points. This year directly adding to our net interest margin.
Turning to the agency portfolio, we had very strong performance returning to double digit or are we for the quarter not annual non annualized.
Early in the second quarter, we saw some signs that the market environment was a very good one for agency MBS.
First after an absolutely wild March interest rate volatility was very low in the second quarter.
That was the first indication that the fed intervention was succeeding.
As mortgage rates dropped and origination volumes increased combined with fed front month buying it was clear to us that current coupon roles were going to be very attractive and anticipation. Yes. He did something at rarely does it positioned itself is long current coupon 30 year MBS.
Role levels in the current coupon mortgages are so high right now and hits in <unk> and the hedging costs are so low that rolling P.B.A. provides a powerful earning stream one month of roll income can be 20 basis points much more than a hedging costs going entire year at current levels.
Now back in March and April you FC sold a portion of its agency portfolio. After the fed stabilized agency MBS prices, we did that to increase our cash holdings, which was a much better alternative to selling credit sensitive securities at distressed prices.
As cashed built up on our credit holdings with Paydowns in consumer loans residential transition loans and small balance commercial mortgage loans, we have largely replenished our agency MBS holdings and it's continued to add to those holdings into Q3 as Larry Jeremy mentioned.
Looking ahead, I think it feeds into strong position for the rest of the year.
Our origination our origination partner really demonstrated their value to the credit Chuck this year weathering the crisis and posting strong loan performance. In addition, controlling the pricing of our asset pipeline, which was such an important part of our success last year as credit spreads tightened is becoming more important more and more important this year.
As a massive fed purchases are pushing investors out a government assets in a search for yield our ability to keep our asset acquisition meal type.
And our staying disciplined and credit quality given the economic uncertainty are going to be key ingredients for the second half of this year now back to Larry.
Thanks Mark.
I'm very pleased with Ellington Financial's performance, both for this past quarter and so far this year.
We protected book value during extreme market stresses and then participated in the upside to the market recovery.
Besides some strong strategy level performance the key to our successful second quarter was the fact that we avoided for sales in the first quarter I could benefit from the rebound.
All of this was thanks to our adherence to the liquidity management risk management and hedging principles that have served us so well over the years.
Please turn to slide 13.
Which is our usual slide where we show the stability of the FCC returns overtime as well as those of the other hybrid mortgage rates.
Really proud of Ellington Financial's performance, so far this year, both on an absolute basis and relative to the other hybrid mortgage rates.
I was especially excited to restart new credit investments as quickly as we did especially in our loan businesses.
We're seeing a great opportunity to grab larger market share in several several of our lending programs, especially in non QM.
And to booed, we're seeing much wider net interest margins in these programs and we saw a precursor of it.
Residential transition loan business, while we're not seeing a resurgence of supply yet in that market and what we don't expect a resurgence right away, we're gearing up anyway.
My personal belief is that in the medium term the opportunities in that market will actually be much greater than they were creek of it so.
Sadly whenever the negative effects of coded will be an increase in foreclosures.
I wonder if the positive effects of coded will be an increase in remote working and therefore, the mobility of the workforce.
Both of these after effects foreclosures and mobility will contribute positively the housing turnover.
Some of the highest and best use of that housing stock, especially the older housing stock will be in the hands, a fixed and flat and fixed and rent operators.
Ellington financial we plan to be ready to supply even more capital to these markets when the time comes.
As you can see from our balance sheet, we have lots of room to add assets from any and all of our loan pipelines, which we think to drive significant core earnings expansion going forward.
In the second quarter, the board increased or monthly dividend to nine cents per share and as I mentioned before there's ample room for future dividend growth as we move into the back half of the year.
All that said a fair degree of caution is warranted as it's still too early to protect the length and severity of the economic downturn not to mention that there's always uncertainty associated with upcoming presidential elections. So.
So with these risks in mind, we will continue to depend on our core risk management principles and disciplined investment approach to protect shareholder capital and drive returns.
Before we open the floor to questions I'd like to thank the entire Ellington team for their hard work over the past few months, despite despite difficult circumstances and for a long all of those listening on the call. Today, you hope that you and your family stay healthy and safe.
With that we'll now open the call to your questions. Operator. Please go ahead.
Thank you and as a reminder, if he would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from Crispin Love of Piper Sandler.
Hi, Thanks for taking my questions. So first.
The release mentioned the potential for new investments in mortgage mortgage originators would any of these potential investments be similar to your wedding sure and longbridge relationships and are there any specific asset types that you are most interested in right now for for originators.
Yeah I think.
Well.
Yes, I think no longbridge right now.
He is not an investment yet where we are that's directly buying assets from them.
But it's a business that we believe then.
There are lots of potential areas of growth and it does give us exposure to a unique asset class, which is reverse mortgage MSR sale.
Now our investment in lends sure and and some others, where we are getting a pipeline we are actually looking at making investments in other loan originators.
Which would include.
Getting.
Getting access to to their origination capabilities that would include RTL.
In in a couple of cases were looking at.
Non QM as well.
Two.
You know diversify our sources there so.
So, yes, I would say that at least as of now we're looking at minority Stakes as we've had for.
And in.
Originators that are originating product that is somewhere it's a product that we have now we're also.
Looking.
You know nothing that's late stage or anything like that but we're also looking at some completely different products as well that we think could overtime gain traction.
Okay, and then and then looking in the slide 12, where you have the detail on the small balance commercial portfolio. How are those those loans performing currently in how's that have that trended over the last few months and especially among the hotel in retail segments.
Sure object do you want to handle that.
Sure.
So the they I think the first point to make as I mentioned it in today's call as well as last quarter's call.
Repayments and pay downs on small balance commercial had been strong kind of going back even to March and April and kind of current through the current period. So we've been getting resolution favorable resolutions and pay downs and that yeah. That's helped of course de lever there in terms of ER forbearance and.
From an activity.
I think I mentioned that it's affected the portfolio.
Rodley and its it has affected a small balance commercial specifically, we've had and we'll have statistics in the and the Q when we file it but we have granted some forbearance agreements and our smell downs commercial I would say overall performance has a has been strong.
Helped by repayments, but also just as measured by 90, plus delinquency has not really changed all that much of course the for Barents. It is an important 0.2 I'm kind of attach onto that comment. So yeah. So again, we'll we'll put out some specific statistics in the queue, but I think the performance has been a has been strong.
And then in it I guess related to the property types that they you ask about yeah, I think weve here, you see say hotel, a 16% and retail is 11. So those are limited to a quarter of a view PB and we haven't been I guess specific where exactly the the four.
I meant to shake out among the different property types, but I think the diversification.
By property type and geography.
You can see here and and of course, the fact that everything's first lien helps as well.
Yeah, and I, just want to say that I think.
Not what we feel that job.
For example, even in the hotel sector.
We feel that.
That we're in good shape, there and that we've got.
Our properties underwritten.
With enough cushion you know first liens as you can see a in in the slide on the raw first liens and you know even post covered we feel really good about our.
The.
The equity that's still in these properties, even on a mark to market basis. So we feel good about these.
These assets ultimately resolving favorably.
Okay, Great doesn't think that's all very helpful and congrats on a great quarter. During these tough times.
Thank you.
Thanks Ryan.
Thank you. Your next question is from Doug Harter of Credit Suisse.
Hey, guys. This is actually Josh bolting on for dogs, Larry you mentioned in your prepared remarks and in the press release that you see upside to the dividends just curious any more context around that as you're looking at the quote unquote run rate earnings potential of the portfolio as it sits today. Thanks.
Yeah, I don't want to give anymore guidance in terms of timing, but my as I said my personal view.
Is is that is that there is upside there.
The obviously, that's a board decision.
For now we like rebuilding book value and I think we mentioned on prior calls that.
The cost of some tax elections that we've made we actually don't have pressure.
On our so much on our dividends. So it's not like where you will have to raise it from a tax perspective at least not in the very near term but.
I think that.
You will continue to sort of monitor when the right time might be I think.
But for now so really we like rebuilding the book value the stock prices depressed I'm clearly very depressed.
And you know look if you look at the book, We just announced you look at where our stock is trading.
So for now it say our you know its is still a decent yield I think we disclosed surround a 9% yield.
For investors, which is still a house healthy yield as we see that stock price.
Recover hopefully I think that will put more pressure on us to maintain that dividend yield salvia another factor as well.
Great that makes sense, then I guess given the increased liquidity you guys have built up in the first half of the year. How are you thinking about the piece of asset growth appreciate the detail about current.
Asset levels, and how youve grown the books since June Thirtyth, and then I guess following up on what you just said how how are you thinking about asset growth versus share buyback, given where the stock trades versus book value. Thanks.
Yes. So we we mentioned the last fall that we lowered our target for buybacks.
Before we had been before covert I think anything below 80, who are buying pretty aggressively and weve clearly lowered that.
And you can you can see that in terms of our share count.
But.
I think that we.
Our seeing.
Yeah, great production or not you I'm now I think we could be in store for.
Some record months they are in a in the near future as I mentioned in my remarks, I think we're gonna see a resurgence of RTL product can maybe not in the very short term.
And Ami.
You know on the commercial side, we're starting to see our origination bridge loan origination capabilities, there really come into play as you can imagine that's going to be a sector, where we're gonna baby to really pick and choose what geographies what property types and you know what.
Digital assets were going to want to lend against and I think that business is going to go all out too. So we want to keep keep a lot of room for what we see.
As a pretty healthy pipeline for the remainder of the year.
In credit assets, especially loan you know when our loan businesses.
So I don't unless our stock really drops a lot.
Back to.
No.
Well, certainly I think I mentioned in last call.
Above 75%.
Price to book, we're probably not buyers on that either even though we were in the past so.
Roughly that that gives you some color there.
Great. Thanks, Larry.
Thank you. Your next question is from Trevor Cranston JMP Securities.
Hey, thanks.
A question on the incremental deployment into new credit assets I think Mark mentioned that earlier in the quarter you found some pretty compelling opportunities on the security sard.
I was curious if you guys are seeing any areas and securities market, where prices sort of lagged in there are still distressed opportunities or if the incremental deployment is really primarily just gonna be focused on the on the whole loan opportunities. Thanks.
Mark.
Hi, Trevor so I would say.
When I think back about.
March and April well created the opportunity in Securities was the fact that.
Hi, David.
From a financial perspective, it quickly morphed into a balance sheet crisis, right and you had.
Mutual funds and some levered investors that were forced to sell assets in the short period of time.
And typically the.
Turnaround time for selling loans is much longer than it is for selling securities. So the price drop in securities. We thought was exaggerated relative to the risks.
We saw that in March and April in hand.
But some non agencies early on we were constructive on housing and that worked out very well because we wanted to get.
You see more invested we wanted to take advantage of the opportunity we've built up cash and we knew starting our loan origination.
You'll partnerships was going to take a little time, so we were aggressive on the security side.
That worked out as well it was in residential as well as also selectively in CMBS.
No you've seen a pretty strong recovery.
In legacy non agency securities.
The point, where we don't necessarily view them as more attractive versus some of our loan strategies there have been.
Other sectors of the securities market that aren't is big where we found some opportunities. So single family rental is one but I would say that.
No I mentioned about Q, we sort of working is designed.
And it has has sort of pushed a lot of investors that a government guaranteed assets into among government guaranteed assets and so that process has caused a broad based.
Recovery and securities prices. So I would say you know selectively opportunistically, we're still finding opportunities and securities.
But.
It's not sort of on a beta basis the way it was earlier in the quarter.
I just wanted to add to that Mark that I.
I think in on the commercial side in CMBS, Yeah were hopeful that there's going to be that there are good opportunities are going to be good opportunities.
Where you know as you may know from time to time.
We've been a.
Substantial b piece buyer that market.
Can imagine.
A lot of the B piece buyers are.
That was traditional BP spires have been hobbled hobbled by coated and are now not in the mix in terms of new purchases. So I think we've got less competition there.
And and there's going to be some distress, obviously, especially in certain deals versus others. So I think that's one market, where we've had really great.
Great performance in the past a long short strategy for us.
Helpful and I was interested in the comment you guys made about securities repo being pretty much back to pre March levels.
I think that might be the first time, we've heard anyone say that.
On the calls this quarter.
I.
Can you comment on you know if you guys are seeing availability of repo on.
All the same types of collateral you were previously interested in using it on order. If you were really primarily referring to sort of haircuts and rates. When you made the comment.
Well, we talking about especially at the secondary just as a secondary follow up I was curious if you guys are utilizing a repo on the retain bonds from the June securitization.
So we.
So first of all that was limited that statement I think was classified as related to securities.
Right.
Yes, so I think on the security side of things.
I think we.
For the year.
Generally on a non let's just say non distressed securities I think we are seeing.
Rates comparable to what we saw pretty covered so yes, so now on the loan side.
Things are not back to where they were.
And but you know as we said we made a lot of progress getting them closer back to where they were.
And we continue to so I think thats going to take a little bit longer for some of the lenders to get be aggressive in that market, but we see it happening, but it's not there yet if not back to to pre covered levels yet in terms of loan rebound.
I wanted to add a couple of things one is if you look at agency repo.
By any measure spread to LIBOR or absolute level.
That's better than what it was pre cove, it and I think thats, because there's just been a tremendous appetite.
Among money market funds for agency collateral so.
That that repo, it's probably better than what it was pre cobot.
And I talked about the importance of restart of securitization market and so one thing I didnt mention the prepared comments, but one other.
Benefit.
Of the restart of securitization markets is that it gives lenders transparency on dollar proceeds of securitization. So by that I mean, when you were going through March and April and lenders.
Were lending against non QM loans, it wasn't clear to them.
What secured uprate securitization proceeds these loans would generate well now you've seen several deals get done and Securitizations have ranged from you know.
You know as high as you know 90, 596, I think down to as low as 90, so now for lenders.
It's a much they they have that's an important metric they can use for thinking about.
How much they want to lend against assets so.
The fact that there's been the securitization market. We started there hasn't been there hasn't been one or two deals right. It's been a lot of deals where pricing has been consistent it's been orderly.
That has we've seen improve the availability of non QM lending both on sort of the terms you get.
In terms of advance rates and the tenor of these facilities, but also the spread to LIBOR.
Okay. That's helpful and then Ocwen agendas, although a second Jr. Did you want.
Yeah, just the second part of that question about I think is specifically asked had we financed the retain tranches and my last a non can deal and the answer is yes.
Okay, great. Thank you.
And then a question on the agency portfolio.
Are you guys made a point in one of the slides about the biggest risk being a drop in pay ups.
I was curious if you could talk about you know how you think about the risk of that in light of you know the potential for mortgage rates and the primary secondary spurred maybe continue compressing over the balance of the you're in prepay speeds.
The remaining very fast or potentially even moving higher going forward.
Yes so.
You know pay ups are high now.
There are high for good reason, they're high because.
Actual prepayments speeds are high and projected prepayment speeds are very high.
And I'm not something mentioned on this call, but on the aren't call we talked about.
Some of that technological workarounds to social distancing that did you see put in place we think are going to be.
<unk> become sort of a codify in mortgage origination so availability of.
Online.
Notaries.
More and more properties getting refund refinanced or purchased without necessity of an appraiser actually entering the home and so all those things.
So Steve in the S curve, so perhaps or high now they're high for good reason, we spend a lot of time.
Focusing on and the higher coupons, you know focusing on where do we get the best prepay protection.
ER for the money right. So the best P. pay protection is generally low loan balance, but sometimes if you look at that pricing you might think well here's another story, where the prepay protection isn't as strong but the price is a lot lower so managing pay up risk is that's an integral part.
Of managing the Levered agency mortgage portfolio, but that's been.
You know that statements been a truism for a long long time so.
You know the market has sort of embraced.
This lower for longer it's embraced you know the famous now famous day Palace statement about I'm, not even thinking about thinking about raising rates. So what's built into pay ups is the belief that you're going to be in this threeish percent mortgage rate.
Regime for foreseeable feet future.
And that's going to lead to relatively fast prepayments.
On you know mortgage rates mortgages that have an incentive given that rate for a long time so.
You know, it's something we always think about I think we have enough tools.
On the hedging side and on the research side to manage through that but.
You know, we certainly acknowledged that that when you have pay ups that have run up a lot. Then you know that's potential that you know they can come back down to I think the scenarios, where they would come back down appreciably.
You'd need to see.
Moving interest rates I think.
It's not you know right now really priced into the forward curve. It can certainly happen.
But you know the market right now the sunny relatively low probability to it.
And if I could just add to that so.
So I think there's two ways that payoffs drop I mean, I'm, obviously oversimplifying. So one of them is when you've got liquidity crisis and people are just paying up for the liquid TV A's and not paying up for the value in specified pools right. So thats, one way to pass can drop and the other way that they can drop.
You know as as you said is just by.
Cross the border.
You know increases and not prepayments right. So.
And.
Yes.
If that happens. So for example, you mentioned the primary secondary mortgage rate spread narrowing.
You'll see that.
Effect, not only specified pools right, but you'll also see it affect TBS and sort of the reason I'm mentioning that is that right. Now you know going if you look at our presentation and I guess on slide.
19, right you can see that as of June Thirtyth, we had a pretty modest.
Tvs short measured by tenure equivalents terms are hedging portfolio on the next slide Slide 20, you can see that yeah. We had died measured a little differently, we had a larger Tvs short portfolio, but do you go back.
To where we were at the end of year. So for example, you can go on our website and you can look at our presentation on fourth quarter.
Presentation, and you can turn to slide.
19, it looks like it is there and you can see that we were.
Our TV a percentage of our hedging portfolio as measured by tenure equivalents was 44%.
And you know if you look at our next short TBA position that it was over 1 billion. So.
We can dial up and down sort of to make long story short, we can dial up and down that TV, a short a lot and.
So we can you help control our prepayment risk.
By doing so and again that will address and won't necessarily address the compression, perhaps that's due to another liquidity crisis, but I think a will address.
Hey.
Hey across the board increase in prepayments of the type, but you also mentioned.
Yes.
Yes, Okay. Appreciate the comments cqs.
[noise]. Thank you. Your next question is from Eric Hagen at KBW.
Hey, a couple you guys are doing well following up on your comments on the benefits in the short duration portfolio how much.
Do you expect the portfolio to pay down over the next couple of quarters and.
Can you get specific announced at the spread there that you're seeing in the loan strategies and how much of your run off you think might be redeployed into those.
In the those new originations.
Well those are those are some tough questions.
Yes, it's a it's it's hard to predict.
Jr. Do you have a number I think it probably better if we just reiterate what the number was in the first quarter in the second quarter.
Yes.
Yeah. So we had 70 million a pay downs.
The second quarter across consumer.
Residential transition loans and small balance commercial.
And we said that was about 11% of where we started.
The quarter and the previous quarter I believe that number was 55 million for the same.
Set of strategies I can look that up as we talked but yeah. So.
Yes, so, let's let's I think the order of magnitude than.
Yeah, what is the five it was.
Great Yeah, So I think I.
I think thats a good range to two out to think about there in terms of in terms of exactly where we would deploy it.
I think our most most predictable pipeline right now.
As the is non QM and consumer.
But you know as I mentioned, I'm, certainly hopeful that our commercial mortgage bridge loan business picking up and and so you can see some some increases there it's really it's really hard to know it's.
Sorry, it's very asset specific but you know certainly.
With.
No question I think that we'll see.
An increase in you know in non QM.
From the second quarter, where we really know started getting going in the latter part of that quarter.
Got it and the spreads on non QM right now versus where they were.
Yes, yes, yeah, I mean, they're better yields are really not materially different.
Maybe a little lower than they were pre covered by the.
The financing is just much much lower.
And that's financings or whether you measure it by repo or whether you measure it.
Bye.
You know by the securitization execution.
Right, Yeah that actually kind of ties into my my follow up question, which is what.
What is the net loss that you're expecting on the non QM portfolio, what was the loss adjusted yield on entertain trunks isn't the securitizations in June and and the repo rate that your funding those securities.
I'm not even sure we have a year today loss and non QM.
So the expectation for losses, the leap forward expectation.
Oh, I say in terms of.
Well.
I'd say the aggregate law the aggregate loss in the collateral over the life of the asset what does that number.
Right right, yeah, well, that's when I actually had a quarter yield I'm thinking about that remember you know the new production. We are doing the best we can too.
You know, we can be selective in terms of borrowers and.
And where we're part of our underwriting now you know is kind of covert underwriting if you will.
Making sure that.
You know the employment status is where we wanted to be.
And you know et cetera, so I.
I think we're certainly hopeful that.
And in the new the new originations that theres not going to be.
Any material.
I mean, we.
Maybe a few basis points a year of losses.
Going forward now on the agency portfolio, you've got some forbearances.
I don't know Mark do you have.
Do you have a number that you're a range that you are comfortable quoting in terms of where you think the.
Our pre Cove it.
Non QM portfolio is going to shake out in terms of per annualized loss rates.
You know I wouldn't want to do that off the top my head I.
I would say one thing is.
You have to separate out.
They're very unfortunate situation into the <unk> that you know some borrowers made of how to covert related loss of income that.
They they won't fully get back right and then they might need to seek.
Lower shelter costs, so does that situation, which is terrible.
But given what home prices do things given the LTV of our loans it doesn't necessarily translate into a loss for us. So you know there's nothing I would want to quote off the top my head other than that broadly speaking if you look at what's been going on with for parents for Barents numbers have been coming down.
Down and borrowers many borrowers that originally opted for forbearance I think in anticipation of potentially a loss of income have been you know have making payments on those plans.
Yeah, we've been very LTV focused right for the entire life for that program. So there have been other originators that.
Captured larger volume and wider yield spreads.
Our higher coupons on their product by going after higher LTV product and that was just never RMS and still as right. So right, yes, so I think that that ultimately.
It's going to be a big saving grace.
To the extent that we do see.
Delinquency rates in default rates.
In that portfolio, which they're inevitably will will be so.
Right.
I hate to be that analysts kind of pressing for numbers on a Friday after along with the learnings, but the loss adjusted yield on on the securitization from June if I.
Kind of estimated that to be in the maybe 10% ZIP code and then you got.
Maybe 70% advance rate with on on a repo line.
Maybe around 4%.
Would that be kind of the right right Zip code there.
John do you have that Handier office, Yeah, I mean to the second point any repo spreads for nonqm whole loans, there and kind of or the 200 low two hundreds range.
Okay.
Yeah, we are there or more.
Depending on what line you're talking about.
Yes spreads have compressed even more right and securitization execution has gotten even better since we did that deal not surprisingly.
And when we did that deal.
The execution was not as good as it was pre covered but we were very happy because as Mark mentioned, you know securitization market bounced back.
Even more quickly I think than than we had expected so and we were happy to jump on that.
For our you know for lots of reasons so.
Ultimately our securitization in that transaction was not as good as it was on prior transactions.
The cost because of that fact, you know we had bought most of those loans pre covance and we were securitizing still with one of the first few securitizations really in that market I can't remember for me, the third or something like that.
But it was around they are securitization done postcode. It. So yes. So that execution was still though you know which was was still great. It's time and we had.
Those loans were trading those that traded in the marketplace for trading much much lower than we were able to execute via that securitization. So was a great. It's a great deal for us to have gotten off.
And as the securitization is even tighter now market and the.
The yields that we can get on new assets are hanging in there so I think right.
Yes, so yes, so as you said not as maybe not the mid teens that we have seen before.
In terms of the yield on our retained trashes bye bye.
Right.
Certainly something that's a respectable.
Yeah, No I mean, it looks like a fantastic return on on equity I just wanted to make sure I had the.
Right numbers there. Thank you guys entry we can.
You too thanks.
Thank you. Your next question, it's been Tim Hayes B. Riley.
Hey, good afternoon, guys hope you're doing well I just one for me you had a small balance commercial focus competitor today say that they expect a asset values broadly to decline by 10% and on then also kind of highlight that they expect a lot more.
Needs towards the end of the year as maybe some kind of bank capital ratio forbearance period start to expire. So just wondering if you know how you feel about those comments if that's consistent with the view internally and if you're seeing any opportunities to execute on portfolio acquisitions today.
Yeah, we're seeing.
Right I don't I mean, as far as 10% I think it's going to be.
Yes, very obviously geographically and property type specific Sharon I don't I don't want to comment on some overall number.
Certainly.
New York Office space and.
Certain hotels and things like that we'll we'll definitely be challenged.
I would say probably more than that.
But yes, we we haven't seen a flood yet but similar to what.
We were talking about in the residential transitional on space. Yeah. There's no question in my mind that there's going to be.
A lot of supply we before we really got big in the bridge loan business in commercial mortgages, a much bigger business for US was npls and we bought those really from two sources bags and.
And deals you know conduit deals off from special Servicers, So I think youre going to see both of that activity and the.
The work out groups in banks.
Our usually overwhelmed when crises like these take place.
And they got to focus their energies on the bigger assets and that leaves US you know we're in that 20 million an under sweet spot, that's our sweet spot right for.
For Npls and it's a great place to be and I think there's going to be a lot of supply and I agree that the banks are going to be under pressure to sell product at some point right.
Too soon now.
For them to be saying a lot of pressure, but I think we will see it and then of course, you've got the CMBS deals as well that are going to that are going to be selling at some point.
So I unwritten, that's that's going to be a good market for us and that's where our route started was in.
In the NPL space, and we only kind of migrated into the.
The bridge loan space.
In that became in our view a more fertile market.
Got it thanks to the color Larry.
Sure.
[music].
Yeah No further questions at this time, we do thank you for joining today's Ellington Financial Conference call. You may disconnect at this time and having wonderful day.
[music].