Q4 2020 Ellington Financial Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by welcome to the Ellington Financial fourth quarter 2020 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode. The floor will be opened for your questions. Following.
Presentation, if you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If at any time. Your question has been answered you may remove yourself from the queue 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.
Following the Jason Frank Deputy General Counsel and 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.
Statements are not historical in nature as the.
The other item one a of our annual report on form 10-K filed on March 13th 2020, and on the part two item one a of our quarterly report on form 10-Q as amended for the three months period ended March 31, 2020 forward looking statements are subject to a variety of risks and uncertainties that could cause.
Over the actual results to differ from its beliefs expectations estimates and projections. Consequently, you should not rely on these forward looking statements as predictions of future events.
Payments made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward looking statements.
As the weather as a result of a few.
The company of information future events or otherwise I am joined on the call today by Larry Penn Chief Executive Officer of Ellington Financial Mark The coffee co Chief investment Officer of UFC and Jr. Herlihy, Chief Financial Officer of the F C.
As described in our earnings press release, our fourth quarter earnings Conference call presentation is available on our website Ellington.
The dot com manager.
The prepared remarks will track the presentation. Please note that any references the figures in this presentation of our qualified in their entirety by the endnotes at the back of the presentation with that please turn to slide three and I will now turn the call over to Larry.
Thanks, Jay and good morning, everyone as always thank you for your.
Finance interest in Ellington financial.
Ellington financial was again firing on all cylinders in the fourth quarter as we delivered strong results in all of our diversified credit on agency strategies as.
As you can see on slide three.
Generated net income of a dollar of 44 per share which translated into a non annualized.
Time return of eight 7% for the quarter.
How do we generated core earnings of 37 cents per share.
I am pleased to report that with our strong fourth quarter results, we more than made back the losses from earlier in the year and have positive net income and a positive economic return for the full year of 2020.
Economic given the extreme volatility of last March and April I think that this is a remarkable accomplishment for a hybrid mortgage REIT.
And 'twenty 'twenty, one is off to a great start our economic return of January with more than 3%.
Estimated January 31st book value for common share was $18 five.
Which is now within just 22 cents of where it was last February prior to the Covid related volatility.
And that's before giving credit to the dollar of six sets of dividends on our common stocks since last February.
Now of getting back to the fourth quarter results.
Our loan origination business is again led the way.
In the reverse mortgage space Longbridge concluded an outstanding year in fact of record year for both the origination volume and net income.
In the non QM business line sure had a record quarter for origination volumes and earnings and in October we completed our second non QM securitization of the year, which drove strong performance on the portfolio.
Outside of that business.
Meanwhile, we had strong credit performance from our short duration of loan portfolios, particularly residential transition mortgage loans small balance commercial mortgage loans and our consumer loan portfolios.
Notably for most of these investments we either originated the loans directly ourselves or through our origination.
<unk> partners.
In November we securitize, the pool of unsecured consumer loans purchased through one of our loan flow agreements.
Finally, I'll also add that post quarter and in fact, just earlier this week, we price to yet another very successful non QM securitization, which mark will discuss in more detail later.
As we have highlighted before we believe that the loan origination platforms that we are building at Ellington financial are crucial to ensuring us a continued steady flow of high quality investments.
These origination platforms also provides significant franchise value of talent to the financial in fact, I believe that this franchise value of already represents.
<unk> tremendous underappreciated upside for <unk> stock price, especially given the sizable premiums, which many public loan origination companies currently trade.
I believe that these platforms will continue to differentiate ufc's business model moving forward.
In addition to our loan strategies performing well on credit Securities.
<unk> also performed very well in the quarter, most notably Clo's see MBS non agency RMB us and European RMB S. As prices continue to recover from the Marcelo.
Finally, our agency portfolio delivered another quarter of excellent results driven by tightening yield spreads attractive dollar rolls.
<unk> gains and attractive financing rates.
During the quarter, we were able to further extend and improve our sources of financing.
In addition to the loan securitization as I mentioned, we also extended the term of one of our loan financing facilities and also added another such of loan financing facility, which closed shortly after year.
Right.
Okay. Many may not view details about asset financing facilities is the most exciting news, but I mentioned it can impart to remind everyone that in no small part its not just our lower leverage but its also our disciplined approach to managing our financings that enabled us to weather the COVID-19 liquidity crunch last year as well as we did.
Finally, I'll point out that we were again able to deliver strong results this past quarter, even while maintaining leverage below our historical averages. We finished the year with the recourse debt to equity ratio of one six to one down from one seven to one last quarter and significantly lower than the average of $2 71 in 2019.
With this low leverage and ample cash on the balance sheet, we have plenty of dry powder to add assets and grow earnings from here and that's exactly what we plan to do.
And with that I'll pass the Jr to discuss our fourth quarter financial results in more detail.
Yeah.
Thanks, Larry and good morning, everyone all of them.
I'll start with slide.
Slide three which shows the summary of our fourth quarter results.
For the quarter ended December 31st Ellington Financial reported net income of $1 44 per common share and core earnings of <unk> 37 per share.
These results compare to net income of $1 six per share and core earnings of 41 per share for the third quarter with.
With net income and core earnings comfortably exceeding our dividend the board increased our monthly dividend rate by 11% in November our second dividend increase since the reduction last April for the full year 2020, we reported net income of $17 $2 million or <unk> 39 per share.
Next please turn to slide six.
The attribution of earnings between our credit and agency strategies.
During the fourth quarter, the credit strategy generated a total gross profit of $1 69 per share.
While the agency strategy generated a total gross profit of $1 of excuse me of <unk> 13 per share.
These compare to $1 17 per share on the.
For the <unk> 17 per share on the agency strategy in the prior quarter.
Our credit investments generated excellent results for the quarter driven by strong net interest income and significant mark to market gains across the portfolio.
We benefited from excellent performance in all of our credit strategies as prices and liquidity continued to improve.
The credit scoring of the substantial market sell off earlier in 2020.
We also had another quarter of strong performance from our equity investments in mortgage originators for.
Finally, with credit spreads tightening across most asset classes, our credit hedges for the only negative contributor to results during the quarter.
Our agency strategy also had another strong quarter.
<unk> is agency <unk> yield spreads tightened quite significantly.
We benefited from strong net interest income net realized and unrealized gains on our holdings of long TBA is driven by federal reserve purchasing activity and net realized and unrealized gains on our interest rate hedges as long term interest rates rose.
A portion of this income was offset by net realized unrealized.
Unrealized losses on our agency MBS investments driven largely by elevated prepayment activity.
Turning next to slide seven you can see that our total long credit portfolio increased by approximately 2% in the fourth quarter the <unk>.
Order over quarter increase was driven by larger non QM and residential transition loan acquisitions, which more.
We offset significant payoffs on our small balance commercial mortgage loan and consumer loan portfolios.
As well as the completion of.
Of two loan Securitizations during the quarter.
Removing the impact of the two securitizations the long credit portfolio grew by nearly 15%.
Turning next to slide eight.
More than you can see that our long agency MBS portfolio increased by 4% quarter over quarter, but remained significantly smaller than it was pre COVID-19.
Recall that earlier in 2020 in response to the Covid related market volatility, we strategically reduced the size of our agency portfolio in order to lower leverage and enhance our liquidity position.
We continue to keep this portfolio of relatively small throughout 2020, which has kept our leverage low.
Turning to slide nine you can see that our recourse debt to equity ratio adjusted for unsettled purchases and sales decreased during the quarter to one six to one from one seven to one at the end of the third quarter, while our overall debt to equity ratio decreased.
<unk> 61 from two seven to one over the same period.
Our weighted average cost of funds decreased in the fourth quarter as well the two points year of 3% from two 2% in the third quarter as our older higher cost of repo borrowings mature we continue to replace them with repo borrowings price based on current lower cost.
Lower cost borrowing rates.
At year end, we had cash and cash equivalents of approximately $112 million along with other unencumbered assets of approximately $442 million as.
As Larry mentioned, we have plenty of dry powder to add assets from here.
For the fourth quarter total G&A expenses per.
Costs were <unk> 15 down slightly from 16 from the prior in the prior quarter.
Other investment related expenses increased quarter over quarter to <unk> 12 per share from <unk>, mainly due to non QM securitization issuance costs that we occurred incurred in the fourth quarter, but.
But not in the third quarter for.
For the fourth quarter, we accrued income.
Our share of expense expenses of $7 9 million.
Primarily due to an increase in deferred tax liabilities related to unrealized gains on investments held in the domestic Trs.
Finally, our book value per common share at December 31 was $17 59 up six 9% from $16 45 at the end of the third quarter.
Quarter. After a strong start to 2021 or January 31st estimated book value per share stood at 18 O five.
Now over the Mark.
Thank you Jr. Q4 was the strong quarter for ESC today, I'll review performance for the quarter and the full year, how the portfolio of evolved in the quarter.
Tax on our outlook for the coming months.
In the fourth quarter EMC had significant contributions from each of our three core credit strategies.
Other than some mortgages commercial mortgages and consumer loans.
Overall, we achieved an eight 7% total return with only modest leverage and for the entire year.
And that of positive economic return of 2% are simultaneously our simultaneous focus on both protecting against downside shocks and seizing opportunities guided our decisions every moment of what was probably the most volatile year ever for structured product assets.
One reason I mentioned that our eight 7% returned in Q4.
<unk> with modest leverage is because having modest leverage coming into the crisis last March was one of the primary reasons that <unk> was able to weather the storm without selling credit sensitive assets of deeply distressed prices.
Too much leverage in March that you had to sell assets at the lows and then you didn't have assets remaining to drive future.
For performance or any cash to invest.
Our performance for the year demonstrates our disciplined approach to underwriting credit risk. We are remarkably few headaches in the portfolio today.
Certainly a few individual loans, where the underlying property cash flow was challenged but by and large we believe that our loan investments are well covered by the value.
For was underlying assets and they feel highly confident that that will continue to see favorable resolutions on these loans.
You can't really judge the company's underwriting standards until the market hits the speed bump before the speed bump it always looks better to have chased higher note rates higher ltvs lower FICO.
Of the other everything performs the same and you'd rather have the extra yield, but given the disruption to the capital markets into the U S economy in 2020, and the substantial problems in many sectors of the credit markets underwriting practices were really put to the test and the ESC shown across three of the areas of focus residential.
Commercial and consumer.
Our strong underwriting was reflected in our performance and it allowed us to play offense in the spring when assets were really distressed and new lending opportunities are so attractive non QM is of Great example, yes, we had some delinquencies yes, our servicer worked closely with borrowers that have of Covid related.
Oh come on income, but the challenges are manageable and we believes our for our position as a lender with secure because we had faith in our origination process, including our underwriting an appraisal of policy because of that confidence our origination partner Lynne sure Who's one of the first to restart its non QM lending program following the crisis and that is.
Losses paid off for E F C in two significant ways for.
First it immediately increase lynch's prominence in market share and the broker community responded by rewarding Lynch are with increasing volumes and second with less competition, we were able to buy and securitize, new non QM loans at highly attractive levels, which helped drive profit and core.
It's really the F C.
So I think 2020 demonstrated the efficacy of many of our core principles. The first core principle is monitor your leverage closely the difference between being an opportunistic buyer or for seller at the end of March turned on just an incremental extra turn or two of leverage the extra turn.
The earnings which that many managers reached for when spreads are tight is rarely rewarded over the long run. It can certainly work out with higher slightly higher core earnings for a quarter or two but if spreads on liquidity turn against you being over Levered is the enemy of long term performance of.
Obviously in a risk on move like we saw this past quarter, if we had an extra turn.
On the leverage on our credit assets of returns would have been marginally higher but the balance sheets must be managed not just for the upside case, but also to be stable on asset prices are under attack like they were last March.
And the type of leverage matters, a lot to the term non mark to market structure of several of our facilities added additional resilience.
On the Liberty likes ability when the market sold off.
The second core principle is when you were of lender like we are you try to get as close as you can to the ultimate borrower again I think non QM is of Great example, in this business, we are originating loans to lend shore and manufacturing of our product R. R.
R and the product.
And it's directly by issuing securitization we.
We like the model better than just buying the securities in the secondary market here's the good illustration of why we price the non QM securitization deal yesterday, the AAA tranche, which is 75 per cent of the deal priced at a yield under.
8%.
Invest at the average note rate on the underlying loan, whereas about five 7%. So that gives us an enormous spread over our AAA financing costs.
Of course, there's a lot more to the equation here the loans originated of premium we take prepayment risk and credit risk and we have to absorb deal fees. So I don't want to oversimplify.
But by getting closer to the ultimate borrower the homeowner and overseeing the entire process I think we're able to manufacture much higher yielding and frankly much safer investments compared to just buying them after they've been originated warehouse and securitized.
We gained a deeper understanding of the credit risk when we are closer to the borrower.
The Phi and are more involved with the initial underwriting of the credit for.
The third core principle is our belief that ownership stakes in origination businesses represent excellent alignment and are of great long term way to grow book value.
One of the originators can be bumpy in the short can be a bumpy road in the short term gain on sale margins in the origination volume.
The ebb and flow and then in addition to that our investments in the originators don't directly generate core income for E. S. C. C can be underappreciated by the market at times, but overtime, we think they can be material drivers of our book value and our franchise value and because of your own equity in the platforms theyre upside of theoretically not capped.
Volume is another advantage for US is that originator earnings are sometimes inversely correlated with securities yields. So these investments can be counter cyclical.
To some of the other investments in our portfolio and the hence our diversification.
For the quarter, we grew both our agency and credit portfolios even wall.
While we had many loan resolutions and completed two securitizations.
Core earnings our core earnings comfortably covered our dividend, which you raised in November.
Leverage is still low and has room to increase looking at the pie charts on slide seven the commercial strategy shrunk a little due to several successful loan resolutions.
That's a portion of the portfolio that we're intending to grow substantially and we're currently seeing some attractive origination opportunities that should help us to do so.
We're also expecting some of our dry powder to be deployed in commercial npls given the inventory of defaulted loans. That's building up at banks and then C. M. B S deals.
Consumer.
<unk> loans.
Where we have had very consistent performance throughout the year shrunk this past quarter, but that was mainly the result of the securitization. We did in November we expect growth in net portfolio. The residential mortgage loan portfolio grew from both non QM and residential transition loans, even net of the loans we securitized.
Our agency strategy also had another very strong quarter, finishing up the of more than eight more than 8% on allocated capital. The agency portfolio again demonstrated its strategic value to the company in 2020 over the years. It has not only been a source of return, but it's also been the source of liquidity in times of stress.
So at the last March and April.
Our strong fourth for fourth quarter earnings came from a combination of core earnings as well as significant asset price appreciation, which means that the portfolio. We bring into the start of the year isn't quite as high yielding as it was at the start of Q4 for.
For agency MBS and our way of looking at things was more expensive at the end of the quarter than the start and that's also true for many of the credit securities we own but its less true for many of the loans. We are targeting in some sectors. We are seeing expected yields consistent with the second half of last year plus the potential for some better financing terms.
For example focus going forward is to continue to grow our real estate and consumer focused strategies through both loan investments and securities. We have seen some attractive investment opportunities already this month.
A steepening yield curve and higher agency mortgage rates could drive incremental demand in non prime and non agency sectors in particular and as always.
We are also focusing on improving and expanding our financing arrangements finally.
We are focused on supporting and providing resources to our origination businesses. So they can continue to grow and expand their footprint and what it has been a very fertile market for originators now back to Larry.
Thanks Mark.
Our strong fourth quarter brought our net income and economic return positive for 2020 of tremendous results for an unprecedented ear.
As to are part of core earnings and dividend well throughout 2020, we consistently generated core earnings in excess of our dividend and our board has already acted twice to increase our dividend.
I.
I see further upsides of the dividend from here given the earnings power of our current portfolio and given how much dry powder, we have to continue to expand the portfolio, especially on the loan side.
But in addition to the dividend upside I also see a lot of book value upside from here.
Please turn back to slide six.
As you can see towards the upper right area of this slide realized losses in our credit portfolio, where around 33 cents per share in 2020.
I'm extremely proud that we were able to limit our realized losses for the year in our credit portfolio to just 33 per share, but that's 33 cents per share we're not getting back.
But look one row lower our unrealized losses in our credit portfolio in 2020, or one dollar per share much of it COVID-19 related mark to market losses.
That's a dollar per share that we can get back in.
So far in 2021, we're already we've already made great headway getting that back.
And that's our goal and expectation that we're going to get most of that back in 2021.
That would represent a huge tailwind in 2021 for our earnings and our book value per share.
And we're off to a great start there with our estimated $18.05 book value per share as of the end of January.
We're already very close to our pre Covid book value per share and Thats before giving credit for the dollar six cents of dividends on our common stock since last February.
Meanwhile, our traditional financing costs remain attractive in the securitization markets are providing even more attractive long term financing.
We continue to focus on growing our proprietary.
Prior to the loan origination businesses and continuing to grow origination volumes at our originator of affiliates.
This growth creates a virtuous cycle driving increased earnings at the originator, which we participate in through our meaningful equity investment while also driving portfolio growth for Ellington financial.
Furthermore, we are actively.
On the lookout to leverage our strong track record of asset origination partner by adding more strategic equity investments and low loan flow purchase agreements. So I sort of further expand diversify and enhance our sources of investment product.
Finally, I'd like to close by highlighting how Ellington financial has performed not only in 2020.
But over market cycles.
Please turn to slide 23.
This slide shows our net portfolio income on a fully mark to market basis for each of the 13 full years of our existence.
Whether it was the financial crisis of 2008.
The paper.
Taper tantrum of 2013 on.
For the Covid Crunch of 2020.
The financial has generated positive net portfolio income in each of these 13 incredibly varied years.
EMC is one of the only publicly traded hybrid mortgage REIT is true of posted a profit in 2020 I am extremely proud of this.
The result, and of our entire history, which I believe reflects the strength of our of our team and our disciplined approach to investing as well as the importance and effectiveness of our risk and liquidity management.
Before we open the floor to questions I would like to thank the entire Ellington team for their hard work in 2020 and for all of those listening on the call today, we wish.
The best for 2021.
And with that we will now open the call to questions operator.
Thank you at this time I would like to remind everyone. If you'd like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press the pound key.
Our first question comes from the line of Doug Harter of Credit Suisse.
Thanks.
As far as kind of of your.
Sourcing the loans you mentioned.
Getting the was close to the.
The burgers.
As possible on it's kind of on the window and now are you.
<unk>.
Can you just talk about your interest.
As you know kind of fully owning an originator versus kind of the equity ownership and kind of how of that you know kind of how you think about the pros and cons of the of that.
Okay.
Yeah.
Well I this is Larry Hey, Doug.
<unk>.
I think there's yeah, there's a few issues. The first one is that we.
We certainly.
Like having or the principals at these companies.
What line sure in particular have a lot of kind of the game. They are a lot of ownership.
I think I think consolidation is a is a small issue it's not a big issue.
If we were to consolidate these companies onto our balance sheet, then that would create.
Some additional complexity I guess in looking at our financials.
The.
You know on the case of of Longbridge.
That's more of a.
We are we own less than 50% there and.
We have of partner standpoint.
Home point mortgage actually which just went public which is owns an equal share as us.
So I don't think of them at this point.
Certainly there's no.
The concept of the of owning the majority of their.
And we also have other states that were exploring we have one stake that we currently have where it's.
It's also of minority interest so I think for us.
On the important thing is.
As of the loan flow right I mean, we are.
We have a big mouth to feed right in terms of the reach needs to generate investments that clearly are.
We think better from certainly on a return on equity standpoint, and also just in terms.
As of day Repeatability standpoint.
Overtime.
The just to keep that loan flow going so that's really super important so I don't think of.
Obviously the franchise value on <unk>.
Indirectly through ownership of that is important and youre seeing that.
You know already in terms of the earnings.
Flowing through the book values of these companies, which flow through the book value of our company. So that's all important but.
I think it's really the the loan flow is the key.
And the other is sort of of the icing on the cake.
Got it and then.
I guess.
Or are any of those equity and interest.
Are they providing any cash flow through kind of a dividend to the equity ownership of its kind of any of the kind of earnings being retained for growth within those businesses. Yeah earnings is being retained for growth.
Great. Thank you.
Which is out of just added which is you know why you know as Mark said its not.
It's not directly to core right. If they were they were paying dividends regular dividends.
That could be core income right, but they're not I mean, it's and it makes perfect sense for them, we want them to grow.
To grow their platforms.
And the the multiplier effect on that.
Growth is going to be much better than any dividends that they would pay out.
Makes sense. Thank you.
Your next question comes from the line of Eric Hagen of B P. I G.
Hey, good morning, guys. The hobo as well couple of couple of things here first on the non QM portfolio.
So can you maybe go into some detail about how much you think lunch or can originate using your current outlook for interest rates and where you plan to source the.
The incremental capital to support the growth of that portfolio of.
And then on the how are you guys thinking about the consumer loan portfolio. Just following up on your prepared remarks, maybe I think.
<unk> of adding to it here any themes that you're picking up there that kind of driver of your your outlook for credit performance, specifically on the non QM portfolio and other direct lending strategies. Thanks.
Yeah, let me I'm not.
Let me just take the first part on land sure, which as you know they are I think we are.
I heard you on a prior call.
I'm talking about how they originated 80 million of over $80 million in October.
So if you annualize that that's just under a 1 billion. So we are you know certainly I will just say are our target, which we think is an extremely realistic target is for them to exceed $1 billion. This year.
And certainly hopeful that they can exceed it by a wide margin but.
Just to manage expectations I'd say.
Let's let's expect over $1 billion.
Mark do you want to talk about the.
Commercial loans and by the way we can also I mean, we're not.
We don't have to exclusively purchase from lunch or of course so.
Yeah of.
I have looked at portfolios in the past and we'll continue to look at purchasing 19 of M from other other providers as well potentially even through flow agreements I mean, we are.
That is not out of the question.
Sure Yeah, Eric were you asking about.
Are we performance going forward in non QM of more on the commercial bridge side.
Well I was actually asking about the what you're seeing as far as.
The performance in the consumer loan portfolio and whether.
Any trends or themes that you're picking up there.
Have any influence on the other direct lending.
The credit that.
You guys of pursuing specifically around the non QM of course.
Yeah. So we've had very consistent performance.
And that consumer loan portfolio throughout 2020.
And you know right when we think came true right when Covid hit.
<unk> was definitely of portfolio that we.
We're watching very closely because it's certainly I'm concerned us.
Think of lot of the consumers there have benefited.
Substantially from.
The various of stimulus programs from the government.
The end.
You know there were forbearance programs there.
They've by enlarge ended and borrowers have been able to perform so.
We have.
We had strong performance there you know I think that portfolio more than the real estate for real estate.
<unk> portfolios, where you have sort of that.
The low L. T V sort of protection around your investment on the consumer side, you don't have that so it's I think it's a little bit tethered more to the economy than the other of those those other portfolios of me right now just it seems as.
For the economy is starting to pick up and were certainly.
Make no predictions, but hopeful about the the vaccine's ability to open up the economy. So it's just one of those things where every month, we review it we watch it very closely.
We're not you know we're not immune to.
So.
You know changes in performance is a function of the changes in the health of the U S economy.
But we've been.
Investing in that space for a long time, now and we of sort of seeing how it performs over cycles.
That.
That sort of a.
Two linkage to the real economy more so than the real estate strategies is one of the reasons why that portfolio was also of shorter duration right. So it's typically shorter loans and so that allows you. If you take an economic downturn to change your underwriting guidelines relatively quickly relative to how long the assets day on the books.
Right and if I could just jump in for for one minute. The one additional point Eric on your question regarding origination volumes at lunch or Larry mentioned that luxury originated an 80 million plus in October November was a little lower but December ahead of new record at $95 million. So even even a higher run rate I just wanted to add that that additional update.
All right that's great. Thanks, that's helpful color. Thanks, guys.
Thank you.
Our next question comes from the line of Bose George of K B W.
Oh, Hey, guys good morning.
To elaborate on where you're seeing some of the best the turns you mentioned blue line.
The commercial Npls.
And also just what are your returns on the retail.
Retained interest in unsecured positions from the lunch for loans.
And then just on hot Rich do you retain anything or is that all of the.
So to the heck of a program.
Yeah.
Yeah.
Yeah.
Well I'll start Hey, Bose.
So.
They are reverse or so with long bridge no. We don't we don't purchase and he said, we havent purchased anything directly from the Longbridge.
I think that.
One thing that we've talked about but not done is that you know as <unk>.
As a long bridge grows it may.
Makes sense one day.
For them to sell extra servicing rights.
And that's certainly a you know of.
Very interesting of niche asset class extra servicing rights on reverse mortgages and that's something that we've definitely looked at before you know most of our language as tangible book value is in servicing rights.
So so that would be of possibility, but and even though we do acquire.
<unk> ourselves and heck of derivatives like heck of iOS things like that we're not you know of long Longbridge is not our source for that they just sell their production to two dealers.
So that's the Longbridge.
The question.
And I'm sorry, the other two questions were.
The returns on your retained interest from the Lynch for loans.
Yeah, I don't think we we don't disclose that.
You know because it's a I mean, there is the first of.
All of there is an arbitrage as well.
You are probably aware right, which is that when you securitize. You know there are expenses of just securitization, but the value of what you take back.
Is which you know according to risk retention rules, you have to actually you're compelled to actually keep that.
Over time, so it's not liquid.
At that retained assets, but.
Yeah, it's very high all of its well into the double digits I'll just say okay.
But it really depends on where you mark the asset and like I said, it's of retained interest so it's a little bit.
It's odd, but certainly you know what we think is the range of fair values as I said, it's well into the double digits.
So.
But that's not something that I think we specifically disclose.
So okay. That's helpful. Thanks, and then actually just curious about your.
Thoughts on asset prices, both on agencies of credit for me do you think you know the spreads on things could continue to tighten or how.
How do you sort of see that.
Mark.
You know I don't know that's always hard to predict.
And it's a much more of a.
Our focus is on.
On looking at the assets that we can buy either loan or security for them.
The thing about.
You know what.
How different exogenous factors can change their cash flow and then thinking about what Levered total return they generate.
Generate for the shareholders with on our financing arrangements.
I I would just say that the pace at which.
New issue deals are being gobbled up.
Well still theres very strong still very strong demand for new issue. It's.
Quite as ravenous as what it was.
You know.
During I'd say you know the.
You know fourth quarter and ended the third quarter of 2020.
So.
You know a lot of money has been put to work I mean spreads are.
Relatively tight now.
But you know they could go tighter, but I just think I think the biggest part of the move is certainly behind us if I had to guess.
But I would say that you know that's hard to predict.
And what.
More of our focus is just understanding the risks both on the <unk>.
It's not you know on the prepayment side of prepayment risk is substantial now on the agency market and non QM just understanding the risks on the assets thinking about what their expected returns are over a range of outcomes. You know we of a new presidential administration.
And then thinking how that drives earnings when we applied.
Apply you know what we consider the appropriate amount of leverage in <unk>.
If you get the viewing the opportunity set through that lens I think there is a lot of opportunities we're going to have to put more capital to work.
Okay.
That's very good if I could just yeah I just want to add a couple of thinks of that so the first is that.
So for example, let's look at Securities.
The agencies had a great run in the fourth quarter right and now they're looking you know I would say a little on the type of thing not relative to other areas of in fixed income, but you know relative to where they've been.
So that's.
The cost we.
Active traders and we want to rotate we want to go into the best areas where.
Where the opportunities are so first of all we can we can increase our TBA short positions and then we have a trade on that we've talked about a lot that we really like for the last few years, which is long specified pools and short TBA.
The as again of the right flavor in each case right. So an opportunity when spreads are tighter where we can still make money.
But we won the there's no question that we think the most consistent.
Return on equity opportunities that we're seeing right now are in the loan spaces, you know small balance commercial is of great.
Example, we can't.
We have a certain amount of flow there I think we're seeing actually much greater flow recently, so I'm really optimistic about increasing that portfolio.
You know here in the remainder of the first quarter on the second quarter of this year, but.
You can't just.
The faucet hired immediately see.
The higher flow right. It takes time for that to come in but we're if you look at the dry powder. We have we're definitely reserving space you know for.
For that flow of which we think is.
Really going to set up.
Core earnings for.
For the second half of the year non QM I mean, that's a very predictable flow rate that we have.
We talked about that so we you know we're we're certainly keeping space up there and you know last year, we did two securitizations in the obviously, we need for probably could've done another but for of Covid, but this year you know, we're certainly looking to the to do three securitizations at a minimum.
So you know we see we see a lot of good play on the consumer loan portfolio, we talked about as well.
We've got good flow arrangements, there and we certainly would hope to see our our our normal flows there as well so our residential transition loans, it's been a small part of our.
The portfolio, but ramping up there so we really want to keep.
<unk> powder for.
You know as we see that flow coming in and that's that's really where the best opportunities.
So all of you know the securities markets are tightened our tight now there's no question about it. So you know you've seen you'll use the lower yields quarter over quarter, but that's okay. You know we as Mark said, there's just no reason to be adding on another turn of leverage in securities that might be on the tight side of the cycle win.
When we've got that flow coming in on what we think is just a very reliable on much higher return on equity frankly.
Okay, Yes that definitely makes sense just one more question just given the importance of mortgage banking does it makes sense to the include that in your the way.
What are you sort of present core earnings are creating the.
The new core plus category or something like that because they feel like now.
Core and consensus it seems like not all of them from them.
Okay.
Well, perhaps I mean, that's something that I guess, we could explore we think of.
Core is being.
Something that is more interest dividends the recurring like so that's not something that we've thought about in terms of of the.
Our indirect.
Indirect ownership of the earnings of these affiliates you know as something that we can include on core, but I mean I guess.
We could we could take a closer look but we don't have any plans to do that I mean, our hope is that the the market will recognize that.
You know that the the earnings growth that we project that we see.
It is something that is steady and you know it.
It's something that they can.
See as recurring even if it's not in the form of interest for dividends.
That makes sense.
So great well, thanks very much.
Our next question comes from the line of Trevor Cranston of JMP Securities.
Alright. Thanks.
I was curious I think mark mentioned in the prepared comments the per.
The the AAA on the non QM.
<unk> can you guys just did.
My recollection of that that was you know a decent amount lower than where the last deal you guys price and I'm the fourth quarter was.
So I was.
Can you just elaborate a little bit on kind of how execution of deals couple of bold over the course of the last few months ex.
Sure Hi, Trevor.
Yes spreads are.
Tighter.
But sort of the velocity of tightening.
Wondering if slowed down so it was the.
Really really violent tightening move.
Sort of.
The second half of 2020.
And.
I would characterize this year as spreads of sort of like grinding tighter, but at a much slower pace. So in terms of the overall.
Cause supply of the liability costs on securitization.
We consider that very attractive and certainly attractive relative to repo.
You know, it's a competitive market so that better deal execution.
He is also leading to sort of higher loan price.
Prices and we think it will ultimately lead to you know lower note rates for the consumer so it.
We were able to capture a portion of it but.
You know the the market sort of moves a little bit to sort of typically have.
Some level of you know efficiency to.
Got it okay that helps.
And then on the transition loans, you know a couple of questions.
Can I just add one thing that looks like.
It looks like that the you know the.
Just for reference the deal that we priced last October.
Price at.
Swaps plus 90.
Right and here you know you've got the.
The coupons.
You know below 80 basis points.
So right.
Yep Okay.
So on the on the transition of loans a couple of things.
On the Triple net.
Right, Yeah, I got it.
So on the on the transition loans a couple of things one can you give us what the what the actual balance of the transitional loans in the portfolio was the December 31.
And then second.
Since you mentioned the that's growing assets.
Remind us what kind of financing do you have in place for those and what the sort of overall financings for other deals for the for the transition of bumps in particular.
Yeah.
Sure. So the to the first part of the balance to include.
The transition of loan and non QM in the same bucket in our.
Our presentation of the portion of transition on the residential transition loans was a little over $70 million $70 million at year end.
Okay and can you talk about.
The the financing of you guys are using for those.
Well we're using.
No lines that we have from.
You know banks from.
And they are you know.
Often a J do you want to elaborate on that a little bit I mean. These are these are facilities that we have.
Yeah.
I don't think we want out of quote specific spreads Ah.
But it's similar right.
Right to a similar to where we finance 91 of them Yeah. Yeah. That's yeah, that's exactly right and we don't talk about specific spreads on the line, but yeah. It's it's a similar in terms of structure advance and spread on even.
Party in some cases to how we're financing a non QM and so the the unlevered yields on our T cells of held up.
Pretty well I mean, they're coming in with everything else, but they they're still kind of firmly in the mid upper single digits for the spread to financing is still quite attractive on the deals that we.
We're doing I mean, it does the small part of the portfolio. So.
Probably.
<unk> kept it smaller and held the line on yield and underwriting. So that's helped our NIM and that strategy as well, but it's been very accretive for certainly for core earnings for earnings and and the turnover has been very good in terms of we've been getting payoffs even through COVID-19.
Counter for getting payoffs of par so that's been a very good.
The good performing strategy for us.
Okay that helps.
The one last thing on the on the non QM side.
You guys mentioned the benefits of.
Lend for being.
On one of the earliest to kind of get back into the the non QM market after March.
And you also mentioned the possibility of at some point of adding potentially another another flow seller.
Have you guys seen many of the other lenders who are doing non QM pre March come back.
For the market already or is that something you more so expect to continue to have all the sort of the agency repo business starts to burn out a little bit over the course of this year.
This is mark I would say I think most lenders have come back.
I think we were definitely a first mover.
In restarting our lending operation, but.
I think since then a lot of the other lenders that.
You know we saw out in the marketplace pre Covid I think most of them are back originating.
Yeah.
Okay I appreciate the comments thank you guys.
Your next question comes from the line of Crispin Love of Piper Sandler.
Thank you with with lunch or or or any of the other originators are you worried at all of the battle pullback in originations in 2021 following the.
Our record day can we saw in 2020 and its potential impact on on loan flow in 2021, I heard your comment a little bit earlier about the potential for 1 billion in originations from the line share but is there any reason to think that might be too aggressive considering the 2020 strength.
Might not repeat or I guess just asked of.
Another way.
What gives you the confidence of that we could see continuing on that at the October or the December levels that you mentioned.
Oh for well this is Larry Hey, Kristian I think on.
It's not supposed to agencies, where I think you've got real questions about repeatability of especially as rates creep up.
This is not.
Not.
Not nearly.
As rate driven as whats going on agencies. So we're actually not worried about that.
Aye.
I'd say that is not of concern.
The market that is still very under tapped right in fact.
You know, we get a lot of and share it gets.
A lot of lead you can call it or or of loans from brokers right and if anything it's harder to get brokers attention when the.
They are so much refi opportunity in conforming so when that as rates start to creep up.
If you.
You see it getting tougher for our brokers to you know to do just Refis, which is obviously very easy and profitable business right. Now if anything I think you might see a greater focus from the brokers on non QM. So we're not we're not worried about that at all.
Okay, Thanks, and Mark you.
<unk> mentioned of you.
A few headaches in the portfolio today can you compare that to the last few quarters and what has changed recently and performed better than what you might have otherwise expected and then also if there are any other.
Areas of the portfolio that you want to point out that are that of stressed currently.
We.
Review.
On a fairly regular basis.
Any loans that are on the stage of delinquency.
And.
I guess for I said is more anecdotal but.
You know those meetings the review meetings have gotten a.
A little bit shorter over time.
<unk> so.
You know just when we look at the loans.
Say on the commercial side, where a borrower has struggled.
You know when we look at the valuation of the properties.
And we look at.
You know.
We contact with the borrower and what their plans are.
We're confident that in most cases, you know where our loans are well secured so it wasn't so much sector specific.
No, whereas like the problems there are well known right lodging.
Retail student housing it was more just the.
The comment that when we review of the loans in the portfolio.
Just it's not as though we're seeing things where were really concerned that the valuation.
Is you know.
On the loan amount is and you know J R mentioned it.
The pace of resolutions we've got.
Has picked up and so I think that that's another sort of barometer of sort of the health of these markets and how capitals flow and there's no there's.
Below where it's.
As.
A lot of people interested in in real estate right now and so it's also evidenced by the fact that the securitization markets.
Pinned up so quickly after March relative to what happened there for the financial crisis, and I think you know the.
The activity helped a lot, but having active securities markets open.
Really is it took the lubricant for transactions and I think.
It's been a beneficial to not only our portfolio, but a lot of portfolios.
Yeah, so when when.
You know when we obviously.
The fed out there you're not going to have no headaches right coming out of Covid and you know some of the headaches that you have on.
As simple as well you can't get into court to start of foreclosure on a small balance commercial loan for example, so that's the headache, but it's not.
It's not something that ultimately is if you've underwritten the property right now of the right loan to value that's going to impact the resolution if you could turn to page 11.
In the deck you can see how diversified by type we are and how when it comes to the seniority everything's.
And if you if you think about where the headaches are that are out there.
It's people that have taken secondly, or thirdly is people of fad too much concentration in malls or hotels or things like that or you know are.
Do we have some hotel properties.
As for but for example, our biggest one we had I think it was a 20% pay down on that loan.
You know just.
I think it was I don't remember exactly when but the thing was in the basically in the middle of last year. So.
Which tells you a lot right that the the borrowers.
Yes, you know that we were able to get that loan pay down.
To that extent and the LTV still looks extremely solid there. So we're you know that that loan is marked at par and we feel very confident about it for example, so.
Yeah, so they're literally headaches, there and there are a lot of around timing there.
They are going to be somewhere maybe.
Theres, a small shortfall, but nothing really nothing material.
In the context of everything going on so I think we're really you know looking back.
Hmm.
Where we're really proud that the you know the theory behind our underwriting actually turned into reality in terms of.
We did have good.
Appraisals, we did have good diversification, we did you know.
Have a good legal documents place all of that stuff that you're concerned about so and in the other portfolios as well like in unsecured consumer right.
Got it.
You know.
The performance there.
Of the theory of of all of our underwriting and all the data science that we that we put into play but you know and then there's the reality so I think we.
Just feel very good about continuing to apply the same standards that we applied not to reach for yield when it's inappropriate.
And I think.
So I think we're.
Feeling really good about.
On.
Lack of headaches frankly.
Ryan Thank you for all of that color.
I just wanted to this is Jack again I just wanted to.
Clarify one of the answers I gave a minute ago about the financing on our T cells.
We have it's true that there are similar structures and with similar many of the same counterparties. The economics are not quite the same so the spreads are a little wider on advances a little lower on our T cells versus non QM, which is probably what every one would expect given the liquidity and kind of securitizations happening in non QM that are maybe of securities.
Our stations of the other product, but not quite as extensive so just wanted to add that clarification.
Okay.
Your next question comes from the line of Brock Vandervliet of UBS.
Hey, guys.
I think most of it.
And covered by this point.
So but wanted to just circle up on the agency portfolio.
How have you.
Reposition your your hedges in the quarter I saw the basic.
Disclosure on the back on the the hedge positioning, but it didn't get a sense of the AR. The time series, how that might have changed.
No I don't think there was.
I'd want to look back.
And you'll answer with more precision so we can follow up.
But.
Q4.
It was a quarter of pretty low rate volatility on the agency side.
And we didn't have.
Big changes in that portfolio. So in terms of positioning on the yield curve there wasn't any significant changes.
Yeah. The other the other thing I would add is that we liked the mortgage basis I'm coming into the third quarter.
We liked the mortgage basis coming into the fourth quarter.
And those.
We're good calls and so.
When you look at our TBA shorts.
Which as I mentioned before we can really dial those up and down depending upon what we think of of the mortgage basis. The agency mortgage basis, those were fairly consistent between in the third quarter on the fourth quarter.
You.
Now we've mentioned that spreads are tighter so.
Don't want to talk about what's going on in the first quarter of 'twenty 'twenty, one, but don't be surprised if things look a little different.
When the as of March 31st but.
But now what.
We were pretty consistently constructive on the mortgage basis and we were.
Right and.
That caused us to keep that hedging portfolio pretty similar in terms of its construction.
That's in contrast to many.
Many many periods in the past, we got as high as I think maybe even 50% or more.
TBA shorts versus our longs.
So being closer to zero of frankly tells you what we felt about the mortgage basis at the time.
Got it got it okay, and just kind of of modeling housekeeping note. The the tax rate bounced up this quarter I think with the.
And the of the Trs.
Is that likely to continue or are now.
Well when you say tax rate yeah, do you mean, the actual rate or do you mean just are.
Deferred taxes that you see flow through the income statement.
I'm, sorry, I guess I mean, the I guess I mean the water.
Yeah, because the the rate I mean, theres talk obviously of corporate rates going up which could affect that but the rate.
Has remained constant that we.
Apply but it's really a function of how much income we're generating in the Trs in the income doesn't have.
To be taxable net income it can also be unrealized.
Gains as well Jay are you want to elaborate that on that a little bit.
Yes, exactly so the.
The income tax provision increased this quarter.
[noise] of activity in the domestic Trs and that includes the.
The one of our stakes.
In the mortgage originator as Larry mentioned does it is it increases even on an unrealized gain with.
Would trigger the increase of the deferred tax provision. So that's that's one of the drivers as well as just taxable income that we have generating.
In that block or from.
The activity that occurs within within our domestic Trs so it's not that the rate.
The change, but just more income has driven a higher income tax provision right now and we.
We of course limit our activities in the Trs REIT to things that.
We have to put on the Trs and we're going to knowing that those are going to be taxable as you can imagine.
By and large those are very.
Very high ROE strategies, right, we're not going to put a.
A strategy that is the low ROE strategy and of taxable Trs right. So.
So we've got some very high ROE of strategies and there certainly are.
Investments in mortgage originators as one that we think is an extremely high growth rate in terms of those <unk>.
Vestments and.
So.
If at some point in the future.
We do.
Our Trs actually pays the REIT parent dividends, then those should be qualified dividends, which would be of lower tax rate as well as just sort of another benefit for.
For our investors.
Restaurants as well.
Got it okay. Thanks for the color.
Your next question comes from the line of Derek Hewett of Bank of America.
Good afternoon, everyone. Most of my questions were already addressed but could you provide some additional color in terms of what.
Cause the book value increase.
Kris in January was at that further credit credit spread tightening based on that dollar of unrealized losses referenced on I think it was slide six.
Was it maybe stronger valuations from the equity investments of the loan originators given.
The positive trends, maybe from the agency portfolio.
Or were there other factors involved yeah I'm going to.
Mark and Jay or feel free to elaborate.
It was not the.
Not the originator of investments it was mostly spread tightening is certainly.
Would be the lion's share Mark of Jay are you want to add.
To that.
And by the way spread tightening, which we take advantage both in the unrealized but also realized right I mean, we're definitely when we seeing securities now that we think are potentially maxed out.
On.
We're close to it where the risk reward.
For us starts to shift.
Then we're actively selling when we think that's appropriate so yeah. So a combination of realized on unrealized driven by spread tightening.
Any.
Any color you want to add to that Jay RMR, Yeah, I'll just add one thing so following.
Because there was a progression of asset recovery.
Covered kind of following March and April of last year, and so the agency seem to come back quick most quickly and then different credit assets kind of fell followed in order and we've talked about sort.
Sectors recovered faster than the others, maybe non agency of non QM, whereas cielo is in the sea MBS may have lagged.
And those last couple of strategies of really caught up.
The year progressed, and where some of the drivers of earnings in Q4 that we talked about I would say year to date 2021.
We've seen sprite spread tightening in those sectors continue.
Okay. Thank you that's all for me.
Thanks.
That was our final question for today, we thank you for participating in Ellington Financial's fourth quarter 2020 earnings Conference call. You may disconnect. Your lines at this time and have a wonderful day.
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