Ellington Financial Inc. (EFC) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2016 Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed in listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Maria Cozine, Investor Relations. You may begin.

Thanks, Crystal. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our Annual Report on Form 10-K filed on March 13, 2015, forward-looking statements are subject to a variety of risks and uncertainties that could cause the Company's 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. Statements 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, whether as a result of new information, future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings press release, our first quarter earnings conference call presentation is available on our website ellingtonfinancial.com. Managements prepared remarks will track the presentation. Please turn to Slide 4 to follow along. With that, I will now turn the call over to Larry.

Thanks, Maria. And welcome everyone to our first quarter 2016 earnings call. We appreciate you taking the time to listen to the call today. On our last earnings call in February, we discussed that we have been structuring our credit portfolio to be long consumer credit risk and short high yield corporate credit risk. And as disclosed in the fourth quarter earnings presentation for that call, heading into 2016, we had about triple our hedges in corporate credit as compared to where we have been heading into the fourth quarter. We explained that the balance sheets to consumers represent the underlying borrowers for RMBS and ABS. We're in much better shape in the balance sheets of high yield corporate issuers. And that this was all compounded by the fact, that for MBS and ABS, housing crisis were well supported on the high yield corporate side debt covenants had only been getting weaker. We also presented our strong convictions on this portfolio positioning on two fronts. First; that the high yield corporate market was overvalued and extremely vulnerable both on a technical level and a fundamental level to market shocks and second, that on a relative value basis the yields that we expect to realize on our long credit portfolio will ultimately outpace the yields on our short credit hedges. Quite simply, this high level portfolio positioning being long structured credit, while short high yield corporate credit drove our loss in the first quarter. As Mark will describe, it was a quarter of wild swings and there were many technical factors in play that caused the February and March decoupling between structured credit and high yield corporate credit. Technical factors aside, our convictions remain strong and so we've maintained a long structured credit, short high yield corporate credit staff and by the way, some of the decoupling has reversed since quarter end. Obviously given the swings in our credit hedges, we're managing our credit hedging portfolio extremely closely. However, we are not losing sight of our longer term business plans and I'm extremely pleased with how that's been going. I'll expand more on that later, but for now I'm going to turn it over to Lisa.

Thank you, Larry. Good morning, everyone. The earnings attribution table on Page 4 of the presentation breaks down our results for the quarter into our credit and agency strategies and shows you the contribution from the main components within each. You can see that in the first quarter, we had a loss of $17.9 million or $0.54 per share from our credit strategy and a loss of $200,000 from our agency strategy. After expenses we had a total net loss of $23.2 million or $0.69 per share. Within our credit strategy, we had solid contributions from interest income and net realized gains, but these were overwhelmed by mark-to-market losses on our net credit hedges and our investment securities. The net spread tightening that occurred during the quarter on high yield corporate debt indices had a significant impact on our results for the quarter, given that most of our credit hedges are in the form of credit to full swaps referencing high yield corporate bond indices. In addition, widening credit spreads led to valuation losses on many of our structured product securities holdings including our non-agency RMBS, CMBS and distressed corporate debt. I'd like to emphasize though, that losses on these assets were principally unrealized and in fact, we had net realized gain from the sale of certain assets within these categories. In particular during the first quarter, we continued to sell down our non-agency RMBS and CLO holdings and we reinvested the net proceeds in our other target assets principally our loan portfolio and in doing so, we generated net realized gains of $0.08 per share. Also impacting our credit results for the quarter, were declining interest rates which led to losses on our interest rate hedges, which are principally in the form of interest rate swap. On a quarter-over-quarter basis, interest income in our credit strategy decreased 12% to $13.6 million, contributing to the decline with a decrease in our average holdings of CLO equity and CMBS B-pieces which typically carry higher yield. The net reduction in our agency RMBS portfolio also caused our interest income to decline. At the same time, our loan portfolio including consumer loans and non-QM mortgage loans continued to grow partially offsetting these increases. In addition, whenever one of our non-performing commercial or residential mortgage loans converts to REO, any income earned on that assets from that point forward is no longer classified as interest income, but instead it flows to our interest income statement as unrealized gains until the REO is finally sold. During the first quarter, we had positive contributions from our consumer and mortgage loan portfolios including a particularly strong contribution from our small balanced commercial mortgage loan. With respect to this asset class, our results can vary from quarter-to-quarter as assets are resolved or moved closer to resolution. Over the first quarter, our portfolio of credit securities decline while our holdings of loans increased. We can see this on Slide 13 of the presentation. You can see back on Slide 4 that our Agency RMBS strategy essentially broke even for the quarter. Positive results from our bond portfolio were offset by losses on our interest rate hedges. Our interest rate hedges accounted for the bulk of the losses within our interest rate swaps. Our interest income declined approximately $400,000 or $0.01 per share. Our portfolio holdings declined approximately 3% quarter-over-quarter and as a result, our interest income declined. We had a positive catch-up premium amortization adjustment of approximately $350,000 or $0.01 per share which partially offset the impact of the decreased in the size of our portfolio holdings. Excluding the catch-up premium amortization adjustments, quarter-over-quarter yields on our agency portfolio declined just slightly from 3.06% to 3.04%. Our weighted average borrowings declined quarter-over-quarter by approximately 11%, but our repo cost increased. First the cost of repo generally increased over the course of the first quarter. You can see the components of our cost of repo on Page 23 of the investor presentation. Second our credit-related borrowings constitute a higher percentage of our outstanding borrowings which increases our overall average borrowing rate. In addition, while our credit repo borrowing cost for the quarter only increased slightly. Our average credit repo cost as of the end of the first quarter increased to 2.7% from 2.47% at the end of the fourth quarter. Some of our credit relating borrowing cost had shifted from our security holdings to our loans and these facilities used to finance our [indiscernible] slightly more expensive facilities used to finance securities. As of March 31, we have financing facilities in place for our consumer loans, our non-QM loans and our small balance commercial loan. We ended the quarter with a dilutive book value per share of $20.63 down from $21.80 at December 31, 2015. Our diluted book value per share at March 31 includes $0.02 accreted impact of our share repurchase activity that occurred within the first quarter. I will now turn the presentation over to Mark.

Thanks, Lisa. We were disappointed in our results for the quarter, but the silver lining is that, our book value drop wasn't caused by fundamental credit weakness or realized losses. Both rates markets and credit markets had very violent moves during the quarter, as often the case with big [ph] market moves in the short period of time. Some relative value relationships did not immediately re-priced sufficiently. The high yield corporate bond in the season we were short, outperform the cash positive [indiscernible] resulting in a mark-to-market loss in the first quarter, but in the relative calm markets of April and May some of the underperformance of cash bonds [ph] reverse and our forward-looking earnings power has improved. We have secured better financing for our loan strategies and we continue to add loans portfolios to our flow arrangement. At this stage in the earnings cycle, a lot has already been said about what happened in the quarter. We would characterize it as a shock that affected all markets and was centered around concerns about corporate credits stemming from lower commodity prices and period of slower global growth. Turning to Slide 10, this illustrates two important points about the price sanctioned in the quarter. Here we take the S&P 500 a high yield index and an index of CMBS subordinate bonds, we normalized all their prices to 100, to start of the quarter. The first thing to note, is that the different entities with different fundamental risk were all highly correlated and all hit their trough on the same day, February 11. This is symptomatic of a market driven by fear and what happens in shocks when over leverage investors need to reduce risks quick, need to reduce risk in a hurry, you see correlations go up. The second takeaway is that, while the S&C [ph] high yield index recovering more than what they had lost and entire for the month, the CMBS index which has been down over 20% at the trough, still ended down over 10% for the quarter. And cash bonds did worse than synthetics. So our assets, which consists mostly of structured credit bonds and consumer in mortgage loan, underperformed high yield indices for the quarter despite not having any deterioration in the fundamentals. We came into the year concerned about the corporate credit event, with a portfolio more credit hedged than it had been in a while. By mid-February we were approaching markets with a healthy dose of fear and excitement. Unlike others in the space, our book value is being protected and we're starting to see some of the most exciting investments in years and selectively added position to big discounts to prices at the end of the year. By the end of the March, it all reversed with markets cheered by further stimulus by the ECB and the BOJ and the recovery in oil prices. In the second half of the quarter, liquid indices like the S&P and the high yield index led the rally. Primary dealers are now less willing to backstop market in risk-off moves and they can't carry big inventories satisfy demand in risk-on moves With dealer inventories of individual cash instrument so much low in out, than they used to be, more and more investors turn to indices to quickly put on or take off risk and to cash assets now to tend to live indices in big moves. The result of all this, was there a structured credit product cash bonds were down in price, well our hedges threw up in price. We showed this on Slide 11. The yield in our portfolio after projected losses is a dot of blue line, while the green line is yield, and the high yield index assuming zero losses. By the time the quarter was over, you can see our securities portfolio had widened over 150 basis points in yield relative to high yields hedge. We do not perceive this underperformances in result of diverging credit performance of our long and short. If anything, we think the opposite is happening. The US consumer is performing well, up by lower gasoline and utility cost. We viewed this divergence as a timing mismatch and have different instrument react to risk-on and risk-off move. A 100 plus basis move in the quarter is a very large move and liquid indices lead the way in big moves. This quarter end, we've seen a partial reversal. The high yield corporate bond indices have declined since quarter and cash bonds including structured products have appreciated. So we are seeing a correction since quarter end which is benefitting us. The result of all the regulations that have impaired liquidity and constrained dealer activities, naturally leads to world where relative value relationships are more volatile and can decouple over the time stream of a quarter. We're not managing on Ellington Financial with the focus on quarterly return. Instead we're focused on total returns over market cycles with three primary goals. First; to generate high returns know the credit strategies with lower volatility. Second; to create franchises within Ellington Financial, that will create high yielding assets for the company and be recognized by equity investors for their enterprise value and third; to avoid big capital destruction during times of distress. These goals underlined much of our evolution in the past several years and help to motivate our strategic moves into consumer loans, non-QM loans, CMBS, B-pieces etc. In fact the post-crisis regulatory environment it has created this cash synthetic volatility that caused the short-term loss for us in the quarter as the same regulatory environment that's keeping banks away from many lending markets and thus giving us these lending opportunities that didn't exist in sight [ph]. I'd also like to add that over same year history, EFC has generally taken a lot of credit risk and shareholders have been rewarded for that exposure. The current market like 2008 and like the second half of 2011, is a market where we think shareholders better served having some of their credit risk heads with high yield corporate credit. At current prices on our hedges, we estimate that even if corporate default rate don't increase from current levels, these shorts to high yields index will cost us about 200 basis points annually, which represents only a small give back under 10.79 estimated yield on a credit portfolio as you can see on Slide 15. It may in some quarters temporarily create some additional book value volatility, but their primary purpose is to protect book value from large credit widening events, in that regard they were successful. We were in fine shape in mid-February. So what's the opportunity now, we've added some assets in the quarter and have added more post quarter end. The big relative value change between cash assets and liquid hedges incentivizes us to do that. The flow arrangements and relationships that we have in place that's taking years to develop are now providing a consistent pipeline of assets where we can shape and closely monitor the credit parameters. Additionally, we have secured financing for these assets which increases our buying power and improves our earnings potential. We saw good credit performance in our portfolio in the quarter both on securities and loans. The combination of good credit performance in the first quarter spread widening, had pushed the estimated yield on our credit portfolio to almost 11% unleveraged. One of our primary jobs as manager, is to differentiate between liquidity-driven price drops and fundamental credit impairment and to invest aggressively when liquidity-driven price drops are current fundamentally sound credit. Keeping that discipline is our focus, we've viewed the current market is filled with opportunity to drive returns for our shareholders. With that, I'll turn the call back to Larry.

Thanks, Mark. It's easy to Monday morning quarter backs, the wisdom of having credit hedges in the first quarter or our particular choices of credit hedges. Please turn to Slide 25. I'd like to remind everyone that it was our credit hedges that enabled us, that enabled Ellington Financial to have positive P&L in 2008 and then our credit hedges even made money in 2009, despite one of the biggest bull markets ever, when you'd expect credit hedges to lose money. We have a great track record hedging credit. Even in the tough first quarter just passed. It's very much worth noting, that it was our CMBX credit hedges that enabled us to eke out a positive return in our CMBS strategy, despite the absolutely horrible overall performance of the CMBS market as illustrated on Slide 10. Going forward into the rest of 2016 and beyond, we will continue to focus on executing a long-term business plan. Despite the mark-to-market loss in the first quarter I'm confident, that we are poised for success over the long-term as we continue to build our proprietary investment pipeline and adapt the changing market conditions. In our consumer loan business, our non-QM origination business and our distressed commercial mortgage loan business. We are utilizing exclusive relationships and special financing arrangements that are designed to produce a steady sustainable earnings flow. Our proprietary pipeline for consumer loans is growing. As we increased our consumer loan portfolio by 25%, by purchasing loans under our existing agreement as well as under an additional flow agreement with a new originator. We continue to actively evaluate originators in the consumer loan space and anticipate adding more flow arrangements. In our non-QM business loan performance has been excellent to-date, the number of states from which our loans have been originated has also increased according to expectations and our portfolio of loans is ramping up nicely. Our distressed small balance commercial mortgage loan portfolio continues to see asset successfully resolved and replaced to the strong pace. In this business, many commercial mortgage loans that were originated in periods with low underwriting standards continue to hit their maturity dates and many of these loans are enabled to refinance, creating a steady flow of opportunities for us at distressed prices. Financing opportunities continue to be excellent for all three of these business and in the quarter, we closed our new facilities for non-QM loans and distressed small balance commercial mortgage loans. We also increased our existing credit lines and consumer loans. The next step for the financing of our consumer loan business will be to access the securitization markets for long-term financing. We expect to tap those markets later this year and this should free up capital to help us further increase leverage and enhance our earnings potential. Within all of these growing loan businesses macroeconomic conditions are very supportive and we continue to see excellent loan credit performance. Slide 14 illustrates vividly our business realignment over the past two years. on the right-hand side, you can see that at the end of 2013, RMBS represented 82% of our credit portfolio on the left-hand side you can see that as of March 31, RMBS represented only 28% of our credit portfolio and as a consumer loans, consumer ABS business alone had already loans represent 22% of our credit portfolio and rising. Ellington invested heavily in both people and infrastructure to get to this point. But we believe, that we are now extremely well positioned not only for the opportunity that exist today, but also for those opportunities that we anticipate will continue to unfold later this year and in the coming years. Meanwhile on Slide 15, you can see that the average yield of our credit portfolio was up to 10.79% as of March 31, that portfolio yield was only 7.29% at yearend 2013, as you can see by pulling up our fourth quarter 2013 earnings call presentation on our website. As you can see on Slides 31 and 32, I continue to have good reason to be proud of our outstanding performance relative to hybrid mortgage regroup both in terms of the greatest stability of our book value and our superior returns per unit of risk. However, given where our business is going especially our consumer loan business at some point soon, we may stop comparing ourselves to the REITs. As I believe, we're approaching the point where we'll be more accurately described as a highly diversified specialty finance company. In light of the significant discount to book value that our shares have traded. We've continue to execute under our share repurchase plan including the post quarter end period, when we were continuing to repurchase shares under 10b5-1 plan. We repurchase $5.2 million of our shares within accretive effect of about $0.03 to our book value per share. Our capital management strategy will continue to opportunistic and flexible. Our goal is and has always to maximize long-term value for our shareholders. With our ongoing business development and portfolio diversification our disciplined hedging strategies and risk management and strategic capital allocation. I'm confident that over the coming quarters, we'll be able to both capitalize in opportunities and enhance franchise value. This concludes our prepared remarks. We're now happy to take your questions. Operator?

[Operator Instructions] thank you. Our first question comes from the line of Jessica Levi-Ribner with FBR Capital Market.

My first question is just on, you made some comments around the unrealized losses in your credit portfolio, but then you took net realized gains that were about $0.08 per share. Can you talk little bit about if you monetize those assets today that caused you unrealized losses, would you also be realizing a gain, meaning in other words, is that kind of a model mark, but in the market you would probably get a better price for them?

Jessica, you can see on the our holdings table in the earnings release, the market value compared to amortized cost and I mean that will tell you, that will tell you I'm just turning to it, just a second. Right, so I mean you can see the fair value compared to cost. I'm at the bottom of the Page 7 of the earnings release so you can see the different categories. Yes, so fair value is greater than cost, we would monetize that gains. Each category is listed there for you. You can see that in total the fair value exceeds the carrying value.

Okay.

Does that answer your question?

It does.

When we, I just want to add that. When we're making a decision whether to sell something, we're not looking necessarily at our cost basis that could be a long time ago and whether that's going to cause a realized gain or loss for that matter. So I think, we're just going to look at where, where we can sell that security or unwind that hedge, what we think about that hedge in terms of whether it's going to work for us going forward or whether the security has more upside versus downside. So not something that we necessarily focused on so much really at all, I would say in terms of how we managed the portfolio. When we have some unrealized losses like we did this quarter I think that whether it would be on the credit hedging side or the long security side. Obviously we're always going to be re-evaluating our thinking but if anything, I would say all other things being equal, that we would normally think that would create more opportunities for us, but we're always flexible in terms of our thinking.

Okay, that's very fair. And then maybe piggybacking off of that, with the appreciation and I think the right mentality in my opinion of playing the long game. How do we think about, what are your thoughts around deploying capital via share repurchases and then maintaining liquidity because this market is, so I guess we'll call it interesting and could become more so as we go into June-February [ph] meeting. How can we think about that?

Yes, while we always, we always want to maintain liquidity and in a risk management, liquidity management that's always going to come first. In terms of share repurchases and how that interacts with that. I mean, it's a function of that. It's a function of the opportunities we see and its function of, how it depends of the posture we want to take. I would say that, our share repurchases were more compelling in prior quarters, when we were buying I think in the high 70s, mid-to-high 70s a book, often if not lower at times. Now, I think recently our stock was approaching 80%, it was probably 84% of book at one point, it traded up a little bit from there, but now you're getting to a place where it's becoming less compelling. So we're going to be, we're going to flexible and opportunistic and we bought at the same pace really for the last few quarters, but like I said, I think I indicated this one when we first started the program in response to some questions, as the price gets higher and as the opportunities get better that could change. We're not wedded to anything; we're going to flexible about it.

Okay, great. Thank you very much.

Your next question comes from the line of Douglas Harter with Credit Suisse.

This is kind of a big picture question. I think one of the things that have differentiated you guys and I think you even had a slide on it. Is that you've had lower volatility returns and I know March is kind of one month but kind of the volatility you saw in March and in the first quarter, does that change any of kind of risk tolerances, risk bans [ph] that you look to have on the portfolio and results?

Hi, Doug. It's Mark. So I think a few things. One is that, we mentioned in it in the prepared remarks. We think the world we're in now, where dealer balance sheets are smaller, dealer appetite to take VAR, Value at Risk has decreased, we think that it's going to lead a world where there's going to be more volatile bases between different structured products and credit assets. CMBS high yield, if that's a great corporate, not agency mortgages. So we think that there's more volatility, we also think that constraint on the dealers and the reluctance on the part of many banks to take part in lending at higher yield levels, we think that's created tremendous opportunity for us. So the opportunity it's created, it's much better than I think the negative consequence of a little bit of extra volatility. I think a little bit is, you have to think about not just the endpoints end of the year versus end of the first quarter, but where things were within the quarter, right. So I would imagine I don't know, we don't have a crystal ball but if everyone published their book values on February 11 when the market was in the depths of distress. I think our portfolio, I know how our portfolio did, it was holding up extremely well. I think there are probably some others in the space that would have had material book value volatility. So February 11 had been the end of the quarter and I think, our strategy would have viewed as strategy that preserves book value and we definitely think that overcycles having given the pricing of some of the high yield indices now. We think that strategy of having some portion of our credit risk hedge with that makes a lot of sense and I think overtime it's a book value reducer, even though just looking at end of the quarter snapshot in this case, sort of didn't show that. The end of the quarter turned out to be sort of particularly unfavorable snapshot for us. But I definitely think it's a world where you can have a lot of volatility and having some credit hedges in place right now, especially in front of an uncertain spread [ph] makes a lot of sense.

Yes and I just want to expand on that. So when we have this structure, right now in our book with long structure credit and short high yield credit, that's clearly going to create some short-term volatility and so, which is going to translate potentially into some book value and stability? But I would argue as Mark just implied that those are, it should be relatively contained and what we're really trying to do, was to protect ourselves against a big move. Okay and in a big move, if you had seen the long side of portfolio really drop a lot and not have any show [ph] on the short side, that's really what we were and are trying to protect against. So I think that given that you've got a long mess in one market and short bet in another market, although still a credit market, you're going to have some volatility. We did this in 2009 for example, we did it very successfully, we were short, a lot of different forms of corporate credit there and it really worked to our advantage and that's when we were at the course again, long at that point it was just long purely mortgage credit. So, we've done this before, we've done it successfully. You're going to have when you're in two different markets, your hedges versus your assets even frankly, your CMBX versus being long in the mortgage side, if you're short commercial mortgages and your long residential mortgage. I mean, that's going to create volatility. Hedges are almost going to create some volatility. It's not like our agency strategy where if we use TBA versus specified pools, it's really, really controlled. This is going to create a little more volatility, but I think it's going to create a little more volatility that's contained and it's going to protect ourselves against really big moves, which is what we were concerned about going into the years and what we saw in the first six weeks of the year.

That's helpful. I guess one other thought or a question is, as you guys referenced with the dealer balance sheets being constrained and sort of different moves and kind of cash versus synthetics. Does that, that phenomenon of again dealer balance sheet constrained unlikely to go away, does that kind of basis risk cash versus synthetic changed the way that you think about hedging in any way or again is it looking to cash or that the big move and overtime that will kind of will catch up to each other.

Yes, I mean, there's no doubt in my mind that for big moves hedges reduce risk and that's really critical and so the market ended in different place for the quarter, a very different place than where it was middle of the month, there was a lot of central bank intervention but for us, we need to make sure we're protecting the book value over a range of possible events that can happen and if that means in a certain quarter hedge is going to move one point up and it's going to move one point down, that's fine with us, we'll accept that. But the key thing for us is, focusing on fundamental credit and making sure we have high yielding portfolio and are securing a pipeline of credit sensitive assets that are going to drive returns in the future, that's to me the most important thing that's going to drive return to shareholders in the future and overcycles.

Great, I appreciated the color.

[Operator Instructions] your next question comes from the line of Eric Hagen with KBW.

I think my question sort of speaks to that book value containment discussion, but would you say that your decision to operate with lower leverage is more of a reflection of how you see the current environment or is it more of a fundamental belief in the way, Ellington manages money, that a leveraged strategy doesn't necessarily produce a higher quality portfolio.

Yes, I mean it's a little of both. Keeping mind that we're also still ramping up parts of our portfolio, right, but so I'd say you're right it's a combination of being in defensive posture right now but it's also continue to ramp up in the new businesses. So, we're certainly hopeful that as those businesses ramp up, we will be increasing our leverage certainly in those businesses and part of that I think indicated before is going to depend upon the time of financing arrangements that we have in place as well as in terms of pipeline, but we're really optimistic about that. So I think that we're operating right now, at a lower level of leverage and risk, than we have been historically. So I would expect that to change meaning to increase our leverage and risk overtime, some of that it's going to depend obviously on when our radar goes up in terms of what we think is too much risk in the market, then of course we will dial it down. But I think in terms of looking at a longer term trend absolutely, we're looking to increase our leverage, but in the right spot.

At the end of this year or even heading into next year, what percentage of your leverage would you say, would be non-recourse financing as opposed to recourse?

I think, it's really not a matter for us if recourse versus non-recourse in terms of how we, that's not how we think about it. I think we think about it in terms of how much of it is locked in for what period of time, what are the mark-to-market, whether a financing has what the mark-to-market risks are for variation margining, right so for example, if you have long-term do you have a securitization like we're looking at doing later this year in consumer loans, then that's long-term financing that's not subject to variation margining. I never put too much credence in the whole recourse versus non-recourse financing thing because let's face it, you don't, other than in the securitization contacts, right. but if we've got aligned with the creditor which is a major creditor of ours, will that recourse or non-recourse, you're going to have a tough time walking away from that creditors, even if its technically a non-recourse, when that creditor is potentially big counterparty of yours, on many other financing transactions. So any frankly most of our repo it's not all of our repo, I mean maybe there's one exception, I don't know at least I don't remember, but repo is almost always recourse. So you're really talking about securitization when you're talking about non-recourse and absolutely that is an important component of our medium-term I'd call it plan in these businesses whether it'd be the consumer loan business or the non-QM mortgage business where that securitization market still isn't where we like to be, but that's definitely something that we wanted to get to in that business.

All right, thanks Larry. I guess, a bit of housekeeping on Slide 28, you guys list the net spread on both agency and non-agency but I think that excludes hedging cost, what's the margin on both of those strategies if you include hedging?

I don't have that, hand it to me. That's something that we'll have to get back to you on. I mean I think for example, so many of our hedges right now are in high yield that's really based upon, the way we think of it is as we said in the call today, is that we think of that is what the sort of expected run rate is on the high yield assets for the underline, those indices. So we think of that as maybe 200 basis points but other people come up with a different number. Obviously, if corporate credit goes through higher default rates and severities then that number could even turn negative, right you could have negative implied hedging cost on that and then in the meantime, everything is mark-to-market through our income statement. So there's a lot of volatility there. I think, we like to think of those corporate credit hedges is having like I said about 200 basis point of cost for us. Assuming that default rates stay about where there are, then you got [indiscernible] straight hedges and you can see that in the current environment, those really aren't costing much as before it's probably it's going be one handle for sure, right in terms of our interest rate hedges and then you've got just the cost of financing which is in there. So I know the interest swaps are in there too.

No, no.

They're not right.

This is just reflective cost to finance.

Right, so take those to cost to findings numbers between there already. Add, another 1% or so, again this is just off the top of my head. I don't know, it to be for interest rate cost and then add another 2% for credit hedges, but I would argue that 2% is a conservatively high number.

So if I assume like a mid-teens ROE on the agency and low-teens ROE on the credit, would you say that's fair?

I'd have to think about that calculation, remember also, these yields that you see here are based on amortized cost, right because that's the way, that we wanted this chart right here to tie to our book yield and our income statements. So market yields, as you can see on our other slides are higher. So it's not that slide, on the asset side. if you're trying to forecast what we would call earnings potential from leverage net interest margin it's probably not the best slide to look at for that side of the balance sheet.

Got it. Well thanks for the great market color as always guys.

Your next question comes from the line of Jim Young with West Family Investment.

Two questions, number one is and you made the comment that you think overtime that you'll be viewed less as a hybrid mortgage REIT and a more like a highly diversified specialty finance company, then my question I guess is, what other publicly held comps in the market place are you, do you think you should be compared against as a specialty finance company?

I don't want to get too ahead of myself there and I think that's not my area of expertise. I mean, we're trying to put a business plan in place and I do think that's ultimately where we'll end up, but for us it's about where the best opportunities are I could certainly see several years from now, we saw the opportunity going back the other way into the mortgage then I could, see us going back the other way, right. So I'm going to dodge that question for now and just, just admit it's not my area of expertise in terms of what are the comps in the equity space. I think Springleaf is in the space. You could argue CI [ph] came in and there are so many companies that you would argue or in that space. I don't, that again not my strength to tell you, tell you where it is booked, but when we get there I will be, will definitely have an answer to that question, sorry.

Okay and secondly, could you just remind us how much stocks do senior members of management own in EFC and also the board and how much of, how much of did that change in the last quarter? Thank you.

Yes, I don't think it's changed at all in the last quarter other than the fact that, some employees and directors things like that as part of that compensation, got some equity interest.

Still 10.5%.

So it's in fact 10.5%, that includes management, it includes trust that we've set up for our families.

Includes the board.

Includes the board, but the board is a small piece of that. I mean, it's really Ellington and our families if you will that represent that 10.5% and that hasn't change.

Okay, thank you.

I don't think anyone's sold their shares recently. All right, operator it looks like we're done with questions.

And there are no further questions at this time. Ladies and gentlemen, this concludes the Ellington Financials first quarter 2016 financial results conference call. Please disconnect your lines at this time and have a wonderful day.