Ellington Financial Inc. (EFC) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial First Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time all participants have been placed in a listen only mode. [Operator Instructions] It is now my pleasure to turn the floor off to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, operator, and good morning. 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 16, 2017, 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. Management's prepared remarks will attract 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 2017 earnings call. We appreciate you're taking the time to listen to the call today. Ellington Financial had strong performance in the first quarter. Our earnings more than covered our dividend, leaving room for our book value to increase. In the last several quarters, we have carefully been redeploying capital from legacy non-agency RMBS into a wide variety of high-yielding loan and security strategies. Our patience and diligence in selecting assets and building pipelines is paying off. Our annualized economic return for the first quarter was 10.4%, and we're still not done with our transition. I'm pleased to report that the size of our credit portfolio grew nicely this quarter, as we added to our loan portfolios and also took advantage of several opportunities and securities, including select CLO sectors. In the aggregate, the size of our loan credit portfolio grew to 640 million, which is a very sizable 17% increase from the fourth quarter, considering that our overall capital base was roughly unchanged. We funded this growth partially through cash, freed up from selling legacy in non-agency RMBS, also by layering on leverage from the diverse financing lines that we have in place. We worked hard to secure several financing facilities with favorable terms to accommodate growth in our loan businesses. In the quarter, we secured two very significant new financing facilities, the first being a non-mark-to-market term facility for our consumer loan pipeline and a second being a supplemental facility for our non-QM mortgage loan business. We've also significantly extended the term on our residential NPL financing line, which should enable us to safely grow and leverage our debt portfolio even further. Even with the additional leverage we've layered on, our leverage ratio at quarter end was still only 1.7:1, which is still significantly lower than the leverage used by comparable companies, and it's a level that we still consider to be conservative. In addition to all the financing facilities we have in place with our lenders, we also expect to fund additional growth in the coming quarters by tapping the securitization markets. Our most likely portfolio candidates for securitization are our leverage corporate loan portfolio, where we have recently been exploring CLO financing, and our non-QM loans, where we think we're still on track for an MBS securitization some time later this year. Similar to the prior calls, Lisa will run through our financial results; and Mark will discuss how our markets performed over the quarter, how our portfolio performed and what our market outlook is; and finally, I will follow with some additional remarks before opening the floor to questions. And with that, I'll turn the call over to Lisa.

Thanks, Larry, good morning, everyone. On our Earnings Attribution table on Page 4, you can see that in the first quarter, our credit strategy generated growth income of $18.2 million or $0.55 per share and our agency strategy generated gross P&L of $1.9 million or $0.06 per share. After expenses and other items, we had net income of $15.3 million or $0.47 per share. Last quarter, you can see that we had net income of $1.7 million or $0.05 per share. The significant quarter-over-quarter improvement was almost entirely attributable to the results from our current portfolio. The following is the brief overview of the drivers of our credit and agency results. In our credit strategy, you can see that the main drivers of the first quarter's imported results versus the fourth quarter were increased interest income and other income as well as net realized and unrealized gains. Our larger portfolio as well as increased yields in some sectors of our credit portfolio resulted in the increase in interest income, while generally tightening credit spreads contributed to net realized and unrealized gains. Our long credit portfolio increased to $640 million as of March 31 from $552 million as of the end of the year. And our weighted average net book yield also increased. Our larger portfolio of non-QM loans and CLOs contributed to the increase in interest income, while the increase in book yield came principally from our other loans, including non-distressed corporate loans and residential nonperforming and re-performing loans. Actually, our non-distressed leverage corporate loan portfolio increased in size as well as yields. Finally, our remaining non-Agency RMBS also contributed to the increase in yields, as our cash flow expectations of several of those securities increased. Yield on the rest of our current holdings were relatively constant quarter-over-quarter. First quarter net realized and unrealized gains were spread across most of our credit assets, but were particularly strong in: our CLOs, both the U.S. and European; our RMBS, again, both U.S. and European; and our European CMBS. Generally, these sectors benefited from tighter credit spreads during the quarter. In addition, our small-balance commercial mortgage loans and our residential NPLs, each benefited from higher valuation during the period, as some of the assets in these portfolios have gotten closer to resolution. By comparison in the fourth quarter, we had overall net realized and unrealized losses in our credit portfolio. All in all, our credit strategy, where total allocated capital represents about 76% of EFC's total capital base, generated an annualized gross ROE of approximately 15% based on its contribution of $18.2 million in P&L in the first quarter. This gross return includes financing cost, hedging cost and servicing fees and other investment expenses related to portfolio assets, but excludes general operating expenses and management fees. Overall, P&L in the first quarter from our Agency RMBS was very similar to what it was in the fourth quarter at $1.9 million or $0.06 per share, market dynamics were very different. Last quarter, we have filed carry, but this was partially offset by effects of the surge in interest rates, which caused large net realized and unrealized gains on our interest rate hedges but even larger net realized and unrealized losses on our Agency RMBS assets. By contract, in the first quarter, our carry was even stronger, and this was partially offset by net realized and unrealized losses in our Agency RMBS assets, which resulted mostly from a combination of modest sector yield spread winding a modest drop in pay up prices. On the hedging side, our interest rate swaps generated net gains, but our TBAs and U.S. Treasury hedges generated roughly offsetting losses. Still, the annualized first quarter gross ROE for our agency strategy, or total allocated capital represent about 15% of EFC's total capital base, was approximately 8%. We had a $2.1 million catch up premium amortization adjustment, which caused an increase in interest income, but that income is entirely offset in net realized and unrealized gains and losses. Exuding this adjustment, the yield on our agency portfolio increased 16 basis points to 3.1%, and our cost of repo financing increased 12 basis points to 0.95%. In the first quarter, our general operating expenses were about $4.5 million, representing an annualized expense ratio of 2.8%, which was about where we are forecasting it for the full year based on our current capital base. We ended the quarter with diluted book value per share of $90.50, which, in addition to net income of $0.40 and our quarterly dividend, includes a $0.01 per share accretive impact of our share repurchases. We had a positive economic returns of 2.5% for the quarter. I will now turn the presentation over to Mark.

Thank you, Lisa. I'm very pleased with the results this quarter. Our earnings more than covered our dividend. Our book value increased. We grew our portfolio, and we have broad based contributions across our suite of strategies. Importantly, we accomplished all these with low leverage and some downside protections in place. Our broad diversification helped our returns. The quality of the opportunity in every strategy is not the same quarter over quarter and year over year. Dynamically, dialing up and down the capital allocated to different strategies over time is a very powerful tool to enhance long term performance. Q1 was generally a favorable backdrop for credit strategies. The broad metrics of economic health were strong and said have been officially attenuated since the market has absorbed them easily so far. We would like to self caution ourselves that such sectors as high yield corporate's, investment-grade corporate's, GSE credit risk transfer securities and other sectors that are now priced at the tight end of their spread range for the last two years. Current pricing in these sectors means first, that there is less carry because spreads are tighter; and second, that further price gains may be tougher to come by. EFC is now primarily invested in a range of less commoditized, harder to exit strategies, which have largely been created by the post crisis amalgam of tighter bank regulations and substantially higher bank capital requirements. For example, our CLO strategy had a great quarter, driven by our legacy holdings, which we think have remained cheap -- which we think has remained a cheap sector, in part because many of them aren't local compliant. So they can't be purchased by banks. Our small balance commercial strategy was a bigger contributor to the past quarter, thanks to nonperforming loans that we have acquired from bank liquidations, as bank struggle to shed solid assets for peed regulators. To meet their higher capital requirements, the big investment banks, they are much more focused on financing high yield loans and security transactors rather than owning these assets themselves. This is 180-degree pivot from the bank's pre-crisis behavior, and EFC is taking advantage. Larry mentioned term financing of consumer loans and our potential securitization of syndicated bank loans. All of these financing structures we are putting in place are helping to drive returns. By focusing on sectors that yield a lot and have high barriers to entry, EFC now has a suite of sub-strategy that we believe should generate loss-adjusted double-digit returns after leverage. And with the exception of our agency strategy, which represents a relative small portion of our capital base, we achieved all this with low leverage. Let's take a look at how the portfolio evolved this quarter. First, it grew, which was the goal we mentioned on our last call; the other aspect that jumps out is that we are highly diversified across many dimensions. We have real estate exposure in the U.S. and Europe, both residential and commercial. Within commercial real estate, we are exposed to a variety of property types, multi-family, office, et cetera. We have some corporate exposure through our CLOs and our syndicated bank loans. We have consumer loan exposure. Within the U.S. residential mortgages, we own securities as well as NPLs and RPLs. This broad diversification has 2 big advantages. Firstly, that reduces our risk to any single idiosyncratic shock. For example, if the current administration eliminated the property tax deduction, and that hurt U.S. home prices, we'll feel it, but the effect of that should be limited. As another example, if the 10-year treasury yield shoots up to 3% pressure in capitalization rate in the commercial real estate market, again, we'll feel it, but our exposure is limited. The second big advantage of our broad diversification is that we can dial up or down our capital in the particular strategy as opposed to being a one-trick pony. This quarter, we had a huge contribution from team in London with the U.K. residential MBS holdings. Going into the year, we viewed these assets as potentially more attractive than the U.S. non-Agency RMBS. So we cut the U.S. exposure and increased the U.K. exposure. That really paid off. As yields change in one sector relative to another, relative value changes and show should our capital allocations. Another aspect of portfolio of construction that stood out this quarter was our ability to generate earnings with less leverage than our peer group. That's the kind of thing that we have seen can really make a difference if the credit cycle turns. Going forward, I see a lot more we can do. Securitization markets are open now, and in many cases, they offer financing terms better than repo. That was not the case a year ago when we generally saw repo at lower-cost financing but obviously lacking the term nature of securitization. For some asset classes, such as non-term mortgages and bank loans, securitization financing is finally overtaking repo financing at the more attractive source of leverage. That can boost returns and can also create real franchise value for Ellington Financial, creating a propriety securitization brand that, hopefully, will give us the long-term funding advantage over others against when compete for these assets. We continued to see opportunities coming from different sectors over time. For example, in Q2, we've given more and more optimistic about our potential to generate growth and returns in our U.S. residential NPL/RPL strategies. That's the sector that we haven't given a lot of airtime through in the past. So while credit spreads for many sectors are historically tight, and we definitely see that in non-Agency RMBS, many of our strategies have material enough barriers to entry that they have not suffered spread compression. If you couple that yield spread in elasticity with better financing terms and with the very wide net recast across these high-yielding sectors, we should continue to have ample opportunities. Adding more leverage and continuing to ring out more balance sheet efficiency should also be supportive of our earnings going forward. Now I'll turn the call back to Larry.

Thanks, Mark. I really think we're turning the corner. After shrinking the portfolio last year, as we sold down our legacy non-agency RMBS, we're growing at a great pace again, and we're driving that growth both through our propriety pipelines of loans and opportunistic allocations to securities. Allow me to run quickly through some additional important developments in those businesses that Mark didn't touch on. Our portfolio of small-balance commercial mortgage loans, including both distressed loans and bridge loans, increased by $24 million in the first quarter. That's a great sign. This has been one of EFC's best-performing strategies for several years. And as Mark mentioned, the opportunity sets here only get better as more and more loans originated pre-crisis hit their balloon payments and maturity. In fact, only 75% of CMBS conduit loans that hit their maturity in the first quarter successfully paid off. That statistic is courtesy of our friends at Credit Suisse. And of course, it's the loans that go into default, that create the opportunity set for us in both NPLs and bridge loans. We have a financing line for our portfolio, and with the help of that line, we expect to continue to opportunistically purchase distressed loans and originate bridge loans, for the foreseeable future. In our non-QM mortgage business, our origination partner continues to expand nationally and increase production. A sizable portfolio is now $96 million, and we think critical mass for securitization is around $150 million. Loan performance continues to be pristine. Meanwhile, as you recall, we have an equity stake in our origination partner, and as they grow, that stage should become more valuable. In consumer loans, we had a solid quarter. The portfolio is growing nicely again, and so we are very optimistic about that business. For our mortgage originator investments, I'm very pleased with their recent performance and outlook. Most notably, in our reverse mortgage originator joint venture, we just made a follow-on investment, which should allow significant expansion of their footprint in the reverse mortgage space. Competition in this space is low, demographic trends are very favorable, and the plan is to build a large portfolio of reversed mortgage servicing rights, which we believe offer far higher returns than conventional MSRs. On the securities side, we are taking advantage of some very interesting opportunities. We net added around $40 million of leverage corporate loans to the portfolio in the first quarter, and as I mentioned before, we're exploring a CLO financing opportunity there. But in addition to exploring financing assets using CLOs, we of course, have had an active business investing in CLOs. Mark touched earlier on some of the technical factors that keep competition low and yields high for this asset class. Our previous CLO trading activity was almost entirely within the legacy space of CLOs issued pre-crisis, since we like the way that those deals were deleveraging or about to deleverage, and we preferred quasi-static polls that were out or nearly out of their reinvestment periods. However, the legacy CLO market has been shrinking in recent years, as more and more deals get called. And as a result, last year, our CLO portfolio shrunk. That's because pre-crisis CLO issuance came to a screeching halt in 2007, and CLO issuance didn't assume again until 2012. So there were four fold gap years in between. But now we're really excited that the 2012 and 2013 the vintages are finally all the way out, or nearly out, of the reinvestment period. So we've gotten past those gap years, and we're back in business with all the gap years now behind us. We increased our investments in U.S. CLOs during the quarter by $20 million, and now this looks like an opportunity that will be with us for a while. The diversity and growth of our credit portfolio that you can see on Slides 10, and 11, and the strategy yields you can see on Slide 12, with a weighted average market yield of 10.24%, overall, shows the benefits of being able to allocate capital among a wide variety of high ROE-generating strategies. We're off to a good start to 2017. We don't like the fact that our stock is trading in the mid-80s of buck, but hey, I will also be the first to admit that it's not enough to put good numbers on the board for one quarter. But we believe that we are building a powerful and consisting earnings stream, and we hope to continue to demonstrate the success of our transformation in the coming quarters. This concludes our prepared remarks, and we're now pleased to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Steve Delaney of JMP Securities.

I think that the $0.47 is by far the best GAAP number that you've put up over the past year. So great start. Larry, I must have slept through this, but I didn't realize you've set up a REIT subsidiary. And in that context you talked about your high-yield bridge loans, so I guess a couple of questions on that. Help me understand the definition of a high-yield bridge loan and how that would contrast to, say, a $20 million LIBOR plus 450 loan that someone like acre might originate. And I guess that's the first question I want to come back on, distressed versus new origination on that as well. But if you could just kind of help me understand how you define high-yield bridge, that would be, that'd be the first part.

Sure. Well, first of all, high yield, I would say, we're talking about loans that are 9%, or frankly, usually 10% and above. And I'm going to pass the ball to Mark in a second in terms of talking about kind of where we see opportunities there, but as you correctly link the 2, we created a REIT subsidiary specifically in order to take advantage of a couple of different origination opportunities, on the mortgage space. The first one is actually not the bridge loans, but even before then, they non-QM mortgage loans.

They're residential, they're not, okay, got it...

They're residential, right, so the nonterm residential. So we are close enough to the origination process that, just to be conservative, we purchased those into a REIT, which is allowed to originate from, there is no adverse consequence from a tax perspective for a REIT. And so we also use it to modify loans, when we need to, in our NPL and RPL business.

The substantial difference in interest rates, that what you see from some other REITs?

The other difference is, there's a difference in tenant. So typically, the new origination commercial loans we make are typically a year to 18 months loan, and they're declined to "bridge" between when maybe a developer wants to buy a property and improve it a little bit, so when they're going to get more permanent lower-cost financing in place. And that's a part of the market that you would have seen local banks more active in precrisis, but as they have sort of walked back their risk appetite to appease regulators, we've seen an opportunity on a very selective basis to make high interest rate loan, where a loan is collateralized by a substantial equity in the property.

And then the other thing that I want to mention is that, not always, but I would say usually, Mark, we have a partner who -- with skin in the game, often the person that we sourced a loan from. So that's also sort of an aspect of the business as well.

Got it, and that's why I was going to ask is how are sourcing these? Are you working with loan brokers? Or are you working directly with banks that are selling you.

Not with banks.

Not with banks? Okay.

No, not with banks, but we are working with brokers, and we're working with other bridge lenders who don't necessarily have the capital that we do.

Got it, but they have the local connections and the network to the borrowers, I assume, is what they're bringing.

Yes, exactly.

Okay, that's very helpful. And then switching to small balance commercial. It looks like a lot of what you've done there is distressed, kind of just a carryover from your RPL/NPL residential. Are you looking at that also from a new origination standpoint? You have set up your partnerships, right, on reverse, you have partnerships on NQM. What we are seeing in the CRE finance space is it's just so fiercely competitive at that for larger loans of any type that it's almost like down market if you want ROEs kind of where you have to go. And I'm just curious.

Well, let me be clear. Yes, let me be clear. In rolled out commercial, we are not in the business of originating those types of loans. We're only originating high yielding bridge loans, and then everything else that we buy is stuff that already has soured, and we talked about those -- all those loans hitting maturity default. So you've got a defaulted loan, if it's, say frankly a $50 million or $100 million loan, the bank is going to -- they have the resources to work that out. If it's a sub $20 million loan, they usually -- it's not worth their while to do that. The regulators put pressure on them to get that stuff out. So that's the kind of stuff that we buy. We buy a lot from banks, and we buy also some from conduit deals as well, from special services.

So that's a good -- that's a distressed strategy, workout strategy, okay, unlike the high yield. Okay, thanks for clarifying that. And then last -- one last one, if I may. All this credit stuff would be pretty fascinating. The CMBS opportunities set has, obviously, changed, and you mentioned sort of the vertical and the ability to play with the 95% tradable piece that the banks -- the banks have to hold their 5%, but there's 95% there for someone else. I guess, two questions on that. To do that, do you have to be involved in upfront due diligence or review? Or is that something that you can do sort of as a acquisit buyer after the new issue was put out there?

Yes, we could do both, and we could do what we did before this new risk retention rules came into effect. No, you're absolutely involved, possibly, before the pool is fully baked, but I do want to say one think about that business, which is, that business actually slowed down for us in the first quarter, and what's going on there, right, is that it's -- deal issuance were down. We actually are having -- and spreads are tighter on the B pieces, so we've actually missed whereas our hit ratio, I should say, is lower than it was before, and we've, frankly, been doing a little more selling than buying. We're waiting for spreads to rewiden there. As I'm sure you've heard this. Like, a lot of interesting stuff going on in the retail space, and of course, and actually really still working itself out. So in CMBPS says says sure, if stuff rewidens, then I think there's a chance that we'll get back into that. We were one of the biggest buyers not too long ago, but at least for now, we're getting shut out. And that's okay. We'll widen up the portfolio. You got plenty of stuff going on in other spaces. Mark talked about the virtues of having so many different sectors that we can allocate capital to rotate in and out of. But at least for now, I would say, we're more in maintenance or maybe in slightly shrink mode as opposed to growth mode.

Your next question comes from the line of Doug Harter of Crédit Suisse.

This is actually Josh on for Doug. I wanted to talk a little bit about your leverage levels running kind of a conservative level on 1.7. Just curious, can you talk a bit about target leverage going into the second quarter and maybe the back half of the year, given some of your macro assumptions?

Yes, I mean, it's very asset-specific, and as we do securitizations, I think we're much more comfortable increasing leveraged based on securitizations. So I would say, non-QM would be just a classic example, right? If we can get a securitization done there, then the amount of capital that we would have in the portfolio would shrink dramatically, and of course, we would ramp it up again. We're always must more comfortable with long-term walk-in financing, then repo, you can get very low haircuts, but just something that we've done here at Ellington, gosh, for coming on -- going on almost 20 years now. We've been in this business for over 20 years, but I would say, for almost 20 years, we've really been very, very careful about the amount of leverage that we use in a mark-to-market margin-callable repo facility. And so that really sort of -- you have to look at it asset class by asset class. Agencies, yes, that'll stay around the same, and that's a very risk-controlled strategy. Non-QM will lower leverage now, but after we finance that, pretty higher leverage. And whether that'll be technically balance sheet leverage or not will depend on the circumstances of consolidation versus non-consolidation. We would look at that at that point -- since it's locked in, we would look at that really from a risk management standpoint more on an unconsolidated basis. If you look at some of the other things, like consumer loans, where we're financing the portfolio through repo, again, we talked about the non-mark-to-market facility that we put in place, and, in fact, that was term. So that's something that's in our earnings release. That's something that -- again, when we put a facility like that in place, it's suppose to be as we had before, then we're more comfortable adding leverage. So I think, if we -- just to sort of cut to chase, we talked in the past about half a turn of leverage. That's typical as what we did in our credit portfolio. So you've got a $1 of assets and you maybe borrow another $0.5 on that. I think that we're comfortable probably going up to 1:1 on that, and again, it'll depend upon where exactly the growth is. And then if you layer securitizations on top of that, then again, they'll probably be deconsolidated, so that actually won't contribute to leverage. But in sense -- in some sense, in terms of how many assets we have working for us underneath and behind is the credit assets, right? Then in a way, our implicit leverage could get higher. So I know that's sort of a complicated answer, but we'll really have to see how it plays out. But I would use that 1:1, one turn of leverage, I should say, as maybe a benchmark for where we're heading towards. And on the credit side. And then, the agency side, as you know, using about 15% of the portfolio at about 8:1 leverage, so that adds about 1.2 to our overall leverage right there. So we could be getting closer to 2:1, let's just call it, even though we're not there yet. So that's sort of, I think, a good target.

Your next question comes from the line of Eric Hagen of KBW.

Just following up on the last question. What kind of financing do you expect to get in a securitization in terms of advanced rates and what you're paying on the bonds?

Well, I think let's just talk generally in terms of its markets. In non-QM, I don't have the numbers in front of me in terms of exact financing costs. It's obviously a blend, Mark, in terms of overall advanced rate. It's pretty high.

I would say, in non-QM deals, your total financing cost is really two components, right? The bonds typically price as it spread to the curve, right? So you're going to get interest rate movements and then spread to curve, and then the sum of those two, weighted across different tranches you choose to sell, so it gives you a weighted financing cost. And what's been good for us in the last tracking the performance to those deals since the start of the year is those spreads to the curve have been marching in. They're becoming lower and lower. So the financing cost relative to interest rates has been coming in, and the interest rate component is something that we hedge out. So generally speaking, the coupon that we're able to originate, that's been roughly constant throughout the year. The total weighted average liability of those costs have been coming into this year. So that's positive. But it's a function of those two components, right? The interest rate component and also the spread component.

And then the advance rate on a non-QM securitization roughly?

It depends how deep you want to sell, but there've been deals out `there recently, getting into 19s of par advanced rate. Right, exactly, depending upon whether you want to retain certain revenue tranches or not. So that's contrast that to where we are on a repo with non-QM, which is, call it, 75%. I mean, actually one of the things, give or take, one of the things that's interesting, I would say, and while we said securitization, Mark mentioned how repo look more attractive before. The repo markets for some of these boutique facilities I'll call them for certain types of loans, the rate and the haircuts actually haven't gotten that much better. We've gotten somewhat better terms in terms of the terms of the facility and some other features. But what's really interesting is that, the whole credit markets have tightened a lot. But we haven't really gotten that much better on the rate side, and that's obviously, disappointing. So on the other hand, the securitization market, as we all know, the credit markets, public credit markets have really tightened a lot. So that's why we're just taking a much closer look at that and hoping to do stuff as the year progresses, because they are the spreads they're gotten a lot tighter. And the rating agencies are getting more comfortable with non-QM. So that's where we see the trend for us.

Your next question comes from the line of Jessica Levi-Ribner with FBR.

This is Tim for Jessica. On the consumer loan front, we've heard that few of your competitors have gotten more active there, and so just some color around if you've seen any increase in demand there. Have kind of spreads come in at all? And we know you're disciplined in underwriting, but have you see standards losing more broadly across the space?

We're not casting that light of a net there. We've got partners that we partner off with. We know that some people buy a lot of loans off the lending club platform and similar platforms, things like that. I would say that, so we're not, Mark, seeing any appreciable spread compression there in our pipelines, but again, those in more, I would say, special pipelines, and they're not the peer-to-peer stuff that, which is going to probably set the subject to more to competitive pressures.

And there's been no listening of guidelines.

Yes, no listening for guidelines, yes.

And if you go back to 2016, especially, when there were some of the well-publicized prevails at lending club, in the months that followed that, there was actually a tighten of guidelines. So from that time, if I had to say, guidelines are probably tighter than what they were before all the noise of lending clubs. Yes, that helps. That's true.

Got it, thanks. I guess, in that vein, is there any loan type or collateral in particular you've become more focused on, or starting to shy away from ?

In, sorry, in any particular one of our segments or?

Just, I guess, on the consumer loan side.

We're very data-driven, and what's great about that market for us, we had a very solid quarter there. What's great about us is that we are sort of data hounds. We have a huge data budget throughout the firm. We have a lot of, really, skilled statisticians that process data and analyze data. And that market is the market, compared to all the other markets we deal in, that provides us with the greatest amount of data. So it's really tailor-made for us. So what we look for and the combination of metrics that we think are important, some of that's proprietary. But I would just say that it's really the richest of the data set, our ability to process it, and looking at how different credit metrics work in concert with each other, sometimes in nonintuitive ways, which shapes our thinking and shapes sort of our purchase stock.

Mark, just to state the obvious, right? We're very sensitive about, we don't want to give away. You saw us here. We feel that we give feedback to our originators, our partners, obviously, in terms of what kinds of loans we like and what we don't. And we think that's very much part of our edge, we spend a lot of money on research and analysis to help us shape those guidelines. So we don't want to be too public about what kind of loans we like and what kinds we don't.

Our next question comes from the line of George Bahamondes of Deutsche Bank.

I just wanted to confirm a few points you made in your prepared remarks. You have mentioned that credit portfolio grew quarter over quarter and there was capital used from non Agency legacy RMBS sales and some debt was used as well. Did I understand that correctly? Is that what you have said?

Yes, that's right.

Great. So going forward, when looking at growing that portfolio further, will similar strategy be used? Will -- maybe you reduce the Agency portfolio a bit? Are you comfortable with the size of the Agency portfolio? And just any color around how large of that portfolio could get relative to the agency portfolio would be helpful.

Yes, I think we could scale shrink the non Agency RMBS portfolio, right? Obviously, as you -- we're selling the stock we think is the best to sell first, right, and then the stuff that were left is higher yielding, probably the more liquid. But overtime, again, I think, there's a good chance that portfolio would shrink. The other thing that we haven't talked about, which I might as well mention, it's not like -- we don't have anything at works or anything like that, but other source of growth for us, look at where our stock is trading, it's not going to be equity issuance, right, at least, not now, but debt issuance, right, is definitely something that, I think, we would consider. That market, along with the other all the credit markets, is getting better, and so that's something that we look at. Again, we don't have anything in the works right now, but it's something that we stay on top of, and I think that could make a lot of sense to issue unsecured debt. And I think that one thing that, hopefully, the market will appreciate about us is our low leverage. And if we can get rewarded by the debt markets for being more conservative, then that would be great.

Got it. And so you are comfortable with the current size of the agency book?

Yes, the agency book is something that is driven not only by how we feel about the agency market, but it also helps us satisfy our '40 Act requirement to be exempt or excluded. I mean, the official term is, from the '40 Act test, so we need to maintain that as a certain size, and just this is really monster math now. But if you think about that portfolio, that's 15% of our capital, and it's 8:1 leverage, right? And that is 120% of our capital. And if there's a, let's call it, 55% asset test, so -- and again, that's really -- if not exactly 55% when you go to implement it. But if you look at our overall assets, and you can see that our agency assets and up being certainly more than half of our total assets, and that's kind of where we might need to keep it, and this really only rough. So basically, we have to increase the size of our credit portfolio. We often need to increase a little bit the size of our agency portfolio to continue to have the '40 Act tax work for us.

Now that's been a great return on equity for us. It's also a great diversify of returns, too.

Right. Okay, great well that’s helpful, just wanted to get some more color around what are you thinking about growth going forward. So appreciate your comments.

Your next question comes from the line of Lee Cooperman of Omega Advisors.

Basically, given the way you intend to run the company and the amount of leverage you intend to employ, over a market cycle, what do you think a realistic gross and net return on equity for shareholders is, looking at -- $19,500 current book value. And second, to get out of the way, no mention, unless I missed it, of your repurchase activity of in the quarter. So if you could maybe just tell us what the status is of your buyback or what your intentions are? And what was done, if anything, in the quarter?

Okay, I'll let Mark hit the first one, and I'll hit the repurchase one.

Hi, Lee. So over-cycles, I think we should produce returns in the order of 14% growth and 11% net. Portfolio with a run rate not that far away from that now in this environment now, where credit spreads are on the tight side. So I think, over-cycles, the opportunity is good now, but certainly, you've been in these markets a long time longer than we have, and we have been in them a long time. But you know that over-cycles, you get certain pockets of -- you get some speed bumps sometimes, you get some really tremendous opportunities. The thing over cycles, that's realistic expectations.

And then on the repurchase front, yes, that follows up actually from question that you had on last quarter's call. As we talked about, we did get a new repurchase program in place, right? So we sort of reloaded the one that we had before, and therefore, was certainly not an issue. This quarter, we repurchased a fewer shares than we did the quarter before, and that was really just a function of where our stock price was and what our average daily trading volume was. So we traded a little bit less, and our stock price was higher, right? We talked last quarter on this very call that, as pedal to the metal, below 80% a buck and once we got to the mid-'80s, that's where we start shutting it down, and now we're hit back in the mid-80s. So we just ended up based upon those parameters, repurchasing less in combination with the slightly lower volume. And I still feel that, that's appropriate, given the opportunities we're seeing. If we were to trade down, then we would no reason for, as I'm sitting here, to say that we wouldn't do similar to what we did before, but of course, we do have these pipelines coming in and we do want to keep room for that. But that's where, right, unsecured debt actually could be.

And I'm just chiming in like a very specific guy. What is the authorization? Is that 100 million, 50 million, 10 million? I mean, you've made it very clear, and I think you've been very transparent that 80% of book or low, you really get excited, and 90% of book, not so excited. But I'm just curious, what is the actual authorization in place?

Yes, so we just reauthorized the same authorization of a GAAP before, which was 1.7 million shares. So well, that's 30 some-odd million. And like I said, we don't really -- some people went not these huge programs as I never used them. So it's just for us. When announce the program, it's going to take us a while to use it and then we'll just reload, if we need to.

Your final question comes the line of Jim Young of West Family Investment.

Mark, could you expand upon your comments about the opportunity set that you see with the NPL and RPL strategy that you have previously mentioned?

Sure, yes. Jim, there I'm talking about nonperforming and re-performing residential loans in the U.S., the sector I was really -- we're referring to. So we have a team that those investments, and they're at the firm for several years, and for a lot of the last few years, the opportunity set in that space on the larger packages hasn't looked as interesting to us as some of the other sectors where we've been deploying our capital. But, say, probably the last quarter of 2016 and the first quarter of 2017, we've seen some more interesting trades that we've been doing, and we've done -- that team has really done a fantastic job getting some great resolutions for us. So we've noticed a material increase in the return on equity that team's been able to generate. A lot of it comes from thoughtful sourcing of loans. You want to try to get loans where you think your efforts to work out the property is going to be impactful. So maybe your sourcing loans from areas where you don't think the previous efforts to work things out have been as thoughtful. But yes, the reason why I want to put that in the prepared remarks is that the resolutions we've been seeing there are fantastic. So that team is aggressively looking to put more money to work, and I think they really have a great process. And they're very detail-oriented, and they are very efficient in how they go about things. Or yes, I just said that because, just in the last six months, the results have been fantastic.

And the other thing, just add one more thing, Mark, is that the last few weeks, I believe that was post quarter-end, I think that we got that, but we did extend the term on our financing facility for -- I think I mentioned that in my remarks, for this particular business. And I would mention before how when we deal with repo mark-to-market is having to deal with margin calls. That's one reason why we're conservative, and our use of leverage, how much we're going to leverage up, any particular business, but the other thing that also factors in is the term of the repo, right? If you got a very short-term repo, then your role risk is greater, right? If you got longer-term repo, then it's less. So by extending out, we materially extended out the term on our repo line there. So that gives us more breathing room to leverage that business that more, which means higher or tend an equity, which means we want to allocate more capital to that business.

Okay. And as you expand your capital into this part of the business, do you think this presents opportunity to securitize these assets at some point in time, going forward?

We've been doing this strategy for a while. We have not contemplated and securitized in the assets. I know there are some other people do that, part of it, it's a little bit of a scale issue. We think that we've been sort of maximizing return on equity through a combination of working out a lot of loans ourselves and for another portion of loans getting them to a reperforming status, where the borrowers paying on a payment plan and then selling those. So that way of sort of turning over the capital we think has been very efficient in sort of maximizing the ROE. We always look at securitizations, but it hasn't been something that we have…..

We haven't been big enough, yes. Yes, if we get bigger than loan, we'll definitely take a closer look at that. But it's similar, you want to get to triple-digit millions for almost any securitization before it starts to make, at least close to that level.

Ladies and gentlemen, that was our final question. And with that, this does conclude today's Ellington Financial's first quarter 2017 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.