Ellington Financial Inc. (EFC) Q4 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this this all participants have been placed on a listen-only mode. Then the floor will be open for your question following presentation. [Operator Instructions]. And it is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks Carla and good morning everyone. 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 and -- who will be replacing Lisa Mumford as our Chief Financial Officer upon her retirement at the end of March. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please turn to Slide 3 to follow along. With that, I will now turn the call over to Larry.

Thanks Maria and welcome everyone to our fourth quarter 2017 earnings call. We appreciate you're taking the time to listen to the call today. As announced this past December, our Chief Financial Officer Lisa Mumford plans to retire around the end of next month. I'd like to start by thanking Lisa for her 9 years of dedicated service to Ellington Financial. Her leadership and talent have been key contributors to the success of Ellington Financial since its inception. I would also like to congratulate JR Hurley, currently Ellington Financial's Treasurer, and his pending promotion to CFO upon Lisa's retirement. JR has been with Ellington for nearly 7 years. And during that time, he has served in various roles both on the investment side and on the financial reporting side, including first, as the commercial mortgage specialist and then as co-Chief Investment Officer and Chief Financial Officer of Ellington Housing, which was an Ellington Sponsored REIT that had focused on direct investments in single and multifamily residential real estate investments in the wake of the financial crisis. So, JR brings considerable investments and capital markets expertise, as well as experience over same financial reporting. To his new role as Ellington Financial's CFO. And congratulations also to Chris Martin, Ellington Financial's Controller, who will be promoted to Chief Accounting Officer upon Lisa's retirement. 2017 was a year of remarkable comp in the market. Volatility was historically low despite three fed rate hikes a new administration in Washington several significant geopolitical headlines and the first pullback and quantitative easing in decade. Interest rates were unusually steady throughout 2017 and have exited [ph] at an all-time record low in November. Credit spreads grinded persistently tighter over the year and equity reached all-time highs going into year-end. Of course, as we've witnessed these past few weeks, 2018 is entirely different story. Besides violent swings in stocks in the 10-year treasury has broken out of its 2017 range, credit spreads have widened and the VIX even touched its second highest level since 2009. At Ellington Financial we have patiently built a diversified portfolio of loans and securities based on fundamental analysis and proprietary sourcing. We were able to grow the size of our credit portfolio nicely in the fourth quarter and so that’s getting closer to where we think it needs to be to help cover our dividend. Specifically, our credit portfolio grew by $284 million which is a 38% quarter-over-quarter increase. Now these figures included chunk of interim investments that we acquired that were somewhat lower yielding but more liquid in the higher yielding long term assets that we expect to continue to ramp over the next couple of quarters. So, you certainly should not extrapolate that 38% growth in the credit portfolio. JR will elaborate more on all this later in the call. Thanks in part to this continued growth in our credit portfolio, Ellington financial had solid fourth-quarter showing steady improvement from the third quarter and the second quarter. And 2018 is off to a very strong start. We announced last week that Ellington Financial's book value per share was up approximately 1.8% [FFO] $0.34 per share in January. So, we are optimistic that all the pieces are coming together nicely and as we mentioned in our earnings release and summer to the guidance that we gave on the last earnings call we are forecasting that our credit portfolio will be fully ramped by the middle part of this year. During the fourth quarter with our share price trading at a significant discount to book value we saw an attractive opportunity to repurchase our shares aggressively. We bought back nearly $10 million worth of our stock or more than 2% of our shares outstanding which was accretive to book value by $0.08 per share. Since quarter end we have purchased an additional 1.5% of our shares outstanding and last week our board of directors reloaded our repurchase program with an additional 1.55 million shares or about 5% of our total shares outstanding. Even though we love the access coming out of our loan pipelines stock buybacks are just a compelling use of capital for our stock prices been recently. As I mentioned in the past we think that a discount of 20% or more to book value is a level where we should be buying aggressively and we have that. At these levels stock buybacks are providing substantial accretion to book value which will ultimately lead to both significant accretion to earnings-per-share and a higher stock price. With the passage of the Tax Cuts and Jobs Act in December and in particular the lowering of the maximum federal corporate income tax rate from 35% to 21% many publicly traded partnerships especially those in financial businesses have been discussing the possibility of converting their tax status from partnerships to corporation. As alluded to in our earnings release management of Ellington Financial has been actively evaluating potential actions in response to the new tax laws and that includes reassessing our structure as a publicly traded partnership. I'll discuss this further in my closing remarks later in the call. Today's call will follow our similar formats of prior earnings calls. Lisa Mumford is here with us today on the call but in the spirit of the ongoing transition of the CFO duties from Lisa JR, JR will be delivering the rundown of our financial results. After JR Mark will discuss market performance and our portfolio performance over the quarter and whether our outlook is going forward for our markets and our portfolio. Finally, I will follow with closing remarks before opening the floor to questions. And with that I'll turn the call over to JR.

Thank you, Larry, and good morning everyone. I'm excited to take over as Ellington Financials Chief Financial Officer upon Lisa's retirement. Please refer to Slide 6 for details on the attribution of earnings between our credit and agency strategies. Our credit strategy contributed the entirety of our income for the fourth quarter. Credit assets generated gross income of $12.7 million or $0.39 per share while our agency strategy generated a slight loss of $58,000 which rounds to zero cents per share. After expenses and other adjustments, we produced net income of $7.4 million or $0.23 per share. For comparison, in the third quarter we had net income of $6.2 million or $0.19 per share. The following is brief overview of the drivers of our results. Let's begin with the credit strategy which represented about 75% of EFC's allocated equity at year-end. Gross income increased by $4.7 million or $0.15 per share quarter-over-quarter. As Larry mentioned, we made significant purchases this quarter and the incremental carry from these investments is reflected in higher quarter-over-quarter interest income. Our borrowings also increased with these purchases so interest expense is correspondingly higher. Net unrealized gains were significant this quarter driven by the completion of our first non-QM securitization and an increase in the value of Long Bridge Financial one of our mortgage originator strategic investments. Further tightening of credit spreads also led to mark-to-market gains on certain assets while contributing to the losses on a credit hedges and other activities for the quarter. Additionally, other investment related expenses were considerably higher than last quarter because we fully expensed the deal cost associated with the non-QM securitization, which were $1.68 million or $0.05 per share rather than amortizing these expenses over the life of the deal. Finally, P&L impact from trading activity and interest rate hedges was limited for the quarter. At the end of this quarter, interest income was the primary driver of earnings in our credit strategy. Over the course of 2017, we steadily increased the size of our credit portfolio and our net interest income have increased in times. As we look forward to 2018, we believe the high-quality interest income from our loan assets will be the key to generating a steady and predictable earnings stream. In the fourth quarter, we added assets in the following strategies, smaller balance commercial mortgage loans, non-QM loans, consumer loans and UK non-conforming RMBS. As Larry mentioned, we also acquired a substantial amount of more liquid somewhat lower yielding assets in the U.S. non-agency RMBS and COL middle markets. Although these investments have yield below our target for EFC. They are relatively liquid and provide the opportunity for solid positive carry on the capital they are using pending deployment of that capital into higher yielding strategies. Finally, the non-QM loans that we securitized remained on our balance sheet because we are deemed for GAAP reporting purposes to effectively control the securitization trust. As a result, we have consolidated the entire securitization on our balance sheet so the debt sold to the third parties in conjunction with the securitization is included on our balance sheet under the caption Other Secured Borrowings at fair value. In total, our credit portfolio increased to $1.02 billion at year-end, an increase of 38% from the previous quarter and 86% from the previous year-end. Looking now at performance by strategy. We had quarter-over-quarter increases in gross income from the following loan related strategies, consumer loans, small balanced commercial mortgage loans, non-QM loans, European non-performing loans and investments in mortgage originators. Security strategies that hosted higher gross income this quarter included CLOs and UK non-conforming RMBS. We also had an excellent quarter on CMBS although this strategy was slightly less profitable than in the third quarter. We had modest declines in quarter-over-quarter income from our legacy non-Agency RMBS and corporate credit relative value. Our agency RMBS strategy generated a slight loss of $58,000 for the fourth quarter which rounds at $0.0 per share. Although current coupon 30-year agency RMBS fairly budged during the quarter. Many of shorter duration assets that we hold in EFC such as higher coupon pools and 15-year pools had mark to market losses. These unrealized losses were offset by the net interest income on our investments plus the meaningful gains on our interest rate hedges and we roughly broke even. At December 31, 2017 we had agency RMBS holdings of $872 million compared to $816 million as of September 30, 2017. Since year-end much of the fourth quarter spread widening and higher coupon pools and 15-year pools has reversed. Combined the credit and agency strategies had a debt-to-equity ratio of 2.38:1 at December 31, 2017, which a significant increase over the previous quarter end when that ratio was 1.91:1. The increased leverage resulted from the significant growth of our investments coupled with a reduced capital base due to repurchases and dividends. Leverage was also higher because we consolidated the non-QM securitization for GAAP reporting purposes. If we weren’t consolidating the non-QM securitization related debt our adjusted debt-to-equity ratio would have been 2.18:1. During the fourth quarter we repurchased 656,239 common shares on average at a 20% discount to diluted book value per share. As a result of these discounts our share repurchases were accretive by $0.08 per share. For the quarter our general operating expenses were $4.4 million, representing an annualized expense ratio of 2.8% which was in line with ratio for the full-year of 2017 as well. We ended the quarter with diluted book value per share of 18.85. I'll now turn the presentation over to Mark.

Thanks JR. Q4 continued many of the themes established earlier in the year flatter yield curve tightest spreads from most commoditized sectors such as high yield, limited interest rate volatility and limited credit spread volatility. All that themes like a distance memory now. In Q4 credit market was stably strong taking their cues from the steady March hiring stock and you felt like you are competing with many other investors had assets for the balance sheet. For EFC it was a very busy quarter and a lot of the portfolio steps we took not only helped the Q4 performance but are also helping in 2018. Q4 was also a realization for EFC of the live initiatives that we worked on throughout the year. First, we substantially grew our portfolio. We grew in two ways. Organically with proprietary investments, and also in the more traditional way by purchasing attractive assets in the open market. There were two big accomplishments for our proprietary pipeline. Firstly, we securitize our non-QM portfolio with our inaugural deal which priced in November. EFMT 2017-1 is a ticker on Bloomberg. All the mortgages and ideas were originated by [indiscernible] mortgage our non-QM provider in which we hold the strategic equity investment. Our deal was well received by both rating agencies and investors. Rating agencies attracted to our low LPV and disciplined underwriting guidelines rewarded us with a capital structure that allowed us to generate gross financing proceeds of 98% of principal balance. As a result, the deal provides the company with long-term financing that not only isn’t mark to market but is much more levered than we fell and allows us to magnify the excess spread on the deal into the junior tranches that we retained. We had a blue-chip list of investors that bought our bond and have additional investors that are interesting in purchasing loans directly from Lynch in the future. We currently have over $15 million of unsecuratized non-QM loans on balance sheet and are growing our portfolio every week. The securitization also has the potential to add significant franchise value to EFC's equity stake in [indiscernible] The non-QM market has performed well is increasingly competitive and constantly focused on how to protect profit margins and grow [indiscernible] footprint. The second significant organic growth milestone was the pricing of our second Ellington managed CLO and retention by ESP of the equity and some of the debt. Now that we are no longer first-time issuer, we benefited from both tighter debt spreads and the more advantageous capital structure. The deal was well received and we are growing our name in this area, we planned to have EFC participate in further Ellington managed CLOs. We worked hard in Q4 improving our financing terms across the board. This included our financing lines from non-QM consumer loans, small-balance commercial mortgage loans, residential NPL and our retained CLO tranches. This LIBOR has been rising, we have been able to negotiate financing at lower LIBOR spreads. Working to keep our all-in cost to funds close to unchanged in possible. Financing terms in the market are vastly improved from a year ago and with its low levered balance sheet EFC is an attractive counterparty for lenders. Taking advantage of lender demand to finance EFC's assets is a great way for us to improve our net interest margin without taking on any more risk. The great example of how attractive the counterparty EFC is to lenders, you can look no further than the unsecured debt deal that EFC issued late last summer when we issued unsecured notes at five and a quarter coupon at par, which we believe gives us among the lowest -- among the cheapest source of unsecured financing among our peer group. Looking ahead to 2018, the market volatility we've seen so far this year, is like nothing we have seen since early 2016. The high yield and short duration portfolio we've brought into the serious performing well, as you can see from the estimated book value per share that we announced, which January returned at 1.8% non-annualized. We have largely stayed away from the most commoditized sectors in structured credit such as agency credit for transfer security that are most likely underperforming sympathy with their downturn in the high yield market. Instead we have focused on less commoditized high yielding harder sourced investment get typically have both a varied purchase and acquire extensive analytic expertise to model. These assets are typically less impacted by overall market gyration. For our agency portfolio we are positioned defensively to close the year with moderate overall mortgage-based exposure as we didn't proceed pricings particularly attracted at year-end. That positioning certainly reduced our agency income in Q4 that has been helping us so far this year as interest rate volatility has been very high and the NBS of underperformed most interest rate hedges. I like how EFC is currently positioned. We've grown and are growing our credit portfolio so our earnings have increased and they can grow more. We're finally seeing some volatility in credit spreads, so we're hopeful that we'll be able to add assets this quarter at much higher yields than were actively traded in Q4. Our pipeline of proprietary investments contributed handsomely in Q4 and continues to progress nicely this year. Meanwhile our share buyback magnifies all this, with a smaller share count every dollar of earnings is more in first share basis, and buying back our stocks to big discounts gives our price to book at tailwind. We're using two powerful levels to drive the most important metrics to our company, continuing portfolio growth to drive earnings per share and accretive buyback to increase book value and further amplify earnings. The markets have been recently been trading with wild price swings and an overall skittishness that can create both land mines and opportunities. We believe that most of the volatility is coming from an increased inflation expectation, because their stronger economy that may have hit a tipping point with the passage of tax reform. For our consumer-focused assets, we are seeing strong performance and I think most mortgage and consumer loan borrowers will benefit from the rise in wages and increase in deductions. We are focused in capturing the opportunities presented to us by the recent dislocations. With that I'll turn the call back to Larry.

Thanks Mark. Looking back on 2017, our pace of capital deployment was slower than we had originally planned but we believe that our patience is being rewarded. Given the volatility we have seen in 2018 so far, we believe that staying true to our acquisition standards continuing to be disciplined about hedging and otherwise prudently managing risk are more essential now than ever. We made solid progress towards covering our dividend in the fourth quarter but we are not there yet. I'm very happy with our recent pace of acquisitions as reflected in our healthy portfolio growth in the fourth quarter, and we still project reaching our desired credit portfolio strategy around midyear. In the meantime, with our stock price rates been recently and it's way too long on our opinion we plan to continue to supplement our earnings with accretive share repurchases. Before we close I briefly like to discuss the potential impact of the Tax Cuts and Jobs Act in Ellington Financial. As we mentioned on our earnings release we are actively evaluating the potential actions we may take in response of the passage of the tax legislation, including possible changes to our investment strategies and even to our structure as a publicly traded partnership. When we first formed Ellington Financial in 2007 we chose to structure the company as a publicly traded partnership rather than a REIT because it enabled us to own a diversified group of assets including non-mortgage and non-real estate assets are also having the ability to hedge credit risk more fully than we could as a REIT. We believe that this flexibility has been a crucial element to our success. For example, enabling us to whether the financial crisis in 2007 and '08 with our book value intact when other credit-oriented REITs were struggling to survive. While our corporate tax structure or CCORE has even more flexibility than a publicly traded partnership structure. We rejected that corporate structure back at our inception, because we felt that the 35% federal corporate income tax rate in effect at the time was too steep a price to pay for the advantages of a corporate structure which I'll get to momentarily. But now that the maximum federal corporate income tax rate has been reduced to 21% the idea deserves serious consideration again. We have been hard at work with the help of our tax advisors analyzing the ramifications, repercussions and considerations of a possible C corp conversion and to make it easier for everyone to appreciate these considerations we will be posting to our website a list of some of the most significant pros and cons of the C corp conversion. Many of the other financial publicly traded partnerships such as the alternative asset manager PTPs like Blackstone, KKR and Apollo, have also announced that they're analyzing the same C corp conversion issues and that will take them a fair amount of time to settle on any decision. In one sense the bar for Ellington Financial to decide to convert to a C corp is arguably higher than it is for the alternative asset manager PTPs. Namely for the alternative asset managers virtually all of their asset management fee income already flows through corporate block of subsidiaries. So, for the alternative asset managers that fee income is already tax to corporate rates whether they convert or not. So, for these companies the incremental effective tax rate caused by a conversion isn’t the full effect of corporate income tax rate because the tax and a big chunk of their income is unaffected. For Ellington Financial however since virtually all of our income as investment income has opposed to fee income or similar income, the incremental effective tax rate for us upon conversion will be closed to the full effective corporate income tax rate. So, converting to C corp will probably be a harder step for us to take than for most of the alternative asset manage of PTPs. Even with that caveat, I can assure you that not only has no decision been made, but none is remotely close to being made, and it's just way too early to even speculate on whether or not any such major changes in our tax structure will occur. We of course welcome the feedback and input of our shareholders and our potential shareholders. We also recognized that depending on exactly where our effective overall corporate tax rate shapes out including not just federal but also state and local corporate income tax rats, it's quite possible that conversion to a C corp will result in higher after-tax distributions for some shareholders but lower after-tax distributions for other shareholders. The publicly traded alternative asset managers are of course also struggling with these and similar issues. All that said, our publicly traded partnership structure has many, many advantage. And while we will continue to analyze its interest and conversion issue. We are mainly just keeping our heads down and staying laser focused on continuing to grow our credit businesses and thereby our earnings. That is and will remain our primary mission, and I believe this is ultimately what market will reward us for. I am confident that the fourth quarter of last year are now the strong first month of this new year, so that Ellington Financial is on the right track. And this concludes our prepared remarks. We're now pleased to take your questions. Operator?

[Operator Instructions]. Your first question from Douglas Harter with Credit Suisse.

Thanks. Can you talk about due to the share buyback? Does that change the timing that you would expect to get to a fully ramped credit portfolio?

Not enough, we haven't pinpoint it, tried to pinpoint that exact time. Obviously, it’s a kind of a subject of standard anyway. So last quarter, having repurchased a 2%. I mean yes, it will affect things on the margins, but you're not talking about a huge difference right, certainly talking about I think 2% is $12 million a quarter. So that's not going to move the needle too much either way.

Got it. And can you just talk a little bit about some of the placeholder credit assets you talked about, kind of what is the duration of those and kind of how do you expect those to sort of roll off of those with the more longer-term assets?

Hey, Doug, it's Mark. So, in terms of interest rate sensitivity. They typically have very little interest rate sensitivity. And they are primarily very seasoned non-agency mortgages and some season's CLO holding. So, they don't have interest rate sensitivities. So, their prices haven't been impacted by the rate increases. In a lot of cases sort of higher expectations for LIBOR from more fed rate hikes generally supportive of them. So, there are assets that we've had in Ellington financial for a long, long time, these used to represent the lion's share of our portfolio. We like them because they have a significant yield advantage over been in cash. But there is liquid enough so you can convert them into capital. If you see some high yielding less liquid investments that you can redeploy the capital in.

And then they probably have half the spread of many of our targets assets at this point, so just to put it in perspective.

That’s just really a more efficient way to manage our balance sheet.

Your next question is from Steve DeLaney of JMP Securities.

First let me say -- let me just applaud the buyback activity is excellent. Larry you mentioned mid 2018 for sort of optimizing the credit portfolio or the balance sheet generally. So, in your end you were right at 1 billion in the credit portfolio. Could you give us a rough idea of what the magnitude of that growth in the portfolio might be? In other words, what's the sort of forward target for the size of the credit portfolio?

Sure, and as I said it's obviously a fuzzy standard to start with. Its more -- I was going to say optimizing the portfolio but instead I would say I think that by then we will be able to be covering our dividend assuming that we continue to have assets yielding what we are seeing right now they are available to us and assuming you are right a certain acquisition rate. I think if we can add little over 100 million a quarter I think we'll get there by around midyear. And one thing that’s a little difficult in terms of the actual balance sheet number is that -- it gets a little but I don’t want to say distorted but it gets a little bit muddled by the fact that for example when we did the non QM securitization those loans remain on balance sheet and there are obviously argument to be made for and against looking at either on a consolidated or basis or not under GAAP obviously you have to consolidate. So that’s part of the growth this quarter and the portfolio is due to that as well. And composition is also going to matter as well as we replaced these interim assets with the lower yielding with higher yielding assets that is going to locked in one sense like we are trading order from just an asset growth perspective would obviously from an income generation perspective that we want, that we want. So, some of the growth as we have been saying that you have seen this quarter in the portfolio the 38% growth was -- you could almost think of that as a borrowing from real -- more long-term acquisitions from future quarters.

And so, you said something that may have helped clarify something for me. On the securitization, your non-QM securitization -- I think you are telling me that the loans are -- it's in this table on Page 11 on a gross basis, right. And you are showing the total loans not just your retained bonds as -- am I hearing that right?

Yes, that’s correct.

So obviously you have to consolidate for GAAP but its -- that’s something we can talk about offline as far as you get bigger and bigger with securitizations just a question of whether the equity allocation is more useful than just the actual gross assets?

Absolutely.

And just for clarification you had been buying back stock under a prior optimization, the board authorized an additional 1.55 or is the 1.55 now the new total authorization. I'm just trying to understand.

I think it was affected on February 5, was it? And I think it's in our earnings release. If you look at the share purchase program you see that what was announced in the earnings release when we brought through, and it was February 12 included 43,000 of shares we purchased between that February 6 with the authorization and February 12 which was when it went to press so to speak. So that's basically pretty good number less just what we've been buying for the last few days.

Okay, but you said it's about 5% of total shares obviously which is a good level.

Right and we always go back for more authorization when we need it.

Okay. And just one final thing, the book value, we certainly noticed the book value up almost 2% in January when you put that out here, I think just last week. But could you just comment generally on what has worked so well in your favor just over this past 4 to 6 weeks. I'm not asking for a lot of detail, but just kind of what asset classes and or what hedge positions have really delivered that strong performance?

Well. I don't want to get into too much detail. Some of that reflects sort of realized and changes in unrealized and some realized gains in the first month that are non-recurring. I mean obviously we're not sitting here saying we are going to be earning 1.8% a month item to item. So, there were some you can call them non-recurring but for us obviously we do create the portfolio. We do market conditions changed and we have to mark things up and down. So that went in there, I mean our hedges this year obviously are doing well. And which is about time. And we talked about agencies has flat quarter. So, I don't want to get into too much detail there.

Understand, but it sounds like a takeaway we might and an investor that might as it you guys handle volatility pretty well. And then just and in general statement, and in the past when we had periods of volatility you tended to outperform.

That’s right. And one thing that about the portfolio Mark alluded to it, is that the assets that now are favoring and that we're accumulating. They tend to be not all of them, I mean there are exceptions, but they tend to shorter than a lot of the assets that we think have been and bit up to high in this market that look to be vulnerable. So, in a downturn I would say two things about them. Number one, they should move less in price if at all because some of them frankly are just idiosyncratic like for example if you buy a non-performing loan on a commercial property. And you buy that and you've got massive coverage in terms of property value versus what you pay for that loan, that overall macroeconomic conditions when you expect to resolve that situation within a year are probably not going to have a huge effect. Our consumer loans also are relatively short term. So again, you can dial up or down, and change criteria as well or acquisition criteria and that portfolio depending on from what we're working in marketing conditions and not like it's not like we're walked into some 5 or 10-year loans things are going to amortized really quickly right. And of course, as always, we keep our interest rate duration short on the stuff that is fixed rate so that type of interest rate volatility that we see is really both -- should be a non-event for us and it clearly wasn’t the first month.

Your next question is from Eric Hagen with KBW.

JR and Chris, congrats on your appointment. Can you just talk about the pipelines for acquiring more CLO investments and how quickly you might be able to bring new investments into the portfolio? Appreciate it.

I think so -- first of all one interesting development right, is that the risk retention rules seem to -- right there was a core case and at least for I would say a large portion of CLOs including the ones that we sponsored, the two that we sponsored it looks like there is a good chance that the risk retention rules will go away, which I'll just add as an aside with going to financial having participated in those two deals, if that does go away a portion of what Ellington Financial retained from those securitizations will actually become tradable whereas before it was non-tradable. So, I would argue that that makes those pieces worth a good 5% maybe even 10% more in terms of their value. We have no plans to trade those necessarily but that’s clearly a positive. And just not having risk retention just makes securitization easier as well. So, I think that a lot of -- this was sort of two CLOs that we did were a little bit niche, in a sense that the assets that we used are not the ones that are in your typical CLOs which the very large leverage loans and things like that. We tend to gravitate towards some smaller companies with smaller capital structures but that falling angels, things that don't really fit into, they might not be quite yieldy [ph] enough for a distressed book but they are also don’t have high enough ratings for your typical CLOs so we think that it's an asset class that’s actually undervalued, and to a large extent that business and our continuity of the deals is they are going to be based upon just how quicker we can find the assets that we like and accumulate them and it's not so easy, we have to work to do that. You saw us do a couple of deals last year. We certainly are hopeful that we can do two or three this year but that’s obviously going to depend on market conditions.

Your next question is from Crispin Love with Sandler O'Neill.

So last quarter you talked a little bit about potentially covering the dividend and maybe the first or second quarter of 2018. I'm just wondering a little bit of an update on that. Have your expectations changed at all? And should this all just coincide when you reached the desired size of the credit portfolio?

Yes, that’s where kind of the goal line that we have set right, is when we think a portfolio get the level given the yields that we're seeing we are accumulating to be able to cover the dividend largely with just net interest income. So, we're saying about the middle of the year is where we see that taking place. And obviously in terms of covering dividend. I mean the first month of the year, gives us a good head start, but we're really looking and as I mentioned, I think on the prior caller's question, obviously some of that first quarter activity and increase in book value was not to just net interest income. So that's really where with the important place for us is going to where in our portfolio is at the level both in terms of yields and in terms of size, where it's just more repeatable and reliable going forward and we're saying in the middle of this year as we're, middle part of this year is what we're targeting.

Okay, thanks. And then just also to what kind of assets are you seeing right now is the best opportunity for next couple of quarters. I know you mentioned SBC in consumer was this quarter and expect kind of the non-agency to fall off a little bit. Are your kind of still seeing the same opportunities?

Yeah. Mark, do you want to comment on that?

Yeah, we have like the opportunities presented to us in the non-performing, reforming residential mortgage space. Same thing on some of the small non-performing commercial loans that's been a good opportunity. Europe made a big contribution, there has been some good opportunities there. And I think with this volatility just we're going to see a little bit less competition for assets. So, I think across the board, we're going to see things we like. We continue to ramp up non-QM. You mentioned the consumer of that portfolio continues to grow through flow arrangements. So, we're dynamic and we changed sort of the relative thickness of each slice of the pie in response to market opportunity. I'm optimistic, we're going to see more opportunities in CMBS this year. That was an area last year we didn't see a lot of big opportunities to grow. And I really do think there is big benefit to diversification. So, having U.S. versus Europe, having some consumer facing debt versus corporate facing debt like CLO. I think overall you reduced volatility without, reduced volatility while keeping your earnings power high. So, we're going to we're going to keep the portfolio diversified, but those sectors I mentioned in rare. We see some best opportunities for growth.

Okay. And thanks, just one last one for me regarding potential changes to a C corp. If I'm reading your comments right, do you think this is something that's kind of more in the next couple of years. If it were to happen rather than kind of 2,3,4 quarters down the line?

I don't want to speculate. It's something that's going to take serious time to consider all the ramifications that I said. I think we would rather, we're happy to discuss all of this, but nothing is going to happen anytime very soon. How about that?

Your next question is from Jessica Sara Levi-Ribner with B. Riley FBR.

Most have been asked and answered, but one last one on leverage. So, ex the securitization, your leverage is about 2.18x. Is that correct?

Correct.

And what would be your target?

I think it could be a little bigger than that it could get to 2.5 I think, maybe slightly higher. I think that's again sort of depends upon which assets you are talking about. When we retain equity or junior tranche on a of securitization those are obviously riskier assets than some others. So, we wouldn’t typically leverage those right. So, it depends on what kind of asset -- some assets we have are the ones that we are ramping have lower yields with good yields maybe in 8%-9% range and on those we could have obviously a full turn of leverage on those, agency versus that two times of that include -- is that the blend of credit ad agency or…

Yes, excluding the [multiple speakers]

Yes, so obviously our agency strategy is very leveraged, very low risk because of all the TDAs were short we believe but -- so that obviously affects the numbers as well. I would focus maybe a little bit more on the leverage in the credit portfolio itself. So, if you turn the Page 8 of the presentation and you have 1.4 times which I think is 1.2 times ish let's say if you excluded the consolidated securitization yes, then I think it's that could definitely go up let's say 1.5 and I think that would be probably a good decent target.

Ladies and gentlemen, this concludes the Ellington Financial fourth quarter 2017 earnings call. You may now disconnect.